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Soaring commodity prices and lack of Government measures

01 Jan 2022

  • Inflation likely to continue upward trend for next three years: Prof. Colombage
  • Says Govt. needs reverse some ill-advised policy decisions
  • Once the peg on LKR to USD is removed, inflation likely to rise more
By Vinu Opanayake Inflation and the impact of state policies on the cost of living is felt across a wide demographic of Sri Lankans, with many in the low-income category struggling to get by. A visit to a local market in almost any part of the country would provide an opportunity to hear a mixture of concern, disappointment, and disgust as consumers, commuters, and businessmen alike express their frustration about the current situation. According to Central Bank of Sri Lanka’s (CBSL’s) Weekly Economic Indicators reports, in the first week of January, a kilogramme (kg) of samba rice was Rs. 128.25 while a kg of red kekulu rice was Rs. 98.50 in the Pettah Market, whereas as of 24 December 2021, these prices had gone up to Rs. Rs. 145 and Rs. 110, respectively. The same items were priced at Rs. 96 and Rs. 108 in the first week of January 2020. While red kekulu is mostly hovering around the price ranges of Rs. 96 and Rs. 110, the difference between the January 2020 price and December 2021 price of samba rice is around Rs. 49. Similar comparisons are shown in tables 1 and 2. Table 1: Comparison of vegetable prices between January 2020 and December 2021 
Food items Prices as of January 2020 (Rs.) Prices as of January 2021 (Rs.) Prices as of December 2021 (Rs.)
Beans 320.00 168.33 403.00
Cabbage 120.00 39.17 262.00
Carrot 332.00 104.58 366.00
Tomato 116.00 102.50 296.00
Pumpkin 50.00 60.42 56.00
Snake Gourd  150.00 112.50 257.00
Brinjals 253.00 57.08 321.00
Red onions 500.00 500.00 280.00
Potatoes 220.00 190.00 254.33
Dried chilies 410.00 527.50 710.33
Coconut 49.00 85.00 70.00
Lime 54.00 193.75 147.00
Kelawalla 530.00 562.50 937.50
Balaya 412.00 316.67 587.50
Source: The Central Bank of Sri Lanka Table 2:  Comparison of fish/meat product prices between January 2020 and December 2021
Food items Prices as of January 2020 (Rs.) Prices as of January 2021 (Rs.) Prices as of December 2021 (Rs.)
Salaya  192.00 200.00 212.00
Hurulla 430.00 460.00 475.00
Eggs 18.40 14.75 24.50
Source: The Central Bank of Sri Lanka Not only vegetables, fish varieties, and fruits, but the energy sector felt the impact of inflation as well. Table 3 depicts the historical prices of Ceylon Petroleum Corporation (CPC).  Table 3: CPC’s fuel price revisions since 2019
Effective date 95 octane petrol (Rs.) 92 octane petrol (Rs.) Lanka super diesel (Rs.) Kerosene (Rs.)
12.02.2019 152.00 129.00 129.00 70.00
13.03.2019 159.00 132.00 134.00 70.00
11.05.2019 164.00 135.00 136.00 70.00
11.06.2019 164.00 138.00 136.00 70.00
11.07.2019 159.00 136.00 131.00 70.00
13.08.2019 163.00 138.00 134.00 70.00
10.09.2019 161.00 137.00 132.00 70.00
11-06-2021 184.00 157.00 144.00 77.00
12-20-2021 207.00 177.00 159.00 87.00
Source: Ceylon Petroleum Corporation On the other hand, amongst many items that witnessed a hike in their prices are wheat flour, milk powder, cement, and liquefied petroleum gas (LPG) cylinders. Headline inflation, measured by the Central Bank, increased to 11.1% in November from 8.3% in October. Inflation was driven by monthly increases in the prices of items in both food and non-food categories. Reasons for inflation The Sunday Morning spoke to former Central Banker and Open University of Sri Lanka (OUSL) Emeritus Professor of Economics Prof. Sirimevan Colombage regarding this issue.   When asked about the reasons for inflation, Prof. Colombage stated that while supply shortages, high production costs, rupee depreciation, and increased import prices have had cost-push effects on inflation, the profound demand-pull effects stemming from the rapid money supply growth on inflation cannot be underestimated.   He added that the money supply rose by a whopping 42% during the last two years, from Rs. 7,456 billion in October 2019 to Rs. 10,582 billion in October 2021.   “The increase in the money supply was largely an outcome of the rise in net credit to the Government (NCG) by 38%; NCG disbursed by the Central Bank and commercial banks rose by 156% and 15%, respectively,” he noted. He stated that the easy monetary policy adopted by the Central Bank authorities following the obscured Modern Monetary Theory (MMT) since the beginning of last year is the single most prominent factor that has led to the unprecedented increase in money supply, and in turn, high inflation. Prof. Colombage added that consumer goods supply disruptions due to Covid-19 have also contributed to inflation. “The severe shortage of foreign exchange has led to a rapid deterioration of the exchange rate to the tune of around Rs. 240 per dollar in the black market. As dollars are not available in commercial banks, many importers have reported obtaining dollars from the black market at that rate. This resulted in the rise in the price of imports, which in turn accelerated inflation,” he added.   According to Prof. Colombage, there are supply-chain disruptions due to certain policy decisions such as switching to organic fertiliser, import restrictions on essential consumer goods due to dollar shortages, and added rise in world commodity prices. Crude oil prices rose by 76% to $ 74 per barrel from $ 43 a year ago, sugar prices rose by 27%, and wheat flour prices by 36%. Meanwhile, speaking to us, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando stated that there is always a monetary phenomenon if inflation is increasing. He also noted that money printing is a primary reason. “We have been printing money the last couple of years. But people are asking even if the US has printed money so why would it be a problem. Yes, they have printed as well and their inflation too is increasing. But the problem is, the US can do that but Sri Lanka cannot, given the structure of our society. About 50% of our population is above poverty rate and under Samurdhi programme and because of this, it is difficult when it comes to money printing for a country like Sri Lanka,” Fernando noted. Going into the second reason behind inflation, he stated that prices of commodities too are increasing after the Covid-19 recovery. “Organisations are increasing their prices of commodities. For Sri Lanka, it is basically this reason and also the dollar shortage. Also when there is a shortage for commodities, for example, milk powder shortage and gas shortage, automatically a grey market will be created. Then as a result, consumers will end up paying more money to purchase them. These are the reasons,” he noted.  How long will this last? Prof. Colombage noted that inflation is likely to accelerate in the medium-term, as in, during the next three years.  A major reason, according to him, is the continuous government borrowings from the banking sector which leads to a steady rise in the money supply. “At present, the Central Bank maintains a fixed exchange rate of around Rs. 198-203 per dollar, which is unrealistic and overvalued. The floating of the rupee is inevitable in time to come due to tensions in the forex market. Such a float is likely to shoot the exchange rate to around Rs. 230 per dollar. This will lead to further accelerated inflation,” he added. Fernando, in his opinion, stated that it is very difficult to determine how long inflation will rise as addressing inflation would be a collective effort that should be taken by the authorities. “There are other economic problems that are interconnected. There is a budget deficit issue, a foreign exchange problem, reform problem, and there are problems everywhere. When you take a measure to address one problem, it could affect all other areas. We have to be very careful when addressing these issues. But what I can say is that if the dollar problem continues, inflation too might continue as it will create shortages,” he added. Impact on overall economy and solutions According to Prof. Colombage, inflation has to be tackled by a coherent macroeconomic framework, mainly targeting a reduction of the budget deficit and freeing the Central Bank from political pressures. He stated that the Government has attempted to tame inflation by piecemeal measures such as price controls and raids, which have failed, and added that instead of such administrative controls, a free-market mechanism should be permitted for smooth trading. “Price controls and other offensive measures would only create market uncertainties and raise prices. Import restrictions will have to be removed. It is essential to reverse ill-advised policy decisions such as the banning of chemical fertilisers,” Prof. Colombage concluded.   As a measure, according to Fernando, the Government should set up a cash transfer system for poor people. He stated that there is no point in bringing down the prices of commodities for everyone in the country as consumers who can afford these increased prices should be able to purchase them at those price levels. “Now, fuel is mainly consumed by the rich in society. 50% of the fuel is consumed by 20-30% of the people and there is certainly no point in bringing down the prices of fuel for everyone. You cannot give a fuel subsidy because it will also be enjoyed by rich people, so you give a cash transfer to the poor people and they will spend that cash on what they want,” Fernando added. Speaking further on the solutions, he stated that there is no point in keeping the prices of commodities low when there is a shortage in the market and shortages create inflation. He added that after early next year, Sri Lanka would be able to depreciate the rupee which is now being forcibly kept below Rs. 203 following a directive issued by the Central Bank of Sri Lanka to licensed commercial banks (LCBs) and once this price control on the rupee is removed, it will again impact inflation.

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