Financial Times

COL: contrasting perceptions
There seems to be a strange but significant difference between the perceptions of the government and the public about the soaring cost of living that is very much in the news these days following the fuel price hikes and warnings of further price increases in the days ahead.

Government politicians and economists have expressed confidence that the twin shocks to the economy in the form of record high oil prices and an unexpected drought are manageable and that the latest spike in inflation is temporary.

They make it sound as if it is just a matter of adjusting some numbers and that if such adjustments are made properly everything would be alright. But the harsh reality faced by ordinary members of the public, especially the middle class and the poor, is that the already unbearable cost of living has become even more unbearable.

It is all very well for the government to speak of price adjustments (it rarely says price increases) but the latest round of price hikes has well and truly hit the public below the belt. Further price hikes are on the horizon judging by the comments of government ministers and bureaucrats.

What is strange here is that while consumers are faced with soaring prices of a range of items from rice and milk to fuel and liquid petroleum gas, government inflation indicators do not seem to truly reflect the magnitude of such price hikes. To be sure, the impact of the latest round of price hikes would only be seen in the inflation indices of the months ahead but to suggest that inflation could be contained by year's end does not seem to reflect reality, at least not from the consumer's point of view.

The Ceylon Chamber of Commerce has called for "an immediate revision of petrol, diesel and electricity prices" in the country to fully absorb the rising international prices. While acknowledging that this would impose a burden on businesses and the public, the chamber points out that this burden will be far less than the adverse impact of a higher budget deficit and unchecked consumption of fuel and electricity in the absence of adequate price hikes. This is a fair point but the chamber ought to also consider other measures such as working among its own members to discourage conspicuous consumption and wastage.

The chamber has warned that without an immediate and adequate price increase, the Ceylon Petroleum Corporation, the Ceylon Electricity Board and the government that subsidizes a part of the cost increase, will have to resort to domestic borrowings to fund the deficit.

This gives rise to the danger of exerting upward pressure on interest rates. The government has been trying hard to bring rates down and even though it has succeeded to some extent rates are still seen as being too high. Any increase in interest rates will hurt the private sector and the government as it would make borrowing more expensive for businesses and increase the government's debt repayment burden, which is already way too high.

The Treasury has maintained that it would do its best to maintain the low interest rate regime but whether it could indeed do so remains to be seen. While calling for price increases, the chamber wants the government to restrain itself in making public statements on salary increases and other proposals that will require extra public spending. It is inevitable that the public would demand wage hikes in the wake of price increases. But for the corporate sector to call for a freeze on wage hikes when it is making handsome profits is not likely to go down too well with the public.

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