A year after the worst of the crisis, Sri Lanka’s problems remain far from fixed. With food, healthcare, and power costs still high and increasing, and poverty rates on an upward trajectory, economic recovery continues to elude the general public.
Headline inflation, as measured by the Year-on-Year (YoY) change in the Colombo Consumer Price Index was at 1.5% in October 2023 compared to its peak of around 70% in September last year.
The Central Bank notes that inflation is expected to stabilise around the targeted level of 5% over the medium term, supported by appropriate policy measures and well-anchored inflation expectations. However, food, healthcare, and other costs remain elevated.
Food inflation has come down to single digits at present, continuing on its deflationary trajectory for the fourth consecutive month at 5.2% from the record highs of last year (85.6% in October 2022 from 94.9% in September 2022). Clothing prices increased 19% YoY in October, housing 12%, and health 6%.
Poverty continues to rise with the surging cost of living, with the World Bank projecting an increase from 25% to 27.9% between 2022 and 2023.
Meanwhile, according to the Purchasing Managers’ Index of the Central Bank of Sri Lanka (CBSL), expectations for manufacturing activities for the next three months remain positive, mainly due to the expected increase in demand in the upcoming festive season.
While it notes that many respondents highlighted the expected improvements in their business activities during the upcoming festive and tourist season, some respondents expressed their concerns regarding the recent increase in the electricity tariff and the proposed increase in Value Added Tax.
Higher bills dampening festive cheer
Consumer Rights Activist Asela Sampath told The Sunday Morning that consumers were footing higher bills in general, dampening any festive cheer.
“There is an increase in prices of goods in the market compared to the previous year. However, they also have a certain capacity to purchase at higher costs at present. The issue is that the seller is inflating prices over and beyond production costs. This is mostly why consumers are facing issues – the producer isn’t receiving the proper amount.”
He charged that the presence of a mafia of middlemen was driving up prices of goods.
He also noted that businesses were earning significantly less profit due to higher production costs stemming from higher electricity and water bills. Similarly, he noted that this increase in utility bills would affect the consumer as well, while the cost of certain essentials had decreased compared to the previous year, giving some measure of relief to consumers.
Regardless, he did not believe that consumers would find this season significantly festive. “This festive season will be one where consumers will face extortion. For instance, sugar, which is essential for the festive season, is seeing significant increases due to unscrupulous businessmen. Further, importing keeri samba is not a measure intended to provide relief to the public, since it is not generally consumed, unlike nadu. This is clearly a move to earn commissions.”
Advocata Institute’s ‘Bath Curry Indicator,’ which tracks the monthly changes in the retail price of food items that go into rice packets in Sri Lanka, shows an increase from Rs. 1,865 in October 2022 to Rs. 2,034 this October for a rice packet.
Poor forecast for retail sector
Sri Lanka Retailers’ Association (SLRA) Chairman/President Hussain Sadique forecasts a poor showing for the retail sector given the tighter wallets.
“Profitability will be down. We are looking forward to the season, but it doesn’t look great. Consumer buying power will be curtailed given the current situation with electricity tariffs, etc, since every household is affected. With the consumer being affected, consumption will come down. There won’t be growth compared to last year.”
He noted that the non-essential sectors would see a marked drop in sales, especially luxury items and home appliances, while FMCG would continue to move off shelves as they were essentials. “Consumers will buy important things; they will engage in restricted purchasing.”
When asked about the implications of the improved Purchasing Managers’ Indices released by the Central Bank for manufacturing and services activities and the appreciation of the Sri Lanka Rupee against the US Dollar for ordinary consumer’s purchasing power, he said: “There hasn’t been any improvement over the last three years. The economy is in the process of recovering, therefore, purchasing will be slow.”
Noting that festive shopping was yet to properly get underway, he pointed out that the rain too would have a dampening effect on the season, with reduced footfall to shops affecting purchasing in comparison to last year.
“Last year, consumers were looking forward to the festive season after successive setbacks. It was a time they wanted to engage in celebrations after a difficult period. That sentiment is absent this year. While there will be celebrations for the festive season, I doubt it will be exceptional; it will be a normal year, rather.”
He, however, noted: “This year, in a positive trend, consumers started making purchases over the last few months, following the interest rate drop and the lowering of the dollar rate.”
He further noted that the prevailing uncertainty also affected the retail environment, pointing out that retailers would find maintaining profitability and managing operating costs a challenge, since margins had dwindled given high salaries and staff turnover. “The lack of firm policy and short and long-term and policy challenges up in the air make things uncertain.”
Higher level of inflation
“This year, we are at a higher level of inflation, although the rate of change is lower compared to last year. In 2022, price levels came to a very high level and we are still at that level, since the prices didn’t decrease. Therefore, consumer purchasing power is very low and their ability to purchase even the essentials are at a low level,” University of Peradeniya Department of Economics and Statistics Prof. Wasantha Athukorala told The Sunday Morning, observing that consumer purchasing behaviours would not see a marked change compared to last year despite the festive season.
Addressing the impact of taxes, he noted that the increase in indirect taxes VAT and the continuous upping of utility costs, especially electricity, exerted a significant burden on most segments of society: “Not only the poor, but even the middle class are paying a significant amount of their salary as tax and are having an extremely difficult time.”
Although the December festive season usually witnesses a spike in spending habits, Prof. Athukorala stressed that this would not be the case for this year. “Although there is usually higher demand during the festive season, it is unlikely to happen this year. In general, public and private sector workers and daily wage earners are unlikely to be able to spend money for leisure activities this season.”
However, he acknowledged that there was some improvement in income compared to 2022 with the downward slide of the economy coming to a halt, leading to a marginal improvement in purchasing power. While this was not up to the anticipated standards of growth, growth was nevertheless slowly unfolding, he noted.
Prof. Athukorala too opined that retail would not see a marked improvement for the season. “Retailers across the country report that people have less income and are not purchasing as much, only trying to manage with what they have. When considering consumer behaviour, it can be seen that they have significantly decreased their purchases. For instance, those shopping at smaller retail stores purchase smaller quantities of goods than before. Therefore, we can’t expect a big change.”
“GDP has shown negative growth over the last two quarters. This is an indicator that that income is decreasing. Under such circumstances, people’s ability to purchase becomes weaker,” he pointed out, stressing that festive purchases would not see an uptick this year.
“In previous years, people even obtained loans to spend for the festival season, since they knew they would be able to repay it. However, people are unable to obtain loans now, since they may have already taken out loans or face difficulties in repaying loans given the economic circumstances.”