In line with food price inflation, food prices have risen in a steep curve since the start of the economic crisis in Sri Lanka, with no sign of immediate relief on the horizon.
While continuously rising food prices and food security challenges are typical for the country, the high prices following the economic crisis have been described as part of a multidimensional economic crisis.
Sri Lanka’s food pricing increased in parallel with global trends, given that the country is a net importer. As a net food-, fertiliser-, and fuel-importing country, the volatility of global oil prices, rising international food and intermediate input prices, and high logistic costs coupled with the compounded impact of a steep currency depreciation have contributed to food price inflation.
Speaking to The Sunday Morning, Department of Agriculture Socio-Economics and Planning Centre (SEPC) Director Dr. W.A.C.K. Chandrasiri noted that there had been a threefold increase in prices of certain essential foods compared to 2021, although there had been a certain decline over the past seven months.
“Price increases have primarily been driven by the increase in costs of inputs, such as agrochemicals, fertiliser, and seeds. This increased the cost of cultivation, which in turn increased transport costs etc., leading to a rise in retail prices,” she said.
For instance, a sample of some of the crops which have seen steep price increases between the fourth week of 2021 (22-28 January 2021) and the fourth week of 2024 (19-25 January 2024) are as follows: green gram from Rs. 459 to Rs. 1,183, green beans from Rs. 280 to Rs. 941, carrot from Rs. 249 to Rs. 1,231, and cabbage from Rs. 180 to Rs. 727.
As a lower-middle-income nation, Sri Lanka’s headline inflation, as measured by the Year-on-Year (YoY) change in the Colombo Consumer Price Index (CCPI), decelerated sharply to 0.5% in August from 2.4% in July, well below record high levels seen at the height of the country’s financial crisis. Food inflation (YoY) decelerated to 0.8% in August from 1.5% in July.
According to the World Bank’s latest Food Security Update as of 27 June, domestic food price inflation remains high in low- and middle-income countries. “Economic challenges, including high debt levels and geopolitical tensions, compound the crisis, preventing governments from adequately supporting vulnerable populations. Climate variability, including the anticipated La Niña phenomenon, poses additional risks such as flooding and drought, affecting agricultural production and livelihoods in several countries.”
Causes
A World Food Programme (WFP) report from November 2023 notes that Sri Lanka’s political instability since 2021 is a result of a severe macroeconomic crisis that has caused acute shortages of and spikes in the prices of food and other essential products.
The country’s agricultural production has faced significant disruptions, predominantly attributed to reduced yields or losses following the Government’s ban on chemical fertiliser and other agrochemical imports in April 2021, which negatively impacted crop productivity. The report notes that rice production saw over 50% yield loss for 62% of farmers, leading to the reintroduction of rice imports after a decade.
The fertiliser ban has also had negative repercussions on feed production, resulting in escalating feed prices and negatively impacting poultry and livestock production. Similarly, fruit and vegetable production is lower, partly due to increased fuel prices raising the cost of transportation services to distribute the products.
In the backdrop of these challenges, households have been driven towards higher levels of food and nutrition insecurity, with food consumption reaching lower values, compared to those registered during the peak of the Covid-19 crisis.
While WFP surveys have reported lower levels of food insecurity in 2023 compared to 2022, the report notes that in the face of any future shocks, people may find it increasingly difficult to cope.
University of Peradeniya (UOP) Department of Economics and Statistics Prof. Wasantha Athukorala told The Sunday Morning that the drop in agricultural production was a significant contributor to this situation.
He pointed out that the fertiliser and agrochemical ban had led to a shortage of agricultural products, and that the ban of such essential inputs would inevitably lead to an immediate production decline, which would take time to recover.
“Simultaneously, we had to import agricultural commodities. There are only a few importers in the country, so it is not a competitive market. Therefore, they keep a large margin when distributing essentials.”
Secondly, with inflation, food prices increased drastically due to transport costs and other inputs, which also contributed to higher prices in agricultural products.
“In such a situation, there is no way to control it immediately. The Government also didn’t take any steps, not having analysed the situation prior to making these decisions,” he pointed out.
Prices unlike to reduce
Prof. Athukorala explained that without simultaneously reducing prices of all external factors such as fuel, lower prices of essential commodities could not be expected.
“Commodity prices in the country are determined by the supply. When the exchange rate depreciates and world market prices increase, the prices in the domestic market will increase,” he explained.
He added that while inflation had driven up prices, economic theory deemed that although prices could increase rapidly, they would not decrease at the same speed.
“Prices are determined by various other external factors in the economy, so we can’t expect an immediate price decrease. For instance, if prices had increased due to supply shortage and higher transport costs, even if supply normalises, prices will not reduce if transport costs remain high.”
He noted that as a solution, rather than decreasing prices of goods, there needed to be a mechanism for distribution with reasonable prices. Pointing to Sathosa as an example of this, he nevertheless stated that this mechanism was not working successfully in Sri Lanka.
He therefore noted that while prices would not decrease in the long run (although the rate of increase could be stopped, which had been accomplished at present through lower inflation), the Government should increase income levels in order to compensate for this and mitigate the impact. “We need to identify alternative ways of providing relief to the people,” he said.
However, as a long-term measure, if economic productivity is increased, such as through increasing crop yields, reducing input prices, and substituting technology for manpower, high prices could be addressed while simultaneously increasing individual income levels.
Meanwhile, Consumer Affairs Authority (CAA) Chairman T.I. Uduwara told The Sunday Morning that the authority was engaged in undertaking raids in relation to violations of control prices of essentials within the CAA’s legal provisions.
However, he pointed out that they were unable to take any action against certain essentials, saying: “When it comes to essentials such as coconut oil etc., we are unable to take legal action, but we inform traders that they should not exceed specified price levels, according to the pricing index we publish each week. However, traders are not 100% compliant.”
He therefore noted that the CAA was taking steps to change the relevant laws to enable officials to raid and file action against violators, adding that this process was underway with the involvement of the Legal Draftsman.
He also noted that the CAA was diligently conducting raids, especially when the prices of essentials were being artificially inflated in the market.
Middlemen conundrum
Addressing the high prices of essentials, Dr. Chandrasiri noted that there was almost a doubling of prices between farmgate and retail prices, as shown in Hector Kobbekaduwa Agrarian Research and Training Institute (HARTI) data, which she attributed to the manipulation of middlemen.
According to HARTI data, for instance, the farmgate price of a kilo of potato in Nuwara Eliya for the week of 30 August to 5 September was Rs. 282, while its retail price in Colombo and the suburbs was Rs. 455. The farmgate prices of vegetables like carrot (Nuwara Eliya), cabbage (Nuwara Eliya), tomato (Hambantota), and pumpkin (Matara) were Rs. 189, Rs. 179, Rs. 60, and Rs. 53, respectively, increasing to Rs. 318, Rs. 325, Rs. 278, and Rs. 202, respectively, in the retail market.
Meanwhile, the retail price of green gram was Rs. 580, while its farmgate price in Monaragala was Rs. 1,021. Keeri samba saw its farmgate price of Rs. 122 (Anuradhapura) jump to Rs. 296 in the retail market.
Prof. Athukorala too noted that middlemen were a serious concern, explaining that this phenomenon primarily took place due to the information gap and an underdeveloped market.
“Farmers don’t have the power to decide prices, while middlemen decide the prices and purchase the goods. Thereafter, they sell them while keeping a higher margin. The role of middlemen is not regularised in Sri Lanka; it is informal. Given these poor market conditions and the lack of a competitive market, middlemen conceal information, keep a higher margin, and extract profits.”
He pointed to the lack of a clear policy document to overcome these issues, with these problems persisting for decades.
According to CAA Chair Uduwara, although middlemen are earning excess profits when it comes to items such as vegetables, the authority is unable to take any action against them.
“Middlemen face no legal repercussions, although they purchase goods from producers at low prices and sell them to traders while keeping a large profit margin, which leads to high prices in the market,” he explained, likening these middlemen to a “mafia”.
Besides the broader macroeconomic consequences of high food prices for the economy, it continues to lower household welfare in Sri Lanka, despite the purported economic recovery.