HIGHER OIL PRICES PUSH SRI LANKA INTO DEEPER ECONOMIC CRISIS

Introduction

Introduction Factors affecting domestic inflation could generally be divided into two categories.

Demand side and supply side factors that could arise domestically or externally. on the demand side there are monetary policy, fiscal policy, wage policy and seasonal factors such as festivities affect inflation

On the supply side, weather, cost of inputs, level of food production and changes in administered prices have an impact on inflation. Foreign prices and rupee depreciation are the main external factors affecting inflation. Rising oil prices, loose monetary and fiscal policies, upward revision of administered prices such as passenger transport fares and electricity tariff.

Pricing Mechanism of Petroleum Products Until 2002, domestic prices of petroleum products were strictly administrated and for most of the time, were below the cost, even when the international prices were high. The difference between the domestic and world prices was absorbed by the government through direct or indirect subsidies.

The impact of change in diesel prices on both point to point and average inflation has been around one percentage point during 2003 and until recently as price adjustments were gradual. The impact on point to point inflation is rising again since August 2004 with the recent sharp increases in diesel prices. This result implies that gradual adjustment of diesel prices could keep its impact on inflation to a minimum level of around one percentage point. Sharp adjustment would lead to significant increase in inflation in the short-term.

The demand for kerosene, which is largely being used for lighting purposes, has been on a declining trend along with rapid expansion of rural electrification. However, diesel is becoming the major petroleum product that is used in the production process including power generation, transportation and industries and therefore, strongly influences inflation.

A Sri Lankan bus worker carries empty containers searching for fuel in Colombo on March 2, 2022.

It is already terrible economic crisis has expanded as oil prices soar near $110 a barrel. Vehicles are stranded with empty tanks, power cuts are depriving students of study time for exams and shopping mall air conditioners are being switched off to conserve energy. (AP Photo/Eranga Jayawardena, File)(Eranga Jayawardena / Associated Press)By Krishan Francis Associated Press, March 2, 2022 8:16 pm Colombo

The South Asian Island nation already was so short of hard currency that authorities had restricted imports of cars and fertilizer. It’s now having to scrape into dwindling reserves to pay for ever more costly oil needed to keep the economy running.

Authorities have announced countrywide power cuts extending up to 7 1/2 hours a day because they can’t supply enough fuel to power stations. Hydro power, the other energy mainstay, often runs short during the dry season. It will only end with monsoonal rains that usually begin in May.

“We can’t find diesel and furnace oil, all two kinds and therefore we have been compelled to go for such an extended power cut,” Sri Lanka’s Public Utilities Commission Chairman Janaka Ratnayake told reporters.

Bus services vital for many workers are also in trouble, unable to find diesel and sometimes stranding passengers mid-route.

" All Sri Lankans are losing revenue and time, since all nations have to spend hours waiting in long lines to buy diesel”

The higher oil prices are just an extra burden in what really is a foreign exchange crunch.

Sri Lanka is struggling to pay back foreign loans for infrastructure projects that are not making money. A $1 billion repayment is due in July on foreign debt obligations of $7 billion this year.

With dollar reserves running short, banks are unwilling to open lines of credit for imports even of essentials like milk powder, medicine and fuel.

“There are ships waiting for payment before they will unload fuel. Because of this delay limited stocks are being released to the market and fueling stations are limiting sales”

“The crisis we have in our country is not one of fuel or power generation. It’s a foreign exchange crisis”

It’s a big worry as costs rise for most businesses, said Shiran Fernando, chief economist at the Ceylon Chamber of Commerce, a collection of trade and industrial associations in Sri Lanka.

Leading malls featuring big fashion brands are having to switch off air conditioners despite the hot, humid weather because they lack the diesel to keep their generators running.

Fuel shortages are eating into study time for kids who already have had their studies interrupted over the past two years due to the pandemic.

Associated Press writer Bharatha Mallawarachi contributed to this report

CONCLUSION

Price of diesel was used as a proxy for petroleum prices as diesel is widely used for transportation, power generation and has a direct relationship with consumer prices. The direct impact is measured through items relating to petroleum prices which are included in the price indices. For example, electricity charges and transport fares are directly linked to diesel prices. The study found that an increase in diesel prices by 10 per cent would directly increase CCPI and SLCPI by 0.173 per cent and 0.197 per cent, respectively.

 

REFERENCES

CENTRAL BANK OF SRI LANKA

(AP Photo/Eranga Jayawardena, File)

(Eranga Jayawardena / Associated Press)

By Krishan Francis Associated Press, March 2, 2022 8:16 pm Colombo