Thiloka Yapa

Regulating prices: From price mandates to more competition

Originally appeared on Daily FT, Lanka Business Online, Colombo Telegraph, Ceylon Today and the Morning

By Thiloka Yapa

As price controls ultimately lead to instability in the system, a surer way to achieve stability and growth is to allow markets to flow freely and responsibly

The Government recently removed the maximum retail price (MRP) on rice with a decision to import a buffer stock of rice to prevent any shortages.1 This is an important step in the right direction. Opening up the market for more competition will reduce the market power of the alleged oligopoly of large-scale rice mill owners. While the removal of the MRP is commendable, the Government’s action on this front has been anything but consistent. Despite the frequent use of price controls and their appeal to politicians, economists are generally opposed to them, except perhaps for very brief periods during emergencies. While the pandemic is undoubtedly an emergency, Sri Lanka’s current economic problems are largely due to poor policies. 

Although the politicians who impose them may be motivated by good intentions, they are counterproductive, often leading to higher prices and damaging the market. 

The Parliament recently passed an amendment to the Consumer Affairs Authority Act which increases fines on traders who do not follow the MRP issued by the Consumer Affairs Authority (CAA).2 Raising the penalties seems to indicate that the Government intends to impose controls more strictly. The reason that some of the ill-effects of price controls were not experienced is because they were not strictly enforced. Previous research by Advocata Institute revealed that only larger producers and the larger retailers in the formal sector adhered to them; in the informal markets and among smaller retailers these were routinely ignored so the shortages and black markets associated with price controls were not widespread.3 Strict enforcement and larger fines could see products disappearing from shelves as traders find it no longer profitable to engage in the trade of the controlled commodities.  

Price regulation and its impact 

Price controls are administered through the Consumer Affairs Authority Act which has the power to regulate prices.4

Under Section 10(1)(b)(ii) of the Act, the authority, in protection of the consumer, can call retailers and wholesale traders to register their stocks and warehouses with the CAA. Moreover, under Section 18, the Minister in consultation with the CAA is empowered to specify any good or service, as essential to the life of the community, by way of gazette notification. Manufacturers and traders are restricted from increasing prices without the prior written approval of the CAA. A period of 30 days is provided for the authority to examine the application for any price revision and convey the decision to the applicant company. 

This Section permits the CAA to make decisions on behalf of traders in the market, whenever it regards a product to be ‘essential’. Further, under Section 20(5), the Authority can fix the maximum price above which goods and services cannot be sold. It was under this section that the recent MRP for sugar, rice and LP Gas was imposed. 

This regulation could be a barrier against market competition, as it may deter the entry of new firms and discourage innovation which curtails competition. Competition plays a vital role in a market economy. It incentivises firms to challenge each other, create new markets and expand existing markets. While this leads efficient firms to enter and grow, inefficient firms shrink and exit. Firms innovate, leading to lower prices and enhance consumer choices. While the objective of the Consumer Affairs Authority Act No. 9 of 2003 in itself is to promote competition and protect consumers, the impact of the provisions which allow the authority to regulate prices lead to the exact opposite, resulting in high prices and less choice for consumers.

Prices play a key role in a market economy. It is a signal, wrapped in an incentive. Change in prices incentivise individuals to respond; either by consuming less of a product, or shifting to alternatives. Price controls distort these signals. Since the Government defines market prices when controls are imposed, it forces the market to function based on the imposed price. As producers and consumers respond to controls, they produce an excess supply when the prices are set high or increase the demand when prices are set low. This leads to wastage and shortages, exacerbating the fundamental economic problem that the controls expect to solve. 

A 2018 report on price controls by the Advocata Institute revealed that price controls have limited value in controlling the cost of goods, particularly in the consumer market due to weak enforcement.5 The report highlighted other ill-effects: traders surveyed have admitted to the problem of low-quality goods being brought into the market, meaning that quality suffers as a result. As traders are under pressure to comply, they resort to importing substandard products to supply at prices close to the controlled price.

The enforcement of ad-hoc controls also adds up to the costs of suppliers, as these regulations distort their cost structures. This was the case when the Government slashed the Special Commodity Levy on sugar, big onions, dhal and canned fish in November last year, imposing an MRP on these commodities.6 The sellers who were impacted, opposed the MRP and continued their sale at high prices, claiming they would incur massive losses since the stocks were purchased before tax revisions, at a much higher price. 

Price controls also result in policy uncertainty. This is a situation where there is ambiguity in the stability of future rules and regulations. While entrepreneurs in the market will then keep attempting to predict what regulators would do in the future, this comes at the expense of consumers, who would have otherwise been the main-focus of these businesses.7

What can be done?

Sri Lanka urgently needs to rethink government interventions that increase the costs of competing. At a recent discussion hosted by the Advocata Institute, the newly-appointed Governor emphasised the importance of growth and stability. He stated that the lack of stability would lead to uncertainty. As price controls ultimately lead to instability in the system, a surer way to achieve stability and growth is to allow markets to flow freely and responsibly. For this to happen, as one major reform, Sri Lanka needs to amend the sections in the Consumer Affairs Authority Act that permits the authority to regulate market prices. In doing so, it is also worthy to review Sections 34 to Section 38 in the Act, which aims to promote competition and revisit the mandate of the CAA. 

  1.  Ruwani Fonseka, ‘Alagiyawanna explains removal of MRP on rice’, The Morning, September 28, 2021 https://www.themorning.lk/alagiyawanna-explains-removal-of-mrp-on-rice/ (accessed September 29, 2021)

  2. Parliament of Sri Lanka, ‘Hon. Speaker endorses the certificate on the Consumer Affairs Authority (Amendment) Bill’, Parliament of Sri Lanka. September 23, 2021, https://parliament.lk/en/news-en/view/2263 (accessed September 25, 2021)

  3. Advocata Institute, ‘Price Controls in Sri Lanka-Political Theatre’( Sri Lanka: Advocata Institute, 2018), 24 https://www.research.advocata.org/wp-content/uploads/2018/10/Price-Controls-in-Srilanka-Book.pdf (accessed September 25, 2021)

  4.  Consumer Affairs Authority Act No. 09 of 2003 

  5. Advocata Institute, ‘Price Controls in Sri Lanka-Political Theatre’( Sri Lanka: Advocata Institute, 2018), 9 https://www.research.advocata.org/wp-content/uploads/2018/10/Price-Controls-in-Srilanka-Book.pdf (accessed September 25, 2021) 

  6. ‘Revised taxes, MRP complicate commodities market’, The Sunday Times, November 22, 2020 https://www.sundaytimes.lk/201122/business-times/revised-taxes-mrp-complicate-commodities-market-423077.html (accessed September 30, 2021)

  7. Institute of Economic Affairs, ‘Flaws and Ceilings: Price Controls and the damage they cause’ (London: London Publishing Partnership, 2015) quoted in Advocata Institute, ‘Price Controls in Sri Lanka-Political Theatre’( Sri Lanka: Advocata Institute, 2018), 43 https://www.research.advocata.org/wp-content/uploads/2018/10/Price-Controls-in-Srilanka-Book.pdf (accessed September 25, 2021)

    ‘රටේ ආර්ථිකය හා අපේ හෙට දවස’ YouTube video, posted by “Advocata Plus,” September 25, 2021, https://www.youtube.com/watch?v=8JvWQWn7cHw (accessed September 25, 2021)

Thiloka Yapa is the Research Analyst at the Advocata Institute and can be contacted at thiloka@advocata.org. Learn more about Advocata’s work at www.advocata.org. 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.

Where is the money behind our politicians from?

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In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning


By Thiloka Yapa and Aneetha Warusavitarana

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Election campaigns tend to be one of the driving forces behind corrupt practices even after candidates are elected.

Therefore, with a monumentally significant presidential election just over a month away, conversations around the issue of campaign finance and corruption in public office should be gathering steam.

Running a campaign in Sri Lanka is a costly affair; an aspiring candidate needs to connect with people on a grassroots level as well as a policy level. This exercise requires a great deal of manpower, posters, social media engagement, travel, and lots of “buth packets” – none of which come cheap. As a result, adequate campaign finance is a prerequisite for a successful election bid.

The problem lies in the issue of who is providing this finance and whether there are strings attached. If money is being funnelled into an election campaign on the understanding that once the candidate is in power, the financier will be afforded special privileges and benefits, this is when citizens need to be concerned.

Of course, campaign finance is not the root of all evil in the world of corruption. Regulating campaign financing would not address blatant theft within the government, nepotism, irregular procurement procedures, and the handing out of government jobs to political supporters. However, it is a step in the right direction and, interestingly, is something that Sri Lankan law has addressed in the past.

Regulating campaign finance

The Ceylon (Parliamentary Elections) Order in Council of 1946 specifies that a candidate would have to appoint an agent known as the “election agent”. This agent is responsible for the accounting and reporting of all expenses spent on elections, along with a declaration by the candidate. These financial reports have to be submitted within 31 days of the result of the election being published in the gazette. If it is not conveyed within the stipulated time period, the candidate would not be given the chance to sit or vote as a member in the House of Representatives, until such a conveyance is made.

However, this was repealed by the Parliamentary Elections Act No. 1 of 1981. Under this law, the sources of campaign financing would have to be tracked and reported. The fact that non-compliance would prohibit an individual from taking their seat in Parliament provides a strong and effective incentive for candidates to ensure that reporting is completed in the stipulated time period. While this law did not provide caps on spending during campaigns, making these declarations open to the public would provide another avenue through which elected officials could be held accountable.

However, this accountability mechanism is no longer in place. Under the Parliamentary Elections Act No. 1 of 1981, the entire section on reporting campaign finance was repealed, thus removing this avenue of accountability.

Bringing regulations back

The Commission to Investigate Allegations of Bribery or Corruption (CIABOC) has detailed the National Action Plan 2019-2023, aimed at tackling corruption in its various forms. The section on policy suggestions for proposed legislative amendments is all the more relevant in the context of elections. While the amendments proposed to the Bribery and Corruption Act aim to strengthen the powers of CIABOC and increase their ability to tackle corruption across the board, the proposals on campaign finance and asset declarations aim to curb opportunities for corruption in public office.

The proposed legislative framework for campaign finance puts in restrictions and accountability mechanisms on the finances of candidates. This ensures that when an individual comes into office, they do not bring with them the strings and influence of external parties, and are free to prioritise the needs and requirements of their electorate.

While the suggestions do include a cap on campaign financing, the amendments which prevent conflicts of interest and introduce accountability mechanisms may be more practical to enforce.

Restrictions on donations extend to donations made by government departments, companies registered under the Companies Act in which the government owns shares, donations from foreign governments, and organisations registered outside Sri Lanka. The proposed reform also includes a section on accounting and auditing of campaign finances, making this a prerequisite for an individual to come into power and acting as an accountability mechanism.

Beyond campaign financing

Through the proposed amendments to the Declaration of Assets and Liabilities Law, the checks on financing of elected officials continue once they enter office, expanding the scope of the law to encompass the President, private staff of elected officials, provincial council members, and members of local government authorities, to mention a few. The amendments specify that officials would have to submit asset declarations at the point of their initial appointment on a yearly basis while they hold office, at the point of retirement, and for two years post-retirement.

Additionally, asset declarations of the elected official’s spouse, dependent children, and other persons who live with the elected official or have similar ties are also required.

Tackling corruption is a mammoth task, but these reforms could form the backbone of a culture where citizens hold their representatives responsible and demand increased transparency and accountability.