Bad weather, bad luck, bad policies

This piece was written by Rehana Thowfeek for Arutha in partnership with Factum. The original article appeared in The Morning newspaper.

Why is food so expensive in Sri Lanka? This is the question on the mind of every Sri Lankan as they go about doing their weekly grocery shop. The prices of basic food items like vegetables, fruits, fish, and meat are beyond unaffordable for many Sri Lankans whose incomes have been decimated by extremely high levels of inflation.

While goods and services cost approximately two to four times more than they did in 2019, salaries and wages have not risen commensurately. A recent survey by the Department of Census and Statistics (DCS) on the impact of the economic crisis finds that 61% of households have experienced a reduction in income due to the economic crisis while 34% report that incomes have remained unchanged. Only a very small percentage, 5.6% of households, have reported an increase in income despite the crisis. 

While many (85%) did not lose their jobs due to the crisis, nearly half of employed persons reported work breaks and a reduction in working hours or pay cuts due to the crisis, which explains the reduction in household income. While incomes have reduced or remained unchanged nominally, the purchasing power of that income has deteriorated in real terms; the basket of items which could be bought with these incomes four to five years ago cannot be bought today. Only about a third of such a basket can be purchased today with the same income.

It is not surprising then that the survey also finds that nearly all households (97%) engaged in at least one coping mechanism to attempt to manage their dwindling real incomes, with 75% of these households resorting to dietary changes as a major coping mechanism. The survey reports that one in five households currently in debt are in this circumstance to meet their daily food requirements. 

Eating a balanced diet has always been quite expensive in Sri Lanka. An analysis done by a member of Arutha’s team in 2021 shows that a family of four (two adults and two adolescent children) would need to spend between Rs. 46,000-73,000 per month to keep up with a diet recommended by the World Health Organization (WHO) and the Ministry of Health.

However, at the time, roughly only 50% of households reported a household income sufficient to cover Rs. 46,000 while roughly only 20% of households reported a household income sufficient to cover Rs. 73,000 – all of this is without considering any other household expenses such as transport, education, and health.

For the most part, a significant majority of households could not afford to eat a well-balanced diet even before the debasement of the currency. The impact of reduced incomes and extremely high prices of food is beyond reproach. A majority of Sri Lankans are experiencing severe levels of food poverty and the population experiences rampant and widespread malnutrition. The impact of malnutrition cannot be overstated; it will have long-term impacts on health, social, and economic outcomes.

Rising food prices 

This brings us back then to the main question at hand – why is food so expensive in Sri Lanka? 

Global food prices have indeed risen since the Covid-19 pandemic. The Food and Agriculture Food Price Index has risen by 30% compared to its level in 2019. In comparison, however, the food price index of the National Consumer Price Index (NCPI) of Sri Lanka has gone up by 145%. 

One could attribute this to the extreme depreciation of the Sri Lankan Rupee, which fell from roughly Rs. 180 per US Dollar in 2019 to Rs. 330 per US Dollar in 2023/’24 – an 83% increase. Why is it, then, that food prices have risen by a lot more than the depreciation of the currency? 

It is not only the debasement of the Sri Lankan Rupee that has contributed to the rapid increase in food prices. A glance at the daily price report produced by the Central Bank of Sri Lanka (CBSL) lends a possible explanation. The prices of several vegetables such as beans, tomatoes, brinjals, and chillies have increased in price due to limited supply in the main markets. A comparison of the retail prices of a few selected vegetables around the same time in January in the years of 2019 and 2024 is shown. 

As you can see, the increase in prices is not proportional to the loss in the value of the rupee over the period. It is also true that Sri Lanka has been facing bad weather which has impacted harvests of certain produce. Sri Lanka experienced droughts during the southwest monsoon season due to the El Niño weather pattern which affected expected harvests. Data from the DCS shows the impact on harvests in comparison to 2019. The production of all these vegetables has reduced by 40-55% of the total production five years ago. 

Imports vs. local products 

This then begs the next obvious question: if local producers are unable to meet local demand, then why do we not import more? Are imports more expensive than local produce?

Let’s take a look at the data. We compared the retail prices of a selected basket of goods for which national data was available in Sri Lanka, India, and Pakistan. The period selected was the third week of December 2023 for Sri Lanka and 25 December 2023 for Pakistan and India. Data for India is obtained from the Price Monitoring Cell of the Department of Consumer Affairs and data for Pakistan is obtained from the Bureau of Statistics, Punjab. Data for Sri Lanka is obtained from the weekly retail price bulletin of the DCS. 

All import duties, tariffs, and taxes applicable at the period are applied to the items. Additionally, another 25% is added to cover shipping charges (although this is likely an overestimate of the shipping cost). 

Our analysis finds that even with all import duties, tariffs, and taxes applied along with shipping charges, Sri Lanka can import and retail all of these items for cheaper from India and Pakistan than the prevailing domestic market prices. This also does not account for the fact that wholesale prices are lower than retail prices, so it is likely to be even cheaper when imported in wholesale quantities. 

Even meat items like chicken and beef can be imported and sold at lower prices than the current market prices. Despite Sri Lanka having entered into Free Trade Agreements (FTA) with both India and Pakistan, none of these food items are subject to duty-free imports. They are all on the negative list, which means that normal duties apply. Negative lists are generally constituted to protect domestic producers. 

Some duties and tariffs are quite high, meant to make imports expensive in comparison to local produce as well as to raise revenue for the Government which relies a lot on indirect taxes. For example, there is a Rs. 220 duty applied on 1 kg of chicken and a 40% or Rs. 270 CESS applied on 1 kg of tomatoes. If these items were removed from the negative lists and tariffs were amended to strip applicable para tariffs like CESS, then they can be sold at even lower prices than shown here. 

Necessary policy decisions

At the prevailing market prices, where food is extremely costly and is resulting in undernourishment, trade-restrictive measures taken to protect domestic suppliers show clear negative repercussions. While domestic producers are failing woefully to meet local demand and selling whatever they can produce at exorbitant prices, the option of importing must be explored. Who is this policy protecting at the expense of a starving and malnourished nation? Why cannot measures be taken to import when the need arises so that the citizens do not starve themselves due to unaffordability?

Bad weather is hardly a new phenomenon in Sri Lanka as it has faced shortages in food due to bad weather before, so it is not a sufficient excuse for the prevailing situation. Neither are other decades-old problems that have plagued the agricultural sector. 

At a national level, decisions must be taken urgently to fix the supply shortage that is impacting the health and wellbeing of the population. Food items must be added to the list of duty-free items under the FTAs with India and Pakistan so that such trade agreements can benefit the masses, instead of protecting the interests of a few. 

The views expressed here are the author’s own and do not necessarily reflect the organisation’s.

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