WHAT IS THE SOLUTION FOR STAGFLATION IN SRI LANKA?
Posted on July 31st, 2022

BY EDWARD THEOPHILUS

Stagflation means double-digit inflation seems in many countries as a result of the post-Corona pandemic, and the temporary solution to this situation being used by many countries is to increase subsidies to lower income earners, how these countries spend for subsidies (Source of funds) has not been disclosed and it could assume that printing money generates funds for subsidies. Is it the economically logical way of finding funds for spending?   Money printing or more printed money added for circulation is one reason for stagflation.  Printing money for subsidies in all countries and it seems that no alternative policy actions have for the chaotic situation.

Two major definitions for inflation were before the 1960s, the demand full and cost-push. Milton Freidman further defined the reason that increases the volume of money in the economy and his solution was imposing a tax to attract excess money back to the government treasury. Sri Lanka has not a specific tax to attract money from the economy. During wartime, there was a tax to collect funds for subsidies and a similar type of tax should have been introduced by the government to find funds for the Corona period.  

The major reason for stagflation is production-related problems, which means lower production in all areas of the economy and the government needs to encourage production, it will increase employment opportunities and reduce the payment of subsidies.  Consumers of subsidies should be accountable to the government for providing information about how they worked to make revenue instead of depending on the subsidies.      

Stagflation has been impinging Lanka since the late 1950s and the government policy did not focus the measures of inflation control by productive measures and the policy of the government was concerned with weak measures such as price control, rationing the distribution of goods and services and many policy actions were related to so-called socialist policies. Many socialist policies had been introduced by the government since 1956 but they were like sand castles.

As reported in newspapers in Sri Lanka inflation rate in July 2022 is 60.8% and the highest contribution to the average inflation was from food 90.9% and transport a huge contribution of 143.6%.  These statics advise the government that if it can control the inflation in the food and transport sectors the stagflation could reduce to a single digit. In many countries, inflation in the food and transport sectors shows that it is higher and the solution for the food area is to increase production and transport is to develop a plan considering the cost of the transport sector.

Sri Lanka cannot develop programs to control stagflation in isolation and needs to consider the ways other countries are using and developed countries know how these two-area influence human lives. Therefore, developed countries have a system of close monitoring of inflation, especially in food and transport areas.

Data presented by the Census and Statistics Department in Sri Lanka indicate that the non-food sector contributes 46.5% and this means the government policy framework needs to consider policies and procedures for all three areas to control stagflation.

Inflation control in Sri Lanka needs a macroeconomic plan with an appropriate framework that indicates vital factors relate to the economy. What are the contributing factors to the inflation model in Sri Lanka, and how the variation of factors is monitored by policymakers may not be clear.    

Illicit drugs in Sri Lanka have contributed more than 20% of the total money supply consists of drug money and people associated with the illicit drug business are influenced by vital people (politicians) in the society, so it is difficult to control drug money. Many politicians are indirectly associated with the illicit drug business. Sometimes, they get funds from drug dealers. Since the early 1980s, I was being observed that people were overspending and what was the source of funds, one was earning from employment overseas and the other was related to illicit drug dealing.    

The major solution to stagflation would be concerned with many factors.  Why government economists are silent on these issues?

As indicated in statistics 90.9 inflation in the food industry could be reduced to less than 10% if the policymakers attempt to develop programs for increasing food production. Has the government listed the items of the food industry and what kind of actions should take to increase production and distribution of such items?

A considerable part of the stagflation in Sri Lanka has been contributed by weak policymakers and the lack of knowledge of policymakers to manipulate policies to control the inflation.

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