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World Affairs



This is Paradise






Economy on a downward spiral

Bandula Gunewardena

By Mandana Ismail Abeywickrema

Sri Lanka is now well and truly spiraling into an abyss of staggering price hikes culminating in a skyrocketing cost of living and inflation.

Amongst many a burden that have been placed on the shoulders of the masses in the name of war and high oil prices, the latest was the government's decision to increase electricity tariffs.

Although the government boasted of reducing the tariffs of the low-end electricity users, the heavy increase imposed on the industrial sector is bound to have a cascading effect with the prices of goods across the board likely to go up sooner than later.


Union representatives of the CEB have pointed out that although the President has directed the CEB not to increase the tariff of those who use less than 90 units per month, the price revision would place a heavy burden on the business/manufacturing/industrial sectors.

"In that backdrop all consumer items from a loaf of bread, a bar of soap, to every item would go up and how could anyone say that the poor will not be affected due to this tariff revision? Although their domestic rates may not go up they will have to pay for the tariff increase incurred by the business establishments when they  buy their daily needs," union leaders said.

However, the masses are now faced with another threat - an impending increase in the price of rice.

Continuous rains in the eastern and north central provinces have resulted in the destruction of many paddy lands resulting in a huge decline in the initially expected paddy yield.


According to the authorities, about 90% of the paddy lands in the Trincomalee and Polonnaruwa districts have been destroyed by the recent rains, which would result in a drastic drop in the expected yield for Maha this time around.

The government in principle has also decided to reduce or even stop the import of rice in a bid to encourage local paddy farmers. Therefore, a rice shortage and an increase in rice prices would be inevitable if the government fails to respond immediately to the crisis situation.

Be that as it may, 'stabilising prices' has now become the terminology used by the government to allay people's fears about further price increases. However, what needs to be asked in clear terms is whether the government means to make an actual reduction in the price levels.


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.

Consumer Affairs Minister Bandula Gunewardena earlier 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.'

Constant widening

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.

The government, which has now run out of every possible excuse - from the war to the rising world oil prices - to hoodwink the masses on the reasons behind the rising cost of living and inflation, has now resorted to scrap the offending consumer price indexes.

Unable to counter the rising level of inflation, the government has decided to scrap consumer price indexes that have recorded high levels.


The Sri Lanka Consumer Price Index (SLCPI) recorded a staggering 26.2% rate of inflation for November 2007, which is the highest to be recorded since the inception of the index.

According to the Census and Statistics Department, having "too many indexes was a problem" as people have now begun to compare statistics.

"This has all become political. The indexes are now being used for political purposes. We are not involved in politics," an official at the department told The Sunday Leader.

The department has now decided not to release the SLCPI.


Interestingly, the decision to stop releasing the SLCPI has come at a time it has recorded the highest ever level of inflation to be shown in a price index.

The department has justified the move by saying that the SLCPI was a trial index initially brought about to replace the CCPI.

The Census and Statistics Department has also released a new index for Colombo, CCPI(N), which has shown much lower inflation of 19.3% for November 2007. According to the department, the CCPI(N) depicted inflation more accurately than the existing index, the CCPI.

Although the department has pledged neutrality in its effort to introduce a new index for the city and to stop releasing the SLCPI, comments made by high government officials prove otherwise.

High level

However, even the CCPI recorded a high level of inflation at 24% for the month of February and the new index, CCPI(N) recorded 21.6% the same month, which was also an increase from the January level.

Addressing a forum of financial professionals last year during the budget, Treasury Secretary, Dr. P. B. Jayasundera found fault with the existing CCPI, saying that the index has "never produced annual average inflation below 10% for the last 30 years."

As pointed out by analysts, the recent sustained rise in the level of inflation has caused much concern both locally and internationally and the formulation of the new index it is widely believed is to reflect a lower inflation figure by reconstituting the 'market basket.' The rising inflation has been widely attributed to serious macroeconomic mismanagement by the government and the Central Bank.

It is now obvious that the unprecedented sustained rise in inflation is a sign of serious macroeconomic mismanagement.

Economic analyst Dr. Harsha de Silva has said that there was no sense in changing any index, as the government was refusing to admit it was printing money.


He also said that Central Bank Governor, Ajith Nivard Cabraal has failed in his task as the country is at present recording inflation unprecedented in independent Sri Lanka. "The government must be hallucinating when it says that they have done a good job so far," he said.

"The present crisis is a reflection of the Rs. 45 billion printed in the second half of 2007. It may come down somewhat as there is some discipline now," Dr. de Silva said.

According to him, the Central Bank has to be independent without any political interference to stem the tide.

The steady increase in the level of inflation has now made economic analysts call for a more independent Central Bank to handle the monetary affairs of the country.

Most economists now state that the Central Bank has to be independent, without any political interference.

A sentiment expressed by Steve Hanke, Professor of Applied Economics at John Hopkins University in an article in the February issue of GlobeAsia magazine makes interesting reading.


He has said that in order to slay the inflation bogey, Sri Lanka needed new institutions that would deliver discipline. Monetary discipline according to him, could be delivered if a monetary authority has either a credible internal or external anchor. "It must be stressed that these anchors are mutually exclusive: one or the other, but not both."

In order to introduce more discipline and inflation fighting credibility into Sri Lanka's monetary system, Hanke has suggested the adoption of an exchange rate system.

He has said that the spectre of unanchored inflation haunted the Sri Lankan economy.

Hanke has observed that the problem resided at the Central Bank. "It does not have a credible anchor. In consequence, it lacks the discipline to control inflation and contain inflation expectations," he has said.

Hanke has also said that by establishing an orthodox currency board, Sri Lanka could gain a secure external anchor.

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