ECONOMYNEXT – Sri Lanka’s vegetable prices have started to fall in February 2020 from a month earlier, but remains sharply elevated from last year, when monetary conditions were also tighter, official data show.
Sri Lanka’s food prices generally spike in April and December, when the central bank also prints money to accommodate seasonal demand, pushing up excess liquidity in money markets.
In early 2019, supplies were also tighter due to erratic weather as floods destroyed some crops, officials have said.
Spikes in excess liquidity has worsened amid call money rate targeting, analysts have pointed out.
Prices tend to fall as Maha and Yala season supplies come in.
However due to depreciation of Sri Lanka’s rupee peg as well as positive inflation targeting both domestically and in the anchor US dollar, prices continue to go up year after year, with steeper rises as the credit system recovers from a currency collapse.
Sri Lanka’s Colombo Consumer Price Index at one time contained a higher weight in food, but it has now been changed to show lower levels of price increases by increasing the weight of items non-food and non-traded items such as services, which are consumed by people in higher income brackets.
Similar methods and more have been used by state agencies in developed nations to understate inflation, critics say.
Sri Lanka’s Maha season harvests are now starting to come in.
According to central bank data, average retail prices of beans was down nearly 20 percent to 235 rupees in the week to February 20, 2020, from 292 rupees in the week to January 17.
Cabbage was down to 157.5 in February 20, from 180 rupees a kilogram in the week to January 17.
Carrots were down 49 percent to 232 rupees a kilo, from 462 rupees last month.
Snake gourd was down 32 percent to 135 rupees, from 200 rupees a month earlier. Brinjals wee down 36 percent to 125 rupees over the month.
Coconut prices were up 15 percent to 70 rupees. But in wholesale markets, coconut prices seem to have peaked.
However prices were almost double that seen in 2018 and 2019.
In 2018 Sri Lanka’s rupee collapsed from 153 to 182 to the US dollar, on top of 2016 fall to 150 from 131 in early 2015.
Though the currency collapsed in 2018, liquidity conditions were tight in December and January 2019. A slowdown in credit and tight liquidity prevented an immediate rise in domestic prices as demand contracted.
Companies took in margin contractions and profit falls, despite raw material costs rising due to currency depreciation.
Analysts had warned that prices would go up as the credit system recovered. Food prices may spike sharply because imports are restricted and many agricultural products are non-traded goods.
In 2019 the customary fall in inflation seen after the Yala harvest was absent. Sri Lanka’s monetary policy also reversed after July analysts have said.
Analysts have called for reform of the central bank which will restrain domestic operations and take away its ability to generate monetary instability, trigger currency falls, inflation, output shocks and falls in living standards and economic hardships among people.
However monetary policy where tight liquidity arrests the collapse of a peg with an output shock, even if the policy correction is somewhat late, is better than South America style policy, where the peg continues to fall with excess liquidity creating higher inflation, meltdowns and sovereign defaults or 1980s style permanently crawling pegs, analysts say. (Colombo/Feb24/2020)