Sri Lanka’s political opposition, importers and traders are up in arms after President Gotabaya Rajapaksa declared a state of emergency, allowing his government to dictate retail prices for essential food items and seize stocks from traders as the country’s foreign reserves dry up.
Background
Sri Lankan President Gotabaya Rajapaksa had issued emergency regulations regarding food distribution on August 30, 2021. The regulations aimed to provide essential food items at a “concessionary rate” to the public by purchasing supplies of essential food items at government-guaranteed prices and preventing market irregularities and hoarding, according to the Hindu. After approval from the parliament, a state of emergency was declared by the president in order to control food prices and prevent hoarding amid shortages of some staples.
In a statement from the Presidential Media Division, President Rajapaksa announced the appointment of Major General N.D.S.P. Niwunhella to oversee essential services and provide access for all. It has been a week since the regulations were promulgated, and several questions have been raised about their legal scope and their likely impact on the broader economic crisis still persisting in the country.
Former defence secretary Rajapaksa, who has held the top government position since winning the 2019 election, has appointed trusted military personnel to support his control of key government functions. The COVID task force in Sri Lanka is led by General Shavendra Silva. A number of military officers have been appointed to important positions within the ministries, the customs department, and the port authority.
Legal choices made by the government and their political implications have been the primary cause for criticisms. Opposition party Samagi Jana Balavegaya (SJB) has expressed concern over the situation, stating that the state of emergency was declared with ulterior motives, including restraining citizens’ fundamental rights and moving the country toward authoritarianism, reported the ORF.
Defending his government, Trade Minister Bandula Gunawardena claimed that it had no choice but to appoint a commissioner-general to investigate “an ongoing conspiracy” that was creating artificial shortages to raise prices for essential items like rice and sugar.
What Has Caused The Current Crisis?
Sri Lanka has suffered two Marxist insurrections and a civil war in the last few years. It was often alleged that authorities used the laws to suppress their opponents. Recent weeks have seen shortages of essential items such as sugar, milk powder, and cooking gas. According to the government, hoarders have artificially created shortages. In addition to facing a foreign exchange crisis, the country is struggling with heavy debt repayments. The pandemic also caused unprecedented economic disruptions in Sri Lanka. Due to the country’s dependence on tourism and tea exports, the economy shrank by a record 3.6 percent in 2020, and rising exchange rates meant that imports became increasingly unaffordable.
The Sri Lankan rupee (LKR) has continued to drop over nearly two decades, resulting in a continuous drain on forex reserves, according to News18. Rajapaksa’s government cannot continue to blame its predecessor since it has had nearly two years to remedy the situation. Things under the current government have worsened as it failed to contain the second and third waves of COVID-19.
The pandemic and the bombings that took place in the country on Easter Sunday have dealt a severe blow to the country’s tourism industry, which serves as a primary currency exchange source. Data from the World Travel and Tourism Council indicates that tourism contributed 4.9 percent to Sri Lanka’s GDP in 2020, down from 10.4 percent in 2019. Foreign visitor numbers were down by about three-fourths, while employment in the sector fell by about 25 percent. When Rajapaksa took office in November 2019, Sri Lanka’s foreign exchange reserves stood at $7.5 billion. At the end of July, they stood at $2.8 billion. The Sri Lankan rupee has lost more than 20 percent of its value against the US dollar. Sri Lanka’s Department of Census and Statistics explained that the key cause of the import crisis was a strengthening dollar.
In the Budget 2021 presented by the then Finance Minister Mahinda Rajapaksa, import of food items such as turmeric and chemical fertilisers was banned to encourage local farmers and organic farming, but it caused more problems than it solved. This was meant to save on forex-outflow, but the unplanned import ban caused multiple crises at different levels, from the farm to the dinner table. Despite these economic realities, President Rajapaksa refused to budge.
While COVID-19 may have amplified the crisis, economic policies and structural factors have been blamed for the crisis itself. After the military organisation Liberation Tigers of Tamil Eelam were defeated, Sri Lanka experienced an economic boom that led to a rise in foreign borrowings via the issuance of sovereign bonds. Aside from tourism and certain exports, however, the country barely managed to attract enough foreign direct investments and foreign funds to meet its rising debt obligations. From close to $48 billion in 2016, the national debt is expected to reach $86 billion in 2021, according to the Nikkei.
There are now reports that the country lacks the reserves to cover at least three months of imports, and is in danger of defaulting on its foreign debt. Sri Lanka still has to repay $3.7 billion in foreign debt this year, however, as the country’s currency weakens against the dollar, such repayments will become more expensive.
The former regime’s profligacy, as well as political instability that deterred investors, caused a severe economic crisis in the country before COVID. Due to the pandemic, a large number of Sri Lankans working abroad were cut off from sending remittances and exports that accounted for the single-largest tranche of foreign exchange coming into the country.
China To The Rescue
Rice and sugar are bulk food items that the government can import, but require long-term repayment arrangements. The food items Sri Lanka needs to survive must come from other parts of South Asia or East and Southeast Asia. The nation’s last food crisis occurred post-independence in the 1950s when the fledgling communist regime in China offered a “rice-for-rubber” pact. According to the agreement, China exported rice to drought-hit Sri Lanka and Ceylon at lower prices than the international market and imported rubber from the country at higher prices. Sri Lanka and its citizens continue to appreciate China’s gesture. China continues to enjoy a close relationship with the country but is ensnared in a debt-trap over the Hambantota accord. However, it is unclear why the Rajapaksa administration hasn’t taken advantage of this opportunity to increase food supplies.
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Final Resort
The Sri Lankan government has taken extraordinary measures to address the crisis in addition to activating emergency provisions. Due to the government’s desire to conserve foreign exchange reserves, items like automobile spare parts and turmeric have been added to the import embargo list. Toothbrush handles, strawberries, vinegar and wet wipes are among the items whose import has either been prohibited or subjected to special licensing requirements. This has pushed up prices in local markets, raising inflation to 6 percent in August 2021 from 5.7 percent in July.
According to reports, the Sri Lankan energy minister has urged drivers to save on fuel so that the country’s foreign reserves can be used to purchase essential medicines and vaccines as economies across the globe open up. Sri Lanka has also entered into currency swap agreements with China ($1.5 billion) and India ($400 million) as options for temporarily taming its foreign exchange liquidity crisis. However, experts say that none of these actions will provide lasting solutions to prevent future crises.
