By Mandana Ismail Abeywickrema
Sri Lanka heralded the dawn of 2008 with another price
increase - this time the price of LP gas.
Along with it several essential items also
saw their prices going up.
The government on the other hand, has expressed
confidence in reducing the prices of
consumer goods by April. The weary Sri
Lankan consumer has heard this before,
many times, from this very government, but
the promised relief is yet to materialise.
prices' is the terminology used by the
government to allay people's fears about
further price increases. But what needs to
be said in clear terms is whether the
government means to make an actual
reduction in the price levels.
Apart from the hike in gas prices, people have been once
again burdened with an increase in the
price of several essential items as the
'per kilo unit price' formula came to an
end on December 25.
In March the government introduced a price formula where
the taxes imposed on essential items were
removed and replaced with a unit price per
kilo. The mechanism came to an end in
December and with it the old taxes are
once again being levied on consumer
The increase in gas prices has been made in line with the
rising global prices, both Laugfs and
The price freeze imposed on fuel has pushed the CPC to
incur heavy losses. In order to minimise
the losses incurred by the Corporation,
the CPC from December stopped providing
diesel to the CEB at subsidised rates.
This move has pushed the CEB to reconsider
its tariff structure due to the increase
in its expenditure on fuel purchases. (See
Consumer Affairs Minister Bandula Gunawardena says that
the government has plans to introduce
several new measures that would help ease
the burden of the cost of living.
The government has always blamed the high oil prices for
the country's record high inflation level
and has said it was a global problem as
huge amounts of money were being spent on
oil imports, resulting in 'imported
However, economists have argued that although global oil
prices do have an impact on inflation, it
was not as much as the government has made
it out to be and blame bad financial
management and the printing of money to
meet rising government expenditure as
factors contributing to rising inflation.
They say that the global prices do not have an impact on
the level of inflation.
Other countries in the region, which are also affected by
the high global prices, have managed to
maintain single digit levels of inflation.
While Sri Lanka's closest neighbour India has recorded a
3% level of inflation along with many
other countries in the Asian region, Sri
Lanka has one of the highest levels of
Worst case scenario
Consumer Affairs Minister Bandula Gunewardena told The
Sunday Leader that 2007 has been the worst
case scenario where food prices were
concerned. He said it was a global issue
created mainly due to the abnormal
increase in oil prices.
He also said that other countries in the region have
recorded low levels of inflation as they
were not involved in spending heavily on
social welfare measures, fighting a war
and paying salaries of an 'excessive
All these have resulted in the constant widening of the
budget deficit pushing the government to
borrow money, he asserted.
According to economists, until the government stops
printing money, the country would continue
to record high levels of inflation.
Analysts have pointed out that the government had printed
Rs. 45 billion from May to September last
year and was borrowing vast amounts from
the state banks to fund its survival,
causing high inflation.
Bank's road map
Last week, Central Bank Governor Ajith Nivard Cabraal
outlining the bank's road map for 2008 has
said that the conduct of a successful
monetary policy, while facing a high
budget deficit was a challenging task. He
said that borrowings by the government
from the banking system to finance such a
deficit made it difficult for the Central
Bank to maintain the monetary expansion
along a pre-determined, tight path.
However, he also said that in the medium to long term,
the Central Bank would conduct monetary
policy action with a goal to reduce
inflation to a level of around 5%.
The governor also blamed imported commodities for the
a serious challenge to any Central Bank to
conduct its monetary programmes when a
substantial part of the country's
inflation could be driven by external
shocks," Cabraal has said in his
"The impact of high oil prices on the macro-economic
stability of Sri Lanka is manifold. It
widens the current account deficit through
an increased import bill and adversely
impacts on the exchange rate stability.
Further, it seriously impacts on domestic
inflation, irrespective of the
government's policy to either adjust
domestic prices in line with the
international prices or subsidise domestic
Going by what has so far been placed before the country,
it would be interesting to see if 2008
would be yet another year of shocks or
bring some form of relief to the people as
Defence expenditure a huge
The 2008 budget saw the highest allocation made for
defence in the country's history, and
analysts have already warned that the
actual defence expenditure for next year
would be far greater than that printed in
black and white.
With the government's decision to withdraw from the CFA
paving the way for a full-blown war, it is
only likely that defence expenditure would
skyrocket even further. It has also been
stated by senior government ministers that
in the event the government was unable to
meet its expenses, the only option would
be to print money - a move that would push
inflation over the roof.
Analysts say that with the addition of other indirect
costs, the defence expenditure for next
year would definitely be far greater than
that presented by President Mahinda
Rajapakse in the 2008 budget. It has been
predicted that defence expenditure could
rise up to Rs. 200 billion in 2008.
Since 2006, there has been a difference amounting to
with regard to the funds allocated
for defence and the actual expenditure.
In 2006, the government estimated to spend a sum of Rs.
96 billion on defence when the actual
amount spent amounted to Rs.111 billion.
In 2007, the initial estimate of Rs. 139 billion for
defence funding increased to Rs. 156
billion by end November.
In 2008, the government expects to spend a sum of Rs. 166
billion, which is Rs. 456 million (US$ 4
million) per day on defence and public
security, which is a huge amount for a
lower middle-income country.
However, going by the earlier defence spending since
2006, the government estimation of Rs. 166
billion for next year would undoubtedly
see an increase of many more billions of
According to analysts, if the additional costs such as
pensions and disability expenditure and
instalment payments for military
procurements are also taken into
consideration, defence expenditure for
2008 will definitely exceed Rs. 200
The figure of Rs. 456 million expenditure for defence per
day would under such a scenario be an
underestimation, as most military
procurements are made on a 'pay later'
basis and therefore the payments are
spread over a
number of years into
the future and with accrued
the compounded cost of defence
expenditure would therefore be
significantly greater than that shown in
the annual budget outlays, which applies
to other public expenditure as well.
The government in its 2008 budget has allocated the
highest funding for defence while key
sectors like and health and education have
been allocated marginal amounts when
compared with that set aside for defence.
The government has allocated Rs. 8,536 per person for
defence in 2008. This is in contrast to Rs.
2,974 per person allocated for health and
Rs. 2,359 per person allocated for
education for 2008.
More shocks on the way
The Ceylon Petroleum Corporation (CPC) has stopped
providing fuel to the Ceylon Electricity
Board (CEB) at subsidised prices from
This move by the CPC has created the likelihood of CEB
increasing its tariffs in the first
quarter of 2008.
The Sunday Leader learns that discussions are now
underway on the measures to be adopted by
the CEB to address the issues that have
arisen due to the large sum of money that
will be used to purchase fuel for power
The CEB it is learnt is looking at making changes to its
existing pricing structure.
The CPC till December provided a litre of diesel at Rs.
55 to the CEB. The current market price of
a litre of diesel is Rs. 75.
CEB consumes 40% of CPC's diesel imports.
Petroleum and Petroleum Resources Minister A.H.M. Fowzie
told The Sunday leader that the CPC was
compelled to take the decision due to the
CEB's delay in making payments for the
fuel supplied. For the last three months,
the CEB owes a sum of Rs. 6 billion to
When asked about the possibility of increasing
electricity tariff rates, Fowzie said the
CEB would have to put its management in
order and find alternative ways of
minimising the losses.
According to Fowzie, the CPC was incurring a loss in the
sale of fuel in the local market due to
the freezing of fuel prices since August
The CPC currently incurs a loss of Rs. 5.65 on a litre of
petrol, Rs. 19.87 on diesel and Rs. 20.83
Fowzie also said that the CPC incurs a loss of Rs. 3,442
million per month on diesel.
"The 10% reduction of VAT does not help. That saves
only Rs. 400 million and there still
remains a balance of Rs. 3,042
million," he said.