Will we have a Suba Aluth Avurudhak?

By the Economist

Everyone has been wishing each other Suba Aluth Avurudhak last week. We live in the hope that this wish would be realised. The word Suba denotes a holistic concept far broader than mere materialistic prosperity. It denotes a state of happiness far higher than material welfare: a state of happiness and contentment that material prosperity alone cannot possibly achieve. Yet as Amartya Sen the Nobel laureate in economics has pointed out in several of his writings, though the end of economic activity is not the attainment of high incomes, there is no doubt that material well being is an important contributor to happiness. This may be particularly true of the poor people of the world who have to cope with meagre incomes that are inadequate to provide for their basic needs. So, for about a third of the country’s population Suba Aluth Avurudhak cannot be separated from their material well-being.

It is not their nominal incomes that matter in meeting their basic needs and in enabling a decent livelihood, but their real incomes. What they can buy with their incomes is the important determinant of their living conditions. The current high wave of inflation is unfortunately eroding into their real incomes even when their nominal incomes may be rising. The poor are vulnerable to the price rises not merely because their incomes are low but also because the rises in prices of basic items of consumption are rising sharply. It is the prices of basic foods, utilities and transport that hit them most. Most inflationary conditions affect the poor and the fixed income groups, the worst. The current inflationary spiral is in fact more devastating to the poor as the costs of basic items are rising even faster than the general level of price increases. Thus the current inflation is affecting the poor considerably more adversely as the prices of their basket of commodities is rising sharply.

Therefore even as people were wishing each other the traditional greeting, they may have felt that the realisation of a happy and prosperous New Year was a distant dream. For most rural communities and the lower income groups even the participation in traditional celebrations and the preparation of the variety of sweetmeats and even the traditional kiribath would have been a strain. The exception would have been the farmers whose crop was not destroyed and the shortfall in paddy production had given them a windfall. Others who may have been untouched by the high prices would have been those who derive their income from relations living abroad. When these particular sections of the community, the rich and the affluent are left out, the majority of the people would have felt that the year ahead would be one of economic difficulties mainly as a result of the rising prices of essential commodities, essential utilities and services.

What are the prospects for these adverse conditions to change? Whilst this column is being written, news is that oil prices have reached a new high record of US$ 114 per barrel. In fact oil prices have been on an uptrend now for the past two years and in the three and a half months of this year it has increased by 17 percent. The oil price increase has much to do with the rise in prices of goods and services in the country. There is no need to get caught up in the controversy between the IMF study and the Central Bank’s debunking of it to know that oil prices have an important impact on the rising inflation in Sri Lanka. Whether the pass through effect is 25 percent or more has been the bone of contention between economists of these institutions. A commonsense approach to the issue discloses that the oil price rise has both a direct and indirect impact on prices. Directly, it affects the prices of petroleum, diesel, gas and kerosene. To the extent that the price increases are not passed to consumers, the resulting losses add to the government’s subsidy bill and fiscal deficit that causes inflationary pressures. Other indirect effects are through the increase in transport costs, higher costs of production of domestic goods and agricultural produce and costs of food preparation. This is why the oil price hike has an impact on prices of domestically produced goods and services as well.

The rising import prices have not been confined to oil prices but include a sharp increase in international grain and food prices as well. Being a country totally dependent on the import of our wheat requirements, about 85 percent dependent on sugar imports and about 8o percent on milk, the rises in the prices of these commodities and several other articles of common consumption seriously affect the prices of basic food items. Unfortunately a shortfall in the production of paddy this year also requires us to import a substantial quantity of rice at high prices. Regrettably there are no signs that the price hikes of oil and food would abate during the course of this year. An already price hike stricken poor are likely to face further price increases during the year that would make their livelihoods very onerous.

While it is true that we cannot control these international prices, it is wrong to think that the inflation is caused entirely by it and that the government can do little to ameliorate the condition. The fact is that the government itself is responsible for the inflationary conditions owing to its high spending, the losses generated by public corporations that are run inefficiently, the large fiscal deficits and defence expenditure. It is now quite clear that the government is little concerned with putting its own house in order perhaps due to a lack of understanding of economic issues. As long as this is the case, the Suba Aluth Avurudhak will be for the very few, while the majority of the people will have to suffer the inevitable hardships of high inflation. For them there would be no Suba Aluth Avurudhak.

This situation portends serious social tensions and political unrest as the hardships are borne by the people in a context when they see so much of conspicuous wasteful expenditure. Statistical contentions, boasts of growth rates, calculations of core inflation and other methods to deceive the people will not succeed. If the people are to have a good new year, the government must buckle down to doing what it could to curtail government expenditure and thereby reduce inflationary pressures. In a context of adverse international factors and an expensive war, it is essential to curtail other expenditures to reduce inflationary pressures. Failure to do this only aggravates the financial and economic crisis that is upon us.