SL risks runaway inflation with govt.’s mega relief package

Sri Lanka reported 12-year high inflation in December, with prices rising by 12.1 percent and food prices soared shocking 22.1 percent from the same month a year ago
Pic by Nisal Baduge

• SL could get caught up in wage-spiral inflation in absence of corresponding productivity gains 
• Economists worried over how govt. is going to fund relief package as FinMin said no new taxes would be introduced
• Say relief package makes a mockery of country’s entire budgetary cycle
• Relief package amounts 10% of budgeted revenues for 2022, 6% of total expenditure, 8% of recurrent expenditure and 14% of deficit

Already entrapped in high inflation, Sri Lanka runs the risk of runaway prices in the coming months, as the government this week unveiled a surprise stimulus package worth of Rs.229 billion, without explaining how it will be financed. 

Finance Minister Basil Rajapaksa, soon after returning from the United States—a free market economy, where his family lives and he himself is a citizen—announced a host of relief consisting of a monthly salary allowance to public servants and pensioners, additional handouts to Samurdhi recipients, higher guaranteed prices for paddy farmers and also threw cash at growing “ala, batala, manioc” at one’s backyard, all of which added up to a mammoth Rs.229 billion. 

This also amounts to 10 percent of the budgeted revenues for 2022, 6 percent of total expenditure, 8 percent of recurrent expenditure and 14 percent of the deficit projected for this year. 

Rajapaksa said the package would be paid for within the budget and no additional taxes would be imposed on the people. Sri Lanka expects to have 8.8 percent deficit in the budget against gross domestic product this year. With almost all the deficit is financed through domestic financing, due to the net repayment of foreign debt projected for the year, additional domestic financing could become inflationary. Economic analysts flayed the whole package as reckless, highly inflationary and regressive and added that it makes a mockery of the country’s entire budgetary cycle, as things happen outside the budget, which was passed only three weeks ago. “The fact that they keep silent about how they are going to finance the budget makes it all the more scary. While on one side people have the right to know how their government finds the money to pay for this pie in the sky programmes and second, the country should know what the government is doing to tame the prices rising at north of 20 percent on basic food for two months consecutively,” said one economic analyst on the condition of anonymity. 

“Nobody should think that Rs.229 billion would fall from the sky. If somebody thinks that he can suddenly appear before the media and do a complete makeover of what the government has brought on to itself by throwing some freebies here and there, they are nothing but fooling themselves,” he added. Sri Lanka reported 12-year high inflation in December, with prices rising by 12.1 percent and food prices soared shocking 22.1 percent from the same month a year ago. Turkey on Monday reported consumer price inflation at 36.08 percent for December, reaching the highest since 2002, rising from 21.31 percent in November as the country’s President Tayyip Erdogan sacked multiple central bank governors and finance ministers in his Cabinet for staying in the way for his obsession for lower interest rates. Lira, Turkey’s currency, plummeted 44 percent in value last year against the US dollar as prices of imports soared while people have been forced to cut down on their staples and eat less. While Sri Lanka has had a milder version of Turkey during the last five months, things could go out of hand if the government decides to slosh the markets with more cash, particular with no corresponding improvement in productivity. 

Mirror Business recently showed that Sri Lanka is on the brink of getting caught in what was referred in economic parlance as ‘wage-spiral inflation’, where the government and private companies having to raise wages endlessly, heeding to employee demands and the cycle continues as employees start demanding more goods and services from the money they get by way of higher wages. 

This becomes a never ending cycle until the government reduces its spending and the Central Bank increases policy rates to cease the demand and thereby the prices in the economy. “While some cash transfers may be necessary for few segments, who may struggle to make their ends meet, cash transfers for farmers on top of what is already included in the budget in the form of subsidy will not solve the mess created by the fertiliser fiasco by the government, nor will solve the food security problems by throwing cash at home gardening,” another economist said. 

“And any amount of taxpayer money throwing at agriculture here is a waste because it is totally unproductive,” he added. Sri Lanka has already printed record volumes of money during 2020 and 2021, firing inflation to more than a decade high and spent its reserves to pay down debt and also to provide convertibility to imports and is now on the brink of a debt default. 

The government is seen desperately seeking assistance from foreign nations to avoid a debt default, as no consensus has been reached among the various parties within the government to seek assistance from the International Monetary Fund.