the inflationary spiral
The increase in fuel prices announced earlier this week would undoubtedly
fuel prices further. The price increases will not be confined to
transport costs but raise prices of most other goods as well. The
several cost of living indices of May demonstrate this fact. They
displayed increases in domestically produced goods such as vegetables
that are in season. The inevitability of inflation has to be accepted
by the government and people.
impact of the oil price increase is several folds. It affects the
cost of living both directly - in petrol, diesel and kerosene price
hikes - and indirectly - through its impact on electricity and transport
costs. These in turn affect costs of production and transport of
domestically produced goods as well. The increase in prices of vegetables
during a season is indicative of the impact of transport costs.
So the import induced inflationary spiral is inevitable.
government does not know how to handle it politically. On the other
hand, the political situation only helps to exacerbate it. Here
once again is an instance when economics and politics are dialectical.
The opposition is quite jubilant about the turn of international
events that has made the election promises of reducing prices impossible
to fulfill. Yet such jubilation can well be short-lived if they
achieve their ambition of regaining power. Already the opposition
is promising a reduction in prices, if they are returned to office.
That is once again a promise that is well nigh impossible to fulfill.
They would be saddled with the same problem again as much of the
problem lies in the oil price hikes that have induced a large trade
deficit and a strain on the balance of payments. These in turn have
weakened the rupee and contributed to the inflationary spiral through
higher import prices.
way to cope with the ever-rising increases in international oil
prices is a long run issue of structural change and economic development.
A monetary response is needed to ensure that the inflationary spiral
does not get out of control. However the short-term measures at
stabilisation could even be harmful in the long run to growth and
consequently to long-run price stability.
column has pointed out the inevitability of a rising trend in international
oil prices owing to increasing demand on the one hand, and diminishing
reserves of oil globally. The solution to the problem lies in conservation
of energy use and the development of alternate sources of energy
to replace oil based needs. This is both the local and global solution.
Meanwhile Sri Lanka has to cope with the problem of sharp increases
in prices that could choke the economy. Sri Lanka's vulnerability
lies in her being an importer of oil, as well as being an import-export
damage to the economy could be more serious and long-term. The higher
costs of production of this chain of events mean that our exports,
especially of manufactured goods would rise. This would render our
exports relatively more expensive, particularly with countries that
have their own reserves of oil. Further the rise in the costs of
living would result in a rise in wages that would in turn increase
costs of production. This would in turn make our exports more expensive
and less competitive. One answer is the inevitable depreciation
of the currency that would further aggravate the problem of higher
import costs and increasing prices of essential items and the cost
are several ways of coping with this problem in the long run. First
the dependence on oil has to be reduced over a period of time by
more realistic pricing, conservation in its use, alternate sources
of energy and augmenting electricity generation.
the dependence on other imports should be reduced by increased production
of the same or substitute commodities. This must be done through
productivity gains, rather than import substitution for its own
sake. Increased productivity in agriculture is an obvious option
to reduce the dependence on food of around 8 to 10 per cent at present.
The increased production of agricultural commodities must be achieved
through improved productivity. Otherwise domestic production at
higher than international costs and imports could itself be a factor
in inducing further inflation.
would be increased production of value added agriculture-based products
for domestic consumption and exports. Fourth, higher value added
and lesser import dependent exports should be explored and encouraged.
improved productivity in all sectors of the economy would add to
the country's international competitiveness and export earnings
and import substitution. The consequent economic growth would make
the international pressures manageable.
are some options that must be explored to cope with what appears
to be a deadly scenario for an oil import economy. These considerations
must seep into the thinking of the government's fiscal, monetary,
investment and long-run development policies. They are policy options
and strategies that would take time to show results. Action has
to be taken now to avert an economic disaster in the near future.
our political context an awareness programme that makes people cognisant
of the nature of the problem would render economic policy measures
politically less unpalatable. Cooperation of political parties in
this is too fanciful an expectation, but consensual policy measures
could help to not aggravate the problem. Inflation is inevitable;
the issue is how do we cope with it.