By Mandana Ismail Abeywickrema

Sri Lanka heralded the dawn of 2008 with another price increase - this time the price of LP gas. Along with it several essential items also saw their prices going up.

The government on the other hand, has expressed confidence in reducing the prices of consumer goods by April. The weary Sri Lankan consumer has heard this before, many times, from this very government, but the promised relief is yet to materialise.

 'Stabilising prices' is the terminology used by the government to allay people's fears about further price increases. But what needs to be said in clear terms is whether the government means to make an actual reduction in the price levels.

Apart from the hike in gas prices, people have been once again burdened with an increase in the price of several essential items as the 'per kilo unit price' formula came to an end on December 25.

Price formula

In March the government introduced a price formula where the taxes imposed on essential items were removed and replaced with a unit price per kilo. The mechanism came to an end in December and with it the old taxes are once again being levied on consumer essentials.

The increase in gas prices has been made in line with the rising global prices, both Laugfs and Shell said.

The price freeze imposed on fuel has pushed the CPC to incur heavy losses. In order to minimise the losses incurred by the Corporation, the CPC from December stopped providing diesel to the CEB at subsidised rates. This move has pushed the CEB to reconsider its tariff structure due to the increase in its expenditure on fuel purchases. (See box)

Consumer Affairs Minister Bandula Gunawardena says that the government has plans to introduce several new measures that would help ease the burden of the cost of living.

High inflation

The government has always blamed the high oil prices for the country's record high inflation level and has said it was a global problem as huge amounts of money were being spent on oil imports, resulting in 'imported inflation.'

However, economists have argued that although global oil prices do have an impact on inflation, it was not as much as the government has made it out to be and blame bad financial management and the printing of money to meet rising government expenditure as factors contributing to rising inflation.

They say that the global prices do not have an impact on the level of inflation.

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

While 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.

Worst case scenario

Consumer Affairs Minister Bandula Gunewardena told The Sunday Leader that 2007 has been the worst case scenario where food prices were concerned. He said it was a global issue created mainly due to the abnormal increase in oil prices.

He also said that other countries in the region have recorded low levels of inflation as they were not involved in spending heavily on social welfare measures, fighting a war and paying salaries of an 'excessive public sector.'

All these have resulted in the constant widening of the budget deficit pushing the government to borrow money, he asserted.

According to economists, until the government stops printing money, the country would continue to record high levels of inflation.

Analysts have pointed out that the government had printed Rs. 45 billion from May to September last year and was borrowing vast amounts from the state banks to fund its survival, causing high inflation.

Bank's road map

Last week, Central Bank Governor Ajith Nivard Cabraal outlining the bank's road map for 2008 has said that the conduct of a successful monetary policy, while facing a high budget deficit was a challenging task. He said that borrowings by the government from the banking system to finance such a deficit made it difficult for the Central Bank to maintain the monetary expansion along a pre-determined, tight path.

However, he also said that in the medium to long term, the Central Bank would conduct monetary policy action with a goal to reduce inflation to a level of around 5%.

Serious challenge

The governor also blamed imported commodities for the inflation.

 "It is a serious challenge to any Central Bank to conduct its monetary programmes when a substantial part of the country's inflation could be driven by external shocks," Cabraal has said in his speech.

"The impact of high oil prices on the macro-economic stability of Sri Lanka is manifold. It widens the current account deficit through an increased import bill and adversely impacts on the exchange rate stability. Further, it seriously impacts on domestic inflation, irrespective of the government's policy to either adjust domestic prices in line with the international prices or subsidise domestic prices."

Going by what has so far been placed before the country, it would be interesting to see if 2008 would be yet another year of shocks or bring some form of relief to the people as promised..