Sri Lanka hikes controlled price of milk powder as word price rise and rupee falls

ECONOMYNEXT – Sri Lanka has raised the controlled price for milk by 20 rupees to 345 rupees for a 400 gram pack andb by 50 rupees 860 rupees for a 1 kilogram pack, the Consumer Affairs Authority said as world prices rose and the rupee fell amid central bank money printing.

The prices have been controlled after they were cut as part of a series of political subsidies given in early 2015. World commodity prices also fell later.

The finance ministry said the prices were still lower than the 386 rupees for a 400 gram pack and 962 for one kilo pack that prevailed in 2014.

Global milk powder prices fell in 2015 and 2016 and climbed in 2017 and 2018.

The central bank also printed money to control rates as deficits rose in 2015 and the rupee collapsed from 131 to 150 levels to the US dollar.

 In 2017 though credit was reduced and the balance of payments crisis ended the central bank continued to depreciate the currency in a bid to keep a real effective exchange rate low pushing up prices of exports and imports.

In January 2015, the Oceania price for a tonne of whole milk powder (WMP) with 26 percent butterfat was 2,415 dollar a tonne when the rupee was 131.04 to the US dollar giving a rupee price of 324,345 per tonne, not counting freight and taxes.

The prices were down sharply from the 5,000 dollars a tonne level seen in January 2014.

By January 2018 WMP Oceania was 2,938 a tonne, which was 449,000 rupees with the currency fallen to 152.85 to the US dollar.

By April 2018 the WMP price had risen to 3,313 to the US dollar, and the rupee price was 516,736 a tonne with the US dollar fallen to 155.97 by March 2018.





If Sri Lanka had a credible peg with a single anchor at least from the beginning of 2015, the rupee price of a tonne of whole milk powder would only have been 434,000 rupees.

Sri Lanka’s rupee falls because the central bank targets two anchors, trying to print money to stop interest rates going up and trying to maintain the exchange rate at the same time.

Lately a third anchor was added where the rupee was deliberately pushed down the keep to a real effective exchange rate index (REER), where the basket of currencies include third world countries with bad monetary policy.

In April the central bank printed money to enforce a rate cut and the rupee started falling after a peg was abandoned and the currency was floated.

Some analysts and economists have called for the central bank to be abolished and a currency board re-established. Under the curency board, the exchange rate would be fixed and the interest rate would float as money printing will not longer be allowed.
(Colombo/May02/2018 – Corrected 1kg pack in 2014 is Rs962).

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