Government Fails to Tame Inflation

CEYLON TODAY | Published: 2:00 AM Dec 2 2021

The main pivot to uplift a country’s real growth that spawns employment and doesn’t overburden its debt profile is investor confidence.

If that confidence is lacking, a low interest rate regime in place by chance or by design is not going to uplift real growth.

Last month, inflation hit a 154 month high of 9.9 per cent (Yesterday’s ‘Ceylon Today’ (CT)). Central Bank of Sri Lanka (CBSL), whilst acknowledging and further forecasting such inflationary developments, attributed those to supply side effects (Friday’s CT).

CBSL however refused to tame inflation on the basis that it is due to supply side and not demand side effects. One of the key tools that CBSL has to check inflation is raising rates, thereby drawing in money supply in the economy to financial institutions such as banks due to the cascading effects of a CBSL rate hike.

A reduction in money circulation in the economy also reduces demand, which in turn leads to a contraction in prices, hence mitigating inflationary pressure.

The importance of taming inflation is that it preserves the value of money. This is particularly important to pensioners and savers who have no other source of income, where, pensioners in this instance, defined as retired private sector employees who generally don’t have a regular monthly pension unlike retired public sector employees, where, public sector pensions are generally upped, almost in tandem with salary hikes given to public servants, which take place fairly regularly.

Supply side inflationary effects may be due to both external and domestic reasons. With food being one of the major catalysts of inflation in a country like Sri Lanka, coupled with the fact that the country  runs perennial trade deficits, external inflationary effects caused by rising international prices of essential items  are made worse, if the rupee is weak, a general fact, considering Sri Lanka’s perennial trade deficits.

Domestic led supply side inflationary effects may be caused when agriculture harvests are impacted by droughts and such like leading to shortages, as an example.

The issue of external supply side inflation may be met by finding external sources of supply in the context that competition drives down prices, provided those external sources of supply are not cartelised and also if such sources are available. The same such treatment rings true when it comes to treating domestically driven supply side inflationary effects by resorting to imports to meet such shortfalls.

On the assumption that CBSL’s view, that current inflationary pressure is due to supply side disruptions and not due to demand side uplift, vis-à-vis inflation, CT yesterday, in  the above  article published under the heading ‘Inflation at 154 month high of 9.9%,’ to quote excerpts said,’ ‘among the main drivers of food inflation last month were rice, vegetables, coconut, chicken, egg, green chillies, big onion and sugar and the main drivers of non-food inflation were high LP gas prices.’

Food inflation has to be looked at in the context that last month’s food inflation soared to a 157 month high of 17.5 per cent.

Such high food inflationary levels are not tolerable. The only recourse is imports. As reported in yesterday’s CT, the Government, to mitigate ‘rice inflationary pressure,’ plans to import 20, 000 metric tons from Myanmar.

But rice, though a key product in the food inflationary measurement basket as well as being Sri Lanka’s staple food is just one among several food items as shown above, which also need to be imported to alleviate high prices.

But the crux of the matter is that the country is starved of US dollars to make such key imports to alleviate inflationary pressure, impacting in particular retired private sector employees living off their savings, made worse by stagnant, or even worse, falling deposit/savings rates.

In short, the Sri Lankan inflationary scenario, according to CBSL is supply led, but with no efforts by the State, other than planning to import rice from Myanmar to mitigate this situation, whilst not taking remedial measures to counter other food shortfalls in the market.

However, such nonchalance has an adverse effect on both the poor and those who live off their savings. A Government is elected to see towards the welfare of its people. If that’s not taking place, that signifies that the State has failed to fulfil its mandate to its people.

CEYLON TODAY | Published: 2:00 AM Dec 2 2021

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