By Mandana Ismail Abeywickrema

The controversy surrounding the government's delay in reducing the local fuel prices in line with the decline in global oil prices has intensified calls for the re-establishment of a pricing formula for the petroleum sector.

Financial analysts point out that a pricing formula was a necessity for the local fuel sector, while the government claims such a formula would not be beneficial to the consumers.

Apart from a pricing formula, analysts also say that subsidies should be given to targeted groups rather than the present across-the-board system where those who can afford a price increase are also being subsidised.

A pricing formula was first introduced to the local fuel sector in 2001 during the two-year tenure of the UNF government, when fuel prices were revised on a monthly basis depending on market prices.

At the time opposition politicians mainly from one time coalition partner of the UPFA, the JVP, condemned the pricing formula claiming there was no need for a government if prices were adjusted according to world market prices every month.

World market plug

Some Marxists even went to the extent of saying that once in power they would unplug the country from the world market and stabilise prices and bring 'benefits' to the consumers.

In 2004, when the UPFA government assumed office along with the JVP as its main partner, the government got rid of the pricing formula.

The decision to end the pricing formula resulted in the government facing a huge balance of payment crisis while also driving the inflation rate into double digits. The government in order to subsidise the fuel sector had to resort to printing money amounting to billions of rupees which resulted in pushing the economy into a crisis situation.

Today a litre of diesel and petrol is sold at Rs. 110 and Rs. 157 respectively.

Unions attached to the CPC have however charged that the government is in a position to sell a litre of petrol at Rs. 111 inclusive of all current taxes and profit margins.

Petrol could be brought down

Sources from the CPC last week told The Sunday Leader that a litre of petrol when imported to the port costs Rs. 73. Even after adding various charges and levies, a litre of petrol comes to Rs. 111 a litre.

According to sources, if the government so wished, the price of a litre of petrol could be brought down even further as 550 mt. of the 1,100 mt. of petrol used for daily consumption is refined in the country.

CPC statistics reveal that 1,100 mt. of petrol is used on a daily basis while 4,300 mt. of diesel is used daily.

Unions also claimed 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 huge debts from other state institutions including the defunct Mihin Air.

Recovering outstanding dues of the CPC was a matter the government has to deal with without burdening the people, the unions claim.

CEB owes Rs. 40 bn

Meanwhile, Power and Energy Minister John Seneviratne stated in parliament last week that the Ceylon Electricity Board (CEB) owed the CPC a sum of Rs. 40 billion.

Be that as it may, given the declining global fuel prices, consumers have been anticipating a decline in the local fuel prices.

However, the government's announcement last week of its "inability" to reduce fuel prices in the local market came as quite a shock as consumers as well as opposition politicians argued that the government after instantly increasing fuel prices when there was an increase in the global fuel prices, should not hesitate to pass on the benefit of the decline in global oil prices to the consumers as well.

The government has also said it did not have any plans of introducing a pricing formula for the fuel sector as it would 'create a difficult atmosphere to the consumers.'

Petroleum and Petroleum Resources Minister A.H. M. Fowzie told The Sunday Leader that if there was a pricing formula for the fuel sector, consumers would now be paying Rs. 30 extra for each litre of diesel sold.

First five months

He said that for the first five months of the year, the government was selling a litre of diesel at Rs. 80 when it should have been higher.

"In January a litre of diesel should have been sold at Rs. 88, in February Rs. 95, in March Rs. 106, in April Rs. 120 and May Rs. 131. By May we had incurred a loss of Rs. 11 billion. Finally we increased the price to Rs. 110," Fowzie said.

He pointed out that if a pricing formula were in place at the time, the consumer would have had to pay the difference between the market and selling price.

Fowzie also said that even after increasing the price of a litre of diesel to Rs. 110, the government still incurred a loss on diesel sales till September.

"In June the market price for a litre of diesel was Rs. 139, in July Rs. 137, in August Rs. 133," he said.

According to Fowzie, although the government has earned a profit of Rs. 290 million on fuel sales in the month of September, it is only a 'fraction' of the losses incurred during the other months.

Losses had increased

He said that by August, CPC losses had increased to Rs. 17 billion, an amount, which he says, the consumer would have had to pay if a pricing formula was in place.

"A formula would have put the consumers in trouble," he said.

Fowzie also said that the profits earned by the CPC through its refinery, hedging and sales of petroleum by-products were not commensurate with the losses incurred by fuel sales in the local market.

He added that reducing the local fuel prices was doubtful as the world oil prices may see an increase depending on the plight of the US economy. "If Congress allows the printing of money, then oil will go up to US$ 150," he said.

Cess on petroleum products

Speaking of the new cess on petroleum products, Fowzie said it was a move to curtail the profit the Lanka Indian Oil Company (LIOC) would accrue when getting the next shipment.

He added that the money received by the government from the cess would be paid to the CPC to cover its losses.

As for the large number of taxes imposed on diesel and petrol imports, the Minister said it was the case with most of the countries and that it was not specific to Sri Lanka.

"Any government makes its budget based on taxes. Apart from the war, the government needs money for other development activities and taxes are a revenue generating measure," he said.

Fowzie reiterated there was no decision by the government to reduce the local fuel prices and to introduce a pricing formula.

Pricing formula necessary

Economist, Dr. Harsha de Silva says that a pricing formula is a necessity as the whole idea is to pass the prices to consumers, so that demand could reflect market reality.

He said that if local fuel prices were increased with the global prices, people would use less fuel reducing the country's fuel imports. "When fuel prices are held below market prices, people use more and the subsidy would also increase the fuel import bill," he explained.

He also said that when fuel is subsidised, the Central Bank is called in to print money, a scenario witnessed in 2004 and 2006 when money printed to subsidise fuel led to many economic complications.

According to Dr. de Silva, the high fuel prices and the resultant electricity tariff increase reduces the country's competitiveness in the foreign markets.

He added that given the high inflation rate and the overvalued exchange rate, the government should try to pass on the benefit of the decline in oil prices to the private sector to be competitive.

Economy no fairytale

Dr. de Silva disagreeing with Minister Fowzie's comment that a pricing formula would not be beneficial to the consumers said that the economy is not a make-believe fairytale, but harsh reality.

He noted that subsidies bring about unnecessary inflation pressure on everyone.

"If the government prints money to subsidise fuel, everyone will have to pay more for everything as a result," he explained.

His suggestion was that if prices were increased to reflect reality, only those who use the commodity most would be affected while the others would not. He also said that the segment of society that was unable to bear the high price should be given a targeted subsidy.

"It is better for the government to pass on the actual prices and have targeted subsidies for those who cannot afford," Dr. de Silva said.

While the debate continues on reducing fuel prices, the main opposition UNP has filed a case before the Supreme Court pleading a reduction in local fuel prices while the Marxist JVP last week, after a long silence, took to the streets calling on the government to reduce fuel prices.