17 October 2022 12:03 am Views - 379
Inflation is the topic at the tip of every Sri Lankan’s tongue these days, given the skyrocketing prices of goods. Making matters worse prices seem to rise from day-to-day. Inflation is the phenomenon of prices increasing for all goods. Most central banks have a target of low and constant inflation, generally between 1.5 and 4% per year. However, since the end of 2021, global inflation has been rising, as seen in many of the world’s regions.
The stark reality of what we are living through today, can best be seen in the reality of price variations. World Data.info reveals for instance, an item that cost you and me Rs.100/- in 1960, cost us Rs.11,692.94 at the beginning of 2022!
Consumer inflation here accelerated to 70.2% in August, according to the department of Census and Statistics from a year earlier. Meanwhile Food prices climbed 84.6%, while prices of non-food items rose 57.1%!
Colombo based investment firm First Capital predicted inflation was likely to taper from September and probably likely to moderate and reach single digits in the second half of 2023.
Meanwhile, the Central Bank has predicted inflation rate would moderate after peaking at around 70% in August. It is likely therefore, the present financial crisis (brought on by an acute dollar shortage, caused by economic mismanagement and the impact of the COVID-19 pandemic and left our country unable to repay its debts and struggling to pay for essential imports including food, fuel, fertilizer and medicine) is not going to end by year’s end. The financial crisis is expected to extend into next year.
A silver lining in the otherwise dark clouds on our financial horizons, was the ability to reach a preliminary deal with the International Monetary Fund (IMF) for a debt restructuring facility of around US$2.9 billion, contingent on it receiving financing assurances from official creditors and negotiations with private creditors.
Lanka has however not been the only country worldwide to be hit by inflation. The European Union’s attempts to punish Russia for its invasion of Ukraine, which includes a ban on imports of oil and gas from Russia by EU nations, is now taking a growing toll on Europe’s economies.
Commenting on its inflationary effects, Alfred Kammer, Deputy Director of the IMF’s Middle East and Central Asia Department said gas flows from Russia to Europe had dropped by over 80%, compared to 2021. As a result, energy prices have spiked, and they are unlikely to return to their pre-war levels soon. He added these terms of trade shock had raised costs and led to a cost of living crisis, with growth set to drop and inflation remaining high.
Euromonitor International predicts inflation will reach a peak in the third quarter of 2022 and global inflation forecast to reach 8.7% in 2022.
In the UK, ‘The Guardian’ reports that inflation is soaring as people are hit by higher prices for daily essentials. In India, the annual rate of inflation rose to 10.7% in September 2022.
However, a major difference between inflation occurring in other countries and our own problems, has been that our crisis has been created more by populist measures adopted by different governments over the years.
At the time of independence (1948), our economy was one of the best in Asia. Populist policies including subsidized rice, cheap bread, free fertilizer, lower taxes led to fiscal deficits, increasing the government’s debt and printing of money, resulting in a slow, but steady rise in inflation.
Political parties promising government jobs during election time, resulted in many people getting state sector jobs – even when vacancies did not exist. For example the state sector workforce amounts to around 1.4 million people, meaning nearly one in six of the country’s total workforce is employed in the state sector.
As mentioned earlier, the government has approached the IMF for a debt restructuring facility. Saturday’s Daily Mirror reported the facility will be linked to ‘deep reforms’. If the ‘deep reforms’ include possible job losses in state-owned enterprises, taken together with present tax hikes, it may be the veritable straw which broke the camel’s back, could easily result in mass unrest.
Government, together with its international partners need to urgently come up with a plan to protect the worst-affected sections of society from falling into despair and resorting violence and breaking the law in an effort to keep body and soul together.
A failure to do so, could well result in consequences worse than the uprisings of 1971, 1989 and the ethnic war which raged for nearly three decades.