Sri Lanka to lower fuel prices by taxing other goods

Nov 07, 2007 (LBO) – Sri Lankan President Mahinda Rajapaksa said Wednesday that fuel prices will be maintained at current levels “temporarily” and revenue losses would be offset by higher levies on imported consumer goods. Due to a long-term policy of giving benefits to privileged classes of society based on muddled political thinking, Sri Lanka subsidizes both fuel and electricity.

The poorest 25 percent households do not have electricity, and in rural Sri Lanka where poorest live, even bus transport is not available.

Energy all over the world is associated with higher income earners.

Until the sector was privatized telephones Sri Lanka were a cheap luxury limited to a few who had the political clout to get a ‘priority’ connection. “The revenue loss due to this (petrol subsidy) will be offset by higher taxes on liquor, motor vehicles and unnecessary imports,” said Rajapakse who was presenting his government’s third budget in parliament.

Crude oil prices hit a record 97.10 dollars a barrel in early Asian trade Wednesday ahead of the northern hemisphere winter when consumption and prices usually rise.

“I propose that the 15 percent value added tax on petrol be reduced to 5 percent from January,” said Rajapaksa who is also the finance minister.

Revenue will fall by 7.4 billion rupees next year due to the VAT reduction on petrol while higher rates on liquor will net 3.2 billion rupees and increased excise duty on consumer durables and vehicle imports will being in 3 billion rupees additionally.

That would reduce petrol prices by around 10 rupees a liter from their 117 rupee level at the pump but the president did not say which consumer good import levies will be increased to compensate.

Many consumer goods like electronics, food and clothes are imported from the region where a large manufacturing and lower cost base makes these goods affordable to ordinary households.

Petrol, which is also charged 20 rupees per liter excise duty, is used by motor vehicle owners.

Diesel had only a small consumption tax earlier.

“My attention has been drawn to holding diesel and kerosene prices at current levels temporarily,” said Rajapaksa to loud applause from government MP’s who together with their opposition colleagues caused a major rush hour traffic jam due to roads being shut for their traveling to parliament.

Government maintains that the high cost of international commodity prices is the cause of the near decade high 19.6 percent inflation in the 27 billion dollar Sri Lankan economy

“When it goes to 97 dollars, prices have to be increased – that’s the theory,” according to the president who was flown to parliament in a helicopter to deliver the budget speech.

“But we plan to change this theory somewhat.”

Sri Lanka introduced market based fuel pricing mid this year but abandoned that policy after crude oil, which is the base in petrol, diesel and kerosene, climbed above 90 dollars a barrel in August this year.

“Because increasing diesel and kerosene prices will impact poor people my attention has been drawn to not increasing prices temporarily,” to loud applause from the government side while opposition parties pointed out the policy was “temporarily”.

However economic analysts say an important message coming out of the bizarre fuel tax issue is that the government for the first time is showing the people that there are opportunity costs to tax cuts.

Sri Lanka imports all its crude oil based fuel, more than a third of which is used for electricity generation.