Sri Lanka slaps price controls, rulers punish SMEs after keeping prices up for years with taxes

COLOMBO (EconomyNext)- Sri Lanka’s ruler have started punishing citizen-owned small businesses and others after keeping prices of essential goods artificially high for years through high taxes to maintain a bloated state.

Sri Lanka’s rulers kept prices of essential goods high for years by charging high import taxes on basic foods and have imposed price controls and have started pushing small and medium businesses, many of whom still have stocks, which the rulers have already collected taxes from.

The Trade and Commerce Ministry quoting Trade Minister Rishad Bathiudeen, said 800 incidents of "price violations" had been detected by the state Consumer Affairs Authority.

The imposition of price controls goes radically against a ‘social market economy’ promised by the more economically knowledgeable and justice-oriented members of the new administration.

Sri Lanka’s rulers are still keeping prices such as rice artificially high with import tax barriers and also using people’s money to buy up rice stocks.

Sri Lanka’s new administration cut prices of a series of consumer foods saying high food taxes were regressive.

Though the price of cement was cut other building materials used by homeless people including steel and tiles remain propped up at artificially high levels through taxes.

Sri Lanka’s rulers gazetted a Maximum Retail Prices for a series of goods, ordering not only importers and traders, but also domestic manufacturers from selling below the state controlled prices.

It had set maximum retails price of 54.00 rupees for a loaf 450 grams bread, White Sugar (unpacked) at 90.00 per kg, Milk powder 400 Grams 325.00, (and 1 Kg at 810.00), Sustagen (a branded product) 400 grams tin 1500.00.

Unpacked wheat flour 90.00 per Kg, green grams 280.00, sprats 525.00 per, canned fish 260.00 per 425 grams, coriander in crust form 348.00, black grams (undu) 285.00, maldive fish 1740.00 per Kg, turmeric not crust 265.00 per Kg, and chillies (crust) 350.00 per Kg.

Ironically current Trade Minister Bathiudeen, was also the trade minister when taxes were kept high to prevent freemarket trade from bringing down prices, through import controls.

Small businesses as well as large traders who had bought goods at earlier taxed prices, will have to suffer losses when taxes are cut, though they no longer need the same working capital to replenish the stock.

Private traders who carry stocks for several months are essential to keep the people supplied with goods when there are gaps in imports or local production, but it could also means that retail prices will also be sticky, downwards.

But the rulers also blame traders when they sell at new prices when taxes are raised on products, and analysts say it is not logical for citizens to be blamed for both actions.

Sri Lanka’s rulers who have earlier printed money, generated inflation have also then imposed price controls and created black markets and shortages, and then punished citizens for trying to sell at market prices.

Economic analysts say the biggest danger of price controls is that that it can create shortage and black markets, but it sets a guide for the market not to work and make prices sticky downwards by giving incentives to keep prices up.

In other words it creates similar conditions to branding in basic commodities markets, without any regard to quality.

The Consumer Affairs Authority previously set a maximum retail price of 923 rupees a bag of 50 kilogram of cement after creating shortages and hardships for house builders by refusing to raise ceiling prices when prices went up.

When global prices fell, it took many months for retail prices to fall to 910 rupees a pack. If the CAA did not gazette the ceiling price analysts say the prices would have fallen faster.

In the past few weeks, global commodity prices have moved up slightly, and it is not clear what the new ceiling prices would do.

Economic analysts say to keep prices as low as possible, trade must be kept free without protection and the bloated public sector must be trimmed to keep overall tax levels bearable and eliminate any need for money printing, which leads to currency depreciation and high prices.

The new administration has raised public sector wages, which could depreciate the currency and push up the prices of all goods, including those on which taxes were cut, unless interest rates are raised, analysts warn.