While the Government claims that prices of consumer goods have decreased, consumers islandwide continue to experience high prices in the aftermath of a significantly eroded purchasing power.
Speaking at the reopening of the renovated Sathosa outlet in Anuradhapura recently, Minister of Trade and Commerce Wasantha Samarasinghe announced that the Government had successfully reduced the prices of goods by 17% over the past three months in addition to reducing the prices of 40 essential items by 8% over the past month.
Alongside this, the Minister revealed that steps would be taken to increase the number of Sathosa outlets across the country in order to lower prices of consumer goods and provide relief to the public.
While Minister Samarasinghe remained uncontactable at the time of going to press, Deputy Minister of Trade R.M. Jayawardana was unable to explain the precise nature of this price reduction, nevertheless asserting to The Sunday Morning that the Government had intentions to ensure reduced prices of consumer goods.
CBSL forecast
Following Sri Lanka’s economic crisis, which saw inflation reaching record highs, headline inflation, as measured by the Year-on-Year (YoY) change in the Colombo Consumer Price Index (CCPI), remained in the negative territory for the fourth consecutive month, recording a deflation of 1.7% in December 2024 compared to the deflation of 2.1% in November 2024.
According to the Central Bank of Sri Lanka (CBSL), headline inflation is expected to remain in the negative territory in the next few months, driven by the persistent effects of significant downward adjustments in energy prices and the reduction in volatile food prices, coupled with the considerable base effect, owing to the price increases experienced in early 2024 due to tax amendments.
The ‘Central Bank’s Policy Agenda for 2025 and Beyond’ notes that the deflationary environment resulting from the one-off effects of supply-side price adjustments will continue in early 2025 as per the bank’s current projections.
“Following the high inflation episode from late 2021 to early 2023, it is believed that this temporary period of deflation would provide some respite to the general public by dampening the cost of living to some extent,” it reads.
However, it notes that inflation is expected to turn positive from mid-2025 and gradually converge towards the targeted level of 5% over the medium term, supported by appropriate policy adjustments.
Restricted benefit
Nevertheless, market realities show that the benefits of reduced prices are not being universally felt.
Noting that the Government had announced the availability of certain essential items with reduced prices at Sathosa outlets, University of Colombo (UOC) Department of Economics Head Prof. Chandana Aluthge pointed out that the widespread availability of these goods was a question.
“The question is whether these goods are available to all. We know that Sathosa outlets are very limited. There is also a question of whether these reductions and methods will apply countrywide, and whether the trickle-down effect will apply for everybody,” he said, highlighting that prices decreasing for a certain segment of society alone would not imply that the entire population was receiving the benefits.
“When looking at statistics, the Government can say prices have gone down given the negative inflation prevailing at present, starting from last year. The CBSL Governor has mentioned that it could be a temporary situation and that this negative inflation is welcome, because we experienced very high inflation about two years ago. After prices doubled or tripled, they have now stabilised and are falling a little,” he explained.
Noting that food items had a greater weightage in the CCPI, he said: “There may be a contribution from falling prices of food items on the general level of inflation. In that sense, the Government claim may be legitimate, but it says these products are available at Sathosa outlets, not islandwide.
“There is also a question of how long the Government can sustain these lower prices and on what basis the prices have decreased; whether the Government has reduced taxes, or whether it is exerting pressure on the market, as in the case of rice and paddy, where the Government is indirectly forcing the market to lower prices.”
According to official statistics, Non-Food deflation (YoY) moderated to 3% in December 2024 from 3.3% in November 2024. Meanwhile, Food inflation (YoY) showed a marginal uptick, recording 0.8% in December 2024 from 0.6% November 2024.
On a month-on-month basis, the CCPI recorded an increase of 1.19% in December 2024 due to the combined effect of a 1.24% increase in the prices of items in the Food category and a 0.06% reduction in the prices of items in the Non-Food category.
The role of policy
Ongoing economic policies and market conditions also contribute to a lack of favourable prices for consumers.
Prof. Aluthge noted: “Sri Lanka continues to import certain primary food items. The stability of the exchange rate will contribute to low inflation, which is favourable since the rupee value to be paid for these imports will be stable, in turn leading to stable prices.”
However, some of the realities that could potentially manifest given the country’s economic situation can challenge this stability, as well as the feasibility of balancing Government handouts with revenue.
“The problems will arise if the rupee becomes unstable in the near future. Further, the Government has promised compensation through its handout programmes, which is a huge amount of money. There is a question as to how the Government is going to finance these handouts.
“At the same time, if lower food prices are due to reduced taxes, the Government will be in a difficult situation. On one side, there will be more handouts, and on the other side, the Government will have less income. If the Government borrows, it could feed into inflation at a later stage,” he explained.
Currently, economic policies have led to the development of markets that are not consumer friendly, instead being supplier or producer friendly.
Positing that the primary challenge was to ensure that the market conditions were improved, Prof. Aluthge said: “The Government should influence the market in a better way than disturbing the market mechanism. Firstly, Sri Lanka lacks proper, well-developed markets. The markets are typically underdeveloped, including our stock market, which is highly volatile. The expectation is to have stable markets.
“Similarly, when the Government is influencing any market in an ad hoc manner, imposing certain conditions without considering the realities, the consequences could be either felt by consumers or the Government itself,” he said, pointing to the failed imposition of a ceiling price on rice as an example.
According to him, Sri Lanka, which lacks proper competitive markets, being highly monopolised, skewed, or dominated by few suppliers, requires the Government to be smarter than the suppliers in order to tame the market and introduce more competition.
“The Government’s task is to gradually introduce competitiveness into the market, allowing more suppliers or producers to enter.”