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Sri Lanka has declared a state of economic emergency, and basic food supplies are in limited supply. Hundreds of people are queuing outside ration shops to purchase essential items like rice, sugar, milk powder, and cooking oil.
What was the catalyst for this crisis? Sri Lanka's economy is dying under the weight of Chinese debt, which is draining the coffers of Colombo. Essentials will now be supplied by the state, staples supplies will be confiscated, and the Sri Lankan government will decide how and at what price they will be sold.
The country is running short of foreign exchange. By July 2021 they have fallen to 2.8 billion dollars, this money is going to be worth debt settlement so Colombo doesn’t have enough money to pay for the imports of food items.
Srilanka is using its foreign exchange reserves to meet its debt and interest rate obligations as a result the foreign exchange resources that are available to import goods for citizens to consume are limited.
Sri Lanka must pay 3 billion dollars to its creditors in the next 12 months, indicating that it lacks the financial means to do so. Colombo has just one choice for obtaining funds: more loans. More than 80% of the country's earnings are spent on repaying loans and interest. The island country is trying to stay afloat as it sinks under the weight of China's debt trap.
Sri Lankans Are up in Arms Over a Chinese Project:
A series of applications have been filed before the country's highest court, expressing worries about how China is threatening Sri Lanka's sovereignty, and all of these motions are focused on the Colombo port city project. As the petitions over the sport were being evaluated in the country's upper code, China was given rights to construct it.
The Sri Lankan port of Hambantota was leased to China for 99 years in 2017. There have been concerns about how China's presence here jeopardizes the Indian Ocean's stability.
Government’s Response
The government of Sri Lanka has blamed speculators for the rise in food prices, accusing them of hoarding essential commodities and declaring an economic emergency under the Public Security Ordinance. The army's objective is to confiscate food supplies from traders and resell them to clients at a fair price.
It also can ensure that foreign reserves are only used to purchase requirements. The government has refused to back down from its aggressive drive for 100% organic farming, claiming that the short-term expenses will be outweighed by the long-term benefits.
It has also promised to offer farmers organic fertilizers as an alternative. Additionally, early this year, Sri Lanka's central bank prohibited dealers from exchanging more than 200 Sri Lankan rupees for an American dollar or entering into forwarding currency contracts.
Agricultural Crisis
The Rajpaksa administration banned the use of artificial fertilisers in agriculture in early 2021. The action is part of Rajpaksa's aim to make Sri Lanka the first country in the world to have a completely organic agriculture industry. Sri Lanka banned the import of chemical fertilizers and other agricultural items on April 29 to promote organic farming.
According to experts, the prohibition of artificial fertilizers has resulted in lower agricultural yields. Hoarding and high price rises have resulted from the insecurity generated by the organic-only policy.
Factors contributing to Sri Lanka's food crisis include:-
The country's new organic-only farming policy.
Insecurity as a result of the expectation of lower crop yields
Hoarding
Imports are heavily reliant
Currency depreciation is depleting forex reserves.
How Government Actions Might Exacerbate the Crisis:
Despite the crisis, Rajpaksa's administration has refused to abandon its campaign for organic farming, claiming that it will compensate for any short-term issues. As an alternative to chemical fertilizers, the government offers to provide organic fertilisers.
The central bank of Sri Lanka has banned dealers from exchanging more than 200 Sri Lankan rupees for one dollar. Forward currency contracts have also been prohibited for traders. According to experts, the Sri Lankan government's actions may inflame the problem.
Imports have been harmed by these foreign exchange controls since international traders are generally hesitant to undertake a deal with a fluctuating currency. The imposition of a price ceiling on food will result in a severe scarcity when demand exceeds supply. Because the army is confiscating commodities from traders, there is no incentive for them to bring new supplies to market, causing greater shortages.
Conclusion
Sri Lanka's foreign debt has risen sharply since 2014, hitting 42.9 percent of the country's GDP in 2019. The worldwide recession caused by the COVID-19 epidemic intensified the problem, and by 2021, the country's foreign debt had risen to 101 percent of its GDP, precipitating an economic catastrophe.
Written By - Dhwani Dobhal
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