Thread by @ChayuDamsinghe

This 🧵is the sad story of why fuel+electricity subsidies to the rich gave us powercuts and petrol/diesel queues

Tough choice, but powercuts and fuel queues affect all of us far more now

#EconomicCrisisLK #SriLankaEconomicCrisis #GoHomeRajapakshas #IMFnow

(1/20)

Let's set out our characters. Rehan represents all rich people in Sri Lanka. Pasan represents all poor people in Sri Lanka. CEB, CPC, banks, and Central Government remain players.

Let's see how Pasan gets screwed over by the rest.
(2/20)

In 2021, at different points, CPC made Rs. 10-50 losses per litre of fuel. Every single litre. So that's a massive loss.

Along with other losses, comes to around 83 billion rupees of a loss in 2021

(3/20)

Why is there such a loss?

Let's take Rehan's diesel SUV with an 60 litre capacity - and end-2021 50 LKR loss per litre. At 5km/L and moderate use (20-25km per day), he needs around a full tank every 2 weeks.

That's a 2000 subsidy every week, 100k every year.

(4/20)

Remember, Rehan is rich. He earns some 500k every month. He really doesn't need a 100k subsidy every year.

But what about buses? They get subsidies and Pasan benefits there right?

Well, not really

(5/20)

A LAL bus at ~250 L capacity, 5km/L, and running the 138 (80km/day) will need a full tank roughly every 2 weeks - which is a 325k subsidy every year.

That's better than the SUV right?

Not really

(6/20)

This benefit doesn't go to Pasan. Assume a conservative 1000 people use a bus a year, that means the per person annual subsidy is 325 rupees.

325 rupees a YEAR! You can't buy 2 බත් packets with that.

And this isn't transferred anyway, bus operator gets a profit instead

(7/20)

But what about farmers and their tractors? Surely they need the subsidy?

So give them a subsidy. Just because farmers need a subsidy, doesn't mean Rehan needs a bigger one?

(8/20)

What about tuks?

Running 20 km/L and 20L tank, doing an aggressive 100 km a day gives you a full tank every 4 days, and at a petrol loss of around 12 LKR/L, that's around a 22k subsidy every year.

60 rupees a day. I think consumers can handle that

(9/20)

Let's get back to the CPC's loss. Some 80 billion.

How is that handled?

Either through treasury financing or bank loans from BOC/PB.

What would treasury financing be? Taxes or printing.

(10/20)

If 80b is pushed to the consumer, that's an extra 16k every year in taxes for a family. Remember - though that's not a lot, the subsidy benefit to Pasan is miniscule.

If it's taxes, Pasan lost money.

(11/20)

If it's purely to the banks, then the banks are in trouble. Now they need 80b more, either from the treasury again, or from borrowing. This is okay, but this now means actual productive enterprise, that could pay Pasan a good salary, has 80b less in credit to access.

(12/20)

So Pasan has already lost money. But how does this cause powercuts?

Remember that so much of our fuel consumption doesn't subsidize Pasan, but Rehan. Rehan keeps spending more and more fuel, and that means we keep importing more and more fuel.

(13/20)

Now the normal way to import that would be by converting rupees into dollars. But remember, CPC is making a massive loss. It doesn't even have rupees to convert to dollars. Hence, their ability to import goes down.

(14/20)

Then the only thing we can do is to get financed by the CB reserves (which we ran out of) or bank loans (which we've maxed out).

So now, unable to access rupees for dollars, CPC loses out on import ability. Queue fuel shortages.

(15/20)

Now, if CEB could have enough rupees to buy dollars with, powercuts could be solved. But they have the same issues - making a big loss. So not only can they not pay the CPC in rupees properly, they definitely can't give dollars.

(16/20)

So now, Pasan, who originally lost money due to how his taxes finance Rehan's subsidies, is now facing powercuts and fuel shortages, because the CEB and CPC doesn't have money to do its job - because they gave Rehan subsidies instead.

(17/20)

The solution to shortages is complicated, but raising prices to reduce these losses that finance Rehan is a critical part of what's needed. Otherwise, any dollars we get will once again be swamped away, and remember, Pasan doesn't benefit even if we have power.

(18/20)

This is obviously an oversimplified example, but it gives a sense of how the CEB/CPC use taxpayer money, directly or indirectly, to pay subsidies to rich people and oligarchs, and the poor arithmetically lose out as result.

(19/20)

In the end, all those rich people subsidies mean that CPC/CEB can't have access to dollars in a crisis, because they don't have the money for it, and we all suffer in fuel queues and powercuts as a result.

Without fixing this too, there's no way forward.

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