All the lights are on red and Sri Lanka’s economic indicators seem to signal an impending sinking. Food prices have risen to record highs, inflation has reached an all-time high and foreign exchange reserves, essential for imports, are dangerously low.
In an attempt to contain the discontent of the population, the government therefore unveiled, Monday, January 3 in the evening, an aid plan in the amount of one billion euros. The salaries of civil servants and pensions of retirees will be increased to the tune of 5,000 rupees per month (approximately 21.90 euros) and the most vulnerable citizens will also receive direct aid. About two million people will be affected by this boost.
No tax increase is planned to finance this program estimated at around 1.3% of Sri Lanka’s GDP. However, the country has an external debt of 26 billion dollars (about 23 billion euros) and has a “Increased probability of default”, according to the American rating agency Fitch.
Commodity shortages
While this aid plan will help relieve part of the population in the short term, it does not tackle the heart of the problem: the soaring prices caused mainly by the drying up of foreign exchange reserves. “While problems in global supply chains have driven up prices across the world, shortages and soaring prices in Sri Lanka are compounded by sharp drops in foreign exchange reserves,” confirms Deshal De Mel, economist at Verité Research, a Colombo-based think tank.
Food prices rose 22.1% in December 2021, unprecedented
The coronavirus pandemic has hit the Sri Lankan economy hard, which experienced an unprecedented 3.6% contraction of its GDP in 2020. The tourism sector, a key source of foreign currency, has been particularly affected. And from the start of the pandemic, the government banned imports of non-essentials in hopes of saving dollars. But commodity shortages have increased. For months, powdered milk, sugar and lentils have been rationed by stores.
And the situation worsened further after the government’s decision to brutally ban the import of agricultural fertilizers in April 2021. This campaign, presented as a program to make Sri Lanka the first country in the world to practice 100% organic agriculture has turned into a disaster. After months of protests from farmers, the government ended up re-authorizing the import of these chemicals. But agricultural crops continue to suffer. Food prices increased 22.1% in December 2021 year on year, unprecedented. More generally, inflation stood at 12.01% in December, again a disastrous record.
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