Solving Sri Lanka's fuel crisis

Undiyal, economic theory and Pettah merchants can make cheese scarce and fuel abundant

Burrata is imported, so is petrol. But there’s more cheese than ever on super-market shelves, while fuel queues now snake all around the city. This is baffling. Even during the war, shops in Jaffna had multi-coloured shelves with bottles of blue kerosene and translucent petrol. So what’s going on?

The fundamental reason cheese is available and fuel is not, is that markets are allowed to function for cheese imports. Fuel, on the other hand, is highly controlled. This example illustrates how cheese, and until recently 25% of our imports (which is about $400 million a month), arrived on our shores.

1.       Migrant worker hands over 100 USD to undiyal broker in Jeddah.

2.       Jeddah undiyal broker contacts his Sri Lankan correspondent and asks him to give the migrant worker’s family the LKR equivalent of 100 USD, which he does using the kerb rate.

3.       The Jeddah undiyal broker now owes his Sri Lankan correspondent 100 USD.

4.       A Sri Lankan cheese merchant approaches the Sri Lankan unidyal broker and hands over the LKR equivalent of 100 USD, again at the kerb rate .

5.       The Sri Lankan undiyal broker instructs his Jeddah correspondent to pay the cheese merchant’s overseas cheese supplier 100 USD.

6.       The overseas cheese supplier ships 100 USD worth of cheese to the Sri Lankan cheese merchant and the cheese is cleared under the open-account modality.

At this point all liabilities are cleared in the system, the migrant worker’s family has received their cash and cheese appears on supermarket shelves. Everyone is happy. Now scale this to the billions of dollars migrant workers remit to Lanka, a substantial share of which flows through undiyal.

Imported cheese at a Colombo boutique, 14 May 2022.

So why doesn’t this process work for fuel you may ask. Why doesn’t the cheese merchant replace stinky Stilton with equally odd-smelling petrol, diesel, kerosene and LPG? The reason is that there are three major restrictions preventing a Pettah merchant from importing fuel.

A.      Fuel imports were a CPC and IOC monopoly until a few weeks back, and even now licenses are highly restricted.

B.      Open account imports have been suspended for all major goods, including fuel.

C.       Fuel can only be sold at the controlled price and by licensed distributors i.e. petrol sheds.

Should these distortions be removed, then Pettah merchants will import fuel and sell it to virtually every kade in the country. That is they will allocate the USD used to purchase cheese, to purchase fuel. This means that if we temporarily, say for a period of six months,

• abolish licensing for fuel imports and fuel sales,

• permit open account imports for fuel only,

• remove price controls for non-CPC / IOC fuel sales,

then some chunk of the fuel shortage should largely solve itself. And this could all happen within a few weeks. For more details on failed state fuel imports see this article on Somalia’s energy market.

Oil is imported from the Arabian Gulf by a group of Somali oil dealers who normally share the cost incurred. In fact the oil importers use foreign tankers with different capacities to import the product. Sometimes there are small dealers who do not afford to use tankers; they import oil in drums as retailers, and distribute in drums for the market retailers. There is no authority that controls the quality and the standard of imported oil. There is no accredited laboratories for product quality specification tests. Importers honor the international standard as it’s a competitive market and this will compel all the transporters to abide.

When floating this idea with friends, the question of safety has arisen. I have little patience for this argument; during the war these less-formal markets worked effectively and fairly safely (despite bullets, grenades and shelling). More importantly, the loss of life caused by not having fuel to take people to hospital, higher food prices and loss of economic activity is far, far greater. Should anyone continue to object, I should like to see a cost-benefit analysis in terms of expected QALYs lost for each scenario. In the absence of this, I think the arm-chair reasoning is strongly in my favour.

The other main objection is fuel quality. This too is not a major issue. First, those concerned about quality can continue to pump at LIOC. Second, as in Somalia and war-time Jaffna, shops will quickly identify reliable suppliers, otherwise consumers will cease to purchase from them. Third, a few flying squad tests on the larger importers with correspondingly large penalties can be done quickly and with little cost.

Once fuel and electricty flow smoothly, economic activity and tourism will begin reviving. We can start breaking the vicious cycle of the past few months and take the first steps towards a creating the virtuous cycle that is so critical for the long, arduous process of recovery.

Annexe I: A more technical objection

The argument can be made that with open account imports being restricted all undiyal financed imports will stop. This is unrealistic; our border is porous. Corrupt officials and sea or air-based smugling are common, especially for high-value goods. Even with Letters of Credit, under-invoicing is not impossible. Goods like cheese, though in smaller quantities, will continue to flow. And migrant workers, having got used to undiyal, are unlikely to switch back to the formal banking system quickly (they never fully used it either). Moreover, it is likely that Sri Lankan undiyal brokers have built up ‘reserves’ with their overseas correspondents. Considering the huge demand and thus parallel market price for fuel, there is likely to be considerable interest in using those reserves for fuel imports.