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Softening the blow from the surging cost of living  

12 Oct 2021

  • Looking beyond price controls towards a more holistic strategy 
BY Sumudu Chamara With the lifting of the lockdown, Sri Lankans thought that they could breathe a sigh of relief now since Covid-19 infections and related deaths have dropped considerably; however, the increasing prices of essential goods, including food items, say otherwise, and now, in addition to the national health crisis, Sri Lankans are in an economic crisis which is severe than it was before. Immediately after the Government’s decision to revoke gazette notifications regarding price controls for rice, milk powder, liquefied petroleum gas (LPG), wheat flour, and cement, importers and producers of those products decided to increase the prices, as they had been requesting the Government during the past few months. What happened to the price controls imposed by the Government and why it happened are questions consumers are awaiting answers for. However, the question that is more relevant now is how the country, i.e. consumers, can face the prevailing situation in a more practical manner, and what the role of consumers, authorities, and the Government is to lessen the impact of price hikes. To discuss what Sri Lanka can look into to reduce the pressure on the Government and the consumers, The Morning spoke to several persons who can shed some light on the matter. Competition and alternatives  According to Advocata Institute Chief Operating Officer (COO) Dhananath Fernando, controlling the prices of goods, in most cases, is a short-term measure, and what Sri Lanka should focus on is taking long-term measures in the domestic market through competition and diversification.   “One of the solutions to bring the crisis faced by the people under control is introducing and promoting alternative products and services to replace or reduce the use of goods of which the prices have increased. When it comes to the LPG price issue, if we can relax market regulations that apply to similar alternative products and increase competition, the people would benefit from it in the long run. It is true that there is a need for more gas companies as well; but, competition between such companies is what decreases prices in the long run and makes it possible for consumers to opt for suitable alternative solutions to replace or reduce the use of gas. Allowing such products to enter the market easily is also of great importance in this process. Coconut shells and coconut shell charcoal, electricity, and firewood, for example, will allow the people to diversify the alternatives for LPG they need without sticking to gas of which the price has increased, in order to face the prevailing situation. In fact, if we take LPG as an example, there are a lot of competitive substitutes for LPG. If there were such alternatives available, the people can use the expensive goods only when they are absolutely necessary, and save money by using alternative products. “Even when it comes to milk powder, the situation is the same – the people can change their lifestyle by reducing the number of times or the amount of milk powder they consume. The same goes for products such as fuel of which the prices change often; when fuel prices increase, people tend to consider whether they use their own vehicle or public transport services. The people anyway try to adapt to the prevailing situation by managing their use of goods, and it is very important that the people have alternative products also to facilitate this process.” What Fernando described, i.e. introducing alternative products to reduce the use of goods of which the prices have increased, has already grabbed the attention of some traders. As The Morning saw, a famous local online store has advertised firewood (a bundle of wood) for Rs. 140 per unit, while another private company has advertised (on another online platform) cylinders of kerosene and cookers compatible with those cylinders, claiming it to be a “solution to the LPG issue”. Government’s duty and policies According to Fernando, the above-mentioned competition in the market, with the aim of promoting and encouraging alternative, cheaper options to be more prevalent, can be achieved via adopting and amending laws and policies that support such alternative products, and taking other measures to break the monopolies that have been created within certain industries.   He explained: “Removing the existing barriers for small-scale companies that make available cheaper alternatives to enter the mainstream market is of extreme importance. When it comes to some products such as LPG and wheat flour, as well as industries such as the rice mills industry, there are only a handful of major producers and suppliers. They decide what the prices should be collectively, which is tantamount to going against the accepted market rules and practices, and such issues arise because we don’t have adequate laws and policies to address such realities. There are only a handful of wheat flour producers in the country, and they usually import wheat and grind it. However, importing wheat flour is not allowed adequately, which leads the said companies to sell wheat flour for a higher price. There are tax-related concerns as well when importing wheat flour, as they attract a relatively higher tax. To establish competitiveness, importation of both wheat and wheat flour should be allowed. Doing so would reduce the stress on both the Government and the people.” Fernando noted that what the Government should focus more on is not controlling prices, but addressing the factors or barriers that obstruct competitiveness in the market, by way of introducing the necessary laws and practices. “There are practices in the world, where companies that hold the number one and two places in the market share, cannot merge, in order to ensure competitiveness by preventing their ability to merge and strengthen their market share, and thereby be in a position to control market prices. Even if there was one manufacturer or seller of a certain product, there are ways to increase competitiveness,” he explained. When queried as to what the Government can do through the next Budget to address the increased prices of essential food items and the increased cost of living, he opined that the only thing the Government can do is provide relief from the Government’s side or in collaboration with the producers or suppliers of the goods of which the prices have increased. He expressed concerns that such a measure, however, is not very advisable, because, ultimately, it is the people who are going to have to bear that cost. He explained: “For example, the Government can pay a certain amount to LPG companies to reduce the price of a cylinder of LPG. But, essentially, that money should also come from the people because there is no other way to allocate funds for such a step. Therefore, even if such measures can be viewed as a relief aimed at reducing prices, it is the people who have to pay that price indirectly. Such a measure could be beneficial for some time, especially since Sri Lanka does not produce some of the goods of which the prices have increased. However, what the Government should do is seek the long-term measures I described – competitiveness and deregulation measures should be established for all related products, and doing so will allow the people to choose alternative products if one product becomes scarce or unaffordable. “Prices of a lot of goods are on the rise at the international level as well, and when it comes to Sri Lanka’s situation, the depreciation of the US dollar (USD) is also a factor that affects this situation. This situation is mostly a result of Sri Lanka’s monetary policies, which cause negative impacts on the value of the USD by releasing more money to circulation than we should. Sri Lanka is keeping the USD in the Rs. 202 range artificially, but I am of the opinion that we might have to change that situation due to the scarcity of USD in our system. If the USD continues to depreciate, the impact on Sri Lanka would worsen.” Price controls One of the main concerns the issue of increasing prices of consumer goods relates to is price controls, which the Government seems to have given up on, and consumer rights activists keep making demands on. According to Fernando, price controls, despite how effective they seem, are also a temporary measure. When questioned as to whether controlling the prices of goods artificially such as through laws and regulations is an effective measure, he opined that price controls are not a long-term measure due to several reasons and that it can lead to several other issues that affect the domestic market. He explained: “Imposing price controls has the potential to create a black market for certain price-controlled products, and producers and suppliers may tend to refrain from releasing products to the market, as seen in Sri Lanka in the recent past. If a seller suffers losses on every unit of a good they sell, by not selling those goods, they can at least minimise the loss. We may call it the hoarding of products, which is true to some extent, but what is really happening is that they refrain from selling those products because they have to suffer losses, which is a fair act from their perspective. In most cases, if traders can make at least a small profit, they usually release their products to the market. This is one instance where the situation we call a shortage of goods arises.” He added that controlling prices is also not an ethical act, because the sale of even the same product may not take place under similar circumstances. Fernando explained that sometimes, traders tend to be creative and innovative when selling their products compared to other traders that sell the same product, which leads the former type of traders to sell the product in question at a higher price. He stressed that blanket price controls, therefore, affect creativity and innovation, which, in the long run, affects the market. “Price controls have existed in Sri Lanka for four to five decades. If such measures actually reduced the prices of goods, we would not have to have this discussion. The best solution is allowing competition in the market. One of the best examples that show the effectiveness of competition is low charges in mobile connections and related services. Mobile connection providers, who charged exorbitant prices for incoming calls and even basic facilities such as corded landlines, when there were one or two companies that provided such services, have now reduced their charges because now there are several such companies,” Fernando further added. He noted that steps such as imposing price controls and raiding stores are not measures that can change the prevailing situation. Although The Morning attempted to contact Co-operative Services, Marketing Development, and Consumer Protection State Minister Lasantha Alagiyawanna, to find out whether the Government and his State Ministry is planning to introduce any solutions through the upcoming Budget to reduce the cost of living or to manage the increased prices, he was not reachable. Consumer rights The Morning also spoke to the National Movement for Consumer Rights Protection (NMCRP), to find out what sort of relief measures consumer rights activists seek and/or suggest. NMCRP President Ranjith Withanage noted that they are planning to hold discussions with the Government, with the aim of getting some kind of relief for the people, as the present situation is not in an acceptable state, and that they will also take to the streets demanding relief for consumers. He added: “We see the decision taken by the Government to revoke price control regulations as an arbitrary act, and it is not a case of managing the situation properly. The Government does not seem to be actively taking measures and we are of the opinion that the authorities lack the practical knowledge to handle the situation.”   When questioned as to whether any discussions would be held with the business community to agree on some relief for consumers, he said that it is not practical, and that most businesses are trying to make as much money as possible. He opined that businesses cannot be trusted to take decisions in favour of consumers.  “Even though certain trade unions and consumer rights groups claim to have come to agreements regarding price increases or giving reliefs to consumers, not all businesses are members of these groups, and not all of them are on the same page. In fact, most businesses, especially small-scale ones, work on their own accord.” With regard to food items, such as cooked rice packets, that are not covered by the official price hikes, Withanage said that businesses would increase the prices of such food items as they want, sometimes unfairly, and that therefore, his organisation will encourage consumers to choose places that give the best value for money. Even though these price hikes led to a public furore, given the economic situation the country, businesses, and consumers are in, there is a question as to how much the Government, or anyone for that matter, can do in order to control the situation in a manner that is favourable to all parties. Although the Government has claimed that it would not allow any unfair price hikes, consumers are of the opinion that price hikes are already quite steep. Moreover, having to withdraw price control regulations is a sign that short-term measures do not always work. The truth is that price hikes are most likely to remain, or worsen further, in the foreseeable future, as the entire world is going through economic and food crises, and the people will most likely have to live with it. In a context where controlling prices remains a complicated and arduous matter, the least the Government can do is make this an opportunity to rethink what long-term measures can help the country, and how it can lead the people to mitigate the impact of the price hikes.


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