Sri Lanka Economic Crisis – Explained

What is happening in Sri Lanka? Why there is a food crisis in Sri Lanka? Why did Sri Lankan president Gotabaya Rajapaksa declare an economic emergency? Explained.

Created On: Sep 7, 2021 14:01 IST
Sri Lanka: Queue of people to buy essential food, Source: AFP
Sri Lanka: Queue of people to buy essential food, Source: AFP

Sri Lankan economic crisis: The President of Sri Lanka Gotabaya Rajapaksa had declared an economic emergency on September 1, 2021, due to rapidly depleting forex reserves, depreciating currency, and rising food prices in the country. The emergency was declared under the Public Security Ordinance to prevent the hoarding of essential items, including sugar and rice.

The Sri Lankan government has appointed a former Army General as Commissioner of essential services who is authorized to seize food stocks held by traders and retailers and regulate their prices.

What is happening in Sri Lanka? Why is Sri Lankan economy in crisis?

Sri Lanka is facing an economic crisis due to a number of reasons including depleting forex reserves, depreciating currency, and rising food prices in the country. The President of Sri Lanka Gotabaya Rajapaksa declared an economic emergency under the Public Security Ordinance to contain the crisis from worsening further.

Reasons of food crisis in Sri Lanka

Depleting forex reserves, depreciating currency, rising food prices

Sri Lanka during the COVID-19 pandemic suffered a severe setback in its tourism industry which contributes to over 10 per cent of the country’s Gross Domestic Product (GDP) and brings in foreign exchange. A setback in the tourism industry of the country has resulted in the depletion of forex reserves from over %7.5 billion in 2019 to approximately $2.8 billion in July 2021.

Due to the depletion in the forex reserves, the country had to increase the amount of money to purchase the foreign exchange to import goods. This increase has led to the depreciation of the Sri Lankan rupee by approximately 8 per cent so far in 2021.

Since Sri Lanka heavily relies on imports to fulfill the basic food supplies in the country, the depreciating currency has further led to a rise in the price of food items.

Sri Lanka govt ban on use of chemical fertilizers in farming

The ban on the use of chemical fertilizers in farming by the Sri Lankan government has led to a reduction in the agricultural production sector. Rajapaksa in 2021 announced his plan to make Sri Lanka the first country in the world with a 100 per cent organic agriculture sector.

Experts noted that the push towards 100 per cent organic farming in a country like Sri Lanka could cut the production of tea and other crops by half and further aggravate the situation than the current one.

How did Sri Lanka govt response to economy crisis?

Sri Lankan government has ascertained that the rise in food prices is due to speculators hoarding essential supplies. Therefore, the government has declared an economic emergency under the Public Security Ordinance.

The government has appointed the army with the authority to seize food supplies from traders and supply them to consumers at fair prices. The army has also been given powers to ensure that forex reserves be used only for the purchase of essential goods.

The government has announced that it will continue with the plan of 100 per cent organic agriculture sector. The government stated that the long-term benefits of organic farming will make up for the short-term losses. The government will provide farmers with organic fertilizers as an alternative, it added.

The Central Bank of Sri Lanka in 2021 announced that traders are prohibited from exchanging more than 200 Sri Lankan rupees for an American dollar. Traders are not to enter into forward currency contracts, it added.

Will Sri Lankan govt response solve the economy crisis?

The move to make Sri Lanka a country with a 100 per cent organic farming agriculture sector is expected to aggravate the economic crisis. It will reduce domestic food production significantly and cause a further rise in prices.

Other steps such as capping of prices of food items will cause severe shortages as demand exceeds supply at the price fixed by the government. People are already queuing up outside shops to buy essential goods due to a shortage of supplies.

Deployment of the army with the power to seize supplies from traders will take the incentives from the traders to bring in fresh supplies. This will further cause a drop in supplies and an increase in the prices of food items.

Further, the ban by the Central Bank of Sri Lanka on forward contracts and spot trading of Sri Lankan rupees at above 200 rupees to an American dollar may further fuel the crisis. Due to the ban, if a trader wants to pay more than 200 Sri Lankan rupees for an American dollar to import food or essential item will not be able to conduct the trade.

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