By Mandana Ismail Abeywickrema
is now well and truly spiraling into an
abyss of staggering price hikes culminating
in a skyrocketing cost of living and
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
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
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
"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
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
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
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
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
"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
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.
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
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
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
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
Hanke has also said that by establishing an
orthodox currency board, Sri Lanka could
gain a secure external anchor.