Unstable Policy

Nov 08, 2008 (LBO) – Sri Lanka has defended state manipulation of fuel prices which has de-stabilized the economy, brought high inflation and endangered the country with foreign borrowing, while rejecting formula based pricing. The island scrapped a fuel price adjustment formula in 2004, and printed money to keep prices low, pushing the country into high inflation and balance of payments troubles with the rupee depreciating sharply that year.

Formula

The policy was promoted by the Janatha Vimukthi Peramuna, a Marxist party. It was popularized as ‘removing the plug’ from the world economy.

In 2006 the government officially reduced fuel subsidies when revenues were badly hit and started to raise fuel prices.

“Unlike the previous government, we did seek to change fuel prices based on a pricing formula,” President Mahinda Rajapaksa, who is also the finance minister of the island, said in his budget speech this week.

“If we did so, the adverse impact it would have created on the cost-of-living may have lost limitations.”

The statement came despite inflation rising to 29.9 percent in April 2008, probably the worst in the island’s history despite fuel price fixing. The country then change