The riddle to price controls

Imposing price controls on essential items is a plausible solution for any Government beset by vehement public criticism. But such an effort would have to be combined with sustainable consumer protection regulations to be effective in the long term. 

Raising VAT from 11% to 15% from 2 May onwards required a massive adjustment from the side of the public. Faced with steeply increased prices it is only natural that the public would vent their anger on the Government. To be fair there are instances where traders indiscriminately and sometimes gleefully transfer the tax increase to consumers without considering alternatives. Private healthcare providers are especially guilty of this as many add opaque charges to bills and demand payment for costs that are not adequately explained to patients. Such badly regulated industries cause more hardship for people when tax increases are imposed. 

However, it must be acknowledged that the Government, in many ways, created this mess. Clear details of how, why and where the VAT increase would apply have not been clearly communicated to the public. As many as 73 items are nominally exempted from VAT but few are aware of the full list and whether they cover items essential to basic public needs. The list of exemptions moreover was never discussed with the public. Progressive steps such as having a consumer rights activist or even a public representative on the Cost of Living Committee appointed by the Government also creates a disconnection as Government Ministers do not always act in the best interests of the people. 

On Tuesday the Government, under severe public pressure, issued price controls on 15 essential items including rice, flour, sugar, sprats, dried chillies and others. The gazette notification is expected to be rolled out on Thursday giving relief, at least by law, to the people. The Government then has to do two things. One is to absorb the heavy hit to revenue from providing import tax concessions to these staples and secondly ensuring that these goods are delivered at the controlled price right across the country.  

For this purpose the Government hopes to roll out 600 more Lak Sathosa outlets countrywide by the end of this year and expand it to 2,000 outlets by the end of 2017, according to State Finance Minister Lakshman Yapa Abeywardena. Such an increase of outlets in an organisation that is consistently loss-making creates more financial problems for the Government. 

Such an expansion should be married to widespread reform within Sathosa. After all this is the organisation which in August 2014 obtained a bank loan of Rs. 14 billion to purchase 258,000 metric tonnes of rice, eventually spending Rs. 17 billion only to find over 3,000 metric tonnes were unsuitable for human consumption. 

In March 2016 Cabinet had to approve a Rs. 8.7 billion bailout for the organisation. Any more losses on top of subsidies would make little financial sense to the Government, which ostensibly is increasing taxes to raise State revenue. 

The Government also hopes to empower 1,000 officials at the regional level to coordinate with the Consumer Affairs Authority (CAA) to catch errant traders. However, this has to be done transparently and sustainably with the sincere wish of protecting consumers.    

Taxes are complicated revenue earning systems that are difficult to understand universally. But Governments elsewhere in the world can impose high taxes because they use them transparently to reinvest in social activities that bring real value to the public. Unless this element is also improved by the Government taxes will only draw public resentment. No Government can survive such displeasure for long.