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Wednesday December 7th, 2022

Sri Lanka food, cooking gas prices up after controls removed amid money printing

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.

Basic Foods

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.

Energy Bubble

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.

Price Stability

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)

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Crisis-hit Sri Lanka sees recovery in cruise ship tourism from zero

ECONOMYNEXT – Seventeen cruise ships are scheduled to arrive in Sri Lanka next year with
Queen Mary 2, one of the largest and popular ships, Colombo’s harbor master said, as the island nation is looking for alternative avenues to boost its faltered tourism sector.

The rise is expected to bring thousands of high end tourists with higher spending capacity after two years. The island nation saw a record high 54 ships in 2019, rising from the previous year’s 42, Nimal Silva, Colombo Port Harbor Master said.

“The 2019 was one of the best years and in 2020 there were more than 60 scheduled vessels to
call but with COVID pandemic all hell broke loose,” Silva told EconomyNext.

Fourteen cruise ships are scheduled to call from January-May next year and another three are scheduled to arrive in Colombo in November, when the peak tourism season begins.

Cruise tourism cycle begins in Sri Lanka from October to May with a dip during the monsoon

Sri Lanka welcomed two cruise ships in November after almost two years.

Three ships are scheduled to arrive in December and Azamara Quest, carrying at least 722 tourists, arrived in Colombo on December 3 and is now heading to Hambantota.

On December 18, Le Champion carrying 264 will arrive in Colombo and depart to Mumbai and the third vessel, Silver Spirit will arrive in Colombo on December 23 carrying up to 648 passengers.

There are two scheduled in January, one in February, and four in March next year, according to the harbormaster.

“Next year more ships could schedule, so far these are the confirmed ones now,” he said.

This also generates income for the port and the prices are charged according to the size of the

Silva said the first medium sized-cruise vessel, 229 meters long, generated about 14,000 dollars
for docking in the port for a day.

He said Queen Mary 2, a 325 meter long ship and one of the largest cruise ships in the world, is also
scheduled to call at Colombo in February. It can carry up to 3200 passengers.

Silva said almost all the ships that were scheduled have arrived on the island and therefore, he is
confident all the ships including Queen Mary 2 will arrive in Sri Lanka.

“Only one ship has been canceled thus far. There are no last minute cancellations if there were some they would have informed us by now,” Silva said. (Colombo/Dec07/2022)

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Sri Lanka President says 2015-2019 policy struggle was ‘warfare’

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe said his attempts to reverse the inward-looking protectionist policies and fix state finances during his last term as Prime Minister was opposed both by politicians and business interests.

“In the 4.5 years as prime minister it was an effort to take this economy out in a different direction,” President Wickremesinghe told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“We were able to get a surplus in the primary budget. But it was warfare.

“Politicians wanted to protect their power, businessmen wanted to protect their profits and many others wanted to see what the country would provide them free of charge.”

Wickremesinghe was unable to bring private investment to the port under apparent internal political opposition. Relations with President Maithripala Sirisena also soured and he appointed his own economic advisors.

Meanwhile Wickremesinghe’s free trade agenda was hit by monetary instability as the central bank printed money under flexible inflation targeting and triggered forex shortages which were followed by trade controls.


Sri Lanka controls imports in ‘Nixon-shock’ move to protect soft-pegged rupee

Sri Lanka President calls to expand Nixon shock as rupee falls

Wickremesinghe’s ‘Yahapalana’ administration also went on a spending spree called ‘100-day program’ in 2015 triggering a currency crisis in 2015/2016 as the central bank printed money to suppress rates.

The central bank however had already started injecting liquidity and losing reserves (by terminating term repo deals) from the fourth quarter of 2014 as domestic credit recovered from a 2012 currency crisis before his administration came to power.

The rupee fell from 131 to 152 and stabilization policies led to an output shock. The International Monetary Fund then taught the agency which had already depreciated the currency from 4.70 to 152 to the dollars seeking bailouts 16 times, how to calculate an output target.

Under Finance Minister Mangala Samaraweera taxes were raised and budget were fixed in 2018 to bring deficits back to pre-2015 levels, though state spending went up from 17 to around 20 percent of GDP under the spendthrift ‘revenue based fiscal consolidation’ where cost cutting was dropped.

The central bank then printed money by purchasing bonds from banks to target the yield curve, jettisoning a bills only policy established by ex-Central Bank Governor A S Jayewardena, through term reverse repo and overnight injections taking the rupee from 151 to 162 to the US dollar.

The central bank also created money by entering into a swap with the Treasury in 2018, a type of strategy used by speculators to bring down East Asian pegs putting, further pressure on the currency from around July 2018 onwards.


What went wrong; Sri Lanka’s illiberal economics and unsound money : Bellwether

Stabilization policies then led to another output shock. As forex shortages came Sri Lanka resorted to heavy external borrowing as it was unable to settle maturing loans with domestic borrowings.

After two currency crises and output shocks, macro-economists of the new administration cut taxes saying there was a ‘persistent output gap’ and printed even more money for stimulus (close the output gap). (Colombo/Dec07/2022)

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China calls for joint effort to ease Sri Lanka’s debt burden, no mention of restructure

ECONOMYNEXT — A top Chinese official has expressed hope that countries and multilaterals like the International Monetary Fund (IMF) work with Beijing to play a constructive role in easing Sri Lanka’s debt burden, stopping short of an assurance on debt restructuring.

Chinese Foreign Ministry spokesperson Mao Ning was quoted by international media as saying on Monday December 05 that China attaches high importance to Sri Lanka’s difficulties and challenges.

She was responding to a question on media reports that an IMF team will be in China this week to discuss faster progress on debt restructuring for countries including Sri Lanka, which is negotiating for an IMF bailout.

“On Sri Lanka’s debt issue, I’d like to stress that we support the financial institutions in working out ways with Sri Lanka to properly solve the issue,” said Ning.

“We also hope relevant countries and international financial institutions will work with China and continue to play a constructive role in helping Sri Lanka overcome the current difficulties, ease its debt burden and realise sustainable development,” she added.

She said China has long-standing sound cooperation with the IMF and other international economic and financial institutions.

The spokesperson avoided any mention of debt restructuring, a prerequisite for the IMF extended fund facility (EFF).

Nearly a fifth of Sri Lanka’s public external debt is held by China, according to one calculation. The emerging superpower has been generous in Sri Lanka’s time of need, extending much needed assistance in the form of rice, medicine and other commodities.

The latest arrival in the Colombo port from China was 2 billion Sri Lankan rupees worth of essential medicines and medical supplies, delivered on Tuesday.

However, critics say China is doing everything but what Sri Lanka really needs: agreeing to restructure its outstanding debt.

At least one Sri Lankan opposition MP has demanded that China agree to a restructure.


Sri Lanka debt restructuring: opposition MP warns of “China go home” protests

Tamil National Alliance (TNA) legislator Shanakiyan Rasamanickam, who had been on the warpath with Beijing over an apparent lethargy in helping the crisis-hit island nation restructure its debt, recently warned of a “China, go home” protest campaign similar to the “Gota, go home” protests that unseated the country’s powerful former president in July.

The MP told parliament last Friday December 02 that Sri Lanka owes 7.4 billion dollars to China, a nearly 20-trillion dollar economy, and if the latter was was a true friend, it would agree to either write off this debt or at least help restructure it.

Colombo has been vague at best on the status of ongoing restructure talks with Sri Lanka’s creditors, and opposition lawmakers and others have expressed concern over what seems to be a worrying delay. Rasamanickam and others have claimed that China, Sri Lanka’s largest bilateral creditor, is the reason for the apparent standstill. (Colombo/Dec06/2022)

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