With escalating fuel prices and a rising cost of living, the inevitable thing for Sri Lankans to do is to face reality, according to Treasury Secretary, Dr. P.B. Jayasundera. In an interview with The Sunday Times, Dr. Jayasundera, who is the chief financial officer of the state, said global oil prices had doubled over the past three years and Sri Lanka`s near total dependence on fuel imports had compounded the crisis.
He said oil prices were around US$40 not long ago but now they were soaring beyond US$70 and Sri Lanka had no alternative but to manage the huge outflow of foreign currency. He said the cost of oil imports was now about US$2 billion a year with little or nothing by way of loans or credit.
Dr. Jayasundera said this was the main factor influencing the exchange rate ? the declining value of the rupee in relation to the dollar ? and people must be brought to an awareness of this stark reality. The Treasury Chief said the complex situation was made worse because of the crisis over power supplies where a huge subsidy had to be given by the Ceylon Petroleum Corporation to the Ceylon Electricity Board. He said with the hydropower generation declining Sri Lanka was today 70 percent dependent on thermal power and other fuel-based generation. This meant a huge and growing subsidy which was having a shattering impact on the economy.
He said there were undue delays in starting alternative power supply facilities. Furthermore, even the purification of water for drinking needed electricity. Such realities also needed to be understood by the people.
Dr. Jayasundera said it was a hard and painful decision for the government to increase kerosene prices and it was equally hard and painful for the people to adjust. He said kerosene prices had not been increased substantially in earlier years for political purposes but this could not go on beyond prudent levels, because the economy might be damaged severely.
He said despite various problems the world economy was growing with the United States and the European Union leading the field. More significantly the highly populated India and China were also experiencing double digit economic booms and this was increasing the demand for energy. Thus prices were soaring.
He said the demand for energy from East Asia and other Asian countries was also growing but supply was not increasing in proportion largely because of the crisis in Iraq, one of the largest suppliers. Other major suppliers like Nigeria and Venezuela were also having various problems. He said that while adjusting to realities in the short term, Sri Lanka also needed long-term energy conservation policies and a more intensive search for alternative sources of energy.
Dr. Jayasundera said he believed Sri Lanka had gotten itself into an `unnecessary crisis` because the country needed only half of the fuel it was currently importing for transportation with the rest being used for power generation. He said the cheapest form of energy to come in the next 10 to 20 years would be from coal. In terms of income, balancing out the environmental factors and looking at cost and affordability, `coal should be our choice.`
He pointed out that a coal based 900 megawatt power plant was being constructed in Puttalam with a transmission line in progress. Dr. Jayasundera said this project would be accelerated. He said the government was also exploring new technology for hydro and other renewable energy sources.
`Here in Sri Lanka, we have removed taxes on several products such as gas. Kerosene and various other industrial fuels have no tax.` In the past, diesel was subjected to VAT but that has been removed. Diesel, crude and kerosene are also free from Customs duty,` he said.
However, Dr. Jayasundera said diesel had an excise duty of Rs.2.50 to generate some fraction of money that was required for road maintenance. Petrol had an excise duty and standard VAT of Rs.20. In 2005, Sri Lanka generated Rs.37 billion from petroleum products. The amount declined to Rs.28 billion in 2006 but the country was spending Rs.54 billion on road maintenance and development. `There is still a deficit in terms of what people are paying for the use of roads,` Dr. Jayasundera said.
He said that to a certain extent, the tax burden has been reduced but people should not get the impression that by giving tax breaks, the problem can be solved. If you remove taxes, what is the relief?`
Consumer spending on the rise?
Asked about recent statements made by Central Bank (CB) Governor Nivard Cabraal on how consumer spending had increased and the opposition was wrong in its criticism of the government, Dr. Jayasundera said he agreed with Central Bank Governor Nivard Cabraal`s assessment that despite opposition criticism, most consumers were having money to buy more and that economic growth came with challenges and opportunities.
As proof of this, he pointed out that in 1995, Sri Lanka had about 60,000 to 70,000 gas cylinders. Today, there were millions of gas cylinders. `To that extent, the number of people who are affected by gas prices is large but that doesn`t mean they are poor. The same applies to mobile phones. There are about 6 million users but that does not mean every single mobile phone user is a rich guy but they do have the expenditure capacity. This is the kind of economic activity which has increased Sri Lanka`s economic development and growth.
`Last year, Sri Lanka had a US$1300 per capita income but this year, we are expecting it to go to US$1500 per capita,` Dr. Jayasundera said. `While our income has risen, our comfort margins have also risen but our difficulties will be there. The opposition will pick up that side of the story and the government will pick up the other side but the most important thing is that there is a growing economy. To me, all the indications show that while there are many challenges, our economic growth is not evenly distributed. There has to be justifiable distribution in the lagging regions.`
Dr. Jayasundera said over the past three to four years, he had seen a continued improvement in economic growth despite the tsunami and the conflict. `We have come to 7% growth range so the economy is growing and people have learned to manage various risks. When Sri Lanka first confronted the conflict in 1983, it was a tremendous shock and there was huge setback to the economy because the economy was not adequately diversified.`
`The tourism sector, business cycle shows how it has been affected by the various terrorist incidents and how it has bounced back because today, there are more diversified operations and risks can be managed.`
The Treasury Chief said tourism industry had never reached the US$1 billion status and still hovered around US$400 million annually.
`When the industry is affected it might go down to around US$350 million. From a development perspective, those who are living in the tourist belt and those who find livelihood have a different problem because when tourism arrivals are low, their incomes are low and they can`t diversify into other activities.`
He said foreign direct investment was good even in the context of terrorism. Investors faced strong security restrictions in other countries as well and were becoming accustomed to it, he said `All these factors show that the economy is developing.`Referring to defence expenditure, the Treasury Secretary said it was roughly 3.5% of GDP.
`Many countries are compelled to spend more on defence now because of terrorism threats. There are some one off payments such as an air defense system or navy surveillance system. He added that the newly liberated area in the East cannot be handed over to a civil administration until there is adequate security. The range of 3 to 3.5% is low because above 5% is considered to be on the high side.
He said defence expenditure had not increased from last year in terms of the GDP. `Sri Lanka is in a more stable ratio when it comes to defence. By and large, we are not in an unmanageable situation. I want the people to understand that almost 70% of our defence budget is on personnel facilities for security personnel, their uniforms, food, salaries, looking after them. So this is not a high capital defence budget. Oil is the biggest worry. The risk has to be managed responsibly and professionally rather than just giving subsidies.`
Commenting on the development in the East, Dr. Jayasundera said: `the development projects in the East are in terms of the provisions in the budget. The projects were interrupted when some terrorist incident occurred. With the liberation of the eastern province, we took stock of projects already there and what new projects are needed. There is Rs.14 billion rupees which was provided for in the budget. We have also prepared an eastern revival programme where donors may reallocate or commit new funding,` he said.