By Mandana Ismail Abeywickrema

The government's determination not to reduce local fuel prices in line with the declining global prices has drawn criticism from all quarters in the country.

This determination was amply evident last week when the Treasury hiked the customs duty on petrol from the present Rs. 20 per litre to a whopping Rs. 35 per litre. The excuse trotted out by a Treasury official was that the move was to 'trim the profits' being earned by the two players in the local market as a result of the sharply falling global prices.

Brent crude as at Friday was sharply down to $46 per barrel while the OPEC basket price for a barrel stood at $ 44. Refined petrol in the Singapore market was going at $39 a barrel Friday. In the United States last week petrol at the pump (retail) fell to under $ 2 per gallon, that is around Rs. 50 per litre in Sri Lankan currency. Sri Lankans struggling under a huge cost of living burden are paying Rs. 142 per litre for petrol! Politicians who shouted from the rooftops about local fuel prices being "plugged to the world market" not so long ago are conspicuously silent today.

Economic analysts, the working masses as well as opposition parliamentarians have questioned as to why the government has not taken steps to pass on the benefit of the declining global fuel prices to the heavily burdened local consumers.

Sources at the CPC said that a litre of petrol according to the pricing structure as at May 25, 2008 could be sold at Rs. 72 and a litre of diesel under the same structure could be sold at Rs. 45

 Cess and customs duty

Earlier the government imposed a Rs. 20 custom duty and a Rs. 15 and Rs. 10 cess on imported refined petrol and diesel respectively, when world oil prices began to fall.

The CPC sources further said that even after adding this new tax and the cess, a litre of petrol could be sold at Rs. 107, while a litre of diesel could be sold at Rs. 55. The current market price of a litre of diesel is Rs. 90.

It is also interesting to note that while the taxes and the cess have been imposed on imported refined products, 70% of the country's petrol needs as well as 30-40% of the country's diesel requirements are refined in Sri Lanka

No duty for locally refined products

"Therefore, the taxes and the cess are not applicable to most of the fuel sold by the CPC. However, the pricing has been done by adding the taxes and the cess even on the products refined in the country," the CPC source further said.

CPC refines close to 550 mt. of petrol daily while the LIOC sells close to 450 mt. of petrol. The country's daily petrol requirement according to the CPC stands at between 1,100-1,200mt.

As for diesel, the CPC refines close to 1,400-1,500mt per day while the LIOC sells close to 1,000mt. The daily diesel requirement of the country stands at 4,300mt.

Given the present scenario, analysts as well as CPC sources say that the government could 'without any hassle' reduce the local fuel prices much further.

UNP Parliamentarian Sagala Ratnayaka opening the committee stage debate on the Petroleum and Petroleum Resources Ministry in parliament last week also highlighted the need for a real reduction in fuel prices.

However, Petroleum and Petroleum Resources Minister A.H.M. Fowzie has evaded any mention of a further fuel price reduction in the local market than that offered in the 2009 budget proposals.

"We will not increase fuel prices in 2009 and will maintain prices through a mechanism we are planning to adopt," he told parliament during his speech at the committee stage debate on the budgetary allocations for the Petroleum and Petroleum Resources Ministry last week.

Criticising the previous pricing formula applied to the fuel sector, Fowzie said, "The CPC has incurred losses amounting to Rs. 21 billion. If the pricing formula was in place the people would have had to pay that money. The losses therefore could also be considered as relief provided to the people."

Presenting the budget proposals for 2009, President Mahinda Rajapakse in his capacity as the Finance Minister also said that unlike the previous government, the present government did not seek to change fuel prices based on a pricing formula.

"If we did so, the adverse impact it would have created on the cost-of-living will have no limits," he said.

High inflation

The country's inflation rate has been recording high double-digit figures for the past two years with the rate rising up to 29.9% in April 2008. This high inflation rate was recorded despite the so-called "fixing" of local fuel prices.

Analysts point out that when the government last increased local fuel prices citing the record world market prices at the time, it was selling fuel purchased several months back at a much lower price. "Now that the world prices have declined, the government could apply the same mechanism and reduce the prices. Instead, they are now using the excuse of trying to 'cover losses' incurred by the CPC as the reason for the inability to reduce local fuel prices. That does not make sense," it was pointed out.

Recovering outstanding dues

CPC unions however claim that recovering outstanding dues of the CPC was a matter the government has to deal with without burdening the people.

"The CEB owes Rs. 40 billion and other state institutions have to pay the CPC Rs. 10 billion. The government has to find a way of recovering that money. Increasing the burden on the people is not the answer," a unionist said.

Analysts say that financial indiscipline at the CPC is the main reason for consumers not to benefit from the low crude oil prices.

"CPC customers like the CEB, Railway, RDA, Mihin Air, armed services, Maga Neguma have to pay as much as Rs. 80,000,000,000 for fuel supplied. Why the CPC allowed such credit and why it was allowed to go up to such dizzy levels is nothing but due to the lethargy and incompetence of the CPC," an analyst charged.

He further said that all the defaulting customers are funded by the government budget and the Treasury transfers money on a regular basis as  per the budget. "It is the duty of the CPC to collect their dues on time. This massive debt is temporarily overcome by the CPC by borrowing from the banks at high interest rates averaging 20% +. This is a massive and unnecessary cost to the CPC and this burden is also recovered by the CPC from the consumers by including it in their costs when fixing fuel prices," he said.

According to analysts, the petroleum sector in the country is suffering from the lack of a transparent pricing formula as well as severe politicisation of the pricing system.

Analysts have said that if the CPC is to survive and the consumer is to benefit, a independently enforced reasonable price formulae  is an absolute necessity.

"Politics should have no place in this. If the government wants a political price, then it should be backed by a subsidy from the Treasury," an analyst said.

Professionally managed CPC

An independently and professionally managed CPC with a price formula in place will result in reduced costs, reduced wastage and above all the banks will back it up with good credit terms and thereby benefit the consumer.

"In today's context, our local retail prices should be in the range of Rs. 50 - 60 per litre and nothing more," it was pointed out.

The previous UNF government introduced a pricing formula for the petroleum sector, which helped maintain a low inflation rate and left a margin for the petroleum firms to make a profit. However, in 2004, the pricing formula was abandoned under pressure from the then coalition partner of the UPFA government, the JVP, which at the time took to the streets campaigning to remove the country from the so called "plug" that was connected to the "world market." Needless to say if that infamous 'plug' was still connected fuel prices would today be in the Rs. 50 - 60 per litre range.

Overnight, inflation which was near zero in early 2004 sky rocketed to double digit figures as money had to be printed to finance subsidies also putting the rupee under pressure.

Central Bank Deputy Governor W. A. Wijewardena was recently quoted in a local business website warning against 'monetising' external shocks - like oil prices - saying market pricing was needed to keep inflation low.

Under the previous Rata Perata and the present Mahinda Chinthana policies of the UPFA government, billions of rupees have been wasted on fuel subsidies.

Monthly price adjustments

According to economists, if monthly price adjustments are brought in again, inflation will start to moderate as it did in 2002 and 2003, and there would be no need to raise interest rates.

Although the government has boasted of the non-changing of fuel prices in line with the global prices, the inflation rate has been steadily going up.

The reason pointed out is that fuel prices were fixed with printed money, causing domestic inflation on the first round.

However, the rupee depreciated with the printed money hitting the forex markets causing a balance of payment crisis and resulting in a second round of inflation.

Interestingly, when the pressure became intense, the government decided to raise prices causing another round of inflation.

As pointed out by analysts, if prices were adjusted in the first place there would have only been a 'one-off' inflation.

Be that as it may, it is widely being alleged that the government without "really" reducing the local fuel prices was trying to gain a profit to cover up losses due to flawed economic policies, corruption and wastage.

CPC sources have charged that the government was misleading the public by showing inflated figures without showing the actual truth.