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

The Government Should Rethink the Minimum Room Rates Policy

Originally appeared in the Daily FT, Daily Mirror, Daily News, Lanka News Web

The Advocata Institute expresses concern over the recent proposal by the Sri Lankan Authorities to impose minimum room rates on hotels in the city of Colombo.  

This proposal, set to take effect from October 1st 2023, stipulates rates of USD 130 for 5-star hotels, USD 100 for 4-star hotels, and USD 80 for 3-star hotels. While the authorities argue that this measure aims to counter underpricing by higher-tier hotels, this policy threatens to undermine the growth and vitality of the tourism sector. It places an unnecessary burden on hoteliers already grappling with the challenges posed by the global pandemic and subsequent economic crisis. Further, it undermines the country’s competitiveness in the regional tourism market.  

Pricing acts as a reflection of the quality of services offered by hotels and serves as a differentiating factor. If prices fail to accurately represent the services provided, customer dissatisfaction can ensue, especially when compared to more competitively priced options in neighboring countries such as Thailand and Vietnam. This is supported by a comment made by the Sri Lanka Association of Inbound Tour Operators (SLAITO) which states that “before implementing such prescribed rates, it is crucial to generate demand and interest in Sri Lanka...Adopting these rates will render Sri Lanka uncompetitive and result in a loss of clients, even when compared to hotels in New Delhi, with which they are currently competitive”.

Sri Lanka has previously attempted to implement price controls between 2009 and 2019, following lobbying by a segment of  hoteliers aiming to compete more effectively against 5-star rated hotels. However, this policy failed due to numerous violations resulting from inadequate monitoring and enforcement by the authorities. Many hotels, including those that initially advocated for the government's proposed room rates, have not complied with the established rates, as alleged by the former Minister of Tourism, John Amaratunga. 

The imposition of minimum room rates restricts hotel owners' flexibility in setting prices in accordance with market demand and effectively stifles healthy competition among various establishments. The tourism industry experiences fluctuations in demand that correspond to seasonal and weekly trends. Such demand patterns necessitate the ability for hotels to tailor their pricing strategies to capitalize on peaks and optimize profitability.

Every hotel has its unique room pricing considerations depending on factors such as location, size of the hotel, market demographics, level of competition, and type of service offered to name a few. The uniform imposition of minimum rates disregards the diverse range of hotels and accommodations available in Sri Lanka, catering to various budgets and preferences. This one-size-fits-all approach disregards the crucial factor of consumer choice. Imposing minimum room rates on a certain type of accommodation whilst disregarding alternate forms of accommodation available within the city of Colombo such as guest houses and Airbnbs, undermines the effectiveness of this policy.  

Furthermore, hotels do not solely rely on revenue from room occupancy; rather, the occupancy of rooms paves the way for alternative sources of income such as from food and beverages, along with the provision of other hotel-related services. For example, a leading hotel in Colombo earned 77% of their revenue from food and beverages in contrast to the 19% earned from accommodation services in 2022. Therefore, when the government intervenes in one component of a hotel’s business model, it disrupts the interconnected methods of revenue generation.  

Further, the foundation for these minimum rates—star classifications—is itself flawed. This system primarily relies on quantitative factors, often overlooking qualitative aspects such as service quality and ambiance. The inability to quantify these vital attributes compromises the accuracy of the classification.

The tourism industry in Sri Lanka has historically played a crucial role in the country's economic development, providing employment opportunities, promoting cultural exchange, and contributing significantly to foreign exchange earnings. However, the recent decision to enforce minimum room rates could deter these potential visitors who are seeking affordable accommodation options, particularly given the publicity international vloggers have given Sri Lanka as a tourist destination. Further, this approach stifles innovation within the hospitality sector, and ultimately leads to reduced tourist arrivals and negatively impacts the entire value chain that relies on a thriving hospitality sector.

This policy undermines competition and oversteps in a serious way the role of government in a competitive market economy, the stated policy framework of the government. 

The Advocata Institute strongly urges Sri Lankan Authorities to reconsider this ill-advised proposal. 

By fostering an environment that embraces market competition, Sri Lanka can position itself as an attractive destination for travelers while allowing its hotels to thrive and cater to diverse consumer demands.

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.

Media coverage on 'Essential goods price hike'

Essential goods price hike: ‘Price formula is another way for Govt. to interfere with businesses’

Expressing their view regarding the prevailing situation over the price increases of multiple essential goods, the Advocata Institute stated that the public has to brace themselves for a ‘rocky’ next months due to necessary hard economic reforms.

Join the conversation with Hiru News, on behalf of the Advocata Institute, which is a Colombo-based independent public policy think tank, Research Analyst Sathya Karunarathne commented on the multiple price hikes imposed in the market within the past week as well as the possible long-term solution that could be interested.

Read the full article here.

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.   

Media coverage on මිල පාලනයෙන් පොඩි වෙන මිනිස්සු - Cyber Conference

Lifting price controls will help local milk producers

The shortage of essential products can be mitigated by creating a competitive business environment without price controls for imported and local products, according to an economic expert.

Chief Operations Officer of Advocata Institute Dhananath Fernando said by doing so, the consumer will be provided with an opportunity to select whatever goods that are suitable for them.

Participating in a discussion at the Government Information Department, he cited imported milk powder as an example and pointed out that freight charges have been increased by five or six-folds, adding that it was a world issue and not something exclusive for Sri Lanka.

Read the full article here

ITN News Coverage

Rupavahini News Coverage

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.

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.

Murtaza Jafferjee on Face the Nation: Overcoming Sri Lanka's economic woes

Murtaza Jafferjee Chair of Advocata Institute was featured on the News1st Face the Nation: Overcoming Sri Lanka's economic woes that was aired on the 14th of April 2021.

'It is a pity that we have been playing politics with fuel prices. The first time I recollect a fuel pricing formula was put into operation was back in the early 2000s. In 2005 this program was suspended by the new government. It's by far the single largest component of our import bill. So it's vital that we price it correctly. This price increase was long overdue. Even now we are running at a loss.' - Murtaza Jafferjee

Click here to watch the full video:

Advocata mentioned in article on Price Controls during COVID-19

Excerpt from an article on Roar

Price Controls: Who Will Pay For The Canned Fish And Dhal?

“But as Gunasiri attends to his next customer, a thought weighs heavy on his mind— he has just made a loss of Rs. 60 on that sale. And by the time he exhausts his stock of dhal alone, he would have made a loss of a few thousand rupees. A princely sum, considering the circumstances."

“It is commendable that the government has taken steps towards easing the burden on the poor, especially during a time like this. But, controlled prices can also lead to shortages, as producers lose incentive and ability to stock these products. In addition, when imposed with no prior warning, price controls force smaller businesses to take losses, which can sometimes be inequitable. Despite the good intentions behind this decision, it has the potential to make the situation worse,” Aneetha Warusawitarana, Research Manager, Advocata Institute told Roar Media. 

Read full article here.

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.

Media coverage on report launch: Price Controls in Sri Lanka

The Advocata Institute recently released their latest report, “Price Controls in Sri Lanka: Political Theatre”, which finds that consumer price controls lead to unintended outcomes including lower quality.

Advocata advocates abolishing price controls

"Politically-motivated price controls offer very little value to reduce costs and are detrimental to trade, industry and consumers asserts The Advocata Institute, launching its new report ‘Price Controls in Sri Lanka: Political Theater’ in Colombo on Tuesday." 

Read the full article

Price controls on foodstuffs —a political gimmick?

"The price controls slapped on a number of foodstuffs are of limited value despite their popular rhetoric, given the low adherence of traders towards the administered prices and lax enforcement actions by authorities, a recent survey conducted in Colombo and a few of the suburbs, revealed. " 

Read the full article

Do price controls reduce the cost of living?

“Last year, the Government imposed price controls on sixteen essential items, including dhal, sugar, potatoes, and imported onions. Has this reduced prices for consumers? Unfortunately not. A recent survey by Advocata found that the controlled prices are not being followed in most instances.”

Read the full article

Price control - a political stunt

‘A report on competition by the Advocata Institute says that fostering competition and improving productivity are the best forms of price control. The report titled ‘Price Control in Sri Lanka: political theatre’ notes that price controls are of limited value in reducing prices of consumer goods. Such measures rather than benefiting consumers lead only to welfare losses, deterioration in product quality, reduction in investment and in the long term, higher prices.’

Read the full article

Price control through taxation, self-defeating

‘The government’s price control practice  through taxation on essential items does not serve the purpose because it limits the value in reducing cost and damage markets by preventing the supply of products from rising to meet demand, a top market research company said.’

Read the full article

Panel Discussion on Price Controls - Why should they be abolished?

Ravi Ratnasabapathy, Resident Fellow Advocata Institute; Travis Gomes, Product Head Frontier Research and Dilini Jayasuriya, Managing Director Breakthrough Business Intelligence, discuss Advocata's latest report “Price Controls in Sri Lanka: Political Theatre”, that finds that consumer price controls lead to unintended outcomes including lower quality.

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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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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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Ravi Ratnasabapathy on Price Controls in Sri Lanka

Advocata Resident Fellow Ravi Ratnasabapathy joined Bizfirst to speak about Advocata’s latest report launch on Price Controls and it’s ill-effects on Sri Lankan consumers and producers.

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.