Financial Times

Govt. doublespeak on fuel prices
For weeks the new United People's Freedom Alliance government had maintained that it would not raise fuel prices despite soaring world market prices of crude oil and refined products. These remarks were made by ruling coalition politicians despite indications that international oil prices were unlikely to come down significantly any time soon and the increasingly heavy burden of maintaining petroleum subsidies on government coffers.

Of course, none of these government assurances were believed by the private sector, which had been maintaining all along that once the provincial council polls were out of the way, the government would make the unpalatable economic decisions that it had been postponing for so long. The most obvious was the fuel price hike. It was becoming increasingly obvious that the government would not be able to maintain prices at previous levels given the soaring cost of crude oil in the world market and the difficulty of the Treasury in increasing subsidies.

In a surprise announcement on Friday, July 23, the government raised the price of 90 octane petrol by eight rupees to Rs 65 a litre - said to be the sharpest increase in recent years. While this price hike makes economic sense, it seems to be of little benefit to the Ceylon Petroleum Corporation because petrol accounts for only a small part of fuel sales, the bulk consisting of diesel sales.

The government maintains that it would not increase diesel and kerosene prices, as this would lead to widespread cost increases and an increase in the cost of living, which would particularly affect the poor man. However, it seems inevitable that the prices of these essential commodities too would be increased. After all, given the government's income constraints it cannot realistically afford to support Ceypetco's losses for much longer or increase subsidies. Another option is to discourage the import of diesel vehicles to reduce consumption. Already prices of such vehicles are higher than that of petrol ones.

The government is also under increasing pressure to raise the prices of other commodities from flour to milk given price hikes in world markets and our dependence on imports. Local manufacturers and distributors of such products have reportedly asked for permission to raise prices or for a government subsidy in the alternative.

And the pressure of petroleum imports at high prices is said to be one of the reasons for the sharp depreciation of the rupee in the foreign exchange market.

It would have been much better if the government had come clean at the outset and been honest with the public who had voted it into power. It could have told them of the intolerable burden of maintaining fuel price subsidies in the teeth of such sharp increases in world petroleum prices and the need to raise domestic prices accordingly instead of misleading the public with its doublespeak on fuel pricing.

After all international oil prices are something beyond the government's control and the public should be able to understand and appreciate the government's predicament. By lying to the public this government has lost credibility. Already there are reports of a planned increase in electricity prices. These are said to be among the highest in the region but given the increasing dependence on oil-fired power plants, it seems inevitable electricity prices too would have to be raised.

As usual, the government has denied speculation it was planning to raise electricity prices and promised not to do so. But given its penchant to play politics with economic matters and about turn on fuel pricing and consequent lack of credibility, such promises too are difficult to believe.

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