The sharpest depreciation of the rupee following the free float of the currency ignited across the board prices hike with cost likely to soar further if Ceylon Petroleum Corporation revises upwards its pricing whilst the Central Bank said spikes are temporary and its recent moves will usher longer-term benefits and stability.
Of the announced hikes, most centred around food on the basis that producers will incur higher prices on account of imported flour and other ingredients would be costlier following the near 30% depreciation of the rupee.
Forex markets and the private sector saw continued uncertainty as at interbank level the US Dollar was quoted at between Rs. 260 and Rs. 280. Dealers said the highest-level transactions were done at Rs. 265. However CBSL continued to quote Telegraphic Transfer rates at Rs. 249.96 (buying) and Rs. 259.99 (Selling).
Prima said that One kilogram of Wheat Flour was increased by a price between Rs. 35 to Rs. 45 whilst the other producer Serendib increased it by Rs. 35.
The All Ceylon Bakery Owners’ Association said the price of a loaf of bread has been increased by between Rs. 20-30 and a loaf would cost between Rs. 110 and Rs. 130. The price of a sweet bun has been increased by Rs. 10.
The All Ceylon Restaurant Owners’ Association said the price of a rice packet has been increased by Rs. 20; Kottu by Rs. 10 and Short Eats by Rs. 5.
Separately the Civil Aviation Authority said the price of airline tickets has increased by 27%
The Ceylon Cellular Vendors Association said due to the increase of the dollar, the price of phones and accessories will be increased by 30%.
The hikes are coming as inflation hit a record 16.8% in January with food prices up 25%.
Prices are likely to go up further as State-owned Ceylon Petroleum Corporation (CPC) under growing pressure to adjust its prices upward following global spikes. Lanka IOC revised its prices citing devaluation as well as rise in global prices. It increased diesel by Rs. 75 per litre and petrol by Rs. 50 per litre. Though losing Rs. 1,201 per litre of diesel, the CPC has avoided increases despite LIOC implementing two revisions within a month.
Even without CPC hike, three-wheelers drivers are demanding that the base fare for the first kilometre must be Rs. 80 up from Rs. 60 implemented in early this year.
Under flak from the Opposition and economists for sheer mismanagement and late decisions, Central Bank Governor Nivard Cabraal took to video and CBSL Facebook to reassure markets and the public.
“We are aware of the implications of these moves. It will be short term and greater stability will ensure long-term benefits to all,” he said.
Cabraal said that recent policy rates hike and allowing flexibility of the exchange rate (depreciation) were made in ensuring economic and financial system stability which are core responsibility of the CBSL. “These decisions are not avoidable,” he said in discharging CBSL’s duties.
Stressing that a flexible exchange regime will boost foreign exchange inflows thereby help stabilise the economy, Governor however stressed that “CBSL stands ready to meet any challenges post devaluation.”
Difficult and challenging times. Maintaining macroeconomic stability is an arduous task. CBSL initiated a host of measures amidst the COVID pandemic to cushion the impact. He said that the Russia-Ukraine war posed the biggest setback globally. In that context CBSL had to opt for new tools to ensure macroeconomic stability. They included hiking interest rates and introducing flexibility for the exchange rate.
CBSL Head of Economic Research Anil Perera said a managed exchange rate since the pandemic helped the country to mitigate the impact of global and local shocks to the economy. However support extended to the economy and the public by way CBSL actions needed to be relaxed to ensure greater stability and sustainability.
He said that reforms were required especially since the outbreak of the Russia-Ukraine war and resultant spike in oil prices. He said depreciation will cause short term challenges such as rise in prices but expected stability in the currency will help.
“Foreign inflows will increase and exchange rate flexibility will boost exports whilst discouraging imports,” Perera said, adding that the CBSL will closely monitor the behaviour of forex markets and take appropriate action to ensure further stability if necessary.
