ECONOMYNEXT – Prices of several basic foods in Sri Lanka cement, and cooking gas saw a sharp increase after the government aborted its failed price controls, while price increases in fuel, which is also a source of taxes expected.
Admitting the government’s price controls created shortages, Sri Lanka on Friday abandoned price controls amid a weakening of the rupee against the dollar.
Prices of a raft of essential foods including rice, wheat flour, bread, rice packers, and milk powder have already increased since the government cancelled the price controls.
Sri Lanka has an oligopoly of rice millers who have been keeping domestic rice prices higher than orld prices helped by import controls imposed by the government after printing money.
The FOB price of Pakistan IRRI-6, 5 percent broken is only 370 US dollars a tonne (about 75 rupees a kilogram with the rupee at 203 and 85 rupees with the rupee at 230 to the dollar).
Rice prices have risen between 17-32 percent depending on the variety to 115-165 rupees.
Wheat flour has gone up 11.5 percent to 97 rupees, and import milk powder by 26.4 percent to 480 rupees (400 grams) and 1,195 rupees (1 kg).
Sri Lanka’s Bakery Owners Association has decided to raise 450-gram loaf of bread by 5 rupees and Canteen Owners Association have increased the price of cup of tea by 10 rupees.
The two associations engage in openly collusive pricing undermining price competition. No action has been taken against the anti-competition behaviour.
State-run Litro Gas Company increased the price of mostly used 12.5 kg gas cylinder by 84 percent or 1,257 rupees while Litro’s only competitor Laugfs raised the 12.5 kg gas cylinder price by 51 within Colombo district to 2,840 rupees within Colombo.
One of the two wheat flour companies which import wheat to Sri Lanka said though they have been allowed to decide the price, they were asked only to raise the price by 10 rupees.
“The government told us to raise the price by only 10 rupees, which is enough for break even from incurring loss,” an official from a wheat importer told EconomyNext.
“But the government has assured that if there is further price increase globally, they will consider price revision again.”
The price of chicken also has gone up, market players say.
Global prices of food, base metals and energy has gone up at the Federal Reserve printed money firing inflation of over 5 percent or double its target rate.
Among major central banks the Fed is known to have fired the biggest global bubbles in history.
It created the Great Depression after the ‘roaring 20s bubble’ in, the oil shocks and Great Inflation in the 1970s after busting the gold standard and the so-called ‘food crisis and housing bubble’ in which burst to create the Great Recession in 2008.
Despite rising Butane and Propane prices, the state price control authority held prices creating shortages and forcing private owned Laugfs has run billions of rupees of losses.
“Despite the increase in costs, there was no opportunity to increase retail prices,” Laugfs chairman W.K.H. Wegapitiya told EconomyNext.
“The Consumer Authority did not allow it. The gas companies suffered huge losses due to this situation.”
“The companies were still in a crisis of survival as they were suffering heavy losses.”
Meanwhile, the Siam City Cement company has proposed to increase the price of cement by 9 percent to 1,098 rupees and imported cement by 21 percent rupees to 1,150 rupees.
The state-run Ceylon Petroleum Corporation (CPC) chairman also has said the fuel prices need to be increased amid rise on global oil prices to minimize any losses.
The government raised the fuel price in June to minimize the losses to CPC which is also a source of taxes for the cash-strapped government.
The hike took place during lockdown amid protests by the people.
Sri Lanka’s rupee has also fallen adding to prices.
Sri Lanka’s official exchange rate is around 203 to the US dollar, but importers have to wait in line to get the dollars or go without.
Some remit dollars through other means at rates of up to 240 to the US dollar.
Importers were not given dollars by the central bank until last week to release around 800 containers stuck in Colombo port.
A state imposed price control creates shortage and a black market and Sri Lanka witnessed almost 100 percent spike in sugar and rice prices during the lockdown despite the government data showed the country has enough stocks.
Economists say removing price controls was correct by but an overall policy of price stability was needed.
“The purpose of the price control is never achieved. It puts away all our quality products and garbage will be there in the market.” Sirimal Abeyratne, a professor of economics told Economy Next.
He said better policy was needed to ensure price stability.
“It (removal of price controls) does not tell anything to consumers and producers on a policy measure that will help to stabilize the prices in the future.”
“There is going to be an overall pressure on aggregate demand globally.
“However, Sri Lanka is going to see more pressure due to ad hoc policy measures of the government.”
The central bank has printed large volumes of money after price controls failed bond auctions and tax cut undermined state revenues.
The central bank has since lifted price controls on bonds, but markets are still dysfunctions.
Forex markets are under multiple controls.
Sri Lanka has un-anchored monetary policy leading to high inflation and external instability critics have said. (Colombo/Oct11/2021)