Sri Lankan Economic Crisis- Things to know

Government of Sri Lanka declared an economic emergency in last week of August 2021 because of rising food prices, depreciating currency, and depleting forex reserves.

Highlights

President of Sri Lanka, Gotabaya Rajapaksa, called in the army to manage this crisis by rationing the supply of essential goods.

What led to economic crisis in Sri Lanka?

Factors that led to the current economic crisis in Sri Lanka include:

  • Tourism industry in Sri Lanka has hit hard because of covid-19 pandemic. It represents more than 10% of the its Gross Domestic Product and brings in huge foreign exchange.
  • Thus, forex reserves have decreased to$2.8 billion in July 2021 from over $7.5 billion in 2019.
  • As the foreign exchange supply is decreasing, amount of money that Sri Lankans was having to shell out to purchase the foreign exchange has increased. This, value of Sri Lankan rupee has depreciated by 8%.
  • As Sri Lanka depends on imports to meet the basic food supplies, the price of food items there has increased in line with depreciating rupee.

How government is responding to the crisis?

Sri Lankan government blamed speculators for resulting into rise in food prices by hoarding essential supplies. Government declared “economic emergency” under the Public Security Ordinance. Under the emergency situation, army has been tasked to seize the food supplies from traders and supply them to consumers at fair prices. Government has also given power to the army to ensure that forex reserves are used to purchase the essential goods only.

Impacts of government’s decision

Sri Lankan President seeks to make Sri Lankan agriculture fully organic which will significantly decrease the domestic food production and cause a further rise in prices. Capping of food prices could also lead to severe shortages because demand exceeds the supply at prices fixed by the government. When supplies will be seized from traders, it will lead to further drop in supplies and higher prices for essential goods.

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