Inflation challenge

Thursday, 30 August 2012 00:45 - - {{hitsCtrl.values.hits}}

THE cost of living is a daily state of being, rather than a condensed number for the masses. However, the latest August data depicts dangerous signs for the Government as it heads towards elections.

On Tuesday President Mahinda Rajapaksa was seen visiting the drought-hit regions ahead of his campaign trail in the three provinces that will hold elections next week. Following the visit, it was reported that instructions were given to State banks to halt all loan payments until the next season, while promises were made to provide assistance to thousands of farmers affected by the water shortage.

In separate reports, experts have warned that farmers working in the dry zone are also vulnerable to kidney diseases, which are likely to be exacerbated by higher temperatures and low quality drinking water. Steps to provide these people with adequate drinking water, compensation for destroyed crops and drought-resistant crop varieties for the next season seem to be unfolding at a slow pace despite Cabinet approving over Rs.3.5 billion last month.

The drought is also causing havoc in other parts of the country with annual inflation set to hit double digits for the first time since 2009. A Reuters report has stated that Sri Lanka’s annual inflation rate may have accelerated to near record high of 10.2 per cent year-on-year in August – mostly on drought.

The article points out that the sharp dip in the rupee currency along with higher food prices drove annual inflation in the $ 59 billion economy to a 42-month high of 9.8 per cent last month. The rupee has depreciated 16.8 per cent since November, making imported inflation a serious threat, given that most essential goods and fuel brought externally.

Consumer goods accounted for 20 per cent of last year’s total $ 20 billion import bill. Food accounts for more than 40 per cent of the basket of items used to compile inflation figures. The Government has reduced import taxes of selected essential goods since last month and the Central Bank has said supply shocks will taper off the with expected monsoon rains next month.

Central Bank Governor Ajith Nivard Cabraal was quoted last week saying that annual inflation in August is unlikely to hit double digits because of steps that have been taken by the Government. But that is unlikely and irrespective of what the official digits say, the people will feel the burden of increased prices.

The International Monetary Fund in its latest staff assessment report has said that the current monetary policy stance is appropriate, and a tightening bias should be maintained in the near term until further evidence of diminishing inflation pressures and credit demand emerges.

Given that elections are on the horizon, the Government has also capped electricity, fuel and gas increases that would leave them vulnerable in the poll. Weeks-long power cuts have also affected the economy, though calculating the exact impact would be difficult.

Yet it is difficult for even politicians to sweep reality under the carpet and the drought will continue to have a severe impact on masses. Wiser Government spending, policymaking and right action at the right time will all be needed to make the cost of living burden lessen – at least slightly.