17 October, 2021

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What are The Reasons Beyond Sri Lanka’s Economic Crisis?

Due to increasing food costs, a declining currency, and fast dwindling foreign exchange reserves, the Sri Lankan government has declared an economic emergency. He has also called in the army to help him handle the situation, which he plans to do by limiting supplies of different necessities.

The present economic crisis in Sri Lanka is the result of many causes.

The coronavirus pandemic has had a significant impact on the country’s tourist sector, which generates foreign currency and accounts for nearly 10% of GDP. FX reserves have decreased from over $7.5 billion in 2019 to around $2.8 billion as recently as July of this year as a consequence of this decline. There has been an 8 percent depreciation in the Sri Lankan currency so far this year. It should be emphasized that even the most basic of food needs in the nation are imported extensively.

Response To the Crisis

Because to speculators’ hoarding of critical commodities, the Sri Lankan government has declared an economic emergency under the country’s Public Security Ordinance. Taking food from merchants and reselling it to the public at reasonable rates has been given to the army. As a result, it now has the authority to guarantee that the country’s currency reserves are exclusively utilized to buy necessities. In addition, organic fertilisers have been offered to farmers as an alternative by the company. Prior to that, the central bank of Sri Lanka barred foreign exchange dealers from exchanging more than 200 Sri Lankan rupees for one US dollar and banned them from engaging into forward currency contracts.

Because of Mr. Rajapaksa’s push to make all of Sri Lanka’s agriculture organic, domestic food output is expected to fall significantly, pushing up food costs even more. For example, if the government sets a price limit on food, there will be shortages if demand exceeds supply at that price.

When the army uses coercive measures, the results may be unexpected. There is less motivation for merchants to bring in new goods when supplies are taken from them. As a result, supply may be reduced even more, pushing up the price of basic necessities. In addition, speculative investors, and mostly those who use tools for stock trading in order to forecast future stock price fluctuations, assist to keep price volatility in check by intelligently allocating limited supply over time. As a result, the army’s actions may increase food price volatility by discouraging speculative activity. Sri Lanka’s move to prohibit forward contracts and spot trading of rupees at a rate greater than 200 rupees to the US dollar may also have an impact on the country’s basic supply chains. So, a rice merchant who wants to import rice but has to pay more than 200 rupees per US dollar may find that they can no longer make the transaction. Since the central bank’s directive, currency trading on the spot market has almost ceased. Aside from that, without forward contracts, many merchants may be reluctant to purchase necessary goods because of the risk of currency volatility they dump onto professional speculators.

Covid Effect on the Crisis

In an effort to rein in soaring inflation, authorities said they would seize control of the supply of staple foods like rice and sugar and set pricing.

This year, the Sri Lankan rupee depreciated by 7.5% against the US dollar.

On Tuesday, a slew of emergency measures went into force.

Traders and retailers’ inventories may now be seized under the authority of the government’s commissioner of vital services, who is a former army commander.

According to the president of the island nation’s announcement, “the authorized officials will be allowed to take measures to supply necessary food products to the people at a concessionary cost by buying stockpiles of vital food items.”

According to the announcement, “These products will be supplied to avoid market anomalies at government-guaranteed rates or based on the customs value on imported goods.”

Price increases for staple goods including sugar, onions, and potatoes prompted the statement.

Due to shortages of other products like milk powder, kerosene, and cooking gas, there have been lengthy lines outside of stores as well.

Increasing foreign currency rates, according to the country’s Department of Census and Statistics, were one of the causes for price increases in several essentials during the past year.

The agency said that month-on-month inflation increased to 6% in August, mostly owing to rising food costs.

There has been an uptick in coronavirus infections and fatalities in the nation, which is a net importer of food and other commodities and one of the government’s primary foreign currency earners.

With visitor numbers falling, Sri Lanka’s GDP fell by a record-breaking 3.6% in 2013.

Vehicles and other goods were banned from entering the country as the government attempted to stop the flow of foreign currency.

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