ECONOMYNEXT – The cost of key ingredients for making Sri Lanka’s Christmas cake, fell 7.3 percent in 2024 amid deflationary policy and currency appreciation followed by the central bank under Governor Nandalal Weerasinghe, retail price data show.
The difference in the cost of ingredients from 2022, when deflationary policy started showing up in the balance of payments and November 2024 was only 0.8 percent.
The widely watched Colombo Consumer Price Index also rose 1.2 percent from November 2022 to November 2024.
The Sri Lanka Christmas cake is acclaimed by international foodies who have tried out the confection to be perhaps the World’s Best’.
“For years I firmly believed that I had tried every single variation of the Christmas cake possible. Light, dark, moist, dry, British, Scottish, Italian, Serbian… That was, until I met my Sri Lankan husband,” writes author Queensashay at Food52, a foodie portal.
“I would have never thought that the richest, the most decadent, the most interesting and the most delicious Christmas cake of all would come from Sri Lanka.”
The Sri Lanka Christmas cake is a mix of foreign and local ingredients. The cake came from Sri Lanka’s colonial period when some local ingredients were substituted (or enhanced depending on how it is viewed) with imported fruit preserves.
Key ingredients includes dried grapes (sultanas, currents, raisins), candied orange peel, cherries, as well locally made ginger, pumpkin and chow chow preserve. Sri Lanka specific spice powder with cinnamon, cardamom, cloves and nutmeg is added.
Each family has a recipe handed down the generations which are slightly different depending on the types and quantities of fruit preserves added. The cake also require large number of eggs, but there is a wartime recipe in Sri Lanka for a cake that can be made without eggs.
Nationalist Food Taxes
The cost of 11 ingredient including margarine (it was butter originally), totaled 14,774 rupees in 2024, down from 15,913 rupees in 2023.
Sri Lanka has imposed horrific protectionist taxes on dairy products to allow nationalist domestic producers to gauge customers especially after the end of a civil war as nationalism worsened.
Food and shelter (building materials) are among the most essential items from which money can be easily extracted including from poor people, by blocking competition.
Butter is taxed at 750 rupee a kilo duty and 400 rupee cess in additional to value added tax. Cheese has similar nationalist taxes (650 rupees + 500 rupees), according to the customs duty list. At the moment however butter is on a 1,500 rupee kilo special commodity levy.
As a result of protectionist taxes and the general inefficiency that comes from a nationalist autarky, butter costs about 6000 rupees a kilo compared to about 2000 rupees in India.
From 2022 to 2023 costs of several ingredients went down down, while others went up including cashew and ginger preserve. In 2024 the price of many ingredients fell.
Monetary Policy
Sri Lanka’s central bank stopped printing money to cut rates under flexible inflation targeting and/or potential output targeting in 2022 and started running deflationary policy after allowing rates to rise, which showed up in the balance of payments as a surplus from September.
Inflation almost stopped in its tracks from then on as traded goods prices fell. However services and some non-traded items continued to catch up to the previous depreciation, as the central bank allowed the exchange rate to appreciate.
RELATED Sri Lanka consumer prices rise 0.05-pct in 26 months to November 2024
Under deflationary policy a central bank has full control of the currency and can appreciate or depreciate the currency at will as outflows of foreign exchange is lower than inflows due mopping up inflows from dollar purchases.
Sri Lanka’s International Monetary Fund program also has high credibility due to currency appreciation allowed under Governor Weerasinghe.
However there has been warnings that inflationary policy is resuming. The central bank has also threatened to raise cost of living by 5 percent a year soon as it has done in the past.
Sri Lanka experienced a series of balance of payment crises under 5 percent inflation targeting and defaulted on its foreign debt Latin America style without a war.
Part of Sri Lanka’s inflation through traded goods comes from the US Federal Reserve as the rupee is pegged to the US with the dollar used as the intervention currency to manage the exchange rate.
The Fed has seen some of the worst monetary policy in its history under Jerome Powell, hitting levels seen in the tail end of Great Inflation.
The Fed jettisoned the concept of excess reserves and also claimed inflation was due to supply chain bottlenecks (cost-push). That inflation was not monetary (or is only partly monetary) also existed in the 1970s. (Colombo/Dec25/2024 – Update to show that butter is under SCL)
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