Facing a global reality: economists’ view on fuel price hikes

The recent price increase in fuel and gas came in the eve of the World Cup

final. Now that the cloud settles and its effects are felt amongst the public we spoke to some of the economic experts to weigh in on the Sri Lankan situation.

‘The crisis in the Middle East is  affecting fuel prices’

Former Director at the Central Bank, Author and Senior Professor at the Open University of Sri Lanka Sirimevan Colombage

The crisis in the Middle East is affecting fuel prices. It will have an adverse impact on the domestic economy. Passenger and goods transport cost will rise. This will have an impact on the industrial sector which is already facing problems to compete in the world economy since our productivity is low. Labour laws and on top of that the increase in fuel prices only increased the cost of production. Also the Ceylon Electricity Board will increase their prices triggered by further increase in fuel prices and inflation. The hedging agreement was done for the purpose of stabilizing prices but it turned a blunder. The downward rigidity of fuel prices is due to this.

Transport of vegetables from the producing areas to the market will definitely push up the prices of vegetables and food in general. Although it will not have an immediate effect on the rice prices due to the stocks stores.

‘When the international prices increase every country is forced to increase its fuel prices’

Economist and Executive Director at the Institute of Policy Studies Dr. Saman Kalegama

When the international prices increase every country is forced to increase its fuel prices. Since Sri Lanka has a highly integrated economy we are left with no option but to pass it on to the public. The Government has made the right move.

‘The Government should have a mechanism to increase the consumption level of the public’

Senior Economic Lecturer at the Open University of Sri Lanka Dr. Chandrabose 

Oil prices have a big impact on a developing country like Sri Lanka. India and Sri Lanka back in the day in the 1980’s made a decision on what it would do to face a major crisis in terms of an increase in the world market fuel prices from affecting the public and ultimately the performance of the economy. The decision was that they would not reduce the prices when the world market prices fell but instead they will use that money to set off the increase in the future world market fuel prices. 

Although it was practised in the 1980’s I don’t know what happened to that decision. It is unknown whether the Government deviated from that policy or not. Now what is clear is that they simply transfer the burden to the consumers. Why isn’t the government safeguarding the public true to that agreement?

Therefore according to the current trend of action by the Government any changes in the international price will be borne by the public. We know that the changes in the prices can be fluctuating. The Government should have a mechanism to increase the consumption level of the public, increase the economic opportunities as new avenues of income generation and job employment. The fuel and gas prices along with the kerosene prices have been drastically increased. Gas price affects the middle and upper class people. But the increase in the price of kerosene oil affects 65 percent of the population living in villages who use kerosene oil not only as an alternative source to electricity but also for cooking.

This will lead to widespread poverty. Nearly 65 percent of the population can’t bear the increasing cost of living which leaves a bare minimum of the high class people who feel the pinch. The situation is also worsening although they do not see it coming now.

‘It has a lot of implications on the cost of living’

Senior Lecturer in Economics and Author Dr. N. Morais

It has a lot of implications on the cost of living. Production to supply chain everything is dependant on fuel. This will have wider repercussions on the supply chain. So it is not just a fuel price increase but also the wide spread inflation in the economy. The competitiveness of the economy is lost and bank credit functions and loan borrowing capabilities of the people will come down. This trend will come to play in the next few months.

Certainly it’s going to rise. The slight reduction in the food prices since Jaffna was sending food stocks helped the recovery a bit after floods.

‘This time the world market prices were affected by the Libyan war understandably’

Senior Lecturer of the Department  of Economics, University of  Colombo Dr. M. Ganeshamoorthy

The Government said the petroleum price was revised according to the market principles. Which means that when prices are increased it is passed and when prices are decreased then it should be also passed on to the public. However the benefit of the decreasing prices of fuel in the world market is not passed on to the public. One of the IMF instructions to the Government is that they cannot give long term subsidies to the public whilst reducing their commitment towards subsidies. So when the opposition questioned the Government as to why they didn’t reduce the fuel prices when it came down in the world market the answer the Government gave was that the Ceylon Petroleum Corporation (CPC) was making huge losses and it was used to set off them.

Further increase of fuel prices is expected with the elections out of the picture. Whenever the crude oil prices came down in the world market the reduction given was not to the market level. This time the world market prices were affected by the Libyan war understandably. The problem is that whenever the prices fall the benefit is not passed on to the public.

Because of the hedging the Government had to incur heavy losses. Since they had not kept a provision for a situation if the oil prices fell they didn’t have a safeguarding mechanism. Hedging was done with a good intention but not looked into the downward trend in prices. Some one who has been advising the government on that had not considered the possibility of a downward trend on the oil prices at the expense of the valuable tax payers’ money.

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