Sri Lanka finance minister in battle to de-politicize fuel pricing

ECONOMYNEXT – Market-pricing fuel strengthens the economy, and the benefit of falling oil will also come without political interference unlike in the past when tariffs were kept high with no questions asked, Finance Minister Mangala Samaraweera, who is waging a battle to de-politicize energy pricing said.

"The price formula will strengthen the economy," Finance Minister Samaraweera told reporters in Colombo.

"The benefit of formula will be that prices will also fall when global prices fall."

In the first two years of the currency administration, then-Finance Minister Ravi Karunanayake ignored calls for formula pricing when oil prices were falling and instead made some politicized price cuts especially for kerosene which led to massive mis-use.

Samaraweera and the ruling United National Party is now paying the price for the early economic follies of the administration.

Internal Battle

The follies of the first two years had also allowed President Maithripala Sirisena to interfere in economic policies, several of which were reasonable.

But a scheduled price hike on July 05, which was already approved by the cabinet was delayed suddenly reportedly by President Maithripala Sirisena forcing Samaraweera to to cabient agains this week to to halt the re-politicization of fuel prices.

Minister Samaraweera is also waging a political battle with ex-President Mahinda Rajapaksa’s opposition party to maintain formula pricing, a reform many economists and independent analysts had called for many years.

The biggest danger to the economy comes when fuel prices go up and the losses are borne by bank credit and printed money.





Market-pricing fuel, which is a difficult reform is expected to bring long-term stability, and low inflation especially when oil prices rise.

Low Oil Prices, High Inflation

Sri Lanka had low single digit inflation when oil was market priced in 2003, but inflation rocketed to near 20 percent in 2004, when formula pricing was abandoned amid criticism from legislator Wimal Weerawansa and billions of rupees was printed to finance subsidies.

Massive losses in state energy utilities, filled by bank borrowings and re-financed by central bank credit (money printing) had been triggers of balance of payments crises in 2000, 2008 and 2011.

When money is printed to cover losses in fuel, the currency falls and inflation goes up faster than if oil prices were raised in the first place.

That is why countries like Venezuela and Iran, which produce oil and sells the at the lowest prices in the world, have very high levels of inflation. Meanwhile non-oil producers with strong central banks or currency boards like Singapore and Hong Kong have low inflation.

Venezuela, which had a mixed or socialist economy, with arguably the worst centrl bank in the world, which sells petrol and diesel at next to nothing is now having inflation in excess of 40,000 percent.

Iran, which also has a bad central bank, saw its currency collapsed from 32,000 to 42,000 riyal since July 2017 and is still falling. Unofficial assessment of inflation is around 55 to 100 percent, though official numbers are still below 10 percent.

In general large and peristent increase in oil prices (along with other commodities) are caused by a weakening of the US dollar due to bad policies of the Federal Reserve.

Political Battle

Ex-President Rajapaksa had said while he was in power, petrol was sold as low as 120 rupees a litre, when crude was at 97 dollars a barrel.

He also called for details of the price formula to be made public.

Minister Samaraweera fired back that saying President Rajapaksa was in power, and oil prices fell to 40 dollars a barrel, in the wake of 2007/2008 global credit collapse retail prices were kept up.

"There was a court case, and (former Chief Justice) Sarath N Silva, who is now his advisor ordered oil prices to be brought down," Minister Samaraweera said.

"But using his dictatorial powers, he opposed it."

He challenged Rajapaksa to a direct debate instead of sending statements like a person throwing stones from behind a bush.

"These charges are being made when a strong foundation has been laid in the economy," Samaraweera said.

Deputy Finance Minister Eran Wickremeratne said during Rajapaksa rule nobody asked for justification of high fuel prices or called for the formula to be revealed.

He said the current formula was based on a number of items like the Singapore Platts price for petrol and diesel, distribution margin and taxes, like in any other country.

"This is usually called an A,B,C formula," Wickremeratne said, going on the offensive.

"How were prices decided then? Nobody asked for justification then. At the time the formula was M, B, G, Mahinda, Basil and Gota," he said in reference to Rajapaksa and his two brothers, who ran an authoritative regime until 2015.

Monetary Woes

Sri Lanka’s fuel price hikes are high partly due to currency depreciation, due to bad money provided by the central bank.

Since 2015, the rupee has fallen from 131 to 157 to the US dollar. While claiming to a ‘flexible exchange rate’ the rupee does not appreciate after falling, and is behaving like any typical third world crawling peg.

Critics say many of the country’s economic problems date back to 1951, when the central bank was created, and no serious attempts to have sound money has been part of economic reforms.

India’s last two decades of growth breaking away from the Hindu rate of growth was backed by monetary reform in 1991, which strengthened the currency, but the Reserve Bank of India is still a backward agency by East Asian standards.

Before independence the rupee was a strong currency and was also used in the Middle East, like the US dollar now. Sri Lanka’s rupee was also fixed to the Indian rupee through a currency board.

Sri Lanka’s central bank had depreciated the currency even in 2017, even as other emering markets including Malasia, China and Singapore appreciated, in a blatantly Mercantilist ‘industrial policy’ to boost hard merchandise exports with a ‘competitive exchange’ or the destruction real wages and to make workers cheap, which comes at a huge political cost.

Analysts have warned against Sri Lanka’s current trade-oriented or Mercantilist monetary policy of targeting the Real Effective Exchange Rate, that has been tried out in countries like Tunisia and also in Korea soon after 1980, which led to persistent inflation and the Great Workers Struggle in that country in 1987.

False Doctrine

The idea seems to be based on a false claim by US Mercantilists that successful East Asian nations had weak or ‘undervalued’ or which has been equated with currency depreciation. In reality successful East Asian currencies have had strong or appreciating currencies.

East Asian nations, particularly Singapore, Malaysia, Hong Kong and Japan in reality have perused very sound money policies which provided stronger exchange rates than the US dollar.

During the late 1960’s sterling crisis, Singapore and Malaysia switched parity from sterling to the dollar to keep the exchange rate at 3.06 to the dollar and when Bretton Woods broke up, the two countries floated up to 2.8 to the US dollar and 2.4.

The Singapore dollar is now at 1.3 to the US dollar. In 2017 the Singapore dollar strengthened from 1.45 to 1.30 as oil prices rose, with the dollar weakening.

Japan’s currency is less than a third of what is was at the break up of Bretton Woods. Japan’s currency was successfully fixed at 360 to the US dollar during Bretton Woods. It is now at 112 to the US dollar.

Analysts have urged reform of the central bank or its abolition in favour of a Hong Kong style currency board to help prevent political instability and to take ‘cost of living’ out of politics.

Sri Lanka also had a currency board until 1951, helping keep the economy stable. (Colombo/July14/2018 – Update II)

Tags :

Latest Comments

Your email address will not be published. Required fields are marked *