World Affairs









The signs of a faltering economy

Bandula and Fowzie

By Mandana Ismail Abeywickrema

The country heralded a rather bleak festive season with the decline in the purchasing power of the people, which is showing signs of deteriorating further in the new year.

The rising cost of living has taken its toll on the people since 2004, and they are now feeling the pinch of the drastic decline in their purchasing power.

The masses have been facing several shocks in the form of price hikes in essential food items at regular intervals over the past few years, with this year being the one that has recorded the highest number of price hikes in consumer goods. However, the unkindest cut was the Christmas Day surprise - a Rs.9 hike in the price of a kilo of wheat flour.

Doubled within a year

Within this year alone, the price of wheat flour has seen an increase of over 110%. The Rs. 9 increase in wheat flour caused an immediate Rs. 3 increase in the price of bread as well.

A kilo of wheat flour is now Rs. 74 and a loaf of bread is Rs. 38 at the minimum.

A litre of petrol has increased from Rs. 51 in 2004 to Rs. 117 in 2007 (129.41% increase), a litre of diesel has increased from Rs. 32 to Rs. 75 (134.38% increase) and a litre of kerosene has seen the highest increase - from Rs. 25 to Rs. 68 (172% increase). The price of a domestic gas cylinder too has seen a 97.27% increase since 2004.

Milk powder prices have seen a drastic increase as well. A 400 gram pack of milk powder now costs Rs. 275 forcing many poor families to purchase milk powder in spoonfuls.

The market basket value has been on a steady increase as a result.

According to the Census and Statistics Department, there has been an increase of Rs. 512.08 in the expenditure value of the Market Basket in November when compared to October 2007.

Campaign against CoL

The cost of living has been the make or break factor of governments right throughout.

The CoL played a key role in the great hartal of 1953. The opposition then led by the late Sirima Bandaranaike carried out a campaign against the rising cost of living, which led to her return to power.

However, ironically, it is these very same issues - the rising cost of living and the lack of essential goods that subsequently led to her defeat in 1977.

Then, in 1994, the government headed by President Chandrika Kumaratunga came to power on the promise of providing bread at Rs. 3.50 (a loaf of bread weighed 450 grams) at a time when a loaf was sold at Rs. 5.50. A US dollar was then Rs. 49.

No viable solution

There are two factors that play a key role in the cost of living - the prices of goods and services, and the income of the people.

So far there has been no proper solution offered on both these fronts. The government has not been able to control the prices of goods and services and neither has it been able to increase the income of the people, in a manner it would help increase the people's purchasing power.

While 16% of the country's labour force is employed by the public sector, 63% is employed in the private sector.

However, while the salaries of the public sector employees have seen a somewhat positive increase, the private sector employees' wage has seen a negative growth.

According to the Labour Department, the real percentage change in private sector salaries has seen a negative growth; - 4.8% in 2004 to - 9.9% in 2006. The real percentage change in the public sector worker's salary has been quite the opposite as it has recorded an increase from 14.0% in 2004 to 15.1% in 2006.

Analysts have pointed out that the statistics clearly show that the majority of the labour force in the country were drawing a salary that obviously is not commensurate with the expenditure, given the rising cost of living.

Failed so far

The government for its part has so far failed to introduce any solid methods to combat the rising cost of living. The only solution so far has been the decision arrived at by the government in August to freeze prices of petroleum products for a period of three months. That lapses this month.

The government has artificially prevented any price hikes in fuel for the time being, but its economic viability is questionable given the fact that the consumer would ultimately have to pay for it at some point.

However with rising global prices, Petroleum and Petroleum Resources Minister, A.H.M. Fowzie says that if the government continues with its decision not to increase fuel prices, then the Treasury would have to look at an alternative to minimise the losses incurred by the Ceylon Petroleum Corporation (CPC).


He also said that President Mahinda Rajapakse's proposal to waive off taxes imposed on fuel to stabilise prices too would not make much of a difference when it comes to maintaining prices. (See box)

Instead of finding proper methods to address the present crises the government has found solace in blaming everything on the rising global prices.

Consumer Affairs Minister Bandula Gunewardena earlier told The Sunday Leader that the rising global prices have resulted in the increase of prices of certain commodities, which has pushed inflation further.

"The global prices have affected every country. The whole world is now facing a food crisis and during the next few months it would get visibly worse. Inflation would see an increase then," he said.

However, economists have argued that although global oil prices have an impact on inflation, it was not as much as the government has made it out to be.

They point out that global prices did not have an impact on the level of inflation as much as the government has highlighted.

Region better managed

Other countries in the region, which are also affected by the high global prices, have managed to maintain single digit levels of inflation.

Sri Lanka's closest neighbour, India, has recorded a 3% level of inflation along with many other countries in the Asian region.

Sri Lanka has one of the highest levels of inflation in the region.

The Colombo Consumer Price Index (CCPI) recorded a 4.4% increase between the months of October and November.

Meanwhile, the countrywide consumer price index, the Sri Lanka Consumer Price Index (SLCPI) was recorded at 24.1% in October this year, the highest recorded by the index since 2005. The SLCPI's previous high was 18% recorded in January 2005, soon after the government printed Rs. 65 billion to fund its fuel and fertiliser subsidies in 2004.

Minister Gunewardena has publicly admitted that the government, since 2005, has been involved in printing money to fund its expenses. He also said that the government would not have any option but to print money if it did not have the necessary funds to meet its expenses.

Amidst the present economic conditions, the statement made by Gunewardena is a warning of the compounded economic issues that the country would be likely to face in the new year. Sri Lankans are far from seeing the end of the shock treatment.

Stats reveal increase

The cost of living has been on a steady increase since the ascension to power by the UPFA government in 2004. The many excuses given by the government have not helped ease the burdens of the masses. The following statistics show a steady increase in the cost of living since 2004.

2004            3632.8

2005            4055.5

2006            4610.8


January         5184.3

February        5116.0

March           5029.6

April              5025.4

May              5176.4

June              5344.3

July               5496.5

August           5453.2

September      5513.8

October          5723.0

November       5976.2

Inflation over four years

For almost four years now, the level of inflation has been on the increase. Since 2004, inflation has been on an increase and the deteriorating economic conditions caused by loose fiscal policies have helped push further the level of inflation.

2004     7.6

2005     11.6

2006     13.7


January 14.8

February 15.8

March   16.8

April      17.4

May      17.4

June     17.0

July      17.2

August  17.3

September  17.3

October      19.6

November    19.6


Salary with 50% self-imposed
  cut                                  Rs. 27,142

Diesel allowance                 Rs. 75,000

2 office telephones              Rs. 25,000

Residential telephone           Rs. 10,000

Mobile telephone                 Rs. 4,000

House rent                          Rs. 100,000

Daily allowance for parli. 
sittings                               Rs. 500

            (eight sessions per month)

Total                               Rs. 241,142

Plantation worker

Basic salary                   Rs. 2,550

Additional allowance        Rs. 1.60

Incentive                         Rs. 300

Other allowances             Rs. 3.85

Total earnings                  Rs. 2,855.45

Deductions - EPF             Rs. 255

Trade unions fees             Rs. 15

Total deductions               Rs. 273

Total earnings                  Rs. 2,582.45

State enterprises owe CPC Rs. 25 billion

Petroleum and Petroleum Resources Minister, A.H.M. Fowzie says that the Treasury would have to look at alternative methods to minimise losses incurred by the Ceylon Petroleum Corporation (CPC) due to the non-revision of fuel prices.

However, he said that the government was yet to decide on increasing fuel prices and added that prices may not be increased for another few months. The CPC currently incurs a loss of Rs. 18 per litre of diesel and Rs. 22 on a litre of kerosene.

According to Fowzie, due to hedging, increase in the refinery capacity and by cutting down on wastage, the CPC has managed to make some money which has set been set off against part of the losses made in the last three months.

Various state enterprises owe CPC Rs.25 billion.

"I will make a request from the Treasury to look into the present situation. CPC needs its outstanding dues from other state enterprises settled if it is to continue without any price revisions," Fowzie said. When asked if the CPC could maintain local fuel prices by following the proposals of reducing VAT and waiving off duty levies, as presented by President Rajapakse in his 2008 budget, Fowzie said that it would not be sufficient.

According to Fowzie, the reduction in VAT and the waiving off of the Rs. 20 excise duty would not make much of a difference as the loss incurred by the CPC for a litre of diesel and kerosene is higher than the amount proposed to be reduced.

"The government will have to come up with an alternative plan," he said.

CB issues bills on tap

The country's 3-month Treasury Bill yield last week increased by 116 basis points to 21.30 per cent amid a cash crunch faced by the government with the Central Bank refraining from printing money to intervene in the bill auction.

It was reported that during the past four weeks, the 3-month yields have shot up 523 basis points, 6-months 220 basis points and 12-month yields 189 basis points.

It was also said that the government's debt office, which is a unit of the Central Bank, raised 6,421 million in 3-month money and 512 million in 6-month money and retired 7,000 million in maturing bids.

The 6-month yield remained the same as last week at 19.99 per cent, while all bids for 12-month bills were rejected. Last week the average 12-month yield was 19.96 per cent.

The cut off - the highest rate at which bills are accepted is estimated to be 22.00 per cent for 3-month bills and 20.20 per cent for 6-month bills.

The Central Bank has tended to issue bills on tap in between auctions during the past few weeks to raise money for the government.

Glaring disparities

The soaring cost of living has however burdened only a certain section of society, namely the common man. The government ministers earlier agreed to a 50% salary cut in order to 'share' the burdens of the rising cost of living. However, it is interesting to note that the 50% slash was only applicable to the basic salary and not the allowances.

Ministers, even after the 50% slash in their salaries earn a hefty Rs. 240,142 monthly as opposed to a plantation worker who earns a measly Rs. 2,585.45.

Below is the breakdown that highlights the economic disparity between the ministers and the plantation workers.

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