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Rising fuel prices: SOS to OPEC
Jayantha Dhanapala on special assignment for Finance Ministry
By Feizal Samath
The government, backed by a new Indian credit line that will ease pressure on the exchange rate, is using diplomatic channels for long-term fuel imports from "friendly" countries while veteran diplomat Jayantha Dhanapala’s assistance has been sought to negotiate a special loan facility from OPEC.

“We are hoping Mr. Dhanapala could use his extensive diplomatic contacts to swing a deal with the OPEC Fund which has provision to provide non-OPEC members with special facilities,” Finance Secretary P.B. Jayasundera said. OPEC (Organisation for Petroleum Exporting Countries) controls global oil production and prices.

Mr. Dhanapala, a retired UN Under Secretary General and Sri Lanka’s most accomplished diplomat, now heads the government’s Peace Secretariat and is not involved in any foreign affairs assignments. The former UN diplomat confirmed he had discussions with the Finance Ministry on this issue. “They have made some contacts with OPEC and requested me for some help,” he told The Sunday Times, adding that he was awaiting further intimation from the ministry. The OPEC Development Fund has various windows for soft loans particularly for countries like Sri Lanka that pay high prices for crude oil, Mr. Dhanapala said.

Finance Minister Sarath Amunugama has been discussing long-term fuel import contracts with Saudi Arabia, Iran and some other countries with prices that would be more favourable than spot market rates which is how fuel is imported now. Long term contracts, a mechanism used some years ago, will not be affected by sharp swings in the spot market.

The main focus of long-term oil contracts is to ease pressure on the rupee and the trade balance and in turn boost foreign reserves. These proposed arrangements though unlikely to bring down fuel prices locally, are expected to halt the rapid depreciation of the rupee against the US dollar and in turn reduce food import prices. On Friday, the government announced an Indian line of credit of $150 million for petroleum imports to be made use of by the Ceylon Petroleum Corporation and IOC. The loan is repayable over seven years at concessional interest rates.

“We were negotiating a three-year loan facility but the Indians agreed to seven years which is even better,” the Finance Secretary said explaining that refined oil products would be imported from India under this package. The fresh inflow of dollars is likely to stabilise the dollar at the Rs 100-102 range in coming weeks. World market fuel prices have been rising and according to the government’s two-long pricing mechanism should have also risen locally by at least Rs 10 per litre in the case of petrol. Finance Ministry officials said a fuel price increase was inevitable but has been delayed to lessen the burden on the poor, already affected by high COL. The opposition however accused the government of delaying the increase because any rise would have made it unpopular before last week’s provincial council poll.

According to current estimates, the government spends $900 million a year on crude oil imports at $32 per barrel and an extra $250-350 million when it is at $40 per barrel. “Our biggest exercise now is to ease pressure on the exchange rate and that’s why we are looking at a range of options like hedging facilities, long term contracts, etc to minimise the impact that spot market oil prices have on the economy,” Mr. Jayasundera said. Oil is currently trading at $38-39 per barrel now but is expected to fall by next month due to West Asian developments following the pullout of US administrators from Iraq.

Another possible $100-150 million from the third player in the oil import and distribution market here would add to foreign exchange reserves, he added. The government is negotiating with Chinese and Indian parties for the vacant third position in the market.

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