Flammable economy?

• Fuel hike fires up fresh crisis
• Unprecedented rise to rocket cost of living; Opposition says hike anti-poor; subsidy scheme impractical
• Import bill in 2011 first 11 months at $ 4.1 b far above 2010 full year figure of $ 3 b
• Experts urge country to go back to automatic monthly price revision
• Hike likely to cut ballooning CPC, CEB losses – a key condition in IMF SBA program

Many anticipated a hike in fuel prices, but the unprecedented increase from Sunday has fired the economy and the poor into a fresh crisis, analysts and the Opposition warned yesterday.

Given the 50% increase in kerosene to Rs. 106 per litre and 37% hike in diesel to Rs. 115 per litre, the UNP was quick to label the move “anti-poor”. The Government said the upward revision was warranted given global spikes in oil prices and has assured relief via subsidised fuel to select vulnerable groups. (See box)
“The subsidy scheme hasn’t been thought through yet. Since there is no trust as the system is corrupt, any subsidy scheme will be impractical,” UNP MP and its Chief Spokesman on the Economy Dr. Harsha de Silva told the Daily FT. “The increase will have an unprecedented impact on cost of living,” he claimed. Bakery Owners Association yesterday announced prices of their products will be increased following the fuel hike.
Other analysts said if fuel prices weren’t increased the economy would face greater repercussions. They also said that the hike is likely to reduce pressure on the exchange rate as usage of fuel will be curtailed leading to lower demand and imports.
Despite a meeting with the Treasury Secretary last week and reaching an understanding, private bus operators have threatened to go on strike from Sunday midnight, whilst many had pulled back their services during the day since the hike was too much to bear.
The last fuel price revision was made on 30 October with diesel increased by Rs. 8 per litre and petrol by Rs. 12, same as the latest hike. Last year only two revisions were made as the Government postponed adjustments for political reasons. The first hike was in April.
If there was comfort last year, the pampered motorists and those who rely on public transport have been given a rude shock with the latest hike.
Whilst the Government has pinned the hike on global developments, the Opposition alleged it was aimed at finally satisfying IMF conditions. The MoU signed between the Government and the IMF for the $ 2.6 billion Stand-By Arrangement (SBA) of which $ 800 million still left, the President Mahinda Rajapaksa administration has to ensure combined losses of CPC and CEB must be at zero level.
President Rajapaksa during his address to the nation on 64th Independence Day celebrations said: “It is important to understand the problems we face due to the rise in oil and gas prices. It is important to be aware of the reality.”
Judging by the ballooning fuel import bill, the hike is justified though automatic adjustments are the best way out in to the future.
Imports in the first 11 months of 2011 had shot up by 54% to $ 4.15 billion, dwarfing the 2010 full year figure of $ 3 billion. The 2010 full year figure was almost reached by August 2011 (in which month import price was $ 107.74) with a figure of $ 2.98 billion.
In the month of November import cost rose by 117% to $ 469 million. the Central Bank said import expenditure on petroleum increased mainly due to higher average import price of crude oil of $ 113 per barrel in November 2011 compared to $ 84.85 per barrel for the corresponding month of 2010. However, in December it had declined to $ 110.57 as per Central Bank data.
Last week a spot prices of crude oil rose to $ 117 per barrel in New York but downward revision in growth forecast by OPEC saw price bit an eight-day rise. Brent’s New York closing price in December was $ 109 whilst on 3 February 2012 was $ 101 and on 8 February it was $ 99 per barrel.