Sri Lanka: Inflating economies and incompetence


  • Govt. caught between global crises and local crises 
  • Rising prices blamed on adverse weather, crippled supply chain, global prices 


By Lavanga Abeyrathne

Last week, wheat flour importers Prima Ceylon (Pvt.) Ltd. and Serendib Flour Mills (Pvt.) Ltd. (SFML) increased the price of 1 kg of wheat flour by Rs. 17.50. With this increase, the price of bread and bakery products inevitably hiked as well, leaving the public, which was already unable to afford rice, out of options.

The latest price hike of an essential food item comes in the background where Sri Lanka has been facing a rapidly exacerbating economic crisis, with recent headline inflation changes in the Colombo Consumer Price Index (CCPI) on a year-on-year (YoY) basis hitting a 12-year hike, increasing to 9.9% in November 2021 from 7.6% in October 2021. 

According to the Central Bank of Sri Lanka (CBSL) Statistics Department, the CCPI, measured on an annual average basis, increased to 5.3% in November this year, from 4.8% in October.

While the inflation was driven by monthly increases of item prices in both food and non-food categories; as stated by the CBSL, the food category, driven by rising vegetable and rice prices, jumped by 4.7%, compared to the non-food category, which jumped by 1%.

What is inflation really?

At a basic level, inflation is the rate at which the value of a currency falls. As a consequence of this failure, the general level of prices for goods and services will rise, which is what we’re currently seeing. 

While generally a low level of inflation is expected and even viewed positively, a rapid rate of inflation leads to high prices and skyrocketing costs of living. Currently, the country is experiencing the latter, with this recent wheat flour hike becoming the straw to break workers’ backs. 

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.

The pandemic had a large part to play in this, with the economy all but coming to a standstill after the initial wave and subsequent lockdowns, from which we and the rest of the world are still recovering. However, while the pandemic was a global crisis, it’s undeniable that Sri Lanka seems to have it worse than most.

An increase in the supply of money is at the root of inflation, and unfortunately, Sri Lanka has been on a record-breaking money printing spree. In terms of the Monetary Law Act No. 58 of 1949, the CBSL is empowered as the sole authority to print money on behalf of the Government. Media reports stated that the CBSL printed Rs. 208 billion on 28 June, after printing Rs. 23 billion the previous week. These moves by the CBSL led to widespread criticism.

CBSL Governor Ajith Nivard Cabraal had stated to the press in September that money printing had no impact on inflation, adding that “excess money issued can be absorbed by the CBSL whenever the need arises”, causing outrage among the community.

Stock performance: Less prosperity, more desperation?

In the midst of denials regarding money printing and inflation, and a rising economic crisis, one other rise was also noted; the rise in the Colombo Stock Exchange’s (CSE) performance. Breaking multiple record highs during the past two months, CSE’s performance has been garnering attention across the South Asian region.

However, as reported by The Sunday Morning Business early this year, the prevailing economic despair and the starkly contrasting buoyant market are correlated, and both are related to money printing. When money is printed and released into the economy, interest rates reduce, and subsequently, lowered interest rates make the stock market an ideal place for investment. 

At the time, officials also attributed the market boom to lowered interest rates.

Thus, we are left questioning whether the boom was a sign of a prospering investment economy or of desperate citizens trying to save some of their money through investments.

Excuses, and more excuses

Speaking to The Sunday Morning last week, Agriculture Ministry Secretary Prof. Udith K. Jayasinghe said that the soaring vegetable prices were a result of adverse weather, the prevailing pandemic conditions, and the fertiliser crisis.

The same reasons were given for the increase in rice prices earlier this year.

Meanwhile, the rise in prices for a number of items, including milk powder and sugar, were attributed to import restrictions, and the imposition and subsequent removal of price controls. Prices of other items such as fresh milk increased as a direct result of the shortages caused by the said hikes.

The wheat flour price increase, the third in just two months, was attributed by both Prima Ceylon (Pvt.) Ltd. and SFML as being due to the foreign exchange (forex) crisis. Following this announcement, the All Ceylon Bakery Owners’ Association (ACBOA) also noted that they would be increasing the prices of bakery items. Speaking to the media last Sunday (28 November), ACBOA President N.K. Jayawardena stated that the price of bread had to be increased due to the increase in the prices of wheat flour and gas.

The walk of shame

To control food prices and hang on to its diminishing dollars, the Government of Sri Lanka (GoSL) in September set maximum retail prices (MRPs) for several food items, and limited purchases at subsidised government shops. The regulations backfired, with manufacturers hoarding items – as, with the MRPs imposed, they were unable to make a profit – and prices further hiking in the aftermath, with goods being sold at extremely high prices on the black market.

At a time when Sri Lanka could have imported goods from countries where the production cost was less and hence slow or halt the exacerbating crisis, it decided to impose import restrictions on several essential items not produced locally. These import restrictions resulted in mass panic, with items such as milk powder, sugar, liquefied petroleum gas (LPG), and cement being sold at a premium.

In the midst of pandemic recovery, the Government’s sudden decision to stop importing chemical fertilisers and pesticides earlier this year, in an attempt to transition to organic farming, had devastating effects on the sector, which are still being felt in tea plantations and paddy fields.

Subsequently, the Government said that it would revoke Extraordinary Gazette No. 2226/48 of 6 May 2021, which banned the importation of chemical fertilisers and agrochemicals including pesticides, fungicides, and herbicides/weedicides, and to thereby allow the private sector to import the same, with effect from 24 November 2021. However, as of last Friday (3), a gazette notification revoking the previous gazette notification had not been issued.

Speaking to The Sunday Morning on an earlier occasion, All Ceylon Farmers’ Federation (ACFF) National Organiser Namal Karunaratne noted: “The Government decided to undertake an experiment regarding food at a time when the whole world is facing issues with food production and supply chains due to the pandemic. This decision is a foolhardy one, since ordinarily, under such circumstances, no country would consider embarking on such dangerous experiments. Furthermore, this decision was timed with the start of the Maha season, which is the season which bears the bulk of the country’s food production, at over 65%.”

Meanwhile, Former Manning Market General Trade Union Chairman Lal Hettige, speaking to us recently, said: “The prices of upcountry vegetables such as leeks, carrots, capsicum, and beans are extremely high. Additionally, fewer quantities of vegetables arrive in the market. For instance, if there used to be five lorries’ worth of produce that arrived from one area previously, now you might only see one lorry’s worth.”

While the policies have been rolled back, the CBSL has continued to restrict banks from issuing letters of credit (LCs) to traders seeking to import food and other items, aggravating shortages.

‘Face the reality’

Meanwhile, speaking to The Sunday Morning, Ministry of Trade Secretary Bhadranie Jayawardhana said that the Government’s hands were tied when it came to this situation.

She explained that with tourism and foreign imports being impacted, the Government’s main revenue at the moment comes through taxes. “Asking the Government to do something means that you and I will be paying. This is the reality,” she added, noting that the only concession the Government can make is by distributing essentials at lower prices through co-operative services.

She also elaborated on the supply chain, mentioning that on the one hand, ships and freighters were scarce, limiting imports, while the weather and only the truly desperate farmers resorting to cultivation, had led to issues in local production.

“In this situation, the fact that people are managing to put food on the table is an accomplishment,” she added.

How do we overcome this hurdle?

Advocata Institute Chief Operating Officer (COO) Dhananath Fernando, speaking to The Sunday Morning, stated that there were no short-term solutions for this inflation issue, because the problem itself has been around for some time.

However, he noted that even though he doesn’t personally recommend it, “one option we have right now is to sort out the dollar problem, and for that we have to raise dollars, monetise some of the assets, and create dollars”. 

“But the challenge with that is our financial track record is not that good, so people expect a crash,” he further said.

However, looking at the recent developments regarding the pandemic situation, University of Colombo Professor in Economics and CBSL Monetary Policy Consultative Committee Chairman Prof. Sirimal Abeyratne told us that, while he has no insight into the specifics regarding the situation, recovery might be further slowed down if the new Omicron Covid-19 variant causes a resurgence of cases and lockdowns, with impacts on the global economy. “Our recovery will be postponed through such measures,” he elaborated, adding: “When recovery is postponed, the problems will continue, but obviously inflation will come down.”

Whether we will wait for the situation to take its course or develop a long-term strategy to overcome this crisis, remains to be seen.