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.

Avoiding IMF won’t help us avoid austerity

Originally appeared on The Daily FT, Daily Mirror, Lanka Business Online, The Island, ColomboTelegraph

By Naqiya Shiraz and Rehana Thowfeek

Sri Lanka’s debt problems are  a topic of national conversation. Foreign reserves, already low at USD 4bn in May 2021 fell to USD 2.8bn after the most recent bond repayment of USD 1bn in July 2021 . The Government claims that the timely repayment of the bond is proof that doomsayers were wrong and that it indicates a robust economy. Is this correct?

While it is true that a default has been avoided thus far it does not necessarily mean that the economy is sound. The recent bond repayment comes at a cost: a foreign exchange squeeze. Bond holders are being repaid, but this means that foreign exchange that could otherwise have been used for imports are now being used to pay bond holders instead.

The government seems to be adamant in avoiding the bogeyman, the IMF, perhaps to avoid the tough medication an IMF program will bring. Yet avoiding the IMF does not mean we can escape the inevitable austerity that will follow. Austerity is in fact already upon us, in the form of restricted imports. The restrictions are denying essential inputs to the local economy and medicines and food to citizens. These restrictions work   in two ways:

1. The outright restrictions on imports

2. The shortages of foreign exchange in the market

The government has banned or restricted imports of what is termed “non-essential” items although the list includes goods like some clothing items, refrigerators and food items ( live fish, tomatoes for example). 

In addition, Central Bank’s attempts to control the rate of exchange have resulted in shortages of foreign exchange. The Central Bank has decreed an official rate of around 200/- but only limited amounts are being converted at these rates resulting in a shortage of hard currency.

 Banks are now rationing foreign exchange with the result that even items that are not banned are becoming unavailable.

“We cannot accommodate the requests for LCs so we have to ration them,” a banker said. “There is no regulation to say to ration them, but we are forced to do it.”

https://economynext.com/sri-lanka-rupee-forex-markets-in-pickle-as-lc-rationing-froths-83224/

The import restrictions were supposed to be restricted to luxury items but the currency shortage means that even medicine and some food items seem to be running short

While foreign bondholders will undoubtedly be pleased to have been repaid, local consumers and businesses must now suffer, making do without everyday products. The shortages in supply mean that prices rise: of whatever available imported products as well as local products. 

This affects not only consumers but also businesses. With banks being unable to open a Letter of Credit (LC’s), imports of intermediate goods, even exports by SME’s which have no access to BOI facilities are at risk. 

Unable to trade or operate due to lack of stocks or input material, import-dependent businesses are losing out. The net result is an overall decline in economic activity and welfare of all Sri Lankans. 

A person interviewed for this report explained the difficulty in obtaining asthma medication for his mother. He had to try 4 different pharmacies to get the required drugs.  He said that he believes larger stores have fewer stocks available as the volume of people going to them is much higher. 

Another respondent said chemotherapy drugs brought in from Europe were no longer available with only cheaper products from India, Bangladesh or Argentina being available. As he had no other choice he used the substitutes for part of his wife’s chemotherapy treatment but was worried about the quality and safety. 

The knock on effects of these are palpable. Prices of basic goods are increasing. Inflation in January 2019 according to the NCPI was 127 index points which increased to 146 in June 2021. That means prices have increased by 15% in little over two years as a whole. But prices of essential food prices have increased by a lot more. Food inflation particularly has dramatically increased by 25% (NCPI). According to the Advocata Institute’s Buth Curry Indicator, prices of food that would be consumed in a buth curry meal have increased by 45% from July 2020 to July 2021.

The effects don’t end there. Importers of seeds were complaining that their sales have dropped by 50% because of uncertainty over fertiliser imports. These importers bring in seeds that are not produced in Sri Lanka, for vegetables like beetroot and carrots. Sales have fallen as they are not being purchased by domestic farmers. Farmers are holding back from cultivating due to the uncertainty caused by the shortages of fertilizers needed for production. A consequence of this would be shortages and rising prices of fruits, vegetables and other produce in the coming months. This will not only affect farmers' incomes but also result in higher consumer prices. The government may have to resort to importing more food, thereby negating the impact of the fertilizer ban to begin with. Only recently, the cabinet approved the importation of 6000 metric tonnes of rice from Pakistan to manage the shortage in the market.

This fertiliser fiasco has affected the poor disproportionately. Larger businesses are able to stock up on fertilizer, but not everyone can afford to do that. It’s the small farmers that lose out on income. The incomes of these small farmers are in jeopardy. Coupled with the milk powder and gas shortage, prices of these essential commodities are forced to increase at an already difficult time. 

Economic policy affects the ordinary person in a society. These may be individual stories but they are certainly not one off situations. 

The fact of the matter is that the country is undergoing a self-imposed austerity program in the form of import restrictions and more recently a foreign currency shortage that has resulted in the rationing of even items that are not subject to control.  

The basic principles of economics cannot be ignored in policymaking. By avoiding the IMF for fear of austerity measures, has resulted in more damaging self-imposed austerity. We need to ask ourselves how sustainable this really is in the long term. The longer we wait, more stringent austerity measures will be needed. 

Rehana Thowfeek is an economics researcher by profession. She has a MSc in Economics from the University of Warwick and a BSc in Mathematics and Economics from the University of London. She has worked previously for Sri Lanka-based think tanks; Verité Research and the Institute for Health Policy. At present she works for a US-based food technology company as a researcher. Naqiya Shiraz is the Research Analyst at the Advocata Institute and can be contacted at naqiya@advocata.org.

Fertiliser ban is flawed

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

The Cabinet Paper banning fertiliser, pesticide, and weedicide imports with immediate effect that was rubber-stamped last week without discussion constitutes a sea change in Sri Lanka’s agriculture policy. Its implications for consumers, for the livelihoods of farmers, and for those who have invested in agriculture and related sectors are vast. 

Despite the 20th Amendment, it is wrong to marginalise Parliament and to ignore State agencies with expertise. Because agriculture is a devolved subject, officials in the Provincial Councils should be consulted even in the absence of elected Council members. Given the expropriatory effects on the private property of those whose investments are affected, the authority of the Courts as the guardians of fundamental rights and as the upholders of equity is likely to be invoked.

No mandate for change

The Cabinet Paper is rather unusual. The entire justification for the proposed actions is anchored on the President’s election manifesto. No references are provided to studies, committee reports, etc.

It is foolhardy to build national policy on the weak foundation of manifesto promises. Each manifesto contains a multiplicity of promises. Was the vote a considered approval for each of those promises? 

The primary purpose of a manifesto is to convince citizens to vote for the candidate or political party presenting it. The secondary purpose is to gain legitimacy for specific actions. Manifesto making is political not scientific or systematic. 

Those who have been involved in manifesto making will testify to the opacity of the process, wherein what is accepted one day can disappear the next and new clauses and conditions can mysteriously appear even after “finalisation”.

Contributions can be sought, and consultations conducted, but in the end, decisions are made by a few in proverbial “smoke-filled rooms.” A manifesto is, at most, broadly indicative of orientation and priority-setting. Given the partisan and opaque procedure used to develop a manifesto, errors and impossible promises are unavoidable.

But because the Cabinet Paper lacks any other justification, one must look. Rather than rely solely on the quoted excerpts, I went to the source. The proposed actions are inconsistent with the language of the manifesto.

In order to guarantee the people’s right to such safe food, the entire Sri Lankan agriculture will be promoted to use organic fertilisers during the next 10 years. For this, production of organic fertiliser will be accelerated.

• To resuscitate the farming community, we need to replace the existing fertiliser subsidy scheme with an alternative system. In the new system, the inorganic and organic fertiliser both will be provided free of charge to farmers. They will be promoted to shift gradually into a complete system using entirely carbonic fertiliser.

• A system of assistance will be introduced to convert traditional farming villages into users of only organic fertiliser.

The language is anchored on food safety. But the ban affects fertilisers and chemicals used for all crops, not just what is consumed by citizens. There is a commitment to provide inorganic fertiliser free. The transition is to take place over a decade. These actions are to be taken in the context of “a new national agricultural policy would be introduced after an in-depth review of the present policies.” This promise is prefaced by a condemnation of “policy that changes from one season to another”.

No national policy based on review of existing policies and experience; no assessment of the experience of other countries; a policy that changes things in one week not a season. And most importantly, the telescoping of a 10-year process into a few months. Sudden, not gradual. Instead of free inorganic fertiliser, a ban. Not limited to traditional villages but across the board. The proposed bans lack a mandate.

Procedurally flawed

A change in a policy with broad impact requires care and caution. 

The change may do much good, as the Cabinet Paper claims. Because of the repeated claims that our food is contaminated with “vasa visa,” most consumers would support a change away from chemical fertiliser and pesticides. But they are unlikely to accept higher prices and unavailability. Hotels are unlikely to accept “ugly fruit”. Growers are unlikely to accept drastically reduced yields and/or inability to market their produce at prices that are above costs of production. The net benefit must be demonstrated, not simply asserted.

Growers large and small will be unhappy about being unable to recover the investments they have made in preparations for growing or in crops in the ground by this sudden reversal in policy. This response will also be shared by other participants in the sector who had entered perfectly legal contracts but are now unable to clear their shipments from the port. It is common sense for the government to give adequate notice of a change in policy or the law so that affected parties can make the necessary adjustments to their business practices minimising losses.

Policy changes that can do good, can also do harm. It is customary in policy formulation and implementation to look at relevant cases in other countries or in this country. Risk assessment, identification of collateral effects, and careful structuring of rules to avoid negative outcomes can be done by government officials or by external consultants with the required expertise. When the government liberalised the market for international telephony in 2003, we studied prior experiences in countries including Hong Kong (the most liberalised market in Asia) and India (to learn what missteps to avoid). 

The President claims that Sri Lanka will be the first to go all-organic. A cursory internet search will show that a fellow SAARC country, Bhutan, announced the intention to go all-organic in 2008; and that its experience has been assessed by independent scholars and published in the peer-reviewed and open scientific publication PLOS ONE in 2018 (DOI =10.1371/journal.pone.0199025). The abstract states: 

Organic agriculture (OA) is considered a strategy to make agriculture more sustainable. Bhutan has embraced the ambitious goal of becoming the world’s first 100% organic nation. By analysing recent on-farm data in Bhutan, we found organic crop yields on average to be 24% lower than conventional yields. Based on these yield gaps, we assess the effects of the 100% organic conversion policy by employing an economy-wide computable general equilibrium (CGE) model with detailed representation of Bhutan’s agricultural sector incorporating agroecological zones, crop nutrients, and field operations. Despite a low dependency on agrochemicals from the onset of this initiative, we find a considerable reduction in Bhutan’s GDP, substantial welfare losses, particularly for non-agricultural households, and adverse impacts on food security.

Does this mean that no other country should go all-organic? No. Is this the only study? No. The purpose of looking at the experience of others is to learn from them. It is irresponsible not make the effort to mitigate the negative impacts will fall upon consumers, growers and others in the sector and to design the policy most suited for local conditions.

Even within the country, prior knowledge existed because the fiasco of the previous Government’s effort to promote organic farming at the behest of Ven. Athuraliye Rathana, MP. That ended with much waste of public funds and the shutting down of the implementing agency, SEMA. It would not have been all wasted if the present Government made the effort to learn from it. 

The Government appears to have learned little from the palm oil ban that had to be walked back and modified. It is normal procedure to circulate a Cabinet Paper to all relevant Ministries for their input to and to win concurrence. Walking back and modifying is what happens when this procedure is not followed.

This blanket ban does not affect only food items consumed within Sri Lanka. It affects subjects under multiple Ministries. It can devastate non-food segments such as foliage exports. It is likely to strangle the fast-growing fruit and vegetable export industry which was subject to rigorous enforcement of standards such as Euro GAP that my organisation worked on with the Department of Agriculture and the exporters association. The Legislature can choose to take actions that result in such collateral effects. But it should at least have considered them. This Cabinet Paper does not.

What should be done

The Government should suspend the implementation of the Cabinet Paper and appoint an inter-Ministry committee of experts with the power to co-opt external experts to report back on a practical method of achieving the objectives of ensuring food safety and environmental conservation. Given the complexity of the changes and the collateral effects, it is best that a pilot be conducted. The larger program design should be based on those learnings. 

If the Government does not act responsibly, the Opposition should demand a select committee, or at least a debate in Parliament. Stakeholders should move the courts. Our food and our livelihoods are too important to be cavalierly toyed with by those learning on the job.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.