US embassy cable - 04COLOMBO1272

UNCLAS SECTION 01 OF 02 COLOMBO 001272 
 
SIPDIS 
 
DEPT FOR SA/INS 
COMMERCE FOR ARI BENAISSA 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, CE, ECONOMICS 
SUBJECT:  Gasoline Hike a First, Tiny Step Forward 
 
Sensitive but Unclassified.  Please handle accordingly. 
 
1.  (U) Summary:  The Government took a tiny step to cut 
subsidies by increasing the price of gasoline last week. 
Gasoline accounts for just 10% of oil consumption in Sri 
Lanka, and the hike is unlikely to have a big impact on the 
cost of living.  This is the first price increase announced 
by the new Government and therefore a step in the right 
direction.  Subsidy related debts have accumulated in 
recent months as prices were not revised, particularly in 
the case of rising oil prices in global markets.  Political 
considerations (looming elections) were the reason.  End 
Summary. 
 
 
 
Price hike 
---------- 
 
2.  (SBU) The Government announced a 14% (Rs 8) hike in the 
gasoline price on July 24.  The new price of a liter of 
gasoline will be Rs 65 or $2.20 per gallon.  According to 
the state-owned Ceylon Petroleum Corporation (CPC), the 
price is still one rupee (1 US cent) below the cost.  The 
hike is unlikely to have a big impact on the cost of living 
as it is primarily the small upper-middle class and private 
and state institutions that use gasoline in motor vehicles. 
Hence, there was little public outcry following the 
increase.  Samantha Abeywickrema, Federation of Chambers of 
Commerce of Sri Lanka representative of small and medium 
enterprises, told EconFSN it was a sensible move not to 
increase the price of diesel and kerosene immediately, as 
price hikes on those products would have affected both the 
poor and the business community.  He contended that 
eventually these items also have to increase in price, due 
to the GSL's worsening financial position. 
 
3.  (SBU) The bulk (50%) of the oil consumed is diesel, in 
buses, trucks, passenger transport vans, industries and 
thermal power plants.  Due to traditionally low diesel 
prices, a considerable number of private vehicles are also 
diesel run.  Kerosene and Liquefied Petroleum Gas (LPG) are 
used for cooking.  At a recent meeting with the Ambassador, 
Finance Minister Amunugama discussed plans to increase the 
price of gasoline, but indicated that kerosene and diesel 
prices would remain unchanged for the time being, as they 
are widely used by low-income groups.  Electricity and 
wheat flour, among other products, are also subsidized. 
During 2001-2003, the previous Government began to revise 
prices of essential items and reduce subsidies. 
 
Pricing methods 
--------------- 
4.  (U) Sri Lanka adopted an automatic petroleum pricing 
formula in 2002, which allowed petroleum prices to be 
revised monthly, according to world market prices. 
Accordingly, oil prices were revised many times during 
2002-2003.  The automatic pricing formula was helpful in 
reducing cross subsidization between gasoline and other 
fuels such as diesel and kerosene.  Since February 2004, 
however, despite a sharp rise in international prices, 
petroleum prices were unchanged.  The previous UNP 
Government implemented the freeze for political reasons and 
the current UPFA Government had continued it.  Sri Lanka 
imports approximately 3,530 metric tons of petroleum 
products annually.  The import bill for oil is expected to 
rise to $1.2 billion in 2004.  If no price increases were 
enacted, the GSL would foot an oil subsidy of about $350 
million (Rs 35 billion). 
 
Way to go 
--------- 
 
5. (SBU) Cresenta Fernando, a local World Bank economist, 
told EconFSN the Bank welcomed the gasoline hike, but a 
massive oil shock (i.e. similar price hikes in diesel and 
LPG) to the economy could not be expected at once.  World 
Bank advocates cost recovery in petroleum and electricity, 
through automatic pricing formulas.  World Bank would like 
to see the pricing of these items de-politicized and 
assigned to the recently created Public Utilities 
Commission.  The bank wants pricing to be transparent, and 
subsidies, if any, funded through the GSL budget, in order 
to prevent acute weakening of the financial positions of 
the state institutions. 
 
6. (SBU) Comment: While price hikes were largely seen as 
inevitable, and likely to follow the recent provincial 
council (local) elections, there had been no prior 
announcement of this move.  It is a small step in the right 
direction, as gasoline constitutes only about 10% of oil 
consumption.  Financial difficulties may eventually force 
the government to revise other prices as well.  End 
Comment. 
LUNSTEAD