Saturday, August 23, 2008

Sri Lanka's Inflation Higher Than Pakistan's

It may not be any consolation to an average Pakistani but Pakistani economy is not alone in returning to the bad old days. Sri Lanka is keeping pace with Pakistan.
While Sri Lanka's long running civil war has largely been limited to the north and east, leaving the populous, well-off west largely unscathed, its stresses are beginning to show in the island nation's economy.

The Economist reports that Sri Lanka's annual inflation is close to 30%, the highest in South Asia. The rupee has appreciated against the dollar, further hurting exporters. By one estimate, economic growth—which was 7.6% in 2006—will be 4.3% this year. As elsewhere, inflation is being driven by high food and energy prices. But in Sri Lanka, 25-year average annual inflation is 12%. Monetary policy has been too loose, in part to finance the war. Including the cost of resettling refugees, the war eats up around 30% of the government’s budget.

Sri Lanka's exports and economy have been propped up by special EU preferences for Sri Lankan textiles. Under a concession known as “GSP Plus”, awarded in 2005 to help Sri Lanka rebuild after the 2004 tsunami, Sri Lankan exporters enjoy preferential tariff treatment from the EU. As a result, the EU is Sri Lanka ’s biggest export market, accounting for annual sales of around $1 billion; about half are covered by GSP Plus. But there is a problem with the rules of GSP Plus. Beneficiaries must comply with 27 international conventions, on environmental, labour and human rights standards. And on the last of these, Sri Lanka is struggling. The agreement expires at the end of 2008. The Economist believes that it will not be renewed.

What has upset the EU are various reports indicating government complicity in the abduction or murder of hundreds of Tamil and Muslim men. It is at war with human-rights groups. It has refused to let the UN High Commissioner for Human Rights set up an office in Sri Lanka. The EU cancellation of Sri Lankan preferences would mean 4% cut in Sri Lanka’s garment exports. Overall, it would cost 2% of GDP. If the EU renewed the agreement without progress on human rights, it might be challenged at the World Trade Organization—as happened to an EU trade sop to Pakistan in 2004.


Jaydev said...

Could you throw light on why we are facing such a high inflation? Is it tied to recession in US(banking fiasco) and globalization playing its part in "evening out" equally among the financially tied states or is it just a coincidence? In India, though indices are outdated and numb, inflation is close to becoming 13% from 12..What's you take on the whole price rise and inflation problem that we are experiencing across the globe?

Riaz Haq said...

I have another blog which focuses on economy in South Asia. It's called "South Asia Investor Review". You can find several of my posts there on inflation.

Jaydev said...

Yes..I found exactly a post of yours that mentions it..thank you.
What is driving food and oil prices higher? - June 26
I initially thought the whole menu items on the right side on the blog is google ads..or something
really sorry to bother you with the obvious without checking..

Riaz Haq said...

Here's a piece by BBC's Soutik Biswas on India's onion crisis:

A spectre is haunting India - the spectre of an onion-less life.

Onion prices have shot through the roof this week, climbing to an eye-watering 85 rupees ($1.87; £1.20) a kilo from 35 rupees only last week. Crop damage due to unseasonal rains has apparently led to a shortage. Traders have been hoarding stockpiles of the staple food to make a killing, despite official threats to punish them.

A fretful government has banned exports till mid-January to bring prices down, and cut import duties on the vegetable. The prime minister, we are told, is busy writing letters imploring his farm and consumer affairs ministries to bring down prices quickly. The opposition is breathing fire.

Onions have stormed their way to the front pages of newspapers and the top of TV news bulletins. I counted two dozen stories on onions in a dozen-odd English papers today. One editorial chides the government for the price rise and asks it to "know your onions". "UPA [United Progressive Alliance, another name for the ruling Congress-led government] lands in onion soup", is a particularly colourful banner headline in another paper. "Onions: Weep till March", bemoans yet another headline, alluding to a minister's deadline to fix the crisis. And a tabloid's onion edit - teasingly called "More at work than onions" - is strategically placed between one on a corruption scandal besieging the government and another on the sizzling alleged affair between the British actress Liz Hurley and the Australian cricketer Shane Warne.

Chefs and cookbook writers have come out in droves giving out free tips on how to cope without onions. "My advice, especially to those who want to eat out," says one chef, "would be to shift to different cuisines for a while as onions are primarily used in Indian cooking." So try European and other Asian foods, he advises. At home, he says, substitute onions with tomatoes and curds. Onion lovers may not find that a very convincing answer.

Everyone is concerned about the prospect of life without onions in India. Most worried of all are the politicians. In 1998, onion inflation was partly blamed for the unseating of the Hindu nationalist BJP government in Delhi's state polls. Political pundits insist that steep onion prices also contributed to the now-defunct Janata Party's debacle in the 1980 general elections.

So why do high onion prices drive Indians up the wall and unseat governments? One onion exporter said to a paper: "Why does the consumer never compare prices of onions with those of other vegetables? No vegetable is available at less than 40 rupees a kg in the retail market."

It's simple. Onion is a vegetable that no Indian kitchen can do without. It is also the most egalitarian of vegetables. A poor peasant or worker's sparse meal is incomplete without a bite of the pungent bulb. The onion is pureed, sauteed and garnished in the rich man's feast as well. It also occupies a unique culinary space in Indian cooking.

It is a must for adding taste and crunch to many vegetarian and non-vegetarian dishes. It is eaten raw as a salad, pureed for flavouring and sauce for meats and garden vegetables; used as a dip; fried as fritters and crisps. Rustic medicinal beliefs have it that it has healing properties and reduces acidity. Indians believe onions cool the body in the searingly hot summers and keep fungal infections away during muggy monsoons. In the old days Hindu widows kept away from onions after their husbands' deaths as the humble bulb was believed to have aphrodisiac qualities. How can you possibly compare such an exalted vegetable with any other?