ECONOMYNEXT – Sri Lanka’s soaring food prices are due to bad weather and intermediaries, and they will come down in time for April New Year, Minister Anura Priyadarshana Yapa said as the island wallowed in a period of stagflation after a currency collapse.
“It is well-known that vegetable prices wrere going up rapidly in the last few months,” Yapa told reporters in Colombo.
“The main reason for this is the climate anomalies which resulted in excess rain in both upcountry and low country regions simultaneously.”
“This hindered all agricultural activity where farmers faced great difficulty as some crops were completely destroyed, leading to an unusual increase in prices of vegetables and rice.
“Therefore, a price increase happened in vegetable and rice prices throughout the country.”
Sri Lanka rice prices have also gone up, despite having an estimated half a million tonne surplus last year.
Sri Lanka projects 0.5mn tonne rice surplus in 2019
Trebling and Quadrupling
Sri Lanka’s vegetables prices have more than doubled (cabbages up 176 percent to 180 rupees a kilogram, beans up 166 percent to 367 rupees, and snake gourds up 163 percent to 200 percent in the third week of January 2020 from a year earlier according to official data.
Some vegetables have trebled (tomatoes up 242 percent to 342 rupees a kilo and while carrots have quadrupled to (up 302 percent to 464 rupees a kilogram over the year, according to data published by the central bank.
In Sri Lanka the central bank prints large volumes of money in April and December to accommodate a seasonal demand in cash, which analysts say tends to push up prices.
From around 2018, the central bank has started to over-accommodate money pushing up excess liquidity in excess of 50 billion rupees on some days to target the call money rate, also putting pressure on the rupee in May and January.
However liquidity was tight at the end of 2019, which helped moderate prices despite a currency fall.
Analysts had warned that prices including imports will go up, as credit picks up. However the official inflation index in which the food component and tradables have been reduced showed 4.8 percent inflation in December as vegetable prices rose. January data is not out yet.
Government agencies around the world under reports inflation by building indices with consumption baskets of higher income brackets, so that the weight of food is as low as possible.
Traded commodities generally respond faster to money printing than, services, or manufactured and branded goods.
Because energy, also a traded commodity that responds fast to currency movements and liquidity, is consumed more by higher income groups, ‘core-inflation’ indices that do not reflect consumption patterns of anyone have been developed, critics say.
Sri Lanka’s growth has slowed and inflation has picked up in a so-called stagflation conditions after the currency collapsed in 2018.
Sri Lanka in stagflation after flexible exchange rate collapse
The liquidity injections in April comes after the Maha harvests, but the December injections come in a in between the Yala and Maha harvests.
In 2018 a balance of payments crisis was triggered party because Sri Lanka printed money to cut rates while the US tightened, also brining down global commodity prices. But US policy is now also loose, which is firing international commodity prices.
Minister Yapa expects prices to come down over the next few months.
“With the easing of heavy rainfall, farmers can now cultivate without any problems,” he said.
“We can see the prices already beginning to fall and will hopefully continue in the coming months.”
Sri Lanka’s Maha harvests would come to the market from around next month.
He also blamed ‘intermdiaries’. Errant traders and black marketers (an automatic result of price controls) are a favourite target of politicians in many countries.
“Intermediaries also cause price distortions in the market which in a way contributes to this problem,” Yapa said.
“We should gradually evolve into a market where producers communicate directly with consumers more often,” he said.
In the US, when the Fed print money and drives up commodity prices, ‘speculators’ in forward markets are also blamed. The general public laps up such statements eagerly, analysts say.
If the price spike is purely due to a fall in harvests, the farmers would get more cash to cover their losses and build up capital for the next season, bringing down prices.
In Sri Lanka such cycles are sometimes also disrupted due to price controls, though it has been difficult to enforce price controls in vegetables, and markets signals generally work,
The minister claimed the answer to high vegetable prices lie in moving into technologically advanced cultivation methods like greenhouse which could regulate temperature and humidity.
Sri Lanka’s food prices are generally higher than the world due to protection given to farmers through import duties.
Some import duties in foods have been cut as commodity prices surged around the world in recent weeks.
Inflation Always and Everywhere is monetary
Though productivity in agriculture has surged including in the US, a central bank that targets a positive inflation number tends to print more money to keep its target, which tends to generate bubbles and collapses as well as permanent rises in prices.
Permanent price rises are more pronounced in soft-pegged regimes, which suffer the inflation of the reserve currency, through exports and imports and also generate their own inflation by busting the peg.
While seasonal price spikes can be due to supply disruptions – which can be worsened by monetary accommodation – permanent prices rises over several years, overtaking productivity improvements, is due to central banking in general and positive inflation targeting in particular.
In January 18, 2002, beans were only 48 rupees, carrots 45 rupees, snake gourd 14 rupees and ahs plantains 40 rupees.
The price rises over the past 18 years were not due to supply disruption or intermediaries but due to the collapse of the rupee, and monetary inflation from the Federal Reserve, to whose currency the Sri Lanka rupee is soft-pegged to, analysts say.
Before paper fiat money was born with the collapse of the Bretton Woods system, period of inflation was followed by periods of deflation. (Colombo/Jan22/2020)