ECONOMYNEXT – Sri Lanka will gradually move away from price controls, but wanted markets to function "freely" and "responsibly" to give benefits to consumers, State Minister for Finance Eran Wickramaratne said.
Sri Lanka has already said para-tariffs such as cesses which were imposed to allow politically connected rent seeking domestic producers, which critics generally call ‘crony capitalists’ to exploit the poorest consumers with higher than global prices will be gradually removed.
"A part of the philosophy of liberalizing is that we want the markets to function freely. We want it to function responsibly," Wickramaratne said.
"When taxes are reduced prices should reflect it. The consumers should benefit. Generally we are weak on the regulation side and people take advantage of it. That is why on about 17 items we still have maximum retail prices – on the retail side.
"But gradually you will see an easing of that. We will remove it."
Price controls remove the most important signalling mechanism for markets, both for producers and consumers.
When prices rise more people will import, paying freight and other charges. When chicken meat prices rise, farmers will be incentivised to raise more chicken.
When the new production comes to the market prices will fall. In the interim however prices will remain high. Some consumers will meanwhile temporarily shift to other alternatives such as fish.
Price controls also discourage the raising of quality over time, as producers who make a better product cannot charge extra.
A controlled price means production will not increase and only the larger more efficient producers will be able to survive.
When price controls of chicken was in place, prices hardly moved but eggs which were not under control, moved up and down.
Prices generally move up above global levels when the government imposes import duties or when the central bank prints money, debases the currency and creates demand pressure and inflation. When the currency depreciates, the price increases are made permanent.
Sri Lanka cut taxes on rice and several other foods as a drought hit domestic production.
Butafter the currency collapse in 2015 and 2016, Sri Lanka’s price structure is now permanently up and rice and other goods have to be higher than before even if they are imported at a lower duty.
But usually retailers are blamed for rising prices, not central bankers or politicians who imposed import cesses or taxes.
Prices controls dating back to the Roman ‘edict on maximum prices’ in 301 were triggered by the inflation of the currency, when Emperor Diocletian debased the silver denarius using copper.
The same process now happens when the central bank buys Treasury bills with printed money and expands reserve money, when budget deficits or credit demand rises.
In Sri Lanka price controls were widely seen in the 1970s. When prices are controlled, the government creates black markets and hoarding incentivising other law-abiding citizens to disregard the law.
High import duties also generate smugglers. In communist states in Europe, especially the Soviet Union, black marketeers and smugglers were the biggest ‘entrepreneurs’. (Colombo/Aug10/2017)