Setting the price right

THE International Monetary Fund (IMF) has added its voice to the call for an automatic price adjustment formula, literally fuelling the quest for fair pricing policies. In December the Government increased petrol prices in the midst of the Night Races, yet again highlighting the lopsided and often unsustainable procedures followed for, mostly, political reasons.

Policymakers have long called for a transparent system that would allow for price flexibility so that when prices increase in the global market, they are passed directly on to the consumers rather than allowed to bleed a public company dry.

One can argue that even if the Treasury releases the funds to cover billions in colossal debt incurred by the CPC, people would still end up paying as the costs would come from their tax money. Conversely, if world prices decrease, the relief would be directly passed on to the public.

Historically, governments have sought to subsidise basic needs, such as fuel, energy, transport, and water and sanitation. Generalised subsidies were more justifiable when Sri Lanka was a low-income country and a higher proportion of the population lived below the poverty line. It was also more affordable when Sri Lanka received large amounts of grants and concessional loans.

However, Sri Lanka is now a $ 2,800 per capita income country and the poverty level is 8.9%, according to the Government. The Pathfinder Foundation points out that as a lower-middle-income country, it is no longer eligible for concessional assistance.

The IMF has pointed out to CPC officials that an automatic price adjustment formula would not leave poor people destitute. In fact if a targeted system based on cash transfers is drawn out where only people with recognised income vulnerabilities are assisted rather than broad subsidies that help even the financial stable, then the benefits move directly to the poor.

Contrary to popular belief that the IMF does not promote policies that are beneficial to the poor, the suggested formula can actually improve public sentiment of the Government if handled properly and even increase business confidence since investors will not be under the constant sword of Damocles of random price hikes.

Furthermore, it has been argued that the underperformance of State-Owned Enterprises (SOEs) undermines the macroeconomic stability needed to access the financing required from international capital markets for the country’s development programs. This new environment attaches even higher priority to addressing the underperformance of SOEs.

It must be conceded that the losses of SOEs are due to non-cost-reflective pricing policies, operational inefficiencies and poor governance, and the recent move to more cost-reflective administered prices is a welcome development. However, it should be accompanied by a concerted and accelerated campaign to strengthen the ongoing efforts to improve the performance of SOEs.

The Committee on Public Enterprises (COPE) has repeatedly pointed out the massive financial and resource mismanagement taking place in SOEs, particularly in the CPC. Sub-standard fuel imports, sporadic price increases, financial scandals and strikes are among the many ways that the public has experienced the CPC’s inefficiency – many shortcomings that go routinely unpunished. Moreover, raising prices without public consultation is negligence of democratic rights including transparency and accountability. While it would be challenging to have constructive public engagement on such a sensitive topic, it does not then mean that the Government should always resort to midnight decisions.