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.

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.

Roar explains Advocata Research on Food Taxes

Roar.lk,  Sri Lanka's rich media platform featured Advocata's research on food taxes in one of it's ex plainer videos.   Advocata launched a project to track food taxes in September.