Financial Times

Diesel, kerosene price hike seen inevitable
The Central Bank last week indicated a diesel and kerosene price hike was on the cards given soaring international fuel prices, saying the government could not bear the burden of more subsidies without affecting other essential public spending programmes.

It said there was strong demand for exports, particularly apparel, but noted that the momentum of economic growth in the second quarter was likely to be slower than in the first.

The bank said in its monthly monetary policy review that the Monetary Board had decided to maintain policy interest rates at current levels despite some central banks raising rates elsewhere in response to upward inflationary pressure.

It noted that inflation here, which fell continuously from the second quarter of 2003, had started to pick up, as expected. The overnight Repurchase (Repo) rate will remain at 7.00 per cent per annum and the overnight Reverse Repurchase (Reverse Repo) rate will remain at 8.50 per cent per annum.

The Central Bank said it would be difficult for the government to maintain its current monetary policy stance and fiscal discipline, if it did not make adjustments in the economy to reflect adverse overseas developments. "In this context, the recent increase in the price of petrol and permitting the price of LP gas to be raised are steps in the correct direction," the Central Bank statement said.

"However, it would be necessary to accelerate adjustments in other prices, such as diesel and kerosene, too to reflect the current international prices. It is not prudent for the budget to bear the cost of such subsidies as it amounts to sacrificing other essential public expenditure programmes."

The bank said that despite the rise in inflation, the continued depreciation of the rupee has helped to maintain the country's external competitiveness as reflected in the 24 currency real effective exchange rates, which has depreciated by 1.5 per cent.

External developments have increased the pressure and volatility in the foreign exchange market, requiring the bank to intervene to stabilise the foreign exchange market.

The rupee depreciated by 6.4 per cent vis-à-vis the US dollar during the first seven months of 2004, compared to a depreciation of 0.4 per cent during the same period in 2003.

During this period, the rupee also depreciated against the sterling pound (8.3 per cent), Japanese yen (1.9 per cent), euro (2.3 per cent) and Indian rupee (4.9 per cent).

Gross official reserves have declined to US $2,104 million (3.5 months of imports) at end-June 2004 from US $2,329 million (4.2 months of imports) at end-December 2003.

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