Who does Sri Lanka’s fuel subsidy really benefit? 

by Prof. Amal Kumarage

In a recent article, parliamentary MP and former VP of CitiBank, Eran Wickremaratne said Sri Lanka’s policies are skewed towards the rich and not the poor of the country.  He was referring to fuel subsidies where the government pays the difference between the high global fuel price and the price it is sold at the pump to cushion the people.  But the MP says it is not the man on the street who benefits from this subsidy but the wealthy private vehicle owners with big vehicles that require more fuel.

“As a country, when we choose this subsidy, we are actively choosing to give more money to wealthier families to drive their large vehicles. We are saying that our government would rather support the businessman with a fancy gas-guzzling car in Colombo over the school children in Monaragala who are struggling from a lack of food.”

Pump prices of petrol and diesel in Sri Lanka, even after the increase, are still lower than in most neighbouring countries. It is ranked 50th lowest from 170 countries listed, with almost all those having lower fuel prices than Sri Lanka being oil producing countries. Sri Lanka then becomes a country having the lowest pump prices for a non-oil producing country. It is also lower than the inflation-adjusted price in 2008 when global crude oil prices exceeded $100 per barrel, and the US dollar was only LKR 110. Oil crossed $100 per barrel even in 1981-82 during the Iran-Iraq war when the US dollar was just LKR 20. Sri Lanka has weathered such price hikes before. But what is needed is not just a temporary tiding over in terms of the fuel over-consumption, but a permanent policy that will make fuel use sustainable.

It is becoming more and more clear that the widespread practice of cushioning people from fuel price shocks in the long term, no longer works and it has also come to a point where the country can no more afford it. There is just too much oil consumption and eventually, it is the affluent heavy consumers who benefit from the subsidies.  Incidentally, the cost of kerosene in Sri Lanka is the lowest in the region, sold at a concession of around 60%.  Yet, it is manageable since the consumption is only 206 million litres per year, which is around half the domestic use of LP gas and around 5% of the fuel used for transport.

Therefore, efficiency targets should be given to fuel companies (CPC/LIOC) to reduce operating costs by 20%, equal to Rs 1 per litre of fuel, enabling the savings of Rs 3-4 billion per year.  This should be connected to programs supporting the reduction of fuel consumption in the long term.

Unlike other goods, fuel imports should not be restricted or just rationed as it is necessary for almost every category of economic production. But at the same time, our selling prices should be pegged to market prices with a reasonable tax component introduced.  This will discourage heavy consumption and encourage alternate use.

Most countries build in a tax for fuel that goes to assist in developing public and alternative modes of transport. This should be an important aspect of our long-term fuel policy as improved public transport means more people using it, and this would bring us another step closer to reducing our massive fuel costs. Countries that have implemented this successfully have been able to reduce their fuel consumption without reducing productivity or convenience.  In the current Sri Lankan context, adopting a similar policy will allow more funds to be allocated for goods that are vital for daily living.

While annual car imports keep adding to our fuel bill, another issue is the concessionary permit system provided by the government to certain state officials to import cars with tax benefits. According to statistics, the concessionary permit system is a huge loss annually to the Treasury averaging Rs. 94 billion per annum.  This figure is almost equal to the LKR 97 billion per annum the Treasury gathers from the country’s overall car imports. Furthermore, because of the tax concession, permit holders tend to go for more expensive vehicles in consideration of the resale value and more often than not, these expensive choices are heavy on fuel consumption.

Therefore, policy readjustments such as scrapping the concessionary vehicle permit system, and allowing concessions only for electric vehicles, should be brought in.

(Prof. Amal Kumarage is a transport sector professional with over 35 years of experience in academia, government and consulting. He is a Senior Professor in the Department of Transport & Logistics Management, University of Moratuwa, a Chartered Engineer and a Fellow of the Chartered Institute of Logistics and Transport and Founder President of the Sri Lanka Society for Transport & Logistics. He is a graduate in Civil Engineering from the University of Moratuwa, Sri Lanka. He completed his PhD at the University of Calgary, Canada.)