Sri Lanka’s inflation would be running higher than its present 8% were it not for the government’s diesel subsidy and the surcharge on vehicle imports, Central Bank Governor Nandalal Weerasinghe said on Wednesday.
“If not for fuel subsidy and surcharge on vehicle imports, the inflation would have been higher than the current level,” Weerasinghe told reporters at a media briefing in Colombo held after the monetary policy announcement, EconomyNext reported.
“There could have been higher imports and reserve building up would have been difficult.”
The remarks came hours after the Monetary Policy Board left the Overnight Policy Rate unchanged at 8.75%, and they attach a counterfactual to the Bank’s own inflation numbers: two fiscal measures, not monetary policy alone, are credited with keeping the figure where it is.
Two measures, two channels
The fuel subsidy works on prices directly. The government provided Rs. 57 billion between April and June, mainly for diesel, and has now approved a further three-month package for October to December — this one allocated only to diesel, on the grounds that it is the fuel used by public transport.
EconomyNext puts that second package at Rs. 41 billion. That was the figure President Anura Kumara Dissanayake announced at Gampaha on 27 September; the sum the Cabinet actually approved two days later was Rs. 40.65 billion, tapering from Rs. 15 billion in the first month to Rs. 12.15 billion in the third, as the Daily Mirror reported at the time.
The vehicle import surcharge works on the external account. A temporary 50% surcharge on Customs Import Duty on new personal vehicles was imposed on 16 May and has since been extended to 31 December. Weerasinghe’s point is that suppressing vehicle imports keeps foreign currency from flowing out — which is why he linked it to reserve accumulation rather than to prices alone.
The inflation backdrop
Headline inflation has been above the Central Bank’s 7% upper band since July, and reached 8% in August — a 37-month high. The Bank attributes the rise to fuel prices, which the government raised by more than 50% following the escalation in the Middle East at the end of February.
The Central Bank’s target is 5%, with a lower band of 3% and an upper band of 7%. It also tightened policy in May, raising the key rate by 100 basis points to curb demand-driven price pressure.
No other verified newsroom had published its own account of the post-policy briefing at the time of writing; the two aggregator sites carrying the remarks are both rewrites of the EconomyNext filing.