Inflation dipped further in August to 24.9 percent the Central Bank announced last week. In July the point-to-point change in the Colombo Consumers’ Price Index (CCPI) recorded 26.6 percent. In January 2008 the inflation rate was 20.8 percent and it peaked in May at 28.2 percent when world food prices and oil prices increased sharply. The Central Bank always maintained that these prices would ease after July, and as such a decrease in the inflation rate can be seen. An official of the Census and Statistics Department said that domestic food prices have remained static for the most part while vegetables and rice price increases had declined according to expected seasonal trends with the Yala season and the harvesting of other vegetable crops. The new index, introduced this year, is based on expenditure survey of the Greater Colombo area in 2002. The basket of goods that cost Rs.100 then, costs Rs. 206.3 in August 2008 (Rs. 206.4 in July, Rs. 205.9 in June, Rs.198.5 in May, 2008 and Rs. 183.5 in January 2008). In the new index, food items are given a weight of 46.71 percent, where as in the old index, food items consisted of 68.3 percent of total expenditure based on a survey in 1952 survey. The weights for the selected goods had been recommended by a technical committee appointed by the Treasury which prompted some analysts to call it a ‘cooked-up’ inflation index. While the Central Bank continued with its tight monetary policy to curb the expansion of domestic credit resulting in high interest rates, manufacturers are finding it extremely difficult to maintain their competitiveness as working capital costs are high. While both interest rates and inflation rates erode into margins, the exchange rate does not reflect the trade balance. The two rates have steadily increased over the past months, while the exchange rate has more or less stagnated. The export community has accused the Central Bank of controlling the rupee instead of allowing it to depreciate, like it should, according to the trade balance. Although the trade deficit keeps widening, the Central Bank maintains that other foreign currency inflows (FDIs, grants, worker remittances etc) threaten to appreciate the rupee and that the bank has so far recorded a net-buy of dollars to prevent the extreme appreciation of the rupee. The Central Bank last month began to use its own securities when it depleted it stock Treasury bills which is generally used to mop up excessive liquidity in the market. The bank had issued Rs. 8 billion in Central Bank Securities by mid August depending on the foreign exchange inflows will continue doing so. When foreign currency inflows increase, liquidity of the money market increases correspondingly. The Central Bank then auctions its Treasury bills to mop up the excessive liquidity of the market. But Sri Lanka is heavily dependent on imports, so while on the long run, a depreciated rupee could improve the country’s export sector, create employment and bring development, on the short run it may spike food prices even further and the poor could suffer immense hardships. According to Food and Agriculture Organisation (FAO) a record harvest is expected for grains this year, but the high prices will remain. Quoting the FAO, ADB Country Director Richard Vokes said that the production prospects for cereals was good after rice prices increased by almost 100 percent and wheat by 130 percent between the later stages of 2007 and May 2008. "The FAO predicts a bumper harvest and although cereals and other commodities have started to ease since April, the high prices will remain and we may not see the former price levels again," he said, addressing the session on Managing the Food Prices Crisis at the first South Asia Economic Summit. An estimated 40 percent of the world’s poor is homed South Asia and they are more vulnerable to increases in food prices. "Food constitutes 65 percent of the consumption basket of South Asian households and soaring food prices are pushing many of them into poverty and malnutrition. "An estimated half a million people are severely affected by the crisis. An ADB study shows that a 10 percent increase in food prices will push some 7 million into poverty in Pakistan," Vokes said. He called for the need for countries to invest in their agricultural sectors and formulate projects to increase production, develop technologies and manage climatic and disease related risks. The First South Asia Economic Summit issued a declaration at the end of the sessions and said that food price inflation is a major concern for the region. It said that countries should expand existing social assistance programmes that directly targeted the poor who most vulnerable to food price hikes. "These programmes could be expanded by increasing the amount of cash transfers and the number of people receiving low cost grains while still passing the price increase to other domestic consumers who can better afford it, and this is where targeting becomes crucial," the declaration said. The Summit resolved to monitor and pressurize the SAARC process in implementing strategies to improve regional cooperation, where technology transfers and resources can be shared to increase agrarian productivity, give lagging regions access to markets and where a seed bank could be established for the region, as against a food bank which was proposed in 1988 of which no country gained a grain of salt. |
