Saturday, 20 December 2014 00:00
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Dwindling oil prices can be a boon for developing countries but governments still have to work hard to ensure long-term benefits are felt from short-term windfalls.
As many as 45 countries in developing Asia were net fuel importers with lower oil prices giving them a “golden opportunity” to increase growth in 2015, opines the Asian Development Bank (ADB) in its latest report. But will governments be quick to capitalise on the new positives?
Falling global oil prices present a golden opportunity for importers like Indonesia and India to reform their costly fuel subsidy programs. On the other hand, oil exporters can seize the opportunity to develop their manufacturing sectors as low commodity prices tend to make their real exchange rates more competitive.
For Sri Lanka the upside can have at least two angles. With election fever gripping the country the Government has sought to gain quick spikes of approval by slashing fuel and gas prices. The Opposition, not to be outdone, has demanded steeper decreases and even gone a step further by insisting that if they are elected to power on 8 January fuel prices will be reduced even further. In fact the manifesto presented on Friday by the common opposition’s camp specifies gas prices will be dropped by Rs. 300 from its present point. In the battle to provide and pledge handouts the oil price decline has certainly been a boom.
But it has come at a cost. The monumental losses of the Ceylon Petroleum Corporation (CPC), which would have been soothed somewhat by prices being kept at the previous point, will continue to stagnate. Despite consistent rains for most of 2014 providing relief to the Ceylon Electricity Board (CEB), lack of structural changes to it and other State enterprises that rely on CPC for cheap fuel will mean the debt monster will continue lurking, only to come down hard on consumers and the fiscal health of the country once elections are worked out.
The Government, if it is smart enough, can take this lull in prices to put its own oil subsidy in order and work on a more sustainable model that allows the CPC and its interlinked State enterprises to move closer to breaking even. Perhaps even, unlikely as it may seem, better governance.
Sri Lankans will also be relieved that the latest round of price fluctuations does not come with hedging debacles attached. Many will remember that CPC entered into a series of contracts to hedge a portion of its oil imports beginning in 2007, increasing the amount hedged over time to about one-third of oil imports. Lanka IOC also hedged. As long as oil prices were rising, hedging was advantageous, but hedging proved to be extremely costly once oil prices began to crash in the last few months of 2008.
In the end, Sri Lanka’s Treasury was exposed to about $ 464 million in claims from three foreign and two local banks. The perception that the hedging deals were unfairly structured and that the public was being asked to pay for the hedging losses through higher retail prices and not benefiting from falling oil prices rapidly gained wide acceptance and brought headaches to many.
Yet, perhaps the most crucial point of all, is finding a way for exporters to tap into low oil prices and its inherent trickle down effects. Such modalities need to be worked out irrespective of the many distractions provided by politics. But that is always easier said than done.
