By Asoka S. Seneviratne –

This paper, divided into two parts, seeks to answer two questions: (i) why the government cannot lower the cost of living, and (ii) if so, how it might do so.

Given the above, this is part one explaining why the government cannot lower the cost of living in Sri Lanka. Although some economic reforms have been successfully implemented, the high cost of living remains a serious concern. Inflation measures the rate at which prices change, not the overall price level. Even if inflation drops to zero or some reforms are carried out, the high cost of living remains a significant issue—as it is now—since prices often stay high compared to pre-crisis levels. Sri Lanka’s hyperinflation in 2022 permanently increased the cost of essentials. Disinflation means prices are rising more slowly or slightly falling, not that they return to previous levels. Food inflation, still around 6%, keeps grocery expenses high for families. Non-food deflation mainly affects items like clothing or appliances, not everyday necessities. High taxes, import costs, and the weak rupee keep retail prices elevated, even if the economy stabilizes. Wages or salaries have lagged behind recent price increases, reducing real purchasing power. Households continue to face high living costs despite “low” or “negative” inflation. Therefore, stabilization after Aragalaya has not yet resulted in meaningful relief from the cost of living or a decrease in living expenses.

Sri Lanka can take pride in its macroeconomic stability, supported by a well-managed fiscal deficit, effective debt management, low inflation, and a stable exchange rate regime, along with reserves exceeding US$6 billion. It also claims success in addressing and eliminating all forms of corruption, waste, mismanagement, and bribery. Additionally, FDI flows have increased significantly, and government revenue has grown more than expected. The country has established the rule of law, improved overall governance, and achieved substantial infrastructure development.

Reality on the ground

Sri Lanka can now proudly showcase significant progress across seven key macroeconomic and governance indicators. The country has achieved macroeconomic stability through careful management of the fiscal deficit, responsible debt handling, low inflation, and a stable exchange rate system, while also building foreign reserves exceeding US$6 billion. Strong measures have been implemented to eliminate corruption, waste, mismanagement, and bribery, thereby boosting public confidence in governance. Foreign Direct Investment (FDI) inflows have increased notably, and government revenue has exceeded expectations. The establishment of the rule of law and improvements in overall governance have strengthened institutional credibility. Meanwhile, major infrastructure projects are being completed, laying the foundation for sustainable long-term economic growth.

Given the above, what are the reasons that the government has failed to reduce the overall cost of living? In other words, considering the seven factors mentioned earlier, the rising cost of living remains a significant issue. I want to clarify that these seven factors have not been used to help lower the cost of living. In short, even if Sri Lanka has achieved these seven impressive economic and governance milestones, why hasn’t the overall cost of living decreased? This is a crucial question because it highlights the gap between macroeconomic success and household affordability. The answer lies in the fact that the seven factors listed above do not directly address — and in some cases may even worsen — the pressures of the cost of living.

Why the 7 Factors Haven’t Reduced the Cost of Living

i. Macroeconomic stability doesn’t guarantee lower prices in the short term

* A stable exchange rate and low inflation compared to past peaks may still mean prices are high — just not rising as quickly. Inflation slowing from 70% to 5% doesn’t make goods cheaper; it only prevents them from increasing so rapidly.

* Households still feel the pain from the high price base set during the crisis.

ii. Anti-corruption and better governance are long-term benefits

* While tackling corruption can reduce waste and improve efficiency, these gains take time to filter into lower consumer prices.

* Savings may go to debt repayment or infrastructure projects rather than subsidizing essentials.

iii. Higher FDI and revenue don’t automatically lower consumer prices

* Foreign investment often goes into large-scale projects (ports, power plants, real estate) that don’t immediately reduce grocery or utility bills.

* Increased government revenue can be used to close budget gaps instead of cutting taxes or providing subsidies. This is an essential factor. It should be noted that tax cuts will destabilize the economy in various ways, which is more harmful than keeping the cost of living high.

iV. Rule of law and governance improvements are structural, not immediate relief.

* These strengthen institutions, but households still face high electricity tariffs, transport costs, and food prices until targeted policies address them.

V. Infrastructure development can push prices up in the short term

* Large projects may cause land prices, rents, and wages in specific sectors to rise before any productivity benefits trickle down to consumers.

* Imported materials for projects may keep demand for foreign currency high, affecting import costs.

Vi. Imported inflation & global market dependence

* Sri Lanka still imports a large share of essentials (fuel, wheat, milk powder, fertiliser). If global prices rise, local costs follow — regardless of domestic reforms.

The claim that “regardless of domestic reforms” implies that even if Sri Lanka’s government manages to carry out strong internal policies — for example:

* improving fiscal discipline,

* stabilising the currency,

* reducing budget deficits, or

* making local markets more efficient

The prices of imported essentials will continue to be affected by global market conditions, over which Sri Lanka has little or no control.

* As an example, suppose Sri Lanka balances its budget, strengthens the rupee, and cuts local inefficiencies.

* Suppose global oil prices suddenly increase by 30% because of a Middle East conflict. In that case, the prices of gasoline, electricity, and transportation in Sri Lanka will still rise since the country imports nearly all of its petroleum. The same is true for wheat, milk powder, and fertilizer—even a well-managed local economy cannot avoid these global price fluctuations unless it reduces dependency on imports. In short, “regardless of domestic reforms” means that even with good governance and effective local policies, imported goods will continue to reflect international price increases for Sri Lankan consumers unless the country replaces imported products with local production or secures long-term, fixed-price supply contracts.

How to reduce the cost of living vulnerability

At this stage, it is essential to identify strategies for reducing Sri Lanka’s Cost-of-Living Vulnerability. There are 10 key focus areas: (i) Boost Domestic Food Production – Prioritize investment in local agriculture to decrease reliance on volatile global markets. (ii) Support Smallholder Farmers – Provide subsidized inputs, irrigation facilities, and access to modern farming techniques. (iii) Strengthen Supply Chains – Enhance storage, transportation, and wholesale market efficiency to reduce wastage and middleman costs. (iv) Promote Crop Diversification – Shift from import-heavy staples like wheat to locally grown grains and pulses. (v) Review Import Tariffs – Temporarily reduce duties on essential foods until domestic production stabilizes. (vi) Support Urban & Peri-Urban Farming – Incentivize rooftop and community gardens to increase household food supply. (vii) Improve Fisheries & Dairy – Modernize these sectors to meet local protein needs better. (viii) Stabilize the Rupee – Keep the currency stable to prevent imported inflation from eroding gains. (ix) Monitor Consumer Prices – Strengthen market oversight to prevent artificial price increases. (x) Conduct Public Awareness Campaigns – Encourage consumption of local produce to sustain demand and support farmers. All these strategies directly support the goal of enhancing “domestic food production.”

The bottom line is that the 7 achievements are important for economic stability. Still, cost-of-living relief requires targeted measures — e.g., reducing taxes on essentials, improving domestic food production, reforming monopolies in energy/transport, and ensuring wage growth keeps pace with productivity. It is clear that taxes are a massive component of high prices, so their reduction is essential.

However,  (a) improving domestic food production, (b) reforming monopolies in energy/transport, and (c) ensuring wage growth keeps pace with productivity impact on reducing the cost of living. We can break down those three points in plain but policy-focused language, with Sri Lanka-specific context and global examples so it’s clear what each means and why it matters for cost-of-living relief.

(a). Improving Domestic Food Production

Producing more of the food Sri Lankans consume locally—especially staples like rice, vegetables, milk, eggs, and fish—so the country relies less on imports that are vulnerable to currency swings, global price spikes, and shipping disruptions.

Why it matters:

* Around 20–25 % of Sri Lanka’s food basket is import-dependent (wheat, dairy, pulses, some fruits).

* When the rupee depreciates or global prices rise, food prices jump sharply—directly hitting household budgets.

* Boosting domestic output lowers exposure to these external shocks and can stabilise prices over time.

How it can be done:

* Support smallholders with affordable fertiliser, quality seed, irrigation, and training in climate-resilient farming.

* Invest in cold chain storage and rural roads so produce reaches markets without spoilage.

* Encourage contract farming between big retailers/processors and farmers, ensuring price guarantees.

Example: Vietnam’s investment in rural irrigation and farmer training turned it from a rice importer into the world’s second-largest exporter, keeping local rice prices low even during global spikes.

(b). Reforming Monopolies in Energy/Transport

Meaning:

Opening up or regulating state-owned or private monopolies to prevent them from setting high prices without competition, and ensuring that efficiency gains are passed on to consumers.

Why it matters:

* In Sri Lanka, sectors such as electricity (CEB), petroleum (CPC), and parts of public transport (SLTB bus routes, port cargo handling), the Sri Lankan railway has little to no competition

* Inefficiencies and procurement problems raise costs, and the lack of alternatives means households and businesses pay more than necessary.

How it can be done:

* Introduce competitive tendering for fuel imports and power generation contracts.

* Allow multiple service providers in public transport routes, subject to safety and service standards.

* Strengthen independent regulatory bodies to set fair tariffs based on real costs, not political cycles.

Example: In the Philippines, opening power generation to independent producers while keeping strong regulatory oversight helped cut electricity shortages and stabilise prices.

(c ). Ensuring Wage Growth Keeps Pace with Productivity

Meaning:

Making sure that as workers produce more value (goods or services per hour), their wages increase in proportion, so rising economic output translates into higher household incomes—not just higher profits.

Why it matters:

* Even if inflation slows, stagnant wages mean people can’t afford the same standard of living.

* In Sri Lanka, formal sector wage growth often lags behind inflation, especially after the 2022–23 crisis.

* If wages rise in line with productivity, households have more spending power without needing subsidies.

How it can be done:

* Link minimum wage adjustments to both inflation and productivity growth.

* Strengthen collective bargaining in key sectors.

* Invest in skills training to help workers transition into higher-value, better-paid jobs.

Example: In South Korea, a tripartite wage council adjusts minimum wages annually based on inflation, productivity, and employment impact, ensuring that wage growth supports living standards.

Vii.Wage–price gap

Even when the economy grows, wages in many sectors haven’t kept pace with rising living costs, leaving households strained. Despite overall improvements in GDP growth, many workers see little to no real increase in their take-home pay. Wage increases in key sectors—such as manufacturing, services, and agriculture—have lagged behind inflation in recent years. As a result, in real terms, the value of salaries has decreased despite the economic recovery. Households find that basic expenses—food, rent, transportation, and utilities—take up a larger share of their income. Low-income families are most affected, as they spend most of their earnings on essentials with little or nothing left for savings. Middle-income earners also feel the pressure, cutting back on discretionary spending and delaying major purchases. The gap between wage growth and the cost of living fuels frustration and weakens confidence in economic reforms. Productivity gains in some sectors haven’t resulted in equivalent wage increases for workers. Without targeted wage adjustments or cost-of-living increases, inequality and social tensions could worsen. Sustainable growth must be paired with fair wage policies to ensure the benefits of recovery reach all households.

Summary & Conclusion:

Sri Lanka’s economy has shown notable progress in recent years: macroeconomic stability, foreign reserves exceeding US$6 billion, low inflation, increased foreign investment, higher government revenue, a stronger rule of law, improved governance, and large-scale infrastructure projects. However, despite these improvements, households still face high living costs. This remains a significant concern. The reason is straightforward—these seven macroeconomic successes do not directly reduce daily expenses. In other words, inflation indicates how quickly prices change, not the exact price level. Even if inflation drops to zero or turns negative—as it is now—prices often stay high compared to pre-crisis levels.

Inflation may have slowed from the 2022 hyperinflation peak, but the price base remains high, especially for essentials like food, fuel, and utilities. Imported inflation, weak wage growth, and structural inefficiencies keep household budgets under strain. It should be noted that tax cuts will destabilize the economy in various ways, which is more harmful than keeping the cost of living high.

Tackling the cost of living requires targeted strategies beyond just macroeconomic stability. Three main priorities are clear: (1) Increasing domestic food production to reduce dependence on volatile global markets; (2) Restructuring monopolies in energy and transportation to improve efficiency, lower prices, and encourage competition; and (3) Aligning wage growth with productivity so that economic gains translate into higher household incomes. Additional steps include lowering taxes on essentials, strengthening supply chains, and supporting local production in fisheries and dairy.

The gap between macroeconomic success and household affordability must be closed if recovery is to be meaningful. Without policies that address both prices and incomes, growth risks remaining a statistical achievement rather than a lived reality. Economic stability may be the foundation, but reducing the cost of living is the real measure of progress for Sri Lankan families or households.

*The writer, among many, served as the Special Advisor to the President of Namibia from 2006 to 2012 and was a Senior Consultant with the UNDP for 20 years. He was a Senior Economist with the Central Bank of Sri Lanka (1972-1993), asoka.seneviratne@gmail.com