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Friday June 18th, 2021
Energy

Sri Lanka to hike fuel prices, jettisoning price control strategy

ECONOMYNEXT- Sri Lanka will hike retail fuel prices in the near future as state-run Ceylon Petroleum Corporation and the government can no longer bear the loss, Petroleum Minister Udaya Gammanpila said.

“The cost of living cabinet sub-committee after a long discussion decided to raise fuel prices,” Gammanpila said.

“Prices will be raised in the near future but not immediately, because we do not want big crowds at petrol sheds during the Coronavirus lockdown.”

A key plank of the Saubaghya Dakma policy framework of the current administration was to jettison market pricing of oil and instead set up a fuel price stabilizing fund.

Under the strategy fuel prices were kept high in 2020 when global prices went up and it was to be credited to a price stabilization fund.

The fund would then be used to cover losses of the energy utilities when prices went up.

Ironically the first 50 billion rupees injection to the fund was made with printed money from the central bank by giving it a Treasury bill.

When money is printed and used, there is a shortage of foreign exchange (about 270 million US dollars) when the money goes through the credit system generating deamnd. At the time the rupee was around 185 to the US dollar.

“During 2020, the Fuel Price Stabilization Fund (FPSF) was established, to transmit the gains
arisen from the dip in the global oil prices and Rs. 48,000 million has been released to CEB to settle its dues to CPC by issuing a Treasury Bill which was in turn provided to FPSF as an advance,” the Finance Ministry said in its 2020 annual report.

“However, surcharge was removed due to the increase in oil prices.”

By the end of 2020 the fuel price stabilization account was negative by 26.673 billion rupees, according to Finance Ministry data.

Price controls on fuel were popularized by the then-Janatha Vimukthi Peramuna legislator Wimal Weerawansa who criticized market pricing fuel in 2002 and 2003 when the Fed was firing what was known as the ‘mother of all liquidity bubbles’.

The bubble collapsed in 2008, triggering the Great Recession.

The Fed is now on another money printing spree and firing a massive ‘commodity super cycle’.

The Feds strategy would create further problems for Sri Lanka analysts had warned.

Related

Sri Lanka’s central bank should guard against bankruptcy as Fed lights commodity fires

Sri Lanka net forex reserves fall to 33-pct of reserve money

In 2018, the currency collapsed despite market pricing of fuel as the central bank under the then administration printed money to target an output gap and the call money rate.

The Ceylon Petroleum Corporation made an 80 billion rupee forex loss as it was forced to borrow dollar and run an unhedged forex exposure.

In Sri Lanka Mercantilists belief that it is not money printing but oil that causes forex shortages. There is also a belief that diesel causes inflation and not the central bank, therefore diesel – which emits carcinogenic fumes – is under priced and petrol is overpriced.

The Ministr of Petroleum later said Octane 92 petrol would go up by 20 per litre to 157 rupees and Octane 95 would go up by 23 rupees per litre to 184.

Auto Diesel would go up by 07 rupees to 111 rupees a litre and Super Diesel by 12 per litre to 144 rupees.

Kerosene go up by 07 per litre to 77.

In low inflation countries with better central banks, diesel is priced slightly higher than petrol due to its higher calorific value. Sri Lanka also underprices kerosene (jet fuel) which is usually more expensive than petrol to import. (Colombo/June11/2021)

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