Fiscal Fiasco

November 14, 2006 (LBO) – The massive fiscal cost and the subsequent body blow delivered to the economy of Sri Lanka by indiscriminate fuel subsidies from early 2004 had received the attention of international economic researchers. A study by researchers at the International Monetary Fund has found that 74.9 percent of the money spent on fuel subsidies by the government of Sri Lanka went to 60 percent of the highest income classes.

After abandoning a monthly price adjustment formula in early 2004, fuel subsidies in the country intensified in April 2004, after a new government came into power on the promise of separating local fuel prices from global forces, under a home grown policy agenda.

The policy of indiscriminate fuel subsidies called ˜removing the plug’ was the brainchild of the Marxist – Nationalist Janatha Vimukthi Peramuna or Peoples' Liberation Party.

Subsidies were largely discontinued in July 2006, in favour of an ad hoc price adjustment regime, though a suspension of value added tax from Disel remains in force.

The financing of fiscal slippages through central bank credit, sent the rupee plunging and inflation shooting towards 18 percent within months of the policy coming into effect.