Rising inflation
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The familiar sounds of ‘choon-paan karaya’ Aldoris’s trishaw could be heard in the neighbourhood but this time he was late, arriving close to 9 a.m.“Mokada ada parakku (Why are you late today?),” asked Kussi Amma Sera.
“Aney Miss, mata kiri-piti ganna polime inna wuna (Aney Miss, I had to wait in one of the queues to get milk powder),” he replied.
“Oyage bakery kema ganan wedi wunada hema ekama ganan wedi wena nisa (Have your bakery products gone up in price with the rising costs?),” asked Serapina.
“Samaharak evavala gana wedi wuna (Some items have gone up),” he said.
“Jeevana viyadama wedi wela thiyena nisa samahara pavul eka welak kanne ne (With this increasing cost of living some families are skipping one meal a day),” said Mabel Rasthiyadu, adding: “Hari prashnayak wenawa wena ratawala wage ahara kaerali thibboth (It will be a real problem, if there are food riots like in other countries).”
Just as they bought bread, kept the stuff in the kitchen and went to the margosa tree for their weekly chat, the phone rang. It was Ruwanputha, my young economist friend.
“Hello… hello, best wishes for the New Year,” he said, in a warm greeting.
“Same to you,” I said.
“It seems the government has started the New Year offering a relief package to communities affected by the economic crisis,” he said.
He was referring to Finance Minister Basil Rajapaksa’s announcement on Monday January 3, after the Cabinet meeting, of a Rs. 229 billion-worth relief package effective from this month.
The minister said the package, approved by the Cabinet, would include a Rs. 5,000 allowance for all state sector workers effective from January and also Rs. 5,000 for pensioners and disabled armed forces personnel. The private sector was requested to follow suit with a similar increase — at a time when many companies, particularly hotels, are struggling to recover from the pandemic and loss of business.
The minister also announced that owing to an expected 20-30 per cent reduction in this season’s paddy harvest due to the fertiliser issue, farmers will be paid an extra Rs. 25 per kg of paddy. Samurdhi beneficiaries are to be given an additional Rs. 1,000 from this month. Another interesting decision by the Cabinet was assigning a minister for each donor country to discuss ways and means of helping overcome the current economic crisis in Sri Lanka, a challenging task with Sri Lanka facing global criticism over its human rights record and burgeoning public spending.
“I wonder how the government will fund this new cost because it seems to be coming from non-tax sources,” said Ruwanputha, continuing the conversation.
“Well, if it’s not coming from taxes, then maybe this would be funded by printing new money,” I suggested, adding that this could further trigger inflation.
“Inflation, in fact, has gone through the roof and is now in double digits,” he said, referring to an announcement by the Department of Census and Statistics which reported that Sri Lanka’s annual inflation rate (measured by the Colombo Consumer Price Index – CCPI) surged to 12.1 per cent in December 2021, its highest in many years, from 9.9 per cent in November 2021.
The department said an in-depth analysis of the key drivers of current inflation showed that a large component of inflation was driven by supply-side factors. It said food inflation increased year-on-year to 22.1 per cent in December 2021 from 17.5 per cent in November 2021.
After discussing many other economic and business issues including an overview of the developments last year, we ended the conversation, promising to catch up one of these days over a cup of coffee.
There were several important announcements in the past few days overshadowed, however, by the sacking of State Minister Susil Premajayantha for criticising the government’s handling of the fertiliser and economic crises. One key announcement was the assurance by Central Bank Governor Ajith Nivard Cabraal that US$500 million has been set aside (allocated) to repay a foreign debt in mid-January. Cabraal also flew to Qatar for talks with that government’s Central Bank chief on getting some relief in the form of foreign currency.
Cabraal has repeatedly played down the dollar crisis, saying Sri Lanka will meet all its foreign debt obligations this year…….although there is an acute shortage of foreign currency in the market. The Central Bank chief has also rejected calls to depreciate the rupee against the dollar and bring it to the Rs. 220-230 level per dollar. The government also reportedly turned down a request by Labour Minister Nimal Siripala de Silva to offer Rs. 240 per dollar for worker remittances.
It remains to be seen whether the Central Bank’s offer of an extra Rs. 8 per dollar for Sri Lankan migrant workers which was applicable for the month of December 2021 has been successful. This “Incentive Scheme on Inward Workers’ Remittances” has now been extended to end-January 2022 based on requests by migrant workers to extend the scheme, the Central Bank says.
While no figures of foreign remittances were immediately available for the month of December 2021, remittances for the month of November fell sharply to $271.4 million compared to $611.7 million in the same month in 2020. This means migrant workers were channelling their funds through the informal market known as ‘hawala’ or ‘undiyal’. Despite the COVID-19 pandemic last year and loss of jobs overseas, the total sum of worker remittances was a record $7.1 billion in 2020 due largely to many workers sending more money to their families who were suffering economically due to the pandemic, with some losing jobs, being affected by pay-cuts or rising living costs.
According to Central Bank data, remittances for the period January to November 2021 fell to $5,166.3 billion from $6,291.2 billion in the same 2020 period. Remittances through official channels have seen a drop because money is being funnelled through unofficial channels which fetches a much higher rate (Rs. 230-240 per dollar), compared to the official rate of Rs. 203.
As I walked into the kitchen to get a slice of bread with jam, Kussi Amma Sera handed over my second mug of tea saying, “Itha ikmanin, apita kahata-te thama bonna wenne (Very soon we would have to drink only plain tea)”. I smiled and reflected on whether the dollar crisis – which has exacerbated imports of essentials like gas, milk powder and fertiliser – would worsen in the coming months.
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