Brace for a costly contraction

The old adage ‘the bigger they are, the harder they fall’ comes to mind when reflecting on the view the current Government had of the economy since taking office to now. From the “vistas of prosperity and splendour” to the “completely collapsed” economy Prime Minister Ranil Wickremesinghe spoke about last Wednesday; Sri Lanka continues to fall through the cracks in the short-term with the way forward looking very bleak. The increasingly dire situation at hand, millions are now left struggling to source fuel on top of electricity and food shortages. 

A homemade solution being impossible at this point, global partners and the International Monetary Fund (IMF) have been called on to come and aid stabilise the economy, albeit in the eleventh hour. Public transport has reduced in frequency, forcing travellers to squeeze into compartments and even sit precariously on top of trains as they commute to work. Patients are unable to travel to hospitals due to the fuel shortage. Rice, vegetables, and milk powder continues to disappear from shelves in many shops and supermarkets.

The National Consumer Price Index (NCPI) shot up to 45.3% in May 2022, up from 33.8% in April, bringing the annual average inflation level to 16.3%. This measure of headline inflation in a year-on-year basis, has moved by the monthly increase of both food and non-food categories. Food, that accounts for approximately 30% of the total NCPI basket, increased by a staggering 58% for last month, while non-food was up by 34.2%. As April inflation had reached 45.1% and 23.9% for food and non-food respectively, the change this month has not broken the perilous trend.

Core inflation, which captures the basket of prices without the more volatile items of food and energy, too increased to 37.7% bringing the annual average core inflation to 13%. According to the Department of Census and Statistics (DCS) it was the prices of rice, milk powder, vegetables, fresh fish and bread that had moved the most in the food category. 

Moreover, movements in the non-food category that is not usually seen were observed in prices of transport – capturing Petrol, diesel and bus fares hikes, housing, water, electricity, gas, furnishing, household equipment and maintenance and other fuels. The category of miscellaneous goods and services, that look at price changes in car insurance and soap, too had moved during the month. 

Sri Lanka’s Gross Domestic Product officially contracted by 1.6% in the first quarter of 2022. Significantly slowed down economic activity was to be held responsible, despite the recovery expectations of the two-year pandemic coming to an end. Factors such as inflation, foreign exchange devaluation and the dollar deficit for essential imports were the reason that growth fell short according to the DCS.

While the manufacture of food, beverages and tobacco products reported contractions of 9.1% owing to high prices and supply disruptions, the manufacturing of textiles, wearing apparels and leather products fell only by 0.9% respectively in this quarter. Low business confidence resulting in my expansions put on hold, may have unsurprisingly caused the construction industry, which has the highest share of 9.3% to the GDP, record contractions of 2.2%. However, marginal positive growth in the services sector was led by tourism looking sectors of accommodation, food and beverage service activities. With a 25.2% increase here, IT programming consultancy and related activities contributed to 12.3% with telecommunications at 7.9%. This is all the while the worst is yet to come on the real economy this quarter.