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Current Economic
Landscape
As of October 2023, headline inflation, measured by the Year-on-Year change in the Colombo Consumer Price Index, stands at a relatively modest 1.5%. This represents a significant improvement from the alarming peak of around 70% witnessed in September of the previous year. The Central Bank, in its assessments, foresees inflation stabilizing around 5% over the medium term, attributing this to a combination of prudent policy measures and well-anchored inflation expectations. However, the costs associated with essential commodities such as food, healthcare, and clothing persist at elevated levels, posing ongoing challenges.
Challenges in
Essential Sectors
While there is a positive trend with food inflation
decreasing to single digits, other sectors face formidable challenges. Clothing
prices witnessed a substantial YoY increase of 19% in October, housing costs
rose by 12%, and health-related expenses increased by 6%. The World Bank
projects a worrisome rise in poverty from 25% to 27.9% between 2022 and 2023,
underscoring the detrimental impact of the escalating cost of living on the
general population. The 'Rice and Curry Indicator,' devised by the Advocata
Institute, reveals a concerning uptick in the retail price of food items,
adding an additional layer of strain on consumers.
Impact on Businesses
and Consumers
The Purchasing Managers' Index provides a glimmer of hope by
indicating positive expectations for manufacturing activities, largely driven
by anticipated demand during the upcoming festive season. However, a cloud of
uncertainty looms over this optimism, fueled by concerns surrounding recent
increases in electricity tariffs and proposed Value Added Tax (VAT) hikes. The
spike in utility bills is exerting pressure on both businesses and consumers,
with some attributing the escalating prices to a middlemen 'mafia' artificially
inflating costs beyond reasonable production expenses.
Retail Sector Outlook
The Sri Lanka Retailers' Association forecasts a challenging
season for the retail sector, primarily due to constrained consumer budgets.
Non-essential sectors, especially those dealing in luxury items and home
appliances, are expected to experience a noticeable decline in sales. Despite
improved Purchasing Managers' Indices and the appreciation of the Sri Lanka
Rupee against the US Dollar, these positive indicators do not appear to
translate into enhanced purchasing power for ordinary consumers.
Consumer Sentiment
and Festive Season
Consumers find themselves grappling with higher bills,
effectively dampening any festive cheer. The surge in prices of goods, coupled
with concerns about unscrupulous business practices, has cast a shadow over the
anticipated joys of the upcoming festive season. General sentiment suggests
that celebrations this year will likely be more subdued compared to the
previous year.
The Impact on
Businesses
The increased prices of goods in the market compared to the
previous year have created a complex economic environment. While consumers may
have a certain capacity to purchase at higher costs presently, the core issue
lies in the fact that sellers are inflating prices beyond reasonable production
costs. Allegations of a middlemen 'mafia' further compound these challenges, as
it is purportedly driving up prices of goods and impacting both businesses and
consumers adversely.
Businesses, particularly in the retail sector, find
themselves caught in a precarious situation. Despite the increase in prices,
there is a notable decrease in profitability due to higher production costs
stemming from elevated electricity and water bills. The increase in utility
bills is a double-edged sword, affecting both producers and consumers. While
the cost of certain essentials has decreased compared to the previous year,
providing some relief to consumers, the overall sentiment remains one of
economic strain.
The Advocata Institute's 'Rice and Curry Indicator' sheds
light on the intricacies of the market. Tracking the monthly changes in the
retail price of food items that go into rice packets in Sri Lanka, the
indicator shows an increase from Rs. 1,865 in October 2022 to Rs. 2,034 this
October for a rice packet. This not only highlights the challenges faced by
businesses but also underscores the impact on everyday consumers who bear the
brunt of escalating costs.
Retail Sector's Poor
Forecast
The Sri Lanka Retailers' Association's pessimistic outlook
for the retail sector further emphasizes the prevailing economic challenges. The
forecast suggests a downturn in profitability, with consumer buying power being
curtailed due to the current situation with electricity tariffs and other
economic factors affecting every household. The association anticipates that
consumption will decrease compared to the previous year, particularly in
non-essential sectors.
While fast-moving consumer goods (FMCG) are expected to
continue flying off shelves due to their essential nature, luxury items and
home appliances may see a marked drop in sales. Consumers are likely to engage
in restricted purchasing, focusing on necessities rather than discretionary
spending. The anticipation is that this restricted buying behavior will have
cascading effects on various sectors, leading to a sluggish retail environment.
Factors Affecting
Consumer Purchasing Power
Despite the improved Purchasing Managers' Indices for
manufacturing activities and the appreciation of the Sri Lanka Rupee against
the US Dollar, there is skepticism regarding the ordinary consumer's purchasing
power. The Sri Lanka Retailers' Association notes that there has been no
significant improvement over the last three years. The slow pace of economic
recovery has dampened purchasing power, and the outlook for the forthcoming
festive season appears bleak.
Consumer sentiment plays a pivotal role in shaping
purchasing behavior. Last year, consumers were looking forward to the festive
season as a reprieve after successive setbacks. However, this sentiment seems
to be absent this year. While celebrations are expected, they are unlikely to
reach the level of enthusiasm seen in the previous year. The increase in prices
of essential items, particularly those associated with the festive season, is
cited as a major factor contributing to this subdued outlook.
The Impact of
Increased Prices on Consumers
Consumers are feeling the pinch as the prices of goods in
the market have risen compared to the previous year. While there is
acknowledgment that consumers presently have a certain capacity to purchase at
higher costs, the core issue lies in the perceived inflation of prices beyond reasonable
production costs. The presence of a middlemen 'mafia' is often cited as a
driving force behind the upward trajectory of prices, creating challenges for
both consumers and businesses.
The businesses, particularly in the retail sector, find
themselves in a delicate position. While there is recognition that some
essential items have experienced a decrease in cost, the overall increase in
utility bills, particularly electricity and water, is impacting profitability.
The Advocata Institute's 'Rice and Curry Indicator' further underscores the
plight of consumers, showing a significant increase in the retail price of food
items essential for daily sustenance.
Festive Season
Challenges
The Sri Lanka Retailers' Association paints a sobering
picture of the upcoming festive season. Despite the anticipation that festive
shopping would provide a much-needed boost to the retail sector, the prevailing
economic challenges pose significant hurdles. The increase in electricity
tariffs and the proposed VAT hike are expected to further curtail consumer
spending, particularly on non-essential items.
Consumers are grappling with the reality of higher bills,
which are casting a shadow on the traditional festive cheer. The general
sentiment among consumers is one of caution and restraint. The current market
conditions, marked by an increase in prices and economic uncertainty, have led
to a scenario where consumers are more focused on managing with what they have,
rather than engaging in expansive spending.
Consumer purchasing behavior is undergoing a discernible
shift. Smaller retail stores are witnessing a change in consumer habits, with
individuals opting to purchase smaller quantities of goods than before. This
shift is indicative of a broader trend where consumers are adapting to the
economic challenges by cutting back on non-essential expenditures.
GDP Contractions and
Economic Realities
The economic landscape in Sri Lanka is further complicated
by negative GDP growth over the last two quarters. This negative growth is not
merely a statistical concern but a tangible indicator of decreasing income
levels. Under such circumstances, the weakening purchasing power of the
populace becomes evident. Festive purchases, which traditionally witnessed a
spike, are not anticipated to experience a similar upturn this year.
In previous years, individuals would often secure loans to
fund their festive season spending, relying on the confidence that they could
repay these loans. However, the current economic circumstances have made it
increasingly challenging for people to obtain loans. Existing loans and the
overall economic uncertainty are contributing factors, hindering individuals
from accessing financial resources for leisure activities.
Impact of Taxes and
Utility Costs
The burden of economic challenges is not evenly distributed,
affecting various segments of society. The increase in indirect taxes,
specifically the Value Added Tax (VAT), along with continuous upward
adjustments in utility costs, especially electricity, is taking a toll on both
the poor and the middle class. A significant portion of salaries is being
allocated towards taxes, leaving individuals with limited disposable income.
As the December festive season typically witnesses a surge
in spending habits, this year is expected to deviate from the norm. The
heightened demand that usually accompanies the festive season is unlikely to
materialize, especially among public and private sector workers, and daily wage
earners. The economic strains have made it improbable for individuals to
allocate funds for leisure activities during this season.
Marginal Improvements
Amidst Challenges
Despite the overarching challenges, there are indications of
marginal improvements in income compared to the preceding year. The downward
slide of the economy seems to have come to a halt, resulting in a slight uptick
in purchasing power. While this improvement falls short of the anticipated
standards of growth, it signals a gradual unfolding of economic recovery.
The uncertainty prevailing in the retail environment is a
significant concern. Retailers are grappling with maintaining profitability and
managing operating costs, given the dwindling profit margins, high salaries,
and staff turnover. The absence of firm and decisive policies, both short and
long-term, exacerbates the uncertainty, making it challenging for businesses to
navigate the complex economic terrain.
Future Economic Outlook: Looking ahead, the economic
challenges in Sri Lanka necessitate a multifaceted approach. Policymakers need
to address not only the immediate concerns of inflation and utility costs but
also the long-term structural issues affecting businesses and consumers.
Sustainable economic recovery requires a delicate balance between stimulating
demand, ensuring fair pricing, and creating an environment conducive to
business growth.
As the festive season approaches, the focus should not only
be on short-term economic indicators but also on fostering a stable and
conducive economic environment. Consumers and businesses alike await clear and
decisive policies that can instill confidence, stimulate spending, and pave the
way for a robust and sustained economic recovery.
Conclusion
Sri Lanka's post-crisis economic landscape is riddled with
challenges that extend beyond immediate concerns. The persistent issues in
essential sectors, coupled with the impact on businesses and consumers, paint a
complex picture. The upcoming festive season, traditionally a period of
celebration and economic stimulation, is marred by economic uncertainties,
dampening the usual enthusiasm.
While marginal improvements in income offer a glimmer of
hope, the broader economic outlook remains uncertain. The interplay of factors
such as increased prices, taxes, and utility costs, coupled with the challenges
faced by businesses and consumers, requires comprehensive and targeted policy
measures. Addressing these issues head-on is crucial for fostering a
sustainable economic recovery that benefits all segments of society. Only
through a coordinated and strategic approach can Sri Lanka overcome its current
economic challenges and pave the way for a more prosperous future.
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