ECONOMYNEXT – Lanka IOC, a publicly traded unit of the Indian Oil Corporation, Sri Lanka’s second-largest oil distributor, has called for formula-based pricing to end economic risks and help drive investment to the sector.
"[The] Single most critical factor that affects your company’s performance is the absence of a pricing formulae for auto fuels," Chairman BS Canth told shareholders.
"As the retail price of auto fuels in Sri Lanka is driven by the government, your company is susceptible towards wide profit fluctuations from quarter to quarter as the price of petroleum products we import are based on global market prices."
Along with several other developing countries, Sri Lanka is also pricing diesel (which costs more to import) lightly compared to petrol in a belief that diesel, not monetary policy, generates inflation.
Sri Lanka is also subsiding kerosene, a questionable act, which some critics say benefits large industrialists with political connections. Lanka IOC has stopped distributing kerosene.
Although oil prices fell sharply in early 2016, crude rose again by the end of the year, although moderation of prices has been seen since April 2017.
LIOC said a depreciating currency has also pushed up costs.
Price controls also hurt cashflows, and make it difficult to finance energy infrastructure.
"The pricing mechanism will not only be beneficial for all stakeholders such as GOSL (Government of Sri Lanka), shareholders, oil companies, general public etc but also be good for the overall Sri Lankan economy" Canth said.
"The Energy sector of the country, whether it is refinery, pipelines, tankages, new filling stations etc., requires huge investments, and unless and until oil companies make some investible income, they will not be in a position to invest in new oil and gas infrastructure. Lower petroleum prices result in higher consumption, as Sri Lanka is an import-dependent economy,"
Economic analysts have also identified fuel price controls as a trigger of balance of payments crisis.
When the government controls prices, petroleum distributors are forced to borrow from banks to fund the loss. This can push up interest rates, depriving capital for long-term investments and growth.
But often, the Central Bank prints money to control interest rates, triggering balance of payments crisis, resulting in rupee depreciation foreign reserve losses (if the rupee is defended) or both.
Not raising fuel prices also allows non-oil imports to continue as before. Raising fuel price may result in users becoming more energy efficient as well.
Sri Lanka’s rulers try to keep fuel prices down to escape criticism from fellow rulers in the opposite camp, who deceptively incite the public to oppose fuel price increases and inflict harm on the poor in particular through inflation and currency depreciation.
Opposition politicians cynically raise objections despite knowing the harm it causes. Sri Lanka’s state-run CPC is still paying interest on loans taken to fund losses. It also has dollar loans which generate more losses when the rupee falls.