Concerns over a costly conundrum

Published : 9:52 am  August 17, 2017 | No comments so far |  |  (446) reads | 
  • At present we use the CCPI for which the base year is 2013=100, whereas earlier we used CCPI for which the base year was 2006/7 = 100,”
  • An average household representing the entire country spends 44% of the total expenditure on food
  • In November, the Government tax changes were reintroduced. Food prices were also on the rise partly due to a drought.

 

By Thashani Gunasekera Haadiyah Marikar

As the half-year mark passes us the public continues to be dissatisfied with the rise in the prices of utilities, products and taxes etc. The Daily Mirror not only spoke to various sections of the public to obtain their opinions on the rising cost of living, but also to academics. We learned that both the professionals and the public foresee a continuous rise in costs and hope that a better solution will be offered regarding this issue. 

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“The Colombo Consumer Price Index (CCPI) and the new National Consumer Price Index (NCPI) are the two main price indices used to measure cost of living in Sri Lanka. At present we use the CCPI for which the base year is 2013=100, whereas earlier we used CCPI for which the base year was 2006/7 = 100,”explained Fernando.  


He further stated that according to the CCPI Sri Lanka’s annual average inflation rate has increased in the past couple of years. “According to the new CCPI our rate of inflation in 2015 on annual average was 2.2%, and it increased to 4% in 2016. In 2017 we expect it to increase up to 6% which shows us that during the past 3 years our cost of living has increased from 2% to 6%,” he added.


He continued to speak about the NCPI and other factors that affect the inflation rates.“The Census and Statistics Department introduced a new price index which is called NCPI where the base year is also 2013=100. An average household representing the entire country spends 44% of the total expenditure on food. Through this index the rate of inflation for the year 2015 is 3.8% and in 2016 it increased up to 4%. Furthermore we expect that this year’s average annual inflation rate will be nearly 6%. That means that according to the new index the cost of living gradually increases from 4% to 6%. The NCPI and CCPI statistics on inflation marked an increase in May and June 2016 due to the impact of the increase in food prices. This increase was caused by adverse weather conditions and the increase in non-food prices resulting from the changes in government taxes. In July and August 2016, year on year inflation moved on an overall decelerated trend supported by some improvements in the supply conditions of food items. In November, the Government tax changes were reintroduced. Food prices were also on the rise partly due to a drought. This trend may continue further in some areas of the country,” said Fernando.  

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Speaking about the impact of the increase in inflation, Fernando said, “The increase in the inflation rate can affect many sectors in the economy, the first one being decreasing the real income of the people. This amounts to a fall in the purchasing power of the consumers. The second one is that it affects interest rates, which is why our interest rates from 2016 up to now are increasing gradually. The Central Bank increases its policy rates, which include Standing Deposit Facility Rates (SDFR) and Standing Lending Facility Rates (SLFR). SDFR increased from 6% to 7.25% and SLFR increased from 7.5% to 8.75%, which means that our interest rates are also increasing because of our high inflation. When the interest increases it’s good for the depositors or savers, but it badly affects the borrowers. The borrowers borrow a very limited quantity which can affect the economic growth badly. That is why since 2015 up to now the average rate of economic growth is only 4% to 5% whereas earlier, in 2010, 2011 and 2012 the growth rate was above 8%. Thirdly, it affects the Government Budget. The Government Budget deficit in 2016 was 5.4%, but this year it has increased much more than that due to inflation. In addition to that the increase in the rate of inflation affects our foreign sector. As a result of inflation our cost of production is high. Therefore our export prices also increase which results in a drop in export competitiveness. As a result our exports reduce and our exchange rate will also depreciate. From the perspective of workers, the high inflation adversely affects the real wages-which is the purchasing power of goods and services,” he explained.  

 

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Fernando went on to say, “When the budget deficit increases, they have to finance it by either increasing taxes or obtaining loans. Therefore they will have to increase taxes at the next budget to finance the high budget deficit. That is why the IMF is requesting the CBSL to tighten the monetary policy further. Since 2015 up to now the Central Bank implemented a tight monetary policy. A tight monetary policy means the increase in policy rates and statutory reserve ratio, thus the Central Bank has been advised to continue the tight monetary policy further. But according to the Central Bank’s new monetary policy framework it is going to maintain price stability. The Central Bank has introduced a new concept which is inflationary targeting. By putting this concept in to practice the bank will try to maintain the inflation rates around 4% to 6% for 2017. The bank will utilize this concept because the stable and predictable levels of inflation is conducive for forthcoming sustainable long term growth in a country. Therefore the Central Bank is highly focused on maintaining low levels of inflation around 4% to 6%. That is why we can expect that the average rate of inflation for this year to be 6% due to the cost push factors rather than the demand pull factors,”said Fernando. 

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Speaking on the effects of the rise in cost of living on the society, Professor Amarasekera said,“Due to the high cost of living many social problems have cropped up among the people. Contrary to popular thinking, finding and obtaining food and drinks for oneself isn’t the biggest and only worry that arises among people when prices rise. People tend to face other problems such as losing out on opportunities because they lack the ability to follow through due to high costs. Although they want to display their abilities they lose the incentive to do so. Furthermore they aren’t in a position where they have access to information on good opportunities. As a result their place in society is stagnant and this causes frustration. Because of their inability to spend on their wants along with catering to their needs, anger and jealousy along with the built up frustration make it difficult for them to work along with others even during the smallest of activities,”Prof. Amarasekera observed. 


He further said, “When we consider the situation in our country we see that the Government is making a huge effort to reduce this rising cost of living. This effort includes reducing the prices of essential items and medicines. However, the people haven’t felt this reduction in prices. Even if the Government has taken these steps, because of the long standing economic ambitions, it’s difficult to reduce the rising cost of living if you don’t implement massive long-term programmes. The rising cost of living affects things like education causing people to drop out of schools and join protest groups. We have seen this happen during the past few days. In addition to this a large number of people have left the country causing a large deprivation in the culture of our society,”he said. 

 


 

 

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