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Cost of living and poverty: Rising prices and increasing poverty levels 

06 Nov 2021

 
  • 5.5% unemployment rate in 2020; highest recorded in a decade
  • Inflation increases from 4.56% in 2020 to 7.6% in October 2021
  • Poverty alleviation, employment generation needed to aid affected communities
  By Imesh Ranasinghe  Last month, an unidentified man used a fire extinguisher to break into a Lanka Sathosa outlet in Galle. Caught on CCTV camera, he walked past the cash register and down the aisles full of food items until he stopped near a corner shelf. He grabbed some items with both hands; what he had come for. He kept them close to his chest and got out the same way he came in, his mission accomplished. This break-in was reported on the night of 30 October. The CCTV footage released to the media showed the items he had stolen – several packets of milk powder. As of 4 November, the Police had failed to identify him and arrest him for his crime. However, this incident cannot be viewed as just another crime; rather, it is an indication of the difficulties faced by some communities in the country as they try to navigate economic and social hardships amidst the ongoing pandemic. Poverty is on the rise in Sri Lanka, as is unemployment, forcing many who are unable to get by into making dire choices to survive. According to a 2018 study by the Brookings Institute, a US-based research group, extreme poverty leads to increased crime rates. In 2020, Sri Lanka saw a steep rise in poverty. Estimates based on the “middle-income poverty line” of $ 3.20 a day suggest that poverty rates in Sri Lanka increased from 9.2% in 2019 to 11.7% in 2020. This amounts to an additional half a million people in Sri Lanka, largely in urban areas and the informal sector, experiencing poverty due to the pandemic. What happened? Speaking to The Sunday Morning, University of Peradeniya Economics Professor Dileni Gunewardena said the effects on the economy caused by the pandemic caused many people to lose their jobs while the self-employed lost their livelihoods due to the continuous lockdowns imposed from time to time. This, she said, with the continuous increase in cost of living, contributed to an increase in poverty levels. Sri Lanka recorded an unemployment rate of 5.5% when the pandemic hit in 2020, which was the highest annual rate the country recorded since 2010.  According to the Central Bank of Sri Lanka (CBSL), the unemployment rate for the second quarter of 2021 was 5.1%.  “Poverty is really about how people are able to meet their basic needs, and does not consider only income. When prices go up, we can imagine that they are not able to meet their basic needs,” she added.  Inflation in Sri Lanka was at 4.56% in 2020, while in October 2021, it was at 7.6%. The Colombo Consumer Price Index (CCPI), which measures the weighted average price of consumer goods and services, rose from 138.7 to 146.9 (2013=100) between January to October in 2021. This indicates price increases of 4.6% between the period.  According to International Food Policy Research Institute Director – South Asia Shahidur Rashid, inflation lowers the value of people’s cash holdings, their real income, and the purchasing power of their money, thus leading to increased poverty. Furthermore, the national poverty line, which indicates the minimum amount required by each person to fulfil their basic requirements in a month, was at Rs. 5,353 as of August 2021. This means that a household of four members has to earn more than about Rs. 20,000 or so a month to stay above the poverty line. Advocata Institute Chief Operating Officer (COO) Dhananath Fernando said that more than the loss of income, people are going through poverty due to increases in food prices, as people had to spend a larger percentage of their income on food.  According to the CBSL, the Nominal Wage Index (NWI) of public sector employees was the same between 2020 and 2021 at 114.6, but the Real Wage Index (RWI) had decreased to 88.7 in 2021 from 94.6 in 2020 (2016=100).  For the private sector, the NWI increased from 186.1 to 201.1, but the RWI had only increased to 134.8 from 136.3 from 2020 to 2021 (2012=100).  Real wages are determined by the inflation rate, and take into consideration the purchasing power of the amount paid as compensation. Nominal wages don’t consider inflation and are solely based on the current government regulations.  This indicates how the purchasing power of the wages received by employees are getting reduced with the increased cost of living. Pawning and microfinance  Long queues of people in front of pawn shops were a common sight for the past year when the Government announced multiple lockdowns.  In September, a branch of a leading financial institution in Jaffna recorded Rs. 100 million in pawn loans for a 21-month period since the beginning of 2020. According to Fernando, gold jewellery was sometimes the only asset poorer households in Sri Lanka had, and when they felt the pinch of poverty, the only option they would have was to pawn jewellery. He added that sometimes the same people sought help from loan sharks, which puts them in even more debt.  A pawn shop owner told us that out of the total gold jewellery pawned, only 10-20% was bought back, while about 10% gets auctioned, and the rest is bought by a third party.  This third party, after buying the jewellery, auctions them off or sells them at their own jewellery business.  Fernando said microfinance, another controversy among low-income families, is a very important way for people to gain access to finance when they can’t get finance through the banking system. Although there are many problems in how it operates, he said the main problem was the lack of financial literacy among the people. “While there are people who could not manage to pay their microfinance debts, there are also people who overcame it,” he said.  According to news reports, more than 2.4 million Sri Lankan women who were unable to repay their loans due to high interest rates, were subjected to various forms of physical and mental abuse, including insults from finance companies and debt collectors.  As per reports, there are about 15,000 microfinance institutions that are illegally operating in the country. However, only 54 companies were registered with the Microfinance Association, and only those that obtained loans from those companies enjoyed the benefits given by the Government on several occasions.  However, according to the CBSL website, only four institutions were registered with them, namely, Berendina Micro Investments Company Ltd., Lak Jaya Micro Finance Ltd., Dumbara Micro Credit Ltd., and Sejaya Micro Credit Ltd. Overcoming poverty  The Government needs to help people find sources of income, especially those who lost their jobs or their livelihood, and help the economy to grow back to its previous levels or higher.  In addition, Prof. Gunewardena said that inflation needed to be managed. She said social protection measures that the Government could take include providing supplementary grants to people who have already been identified as poor (e.g. Samurdhi) or deserving of some other kind (e.g. disability payments), etc.   “The Government could also initiate employment guarantee schemes for the poor, engaging them in work. At the same time, monetary policy measures to curb inflation and increasing fiscal space so that transfers to the poor could be increased need to happen,” she said. Moreover, Advocata COO Fernando said many countries in the region had a social safety net in place to help people going through high cost of living. This entails the transfer of cash to the people based on market prices, unlike Samurdhi in Sri Lanka, which gives out a fixed amount every month. According to him, “this was the best way to save taxpayers’ money while poor people were given additional support to manage their food basket”.  Giving up on controlling prices, the Consumer Affairs Authority (CAA) issued an extraordinary gazette removing price controls imposed on 17 essential food items on 4 November. The items include sugar, dhal, chicken, potato, canned fish, wheat flour, green gram, big onions, chickpeas, dried fish, coconut, maize, and milk powder. Speaking on Sri Lanka’s Samurdhi programme, Fernando said the Government was providing money to about 50% of the households in the country through the Samurdhi Programme. As of 2019, there were about 1.4 million families benefiting under the Samurdhi Programme and due to the pandemic, the Government extended support to the affected families where it covered about six million family units with an allowance of Rs. 5,000. This was given on four occasions between 2020 and 2021.  Fernando said this distribution of funds through the programme could be viewed two ways – that Sri Lanka was actually that poor and the Government had a good plan to cover all the poor families; or that, due to the politicisation of the programme, it was overcrowded with a lot of people who have political connections. “I am sure so many people who should have been in the programme are not in the programme,” he added. However, he said that the Samurdhi programme could have played a role in alleviating poverty in Sri Lanka over the years, but he added that the programme did not really reflect Sri Lanka’s poverty numbers.

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