Sri Lanka economy will be stable with cost-based energy prices: IMF

Feb 14, 2013 (LBO) – Sri Lanka’s economy will be stable and more domestic resources will be available for high value spending if energy prices are adjusted to match import costs, the International Monetary Fund had said. “Step number one could be to adjust prices closer to cost-recovery, if not have cost recovery,” IMF mission chief to Sri Lanka John Nelmes said.

“And then the second step would be a price adjustment mechanism. One might envisage that this would take place over the course of the year.”

State Interventions

Arbitrary state interventions, in petroleum and power pricing have repeatedly pushed Sri Lanka in balance of payments crises and currency depreciation.

The most recent incident was in 2011 when a global rise in oil prices which was worsened by a domestic drought which slashed hydro-power increased oil imports.

The imports were funded with bank credit, but state intervention in interest rates prevented interest rates from going up to curb overall credit (private credit) and also curb aggregate consumption and raise more deposits.

Instead large volumes of money was printed and injected (central bank credit) to the banking system to keep interest rates down, mostly