World Affairs



This is Paradise






World oil prices and high inflation bogey exploded

A.H.M. Fowzie and P.B. Jayasundera

By Mandana Ismail Abeywickrema

The present administration's lack of fiscal discipline and proper economic policies are slowly but surely pushing the country's economy into an abyss.

However, it is the lack of fiscal discipline that has worst affected the economy. The government, having run out of excuses for the present state of the economy, has once again focused attention on the war.

The main issue faced by the economy is the printing of money by the Central Bank to fund government debt. Between April and September last year, the Central Bank printed over Rs. 45 billion, pushing inflation over the roof.

Since the second quarter of last year, the country has recorded staggering levels of inflation. The government and its allies however have been busy blaming global oil prices for the high levels of inflation .

But economists have argued that if rising oil prices were in fact the reason for the record inflation, then other countries in the South and Southeast Asian region that also import almost all of their oil requirements should be registering the same high inflation.

Low inflation

In reality however barring Bangladesh, all South Asian countries have registered single digit rates of inflation.

Statistics reveal that at the end of the last quarter, inflation in Indonesia was 7%; in Thailand 2.6%; in Malaysia 2%; in Singapore 2.9%; in the Philippines 3%; in India 6%; and  in Bangladesh 11.2%.

Economists have also pointed out that several decisions made by the government in purchasing fuel from the global market have worsened the problems faced by the country.

The argument put forward by them is that the government which was fully aware that oil prices would be at their peak from October to December during the winter season, decided to import an increased load of fuel during this period as the CPC decided to upgrade its refinery during the same period.

"It is a regular pattern that oil prices increase in the world market during the winter season. But the government decided to purchase oil when a barrel was over US$ 100. Now a barrel has gone down to US$ 84," economists point out.

Be that as it may, the government has shown no signs of reducing local fuel prices though the international prices have come down.

Unions of the Ceylon Petroleum Corporation (CPC) have charged that the government is in a position to sell a litre of petrol at Rs. 112 inclusive of all current taxes.

Unions allege

According to the unions, the reason the CPC is not willing to sell petrol at a lower price is because of the heavy losses incurred by the institution due to long standing debts from other state institutions.

Another allegation levelled against the government by the unions is the fact that while the price of kerosene was increased by 137% in the last year, the turbine oil price, which was similar to the kerosene price, has not been increased.

They charged that since aircraft used turbine oil, the government did not want to increase its prices as it would affect Mihin Air.

However, the government has responded by saying that the even after the recent price hike, the CPC was still incurring a loss of Rs. 1.2 billion per month.

Petroleum and Petroleum Resources Minister, A.H.M. Fowzie has however said that if the global fuel prices continue to decline, the government would definitely pass the benefit to the consumers.

The burdens of the Sri Lankan consumer is however far from ending.

Latest burden

The latest burden to be added to the already heavy list is the proposed increase in electricity tariffs by the Ceylon Electricity Board (CEB). The revised tariff rates are to come into effect from March 1.

This time around, the CEB is to increase the tariff by a hefty 40% at the lowest band.

The tariff hike has been proposed by the CEB as the only alternative to minimise the losses incurred by the institution following the Treasury's decision to remove the CEB from its subsidy list, as well as the Ceylon Petroleum Corporation (CPC) to sell fuel for thermal power generation at market prices.

The government during the past few years had spent billions of rupees subsidising the CEB. Till 2005, the government spent Rs. 5 billion to pay the CEB subsidy and in 2005 the subsidy payment was a hefty Rs. 11 billion.

The CEB was earlier provided  diesel at Rs. 55 per litre when local retail oil prices were much higher. Following CPC's decision, the CEB is now compelled to purchase diesel at Rs. 85 per litre.

The CEB at present provides electricity to consumers below the production cost. Come March 1, the entire burden of CEB costs would be passed on to the consumers.


A key feature among the proposed tariff system is the imposition of a 20% fuel surcharge. According to the new proposals, the low income groups will also be hit by a 20% fuel surcharge. The surcharge scheme which was imposed on users consuming more than 90 units would now be applied to every electricity consumer.

The new tariff system would see an increase of 88% in the price paid by users of more than 180 units. A consumer using 181 units would see an increase of Rs. 1,400 in the electricity bill from March 1.

While Sri Lanka holds the record for the highest fuel prices in the region, it is now planning to increase its electricity tariffs in line with it.

Meanwhile, the International Energy Agency (IEA) last week announced that the world oil market might witness a downturn in prices - a sharp shift from the increase experienced during last month when a barrel of oil reached US$100 per barrel.

"Just as the demand shock of 2004 shaped the oil market for the next three years, so too could the pending slowdown," the IEA had reportedly said in its monthly review of oil trends.

Allowing for a weather-related rebound in demand, "the underlying trend is even weaker," the agency said. "Changes are taking place in the oil market - not just to demand, but also to the supply side."

News agency AFP reported that with the price now around US$90 per barrel, the IEA had said it had revised down demand for 2008 in the light of weaker world growth prospects, and it reported firm supplies in January.

The IEA had explained: "An economic slowdown has the potential to change the landscape over the next few years: depending on how deep it is and how long it lasts."

According to AFP, the IEA has cut its forecast for world demand for oil this year by 200,000 barrels per day, saying it expected world demand in 2008 to grow by 1.9% instead of 2.2% forecast last July.

In January, world oil supply had risen by 745,000 barrels per day to 87.2 million barrels "on new output from Brazil and recovering non-OPEC output elsewhere."

AFP further reported that supplies from the Organisation of Petroleum Exporting Countries (OPEC) had remained close to 32.0 million barrels per day on increased output from Angola, the United Arab Emirates, Saudi Arabia and Kuwait, but production had eased in Iraq, Nigeria and Qatar.

However, OPEC's real spare capacity had risen to 2.4 million barrels per day in January.

The IEA noted that industrial stocks of oil in the area covered by the Organisation for Economic Cooperation and Development had fallen by 39.5 million barrels in December.

The agency warned that oil inventories remained low, "as does spare capacity."

Geopolitical issues in Nigeria, Venezuela, Iraq and Iran had helped push up prices.

Despite the pressures now bearing down on demand, there was "clearly" a need to rebuild stocks, the IEA has said.

Authorities mum

As for Sri Lanka, prices remain sky high and authorities are mum about the possibility of reducing prices given the present global climate. In fact all those who shouted about the increase in cost of living and inflation due to the high global oil prices are today silent.

Interestingly, while global fuel prices are on the decline, the country's inflation level is still going up.

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