“Fuel price hike, not a long-term solution”

Originally published: 1 month ago 18

Increasing fuel prices, which is inevitable to boost revenue, is not a long-term solution to the country’s economic woes, said economists calling upon the policymakers to expedite structural reforms to increase efficiency and reduce waste.

Former Central Bank Deputy Governor Dr. W.A. Wijewardena said Sri Lanka cannot continue to enjoy the luxury of consuming fuel below its costs; the government cannot forgo the easy tax revenue it gets from the fuel sector due to perilous state of its budget with declining revenue (mainly due to unsolicited tax cuts) and rising expenditure due to Covid-19 issues. There’s no other alternative but to get the user to economise on the use by paying the real price for it; in this sense, it’s justified; however, it won’t deliver a long term solution to the country’s catastrophic economic issues; that lies in introducing economy wide structural reforms aiming at increasing efficiency and reducing waste in the public sector and facilitating private enterprises; without that, this increase will soon negate its intended purpose and Sri Lanka will be back to square one needing further fuel price increases.

Professor in Economics, University of Colombo, Sirimal Abeyratne said in Sri Lanka, domestic fuel price setting has been in the hands of the Government and not the market. The matter gets worse as it is not a commodity produced in Sri Lanka so that the Government or any agency in the country has no impact whatsoever on its production cost.

This means that the Government has taken control of the prices of an essential commodity over which it has no control at all, but it has to bear the political cost of it. After all, now it is not about economics, but politics. Obviously, fuel price variations affect consumption and production all over the world, so Sri Lanka is no exception either. The Cost of Living Committee decided to raise fuel prices considering the rise in prices in recent times. The price of a barrel of crude oil shot to over US$ 70 and market trends indicate that prices will continue to surge with the rise in demand as countries relax travel restrictions and return to normalcy.

Economists urge that Sri Lanka has to curtail expenses to maintain fiscal discipline. They propose increasing investments on boosting domestic production and exports to spur economic growth.

The country spends a colossal large amount of foreign exchange for fuel imports each year. The expenditure on fuel imports in 2019 was US$ 3,677 million. The expenditure was slashed to US$ 2,325 million last year due to the ban on vehicle imports and the drop in global oil prices to US$ 45.57 from US$ 68.80 in 2019.

However, sectors that have been adversely affected by the fuel price hike are up in arms over the sudden move when business has crumbled.

“We will resort to legal action if the decision to raise fuel prices is not withdrawn,” said All Ceylon Fisher folks Trade Union President Aruna Roshantha Fernando.

Similarly other sectors including agriculture have been severely hit by the move.

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