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Thursday January 27th, 2022

Sri Lanka’s rising prices will hurt the poor, but price controls do not work: economist

ECONOMYNEXT – Rising prices will hurt the poor in Sri Lanka but controls are have never worked, sent wrong signals and cannot be a part of any price stability and poverty reduction program, senior economist Sirimal Abeyratne has said.

An overall reform package is needed to stabilize prices and raise incomes of the people, he said.

Sri Lanka’s main price control agency, the Consumer Affairs Authority abandoned controls after creating severe shortages and difficulties for consumers but the National Medical Regulatory still has power to create shortages of drugs as money printing weakens the rupee and push up costs.

“Price controls never work and it has never worked for this country either,” Abeyratne, senior professor at University of Colombo, he told a forum organized by NextGenSL, a cross party political grouping and Germany’s Friedrich Naumann Foundation for Freedom.

“We have a long history of price controls and administered prices, and it has done a lot of adverse things in this economy,”

“And it has never sorted out our supply shortages, but it has eliminated the quality goods from the market, and it has created black market for good quality products, and it has not helped in any way to eliminate poverty in this country.”

Sri Lanka controlled imports as the central bank printed money to keep rates down and pay state worker salaries and created forex shortages.

The CAA then imposed price controls on rice, milk powder, wheat flour, sugar, cement, and cooking gas.

Then the state-run Consumer Affairs Authority (CAA) started to raid traders who sold commodities above the government controlled price and raised fines in parliament.

President Gotabaya Rajapaksa delcared an emergency to address food supply as foods disappeared from shelves due to the price controls.

Price controls however gives the impression that politicians are ‘doing something’ to address inflation which is created by central banks through money printing.

“The price control is a feel good policy for the politically correct policy,” Abeyratne said. Other than that, it has done little in this country in solving our basic economic problems related to poverty and promoting growth,”

“So I don’t think it has worked and I don’t think it is going to work in the future either,”

Global commodity prices are rising due to Fed money printing and domestic money printing has weakened the dollar.

The falling rupee has amplified the effect. Rice prices in Sri Lanka are higher than world prices to due to import controls.

Abeyrantne said government’s removal of price controls was also an ad hoc measure and an overall policy reform was needed to keep prices stable and grow the economy.

“So, now you might think that eliminating price control is a good thing that we have done and so that we can feel good about it. No, I don’t say that either,” he said.

“If you select things in an ad hoc piecemeal manner, it’s not going to work either. If it had come as part of an overall reform package, I would have been happy.”

“Because it didn’t come in that way, obviously, the negative implications of the removal of price controls is going to be enormous particularly for the low income groups.” (Colombo/Oct21/2021)

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