Current Food Inflation in Sri Lanka: Causes, Consequences and Way Forward

Originally appeared on the Morning

By Thilini Bandara

In recent times, rising food prices have become a global phenomenon owing to various factors including the Covid-19 pandemic, climate impacts, the Russia-Ukraine war and the downturn of the global economy. These have played a part in Sri Lanka recording the highest food inflation rate of 94.9% in September 2022 according to the Colombo Consumer Price Index—a rate which averaged at 9.39 per cent during 2009–2022. The World Bank's food security update highlights  Sri Lanka among the top 5 countries with the highest food price inflation in September 2022. This article explores the recent trends, causes and consequences of food inflation in the country. 

Fluctuation of food prices over time

Advocata Institute’s Bath Curry Indicator (BCI) tracks the monthly changes in the retail prices of a limited basket of goods normally consumed by Sri Lankans as per the 2016 Household Income and Expenditure Survey (HIES). 

Accordingly, the BCI supermarket prices recorded a 78% increase between September 2021 to 2022.  However, there is a slight decrease in prices on a month-on-month basis of 7.63% in September 2022 compared to August 2022. Further, when considering the BCI-Supermarket prices, it has recorded an 83.88% increase between August 2021 to August 2022 on a year-on-year basis, while showing a slight decline of 6.59% between September 2022 and August 2022. 

Table 1 depicts the price fluctuations in terms of BCI and BCI-Supermarket from 2019 to 2022.

Table 1: Price fluctuation over time according to the BCI index

Causes of food inflation in Sri Lanka

At a glance, rising food prices can be attributed to disruptions in both global and local supply chains due to various factors that include the energy crisis, climate impacts, the pandemic and the Russia-Ukraine War. Additionally, domestic policy restrictions such as import bans of essential commodities, the rising cost of agricultural inputs, recent changes to agricultural policy, and the ban on chemical fertilisers and quick shift to organic fertilizer lowered agricultural production and heightened supply chain disruptions. 

Moreover, the expansionary monetary policy of the previous government through lowered interest rates and heightened money printing contributed to higher food inflation.

Additionally, due to the uncertainty surrounding imports entering the markets, traders must reassess their pricing decisions. This creates distortions in the marketplace and can lead to additional pressure on consumers. 

Consequences of food inflation

People living below the poverty line and middle-income groups with a fixed income are the most severely impacted by this high inflation. Food inflation rising rapidly in contrast to household incomes has widened the income gaps. It has further dealt a massive blow to the economic stability and well-being of the poor through poverty and malnutrition. A recent survey by the Sri Lankan Red Cross Society and the International Federal of Red Crescent Societies has revealed that 50% of households have reduced the intake of meat and fish, while 11% have completely dropped protein intake from their diets. Also, a survey conducted by WFP in September 2022, reveals that more than 1/3rd of Sri Lanka’s population is in food insecurity, while 79% of households are adopting food-based coping strategies to keep food on the table.  Moreover, the evidence revealed that even non-food expenditure such as education, housing, and health has lowered owing to rising food costs, which will lead to socioeconomic pressure.

Way forward

A recent report by the Food and Agriculture Organisation and the WFP highlights that the food security problem could be further heightened during the upcoming “maha” season between October 2022 - February 2023, if the country is unable to import sufficient amounts of rice and other food products to meet demand. In the absence of a sufficient supply of agricultural inputs such as fertilizers, pesticides, and other supplies, targeted assistance should be provided to farmers to increase domestic production and resilience of the agri-food systems. In fact, introducing incentive schemes, identifying special regions for off-season cultivation, implementing innovative food storage and preservation strategies, distributing farm inputs at subsidized rates, and promoting substitutes for imported items are some of the measures that can be implemented to address the food security problems. 

Targeted interventions should also be provided through social safety nets and humanitarian initiatives for low-income groups that are food insecure and require immediate assistance. Though funds for this have been already allocated from the 2022 interim budget, effective and efficient execution is required to identify the most vulnerable groups and provide them with the food assistance they require. 

References

Aneez, S. (2022). Crisis-hit Sri Lanka looks for foster parents to face malnutrition among children. Economynext. Available at: https://economynext.com/crisis-hit-sri-lanka-looks-for-foster-parents-to-face-malnutrition-among-children-101200/. [Accessed 17 October 2022]

CBSL. (2022). CCPI based headline inflation recorded at 69.8% on year-on-year basis in September 2022. CBSL. Available at: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20220930_inflation_in_september_2022_ccpi_e.pdf. [Accessed 13 October 2022]

Economynext. (2022). Sri Lanka households drop meat from diet, slash drug doses as poverty worsens: survey. Available at: https://economynext.com/sri-lanka-households-drop-meat-from-diet-slash-drug-doses-as-poverty-worsens-survey-101259/.[Accessed 19 October, 2022]

FAO & WFP.(2022). FAO/WFP Crop & Food Security Assessment Mission (CFSAM) to the Democratic Socialist Republic of Sri Lanka. Rome: FAO & WFP. Available at: https://www.fao.org/3/cc1886en/cc1886en.pdf.[Accessed 17 October 2022]

OCHA. (2022). Food Security and Nutrition Crisis in Sri Lanka. OCHA. Available at: https://reliefweb.int/report/sri-lanka/food-security-and-nutrition-crisis-sri-lanka. [Accessed 17 October 2022]

Trading Economics. (2022). Sri Lanka Food Inflation. [online] Available at: https://tradingeconomics.com/sri-lanka/food-inflation. [Accessed 19 October 2022]

The World Bank. (2022). Food Security Update. The World Bank. Available at: Food-Security-Update-LXX-September-29-2022.pdf (worldbank.org). [Accessed 20 October 2022]

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Thilini Bandara is a Research Analyst at the Advocata Institute. She can be contacted at thilini@advocata.org. The Advocata Institute is an Independent Public Policy Think Tank. The opinions expressed are the authors’ own views. They may not necessarily reflect the views of the Advocata Institute.

Lessons from Singapore

Originally appeared on The Morning

By Dhananath Fernando

Where Sri Lanka went wrong and pathways to recovery

Too many comparisons have been made between Sri Lanka and Singapore. Once upon a time, becoming Sri Lanka was Singapore’s dream. Today, Singapore has been Sri Lanka’s dream for quite some time. Many credit the success of Singapore to the charismatic leadership given by Lee Kuan Yew. However, little is known about the work done by Dr. Goh Keng Swee on setting up the right architecture for a series of market-oriented policies in Singapore.

Relatively, Sri Lanka’s economy must grow at about 6% per annum for the next 40 years without failure in order to reach where Singapore is today, by 2061. In order to reach the kind of growth Malaysia has reached, Sri Lanka needs to grow at a steady rate of 6% until 2031.

Visionary Singaporean leaders realised that a country the size of Singapore cannot be self-reliant. With a minimum stock of resources, the country has to depend on imports to maintain the overall wellbeing of the people.

Policy consistency as well as establishing the right economic fundamentals set the country in the right direction. Consequently, the currency and monetary system became stable. Having a monetary system which focused on open market policies brought certainty and increased investor confidence. Special emphasis was placed by Singaporean policy makers to ensure that the wealth of the people was not eroded by unnecessary inflationary pressure.

Embracing open market policies attracted global multinationals and regional players to move their headquarters to Singapore, making Singapore a global hub for strategic industries in the region. Many multinational oil companies which left Sri Lankan shores due to nationalisation were welcomed with open arms to operate in Singapore. Even today, without a drop of oil, Singapore is a key player in the fossil fuel trade. They became competitive, efficient, and productive as they embraced the global market with an open mind and attitude geared towards development and prosperity.

Singapore also realised the role of the government. In fact, the world class Singapore AirLines and public housing is still state owned. Many Sri Lankans take these two examples to showcase why a state sector should engage in business like Singapore does with their airline. Many who put forth this argument conveniently forget that the management of some of the state entities are done on a Temasek Model on a competitive basis, where the government has no intervention in business. The professionals running the business earn the same as in a private company and the work culture is set right from the beginning to be competitive.

Unfortunately, Sri Lanka did not make any effort to create an open system. Instead, we closed ourselves from the world of trade and from connecting with global supply chains. In fact, many Sri Lankans once thought that Singaporeans would take over the jobs of Sri Lankans through the Singapore-Sri Lanka Free Trade Agreement. We missed an opportunity of a grand scale due to the pressure from trade unions and some professional groups to showcase to the world that we are trading with countries such as Singapore, and are ready for business and investment. As a result of shortsighted, irrational policies, our financial system became very fragile.

Another issue that holds back our potential is central bank intervention. Our Central Bank continues to intervene in market activity. “Price” can be looked at as being the same as body temperature. There has to be constant diagnosis by a physician. This monitoring without intervening is the role of a central bank in achieving efficient resource allocation. Therefore, intervening in the price signaling function has caused Sri Lanka damage beyond recovery.

Recently released data by the Central Bank indicated about 9.9% Year-on-Year (YoY) inflation compared to November 2020. YoY food inflation is 17.5%. There are many contributory factors behind the price rises such as global commodity price hikes, fertiliser ban, and continuous rains. However, one key reason which cannot be ignored is that over the last few weeks, a money supply of about Rs. 1.48 trillion has been injected from July 2019 to September 2021. This is a primary reason for the uptick in inflation .

Poor people will be the most affected, and as per the Advocata Bath Curry Indicator, the cost of rice and curry for a family of four members has gone up by 35% compared to last year. The poorest sections of society, who spend a greater amount of their money on food, now have to either receive a pay hike or cut down on their regular food intake.

This could also add pressure on private sector businesses, with employees requesting more wages and driving an increase in the cost of production. The high cost of production would impact existing investments, and with inflation Sri Lanka would not be an attractive investor destination.

On the Government front, the 1.5 million state workers will add more pressure by requesting further pay hikes with the new election circle. Making this more complicated, we have now accelerated a dual exchange rate offering, with an additional Rs. 10 for remittances as a measure to incentivise the usage of legal channels.

Singapore avoided most of the above problems we face by setting up a framework on a market based system, understanding the role of the government. As a result, they have developed a strong monetary system. This is a testament to getting macroeconomic policies right.

We can’t simply copy Singaporean policies blindly. Often policies have to be evaluated based on culture and dynamics, from a socio-economic context. However, the principles behind the policies remain the same. It has to be based on price signals and driven by the private sector, with the government only taking the role related to essential public goods such as the judiciary system.

An easy point to begin with is making our Central Bank an independent institution and moving away from ad hoc interventions. Moreover, we should let the markets work rather than having central bank intervention in foreign exchange through different strategies from time to time. Simply, our Central Bank has to work similarly to a currency board and the structure has to be made to facilitate this requirement.

At the same time, the structure has to be revised to ensure the independence of the Central Bank as the monetary policy can erode the hard earned money of poor citizens.

If Sri Lanka is serious about economic growth, it is of paramount importance to have a stable financial system which is an outcome of an implementation of a market based economic policy package. As Karl Schiller famously said: “Stability is not everything, but without stability, everything is nothing”.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.