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.   

Sri Lankan Economic Crisis: Experts vs Central Bank

Covered by The Week.

There is an argument to be made for a direct link between the decline in the island country’s foreign exchange reserves and the empty aisles in shops—the ban on the import of chemical fertilisers. It was reportedly part of Sri Lanka’s effort to be more judicious with its forex reserves. Going forward, the ban is expected to cause serious problems for Sri Lanka’s tea industry. Plantation owners fear their crop could fail as early as October, without chemical fertilisers. This would have a severe economic impact on the three million labourers who pick leaves. In fact, central Sri Lanka—Kandy and the hilly country—rely completely on income from tea and rubber.

While the shortage of food and other essentials is more easily noticeable, experts said there are other signs of trouble, too. The central bank had recently put restrictions on banks, preventing them from declaring profits until accounts had been audited. Economists assert that this is indicative of a looming banking crisis.

K.D.D.B. Vimanga, policy analyst at the Advocata Institute, a think-tank based in Colombo, said: “If reforms are brought in immediately at the macroeconomic level, the crisis will not worsen. It is high time we reform or perish.” He told THE WEEK that the economic crisis was caused by two factors—persistent fiscal deficit and external current account deficit.

Sri Lanka’s new finance minister, Basil Rajapaksa, had, on September 8, addressed the “severe foreign exchange crisis”. He informed parliament: “The data from the central bank shows the country’s net foreign exchange reserves are close to zero.” He added that the government’s revenue had fallen “between 1,500 and 1,600 billion rupees” from the estimate, because of Covid-19. “We are facing a severe external crisis as well as a domestic crisis with revenues falling and expenses continuing to rise,” he said.

Read more…

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.

Media coverage on The Role of Trade in Economic Recovery in Sri Lanka

GSP Plus vital for SL to fight competition – EU Ambassador

After 2010 Sri Lanka’s exports to the European Union (EU) have increased by 60% but half of it is through the Generalised Scheme of Preferences (GSP) plus, stated EU Ambassador to Sri Lanka Denis Chaibi, speaking at a virtual conference organised by Colombo-based think-tank Advocata Institute.

Vietnam increased by 400% and Bangladesh by 150% during the period from 2010 to 2019, thus to stay ahead of competition, GSP plus is significant for Sri Lanka, stated Chaibi. Ambassador further noted that retaining GSP Plus would give a positive image for Sri Lanka that it is committed to human rights obligations. “The EU market is competitive as it is a superpower in terms of product quality standards.

For a Sri Lankan exporter to export to the EU would give the exporter recognition in any other market as the EU only accepts products with certain standards. Sri Lanka is already in a forex crisis. Increasing exports is a way out of the current crises. COVID-19 has created a resilient supply chain but without preferential access it is difficult for Sri Lanka to increase its exports to EU markets.

Read the full article here

SL’s economic recovery led by trade

The Covid-19 pandemic has revealed the real weaknesses Sri Lanka had in terms of its economy for the past four decades.

With the foreign exchange shortage worsening day by day, many fear that the country will go back to the pre-1977 era of ration cards to purchase essential food items, as the importation of such goods will be impossible in the near months.

Sri Lanka needs economic reforms that will decide the fate of the country in the next few decades to come, and many experts say that reforms should start with the country’s protectionism trade that has not really evolved over the years.

Productivity for growth

Speaking at a webinar organised by the Advocata institute, its Chair – Academic Programme Dr. Sarath Rajapathirana said that Sri Lanka has failed to make any substantial reform for the economy, particularly on trade-side reforms, for the last 20 years.

He said trade is very important as it exposes the country to competition and among other areas such as the fiscal side, the budget, and having a proper monetary policy that avoids inflation and contributes to a more stable exchange rate, trade too needs a lot of work.

“Our imports are three times the value of exports, so we have been continuing a trade deficit, which is also accompanied by a current account deficit. These have to be addressed when talking about trade reform; we have to have the macroeconomic support for it,” he said.

He said more than the aggregates of imports and exports, the encouragement to productivity from having open trade or non-restricted trade is more important.

“If you don’t have strong growth in productivity, we have to keep on increasing the factors of production. It is difficult because we need to have more savings and less consumption. So the best way to get it done is to really have a system in which our reforms are going to immediately affect the positive side of our productivity growth,” he noted.

Read the full article here

Increased int’l trade participation key to achieving economic recovery, says top economist

As the national economy continues to face new challenges from multiple angles and their implications are being very much felt by businesses and masses, Dr. Rajapatirana called for the government to start by having in place a more streamlined tariff structure.

“First get rid of para tariffs fast. And then look to introduce a single uniform tariff,” asserted Dr. Rajapatirana while addressing a webinar hosted by the Advocata Institute, this week.

For Sri Lanka to embark on any efforts that would assist in the recovery of the national economy, Dr. Rajapatirana stressed it is essential for the relevant authorities to acknowledge the importance of international trade when charting the path for progress. 

He pointed out that Sri Lanka needs to get away from its protectionist mindset and the way to get about it is to first look at lowering the existing tariff.

“The existing para tariff hurts our competitiveness. This is one of the fundamental things we need to do,” said Dr. Rajapatirana.

He added that the government must also explore the option of introducing a uniform tariff of about 15 percent, which can be reduced over a period of time.

Dr. Rajapatirana opined that by bringing about the suggested changes, Sri Lanka would be signalling to the world that it is serious in wanting to achieve economic progress. 

Dr. Rajapatirana also pointed out that the country has not made any substantial economic reforms, especially on the trade side, in the last 20 years or so.

As the country continues to grapple with the COVID-19 pandemic along with the rest of the world, Dr. Rajapatirana warned that neglecting the economy would only further delay the recovery process. 

“We cannot think of economic recovery without really starting trade reforms. We are in a good driving seat to undertake the reforms since the government has two-thirds majority. 

We need to have the macrocosmic reforms that come from the monetary policy and the fiscal policy. Without that you don’t have the sort of dynamic stability that is needed to put in place a good reform programme,” he said.

Read the full article

Sri Lanka international trade role in Advocata forum as monetary instability drive import controls

Colombo-based think tank Advocata Institute said it is hosting an online forum on ‘The Role of International Trade in Economic Recovery in Sri Lanka’, as the island is mired in the worst import controls since the 1970s after printing money.

Trade controls started during as money was printed to target an ‘output gap’ involving curbs on gold trading and vehicles and other items, escalated into full-scale import substitution, import bans and tightened from 2020.

Sri Lanka’s post-independent economic history is littered with administrations that tried to operate various economic plans without reforming a soft-pegged central bank with activist monetary policy.

Read the full article

NEWS RELEASE: A Deep Dive on Trade “ The Role of International Trade in Economic Recovery in Sri Lanka”

NEWS RELEASE

Originally appeared in the Economy Next, Ada derana Business

The Advocata Institute event on “ The Role of International Trade in Economic Recovery in Sri Lanka”

COLOMBO, Sri Lanka—  The Advocata Institute launches its second episode of the public policy discussion series ‘DeepDive’, which will be on the Topic “The Role of Trade in the Economic Recovery of Sri Lanka”.  

The  discussion  kickstarted with a primer on trade on the topic International Trade: From Theory to Policy: Sri Lanka in Perspective, presented by  Dr. Sarath Rajapatirana,  Chair, Academic Programme of the Advocata Institute. This Primer has already been released in the lead up to the discussion and is available for viewing on the Advocata Institute Youtube page. 

The Deep Dive Discussion will feature an eminent panel consisting of Professor Prema - Chandra Athukorala (Emeritus Professor of Economics, Arndt-Corden Department of Economics, ANU), Dr. Sarath Rajapatirana ( Chair, Academic Program of the Advocata Institute), HE Denis Chaibi ( Ambassador, Delegation of the European Union to Sri Lanka and the Maldives), and Dr. Dayaratna Silva ( International Trade Economist, Former Sri Lankan Ambassador to the World Trade Organization) . The Panel would be Moderated by Aneetha Warusavitarana (Research Manager, Advocata Institute) and would be LIVE-streamed on the 30th of August from  4.00 PM onwards.  

The Advocata Institute remains committed to finding policy solutions to key challenges holding back Sri Lanka’s road to development. The lack of a competitive trading regime that can compete internationally,  remains a key structural issue impeding Sri Lanka’s Economy. With the emergence of the COVID-19 pandemic, Sri Lanka’s economic position has become precarious. Exploring opportunities in global trade can be a key strategy to drive the Sri Lankan economy out of the present peril it faces and towards consistent high economic growth and prosperity.   The second episode of Advocata DeepDive would discuss policies and strategies that would enable Sri Lanka to expand and promote trade competitively. The discussion will further explore  how our regional neighbours have used trade as a tool for economic growth. 

The Advocata Institute cordially invites members of the public to tune into the LIVE streamed event on ZOOM and Advocata Institute Facebook Page. Questions will be taken online via ZOOM and Facebook. To get a comprehensive understanding of the benefits of trade debt and how it can affect Sri Lanka’s economy and the livelihoods of all citizens you can watch the Primer on trade titled “ International Trade: From Theory to Policy: Sri Lanka in Perspective ” available on https://youtu.be/NYG_RQxrSqQ

Advocata is an independent policy think tank based in Colombo, Sri Lanka. We conduct research, provide commentary and hold events to promote sound policy ideas compatible with a free society in Sri Lanka. Visit advocata.org for more information.    

IMF or no IMF, Sri Lanka needs Economic Analysis and Plan going forward: Advocata Advisor Dr. Nishan De Mel

Covered by The Island

Whatever Sri Lanka decides about dealing with its debt and paying its way through the world, the country needs to formulate a very good economic analysis and a publicly-backed plan that will establish the credibility of the world in its economy going forward, Dr. Nishan De Mel, Advocata Institute Advisor and Executive Director of Verité Research said recently.

He made this remark at a virtual forum called the Advokatha (Advoකතා) a weekly series conducted by the Advocata Institute on ‘How to Resolve Sri Lanka’s Debt Crisis Without Seeking Assistance from the International Monetary Fund (IMF)’.

The full discussion can be found on Advocata Plus YouTube Channel.

Further speaking he said:

“Such an analysis needs to be thorough and well-structured with the focus on the real economic activity and the financial conditions in the economy. That would be the first step to build credibility of the world about the Sri Lankan economy. It is actually credibility that we lack rather than foreign reserves. If we can build that credibility about us in the countries that we deal with, we may not need assistance from the IMF to resolve our liquidity issue. When such a favourable environment is created and other countries repose their trust in Sri Lanka’s economy, its sovereign credit ratings would see an upgrade and Sri Lanka would be able to raise funds at the international capital market at reasonable interest rates, The skill we need for this is to present an analysis and a plan and then demonstrate our commitment to stick to it. Our concern is whether the government has such a plan and if it does have one, why it is not publicized”.

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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.

K D Vimanga on Newsline in conversation with Sharlan Benedict 22/06/2021

K D Vimanga, Policy Analyst at Advocata Insitute on News1st NEWSLINE program 22/06/2021. She addresses the policy stability the need of the hour on Newsline with Sharlan Benedict.

"The most important thing we need to realize about public policy is that it deals with peoples issues and the issues that impact their livelihood. And then we analyze those issues. As a policy-maker or policy analyst what we do is try and propose solutions that are equitable, in line with the development and with other factors. The problem in Sri Lanka is that we haven't prioritized this process."

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Dr. Roshan Perera on Newsline in conversation with Sharlan Benedict 18/06/2021

Dr. Roshan Perera, Senior Visiting Fellow at Advocata Insitute on News1st NEWSLINE program 18/06/2021. She addresses the policy stability the need of the hour on Newsline with Sharlan Benedict.

"The fundamental problem that Sri Lanka is facing, which it has been for decades, is our twin deficit problem. We have both a fiscal and external deficit. Basically, we have been living beyond our means and consuming more than we produce. We must address this problem."

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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

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Aneetha Warusavitarana on Newsline in conversation with Sharlan Benedict 14/06/2021

Aneetha Warusavitarana (Research Manager at the Advocata Institute) speaks about the fuel pricing mechanisms & economy. SHe addresses this on Newsline with Sharlan Benedict. June 14, 2021.

'Ideally the solution that would work best here is a fuel pricing formula. A crucial factor is that this formula is transparent. The way in which it is calculated should be made available to the public, it should be vetted by the relevant authorities and we should be able to understand how this formula works and how it is linked to international changes in fuel prices.'

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Media coverage on Advocata Colombo Port City Debate! Live Fireside Commentary

Sri Lanka Port City still at risk of incompetent regulators: Samarajiva

Economy Next: Sri Lanka’s China-backed Colombo Port City, which has attempted to cut through a regulatory morass that is holding back the rest of the country via a fast-track ‘single window’ law is still at risk of delays from incompetent regulators, a top policy specialist has warned.

Rohan Samarajiva, the founder of LIRNEasia, a regional policy research body and former regulator of Sri Lanka’s telecom sector who carried out an extensive de-regulation, says the state ends up regulatory activities of citizens in multiple ways.

“We talk about regulators as some special breed but quite a lot of what the government does is regulations,” Samarajiva said at a seminar organized by Advocata Institute, a Colombo based think tank.

“The difference is that there are entities that do formal explicit regulations, rule-bound; and there are those that can say yes or no therefore regulate but don’t necessarily do in that in a formalized manner.”

Limiting Discretion

Regulations become unclear to investors and the general public and also lead to corruption where there is room or discretion for officials to vary decisions. Delaying decisions also make it difficult to get anything done at all.

“I believe it important to make regulations more efficient and the whole essence of regulations is something called discretion – that is the ability to say yes or no,” Samarajiva said.

“To bound that and to limit that. Of course, you have to say yes or no but to bind it.”

The Port City bill was passed to cut regulatory barriers through a ‘single window’ for investment approvals as the government was called upon to start a state regulator for beauty pageants by people who believe the coercive state with a broken public sector is better at it.

“Why is this concept important? To do any one thing you can ask how many steps you must go through and places you have to go through and any of those places can slow you down due to incompetence,” explained Samarajiva.

“When you talk about the basic concept of greater Colombo Economic Commission law from 1978, the BOI and all the work that was done in the last few years on improvising Sri Lanka’s position in the ease of doing business index; all these hinge on a central concept that is the ‘single window’.

“The whole point of all these activities – I’m not saying it is unique to the Port City bill – but the whole point of all these is the single window concept of simplifying things for the investor.”

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Five areas for consideration in Colombo Port City Economic Commission Bill debate

Originally appeared in the Daily FT, Ada Derana Biz, Sunday Observer

Advocata Institute submitted a letter to all members of Parliament on Monday 3 May, on the proposed Colombo Port City Economic Commission Bill. The letter was addressed to all MPs, highlighting the potential opportunity the Port City project presents and observations on how to maximise the economic opportunities. 

The full letter can be read on www.advocata.org. The recommendations and observations are summarised below. 

1. The case for Special Economic Zones in Sri Lanka

• Special Economic Zones (SEZs) have been a tool employed around the world by bringing in positive value addition to an economy. More broadly, SEZs are places that have all the facilities that firms need to thrive. SEZs can play an important role in creating the right conditions for industrial success. This might include suitable land plots, hard infrastructure, and site-specific policies or clearances. Moreover, firms in SEZs can benefit from each other’s proximity – they can be each other’s suppliers and customers – thereby making a strong case for Sri Lanka to utilise SEZs to achieve economic growth.

• If implemented with the right policies and a globally accepted regulatory framework, the Colombo Port City has the potential to emulate some of the successful financial centres in the region and become a driver of growth that Sri Lanka needs.

• However, the success of an SEZ can only be determined by evaluating the linkages generated within the local economy. In order to become successful, Port City should facilitate positive spillovers in technology and know-how that enable the local economy to enhance productivity.

• In order to become truly effective, given the thicket of red tape in Sri Lanka, SEZs require a certain degree of discretionary powers. The provision of such powers allows SEZs to operate independently and achieve productive targets without having to deal with tedious and time-consuming processes that hobble businesses in the rest of the country. This is why SEZs can effectively accelerate economic growth while also being an incentive for Foreign Direct Investments.

2. The issues with tax concessions 

• Taxes are the most important source of revenue for the Government. However, in 2020, tax revenue fell to 8.1% of GDP, exacerbating an already precarious fiscal situation. With a history of fiscal deficits, the compounding effects of debt financing has snowballed into serious concerns regarding debt sustainability.

• The tax concessions as provided for in the Bill can create distortions within the economy while seriously impairing fiscal sustainability. Businesses located within the Port City will benefit from the agglomeration effects of being in the Port City and having access to world-class infrastructure. Therefore an investment in the Port City should yield a much higher return, thus not requiring further fiscal incentives. Research also suggests that the effectiveness of tax incentives in attracting foreign investment is low. Having only a marginal impact in attracting FDI compared to other factors.

• While recognising the need to be competitive vis-à-vis other zones, the provisions to provide tax relief over and above the tax concessions already provided for under the Inland Revenue Act No. 24 of 2017 will further compromise the progressivity of the tax system and affect competitive neutrality.

• There are, however, instances when fiscal incentives (tax credits, grants, etc.) may be warranted, for example, where private returns are below the cost of capital but social returns (positive externalities) can be generated. However, the existing Inland Revenue Act provides for such incentives – we recommend that the power to grant fiscal incentives be retained within the Ministry of Finance.

3. Considerations on financial regulation 

• Developing a fully-fledged OFC (Offshore Financial Centre) requires the relaxation of capital controls to permit free movement of capital, improving the ability to compete globally. However, given Sri Lanka’s current status of debt sustainability, sovereign rating downgrade, and foreign exchange crisis, it may not be the most appropriate time to set up an OFC. Stringent foreign exchange controls in place as of now may not allow the relaxation of capital controls.

• The success of a financial centre depends on the confidence and trust that it evokes in investors and customers. The key to building this trust and confidence is dependent on two factors. First, the governance structure in place, i.e., the laws, rules and regulations governing financial products and services. Second, the way in which the regulatory authority/ies apply and enforce the regulations. Further, these regulations must conform to international best practices set out by institutions such as the Basel Committee on Banking Supervision (BCBS) and Financial Action Taskforce (FATF) recommendations on anti-money laundering and combatting the financing of terrorism and proliferation (AML/CFT), to ensure global acceptance. Any attempts to circumvent these standards could have adverse impacts on financial institutions operating in the rest of the country as well.

• There is, however, a case for moving from a rules-based financial regulation, as is currently in place, to a more principle-based financial regulation. Such a move encourages financial innovation and facilitates the expansion of financial services in a dynamic global environment. There is also a case for unified regulation of financial services (a single omnibus legislation which has been adopted by other financial centres). The Bill only refers to regulation of banks and capital market institutions. It is silent on whether insurance companies would be allowed to operate within this jurisdiction and who would regulate that sector. It is of vital importance that this issue be addressed if the Port City is to be operated as an OFC.

• According to the draft Bill, licensing (Section 42(4)) and regulating (Section 45) for offshore banking businesses is done by the Commission with the concurrence of the Monetary Board under the Banking Act No.30 of 1988. However, as per the Bill, the examination of such entities would be undertaken by a “competent authority” appointed by the Port City Commission (Section 49), and the Monetary Board may only call for information and reports from these entities through the Commission (Section 51). But the Bill is silent on the expertise and experience of those who would be appointed by the Commission to undertake the examination of these entities. Our recommendation is that until a separate financial regulatory framework for the OFC is set up in the Port City, and until persons with the necessary capabilities are recruited, the existing regulators must undertake both the regulation and supervision of financial institutions set up within the Port City.

Advocata also call upon members of Parliament to make an addition to clause 5, as subsection (k) reading “Uphold laws and regulations on anti-money laundering and terrorism financing” in light of the above mentioned AML/CFT issues.

4. The need for flexible labour regulations 

• The Colombo Port City expects to operate as a service-oriented SEZ that propels Sri Lanka to be a major trading and services hub within the Indian Ocean. It hopes to attract top-notch IT, financial service firms and types of businesses and economic activity that will be highly innovative. In order for such firms to thrive and grow, a labour environment that accommodates failure, mistakes and high rates of experimentation is crucial.

• This requires a flexible labour market with low redundancy and restructuring costs that promotes swift adaptability to market changes. Prioritising labour solutions over capital will result in job creation that will ultimately benefit the country. However, the labour regulations in operation in Sri Lanka does not facilitate the same.

• Unemployment is a social problem, the burden of which must not be borne by the employers alone. Hence, we recommend the establishment of an Unemployment Insurance Scheme similar to EPF and ETF funds to compliment flexible labour regulations.

5. Recommendations on Parliamentary oversight and accountability

• At present, the Bill states that the Commission should submit to the President or Minister in Charge an annual report setting out the status of operations, income and expenditure of the Commission. Alongside this, it also provides for the audit of accounts of the Commission. However, as the main parliamentary oversight mechanisms in place to examine the activities of the government bodies responsible for public accounts and public enterprises are the COPA and the COPE, we recommend that the Port City Commission be made accountable to these committees.

• In relation to the composition of the Commission, it is our recommendation that the Secretary to the Treasury be appointed as an ex-officio to the Commission since this would allow for fiscal accountability.

• Parliament should also consider the provision of including a mechanism for staggered appointments to the committee would ensure institutional stability, preserve institutional memory and political representation. In line with the international governance standards, Parliament should also consider having a minimum quota for women’s representation in the Commission.

The Advocata Institute recommends the consideration of the reforms outlined above to achieve maximum economic outcomes.