Comment – Sri Lanka’s Catch -22 debt crisis
View(s):Sri Lanka has reached a turning point in the power crisis – trapped between the need to increase prices to reduce the massive debt burden and, on the other hand, relieving the burden to the poor.
Weeks after growing outrage and rising protests over the new electricity tariffs which are to take effect in mid-May, President Mahinda Rajapaksa announced concessions including no increase in rates for those using less than 60 units of electricity per month.
That benefit would be shared by 1.3 million customers of the Ceylon Electricity Board (CEB) whose bills were to increase by 47 per cent under the new tariffs. Of the total 5.6 million consumers, about 4.6 million (82 per cent) use less than 180 units per month –which is the largest revenue segment for the CEB.
Why such high rates were imposed in the first place, during a period of rising cost of living, beats one’s imagination. It has without a doubt impacted on the popularity of the regime – another reason for a reverse gear policy on the new rates. A Business Times (BT) poll this week on the price hike threw up some interesting information: The majority say the price hike is unreasonable while most blamed the President and Treasury Secretary Dr. P.B. Jayasundera for the decision.
However on a macro perspective, the Government – saddled with billions of rupees in debt – has no choice other than passing the high costs to the consumer. The question is- was it cheaper or more effective (taking into consideration the issue of committing political hara-kiri and becoming unpopular) to increase rates or continue to accumulate debt?
The opposition, as usual, jumped in to take credit for the reversal of fortunes (going back on the price hike) for the Government … conveniently ignoring the fact that it was the media, reflecting public opinion, that was largely responsible for the ‘change of heart’. Not surprisingly, the President’s announcement came as if he was doing the people a great favour whereas the BT poll revealed that it was the President (as Finance Minister) and the Treasury Secretary who were most responsible for the initial decision in the first place.
Public anger over the price increases also appeared to influence the comments of economists and other experts. International Monetary Fund (IMF) Resident Representative Koshy Mathai told reporters that ad-hoc price increases was not the way forward; rather it should be an automatic pricing formula (in place a few years ago when the United National Party was in power).
Sunday Times economic columnist Nimal Sanderatne said, “It is difficult to concede that revisions of energy prices are a step in the right direction. Reforms in the management of these public enterprises should be the priority and should precede price increases. The increase in electricity prices would increase the costs of living and the costs of industrial production.”
Private think-tank, the Pathfinder Foundation (PF) however welcomed the price hike which it said addresses the chronic losses incurred by the CEB but expressed disappointment that the “public debate has revolved almost entirely on the extent and nature of the tariff increase to make it more cost-reflective”.
Its argument was that public focus on adjusting the tariff structure, based on whatever cost-cutting is possible under the existing inefficient and non-transparent system, is to miss the point entirely. It is similar to “changing the pillow to cure the headache” i.e. it amounts to treating “the symptom rather than the cause”, the PF said.
Government debt is rising. There is a sense of desperation to either raise money or re-allocate current financial resources with efforts underway to slash budget allocations given to critically-important ministries (health and education) and increase the number of tax payers (as reported in the BT last week). The Treasury has an unenviable task of finding money to fund the huge expenditure-heavy budget while tax revenues are far off target.
It is in this space that the never-ending debt at the CEB reached such a critical stage that there was no other choice than passing on the increases to the consumer. The question is – was it necessary to enforce such a high incsease or phase it out over a period of time to cushion consumers from a one-off shock?
Eventually the CEB debt, like other Government debt, would be paid by the people at all levels through increased taxes on consumption. Anyway the people will pay. The change of heart of the Government is just a ‘seeni-boola’ strategy which is not sustainable.
In a larger context, these are tough, tricky and complex questions faced by any administration in ensuring state institutions are financially stable while not taxing the people too much. However in the case of the present Government, the debt accumulation has been greater than others.
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