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Impact of high oil prices on economic stability is
manifold – Central Bank
Central
Bank Governor Nivard Cabraal last week admitted that the impact
of high oil prices on the macro-economic stability of Sri Lanka
is manifold.
“It widens the current account deficit through an increased
import bill and adversely impacts on the exchange rate stability.
Further, it seriously impacts on domestic inflation, irrespective
of the government’s policy to either adjust domestic prices
in line with the international prices or subsidize domestic prices,”
he said during his presentation on the Roadmap for 2008 last week.
The first policy option that is now seemingly being practiced by
the government has an one-off adverse impact on inflation, as against
the more harmful long-term impact of the second policy option, he
said.
According to the Governor, an oil price shock also raises core inflation,
as the supply shock quickly permeates to other prices through increased
input costs. It also raises inflation expectations.
“The increases of international prices of other imported commodities
such as wheat and milk powder also impacts the domestic inflation
in a somewhat similar manner,” he said.
In fact, the Bank said the increases in prices of imported commodities
such as milk powder, wheat and petroleum contributed to more than
25 per cent of the inflation during the year. Inflation rose to
record levels in 2007.
The Governor said the substantial increase in worldwide oil prices
and commodity prices that led to substantial upward adjustments
in prices of many domestic goods and services. “Although adversely
impacting on inflation values and expectations, and causing considerable
economic tension, we consider the price “pass-through”
adjustments as being the appropriate policy action in the medium
to long-term, since this adjustment eliminates the requirement of
providing large subsidies by the government. Such a policy action
would naturally lead to a reduction in the budget deficit, which
in turn, would lead to lower inflation in the future,” he said.
During his presentation Mr. Cabraal also said that the Sri Lankan
economy, being a small, market oriented, open economy, has to continuously
face external shocks arising from global political and economic
developments in addition to domestic disturbances and natural disasters.
“In this challenging atmosphere, the major challenges that
would need to be faced during 2008 would be the impact of high and
volatile international prices of oil and other commodities,”
he said apart from the possible escalation of counter terrorism
measures to respond to the threat of terrorism. The high expenditure
on oil imports is expected to get some relief in 2008. Mr. Cabraal
said the Ceylon Petroleum Corporation is due to receive suppliers’
credit for oil imports from the Republic of Iran at concessional
terms and conditions.
“This facility is expected to have a favourable impact on containing
broad money expansion and is therefore a highly welcome development,”
he added.
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