Sri Lanka is in favour of formula pricing fuel to reflect international prices, a minister said, which is long required move to reduce the risk of balance of payments and currency collapse, when prices move up.
“The finance minister Mangala Samaraweera will be introducing pricing formulae to reflect international prices and give the benefit to consumers,” State Minister for Finance Eran Wickramaratne said.
A pricing formula on one side lowers fuel and gas prices to consumers bringing boosting their disposable incomes when international prices fall.
But the big benefit of market pricing is that when international prices go up, retail prices are raised, temporarily curbing consumption and reducing non-oil imports.
Unlike food, energy is consumed more by the higher income groups, with the richest sections of society consuming the most.
In Sri Lanka state energy utilities including electricity subsidises customers by borrowing from state banks.
The spike in borrowings requires a rise of interest rates, which will bring in more savings, curb credit to other sectors to keep the economy in balance and the exchange rate stable.
When there is a drought, the Ceylon Electricity Board imports more oil, but the cost is financed by bank credit.
But in Sri Lanka the central bank does not counter such so called ‘supply shocks’ with higher interest rates, but prints money in keep rates down, boosting credit, non-oil imports and ultimately generating a balance of payments crisis.
The country has a so-called soft-peg, where the central bank prints money and tries to defend the currency at the same time which is practically impossible.
In the 2011 crisis, the central bank cut rates in early 2011 as a drought took hold, eventually printing over 250 billion rupees to create the BOP crisis.
State energy utilities borrowed over 200 billion rupees from state banks for the consumption subsidies which could have gone for employment generating investment.
The Public Utilities Commission of Sri Lanka, which was set up partly to avoid BOP crises and currency collapses following the 1999/2000 economic crisis failed to raise power prices in 2011, as it could be overridden by the power ministry.
In 2015 money was printed to accommodate a runaway budget with salary hikes and subsidies as well as a pick-up in private credit, despite falling oil prices.
The rupee fell from 131 to 154 and inflation in the current crisis surged, hurting the poorest sections of society most and cutting their real salaries and making them permanently poor.
Sri Lanka was expected to re-introduce fuel price formula by end 2016 under a deal with the International Monetary Fund to save the country from balance of payments trouble, but the deadline was missed.
Under revised deal, fuel pricing has been set a deadline of March 2018 and electricity by 2018. (Colomb/Aug12/2017)