By Ravi Ladduwahetty
Ceylon Finance Today: Central Bank Governor Ajit Nivard Cabraal predicted good times ahead for Sri Lanka in 2015, if global fuel prices stay at the current US$ 60 per barrel.
In an exclusive interview with Ceylon Finance Today, Cabraal said that the country's total fuel imports, estimated at US$ 4.8 billion for 2014, would fall by as much as US$ 2-2.8 billion, if crude oil prices remain around US dollars 60 per barrel in 2015.
Ceylon Finance Today: Central Bank Governor Ajit Nivard Cabraal predicted good times ahead for Sri Lanka in 2015, if global fuel prices stay at the current US$ 60 per barrel.
In an exclusive interview with Ceylon Finance Today, Cabraal said that the country's total fuel imports, estimated at US$ 4.8 billion for 2014, would fall by as much as US$ 2-2.8 billion, if crude oil prices remain around US dollars 60 per barrel in 2015.
As an oil importing country, Sri Lanka also will be benefitted by ease of current account deficit, low inflation and high economic growth, while reducing pressure on fiscal accounts, he observed.
Further, import prices of intermediate goods such as fertilizer, synthetic rubber and polythene will decline in line with the decline in oil prices, he said.
Commenting on the further immediate benefits of the reduction on global fuel prices, Governor Cabraal said that, the decline in oil prices will reduce the import bill substantially, strengthening the current account balance of the Balance of Payments.
Stressing that Sri Lanka's expenditure on fuel imports accounts for around one fourth of its import expenditure, he also said that the reduction in fuel prices will impact inflation favourably, both directly and indirectly.
"As per the composition of the consumption basket which is used to calculate the Colombo Consumer Price Index (CCPI), petrol, diesel and kerosene account for more than 5 per cent of the total weight. Therefore, fuel price reduction will directly reduce the expenditure value in CCPI reducing inflation," he said.
"Further, reduction in fuel prices will help to reduce transportation cost and electricity prices which are also major items in the CCPI basket. In addition, reduction in fuel prices, transport cost and electricity cost reduces the production cost of goods and services having indirect impact on reducing inflation," he remarked.
He added: "The reduction of fuel prices will have a favorable impact on economic growth of Sri Lanka especially through the supply channels. Fuel is used as a main source of energy for the productive sectors such as the agricultural sector, the formal manufacturing sector and transport sector. Therefore, reduction in cost of energy will reduce the cost of production of firms, increasing their profitability and encouraging them to enhance production which leads to high economic growth"
The declining trend of international oil prices will reduce the pressure on fiscal accounts through reductions in energy subsidies, as it will improve the financial performances of Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB). CPC has been able to record profits since 2013 while gradually reducing the dependence on the banking sector resources due to cost reflective price revisions.
The declining oil prices will reduce the cost of production of petroleum products substantially, even though it takes some time to make a positive impact due to time lag in importation and production cycles. While passing the maximum benefits to all stakeholders by reducing domestic fuel prices, improving cash flow will further reduce CPC's liabilities to the banking sector.
The price reduction of petroleum products will also improve the CEB's financial position.
The reduction of Diesel and Furnace oil prices will help reduce the cost of thermal oil power generation, though the thermal power generation is currently low due to commissioning of Phase 2 of the Norochcholai coal power plant.
"Accordingly, as an oil importing country, the oil price reduction observed in the international market will be favorable to Sri Lanka and it will strengthen the external sector, monetary sector, real sector and the fiscal sector through lower current account deficit, lower inflation, high economic growth and reduction in cost of production respectively, he added.
Crude oil prices had been around US dollars 110 per barrel during the period from 2010 to June 2014. But then declined rapidly to below US dollars 60 per barrel by December 2014 recording the lowest level after July 2009.
The reduction of the global price reduction is mainly attributed to weak demand in many oil consuming countries due to sluggish economic growth, and increased oil production by the USA.
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Further, import prices of intermediate goods such as fertilizer, synthetic rubber and polythene will decline in line with the decline in oil prices, he said.
Commenting on the further immediate benefits of the reduction on global fuel prices, Governor Cabraal said that, the decline in oil prices will reduce the import bill substantially, strengthening the current account balance of the Balance of Payments.
Stressing that Sri Lanka's expenditure on fuel imports accounts for around one fourth of its import expenditure, he also said that the reduction in fuel prices will impact inflation favourably, both directly and indirectly.
"As per the composition of the consumption basket which is used to calculate the Colombo Consumer Price Index (CCPI), petrol, diesel and kerosene account for more than 5 per cent of the total weight. Therefore, fuel price reduction will directly reduce the expenditure value in CCPI reducing inflation," he said.
"Further, reduction in fuel prices will help to reduce transportation cost and electricity prices which are also major items in the CCPI basket. In addition, reduction in fuel prices, transport cost and electricity cost reduces the production cost of goods and services having indirect impact on reducing inflation," he remarked.
He added: "The reduction of fuel prices will have a favorable impact on economic growth of Sri Lanka especially through the supply channels. Fuel is used as a main source of energy for the productive sectors such as the agricultural sector, the formal manufacturing sector and transport sector. Therefore, reduction in cost of energy will reduce the cost of production of firms, increasing their profitability and encouraging them to enhance production which leads to high economic growth"
The declining trend of international oil prices will reduce the pressure on fiscal accounts through reductions in energy subsidies, as it will improve the financial performances of Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB). CPC has been able to record profits since 2013 while gradually reducing the dependence on the banking sector resources due to cost reflective price revisions.
The declining oil prices will reduce the cost of production of petroleum products substantially, even though it takes some time to make a positive impact due to time lag in importation and production cycles. While passing the maximum benefits to all stakeholders by reducing domestic fuel prices, improving cash flow will further reduce CPC's liabilities to the banking sector.
The price reduction of petroleum products will also improve the CEB's financial position.
The reduction of Diesel and Furnace oil prices will help reduce the cost of thermal oil power generation, though the thermal power generation is currently low due to commissioning of Phase 2 of the Norochcholai coal power plant.
"Accordingly, as an oil importing country, the oil price reduction observed in the international market will be favorable to Sri Lanka and it will strengthen the external sector, monetary sector, real sector and the fiscal sector through lower current account deficit, lower inflation, high economic growth and reduction in cost of production respectively, he added.
Crude oil prices had been around US dollars 110 per barrel during the period from 2010 to June 2014. But then declined rapidly to below US dollars 60 per barrel by December 2014 recording the lowest level after July 2009.
The reduction of the global price reduction is mainly attributed to weak demand in many oil consuming countries due to sluggish economic growth, and increased oil production by the USA.
www.ceylontoday.lk
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