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.

Living according to a government’s will

Originally appeared on The Morning

By Dhananath Fernando

• Cost of living and the freedom of choice

Jeewan Thondaman, the political leader representing the estate electorate in Sri Lanka, was questioned recently on what development means for the estate sector. He said: “One politician visits the estates and says he built five houses and another one says he built 10. Merely building houses is not development.”

Then the TV anchor probed him on what development really is. “Giving the opportunity for people to build their own house in a land they own, as per their preference and aspirations, is development,” he replied. He went on to say that “if politicians build houses for the estate sector, regardless of the number of houses built, estates would never be developed”.

Politics aside, the young politician’s views on choice are highly commendable. Most often, people do not realise the importance of the ability to choose from a wide range of options. Especially in countries like Sri Lanka, we expect all things to be provided by the government. We like to eat what the government tells us to eat, we want to get educated on what the government says is good for us, we strive to get a job from the government as they see fit, etc.

The ability to choose is often tested in terms of marriage and relationships. Imagine if the government decided to select partners for us. We can all picture what chaos it would be. Similarly, when the government decides which food we should eat, which fertiliser we should use, and which job we should do, the results are not that different.

Availability of a range of options and increasing choices as much as possible is one key parameter on consumer convenience. The same concept works for essential commodities as well at a time when the national conversation is on rising food prices.

Let’s first understand the reason for rising food prices.

The recent food price hikes are caused by multiple reasons. One is rising global food prices and commodity prices with economies opening up after lockdowns. As a result, a barrel of Brent Crude oil, which was priced at about $ 42, is now at $ 83. So, a fuel price hike can be expected, which will, in turn, have a knock-on effect on many consumer goods.

Sri Lankans will be affected more significantly due to the Sri Lankan rupee depreciating in comparison to the US dollar. Excessive printing of money under Modern Monetary Theory (MMT) has further contributed to the depreciation of the currency. As this column highlighted many times, excessive printing of money, which increases the money supply, will also increase the demand for imports. A lot of the money printed will be used to purchase imported goods, which will worsen the balance of payment (BOP) crisis. A worsening BOP crisis will also increase the shortage of USD, thus increasing the price for a US dollar in LKR terms, or the exchange rate.

An increasing exchange rate will cause the prices of all imported goods to increase as the market adjusts, and keeping the exchange rate fixed without really having sufficient US dollars doesn’t make any sense. Simply, we have imposed a price control on the USD, which has created shortages just as with milk powder and liquified petroleum (LP) gas. Price controls also led to shortages.

If the Central Bank has unlimited USD supply, we can keep the exchange rate without fluctuations, but as per official data, our reserves are at a historically low level. So the Government and also our people are in a very unfortunate situation without having adequate tools to arrest the rising prices.

In a situation like this, some recommendations have been floated, such as increasing wages or Lanka Sathosa distributing essential goods.

On the question of increasing wages, the private sector has to have increased profits and revenue if they were to consider a salary hike. The government sector, which is about 18% of our labour force, cannot have a salary hike without further borrowing from the Central Bank. If the Central Bank further borrows on behalf of the Government, the prices will further increase. So, the only way to overcome this is to fasten our seatbelts and make sacrifices on our real consumption.

Sathosa has no other magic formula to reduce the prices unless a subsidy or budgetary support is provided, and obviously someone has to bear that cost of such a subsidy. Removing price controls is indeed a move in the right direction, but ensuring the market has enough competition across sections is also important in bringing down prices.

One good example is the wheat flour market, where there are only two players in the market. There is a very high tariff on imported milled wheat instead of raw wheat. So this acts as an entry barrier for other industry players to enter the market. As a result of such a lack of competition, the two existing players set the market price and the barriers to entry allow ample space for rent-seeking activities.

It’s the same for cement and industries like LP gas. In most cases, these industries are protected from competition. Protection from competition is directly undermining consumer choice. If Sri Lanka is serious about bringing down prices, our only solution is competition and expanding consumer choice.

At present, though, it seems that sacrificing consumption will be the only option we have and it will not be easy, specifically for the poor, where a higher percentage of income goes for purchasing food. This is going to be a truly difficult time period for such families. So the only option available is increasing the range of options available by increasing competition. Then, people can adjust their choices so that they have room to explore alternatives without experiencing the effect of higher prices. The only way to do it is to remove all barriers to market entry in order to pick the supply side up and iron out market distortions.

Different households will adjust in different ways to price hikes. For example, some households will reduce the quantity of milk powder used per cup. Some households may decide that only kids should be fed with milk powder and adults give up milk powder and shift to plain tea. Some families may adjust with frequency. Instead of having milk tea seven days a week, some will skip two to three days based on their affordability. Some families or businesses who have a higher degree of dependence on milk powder will use the same quantity, but they will reduce their entertainment expenses or other expenditure categories to keep the milk powder consumption going.

In simple terms, each household and individual, based on their circumstances, can decide what is the best choice for them. So even when making “sacrifices in consumption”, the freedom to choose is vital. With people making choices, there will be new market opportunities where suppliers will consider more options to supply alternatives to the  market and capture a different market segment.

Freedom of choice matters both in hard times and good. It is a fundamental pillar in a market system where people have the option of adjusting for higher prices by managing the cost of living to a certain extent. Competition in the market is what fuels the choice for consumers. Sri Lanka has to set the fundamentals right. For example, we cannot develop the estate sector by just building houses. We need to provide them the opportunity and choice to build a house as per their preference. This can only be done by allowing the market forces to work and establishing freedom of choice for people. While the importance of having the freedom to make individual choices is fundamental, the Central Bank can ensure that the rate of money supply increase is limited by using monetary policy. Finally, MMT does not work as it is claimed by those innocent of simple monetary economics. As our currency is not an internationally accepted currency, money printing by the Central Bank leads to inflation.

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.