April 17, 2008 (LBO) – Sri Lanka’s Central Bank has said heavy government spending to subsidise fuel, electricity and fertiliser destabilises the economy, leads to waste and hurts the poor by eventually fuelling inflation. Regular domestic fuel price hikes in keeping with rises in global oil prices are needed, the bank said in its 2007 annual report, adding that it would help contain future inflation by eliminating government inflationary borrowing.
“The cost of the subsidies will have to be financed by the government through taxes and inflationary borrowing. Hence, ultimately, the costs of the subsidies are shared by the general public, including the poor.”
The Central Bank said that adjustment of fuel prices could be considered as an “appropriate” policy measure, since any delay in adjusting prices would require more abrupt and larger adjustments at a later stage.
Successive Sri Lankan governments have spent billion of rupees to subsidise fuel fearing that price hikes would make them unpopular.
But there have been growing calls to eliminate fuel subsidies because of their inflationary impact.
Sri Lanka has had 20 percent inflation for the past two years and inflation hit an all-time high of 23.