Header Ad

Sri Lanka mulls cutting controlled petrol, diesel prices after oil crash

ECONOMYNEXT – Sri Lanka is considering a cut in retail fuel tariffs after global oil prices crashed, Minister of Power and Energy Mahinda Amaraweera had said, as a global Coronavirus epidemic reduced air travel, transport and factories closed in China and other countries.

Sri Lanka abandoned monthly price adjustments after a new administration came to power in December 2020.

But the government is considering a cut in domestic fuel prices, Amaraweera had said.

Fuel is a key source of revenue for the government, brining in excise duties which are highest on petrol, import duties and the port and airport levy.

The Singapore export price of 92-Octane petrol was about 56 dollars a barrel last week (about 65 rupees a litre) before freight and landing costs in Colombo.

Diesel prices which are usually higher, had also come down to the level of petrol this year (about 57 dollars a barrel), and is retailed around 104 rupees in Sri Lanka with a lower level of taxes compared to petrol.

Monday’s oil price crash is expected to push down refined petrol to around 40 dollars a barrel in Singapore (about 45 rupees a litre), according to S&P Platts.

A fall in fuel prices is a ‘stimulus’ to the global economy.

A cut in retail fuel prices in Sri Lanka would increase disposable incomes of the public and margins of companies, stimulating both retail demand and finances of the companies that use energy.

When oil prices fall, wealth is transferred from producing nations to customers in consuming countries and energy using non-oil companies.

To the extent that retail price cuts are limited in Sri Lanka, the government would be able to push up excise taxes and get more revenue, making up for the loss from a steep cut in value added tax in January, which had undermined the budget revenues and spooked rating agencies.

If Ceylon Petroleum Corporation is able run operating profits by retaining part of the profit fall, it would able to pay back loans, it would also reduce pressure on the credit system and allow rates to fall or the central bank to collect reserves if it sells down its Treasury bill stock in the space provided.

If the whole price fall is passed on to customers, any benefit to the exchange rate would vanish, as higher disposable incomes would boost consumption and imports.

In 2015, Sri Lanka’s then administration slashed retail fuel prices as global oil prices fell, boosting domestic demand and non-oil imports, while the central bank cut rates and injected liquidity, triggering a credit boom and a currency crisis while budget deficits expanded.

In 2020 however private credit is weak.

Oil prices have already recovered partially in Asian trade from lows seen on Monday. The Coronavirus epidemic is already easing in China, though it is expanding in Europe. (Colombo/Mar10/2020)