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LMD Interview – The effects/issues of the SL Fuel Pricing Formula

 

Date – May 2018

How important is it to have a fuel pricing formula?

  • Generally in Sri Lanka and many other developing countries, fuel prices are administered in a very ad hoc manner; largely in line with the political agendas of the leaders rather than in response to the changes in the global oil prices.
  • Sri Lanka being a fuel deficient country, i.e. a country that imports nearly all of it fuel requirements, this creates macroeconomic instability.
  • At the moment, the global oil prices are on the rise; it has hit the $70 per barrel benchmark and the global analysts are expecting the trend to continue.
  • Meanwhile in Sri Lanka, we had not seen a fuel price increase since 2015, until the sharp price hike introduced in Early May 2018.
  • The idea of a pricing formula is to transfer the changes in the international prices to the domestic market prices in a timely and transparent manner, so that there are no imbalances or distortions in the pricing system.
  • Therefore, it is very important to have a fuel price revision and also a transparent formula that would determine the pricing of fuel.

In the study that Frontier Research did, it was stated that subsidies are not a good thing. Could you elaborate on it?

  • Having these prices continuously subsidized has mainly impacted our external balance.
  • In 2017 for example, our fuel bill increased by 40%; close to around $ 1bn increase. At the same time, the trade deficit has also increased by $ 800mn.
  • Had the domestic fuel prices been increased in 2017, the consumers would have adjusted their consumption to these prices and the need to import so much fuel would have reduced, thereby reducing the trade deficit.
  • On the fiscal side, the subsidy cost the Government has to bear is also quite significant.
  • In fact, in Sri Lanka and several other developing countries, these subsidy costs are borne by the particular State Owned Enterprises, in our case, the Ceylon Petroleum Corporation.
  • The Government is said to owe the CPC nearly Rs. 320bn in terms of subsidy cost reimbursements.
  • This is a huge cost the CPC has to bear and it is funded mainly through loans – mostly through foreign loans. This keeps on adding to our external debt as well.
  • These are just two main macroeconomic instabilities caused by these distortions.

So the Fuel Pricing Formula was originally brought in 2002. But why was it not continued beyond that?

  • One of the biggest reasons was that, though the formula was implemented, it was not done in an efficient manner. That is, the Government did go for price revisions but not to the extent for it to be effective.
  • In 2002-03 period oil prices in the international market was much lower, so the pass-through or the reduction in the Government subsidy was very minimal. So the adjustment that happened in the domestic prices was not so much.
  • But by the end of 2003, the oil prices started going up at a rapid pace in the global market.
  • By that time, the Government had not gone for sufficient increases in the prices. So they had to go for much larger increases and the entire event was blamed on the fuel pricing formula.
  • This was also the time of elections and it became a point of contention that was brought up frequently by the Opposition party at that time.
  • That is basically how the formula had to come to a halt.

So If the Fuel pricing formula is beneficial why are there protests happening now?

  • Most of the protests done are politically driven and are not very well informed. Most are saying that these price increases are unwarranted or unfair.
  • This is something the current Government has to answer because when they reduced the fuel prices in 2015, in lieu of the election results it was done purely to reinforce the public that they had made the correct decision.
  • But now when the prices are increased citing higher world market prices, that is something the public will not understand.
  • It all comes down to how the Government will be able to convince the public of the benefits of the fuel pricing formula.

Source: Frontier Blog

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