The commissioning of a coal power plant this week can reduce oil imports to Sri Lanka while also helping strengthen the finances of Ceylon Electricity Board, the state power utility.

Though oil prices have been rising, Central Bank Governor Nivard Cabraal said in an interview earlier this month that most Asian countries could manage with oil prices of around USD 100 barrel.

In 2010 Sri Lanka spent 3.0 billion rupees on oil imports, up 39% from a year earlier, partly due to rising prices. A large share of oil is imported for power generation. With a coal power plant being commissioned this month, some oil imports will reduce. Rainfall was also high, helping hydro generation.

Cabraal said that "That will reduce total oil bill.”

Oil is an important intermediate good for economic activity, fueling both transport and power. But rising oil prices are a problem mostly for so-called developing countries that try to fix prices arbitrarily.

Attempts to arbitrarily fix prices results in state revenue losses, losses is state enterprises, higher levels of borrowing by either state enterprises or the government itself, which then puts pressure on interest rates.

If monetary policy is not tightened as credit demand rises, inflation will go up and there could also be pressure on foreign exchange rate pegs if monetary policy becomes loose.

If import prices are passed on to the economy, balancing aggregate demand, there is no pressure on exchange rates.

(Sourced from LBO)