Comment : Steps to curb rising C-O-L

Minister of Trade, Commerce, Consumer Affairs and Marketing Development Bandula Gunawardana last week devised a mechanism together with the Essential Food Commodities and Traders' Association to keep the prices of 10 essential food items stable for one and a half months in the wholesale market to curb the soaring cost of living (COL).

The minister has attempted to solve the most difficult issue that every government in power faces. The COL is one of the buzzwords in Sri Lankan politics. It makes and breaks governments.

Popular slogans of reducing the COL brings one party to power and the increased COL sends governments out of office. The irony is that those who are more critical of the COL when in the opposition face the same criticism within a short time after his party assumes office. Minister Gunawardena has set an example in this regard. This shows the complexity of the issue and not the individual minister's capability of addressing it.

Today the government has to perform a Herculean task to reduce the COL and it is like a double-edged sword since any solution taken will affect some other sector or any macro policy can worsen the situation.

The Colombo Consumer Price Index (CCPI), the official COL index in Sri Lanka is highly sensitive to the prices of rice, vegetable and fish.

In November, December and April the index goes up due to the demand pressure. To keep the COL at a lower level the government has to intervene or let the markets be fully competitive. The issue today is that government intervention is not effective as the market is dominated by cartels.

The Government relies on taxes to maintain the price of rice, B- onion and potatoes to protect local farmers during the harvest season. But it is well known that this policy is not that effective.

The rice market is dominated by a few traders in Polonnaruwa and Maradgahamula. Neither the farmer nor the consumer gets any benefit. Coconut prices in Colombo are also dominated by a few traders in Pettah and there are strong entry barriers to the market. When a lorry arrives at the Pettah market the whole stock is purchased by them and they set the price. Government does not have any mechanism to regulate these markets.

Most of the other essential goods that are highly sensitive to the COL are dominated by Pettah wholesalers associations, with whom the minister negotiates.

Instead of holding talks with them the Minister should break the cartels' monopoly power. This can be done in two ways. One is the government's re-intervention in the market. In spite of all bureaucratic issues and corruption the government earlier had Sathosa and the Co-operatives as retail arms.

These institutions imported goods and it had a strong influence on wholesale and retail prices. In 2003 the UNF government sold Sathosa. The Co-operative network in the country is now almost dead due to prolonged inefficiency, political influences and negligence of the government.

Establishing an efficient government retail arm is a dream according to past experience. Any institution should be able to compete with all private supermarket chains. However the government can check the Pettah wholesale mafia by importing essential food items. It can use Sathosa warehouses and other infrastructure for the purpose.

The Budget shop is one solution introduced by the government. But it will not be a solution for the whole country. On one hand it is an opportunity given to wholesale dealers and there are practical difficulties in expanding it island-wide. Whatever said and done Sathosa and Co-operative shops were real budget shops for the people at one time.

The other option open to the government is to let the market break the monopoly power of the cartels. This can be done by giving more opportunities to traders to enter the import business.

A new import trade can be developed around Trincomalee and Galle harbours. One important factor to be reckoned is in this backward capitalist economy there is no competitive market. Hence the authorities should be vigilant and regularise any malpractice.

Other macro economic issues such as the depreciation of the rupee is another reason for the price increase. This affects prices of all imported items. The sharp oil price increases transport cost of all goods.

The cost push on prices of locally produced goods is another factor that policy makers have known and discussed over a period of time, but nothing materialised. Low productivity in agriculture, inefficient extension services of the government agencies, primitive packing and transportation lead to huge post harvest losses and increased prices. Much time has been spent on lengthy discussions. The need of the hour is action.

A close link along with the Pettah wholesalers will not be a solution to the COL issue.