Year on Year increase in food prices of 2%

Originally appeared in the Daily Mirror, Daily FT, The Morning

Advocata’s Bath Curry Indicator (BCI) which is a price-index that tracks the monthly changes in the retail price of a basket of commonly consumed food items recorded a year-on-year increase of roughly 2% between September 2022 and September 2023 and a month-on-month fall of 1.6% in between August and September 2023. Additionally, the BCI also tracks the price of the same basket of food items as they retail at local supermarkets, which shows an annual decline of roughly 16% of the BCI’s basket of items between September 2022 to 2023, and month-on-month fall of 3.2% between August and September 2023.

The graph below visualizes the fluctuations in the BCI and BCI-Supermarket indices over the last 3 years.

According to the BCI, the items that contributed the most to prices falling between August 2023 to September 2023 were tomatoes (12%), pumpkin (10%) and brinjals (8%). Alternatively the prices of green chillies (7%) and beans (4%) increased during this period. The Advocata BCI tracks the weekly retail prices in the Colombo market of the most commonly consumed food ingredients that might be used in a typical bath curry meal. The prices are collected from the “Weekly Indicators” that the Central Bank publishes. 

The BCI Indicator can be accessed at www.bci.advocata.org

Year on Year food price increase close to 50%

Originally appeared in the Ceylon Today, Lanka Business Online, Daily FT

Advocata’s  Bath Curry Indicator (BCI) , which tracks the monthly changes in the retail price of food, recorded an increase of 14% from March 2022 to April 2022.  This is a year on year increase of 49% for this basket of food. 

This is driven primarily by prices of dhal and samba rice being the highest recorded by the BCI. A kilo of Dhal in April 2021 was Rs 178, a year later it costs Rs 466. A kilo of samba in April 2021 was close to Rs 130, a year later this costs Rs 210. With food prices increasing at this rate, a family of four to spend on the BCI basket of food would have to pay approximately Rs 560 more for a week. 

The Colombo consumer price index recorded a similar rate of 47% year on year increase in food inflation. Comparing supermarket food prices from March 2021 to 2022 there has been an increase of close to 40%. 

This drastic increase in food prices in 2022 is a result of macroeconomic instability within the country. Although global prices have increased due to the pandemic and issues with supply chains, global prices have not  increased as fast as the prices in Sri Lanka. 

In Sri Lanka in addition to the global pandemic related issues, we are currently facing shortages of foreign currency which impacts local supply chains.  This impact has also been exacerbated by consistent import restrictions, both causing shortages. These shortages compounded by the fact that the value of the currency has been falling steeply have all contributed to food prices rising faster and faster in 2022. 

The BCI tracks the weekly retail prices in the Colombo market of the most commonly consumed food ingredients that might be used in a typical Buth curry meal. The prices are collected from the “Weekly Indicators” that the Central Bank publishes. 

The BCI Indicator can be accessed at www.bci.advocata.org.

15% food price increase in a single month

Originally appeared in the Daily FT

Advocata’s  Bath Curry Indicator (BCI) , which tracks the monthly changes in the retail price of food, recorded an increase of 15% from November 2021 to December 2021. 

Much of this increase is driven by rising prices of vegetables. 100g of Green Chillies at Rs18 increased to Rs 71. This is a 287% increase in just one month. Similarly, prices of Brinjals have increased by 51%, red onions by 40% and beans and tomatoes by 10%. 

Overall, since 2019, prices have almost doubled, and compared to December 2020, prices have increased by 37%. 

This means that an average family of four, who spent  Rs. 1165  weekly on the BCI basket of food items in December 2020 now has to pay Rs 1593 for the same basket of goods just 1 year later. 

The BCI tracks the weekly retail prices in the Colombo market of the most commonly consumed food ingredients that might be used in a typical Buth curry meal. The prices are collected from the “Weekly Indicators” that the Central Bank publishes. 

  The BCI Indicator can be accessed at www.bci.advocata.org.

Fostering competition and improving productivity are the best form of price control.

Originally appeared in the Daily FT , Daily Mirror

The crucial role of prices in solving the economic problem.

The recent  decision by the government to withdraw several gazette notifications imposing price controls is a step in the right direction.  Consecutive governments have used  price controls  to address equity concerns instead of undertaking the hard reforms needed to create competitive markets.  Prices are central to solving the core economic problem that all societies face: how are scarce resources (re)allocated to meet as many of the unlimited wants of consumers as possible? Allowing prices to carry out this function, so that more consumer wants can be met achieves the best outcome for an economy.  

From such a perspective, the recent decision to end price controls on essential foods (including milk powder and wheat flour) , liquid petroleum gas and cement is  a step in the right direction. Price controls create distortions such as shortages, rationing and the creation of a black market as well as substitution towards low quality alternatives. Although price controls are often introduced by governments with the intention of protecting the poorest consumers in society,  they are  very inefficient, as a means of redistribution. Often these subsidies are biased against the poor as they consume less of these goods than the rich.  Further, sharp increases in prices could have negative consequences on low income households in the short run.  Ideally such price increases should be made gradually so consumers can adjust to them or be able to shift to cheaper alternatives.  

Administratively controlled prices particularly on goods and services provided by the government exert a huge burden on the fiscal, leading to high borrowings and debt.  It also affects the conduct of monetary policy by masking  underlying inflationary pressures. 

Fostering competition and boosting productivity is a better way of reducing the cost of living. This involves removing barriers to entry and deregulating the economy. A good example of this is in the cement industry. The industry is dominated by two players and competition is constrained by a government policy that restricts the number of plants that can operate in each port.  If a new factory is set up,  priority is given to existing operators in the port. This limits new investment and  competitive pricing. Another key issue that makes construction prohibitively expensive is the use of paratariffs (CESS) on imports reducing contestability in the market. There is a misplaced perception that imports are not necessary, where there is local production, but it is the threat of imports that increases contestability, keeps prices low and improves consumer surplus. Further, it also incentivises domestic producers to improve productivity and competitiveness benefiting all stakeholders. 

The same is true of the LP gas industry. There are only two players in the market, i.e., the state-run Litro Lanka Limited and Laugfs Gas PLC.  One would expect that the presence of  Laughs Gas should create some competition in the industry.  However, strict governmental control  over LP gas prices and barriers to entry for new players into the industry, have prevented an efficient market  from developing.  The industry is highly capital intensive and the lack of storage facilities is the most significant  entry barrier.  Allowing  the use of common storage facilities along with opportunities in distribution will make the industry more competitive, exerting  a downward pressure on prices in the long run.  

Our experience over the past few months illustrate the adverse impact of price controls on the economy.  At the same time, governments are also  concerned that removing price controls would generate inflationary pressures. However, through careful management and communication, one - off increases in prices need not feed into inflation expectations and wage negotiations.  This requires tight rein over demand driven inflation and credibility that the central bank would use its monetary policy tools to keep inflation within its targeted range of 4 - 6 per cent. 

Hence, going forward, we urge the government to refrain from using price controls to address equity concerns. Instead, creating a competitive business environment and boosting supply is the best solution to lower prices in the economy. In order to support vulnerable households the government should provide a cash transfer to cushion the impact of price increases of essential commodities. This would require a re-examination of the Samurdhi scheme which currently excludes some of the most vulnerable households and tighter administration to ensure benefits accrue to those who need it most. 

Advocata’s Analysis on Price Controls can be found at; https://www.research.advocata.org/wp-content/uploads/2018/10/Price-Controls-in-Srilanka-Book.pdf. 

Key Points 

• Recalling gazettes imposing price controls is a move in the right direction. 

• Allowing market focus to set market prices prevents price instability. 

• Allowing more competition and the entry of private sector players is the only  policy solution to counter the adverse effects of unsustainable increases in market prices.   

Year on year increase in food prices of 30%

Originally appeared in the Daily FT

Advocata’s Bath Curry Indicator (BCI) which tracks the monthly changes in the price of a basket of commonly consumed food items recorded a 30% increase between August 2020 and August 2021. Prices have soared due to a multitude of factors in the last few years. Prices of the same basket of food items tracked on the BCI is up 70% compared to August 2019.

This means that an average family, who spent  Rs.757 weekly on the BCI basket of food items in August 2019 now has to pay Rs 1,288 for the same basket of goods. This is roughly Rs. 500 more than in 2019.  

The month of August however recorded a minor decrease in food prices compared to the previous month, with the prices falling by 1.57% driven by lower prices for onions, rice and green chillies, whilst vegetables such as beans and pumpkin increased.

The items that contributed the most to prices falling in the month of August 2021 were Green chilli (21%), Red onions (19%) and samba rice (8%). 

Alternatively the prices of beans (6.92%), pumpkin (12.46%), brinjals (8.83%) and Dhal (0.71%) increased. 

The BCI tracks the weekly retail prices in the Colombo market of the most commonly consumed food ingredients that might be used in a typical Buth curry meal. The prices are collected from the “Weekly Indicators” that the Central Bank publishes. 

  The BCI Indicator can be accessed at www.bci.advocata.org.

Top economists: Sri Lankan import restrictions at odds with WTO rules, hurts welfare of Sri Lankans

Originally appeared in the Daily FT, Ceylon Today, Ada derana Business

The Advocata Institute DeepDive Series on “ The Role of Trade in Sri Lanka’s Economic Recovery”

COLOMBO, Sri Lanka— A panel of eminent economists urged that the Government take credible and decisive action to carry out immediate trade reforms. Advocata’s Academic Chair Dr. Sarath Rajapatirana, emphasised that “Countries that have grown very fast, especially in east asia have understood the importance of trade reform”. Further adding that the first step of such a reform agenda should be to simplify the taxes at the border by removing the so-called ‘para tariffs’ that Sri lanka levies beyond the regular import duties and to introduce a single uniform tariff for all imports. 

Sri Lanka’s trade as a % of GDP has been low when compared to neighbouring countries like Thailand and Vietnam, indicating that we have not truly exploited our opportunity to trade. Research shows, Sri Lanka, has high tariff rates compared to other developing countries, and while tariffs play a role in protecting domestic infant industries, if tariffs are too high, they can become anticompetitive. Recent import restrictions, such as banning a  wide range of consumer goods since the beginning of April 2020,  have further worsened Sri Lanka’s growth potential and put Sri Lanka at odds with WTO rules. 

Dr. Dayaratna Silva ( International Trade Economist, Former Sri Lankan Ambassador to the World Trade Organization)  elaborated on the severe consequences for Sri Lanka’s economy if such import restrictions continue. He explained that there is a possibility of tariff retaliation. “Prolonged import controls are not consistent with the WTO, and its high time such is readdressed”, he went on to say. 

Such forms of retaliation could have a significant negative effect on our imports, thereby worsening our existing foreign exchange and balance of payment crisis. Another key long term concern for the economy. “My worry is the long term industrial development of the country because of these restrictions. Resources are inefficiently being allocated as a result”, further commented Dr. Dayartna De Silva. 

His Excellency  Denis Chaibi ( Ambassador, Delegation of the European Union to Sri Lanka and the Maldives) commented on the importance of adhering to global rules on trade. He commented that “the European Union tries to have a rule based order. When a country does not follow those rules, the rule based structure is affected. Without trade, for a small country like Sri Lanka, the prospect is not good”.  His comments brought into perspective the wider ramifications of import restrictions on Sri Lanka’s multilateral relations.  

 Professor Prema- Chandra Athukorala (Emeritus Professor of Economics, Arndt-Corden Department of Economics, ANU), who is an authority on global production networks, explained that “No country in the world now produces goods from the beginning to end within their geographic boundaries. Countries specialise in different components within the production value chain. Made in the country X label has become invalid, a  Country has to identify comparative advantage within the production network. “. Thereby elaborating on how Sri Lanka cannot achieve economic growth without joining global production networks through trade. He concluded by commenting on recent developments of import controls by saying that “selective intervention, without disturbing the incentive structure of the country as a policy, is going to be a recipe for disaster”.

These views were expressed at the event “Deep Dive”, organised by the Advocata Institute that aims to bring focus on Sri Lanka’s biggest policy challenges. The event was moderated by  Aneetha Warusavitarana, Research Manager, Advocata Institute.  As a precursor to the event,  Advocata released a primer on debt sustainability with the aim of helping Sri Lankans understand the topic.  The recording of the discussion can be found at Advocata Institute’s YouTube Channel https://www.youtube.com/watch?v=8M981XmlbAs / to get a comprehensive understanding of Trade and how it affects Sri Lanka’s economy and the livelihoods of all Sri Lankans. The event was organised in partnership with the European Union. 

Excessive Price Controls will worsen Shortages

Originally appeared in the Daily FT , Daily Mirror, Ceylon Today, Sunday Times and Ada Derana Business

New measures treating the symptoms rather than the disease.

COLOMBO, Sri Lanka— Harsh enforcement of price controls may worsen food shortages.

The Commissioner of Essential Services has been granted the power to seize food stocks held by traders and retailers and regulate prices.

There is serious concern with the steep rise in the price of essentials which has taken place over the past two years. Advocata’s Bath Curry Indicator (BCI), which tracks commonly consumed items,  shows a 30% increase in retail food prices in August 2021 compared to August 2020.   

The reasons for the increase in prices include import restrictions and tariffs that have disrupted markets. The classic example is turmeric that retailed at Rs.650 per kg prior to the import ban but now retails at Rs 3500 per kg according to the DCS and at around Rs 4400 to  Rs6900 on online retailers . Other products are similarly affected. 

The recent ban on fertiliser is likely to result in even further increases in the prices of vegetables and cereals over the forthcoming harvests.

These restrictive policies have been compounded by the acute shortage of foreign currency caused by the on-going balance of payments (BOP) crisis. Lack of foreign exchange has imposed additional restrictions on imports resulting in shortages causing prices to spike.

While the increases in prices is a real concern, the causes are complex and are largely due to poor policies. 

The balance of payments crisis arises not due to trade policy but due to the levels of aggregate demand in the economy,  principally through consumption and investment influenced by the prevailing fiscal and monetary policy. The tax cuts towards the end of 2019, fiscal dominance of monetary policy and non-pass through of global commodity prices through price controls and administered prices have contributed towards excess import demand.

This is evident in the trade data: despite the stringent import restrictions imposed after April 2020, import demand for the six months to June 2021 have surged by 30% over the same period in 2020. While exports in the period have also risen, it is the rapid rise in imports that have caused the negative trade balance.

Price controls and administered prices have led to shortages and hoarding.

Instead of addressing the problem at the root, the government is trying to control the symptoms. Previous attempts at price controls have not succeeded as  Advocata’s research in 2018 has shown but better enforcement is not the solution. Instead, the Government should address the policy weaknesses that are the cause of the problem.

Trying to negate policy missteps in fiscal and monetary policy through trade policy in an untenable exercise for it impacts economic efficiency hence growth and productivity and also leads to issues with economic distribution.

Harsh enforcement of price controls could in turn create black markets resulting in significant welfare losses in the form of  a deterioration in product quality, elevate scarcities, disadvantaging the poor who are less sophisticated and in the long run lead to higher prices, lower output due to lower investment.

We urge policy makers to urgently address the root cause of the current crisis by increasing tax revenues via more progressive tax policies - by increasing the tax base for both direct and indirect taxes and reducing the tax gap through greater tax effort. Further, it is best where possible to use well targeted cash transfers to vulnerable segments of the population to improve affordability instead of cutting taxing, imposing price control or using administered prices on utilities.

Key Points 

• Advocata Institute highlights the negative  effects of harsh price controls. 

•  The root causes of the present crisis lies in loose monetary and fiscal policies compounded by import controls and exchange control restrictions. Therefore restoring macroeconomic stability is a priority.

• Cash transfers to vulnerable segments is a better mechanism to implement distributive policies rather than intervening in market prices through tax subsidies, price controls or administered prices.

July Food Prices Increase by 0.70%

Originally appeared in the Daily FT and Daily Mirror

Advocata’s Bath Curry Indicator (BCI) which tracks the monthly changes in the price of food recorded a jump of 0.70% for the month of July 2021. 

The month of July experienced an increase in prices compared to the month of June, according to the basket of food tracked by the BCI.

The 3 items that contributed most to this increase were:

For the month of July 2021, the prices of pumpkin showed the largest increase of 66.4%.

Likewise, the prices of Samba rice, Beans, Dhal and fish (balaya) also experienced minor increases in prices as well.

In comparison to the month of July 2020, the BCI has increased by 45% for 2021, which translates that an average family of 4 that spent Rs. 899.85 on this basket of goods for a week in July 2020 would pay Rs. 1308.10 for the same amount of goods in a week in July 2021.

The BCI tracks the weekly retail prices in the Colombo market of the most commonly consumed food ingredients that might be used in a typical Bath curry meal. The prices are collected from the “Weekly Indicators” that the Central Bank publishes.

The BCI Indicator can be accessed at www.bci.advocata.org.

Advocata welcomes full time Minister of Finance for Sri Lanka’s Public Finances

Originally appeared in the Daily FT and Daily Mirror

An independent Minister of Finance can lead the way for better management of Public Finances.

COLOMBO, Sri Lanka— For 23 of the last 30 years, the Head of Government in Sri Lanka has simultaneously held the title of Minister of Finance.  Experience shows that combining the two roles is usually a big mistake as the job of the Head of Government is already very demanding. It is almost impossible for any one person to combine that with being an effective Minister of Finance. The tasks associated with being the Head of Government almost always gain priority.  Secondly, an effective Minister of Finance needs to maintain fiscal discipline by resisting pressures from the political office. The head of government who is also the head of a party or coalition cannot simultaneously meet this requirement due to such conflicting priorities. 

 Analysis of Sri Lanka’s public finances further provides convincing evidence that the absence of a dedicated Minister of Finance has undermined revenue collection. From post independence to around 1990, Sri Lanka’s tax revenue averaged over 20 per cent. At present Sri Lanka has one of the lowest income tax rates compared to peer countries as well as a tax threshold which is several times its GDP (Gross Domestic Product) per capita.

The Advocata Institute, therefore, welcomes the government decision to appoint a dedicated Minister of Finance.

Key Points:

• A dedicated Minister of Finance is beneficial to effective public Finance management.

• The Advocata Institute welcomes the appointment of a full-time Minister of Finance.

• Poor public finance management and poor revenue collection are partly a result of a lack of a dedicated Minister of Finance.

• Understanding the seriousness of the present crisis and utilising pragmatic public policies is the way forward.

[1] The Political Economy of Long-Term Revenue Decline in Sri Lanka, Mick Moore, ICTD Working Paper 65, February 2017

June Food Prices Increase by 14.3 %

Originally appeared in the Daily FT and Daily Mirror

Advocata’s Bath Curry Indicator (BCI) which tracks the monthly changes in the price of food recorded a jump of 14.3%  for the month of  June 2021. 

The month of June experienced an increase in prices comparatively to the month of May, according to the basket of food tracked by the BCI.

The 3 items that contributed most to this increase were:

For the month of June 2021, the prices of green chillies, coconut, and beans, increased by 64%, 33% and 17% respectively. Likewise, the prices of Samba rice, pumpkin, Brinjals, Dhal and red onions also experienced minor increases in prices as well.

 In comparison to the month of June 2020, the BCI has increased by 30%, for 2021, which translates that an average family of 4 that spent Rs.1,136 on this basket of goods for a week in May, would pay Rs.1, 299 for the same amount of goods in a week in June.

 The BCI tracks the weekly retail prices in the Colombo market of the most commonly consumed food ingredients that might be used in a typical Buth curry meal. The prices are collected from the “Weekly Indicators” that the Central Bank publishes.

The BCI Indicator can be accessed at www.bci.advocata.org.

Revival of the East Container Terminal, essential to turning Sri Lanka into a Freight and Logistics Hub

PRESS RELEASE

Originally appeared in the The Island, Lanka Business Online, Daily FT

Open and Competitive Bidding must be the way forward

COLOMBO, Sri Lanka—  As reported in numerous media sources, a leading Indian consortium is the front runner to develop the stalled East Container Terminal (ECT) in the Colombo Port. An agreement was reached during the tenure of the former government to develop the ECT in collaboration with the governments of India and Japan. However, the progress of the terminal development was stalled due to various reasons. 

The Advocata Institute welcomes the decision of the administration to resume the stalled project. The significance of the Colombo Port is driven by its large volumes of transhipment to India, which now accounts for about 70% of the total quantity of shipments. It is beneficial that both countries continue to strengthen this relationship through trade and economic partnerships. 

However, we would like to provide input on two main policy areas surrounding this project, in order for policymakers and the public to evaluate the efficacy of the upcoming arrangement. 

Accountability through Competitive Bidding 

The key concern of the Government when entering any kind of public-private partnership such as the container terminal development process should be to ensure that it will produce value for money. The commercial partner selected should be the most capable of producing this outcome. An open tender process would allow for a more efficient allocation of resources by using competitive pricing as a tool to reflect real market sentiments and allowing better utilization of resources.  

Tax concessions 

The ECT provides an unique competitive advantage for the operator. The risk in this investment is relatively low, given that the port is already established. The Southport (deepwater port) is well known and has been in existence for 6-7 years. The port is also strategically located with only a 4-hour deviation from the major east-west shipping route. Additionally, its competitor, the CICT terminal is running close to capacity.  Finally, there is a very limited employment multiplier effect that this project can create. The private returns are significantly higher than the cost of capital factoring in-country and project risk.  Taken together and based on the publicly available information, the case for tax holidays on this project is weak. Further consideration must also be placed on the precarious fiscal situation that the country is presently in and the need to mobilise more tax revenue.

The Advocata Institute calls upon the government to strengthen oversight and accountability through an open tender process. We believe that such a policy direction would be more conducive to reaching the administration’s vision of a more productive and prosperous Sri Lanka. 

Key Points 

• Advocata Institute welcomes the decision to resume the stalled project of developing the East Container Terminal.

• The economic benefits of developing the East Container Terminal is significant to both Sri Lanka and India- management of this relationship is crucial. 

• The Advocata Institute believes that a tax holiday should not be granted owing to the advantageous location of the Port of Colombo.  

• Implementing an open tender process is essential to signal to investors needed to drive future expansion that a fair process will be followed.

Local experts offer insights on $480 million MCC compact projects

First appeared in Sunday Morning, Sunday Observer, News First, Daily Mirror and Economy Next

The Advocata Institute hosted a public forum on the MCC compact “එම්.සී.සී. ගිවිසුම ගැන ඇත්ත නැත්ත”  on the 19th of September, with the aim of separating fact from fiction around this hotly debated topic. 

Since 2015, Sri Lanka was engaged in a competitive selection process for the  Millennium Challenge Corporation (MCC) grant. In April 2019, Sri Lanka was awarded a grant from the Millennium Challenge Corporation (MCC) for USD 480 million. Since the awarding  of the Compact, concerns around the agreement had gone unaddressed.

To help provide a public platform for the addressal of these concerns, The Advocata Institute convened an open discussion with experts involved in designing the projects for the MCC Compact, Prof. Amal Kumarage (Head of the Department of Transport and Logistics Management, University of Moratuwa); Dr. Saman Widanapathiranage (Deputy Director, Highway Designs at the Road Development Authority (RDA) and Mr. Sarath Jayatilaka (Former Deputy Surveyor General); MCC representatives, Ms. Jenner Endleman (Sri Lanka Resident Country Director - Millennium Challenge Corporation) and the Government, Dr Jagath Munasinghe (Chairman, Urban Development  Authority). 

The experts highlighted the technical details of the Land and Transport Management projects in the grant followed by a Q&A with representatives of the MCC and the Government. 

Prof. Amal Kumarage explained that out of USD 350 million allocated to the Transport Project, USD 50 million would be spent on Bus Services Modernization. He stated that by 2030, the number of vehicles on our roads will triple and it is crucial for our transport system to reflect this. 

Dr. Saman Widanapathiranage (Deputy Director, Highway Designs at the Road Development Authority (RDA) discussed the Advanced Traffic Management System component in the Transport Project. He stated how average speed in Colombo will reduce to 10kmph by 2030, communicating the urgency of improving the city’s traffic management. 

Mr. Sarath Jayatilaka (Former Deputy Surveyor General) detailed the Land Project in the compact which amounts to USD 67 million of the total grant. Since the Sri Lankan government owns 82% of all land and the remaining 18% land is privately owned, he emphasised the importance of developing a State Land Bank to improve land administration policies. 

Joining the Q&A, MCC Sri Lanka Resident Country Director Ms. Jenner Endleman answered some concerns around the compact. To the question of whether the MCC Compact is linked to military agreements, she answered that MCC has no relation to ACSA or SOFA and that the MCC Compact was ready for signing before the renewal of these military agreements. Another question posed was why the Compact was not available in the public domain and that she stated that itis the MCC’s policy to not share the document prior to it being signed by the recipient government. However, she urged concerned citizens to reach out to the Government to release these documents, as they are in a position to share the agreement. 

“In our 15 year history, we’ve never had a situation where an eligible country has come to us and proposed a grant, our board has accepted it, and that same partner country has not approved it” stated Mr. Endleman addressing questions from the audience. 

Inviting media to COPE meetings will help increase accountability of COPE and SOEs: Advocata

First appeared in Sunday Observer, Daily Mirror and Republic Next

“State owned enterprises are a vehicle of large scale corruption in Sri Lanka that hasn’t caught public attention. Advocata’s latest report on SOEs highlights some of these abuses documented by COPE.

Adocata’s 2019 report on The State of State Owned Enterprises, highlights some of these abuses documented by COPE. Opening meetings to the public is a good first step to ensure that people understand the massive abuses by SOEs done by using taxpayer money! We urge the government to consider further reform to strengthen COPE and promote accountability of SOEs”

— Dhananath Fernando, Chief Operating Officer Advocata Institute

In an attempt to promote transparency and accountability, the hearings of the Committee on Public Enterprises (COPE) will be open to the media. The government has enforced this timely initiative in a greater attempt to promote accountability of State Owned Enterprises. The Speaker, Hon. Karu Jayasuriya MP has officially announced the ceremony to mark the opening of the COPE sessions to the media, and should be commended for this decision.

The COPE is a key committee that oversees State Owned Enterprises (SOEs) in Sri Lanka.  The duty of the Committee is to examine the accounts of the Public Corporations and of any business undertaking vested in the government. Although their reports thus far have lacked comprehensiveness, they have examined a limited number of issues in a few institutions, and are a devastating critique on the state of governance. 

Advocata Institute’s 2019 report, “The State of State Enterprises: Systemic Misgovernance”, highlighted the imminent need of strengthening the COPE and COPA (Committee on Public Accounts; the second financial committee whose duty is to examine the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure). The report recommended that COPE and COPA proceedings be opened to the media and the public in efforts to enhance the transparency of financial management of public institutions and hold state institutions to account. 

Advocata Institute urges that further reform be considered seriously in efforts to improve structural failings and misgovernance that promote a breeding ground for corruption in Sri Lanka’s state sector. We insist that the government opens committee proceedings to non parliamentarians;  specifically for technical experts, to bring in industry knowledge and scrutiny. 

Key Points:

• Advocata welcomes the decision to open COPE meetings to the media.  

• The duty of the COPE is to examine the accounts of the Public Corporations and of any business undertaking vested in the government.

• Advocata Institute’s 2019 report, “The State of State Enterprises: Systemic Misgovernance”, highlighted the imminent need of strengthening the COPE and COPA.

• The report recommended that COPE and COPA proceedings be open to the media and public in attempts to promote transparency and accountability.

• Advocata urges the government to further consider reform to strengthen COPE and COPA.

Advocata commends the government’s decision to shut down SaluSala - a State Owned textile Enterprise

First appeared in Daily News, Daily Mirror, Daily FT, Lanka Business Online, Economy Next, Republic Next, Colombo Page and Sunday Observer

Advocata Institute commends President Maithripala Sirisena’s directive to shut down the loss-making, state-owned handloom enterprise Salu Sala. While we commend this decision, we are also anticipating the official gazette enacting this statement.

The SaluSala, now a white elephant to society, was once the only state textile trading enterprise in the country. As the only provider of textile during the closed economy, SaluSala received heavy protection.

In 2011, the First Committee of Public Enterprises Report (COPE) revealed that for the year 2009/2010, Lanka SaluSala Ltd. has made a loss of Rs. 30 million. The reason for this loss, as identified by the report, was due to salaries paid to staff who had been sent on compulsory leave during the restructuring process of the organisation. However, Advocata has been unable to track the financials of Lanka SaluSala thereafter as there has been no Annual Reports or Performance Reports published and available to the public.

“‘A lack of accountability is leading to flagrant abuse within SOE’s. The government must act urgently to prevent it spiraling out of control. Salu Sala is only one of many examples””

— Ravi Ratnasabapathy - Resident Fellow, Advocata Institute

Advocata Institute strongly believes that the state should have no role in running business enterprises using taxpayer money,  particularly in industries with enough private investment and competition. Advocata encourages the government to look at other ‘white elephant’ State Owned Enterprises (SOEs), and divest and exit industries that serves no strategic purpose. Out of 527 SOEs identified by Advocata’s 2018 State of State Enterprises report, only 54 are classified as being ‘strategic’ by the government.

Whilst the policy debate in Sri Lanka on SOEs has focused on ‘privatisation’, many of  Sri Lanka’s SOEs have no commercial purpose, riddled with corruption and mismanagement and, in the core justification of existence, is not attractive to private investors looking for profit making ventures. Advocata urges the government to exit enterprises of  this nature and release the valuable resources they occupy into more productive sectors of the economy, while awarding fair compensation to public sector employees of these enterprises.

In the case of Sal Sala, the Treasury has allocated Rs. 340 million to pay compensation for 217 employees under a voluntary retirement scheme. This is a model the government should consider adopting in cases where paying a compensation is more economically viable than continuing to keep a loss making enterprise afloat. Lanka SaluSala is not the only State Owned Enterprise (SOE) that is a fiscal strain on Sri Lanka’s Economy. Non Strategic SOEs like Sri Lankan Airlines, Lanka Sathosa and Agriculture and Agrarian Insurance Corporation are in need of immediate reform.

Source: Department of Public Enterprises, Performance Reports (2015-2017) and Ministry of Finance - Annual Report (2018)

Key Points

• Lanka SaluSala, a state owned handloom enterprise will be shut down as per orders by the President.

• Advocata Institute commends this decision and is anticipating the gazette formally enacting this order.

• The Treasury has allocated Rs. 340 million to pay compensation for 217 employees of SaluSala under a voluntary retirement scheme.

• SaluSalu has been a “white elephant” for years, and the government has failed to keep track of the financials for this enterprise.

• The first COPE report in 2011 revealed that Lanka SaluSala Ltd. has made a loss of Rs. 30 million for the year 2009/2010. Annual Reports have not been published thereafter, and the Ministry of Industry and Commerce, which is the designated line ministry has also not published any information on the performance of Lanka SaluSala thereafter.

• SaluSala is only one of the many SOEs fiscally straining Sri Lanka’s economy, and it is only one of the many SOEs that the government has failed to monitor financials for. Out of the 527 state owned enterprises identified by the Advocata Institute, the government regularly tracks the financials of only 54.

• While the Advocata commends the government’s decision to close SaluSala, it is equally important that the government conducts a survey of all state owned enterprises in order to establish a comprehensive system of financial monitoring.

• Other non-strategic loss making State Owned Enterprises in need of immediate reform includeSri Lankan Airlines, Lanka Sathosa and Agriculture and Agrarian Insurance Corporation.

Perverse incentives and a lack of accountability lead to rampant corruption in State

A new report by The Advocata Institute, titled “The State of State Enterprises in Sri Lanka: Systemic Misgovernance” identifies the systemic issues that plague state-owned enterprises (SOEs) leading to substantial losses. This flagship publication builds on the analysis and data from the first ‘State of State-Owned Enterprises’ report which was released in 2016.

The essays in the report attempt to analyse the causes for the structural weaknesses and propose simple recommendations to establish basic central government control over SOEs and improve accountability.

Figure 1

The report identifies the lack of an official government definition of state-owned enterprises as a point from which many systemic issues arise. The lack of a definition means that the government does not have an authoritative list of all SOEs. To fill this information gap, the Advocata Institute has compiled a list of all known state enterprises, their subsidiaries and their subsidiaries.

Figure 1 provides a quick overview of the data, emphasizing the excessive number of state enterprises.

The structural problems of state-owned enterprises emerge from the problem of multiple actors (bureaucrats, politicians and citizens) with conflicting interests. This makes state owned enterprises vulnerable to mismanagement and corruption because of potential conflicts between the ownership and policy-making functions of the government, and undue political influence on their policies, appointments, and business practices.

The report finds that internal control, monitoring and governance frameworks appear inadequate to deal with these problems – of the 527 entities regular information is only available for 55. Even obtaining a complete list of entities proved to be a challenge. Financials are routinely late and only a minority obtain ‘clean’ audit reports. In 2017, the total losses incurred amounted to LKR 87.78Bn. To put this value in context, the government budget allocated LKR 44Bn for Samurdhi payments in the same year.

Extracts from reports of COPE and the Auditor General which are included in Advocata’s report highlight repeated instances of fraud, mismanagement, corruption and negligence. The issues no longer appear to be isolated incidents of opportunistic behavior by individuals or occasional lapses in control but point to deeper, structural weaknesses. While internal control and accountability mechanisms are important in checking abuses, they are insufficient in themselves.

The report elaborates on how a trend for SOEs to be incorporated as limited liability companies allows politicians to bypass treasury or budget restrictions and evade parliamentary accountability. Complex corporate structures provide a convenient shroud for abuse. A review of the reports of the Auditor General and the Committee on Public Enterprises paints a dismal picture of systemic failures of governance leading to gross misappropriation of public funds.

The reports concludes with three main recommendations:

1. Compiling a comprehensive list of all SOEs and setting basic reporting procedures

2. Strengthening COPE and COPA

3. Implementing the OECD Principles of Corporate Governance

“A lack of accountability is leading to flagrant abuse within SOE's. The Finance Ministry must act urgently to prevent it spiraling out of control” says Ravi Ratnasabapathy, Resident Fellow of Advocata and co-author of the “State of State Enterprises in Sri Lanka” report.

The immediate antidote to corruption is increasing and improving transparency and accountability. The ideal reform of the recommended three to address the problems that plague are SOEs is to introduce and enforce the OECD Guidelines on Corporate Governance.

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Sri Lanka has a total of 527 State Owned Enterprises out of which regular information is available for only 55. The inefficiencies and mismanagement which riddle our SOEs are explored in the Advocata Institute's new report  “State of State Enterprises in Sri Lanka- 2019"

To read more on SOEs and download full report visit www.advocata.org

Advocata Institute to host Asia Liberty Forum 2019

Over 200 participants, comprising leading academics, policy makers and intellectuals from over 30 countries will come together in Colombo, Sri Lanka for the 2019 Asia Liberty Forum to discuss challenges facing the Asian region and to learn from each other on how to most effectively advance free-market reforms.

Asia Liberty forum is an annual event by the United States based Atlas Network, co-hosted in partnership with Advocata Institute.

The Asia Liberty Forum will be held from the 28th of February - 01st of March at the Hilton Colombo and is the largest gathering of pro-market think tanks, business leaders, professionals, high net worth individuals and policy leaders in Asia. It’s a platform to discuss and present policy solutions for economic concerns in Asia and Sri Lanka.

The 2019 Asia Liberty Forum (ALF) will be held at the Hilton Colombo, from 28th February to 01st March 2019.  Prof. Pratap Bhanu Mehta, Vice Chancellor of the Ashoka University, India, will deliver the keynote address on ‘Freedom at Risk’ at the Freedom Dinner on the 28th of March, while other dignitaries, business leaders and academics will grace the event.

Themes explored this year includes the State of Capitalism and freedom in Asia, privacy issues in the digital age,  fast-tracking courts, currency depreciation and urbanization.

Distinguished speakers at the forum include, Prof. Razeen Sally (National University of Singapore); Prof. Rohan Samarajiva (Chair - LirneAsia); Dr. Ajay Shah (National Institute for Public Finance and Policy, India); Nighat Dad (Digital Rights Foundation, Pakistan) Dr Tom Palmer (Atlas network, USA) , Dr Christer Ljunwall (ENC Global, China) and Dr. Ross McCleod (Australian National University) amongst others.

The Asia Liberty Forum is a rare opportunity to meet, network and interact with some incredible minds in the field of economics and policy. For more information on the forum, speakers, schedule and tickets visit www.alf19.com.

Ailing rupee and Price Controls may lead to a shortage of Milk Powder

A cup of tea is every Sri Lankan’s morning mantra. This might not be the case much longer as Sri Lanka may face a shortage of milk powder as several leading milk powder importers are reported to have taken a collective decision to suspend imports. The recent depreciation of the rupee has caused a significant increase in import costs and importers say they are now unable to sell at the controlled price, hence the decision to suspend imports. The same impact will be felt in other industries subject to price controls. The pharmaceutical industry withdrew eleven drugs from the market citing similar reasons.  

The currency has depreciated by 10% in the past two months and over 20% in the past year, which will raise landed costs of  import products significantly. Importers of goods subject to price controls will continue to be squeezed as their price margins reduce and this will eventually lead to a halt in imports, like in the evident case of milk powder.

Imported milk powder is taxed at a total of 45% in Sri Lanka, with the objective of protecting local farmers and achieving self-sufficiency in milk products. Despite this self-sufficiency goal, local production meets below 40% of the total domestic milk requirement, considerably below 80% levels in the 1970s. Therefore, majority of the demand in milk products is met through imports, mostly from New Zealand and Australia. Over the last decade, in 7 out of 10 years, imports of milk powder has grown at a higher pace than the growth in local production.

Additionally, in May 2018, changes to existing Price Controls on Milk Prices have raised the controlled price for milk powder to Rs. 345/400g pack and Rs. 860/1kg pack. This price control was enforced by the Consumer Affairs Authority, despite a rise in the global prices of milk. Global milk powder prices fell in 2015 and 2016 and climbed in 2017 and 2018 and now the cost of one metric ton of milk powder in the world market is US$ 3250-3350.

Furthermore, the depreciating rupee, now valued at Rs. 184 to a dollar has only continued to worsen the situation, making it more expensive to import milk powder.  “Importers of milk powder are squeezed between the tax (which raises costs), the controlled price which sets a ceiling at which the product retails, and now the depreciating rupee which further raises import costs” says Ravi Ratnasabapathy, Resident Fellow of the Advocata Institute.

The floor price encourages production which the market is sometimes unable to absorb, leading to gluts which cannot be converted to powder (the only long term storage form of milk) due to the controlled price.

A recent report by the Advocata Institute, Price Controls in Sri Lanka, emphasizes the contradictory trajectory of policies in the dairy industry. This tangle of taxes and controls comes at a cost to consumers. Our costs are increasingly becoming apparent by visible shortages of milk powder in the market.

Key Recommendations

1. High import taxes lead to massive costs for milk powder importers. Changing this would not only mean cheaper milk for consumers, but also cheaper raw materials for downstream processors such as the biscuit or confectionery industry.

2. The removal of the Maximum Retail Price would allow for a higher level of healthy competition among both importers and local dairy manufacturers, allowing market forces to decide prices.

3. It is necessary that the government recognises that given the several supply constraints, the objective of self sufficiency is not realistically attainable in the Sri Lankan context. Thus, authorities should recognise the importance if imports in meeting demands of consumers and implement well-thought out measures to level the playing field between importers and domestic producers.

Price controls dominate political debate but may not help consumers

A new report by The Advocata Institute, titled “Price Controls in Sri Lanka: Political Theatre” finds that consumer price controls lead to unintended outcomes including lower quality. Politicians have imposed price controls on a variety of items in the belief that capping prices will lower costs but our survey shows that they are of limited value in controlling the cost of goods.

According to a limited survey carried out by Advocata, a comparison of controlled prices (over a ten month period) against retail prices as per the open market weekly average retail prices, showed that of 13 basic groceries only one (milk powder) was being consistently sold at the controlled price throughout the entire period. No one, not even the Consumer Affairs Authority (CAA), possesses a comprehensive list of items subject to price control.

Serious enforcement seems confined to items produced by multinationals or large corporates (milk powder, cement, cooking gas) which are administratively easier to police. In contrast, there only appears to be token enforcement in the unorganised sector. Loose enforcement prevents the most obvious symptoms of price controls from manifesting but at the expense of consumer choice and quality. Where price controls are enforced (eg: cement, milk powder) it is done so in consultation with the industry, leading to a stickiness in prices. Retail prices are slow to rise when world market prices rise but are equally slow to fall when world market prices decline.

The report also highlights how the Government’s approach to prices is schizophrenic; taxes are imposed that raise costs but the same products are then subject to price controls, supposedly to lower prices. The survey seems to indicate that price controls are of limited value in reducing costs and damage markets by preventing the supply of products rising to meet demand. They can cause significant welfare losses, a deterioration in product quality, a reduction in investment and, in the long run, higher prices.

A survey of traders indicate that 67% of retailers and 46% of wholesalers react to raids by the CAA by temporarily adjusting prices. They later revert to business as usual. Traders even claimed that paying fines for non-adherence was more profitable than retailing products at controlled prices. This was particularly true in the case of small tea and hopper sellers.

Tea and Hopper shops were subject to an arbitrary price control in 2015, but it is rarely enforced. At best, the control is useless and at worst, it works against these small entrepreneurs legitimate business activity and opens up potential for clandestine business. Advocata strongly believes that this control should be abolished.

Key recommendations of the report:

• Little serious attempt appears to be made to impose the price controls on basic foodstuffs, particularly in the public markets. The controls encourage sub-optimal behaviour including the sourcing of poor quality or substandard items. Abolishing the controls will have minimal impact on prices while improving choice.  

• Taxes, specifically the Special Commodity Levy and CESS play a significant role in raising consumer prices. Creating the fiscal space for simplification of the system, moving to uniform rates and the lowering taxes of taxes should lead to lower prices.

“Price controls, tend to have unintended consequences and product quality can suffer”

— Ravi Ratnasabapathy, Resident Fellow of Advocata and co-author of the “Price Controls in Sri Lanka” report

This report highlights that price controls are of limited value in reducing costs. They can cause significant welfare losses, a deterioration in product quality, a reduction in investment and, in the long run, higher prices. Advocata strongly believes that fostering competition and improving productivity are the best form of price control in Sri Lanka.

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“Price Controls in Sri Lanka: Political Theatre”, a new report by the Advocata Institute finds that consumer price controls lead to unintended outcomes including lower quality.

To read more on Price Controls and download full report: www.research.advocata.org/pricecontrol

A video documentary: https://youtu.be/zG5hV94G7Qc

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The Government should rethink price controls on bottled water

In an extraordinary gazette notification released earlier this week, the Sri Lanka Consumer Affairs Authority (CAA) imposed price controls on bottled water, to be enforced starting today (Oct 5).

Advocata notes that this decision will introduce distortion into the market possibly resulting in lower quality or shortages. As more than 120 companies battle for a foothold in Sri Lanka’s competitive bottled drinking water market, worries over unsafe and low quality products is concerning.

The maximum retail prices enforced through this gazette are as follows:

In principle, the action of setting maximum prices on goods and services is known as a “Price Ceiling”. These are meant to “protect” consumers from being exploited.  Yet the reality may be different. A publication slated to release next week by Advocata, “Price Controls in Sri Lanka; Political Theatre” reveal that for the items surveyed price controls do not serve the intended purpose. Coupled with loose enforcement, consumer price controls in Sri Lanka have skewed the market towards a preference for lower quality products. The Price controls on water bottles, will likely to do the same.

According to a basic survey carried out by Advocata, market prices of bottled water for a 500 ml bottle, prior to the enforcement of the price control was as follows:

The bottled water industry has 120+ entrants in the market. This means that until today, consumers had the choice of purchasing a 500ml water bottle at Rs. 45, Rs. 50 or at Rs. 80. Consumers were given the choice to buy bottled water as per their personal preferences and budgetary constraints. This is no longer the case.

In Sri Lanka, bottled water is regulated by the Ministry of Health through the Food (Bottled or Packaged Water) Regulations, 2005 framed under the Food Act No. 26 of 1980. There had not been major health and quality related concerns until 2016, where a CAA directive indicated that plastic mineral water bottling standards were enforced starting September 1, 2016 following the authority detecting several brands using low quality plastic bottles.

The likely result of the introduction of this new price control -- limiting the sale of a 500ml water bottle to Rs.35 -- is that producers have to now cut down on production costs, to reduce the final cost per bottle. Low production cost lead to the sourcing of low quality raw materials, in this case; water and plastic.  It also unclear whether the price controls also apply to glass bottles, which may be priced out of the market.

“In responding to price controls, the usual case is that producers would resort to producing low quality products in order to remain within the vicinity of the controlled price” says Ravi Ratnasabapathy, Resident Advocata Fellow and co-author of “Price Controls in Sri Lanka” report.

Advocata urges the government to engage relevant stakeholders and reverse the decision to unnecessarily intervene in an already competitive market.