Wages could grow from January as economy starts humming amid benign inflation, says ICRA Lanka

Growth in wages is largely expected to keep pace in 2020 begining January, supported by the re-invigorated economy from expected high private sector credit and benign prices, opined ICRA Lanka. 

Sri Lanka’s wage growth fell for four consecutive months before rebounding in November 2019, but still remains below the inflation level. A similar trend has had continued during December. 

The growth in the wages, which does not succeed to keep pace with the rate of inflation in an economy, fails to maintain the purchasing power of the people and thus their standard of living. 

While Sri Lanka in the past decade saw some rapid increase in the nominal wages, the real wages or the wages accounted for price increases, have failed to grow in lockstep, making people impoverish. 

“Private credit demand is to continue amid modest activities in the real economy. In line with this, wage growth recovery is expected,” stated ICRA Lanka, a unit of Moody’s Investors Service, as part of their monthly economic update.

The observation by the rating firm also came after the country’s unemployment rate recorded a nine-year high of 5.1 percent in 3Q19. When a large number of people in an economy remain unemployed, wages do not get bid up, as businesses have many alternatives to find people to fill vacancies. Sri Lanka’s inflation has largely been benign and the latest reading for December 2019 was 4.8 percent, a slight uptick from the previous month due to higher food prices. 

Food prices broadly remain too high despite the hefty tax concessions granted to businesses and consumers since December 2019. 

Out of all, the slashing of Value-Added Tax (VAT) from a high of 15 percent to 8 percent and the abolishing of 2 percent Nation Building Tax (NBT) should have a significant downward pressure on prices. 

This could add a natural tailwind to the real wages as people tend to have higher disposable incomes resulting from lower taxes. 

However, the supply disruptions caused prices of food items to remain elevated through December. 

“The latter part of December saw food and vegetable prices bidding up triggered by supply shocks,” the rating agency observed. 

However, ICRA Lanka expects inflation to remain around mid-single digit level during 2020, largely in line with Central Bank’s desired level.