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Sri Lanka may face milk powder shortage with currency fall: report

Jan 07, 2019 07:02 AM GMT+0530 | 1 Comment(s)

ECONOMYNEXT - Sri Lanka's may face a shortage of milk powder as a collapsing currency and price controls have left distributors with losses forcing them to curtail imports, a media report said, showing the fallout of following illiberal economic policy.

Sri Lanka's The Sunday Times newspaper said some importers have halted imports as the rupee fell below 183 to the US dollar.

The Sirisena-Wickremesinghe administration has followed most illiberal economic policies from the last regime, which has hit consumers and de-stabilized the economy. In Sri Lanka economics per se is hardly known and Mercantilism is the dominant ideology.

The core illiberal strategy of the administration was to follow a policy of unsound money by depreciating the currency deliberately to target a real effective exchange rate and boost exports by cutting real wages of workers with the help of a highly unstable soft-pegged exchange rate regime.

Sri Lanka has since slapped controls on cars and gold and torpedoed its own free trade strategy to maintain the soft-pegged exchange rate without reform.

Without a floating interest rate the central bank cannot target an exchange rate.

A soft-currency peg with a fixed interest rate, can be easily weakened by printing money or building up unsterilized excess liquidity to put bond holders to flight and make exporters hold back dollars.

But the opposite cannot be done, once credibility in the peg has been lost as long as money is printed to maintain the fixed interest rate.

 The Sunday Times said importers had to pay about 184 rupees for a US dollar (the rupee was at 131 when the administration came to power), and there were also multiple taxes.

Currency depreciation tends to expand the effect of ad valorem tax and Sri Lanka has 'tax-on-tax' where some taxes are paid on earlier taxes like duty.

A tonne of milk powder was about 3,250 to 3,350 US dollars (603,000 rupees at current exchange rates) in the world market now.

There were taxes of 15 rupees as duty, 15 percent value added tax, 7.5 percent as port and airport levy and 2 percent as nation building tax, totaling 170 rupees a kilogram the report said.

However prices were controlled by Sri Lanka's Consumer Affairs Authority.

Sri Lanka had money printing, import and price controls under the 1970s administration of Sirimavo Bandaranaike, but a United National Party administration removed many of the price controls.

When the Consumer Affairs Authority came under Bandula Gunewardene, many new items were brought under price control.

Prime Minister Ranil Wickremesinghe has followed Gunewardene and kept many of his price controls in place.  

Wickremesinghe also set up a drug price control agency, which is driving some brands out of the market and may generate shortages as the rupee falls.

Analysts had warned that a falling currency will lead to shortage of goods and drugs where price controls are used in a country with a so-called soft-pegged exchange rate, as had happened in Latin American nations.

"In Sri Lanka because of price controls of the National Medicines Regulatory Authority medicines, drugs can go off the shelves," EN's economics columnist wrote last month (Sri Lanka is not Greece, it is a Latin America style soft-peg)

"In Latin American soft-pegs many price controls were imposed. Instantly goods go off the shelves and black markets appear.

"With import controls more businesses will fail. People will be laid off as revenues fall. Banks will make more losses. Rates will rise eventually. More businesses can fail."

Unless prices are allowed to be raised, shortages can emerge, the report said.

The larger milk powder firms have stocks and can continue to sell at earlier prices until stocks run out. (Colombo/Jan08/2018)