By Hema Senanayake –

Hema Senanayake

The government’s current approach in regard to the revision of electricity tariff, including the President’s May-day declaration for the relief for poor, is neither for pro-business nor pro-welfare. Lack of professionalism is rampant in the government.

On April 30th, the Central Bank which is the chief official economic advisor to the government, defended the electricity tariff increases through the public media. Speaking to the media Deputy Governor of the Central Bank, Dr. Nandalal Weerasinghe claimed that there is no other way to do it in economics and insisted that poor consumers who consume less units of electricity are the most benefited from the tariff revision since the consumers of higher number of units are made to pay more as the consumption increases.

The next day on May 01st, the President pulled down the part of the planned tariff increases. In fact the president jettisoned the part of the tariff hikes which were defended vigorously by the Central Bank. This is the irony of this episode. I guess both the Central Bank and the President got this matter wrong again. Let me explain my point as simple as possible.

This is an issue of certain interrelated factors. Key words of such factors are: real prices of products, Ceylon Petroleum Corporation, CEB, welfare and the national budget.

Before I begin my analysis I must say that certain households need petroleum products and electricity at welfare prices but the current method is not the way to go.

In economics there are certain principles that even Minister of Finance cannot ignore. One such principle is that prices of the economic produce of the economic system cannot reflect the will of the bureaucracy. Prices of petroleum products and electricity do not reflect the economic realities of the present day. Prices of those products, in fact reflect the will of the government as at now, period. For a long time, International Monetary Fund (IMF) correctly viewed that this cannot continue.

A few UNP parliamentarians including Ajith Perera have agreed with the IMF and had said that the present electricity tariff crisis would not have surfaced if the government had listened to the IMF and adjusted the prices over a few years while reducing corruption and waste in those institutions. If Leon Trotsky were alive today he might have taken the same position as of IMF. There are certain enlightening quotes of Trotsky on this subject of pricing of economic produce. Perhaps his views are more enlightening than IMF’s. Hence let me quote a few of them.

“And as to prices, they will serve the cause of socialism better, the more honestly they being to express the real economic relations of the present day.” (Trotsky, The Revolution Betrayed).

“Directive prices were less impressive in real life than in the books of scholars.” (Trotsky, The Revolution Betrayed).

“The professors (of Stalin’s regime) forgot to explain how you can estimate the real cost if all prices express the will of a bureaucracy and not the amount of socially necessary labor expended.” (Trotsky, The Revolution Betrayed).

No doubt, that Trotsky knew that even in socialism the prices should reflect the economic realities of the day. This is well justified in economic theory but explaining it, is beyond the scope of this article.

Getting back to our analysis, let us start with CPC. The CPC should not supply to any of its clients at cheaper prices. After cutting down waste, corruption and managerial incompetence (which occur due to political appointees) let CPC to price its products so as to reflect the economic realities of the day. If this happens many parliamentarians view that the prices of diesel, gasoline (petrol) and kerosene could be brought down. So, it is positive, the prices of CPC products should not reflect the will of the government. This means CEB or Mattala Air Port or any other entity is not getting petroleum products at discounted prices. Such discounts if necessary for a short time period must be borne by the national budget which will spread such discounts across the economy.

Now, as CPC does not supply fuel at discounted price to CEB the cost of production of electricity might go up a little bit. But now the price of a unit of electricity reflects the real price not the government stipulated price. If possible bring the price per unit of electricity down by Rs. 2 or 3 through reducing wastage and corruption. What is important is as Trotsky suggested let the electricity price be reflected the amount of socially necessary labour and other resources. This is the same thing IMF wants.

However there are certain households and a few entities that might need electricity at a welfare price. So, the CEB has to provide them electricity at a welfare (reduced) price which means there is a cost of welfare. But certain households and most of the business entities which consumes higher units of electricity can and must pay for the real price for electricity. But the cost of welfare on electricity should not be added on top of the bill of electricity of the businesses and households that are willing to pay for the real price of the electricity. As a result those business entities might adjust the prices of their products and services so as to reflect the cost they pay for electricity. I guess these adjustments will bring down prices of the most goods.

Now we have a question as to who is going to bear the cost of welfare. It should not be borne by the CEB and hence banks which provides working capital to CEB also secured. In fact the cost of welfare on electricity should be borne by the national budget. As a result the cost of welfare spread out throughout the economy, so one group of economic agents is not overburdened. In fact this approach is pro-business and pro welfare.

Look at the relief that we have in the economy under this approach. If CPC products reflect the real prices then according to many opposition parliamentarians the price of diesel and petrol would be reduced. CPC is no more a burden on national budget. CEB also adjusted prices so as to reflect the business cost. But in this case we need to subsidize prices for some vulnerable households and a few entities. The cost of welfare on electricity is transferred to the national budget. The cost of welfare is moved to the point of consumption from the point of inputs for production.

I invite Deputy Governor of the Central Bank Dr. Nandalal Weerasinghe to use this approach and redo the math. What is important is that you got to know the economic principles first.

As said earlier the lack of professionalism is rampant in the government. Vital economic decisions are being made from the political stage. Especially the economy and the country’s money system are managed badly.