Trade, Marketing Development, Co-operatives and Consumer Services Minister Bandula Gunawardena says that the government would bring down the prices of essential items before the April New Year and that a plan is already being formulated for the purpose. He also told The Sunday Leader in an interview that there would be no necessity to print money if the government were to meet its targets as outlined in this year's budget. However, according to Gunawardena, there were other external factors like the global oil prices, etc. that played a role in meeting the government's expenditure targets for the year.

Following are excerpts of the interview: 

By Mandana Ismail Abeywickrema

Q: What prospects do you see for the people's cost of living burden easing in the next six months given the escalating prices of essential items?

A: Last year, 2007, was the worst with regard to food. The reason is the abnormal increase in global oil prices. Oil prices increased up to US$ 98 per barrel. In 2003, the same barrel cost just US$ 29. A barrel of oil was US$ 57 at the beginning of 2007. There has been a drastic increase in world oil prices and it is only in 2007 that the highest increase in oil prices has been recorded - from US$ 57 to US$ 98 per barrel.

In 2003, Sri Lanka spent US$ 838 million on its oil bill, but now it spends US$ 2.5 billion. When compared to 2003, the amount of money spent on oil has seen a two fold increase. All that money has gone out of the country. The country spends a large amount of money to import oil. In fact the amount spent on settling oil bills is equivalent to the amount of money spent to pay the entire public sector workforce of the country.

Earlier, when money earned on tea, rubber and coconut exports were spent to pay the oil bill, there was still an amount remaining for the government, but now it has changed. Money earned on such exports alone cannot settle the oil bill. After spending export earnings to pay the oil bill, the government is still in need of US$ 1,000 million to pay the bill in full. This is so even in the case of foreign remittances.

In 2003, foreign exchange sent to the country by migrant workers were saved after paying the oil bill, but it is not so now. Although there has been an increase in foreign remittances, it is still not enough to pay the oil bill. It is so for every country.

A key reason for the food crisis was the subsidy given by the US government to ethanol. When the US government decided to grant a subsidy for ethanol, consumption goods like wheat flour, soya, corn, rice and edible oils were used to produce ethanol and hence a food shortage was created as a result.

Another reason for the food crisis was the drought experienced in countries like Turkey, Australia and Canada.

Also, countries like India and China started the free market economy. The population of both these countries put together is 2,400 million, and with the increase in their income there was also an increase in the food demand. There was also a 45% increase in oil consumption in these two countries. However, at some point these countries tried to limit their imports to suit their local market.

India and China both stopped importing wheat flour and rice at various times. There was a decline in the supply; there was an increase in the demand. When that happened prices did not increase, it skyrocketed. After nine years, China increased its interest rates and tightened its monetary policies.

In Myanmar when the prices of gas and oil were increased by 500%, the monks who protested were killed, but prices remained the same. Such incidents happened in several other countries as well. Venezuela has oil, but inflation is between 24-25%. Singapore has introduced a cooperative system called 'fair price' due to the increase in wheat flour prices. So when you look at the world economic conditions, last year has been very bad for oil as well as essential items.

Amidst all these issues and the crises created as a result, the Sri Lankan government and I as the minister of trade took several steps to ease the burden of the rising cost of living.

As the first step, I proposed to the cabinet the appointment of a cabinet sub committee on cost of living headed by the Prime Minister. The committee comprised ministers of subjects directly linked with the cost of living and was also asked to meet once or twice a month.

As the next step, I made arrangements to identify certain items as essential items and gazetted them for the first time. For example, white sugar, gram, green gram, chicken, canned fish, sprats, etc., were identified as essential items. Once an item is identified as an essential commodity, prices cannot be increased without written approval from the Consumer Affairs Authority.

Under Clause 18 of the Consumer Protection Act of 2003, which was not used earlier, I also got importers and traders and held discussions with them and determined a maximum wholesale price for goods. Pettah traders till then have never come to the ministry for a discussion.

There are three components in the pricing factor - production price, wholesale price and the retail price. Production price cannot be controlled, as the commodities that come under it are either not produced locally or are not produced to meet the demand. Hence we shifted our focus to the wholesale price. Then we came up with a maximum wholesale price and when we introduced it, commodities were sold at the competitive market at a price lesser than the stipulated maximum wholesale price. It was however not a controlled price.

I then proposed the introduction of a per kilo unit price to replace the large number of taxes imposed on essential items. For example, importers then had to pay a sum of Rs. 3.50 per kilo of dhal instead of the various taxes earlier imposed on it. The unit price formula was placed on all the essential items. However, there was no law to permit such a unit price and I brought to parliament a new act called the Special Commodity Act. This Act was formulated to reduce the prices of essential items, but when it was brought before parliament, the opposition voted against it.

The speeches made by the opposition members are recorded in the Hansard and it will show what they have said. However, the government managed to pass the Act and the unit price formula received the green light and was put in place from March to December 25. After the new formula was put in place, to my knowledge, the maximum price of a kilo of chicken that was Rs. 285 came down to Rs. 260. In the same manner the price of a tin of canned fish came down to Rs. 95-85 from Rs. 125, dry chillies became Rs. 185 from Rs. 270, sugar became Rs.48 from Rs.63 and chickpeas became Rs.135 from Rs. 170. These are a few examples.

This move to reduce prices cost the government a sum of Rs.1,500 million, but the opposition and certain sections of the media said that the move had not created any benefits for the people. I had nothing to gain from introducing this formula, as there was no personal or political gain for me except to provide some relief for the people. Since there were so many comments made on the futility of the move, the government decided to move out of the system in order to introduce a new system.

The unit price formula ended on December 25. The Finance Ministry has not introduced any new tax, but the taxes that were there in March when the formula came into being have been automatically restored. The people now feel that there is an increase in the prices. I have been asked to submit a report on this to the cabinet when it meets next.

The cabinet sub committee on economic policies headed by the President met last week and this issue was discussed there as well. We also decided to introduce more measures to ease the cost of living burden this year.

There are currently 11,000 Cooperatives and 306 Multi-Purpose Cooperatives in the country and before the April New Year, plans are underway to provide each with Rs.1 million to upgrade them. There are also plans to create 306 Super Cooperatives. Also, under Gama Neguma the Cooperatives in each local government body would be upgraded. We are also trying to clear all their balance sheets. We will supervise them and create a distribution network.

During Minister Lalith Athulathmudali's period, Sathosa was in a position to import certain essential items when the need arose, but today there is no such system and Sathosa is completely defunct. The government has now set up the State Trading Wholesale Establishment with a US$ 10 million bank guarantee and the director board would be appointed shortly. This establishment will import certain essential items depending on the market situation. We are also looking at creating a buffer stock of certain essential items through the Food Department, which also has storage facilities.

We also plan to revamp the Consumer Affairs Authority Act. Although the Consumer Affairs Authority is considered the watchdog where consumer goods are concerned, it does not have sufficient powers. According to the new legislation, we plan to give the Authority more teeth.

The former Consumer Protection Act gave ample powers to the minister. During Minister Athulathmudali's time, it was after putting in place all these laws that the open economy was introduced. According to Clause 25 of the Act, the minister was given a lot of powers, and I too have requested for the same powers to be restored. However, that has not been approved yet.

Q: You have said that prices of goods would stabilise by April. However, the government has on earlier occasions given such deadlines to reduce prices, which never happened. How do you propose to stabilise the prices of essential items by April?

A: It was earlier a difficult task. The first thing we have to do is to identify the goods that are out of control for any government. Such commodities are oil, wheat flour, fertiliser, infant milk powder, gas and chemicals. It is very important to identify such goods as no government is in a position to control the prices of these commodities. Therefore, it is then important to look at other options.

People have now realised that without the unit price on essential items, prices have increased. Therefore, we are looking at the possibility of bringing back the Special Commodity Act. Most ministers have also agreed that the act was beneficial to the people. Before the April New Year prices would be stabilised.

We are also discussing with several countries in the region to help us import certain goods in order to control prices.

Q: When you talk of stabilising prices, does it mean the current prices will remain without further increases or will there be a reduction in prices?

A: We will reduce prices first and then sustain them. Although we now have a maximum wholesale price, we still do not have a maximum retail price. The reason for that is the lack of a proper distribution network. Hence that aspect has to be looked at first. For that we need time and that is the reason why we said that prices would be stabilised by April. By then we plan to put in place all our plans and that would help reduce prices.

Q: You have earlier said that the rising prices were a result of the global market prices and that Sri Lanka would have no option but to join the trend of increasing prices. However, other countries in the region that are also involved in importing the same goods have not faced a crisis like in Sri Lanka and maintain low inflation levels. How do you respond to this scenario?

A: Those countries you refer to don't provide free education, health and many other facilities free of charge to its people. Those countries don't have a war and don't have to fund an over excessive public sector. They also don't have so many welfare measures for the people. Therefore, the expenses of these governments are far lower than in Sri Lanka. The budget deficit of these governments is also around 5-6%. In the case of Sri Lanka, it is different. The situation is such that no government that comes into power could reduce the benefits granted to the people and reduce expenses. Hence we have a widening budget deficit.

Q: In an interview with a foreign news agency you had said that the government had to print money to fund expenses, especially defence and the wages of the new employees to the public sector and that printing money would be the only alternative to fund the government. This would propel inflation to increase further. How do you think the country's economy would react to such a situation?

A: The people need to understand how the system works. The Treasury does not have money of its own and therefore when something needs to be funded it has to be paid by someone. Everything depends on money. There are basic economic principles and money is printed according to them. When the government expenses are high and money is needed to fund them the only option is to print and that is the reality.

However, with a growth rate of 7% it is not bad to have a level of inflation at 15%. In 1980, when the Mahaweli project was underway, the country recorded a level of inflation at 26% and again in 1990 it was 20%. That shows that inflation also increases when there is heavy capital expenditure. If growth is on the increase, then the (high) level of inflation is all right.

I always say that this is a miraculous country. With a war in one hand and heavy state expenditure on the other, the country has recorded a growth in the economy and has managed inflation at a certain level.

Q: How much money do you think the government will have to print to meet its expenses?

A: You cannot just say it. If you take the budget this time, there is no need to print money as such. If the targets were met there would be no necessity for it. However, there are other external factors that also contribute to it. If the price of oil increases further, then there would be a problem.

Q: The government has now decided to withdraw from the CFA paving the way for a full-blown war. Would this not mean a drastic increase in defence expenditure, which in turn would force the government to print money driving inflation further?

A: In the case of defence expenditure, it is a choice that needs to be made. A choice would have to be made - inflation or the country. The people will have to understand that if they are to put the country first, then there will be various difficulties that have to be faced and certain sacrifices that need to be made.

Q: The rising cost of living has led to a deterioration in the people's purchasing power. How do you plan to address the issue?

A: There again it is up to the people to decide. If the country were to come first then certain sacrifices would have to be made. Many countries that have experienced such scenarios have undergone much hardship. You cannot have everything.

Q: Statistics have revealed disparities in the wages system in the country. While the majority of the country's workforce, nearly 63%, employed in the private sector has recorded a negative growth in wages since 2005, the public sector employees have recorded a somewhat positive growth in wages. Given the scenario, could you say that the government has actually worked to uplift the standards of the working masses?

A: The salaries of the private sector are decided on management concepts and they are not based on demands. The government is not in a position to intervene..