How to reduce fuel prices? Economist explains

May 26, 2022 at 12:47 PM

Sri Lankan economic researcher Rehana Thowfeek has outlined the key reasons for the rapid hike in fuel prices in the country.

In a thread of messages on Twitter, Thowfeek has also explained ways in which fuel prices could be reduced. 

Rehana Thowfeek has pointed out reasons such as the effect of money printing, the Ceylon Petroleum Corporation’s (CPC) role, and shortage of dollars, among others for the fuel crisis.

Following are the key factors:  

Why are fuel prices shooting up rapidly?

  1. Fuel is now sold at market rates, so CPC does not subsidize like it used to by absorbing the loss (which is paid for with debt). CPC, i.e. the govt doesn’t have the fiscal capacity to do so.
  2. Rupee has lost its value rapidly due to excessive money printing. Coupled with short supply, a depreciating rupee, and rising global prices, the rupee value of a unit of fuel is significantly higher.
  3. Severe shortage of dollars in SL due to govt’s decision to use forex reserves to pay debt and delay help from IMF. Now every dollar available sells at a very high premium so the exchange rate is very high. Rupee cost of fuel purchasing is very high.
  4. As fuel subsidy removal has not been phased out (due to govt’s fiscal troubles), it is happening suddenly. Hence a rapid adjustment and severe shock to consumers with a cascading effect on the cost of production and living.

How to reduce the price of fuel?

  1. Strengthen the value of the rupee by increasing foreign investments and export earnings
  2. For electricity, invest in renewable energy and reduce dependency on fossil fuels
  3. Allow competitors to set up to offer competitive prices for people
  4. Reform the CPC to ensure better financial performance and efficiency. Reduce costs of operation. (NewsWire)