Continuity of cost-reflective fuel price formula is sensible

The war in the Middle East has dragged on for a month now, and there appears to be no conclusive end anytime soon.

The chaos in West Asia has now paved the way for a debilitating global economic slowdown. In response to the military aggression of the US and Israel, Iran has now effectively closed the Strait of Hormuz. The closure has disrupted oil and gas shipments from the region and rattled markets around the world. Since the outbreak of hostilities, the price of a Brent crude oil barrel has risen from $ 72 to $ 112, a considerable increase of 56%.

The unprecedented increase in global fuel prices has caused huge financial pain to oil-importing countries like Sri Lanka, apart from creating serious challenges for policymakers in emerging economies. Since the crisis erupted, the Government has so far raised fuel prices twice, apart from introducing a fuel rationing system through a QR code to prevent hoarding of the essential commodity by opportunistic individuals. Moreover, Wednesday has been declared a holiday for the public sector, schools, and universities.

Meanwhile, the Ceylon Electricity Board (CEB) has proposed a 13.56% increase in electricity tariffs for the second quarter of the year. Electricity generation would face further pressure with the onset of the dry season, as well as reduced generation from the Lakdhanavi power plant, caused by inferior-quality shipments of coal that were procured under questionable circumstances.

Amid these disturbing developments, fuel prices in the local market have become a major bone of contention. Cabinet Spokesman and Media and Health Minister Dr. Nalinda Jayatissa claimed the Government is absorbing Rs. 20 billion a month to cushion the impact of sharply higher fuel prices, even after raising rates to levels last seen during the 2022 economic crisis. However, some have questioned his statement and criticised the lack of transparency of the fuel price formula. On the other hand, Opposition Leader Sajith Premadasa has called for the reduction of taxes imposed on fuel by the Treasury to ease the burden on the masses, similar to moves taken by Vietnam and India.

While in the Opposition, JVP/NPP politicians severely chastised the timely revision of fuel prices in the local market in accordance with price fluctuations in the international market. During those days, particularly during the two-year premiership of Ranil Wickremesinghe from 2002 to 2004, politicians like President Anura Kumara Dissanayake convinced the masses that fuel prices were increased by their predecessors to counterbalance exorbitant and unproductive Government expenses, as well as losses arising from corrupt activities of politicians. Yet, with the assumption of power, realisation has finally dawned on them.

Subsidising fuel prices at a time when consumption needs to be minimised to manage shortages caused by supply chain disruptions is not logical. Unless local prices reflect the situation in the international market, foreign reserves would be unnecessarily stressed and the local currency would decline rapidly due to the lack of demand adjustment for fuel. Maintaining cost-reflective pricing mechanisms for both electricity and fuel is an integral element of the IMF bailout package, and departing from a system which has ensured economic stability is reckless.

As the Advocata Institute has pointed out, 70% of fuel is consumed by the top 30% of income earners in the population. Thus, subsidising fuel is neither sound economics nor timely, given the severity of the crisis triggered by the war in Iran. Given the absence of concern for the common good in Sri Lankan society, only realistic pricing of fuel and electricity would ensure macroeconomic stability.

The Government must avoid the temptation to indulge in populist actions and instead pursue sound macroeconomic policies to safeguard the best interests of citizens, despite the political incorrectness of such actions.