Govt. cut fuel subsidy to meet IMF goal

Tuesday, 5 October 2010 00:12 - - {{hitsCtrl.values.hits}}

By Ranga Sirilal

COLOMBO, (Reuters) - Sri Lanka from next year will cut a fuel subsidy to the state-run petroleum company that cost it $214.8 million this year as it aims to meet an IMF budget reduction target, the petroleum minister said on Monday.

Sri Lanka is trying to reverse decades of overspending on poorly run state companies. Its plans to cut the budget gap to 8 percent of GDP, under a $2.6 billion International Monetary Fund loan programme, hinge on efforts to streamline state enterprises.

The Ceylon Petroleum Company (CPC) and its sister Ceylon Electricity Board (CEB) are among the biggest cost centres for the state, and the IMF has urged rationalisation to bring both back to a breakeven point. One of the main costs has been CPC’s subsidisation of CEB’s fuel oil bill for power generation, previously at levels of around half the world price. Petroleum Minister Susil Premajayanth said the government had raised the price by 60 percent as of 1 September.

“By January we are not going to subsidise,” Premajayanth told Reuters in an interview. “If we can sell furnace oil without any subsidy, then we can make CPC break even or even profitable.”

Premajayanth said the subsidy would cost Sri Lanka 24 billion rupees ($214.8 million) this year. CPC lost 12.3 billion rupees last year, and CEB owes it 81 percent of the oil firm’s total of 64 billion rupees in receivables.

The Indian Ocean island nation, enjoying the first fruits of peace since the end of a quarter-century of war in May 2009, has a relatively high cost of power generation due to its outdated equipment and the need to import all petroleum products.

The Ministry of Finance last month wrote to the IMF that the government “remains committed to move CPC to breakeven in 2011, while rationalising the electricity tariff regime in 2011 to move CEB towards breakeven”.

That will result in an increased electricity cost, at least temporarily, as Sri Lanka builds a 900 megawatt coal-fired plant due online by next year.

The government is also considering introducing a liquefied natural gas or compressed natural gas facility to help cut generation costs. Both were considered too unsafe to pursue during the war with the Tamil Tiger separatists, who routinely tried to attack vital economic targets.