Sri Lanka : Emergency and Crisis
19 July 2022
"On 30th August 2021, the Sri Lankan Government declared a state of emergency over food....."
The Lankan Food Emergency :
This time Lankans needed no Hanuman to set their country on fire, they themselves took the charge. For the past ten months, Sri Lanka has experienced everything a nation can only have a nightmare of, be it inflation, bankruptcy, political imbalance, or any other turmoil you can think of.
One might wonder what all led to such chaos in the neighbouring nation. According to the Sri Lankan government, two primary reasons have driven the inflation - the crashing of tourism due to the covid pandemic and hoarding of food items. Have you ever seen a government blaming its own steps? Well, it all started when the government of Sri Lanka declared an emergency over money and food. Now let’s sink deep into it.
The Switch from Inorganic Farming to Organic Farming:
On 29th April 2020, former president Rajapaksa edict to ban the import of chemical fertilizers and any other agrochemicals to establish its limestone as the first nation in the world to practice organic-only farming. This overnight decision led to escalating prices of food items such as sugar, rice, onions, etc. the sudden stoppage of chemical fertilizers led to a reduction of the products that were exported to foreign nations like cinnamon, and pepper, etc.
One of the Sri Lankan tea conglomerates Herman Gunaratne augmented that “the move’s consequences for the country are unimaginable”. He further pointed out that the ban will cut the country’s average annual tea production from 300 million kg to half. The cost of producing tea crops from organic farming is 10 times more than that produced through inorganic farming and the question arose of how such an enormously huge amount will be paid. According to an estimate, tea is Sri Lanka’s single biggest export summing to over $1.25 bn/year, contributing to 10% of the country’s export income.
Sri Lanka’s food security has been compromised and without foreign currency, it has only worsened. With the high dependency of tea, rubber, and paddy on inorganic fertilizers, for the shift of agriculture from chemical to organic cultivation, the country needs a large domestic production of organic fertilizers and bio fertilizers. The current situation of the nation is very gloomy.
Researchers have laid light on the increasing farmland caused by organic farming due to its low yield. The low yield results in deforestation, leading to large-scale extinction of species and also a rise in greenhouse emissions.
On 30th August 2021, the Sri Lankan Government declared a state of emergency over food shortages as private banks ran out of foreign exchange reserves i.e., forex to finance imports that were later on 6th September approved by the parliament. The former president of Sri Lanka Gotabaya Rajapaksa issued the emergency regulation under Public Security Ordinance which allowed the government officials to seize food stocks held and hidden by traders and arrest people who hoard essential food.
President decreed the officials to ensure that essential items such as paddy, rice, and sugar were sold at government-mandated prices or prices based on import costs at customs and refrain traders from hiding the stocks. Major General was also appointed to scrutinize food distribution and to ensure the prices of goods don’t mount to the sky even as the country’s foreign exchange reserve dropped amid failed bond auctions. The energy minister appealed to the citizens to make less use of fuels so that the foreign exchange can be used to import essential items.
Due to the continuous fall in the forex reserves, the country began taking a loan to overcome the situation which led to increased foreign debt. As of the overall debt calculation, Sri Lanka had to make two foreign debt payments of $1.5 billion each. Till August’22 it has paid just $1.3 Billion. The Sri Lankan Rupee has fallen to its all-time lowest of 355 rupees equating to 1$. As Sri Lanka got stuck in the cycle of debt repayment it began printing the Sri Lankan Rupee, in the year 2020, 650 Billion Sri Lankan Rupees were printed out of which 213 Billion were used to repay the foreign debt that depleted forex reserves. The apex bank doubled the statutory reserve ratio from 2% to 4% that was imposed after 1 September 2021, which was expected to absorb about billion rupees of excess liquidity ahead of the possible auction failures. On 30th August 2020, it failed to sell 90% of a 50 Billion Sri Lankan rupee bond auction which ensued in the declaration of Emergency.
Sri Lanka’s forex reserve fell to $2.8 Billion at the end of July 2021 from $7.5 Billion in November 2019 when the Rajapaksa government was formed. One main reason is the huge trade deficit. The nation has been under the worst import controls since the 1970s. Tourism was the only vital source of foreign exchange which too was affected because of the pandemic.
According to Economists, the more you print money to repay the debt the more and fast forex reserve you will lose. The Sri Lankan government back in 2021 solicited help from nations like India and Bangladesh too.
The Country and the countrymen are currently facing unforeseen circumstances. The debt, the Rajapaksas have drowned their country in, cannot be repaid in a night like the former president’s overnight decision of changing the cultivation process. Now let’s wait and watch how the nation will be helped by its subordinates and how the country will come out of such an adverse crisis.