The continuous rise of fuel prices has increased the pressure on the Government to cushion the impact on the public by reintroducing fuel subsidies at a greater economic cost.

As expected, the Government in the weekend increased prices of petrol by six rupees and diesel by four rupees which will directly contribute to the rise of the cost of living and also hamper the industrial sector.

Even prior to this announcement, the Central Bank of Sri Lanka warned of a possible rise in inflation during the month of July.

The public fear that the increase of fuel prices will further increase the prices of essential food items, cost of transportation and the utilities. There is growing criticism by opposition political parties that the Government’s improper financial management is the main reason behind the rising cost of living. They say that the Government is blaming the rising costs on the global oil prices, while allowing the rupee to depreciate rapidly against the dollar which has also contributed to the ever expanding oil bill.

There are also concerns that the Government’s inability to control rising prices would ultimately lead to the introduction of subsidies which would have a negative impact on the overall economy. The subsidies are likely to come in the form of transfer of funds to loss-making enterprises.

A possible introduction of subsidies to the energy sector was signalled last week by Enterprise Development and Investment Promotion Minster Dr. Sarath Amunugama, who said that the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) have been allocated Rs.6 billion to offset their losses.

However, CEB unions said that the Government will have to allocate at least Rs.13 billion for CEB to offset its losses. They said, otherwise the CEB will have to increase electricity bills putting further burden on the public and the industrial sector. The CPC, the other loss making entity, is mainly affected by unpaid bills of the CEB and unions fear that the continuous rise of diesel prices would affect both entities.

However, the Governor of Central Bank Ajith Nivard Cabraal last week warned that subsidies would affect the government’s effort to improve expenditure flexibility.

He denied allegations that the Government’s expenditure is out of control due to widespread subsidies, a bloated public sector, transfers to loss-making enterprises and the cost of the counter-terrorism measures.