Increase fuel prices for rich but take care of the poor; IMF turning left?


Defending the government’s decision to increase domestic fuel prices as global oil prices mount, IMF’s Resident Representative to Sri Lanka Dr. Koshy Mathai says fuel subsidies mostly covered the affluent and urged the government to better target the poor for welfare.

"The direct affect of fuel price increases on prices of other goods in the inflation basket is not large and the indirect affect is not known, but it is an important measure to (raise domestic fuel prices) and we feel inflation expectations are under control. It is expected to increase in the short term, but would subside later this year," Mathai said speaking to journalists in Colombo.

"It is a painful decision (to raise fuel prices) but there is a huge majority of those who do not need subsidies," he said.

Mathai said it made no sense for the government to continue to subsidise fuel for those driving around in Prados, alluding to the absurdity of the affluent having access to petrol and diesel at subsidised rates while global oil prices were on the rise.

According to the US$ 2.6 billion standby facility arrangement with the IMF, the Ceylon Petroleum Corporation and Ceylon Electricity Board are expected to jointly breakeven this year, and the IMF has always said the CPC would have to revise prices upwards when global prices spiked.

"The government has said they whished to run these state enterprises on a sustainable footing, so increasing prices is the right way to go about it. However, while raising prices, the government must ensure that poor people are not badly affected. The government has to take care of the poor who may experience an increase in bus fares or other price increases as a result," Mathai said.

"The government is aware of this and needs no convincing. The key thing is that the government should better target the poor," he said.

The government has allowed petrol prices to increase by Rs. 10 per litre; diesel is up by Rs. 3 while Laugfs Gas announced an increase in the price of a 12.5 kg gas cylinder by Rs. 238 to match the price revision by state-owned Litro Gas. These are in response to rising global oil prices caused by unrest in the Middle East and growing demand from emerging Asian economies and the recovering global economy.

Sri Lanka enjoys extensive welfare coverage but has often been criticised for leaving out many of the poor, while politicians use them as tools to reward their followers.

The Institute of Policy Studies in its flagship report, Sri Lanka: State of the Economy 2010 has this to say about the Samurdhi programme, a social protection scheme in Sri Lanka.

"In Sri Lanka… targeting has been subject to much criticism. The evidence shows a considerable leakage to the non-poor and under-coverage of the deserving poor. In 2002, only 52.6 percent of the households of the poorest decile, 45.2 percent of the 2nd decile and 40.7 percent of the 3rd decile received Samurdhi welfare benefits. However, 2.4 percent of richest households and 7.9 percent of the 9th decile and 13.4 percent of the 8th decile also received Samurdhi benefits. (Household income distribution ranks households into ten categories, with the first decile being the poorest)."

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