Sri Lanka State Of Emergency: Bizarre Outcome Of Myopic Choices

Sri Lanka declared a state of emergency on 31 August, over food shortage as private banks run out of foreign exchange to finance imports. The emergency regulations issued under Public Security Ordinance by President Gotabaya Rajpaksha allow government officials to seize food stocks held by traders and arrest people who hoard essential food. A former army general has been appointed as ‘commissioner general of the essential services’ to raid and seize food stocks. Officials were ordered to ensure that essential items, including paddy, rice and sugar are sold at government mandated prices or prices based on import costs at customs. Energy minister Udaya Gammanpila has appealed to the citizens to use fuel sparingly so that country can use its foreign exchange to buy essential medicines and vaccines.

How deep is the crisis?

Sri Lanka’s foreign reserves fell to 2.8 billion USD at the end of July 2021, from 7.5 billion USD in November 2019 when the government took office. A huge trade deficit has been deepening the country’s financial quandary for years. The Sri Lankan rupee has fallen 7% against the USD this year.  

Inflation jumped to 6% in august from 5.7% in july.

Sri Lanka still has to pay 3 billions USD foreign debt payments in the next 12 months. That’s in addition to local debt. With the Sri Lankan rupee depreciating at an all time high, future payments would become costlier than earlier as I USD = 200 Sri Lankan Rupee.

Price of daily food items like sugar, rice and onions have soared over twice, with sugar even touching record Rs. 200/kg, kerosene oil and cooking oil and cooking gas prices are surging, tea crops are predicted to fail in October.

The central bank had in July digged dip into forex reserves to repay 1 billion USD of bonds, which were maturing end of the month.  Out of 650 billion Sri Lankan rupee printed in 2020, 213 billion were used to repay foreign debt. Printing money to repay foreign debt leads to an immediate loss of forex reserves. On august 22, the central bank printed 29 billion Sri Lankan rupees following a failed Treasury bill auction, even it raised rates to 6%. Meanwhile, on august 30, it failed to sell 92% of a 50 billion Sri Lankan rupee bond auction.

The apex bank also doubled the statutory reserve ratio from 2% to 4% effective from September 1,to reduce liquidity.

Therefore, the nation has been under the worst import controls since 1970s.

Responsible factors- the vision of Sri Lanka to go green without proper planning has gone terribly wrong and has put the nation in blackout-

On 5^th april 2021, Sri Lanka banned imports of palm oil and new palm oil plantation. Fast food industry was against this move. Sri Lankan palm oil industry has invested 26 billion Sri Lankan rupees( 131 million USD).

 At the root of this economic catastrophe is a bizarre overnight flip by Rajapaksa’s government on 29 April,2021 - to ban the import of chemical fertilizers and any other agrochemicals to make the Indian ocean nation the first in the world to practice organic-only agriculture.

According to Sri Lankan tea conglomerate, Herman Gunarantne, one of 46 experts picked by President Rajapaksa to spearhead the organic shift, “the move’s consequences for the country are imaginable”. He pointed out that ban will cut the country’s average annual tea production of 300 million kg to half. Also, production of organic tea costs 10 times more, its market in limited too. According to an estimate, tea is Sri Lanka’s single biggest export, bringing in, over 1.25 billion USD/year, which is nearly 10% of the country’s export income. “The ban has drawn the tea industry into complete disarray.. if we go completely organic, we will lose 50% of the crop, but we are not going to get 50% higher prices”, he said.

Former central bank deputy governor W. A. Wijewardena termed the organic plan as a “dream with unimaginable social, political and economic costs”. “Sri Lanka’s food security had been compromised and without foreign currency, it is worsening day by day” he said.

Tourism was the only vital source of foreign exchange earnings, around 10% of GDP, but that too suffered due to corona virus pandemic.

Heavy dependence on imports and less exports, following the sharp decline in forex reserves.

Loans of billions of USD, due to which Sri Lanka has to spend large amount in repayment.

Has Sri Lanka enough source of organic fertilizer?

The answer is a big no. Many key crops in Sri Lanka depend on heavy use of chemical input for cultivation, with the highest dependency in paddy at 94%, followed by the tea and rubber at 89% each.

With the shift from chemical to organic cultivation, Sri Lanka needs a large domestic production of the organic fertilizers and bio-fertilizers. However, the situation is very bleak.

According to an estimate, the country generates about 3500 tonnes of municipal organic waste every day. About 2-3 million tonnes of compost can be produced from it, on an annual basis. However, just the paddy cultivation requires nearly 4 million tones of compost annually, at a rate of 5 tonnes per hectare. For tea plantation, 3 million tones is needed. Mean yield reduction in organic agriculture in Sri Lanka is expected to be around 19-25%. There are fears over a hit to production of other crucial export crops like cinnamon, pepper, rubber, cardamom, cloves, nutmeg, betel leaves, cocoa, and vanilla.

What steps government might take-

They already owe 5 billion dollars to china, again 308 million dollars is borrowed. Banglaesh has previously agreed to 200 million USD currency swap deal, now Bangladesh is set to send 100 million USD to help. IMF has agreed to grant 700 million USD. But 80%of revenue is being spent on interest payment alone. It is required for government to come in damage control mode immediately.