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RR RUEHBI RUEHLMC
DE RUEHLM #0527/01 1541119
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R 021119Z JUN 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8200
INFO RUEHNE/AMEMBASSY NEW DELHI 2069
RUEHKA/AMEMBASSY DHAKA 0923
RUEHKT/AMEMBASSY KATHMANDU 6087
RUEHIL/AMEMBASSY ISLAMABAD 7912
RUEHCG/AMCONSUL CHENNAI 8523
RUEHBI/AMCONSUL MUMBAI 5968
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 03 COLOMBO 000527 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR SCA/INS AND SCA/RA LEO GALLAGHER 
 
E.O 12958: N/A 
TAGS: ECON EINV EAGR PGOV CE
SUBJECT: SRI LANKA: GOVERNMENT RAISES FUEL PRICES BY RECORD AMOUNTS 
TO STEM SUBSIDY LOSSES; PROTESTS NOT YET A THREAT 
 
REF: A. COLOMBO 503  B. COLOMBO 428  C. COLOMBO 76 
 
¶1. (SBU) Summary and comment:  On May 25, the Ceylon Petroleum 
Corporation, Sri Lanka's state-owned oil company, raised diesel and 
gasoline prices by an unprecedented 37% and 23% respectively.  This 
is the second CPC fuel price increase in 2008, bringing prices to 
double the level of two years ago.  The price increases were 
necessary to stem the CPC's losses from selling fuel below its cost, 
which would otherwise add to the government's budget deficit.  The 
fuel price hike was immediately followed by increases in bus and 
train fares, and will ripple through other economic activities that 
involve transportation, exacerbating Sri Lanka's 25% inflation rate. 
 The government's proposed solutions to the rising cost of living -- 
a mix of price controls, more subsidies, and talk of conservation -- 
are unlikely to be effective.  The opposition and unions have 
organized minor protests against the government over the cost of 
living, but at this point these do not have the numbers or urgency 
to threaten the government.  End summary and comment. 
 
FUEL PRICES UP BY RECORD AMOUNT TO REVERSE HIGH LOSSES 
--------------------------- -------------------------- 
 
¶2. (U) The Ceylon Petroleum Corporation (CPC) raised its retail 
gasoline and diesel prices by 30 Rupees per liter on May 25.  The 
new price of standard gasoline following the 23% increase is Rs 157 
per liter (about $5.50 per U.S. gallon).  The new price of standard 
auto diesel is Rs 110 per liter (about $3.85 per gallon), an 
increase of 37%.  The CPC also increased the price of kerosene, used 
by low income householders for cooking, by Rs 10 to Rs 80 ($0.74) 
per liter.  The CPC is a large and inefficient state-owned firm that 
both imports refined oil products and refines crude oil domestically 
(ref A).  Its prices are set by the government, which in turn 
reimburses it in a complex formula that guarantees the CPC to earn 
about 2.5% over whatever its costs are.  The government's price 
formula is set to cross subsidize below-cost kerosene and diesel 
prices with an above-cost gasoline price. 
 
¶3. (U) This was the CPC's second fuel price increase in 2008 and the 
largest one-time increase ever.  The new prices are double what 
prices stood at in mid-2006.  President Rajapaksa told his cabinet 
he had authorized the price increases as a result of rising world 
oil prices, and that the government could no longer continue to 
incur losses by subsidizing fuel.  According to the President, the 
CPC had lost about $70 million in the first four months of 2008, as 
it was losing over Rs 40 ($0.37) per liter from kerosene and diesel 
sales.  (The CPC Chairman separately put its loss rate at about Rs 
60 per liter). 
 
¶4. (SBU) The Ceylon Petroleum Corporation controls about 75% of the 
Sri Lankan retail fuel market.  The CPC's only competitor is Lanka 
Indian Oil Company (LIOC), which is free to set its own prices but 
which normally maximizes profits by setting prices equal to those of 
CPC.  Because it is more efficient than the CPC, it can make profits 
at price levels at which the CPC incurs losses.  Following the CPC 
price increase, LIOC as usual raised its gasoline price to match 
that of the CPC; it had raised its diesel prices prior to the CPC 
move.  In the midst of this, the government has also increased taxes 
on fuel imports.  The LIOC toldEconFSN it believed the new taxes 
were being impoed only on LIOC, and that it had raised its diesel 
prices another 20 Rupees to 130 per liter to comensate.  However, 
the Finance Ministry told us tat the new taxes would apply to both 
CPC and LIO imports.  The government imposes a range of taxes n 
imported gasoline and diesel, amounting to rouhly $2 per gallon for 
gasoline -- i.e. over a thrd of the final retail cost.  The taxes 
on diese are much lower. 
 
TRANSPORTATION PRICES RISING WTH FUEL PRICES... 
--------------------------------------------- -- 
 
¶5. (U) The hike in fuel priceswas followed immediately by a 27% 
increase in private bus fares.  The government-owned Ceylon 
Transport Board (CTB) raised its bus fares by 17%.  In turn, the 
government will provide a subsidy to CTB to cover the higher cost of 
fuel.  In addition, the government is considering doubling its 
heavily subsidized rail fares from June 1, in what would be the 
first rail price hike in three years.  Electricity tariffs may also 
need to be increased.  The state-owned and subsidized, but still 
unprofitable, Ceylon Electricity Board will incur greater losses now 
 
COLOMBO 00000527  002 OF 003 
 
 
that the price of furnace oil, used for electricity generation, has 
been increased by Rs 10 per liter.  Electricity tariffs were 
increased in April 2008 by 50 to 100%, but would need to rise 
further if the government wanted to stem the Electricity Board's 
losses. 
 
... ADDING TO ALREADY HIGH INFLATION 
------------------------------------ 
 
¶6. (U) The fuel price hikes are also likely to exacerbate already 
high food prices, which have increased by 50% to 100% in the past 
year (ref B).  The soaring prices of essential goods and services 
have prompted the President to appoint a special cabinet 
subcommittee headed by the Prime Minister to work out strategies to 
address the issue of high cost of living. 
 
¶7. (U) Meanwhile, the Central Bank of Sri Lanka in its May 26 
Monetary Policy statement said that actual inflation for 2008 would 
be significantly higher than the bank's previous estimates due to 
the surge in international oil prices.  The bank had made its 
initial projection of 10-15% inflation by year end on the basis of 
expected $90 per barrel oil (ref C).  Inflation as measured by the 
newly revised Colombo Consumer Price Index was 26% year on year in 
May 2008. 
 
GOVERNMENT URGES CONSERVATION... 
-------------------------------- 
 
¶8. (U) The government is hoping the fuel price hike will cause 
consumers to reduce their fuel consumption.  On May 27, President 
Rajapaksa appealed to the public "to be frugal in consuming fuel to 
the greatest possible extent to face the current global oil crisis." 
 The Minister of Power and Energy also made a similar appeal to 
electricity consumers.  Treasury Secretary P B Jayasundera told the 
press on May 26 that even with skyrocketing prices, Sri Lankans had 
not decreased fuel consumption.  Local media reported the cabinet is 
considering fuel conservation measures such as setting school 
schedules to four days a week, requiring civil servants to use 
public transportation one day a week, and reducing the number of 
meetings government officials hold outside their offices.  The 
government is hoping for a 20-25% reduction in fuel consumption 
after the present hike.  If consumption does not decrease, the 
government expects Sri Lanka's fuel import bill to rise to $3.5-$4 
billion in 2008 from $2.5 billion in 2007. 
 
...WHILE OPPOSITION ORGANIZES PROTESTS 
-------------------------------------- 
 
¶9. (U) On May 27 in Colombo, the main opposition United National 
Party staged a protest march against the rising fuel prices. 
Protestors in bullock carts blamed the rising prices on government 
corruption.  The UNP also ridiculed the government for increasing 
fuel prices despite bragging about obtaining oil at concessionary 
rates from Iran and other friendly Arab countries.  The UNP said 
that the May 27 rally was the start of a series of protests to be 
held island-wide to urge the government to provide relief to the 
people.  The Marxist JVP and the JVP breakaway group, the National 
Freedom Front, are also protesting against the rising cost of 
living, mismanagement and corruption.  They have asked for relief 
targeted at the poor.  A JVP-affiliated trade union has asked the 
government for a Rs 5,000 monthly salary hike for working people, 
and vowed to stage island-wide protests and strikes if their demands 
are not met. 
 
¶10. (U) To head off protests, the government is discussing with 
employers' associations minimum wage increases for private sector 
workers.  The government has proposed to increase the current 
minimum wage in 37 industries coming under the Wages Board Ordinance 
(WBO).  It proposes to increase the minimum wage for unskilled 
workers from Rs 5,000 ($46) to Rs 5,750 ($53) per month.  Minimum 
wages for several other categories of workers in the 37 industries 
would be increased through the wages board mechanism.  Employers and 
employees have been given until June 13 to file objections to the 
proposed increase.  Government workers, who account for about a 
fifth of the workforce, received wage increases of about 56% between 
2005 and 2007. 
 
COMMENT: HIGH INFLATION HEADED HIGHER; 
 
COLOMBO 00000527  003 OF 003 
 
 
PROTESTS STILL NOT THREATENING GOVERNMENT 
----------------------------------------- 
 
¶11. (SBU) The fuel, transport, food, and impending wage hikes will 
only add to Sri Lanka's already high 25% inflation.  The government 
cannot relish having to defend itself against criticism that it is 
not doing enough to help the poor manage the rising cost of living, 
but has emphasized that global price increases -- especially those 
of oil and food -- are at fault, not its own management of the 
economy.  In fact, the Rajapaksa administration deserves a good deal 
of the blame, as it has only added to the money losing ways of the 
many inefficient state-owned corporations and the overall cost of 
the bloated government with its 100-plus ministers and tens of 
thousands of new civil servants.  These, and the intensified war 
against the Liberation Tigers of Tamil Eelam, are responsible for 
the high budget deficits that have fueled inflation. 
 
¶12. (SBU) The government clearly is taking seriously the political 
implications of citizens unhappy with the rising cost of living. 
However, its proposed solutions -- a mix of price controls, more 
subsidies, and talk of conservation -- are unlikely to be effective 
in controlling inflation.  Nevertheless, it appears for now that 
street protests and threatened union action pose no real danger to 
the government's survival, as there is not yet a sense of urgency or 
outrage in the air.  This is probably a result of the Sri Lankan 
public's generally passive reaction to bad governance and its 
willingness to accept hardship -- as long as it believes the 
government is winning the war against the LTTE.  Moreover, the 
President's core voter constituency, in rural areas of Southern Sri 
Lanka, is relatively insulated from fuel and other price hikes 
because they grow their own food, travel little, and are 
sufficiently poor to qualify for subsidized electricity rates. 
Hardest hit are urban dwellers, whom Rajapaksa is less concerned 
about because he assumes most already support the opposition UNP. 
BLAKE