Apr 02, 2011 (LBO) – Sri Lanka has raised fuel arbitrarily jacking up petrol far above cost while keeping diesel mostly used mostly by businesses low, according to prices announced by a state run distributor. Rich transport contractors, and owners of luxury diesel vehicles and pick trucks are now effectively cross subsidized by small car and motorcycle owners.
Lanka IOC, a unit of Indian Oil Corporation however raised diesel by 12 rupees and petrol by a lower 10 rupees. Sri Lanka lifted a cost based price formula in 2004.
In Sri Lanka rulers believe that inflation is caused by diesel, rather than by the Central Bank. In the past the state has printed money to keep fuel prices low, pushing inflation to very high levels.
Sri Lanka’s inflation rose rapidly in the past few months hitting 7.8 percent in March with no increase in fuel prices.
Timely market pricing of fuel balances aggregate demand helping keep inflation low. In countries with low inflation, fuel is market priced daily.
In most countries where the state sets fuel prices inflation is high, partly due to loss of taxes made up by printed money and partly due to build up of credit or pressure on currency pegs.