“Essential tax hikes may lead to short term higher prices”

Sri Lanka has seen soaring inflation, which topped 70% in August 2022, according to the NCPI, potentially the highest ever on record.

The NCPI (National Consumer Price Index) measures how much people spend on a selected basket of goods and services. In July 2022, the NCPI recorded inflation at 66.7%, said former President Federation of Chamber of Commerce Nawaz Rajabdeen.

“Unfortunately, consumers can expect some further price increases as the government moves to reduce the budget deficit and be more fiscally responsible, through higher taxes, in order to obtain international support to help Sri Lanka overcome its present economic crisis. These price increases will come as a result of companies, manufacturers and service providers being unable to sustain themselves in the face of rising costs due to tax hikes, and being compelled to pass at least some of these to the end consumer. Micro sector too would suffer.”

It is important to note that these moves are crucial and essential to getting inflation under control and bringing in more sustainable fiscal policies in the medium to long term.

Price increases have been driven across the economy due to the sharp depreciation of the rupee in the foreign exchange market, coupled with rising costs of fuel, electricity and other input costs. “This is all on top of rising food prices, with food price inflation in August noted at 84.6 %, a rise from 82.5% in July.”

In terms of immediate tax hikes, VAT has been increased to 15%, while the Social Contribution Levy places an additional tax of 2.5% on revenues. However, some glimmer of hope does appear to be on the horizon, as the Central Bank has expressed its anticipation of inflation peaking in September, before starting to ease thereafter, as a result of policy intervention and the economy adjusting to the new reality facing Sri Lanka. “However, this is dependent on global commodity prices remaining stable and not creating any shocks.”

Added to this, there is the potential for commodity prices to ease in global markets, as we have already seen with crude oil, sugar, vegetable oil and other commodities. Further easement in commodity prices could help insulate Sri Lankan consumers from price hikes and curtail inflation.