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HSBC Global Research on oil spikes and impact on
Lanka
Following
are excerpts from the HSBC Global Research’s latest report
on Sri Lanka.
As can be seen in chart 41 there is little apparent relationship
between year-on-year changes in oil prices in LKR terms and the
CCPI. The reason for this is the presence of fuel subsidies in Sri
Lanka. However, during April- September 2006 domestic fuel prices
were increased by 35% (weighted average) achieving full passthrough
for petrol and diesel while substantially reducing subsidies for
kerosene13. Further, in May- July 2007, the remaining fuel subsidies
were removed, resulting in a weighted average increase in fuel prices
of 22%.
Now that the subsidies have been removed permanently, we would expect
oil price movements to have a bigger impact on inflation in Sri
Lanka, as is the case with other countries with no fuel subsidies.
Assuming that oil trades at USD100 per barrel14 and the LKR depreciates
by 5% over the next 12 months, the year-on-year change in oil in
LKR terms declines quite sharply as shown in chart 41. This should
put a downward pressure on overall inflation.
The other point we would like to make is that although the removal
of subsidies resulted in a one-off increase in the rate of inflation
(see chart 41), it is a positive development as it will reduce the
subsidy burden on the budget and, in the medium to long run, help
contain inflation. This is, of course, assuming that the government
does not simply use the subsidy savings to fund increases/overruns
in current expenditure.
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