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