Sri Lanka’s economy and the fuel crisis

Dr. C.S. Weeraratna

ECONOMY: The most current problem the country is facing is the fuel crisis, which is likely to have extremely undesirable repercussions. A large sum is spent on importing petroleum to Sri Lanka. It has increased from Rs. 75.6 billion (US$ 838 million) in 2002 to Rs. 215 billion (US$ 2070 million) in 2006, nearly a 180% increase over the last five years.

The world market price of crude oil has increased substantially and it may continue to increase according to newspaper reports. As a result it is likely that our annual fuel bill will be around Rs 250 billion in the current year.

The total annual export earnings from tea, rubber and coconut is only around Rs.100 billion. Thus, our annual fuel bill is even more than what we earn annually by exporting these crop products. High oil prices will widen our trade deficit which was around Rs. 350 billion in 2006.

If we consume petroleum products at the current rate, at least an additional US$ 500 million (Rs. 50 billion) will have to be spent. Hence, it is essential that the consumption of petrol and diesel be reduced.

The local prices of diesel and petrol too have increased considerably during the last few weeks, causing an increase in cost of almost everything including bus and train fares and power, ruining the whole economy of the country.

The cascading effect of increasing fuel prices, specially the price of diesel is causing considerable economic hardships to the poor. The buying power of their meagre incomes have decreased considerably which have made the life of a large number of them miserable.

If the present opposition is in power, they would have implemented the proposals of Regaining Sri Lanka causing even severe hardships to the poor but, the current fuel crisis and its undesirable effects have given the opposition a good opportunity to protest.

Economists’ views: Some economists have been analysing different aspects of the problem of increase of petroleum prices, but without pragmatic, people friendly solutions to the problem. The easiest action to mitigate the increase in fuel prices in the world market, as suggested by some economists, is to increase local fuel prices.

They recommended that the fuel prices are made equal to the world market prices. With the world fuel prices increasing almost daily, is this recommendation practicable? What will happen to prices of essential items? It will continue to rise, not proportionate with the cost of fuel, and remain at a higher level even if the fuel prices drop.

Increasing diesel prices will have a corresponding effect on the cost of production of all our exports including tea, rubber, coconut and garments etc, resulting our exports uncompetitive in the world market. Most of the farmers, who constitute nearly 60% of the population, do not get any regular income.

If their buying power is reduced the demand for industrial products will decrease causing further retardation of the economy of the country, setting a vicious circle. Hence, it is important that all the undesirable effects of increasing fuel prices should be given consideration before increasing fuel prices.

Stabilisation of diesel prices

What is important now is to stabilise the local prices of diesel, which is used in many productive functions such as transport of public and goods, electric power generation, factory operations etc. It will negate most of the undesirable effects of increasing fuel prices.

At the present level of fuel consumption the total amount necessary to stabilise diesel prices will be around Rs. 20 billion per year.

A portion of the finances necessary for this may be obtained by taxing heavily (such as a diesel tax) those who use diesel vehicles except buses and lorries. If diesel prices are increased, the owners of these diesel vehicles in any case will have to pay more. Hence taxing them is reasonable.

The Government also needs to provide funds necessary for stabilisation of diesel prices. This is far better than increasing salaries, providing other benefits in lieu of high fuel prices and facing the protests of the people. For a start, and for the sake of the country, the total cost of subsidising food in the Parliament can be used, to stabilise diesel prices. By stabilising diesel prices, the rise in cost of living can be reduced to a great extent and the deterioration of the economy can be retarded.

Reducing fuel consumption

While the diesel prices are stabilised, it is essential that action is also taken to reduce fuel/power consumption in the country. Otherwise, as indicated elsewhere, the trade deficit will continue to rise. In many other countries such as China, Thailand action has already been taken to reduce fuel/ power consumption and cut down wastes. If we reduce our power consumption by 10%, it will result in a saving of Rs 20 billion in foreign exchange.

It has been reported that traffic jams cause an appreciable waste of fuel amounting to around Rs. 2 billion per year. All this can be saved if a realistic and concerted effort is taken by the Police and other relevant authorities to reduce traffic congestion.

Many factors such as heavy vehicles, including lorries and containers, on roads during the times of heavy traffic, roaming cattle in some roads in Colombo, undisciplined drivers cause traffic congestion. Staggered office times and a change in school times would reduce traffic congestion to a considerable extent.

The amount of power used to pump water, an appreciable portion of which is used to wash vehicles, flush toilets etc. is substantial. Roof rainwater harvesting to obtain water for such purposes would reduce power used by National Water Supplies and Drainage Board in pumping water. About 65% of electric power is thermal and diesel is used as the source.

Consumption of electricity in public offices can be reduced to a considerable extent if the Heads of such Institutions are asked to take immediate action to cut down excessive/unnecessary use of electricity.

Alternatives

Studies conducted in many countries have found a number of alternatives to petroleum. Vegetable oils (bio fuels) such as Soya oil, rape seed oil etc. are such alternatives for diesel. Ethanol is the most widely used alternative fuel. It is used extensively in countries such as Brazil, India, Canada etc.

Automobiles powered by gasohol (gasoline and alcohol) are widely used in these countries. In US for example, around 6 billion litres of Ethanol, are used to blend gasoline.

Ethanol can be made from high starch containing crops such as manioc and maize, or high sugar containing crops such as sugarcane. These crops are cultivated in Sri Lanka. Around 10 million litres of alcohol are produced annually at Pelwatta and Sevanagala sugar factories. These can be used to blend petrol and used at least in three-wheelers so that those who use them need not pay higher fares.

Urban wastes can be used to produce bio-gas which can replace LP gas used for cooking. Dendro-power using fast growing nitrogen fixing trees such as glyricidia and Leuceana, and solar-power are also potential alternatives.

Thus, there are many alternatives to petroleum. Unfortunately, in Sri Lanka, development planners and scientists have not given much thought to the need for development of alternate sources of energy.

It is high time that early action is taken to examine the different ways of solving the problem of fuel crisis and implementing appropriate actions, rather than simply increasing local fuel prices, as suggested by some theoretical economists, which would result in many problems to the people and to the Government.

(The writer is Chairman, Sugarcane Research Institute)