Removing price controls a step in right direction, says think-tank Advocata

„Urges govt. to refrain from using price controls to address equity concerns, and instead create a competitive biz environment „Notes administratively controlled prices, particularly on goods and services exert huge burden on fiscal, leading to high borro

The government’s move to withdraw the several gazette notifications that imposed price controls is a step in the right direction, said Colombo-based economic think-tank Advocata Institute while pointing out that the step fosters competition and improves productivity.

The think-tank commended the decision as it acknowledge that consecutive governments have used price controls to address equity concerns instead of undertaking the hard reforms needed to create competitive markets.

The government recently ended the price controls on essential foods, such as milk powder, wheat flour, and liquid petroleum gas, and cement.

“Price controls create distortions such as shortages, rationing and the creation of a black market as well as substitution towards lowquality alternatives. Although price controls are often introduced by governments with the intention of protecting the poorest consumers in society, they are very inefficient, as a means of redistribution,” pointed out Advocata Institute in a statement to the media yesterday.

It elaborated that often these subsidies are biased against the poor as they consume less of these goods than the rich.

Furthermore, it added that sharp increases in prices could have negative consequences on low-income households in the short run.

“Ideally such price increases should be made gradually so consumers can adjust to them or be able to shift to cheaper alternatives,” the think-tank said, while asserting that administratively controlled prices, particularly on goods and services provided by the government exert a huge burden on the fiscal, leading to high borrowings and debt. It also affects the conduct of monetary policy by masking underlying inflationary pressures.

In an effort to reduce the cost of living by fostering competition and boosting productivity, Advocata stressed the need to remove barriers to entry, deregulating the economy, and removing the paratariffs on imports.

While the generation of inflationary pressures is an area of concern, Advocata noted that via “careful management and communication”, one-off increases in prices need not feed into inflation expectations and wage negotiations.

“This requires tight rein over demand-driven inflation and credibility that the Central Bank would use its monetary policy tools to keep inflation within its targeted range of 4 - 6 percent,” it said.

To steer forwards in a seamless manner, Advocata urged the government to refrain from using price controls to address equity concerns, and instead create a competitive business environment and look at boosting supply to lower prices in the economy.

It further suggested that to support vulnerable households, the government should provide a cash transfer to cushion the impact of price increases of essential commodities.

“This would require a re-examination of the Samurdhi scheme which currently excludes some of the most vulnerable households and tighter administration to ensure benefits accrue to those who need it most,” Advocata said.