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Cablegate: Gasoline Hike a First, Tiny Step Forward

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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