SINGAPORE, Sept 16, 2006 (LBO) – The practice of Sri Lanka and other South Asian countries that spend massive public resources on subsidies do not help the poor, World Bank Chief Paul Wolfowitz said.
“Subsidies are often given as an excuse to cushion the poor,” Wolfowitz said during an informal meeting with South Asian journalists at the IMF/WB Spring Meetings here.
“But it doesn’t happen that way, and the poor end up paying more.”
Fuel subsidies have become the biggest threat to Sri Lanka’s economy during the last two years.
The subsidies destabilized public finances, pushed up inflation and caused balance of payments problems.
In 2004, Sri Lanka abandoned a World Bank and IMF backed recovery plan that had boosted economic growth from a negative 1.5 percent in 2001 to 6.6 percent in 2003 and cut inflation from double digits to less than 5.0 percent.
The government then embarked on a home grown model based on fuel and fertilizer subsidies and government jobs, in a policy agenda driven by an extreme left party.
The subsidies, which were partly financed with central bank credit or printed money raised inflation to 16.8 percent by year-end and pushed the country towards a