Govt. struggles to maintain fiscal discipline and consumer prices rise 6.1%

July 31, 2013, 8:23 pm 

The government yesterday showed signs of struggling to maintain fiscal discipline as consumer prices rose 6.1 percent in July 2013 from a year earlier as reflected in the official inflation index, the Colombo Consumers’ Price Index, down from 6.8 percent the previous month largely due to a statistical phenomenon called the base effect.

"Inflation was higher last year so the movement’s in the price index this year show up as lower inflation rates. Only a few items in the index saw prices decrease," a Treasury official said not wanting to be named.

Inflation, as measured by the Colombo Consumers’ Price Index (CCPI) (2006/07=100) computed by the Department of Census and Statistics decreased to 6.1 per cent on a year-on-year (YoY) basis in July 2013 from 6.8 per cent in the previous month. This decline was observed for the second consecutive month. The inflation rate on an annual average basis also decreased to 8.3 per cent in July 2013 from 8.6 per cent recorded in the previous month. Core inflation on both YoY and annual average basis continued to decline to 3.1 per cent and 6.2 per cent, respectively, in July 2013 from 4.3 per cent and 6.4 per cent, respectively, in June 2013, the Central Bank said in a statement.

"The CCPI increased by 0.2 per cent in July 2013 over the previous month, with the Index increasing in absolute terms to 176.8 from 176.5 in June 2013. The contribution to the monthly increase in the Index came mainly from price increases (by 0.2 per cent) in the Food and Non Alcoholic Beverages sub-category. Within the Food category the price of some varieties of vegetables, fruits and fresh fish, potatoes, big onions, red onions and limes increased during the month. However, a decrease in the price of many varieties of vegetables and fresh fish, green chillies and eggs was reported. Within the Non-Food category, increases in prices were reported in the sub-categories of Transport (by 0.5 per cent); Clothing and Footwear (by 0.2 per cent); and Miscellaneous Goods and Services (by 0.1 per cent). Meanwhile, the prices in the sub-categories of Housing, Water, Electricity, Gas and Other Fuels; Furnishing, Household Equipment and Routine Household Maintenance; Health; Communication; Recreation and Culture; and Education remained unchanged during the month," the Central Bank said.

Yesterday the government announced increases to excise duties on tobacco, cigarettes, liquor and ethyl alcohol and import duties on vehicle tyres, excluding for busses, vehicle parts, dairy products, including butter, liquor and tobacco products was also revised with effect from 31 July 2013. "

"This move is expected to help the development of domestic industries, particularly related to light engineering, dairy products and tyre manufacturing. In addition, the total tax applicable for the importation of Single Cabs was also revised to correct an anomaly on taxing such vehicles," the Treasury said in a statement.

The new rates have been published in Extraordinary Gazette Notifications No. 1821/1, 1821/3, 1821/4 and 1821/18, dated 29 July 2013, it said.

Economists said the use of ad hoc mid-night tariff changes were signs the government was having difficulty maintaining fiscal discipline. "The government is obviously finding it hard to stick to the budget estimates, this is what these sudden changes point to," one economist said not wanting to be named.

International Monetary Fund (IMF) Sri Lanka Resident Rep Dr. Koshy Mathai, addressing the Sri Lanka Economic Summit last month, said Sri Lanka’s fiscal position, despite commendable improvements, remained weak and exacerbated macroeconomic volatility and led to high inflation.

Dr. Mathai said Sri Lanka’s loose fiscal position led to higher inflation and higher interest rates. A high level of public debt has also stunted growth compared with many other economies, including Sri Lanka’s peers, and put pressure on the banks.