Context: Sri Lanka’s government declared an economic emergency amid rising food prices, a depreciating currency, and rapidly depleting forex reserves.
President Gotabaya Rajapaksa has called in the army to manage the crisis by rationing the supply of various essential goods.
Why is Sri Lanka’s economy in trouble?
A number of factors have led to the current economic crisis in Sri Lanka.
The tourism industry, which represents over 10% of the country’s GDP and brings in foreign exchange, has been hit hard by the coronavirus pandemic.
As a result, forex reserves have dropped from over $7.5 billion in 2019 to around $2.8 billion in July 2021.
With the supply of foreign exchange reducing, the amount of money that Sri Lankans have had to shell out to purchase the foreign exchange necessary to import goods has risen. So the value of the Sri Lankan rupee has depreciated by around 8% so far this year.
Sri Lanka depends heavily on imports to meet even its basic food supplies. So the price of food items has risen in tandem with the depreciating Sri Lankan rupee.
The government’s ban on the use of chemical fertilisers in farming (to make the country 100% organic) has further aggravated the crisis by reducing agricultural production
It is predicted that the forced push towards organic farming could halve the production of tea and other crops and lead to a food crisis that is even worse than the current one
What has been the government’s response to the crisis?
The Sri Lankan government has blamed speculators for causing the rise in food prices by hoarding essential supplies and has declared an economic emergency under the Public Security Ordinance.
The army has been tasked with the duty of seizing food supplies from traders and supplying them to consumers at fair prices.
It has also been given the powers to ensure that forex reserves are used only for the purchase of essential goods.
The government has refused to end its aggressive push for complete organic farming claiming that the short-term pain of going organic will be compensated by its long-term benefits. It has also promised to supply farmers with organic fertilisers as an alternative.
Further, Sri Lanka’s central bank in early 2021 prohibited traders from exchanging more than 200 Sri Lankan rupees for an American dollar and stopped traders from entering into forward currency contracts.
Will the government’s response help the economy?
The President’s drive to make Sri Lankan agriculture fully organic is likely to lead to a significant drop in domestic food production and cause a further rise in prices.
Also, the various steps taken by the government to tackle the crisis may actually make things worse.
The capping of food prices, for instance, can lead to severe shortages as demand exceeds supply at the price fixed by the government.
People have already had to queue up to buy essential goods due to rising shortages.
The strong-arm tactics of the army can also have unintended consequences. When supplies are seized from traders, there is lesser incentive for them to bring in fresh supplies to the market. This can lead to a further drop in supplies and even higher prices for essential goods.
Conclusion
Government has to take necessary remedial measures so as to prevent the economic crisis turning into socio-political crisis.
