August 31, 2021 | Seyeda Mowhiba
This month, the highly transmissible Delta variant of the coronavirus has brought a fresh tide of bad news, offering a sobering look on the economy. Infection rates are soaring to a new high and hospitalizations are reaching a breaking point, even while vaccination programs are being rolled out across the country. With only partial lockdowns in place, close to 3,000 new infections being reported each day and the health sector running out of capacity, Health officials are announcing it could be a decisive fortnight for the country.
Amidst this wave, price controls imposed by Sri Lanka’s Consumer Affairs Authority (CAA) have induced shortages of some essential consumer products such as gas and milk powder.
Laugfs Gas PLC, a private supplier halted import and distribution of Liquefied Petroleum Gas (LPG) last month as authorities denied approval of a price hike despite soaring costs. This has triggered a serious shortage of liquid gas in the market, leading to long queues amidst a contagious spread of COVID-19. In a bid to end this shortage, the CAA has now approved a price hike of a 12.5kg Laugfs LPG cylinder to LKR 1,856 and the price of a 5kg cylinder to LKR 743. However, it is unclear whether the new price ceiling is adequate for Laufgs Gas to resume sales given that raw material prices have risen further in July compared to when the request for a hike was made in May/June.
While the increase in gas prices have been transferred to consumers, Sri Lanka’s cabinet has decided to maintain the price of milk powder despite importers demanding a price hike. The demands have been on account of increased prices in the global market, expensive freight charges, and depreciation of the rupee resulting in some importers paying far above the price cap set. However, while the CAA has refused an upward price revision, it has abolished import taxes on milk powder of LKR 175 per kg to provide some relief to importers. The government is also taking steps to reduce the import of milk powder by encouraging a gradual shift to local alternatives. Sri Lanka spent USD 333mn in 2020 on dairy imports compared to USD 249mn in 2016.
As many industries continue to struggle in the wake of the pandemic, financing initiatives to both the private and public sector have expanded with an objective to ease crunches. Credit to the private sector has expanded by LKR 83bn in June 2021, while Commercial Bank of Ceylon has also secured USD 50mn in funding from UKs CDC Group to facilitate lending to SMEs and support climate projects in Sri Lanka. Credit to public corporations have also increased by ~LKR 180-190bn. Concessionary working capital loans at 4% interest rate under the Saubagya scheme, have been extended to state owned enterprises while the scheme was originally planned to aid enterprises only with a turnover below LKR 1bn.
While such financing initiatives may ease some pressure on the economy, the Delta variant is continuing to threaten the country into a self-lockdown mode, suppressing possibilities for an uptick in economic activity.