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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Opposition support for ‘inevitable’ energy, transport price increases mixed

Opposition support for ‘inevitable’ energy, transport price increases mixed

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K.Haputantri

K.Haputantri
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Opposition support for ‘inevitable’ energy, transport price increases mixed
* People will bear the brunt of govt excesses, unless rulers voluntarily limit graft – Sunil Handunnetti
* Cash-strapped, debt-ridden govt has no choice, price adjustments a must to get IMF support - Harsha de Silva
January 22, 2013, 7:55 pm
The Island

Opposition lawmakers are divided as the country approaches its greatest economic challenge with certain sections of the current administration sensing it is time to wake up and face reality, or sink deeper into trouble, held down by mounting debts.

Long-called for by independent economists and think tanks, opposition lawmakers say energy and transport price increases are inevitable and a cash-strapped, debt-ridden government should contain graft and take steps to soften the impact.

With the government showing signs that it has realised that decades of populist economic policy can no longer be sustained, where energy and transport prices are being heavily subsidised, incurring huge budget deficits, which ends up burdening the people and nullifying the benefits of the subsidies, opposition lawmakers are divided on the matter.

Economists point out that by delaying pricing reforms, the country would sink further into debt.

"Will the government be courageous enough? Will it be honest for once? Will the opposition unite behind the government? A perilous journey lies ahead of us, so perilous the government may even opt not to change the status-quo, heaping debt upon debt on our children and their children. Both government and opposition lawmakers are equally responsible for happens next," an economist warned.

JVP MP Sunil Handunnetti told The Island Financial Review that his party will not support moves to adjust domestic energy and transport prices to reflect global oil price movements.

"Global oil price movements do not apply in Sri Lanka because we have seen the government increase prices when global oil prices fall, and reduce prices when global oil prices rise, depending when elections are being held. The massive losses sustained by the CPC and CEB for decades suggest a structural problem, where graft, inefficiencies, corruption and fraud are the norm. The government, heavily in debt and depending on debt to sustain itself, has no option but pass down price increases on to its ever-willing closest friend, the people. Domestic energy and transport prices would most definitely be increased soon, and it is the people who would have to bear the full brunt of these adjustments. The government may then see its revenues increase and this would be used to finance its excesses, like hosting night races, and the people would be invited to witness Lamborghini races for free as a reward," Handunnetti said.

"There is one way out of this problem. The government has to voluntarily reduce graft, corruption and fraud. This will create space for loss making enterprises to make a recovery. Merely passing down price adjustments on to the people will not work, and it is not fair," Handunnetti said.

UNP MP Dr. Harsha De Silva said the government has no option but pass-through energy and transport costs to reflect global oil price movements.

"This is the only solution to the problem and it was the UNP that introduced pricing formulae in 2002, which the government rejected outright when it came into power. The Balance of Payments problems in 2008 and 2011/12 were largely caused by not allowing the CPC and CEB to adjust their prices accordingly. And, with the government desperate for financing, future IMF involvement would mean the CPC and CEB would have to breakeven, which means the people would have to bear the adjustments to prices. This will surely happen, because this cash-strapped, debt-ridden and desperate government needs IMF funds to move forward," Dr. De Silva told The Island Financial Review.

"The government keeps printing money each time it has to meet financial requirements of the CPC and CEB and this has lead to inflation. In 2008 we saw inflation spike to over 20 percent as a result."

Dr. De Silva pointed out that all three sovereign ratings agencies covering Sri Lanka (Fitch, Moody’s and S&P) have already made it clear that they were concerned about the growing indebtedness of the government.

"This government should have the guts to explain matters to the people. We find some joker like Wimal Weerawansa say one thing to the people while the government tells the international community something else. One of the conditions for the concluded US$ 2.6 billion standby arrangement from the IMF was to breakeven the combined losses of the CPC and CEB, but this was never done. And one of the conditions for going for an extended fund facility (EFF) with the IMF is for the government to do this now, so price increases are inevitable if the government wants IMF support, but will the government tell the people?"

Dr. De Silva cautions that the government should not try to heap the entire burden (CPC, CEB losses) on the people all at once. "People are already finding it difficult to survive with the cost of living moving up drastically, so the government must give thought to how these price changes would come about. Also, wages should be increased to reflect the changes in inflation, this is only fair."

Dr. De Silva argues that if energy and transport prices were allowed to reflect global realities, then the economy would benefit in the medium to long term. This is because the economy would save when prices are too high. This would also reduce the need for the government to introduce ad hoc tax increases. It would also help contain budget deficit and keep interest rates and inflation stable and under control.

Earlier this year, Central Bank Ajith Nivard Cabraal said the government would have to seriously reconsider its energy and transport pricing strategy, allowing a pass-through of costs to the people in order to ensure a more sustainable economy in the future.

Treasury Secretary Dr. P. B. Jayasundera and Deputy Finance Minister Dr. Sarath Amunugama have both said the heavily subsidised pricing policy was not sustainable. Dr. Jayasundera also said the government wants US$ 1 billion from the IMF for budget support.

Independent think tank, the Pathfinder Foundation, consistently brining up the issue of heavy subsidies for energy and transportation, has said both the government and opposition would have to work together in explaining to the people the benefits of passing-through costs. Sri Lanka needs to act fast on this matter.

The International Monetary Fund (IMF) has told Sri Lanka it cannot subsidise the entire economy and that targeting only the vulnerable was a more sustainable model.

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