Food for thought

High food costs in Sri Lanka, and government policy

Food costs make up a significant portion of household expenditure in Sri Lanka. According to the last Household Income and Expenditure Survey carried out by the Department of Census and Statistics in 2012/13, the average household spent 34% of its income on food. Although this proportion fell from 46% in 2001/2, it’s still significant.

In general, households spend more money on food when incomes rise, but food represents a smaller portion of income, as they allocate additional funds to other goods. In the UK and the US, food takes up less than 10% of household income. The common complaint of the high cost of living in Sri Lanka has some grounding in policy, particularly taxes on food.

Sri Lanka heavily taxes imports, everything from cars to cereal. Basic food items are no exception. The government claims the reason for high taxes is to protect domestic farmers for reasons of food security.

Early concepts of food security focused on food supply problems like assuring availability and, to some degree, the price stability of basic foodstuff. The current view of food security focuses on access rather than availability of food.

The FAO says food security is achieved “when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food”.

Access is dependent on physical availability and affordability. If food is available but unaffordable, there is limited food security.

Taxes, which raise food costs, are thus detrimental to food security. The Global Food Security Index ranks Sri Lanka 65 out of 113 countries, with low affordability (Sri Lanka is ranked 69 on this score) being one of the reasons for the low ranking. Singapore, which has minimal domestic food production, ranks 3rd overall and 1st in terms of affordability. Singapore imports 90% of its food, but the Agri-Food and Veterinary Authority of Singapore, which is charged with ensuring food security, has diversified its sources of imports to spread the risks associated with high levels of food imports. Therefore, it is not necessary to produce food in order to achieve food security, but food must be available, cheap and safe.

Taxes on food generate substantial revenue for the state. The Special Commodity Levy (SCL), which usually applies to food, earned the Government Rs55.8 billion in 2016. In the period January to April 2017, revenues from SCL rose 14.1% to reach Rs24.1 billion due to increases in rates. To give an example, the SCL on potatoes increased progressively from Rs15 to Rs35 to Rs40 just over last year. Similarly, the SCL on Bombay onions rose from Rs5 to Rs25 to Rs40 per kilogram. The SCL contributes around 4.3% of total tax revenue. The end result is higher prices for consumers, rich and poor alike. Nowhere is this more damaging than in food prices, which hits the poorer sections of society the hardest. Most Sri Lankans are unaware of the extent of the tariffs. Consider the following items: Import taxes add Rs130 to a bottle of cooking oil, Rs880 to a kg of butter, Rs300 (or 30%, whichever is higher) to a kilo of cheese and Rs625 to yogurt. This means that taxes make up almost 40% of a slab of butter you buy at the supermarket.

Sri Lanka’s public finances are in disarray, with public debt reaching Rs9,387 billion, around 79% of GDP in 2016. There is a real need to balance the budget to prevent the debt ballooning even further, but the state chooses to do so simply by increasing taxes and the cost of living. Government revenue rose 24.6% in the period January to April 2017, with collection from consumption-based taxes (mainly VAT/PAL/NBT) increasing 32.3%. Unfortunately, little attempt seems to have been made to curb government expenditure, which grew 16.5% during the same period.

Increases in government revenue are welcomed by analysts, but not by consumers, especially if they understand the extent to which they impact the cost of living. There is plenty of room to cut government expenditure by reducing the size and scope of the government with no significant impact to public services. To improve public welfare by cutting the tax burden, a programme to reduce expenditure must be pursued aggressively.

For example, the largest loss-making state enterprises lost Rs54 billion in 2016, with SriLankan Airlines alone losing Rs28 billion. The entire revenue earned in 2016 through the Special Commodity levy was Rs55.8 billion in 2016. Taxes on food basically covered the losses of the largest loss-making state enterprises. Theoretically, food taxes could have been cut to zero if these losses had been avoided.

Privatising loss-making state enterprises has the double benefit of both eliminating losses and raising revenue that can be used to reduce government debt, which in turn leads to permanent reductions in interest payments. Interest payments consume around 36% of government revenue. The sale of idle or underutilised land and other assets can serve the same purpose.

There are innumerable instances of corruption, waste and extravagance, a lot of which is hidden in state enterprises that are being paid for by taxpayers; one well-documented instance is the loss of Rs15 billion in a scam involving imported rice at Sathosa.

The bloated public sector, which employs 1.3 million people whose pensions and salaries consume 50% of government revenue, needs to be downsized. The country employs 272,000 in the military, an unfortunate consequence of the war, but in peace, do we need to maintain a force larger than the combined forces of Britain and France? Even if the military is ignored, how are public services improved by employing 166,588 peons, 72,034 semi-skilled labourers and 25,645 driver/semi-skilled labourers? To put this into context, we only employ 19,612 medical officers, 32,399 nurses and 230,525 teachers. Why does the government need to run 100+ commercial businesses? Does Polipto Lanka, which supposedly turns plastic into petrol, actually have proven technology to do this? If they do, why is this not being exploited fully? How does the Cashew Corporation or Lanka Ceramics benefit the ordinary citizen?

The public needs to hold the government to account. To do this, we need information—this is why transparency is important. We need to ask what our tax money is being spent on, what services are being delivered and how public welfare is being increased.

The next time politicians offer something “free” or “subsidised”, or offer to build infrastructure, we must ask ‘How much does this really cost? How is it being paid for? Does the government really need to do this, and who does this really benefit?’ Unless we get the government to control its expenses, and eliminate waste and corruption, we will be saddled with high taxes and a high cost of living.

 

References
*Dept. of Census and Statistics, Household Income and Expenditure Survey 2012/13, pp 6, 23
*Dept. of Census and Statistics, Household Income and Expenditure Survey 2002, pp 5, 13
*CBSL Annual Report 2016,
*Mid-Year Fiscal Position Report 2017, Ministry of Finance
*Ministry of Finance and Planning Sri Lanka, Annual Report 2015 pp 204, 207
*Ministry of Finance and Planning Sri Lanka, Annual Report 2016 p 187