By Maneesha Dullewe Courtesy The Morning

Despite Government attempts at imposing price controls on the market with the ostensible goal of providing relief to consumers, it has often led to supply and demand issues, with consumers bearing the brunt of the impact.  

According to economists, when price controls are imposed, price signals are distorted and no longer valid for that good or service, causing the market to imbalance as excess demand or supply occurs.  

For instance, when it comes to the rice market in Sri Lanka, price controls have proven contentious. The market is currently facing widespread shortages of certain varieties of rice, with many stores no longer selling red rice after price controls were imposed by the Consumer Affairs Authority (CAA) while import controls reduced the supply of other varieties. 

Meanwhile, President Anura Kumara Dissanayake in early December 2024 directed rice traders to sell rice at a fixed price. Accordingly, the maximum wholesale price of 1 kg of local white rice is Rs. 215, with a maximum retail price of Rs. 220. 

The wholesale price of 1 kg of local nadu rice is Rs. 225, while its maximum retail price is Rs. 230. Furthermore, the wholesale price of 1 kg of keeri samba is Rs. 255 and the maximum retail price is Rs. 260. 

Need for long-term policies 

Speaking to The Sunday Morning, former President of the All-Island Small- and Medium-scale Rice Mill Owners’ Association and Marandagahamula Rice Traders’ Association President B.K. Ranjith said that the distorted pricing in the market had been an issue they had raised with every government for the past 30 years. 

He noted: Each time, they make plans when there is a crisis. Once the crisis passes, it is forgotten.”

Ranjith further pointed out that small-scale mills currently possessed no paddy, with his mill having been closed for two months, a situation he described as being unprecedented. Even if there is paddy, they will be unable to provide it at the control price. 

For small- and medium-scale producers especially, in order to provide rice at Government-imposed control prices, there needs to be a mechanism where paddy is received at appropriate prices, with mill owners also being able to keep a profit margin and supply the stock to the market. However, in order to carry this out there needs to be Government policies. 

We have been saying this for a long time, and we have also informed the incumbent President that suitable price controls need to be implemented appropriately for the Yala and Maha seasons. A control price should not last a full 12 months; it must vary depending on the factors influencing the two cultivation seasons.”

According to Ranjith, a month-and-a-half or two months before harvesting, the Ministry of Agriculture can estimate how much will be harvested, allowing the authorities to set a control price for farmers by taking into account the cost of all the agricultural inputs. 

However, he expressed that rice prices should ideally be decided by the competitive market instead of a control price being imposed. Given the centrality of rice in Sri Lanka, he stressed that what was needed was a long-term Government policy to address the situation.

An issue of supply and demand 

Meanwhile, speaking to The Sunday Morning, University of Peradeniya (UOP) Department of Economics and Statistics Professor Wasantha Athukorala outlined market behaviour in cases of Government intervention through price controls. 

In a competitive market, prices are determined by demand and supply. Whenever the Government tries to control the price, it affects the market price since it is an attempt at artificially creating a price. This affects market equilibrium, leading to changes in consumer and producer behaviour. 

If the Government price is higher than the equilibrium price, there will be a greater influx of commodities to the market, leading to a supply increase but lower demand. This creates a mismatch between demand and supply. 

If the Government price is less than the market price, there will be greater demand in the market while supply will be less. While this will lower prices, suppliers will be reluctant to supply, although more people will demand the commodity because it is cheaper.”

Outlining how price controls could be feasible, he explained: When the Government sets an artificial price, it should have the capacity to purchase the excess supply or provide the additional demand. If the Government price is higher than the market price, this creates an extra supply in the market because more people are supplying given the higher price. The Government should then be able to purchase that extra supply. 

Similarly, if the Government price is less than the equilibrium price, additional demand is created in the economy and the Government should be able to supply that demand. Otherwise, it will create black market prices because there is a higher demand but supply is less.”

Potential solutions 

However, given Sri Lanka’s long history of imposing price controls, which have often led to unintended economic consequences, the Government’s continued reliance on such a mechanism requires explanation. 

Prof. Athukorala attributed this continued failure to a lack of comprehensive market-related information on the country’s requirements. 

We don’t know how much the country requires. We don’t know where the stocks of commodities are available because this information is missing.”

This had led to a few people trying to control the market, he noted, pointing to the egg, coconut, and rice markets as examples, where such individuals attempted to artificially create prices. 

According to him, the solution to this situation lies in opening the economy to the world market in the short term and developing a competitive market in the long term. 

Noting that the short-term measure would be to liberalise the market, he said: When there is excess supply, we should be able to export. When there is extra demand, we should be able to import those commodities.” 

Meanwhile, the long-term solution of developing a competitive market entails having a larger number of producers, ensuring that a single producer cannot change prices since their market share is smaller. 

However, the issue in implementing price controls is that the Government is unable to monitor every sales outlet to ensure that such controls are in place. Accordingly, if the Government wishes to impose price controls, it should also be able to implement these controls, which is not impractical. 

Therefore, Prof. Athukorala noted that while the Government should intervene when there were large price fluctuations, it should not be a permanent or long-term intervention. 

While the lower prices resulting from price controls are popular among consumers, Prof. Athukorala explained that implementing a maximum price rather than a minimum price was what would actually help the consumer.

The Government implements the maximum price to help the consumer, which is always lower than the equilibrium price. But in the Sri Lankan context, the Government often sets a minimum price, which is higher than the equilibrium price,” he stated.

In the paddy market, for instance, if producers claim that the market price is insufficient, the Government will agree to purchase at a price higher than the market price, thus helping producers rather than consumers. 

Nevertheless, traders often object to selling at prices set by the Government. Traders wish to distort the market as they dislike Government intervention, since they prefer to reap the maximum possible benefit,” Prof. Athukorala noted. 

Consumer protection

Meanwhile, National Consumer Front (NCF) President Asela Sampath told The Sunday Morning that while control prices were useful, the issue was that there was no means of implementing them. 

What needs to be done is to identify the wholesale and retail price through an economic committee. The Government needs to intervene in the process by supplying goods at the village level through Sathosa. Otherwise, wholesale traders who obtain goods from Colombo will sell those goods elsewhere at a profit, which will lead to higher prices,” he commented. 

Sampath stressed that there needed to be a programme to identify the quantity of goods needed for consumption each quarter, whether sufficient stocks were available, etc. 

There needs to be a national plan for the entire consumer process without which there will be issues in terms of quality of goods, exploitation of consumers, and service,” he noted, adding that black market operators with undue political influence needed to be eliminated to ensure that consumers were protected in the market. 

Given the long-standing nature of this dilemma, addressing both supply- and demand-side issues is essential for Sri Lanka to achieve food security and price stability.