By Thiloka Yapa –
Thiloka Yapa
The government recently removed the maximum retail price (MRP) on rice with a decision to import a buffer stock of rice to prevent any shortages.[1] This is an important step in the right direction. Opening up the market for more competition will reduce the market power of the alleged oligopoly of large scale rice mill owners. While the removal of the MRP is commendable, the government’s action on this front has been anything but consistent.
Despite the frequent use of price controls and their appeal to politicians, economists are generally opposed to them, except perhaps for very brief periods during emergencies. While the pandemic is undoubtedly an emergency, Sri Lanka’s current economic problems are largely due to poor policies.
Although the politicians who impose them may be motivated by good intentions, they are counterproductive, often leading to higher prices and damaging the market.
The Parliament recently passed an amendment to the Consumer Affairs Authority Act which increases fines on traders who do not follow the MRP issued by the Consumer Affairs Authority (CAA).[2] Raising the penalties seems to indicate that the government intends to impose controls more strictly. The reason that some of the ill-effects of price controls were not experienced is because they were not strictly enforced. Previous research by Advocata Institute revealed that only larger producers and the larger retailers in the formal sector adhered to them; in the informal markets and among smaller retailers these were routinely ignored so the shortages and black markets associated with price controls were not widespread.[3] Strict enforcement and larger fines could see products disappearing from shelves as traders find it no longer profitable to engage in the trade of the controlled commodities.
Price Regulation and its Impact
Price controls are administered through the Consumer Affairs Authority Act which has the power to regulate prices.[4]
Under Section 10(1)(b)(ii) of the Act, the authority, in protection of the consumer, can call retailers and wholesale traders to register their stocks and warehouses with the CAA. Moreover, under Section 18, the Minister in consultation with the CAA is empowered to specify any good or service, as essential to the life of the community, by way of gazette notification., Manufacturers and traders are restricted from increasing prices without the prior written approval of the CAA. A period of 30 days is provided for the authority to examine the application for any price revision and convey the decision to the applicant company. This Section permits the CAA to make decisions on behalf of traders in the market, whenever it regards a product to be “essential”. Further, under Section 20(5), the Authority can fix the maximum price above which goods and services cannot be sold. It was under this section that the recent MRP for sugar, rice and LP Gas was imposed.
This regulation could be a barrier against market competition, as it may deter the entry of new firms and discourage innovation which curtails competition. Competition plays a vital role in a market economy. It incentivises firms to challenge each other, create new markets and expand existing markets. While this leads efficient firms to enter and grow, inefficient firms shrink and exit. Firms innovate, leading to lower prices and enhance consumer choices. While the objective of the Consumer Affairs Authority Act No. 9 of 2003 in itself is to promote competition and protect consumers, the impact of the provisions which allow the authority to regulate prices lead to the exact opposite, resulting in high prices and less choice for consumers.
Prices play a key role in a market economy. It is a signal, wrapped in an incentive. Change in prices incentivise individuals to respond; either by consuming less of a product, or shifting to alternatives. Price controls distort these signals. Since the government defines market prices when controls are imposed, it forces the market to function based on the imposed price. As producers and consumers respond to controls, they produce an excess supply when the prices are set high or increase the demand when prices are set low. This leads to wastage and shortages, exacerbating the fundamental economic problem that the controls expect to solve.
A 2018 report on price controls by the Advocata Institute revealed that price controls have limited value in controlling the cost of goods, particularly in the consumer market due to weak enforcement.[5] The report highlighted other ill-effects: traders surveyed have admitted to the problem of low-quality goods being brought into the market, meaning that quality suffers as a result. As traders are under pressure to comply, they resort to importing substandard products to supply at prices close to the controlled price.
The enforcement of ad-hoc controls also adds up to the costs of suppliers, as these regulations distort their cost structures. This was the case when the government slashed the Special Commodity Levy on sugar, big onions, dhal and canned fish in November last year, imposing an MRP on these commodities.[6] The sellers who were impacted, opposed the MRP and continued their sale at high prices, claiming they would incur massive losses since the stocks were purchased before tax revisions, at a much higher price. Price controls also result in policy uncertainty. This is a situation where there is ambiguity in the stability of future rules and regulations. While entrepreneurs in the market will then keep attempting to predict what regulators would do in the future, this comes at the expense of consumers, who would have otherwise been the main-focus of these businesses.
What Can be Done?
Sri Lanka urgently needs to rethink government interventions that increase the costs of competing. At a recent discussion hosted by the Advocata Institute,[7] the newly appointed Governor emphasized the importance of growth and stability. He stated that the lack of stability would lead to uncertainty. As price controls ultimately lead to instability in the system, a surer way to achieve stability and growth is to allow markets to flow freely and responsibly. For this to happen, as one major reform, Sri Lanka needs to amend the sections in the Consumer Affairs Authority Act that permits the authority to regulate market prices. In doing so, it is also worthy to review Sections 34 to Section 38 in the Act, which aims to promote competition and revisit the mandate of the CAA.
*Thiloka Yapa is a Research Analyst at the Advocata Institute and can be contacted at thiloka@advocata.org The Advocata Institute is an Independent Public Policy Think Tank. Learn more about Advocata’s work at www.advocata.org. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute
[1] Ruwani Fonseka, ‘Alagiyawanna explains removal of MRP on rice’, The Morning, September 28, 2021 https://www.themorning.lk/alagiyawanna-explains-removal-of-mrp-on-rice/ (accessed September 29, 2021)
[2] Parliament of Sri Lanka, ‘Hon. Speaker endorses the certificate on the Consumer Affairs Authority (Amendment) Bill’, Parliament of Sri Lanka. September 23, 2021, https://parliament.lk/en/news-en/view/2263 (accessed September 25, 2021)
[3] Advocata Institute, ‘Price Controls in Sri Lanka-Political Theatre’( Sri Lanka: Advocata Institute, 2018), 24 https://www.research.advocata.org/wp-content/uploads/2018/10/Price-Controls-in-Srilanka-Book.pdf (accessed September 25, 2021)
[4] Consumer Affairs Authority Act No. 09 of 2003
[5] Advocata Institute, ‘Price Controls in Sri Lanka-Political Theatre’( Sri Lanka: Advocata Institute, 2018), 9 https://www.research.advocata.org/wp-content/uploads/2018/10/Price-Controls-in-Srilanka-Book.pdf (accessed September 25, 2021)
[6] ‘Revised taxes, MRP complicate commodities market’, The Sunday Times, November 22, 2020 https://www.sundaytimes.lk/201122/business-times/revised-taxes-mrp-complicate-commodities-market-423077.html (accessed September 30, 2021)
[7] ‘රටේ ආර්ථිකය හා අපේ හෙට දවස’ YouTube video, posted by “Advocata Plus,” September 25, 2021, https://www.youtube.com/watch?v=8JvWQWn7cHw (accessed September 25, 2021)
Lasantha Pethiyagoda / October 7, 2021
Conventional economic theory or principles would seem rather irrelevant when the economy is not really a market economy in its true sense. Market economies do not impose overnight bans and price shocks on the supply or demand aspects of staple consumer items. Market economies do not have a treasury (central bank) that manipulates monetary policy arbitrarily to mislead investors and the general public. Market economies also do not have different rules for different players that depends on allegiances to a political party or leader. It would be immature to apply conventional economic principles to assess or analyse such an environment.
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old codger / October 8, 2021
The current regime must make up its mind whether it is running an open economy or a closed one.
Its body is in an open economy where practically everything is imported, but its soul believes in socialist import substitution and price controls. The farcical LPG situation is a good example. The government owned suppler Litro wants to operate like a private entity, raising prices as gas import prices go up. But its owners prevent this. So, it supplies LPG at a loss! Meanwhile, the private Laugfs simply shuts down when told to sell at a loss, and the government tries to take it over.
The Viyathmaga lot are all isolationists, and W D Lakshman was the chief. That is all the more surprising, given that he was a working adult in the 70’s and would have seen at first hand the Sirimavo government’s disastrous experiments.
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Mahila / October 9, 2021
Hi OC,
It is indeed a pitiable state of affairs.
The policy at the point of 2019 election and the ill thought out Pohottuwa manifesto is the problem.
Gain power without realistic solutions to problems.
they should have been a little smarter.
they have dried up foreign earnings because of external factors and Covid – 19, and the local earnings due to bad policy on Tax and Inland Revenue, and customs earnings due to swollen headedness. They do not appear to be realists!
They cannot sustain an open economy without money, for which they must borrow or seek IMF assistance!
Their pride wont let them do it because of their ‘Big talk’ before the 2019 elections and propaganda. they also thought that it will blow away and after sometime restore the local customs levies and taxes and the exports would grow. That is blasted partly due to mismanaged COVID -19 responses!!
Whither SL? When will the voters of SL learn?
I feel sorry for the poor as the rich may weather the storm with money in hand
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Mahila / October 9, 2021
OC,
Apologies.
I forgot to add, the residual earnings in the majority is going towards servicing loans taken post 2010 (not wartime purchases) for projects without any or little Retrun on Investments (RoI)
Then how could you be in business and successfully?
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old codger / October 9, 2021
Mahila,
These guys all have a closed economy mindset but want all the benefits of an open economy, like imported fruits, cars, electronics, etc. It seems that at least Cabral is better in that way than Lakshman, even though we might end up just as bankrupt. Can you think of any country that in peacetime spends more on its military than for education and health?
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Mallaiyuran / October 9, 2021
Lankawe rice Market is not operating under free market conditions. It is not Oligarchy or Monoploly, it is a new category, Monar-chy competition; in other words, nobody can compete with these crocodiles, when their governments are in power. Polonnaruwa crocodiles grew fatter when Ranil’s Yahapalanaya-chy Market was in process of saving White Flag murderers and Zero Casualty murderers. Yahapalanaya-chy’s important phenomena is selling properties to foreign governments (China) and suppressing local industries. So from Don Stephen’s time there were many dams building and rivers diverting took place, but the country didn’t reach self-sufficiency in rice production, leave aside export. Because all these were done for political purposes and Sinhala Colonization, they didn’t yield expected sufficient. Everything achieved was “Lankawe is the world number one” (in lying). Rice price adjustment has to come from two paths. Farmers can put more land to rice production & traders import more rice, seeing profit on that by the price increase. Sad fact is farmers have only China Hunu, no fertilizer to increase rice production; traders have no exchange to import rice. The benefit of the competition cannot materialize in Lankawe because of the government’s libservice “market economy.”
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Mallaiyuran / October 9, 2021
It is not rice, even the Papadam is in the same situation. Why am I talking about Papadam within economic despair? Today guys I am delaying my lunch because I forgot an important act for a long time. I didn’t eat Papadum for more than a year. I have to fry and eat Papadams. Kids can let candies go, but today I need Papadam. Not to make anybody or a child feel jealous. But to confess myself that I am no better than a child in controlling my impulses or being obedient when I have to eat something. Please don’t tell me that “after all it is only a Papadam”. (There is news that made me to this desperate situation: In Kilinochchi a child’s libs were burned because she ate a papadum without permission. I fear my libs too would have been burned if I were in Lankawe’s poverty and cruel life. More the poverty and lifestyle changes, more children are going to be burned all over their bodies.)
Sorry guys, before Lankawe get worse, for the time being, now bless me & that child, who are same mentality identical, for a happy lunch!
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