Sri Lanka ecomomy

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.

Milk Powder Taxes.PNG

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.

Full Videos : Breakfast meeting on Economic Freedom

The State of Economic Freedom in Sri Lanka by Fred McMahon

Anushka Wijesinha on Economic Freedom in Sri Lanka

Eran Wickramaratne on Economic Freedom and Policy in Sri Lanka

Panel Discussion - Is Sri Lanka ready to embrace Economic Freedom?

EFS Kick Off : Has the Open Economy Worked in Sri Lanka?

Advocata Economic Freedom Summit kicked off with a panel discussion on “Has the Open Economy worked in Sri Lanka?”  It was the historic year of 1977, that the voters used the power of the ballot to remove a government promoting  a restrictive state-controlled socialist oriented economy that stifled growth and opportunity.

Political change often is associated with economic change; since 1977, Sri Lanka has gradually opened up its economy- but to what extent has progress been made?

Forty years after the political change Advocata wanted to revisit the debate with representatives from both sides of the debate  as the front-runner to the Economic Freedom Summit and policy audit in partnership with Canada’s Fraser Institute and Atlas Network.

The discussion moderated by Ms. Anisha Guruge of Verite Research, had three panelists with varying views

Arguing against the opening up of the economy, Mr. Vinod Moonesinghe, a journalist and political researcher,  argued that Sri Lanka inherited a colonial economy from the British, dominated by a mercantilist class who were not interested in investment, a gap that needed to be filled by the state. He argued under the closed economy era of ‘72 the state invested in Plantations and other industries; coincidentally, there was a great deal of innovation associated with state investment in these sectors. By pointing to the the examples of the protectionist policies of East Asia before the countries in the region opened up its economies , especially South Korea and Taiwan, he argued that a closed economy was needed, at least in the short run to provide a platform for Sri Lanka to project itself when the country is ready to adopt a more free trade regime.

Mr Ajith Perakum Jayasinghe, a well-read political observer and blogger disagreed with the notion that Sri Lanka in fact opened up the economy in 1977.  He said that only partial reforms were done in ‘78.  Alluding to the anti-SAITM protests, Mr Jayasinhe argued  if Sri Lanka did really open up there wouldn’t be protests on the street calling for the denial of education freedoms of people.   Calling himself a ‘socialist’, Mr Jayasinghe said the best way forward is a liberalized but regulated economy.

On the other hand, Mr. Chanuka Wattegama, believed that the reforms in the post 1977 era has definitely worked although much remains to be done.  Establishing comparisons of pre-1977 era and since, he substantiated his stance by showing how freer trade translated into tangible benefits that ordinary citizens can relate to, like greater choice and increased incomes.

The point of conflict was the question of innovation- which economic system facilitates it better?

Whilst admitting that certain East Asian economies has some success under industrial policy and a degree of protectionism,   Mr Wattegama vehemently disagreed with the notion that closed economies spurs innovation.  “Then North Korea and Cuba would be the most innovative countries” he claimed. Mr Wattegama went on to cite the obvious disparity of quality between the inferior computer printers made in India under a closed market regime,compared to the far superior Epson printers available at the time. As mentioned in his opening and subsequent statements, Mr. Moonesinghe continued to oppose this notion.

The audience questions and the panel made up for a passionate discussion that addressed a key division in the economic policy debate in Sri Lanka.

The event was streamed online by YAMU TV and the video can be accessed through the following and now available on Advocata’s youtube channel.

Dhananath Fernando, the COO of Advocata said that the institution is committed to providing a platform to discuss contemporary issues in an accessible way.