Food, fuel prices will remain high, says ADB

Fuel and food prices will be high in most countries and “we will have to live with this,” Asian Development Bank economist Narhari Rao said here on Wednesday.

Addressing presspersons ahead of the release of ADB’s flagship annual economic publication, Asian Development Outlook 2011, he said that the solution did not lie in subsidies. “Don’t try to subsidise. In short run, [if you subsidise] you can deal with it. The long run consequences can be quite adverse on your fiscal management,” he said. This is because there exists no switch to turn off fuel consumption or food consumption.

Talking about Sri Lanka, he said rural poverty had come down sharply from 15.7 per cent (2009) to 7.6 per cent (2010). Sri Lanka is one of the “largish economies” that will have managed to provide access to electricity to rural areas. In 2006, the coverage was 78.5 per cent and in 2009, it rose to 83.2 per cent.

The Bank predicts eight percent growth rate in both 2011 and 2012. In 2010 too, the ADB estimates that the economy grew by 8 per cent. This was possible because the recovery was spread out across all sectors – Agriculture, manufacturing and services. “Over all there was a lot of confidence in the Sri Lankan economy,” he said.

Overall inflation increased to reach 8.6 per cent in March 2011, due to escalating food prices –13.9 per cent higher than a year earlier. The ADB expects inflation to average 8 per cent in 2011. Supply side factors will help restrain price rise in 2012, including growth in local food production and improvements to infrastructure.

Because of inflation the Central Bank of Sri Lanka will be forced to intervene, the ADB said. “We think Central Bank will tighten monetary policy later this year. So interest rates will go up. To the extent possible, the government should try and allow price flexibility and exchange rate flexibility,” he said.

The main areas of concern were expenditure and also doubts over the ability of the government to achieve its target of bringing down budget deficit to the promised levels. “In the long run growth is unsustainable without macro economic stability. Now comes the uphill task of bringing down budget deficit to 5 per cent over the next two years…On the tax side some measures have been taken. But doubts remain on the expenditure side. Current expenditure has to be curtailed,” he said and added that the Sri Lankan government would have to look at the subsidy regime seriously.

“I have no doubt that the government is looking at that,” he said. But curtailing expenditure is not easy and cannot be done in a year, unlike tax measures. This is because expenditure curtailing measures are political in nature such as phasing out subsidies etc and hence, will have to be spread out.

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