Explained: Why is Sri Lanka in the middle of food and economic crisis

Sri Lanka’s economy is suffering through an unprecedented slump in the wake of the COVID-19 pandemic, which may have triggered a food crisis as well.

Over the past week, various media reports claimed that country was staring at an acute food shortage resulting from a combination of factors, ranging from the country’s overt push to adopt organic farming, to the depleted forex reserves in a country that relies on net import of food items.

The Sri Lankan government, however, on Thursday denied that the country was facing a food shortage, underlining that the Public Security Ordinance on the supply of essential goods was imposed only to stop their hoarding.

President Gotabaya Rajapaksa on 31 August issued emergency regulations to control the prices of essentials in a preventive move to stop hoarding of them.
The president has promulgated emergency regulations under the Public Security Ordinance on the supply of essential goods, presidential spokesman Kingsley Ratnayake told reporters.

“Certain local and foreign media are carrying out media stories that there is a food shortage in the country. There is no basis to these reports,” the government director of information said in a release on Thursday.

He added following reports that certain traders were hoarding essential commodities such as paddy, rice and sugar the clauses under the public security ordinance on essential food supplies were given effect. The aim was to seize such stocks and hand them over to state establishments for distribution at a reasonable price.

The military is overseeing the action which gives power to officials to ensure that essential items including paddy, rice and sugar are sold at government-mandated prices.

What led to the shortage?

Experts blame three broad reasons behind this sudden onset of financial and economical crisis. Firstly, the pandemic-induced hardships on the island nation, where tourism is the biggest industry, played a part. Secondly, the Department of Census and Statistics of Sri Lanka said that the increase in foreign exchange rates was one of the reasons for the price rise of essential items.

And thirdly, the government’s ill-timed move to switch to organic farming completely has now threatened crop crash and poor produce in the middle of a pandemic when imports are already proving difficult due to the forex crisis.

Since 2012, the Sri Lankan GDP growth rate has plummeted continuously and the manufacturing output has also not seen any growth, maintaining a flatline. It was amid these fragile conditions that the pandemic struck Sri Lanka.

The race for going organic

Sri Lanka’s drive to become the world’s first 100 percent organic food producer threatens its prized tea industry and has triggered fears of a wider crop disaster that could deal a further blow to the beleaguered economy.

President Gotabaya Rajapaksa banned chemical fertilisers this year to set off his organic race but tea plantation owners are predicting crops could fail as soon as October, with cinnamon, pepper and staples such as rice also facing trouble.

Master tea maker Herman Gunaratne, one of 46 experts picked by Rajapaksa to guide the organic revolution, fears the worst.

“The consequences for the country are unimaginable,” he says.

The 76-year-old, who grows one of the world’s most expensive teas, fears that Sri Lanka’s average annual crop of 300 million kilogrammes (660 million pounds) will be slashed by half unless the government changes course.

Fertiliser and pesticides are among a host of key imports — including vehicles and spare parts — the government has halted as it battles foreign currency shortages.

But tea is Sri Lanka’s biggest single export, bringing in more than $1.25 billion a year — accounting for about 10 percent of the country’s export income.

WA Wijewardena, a former central bank deputy governor and economic analyst, called the organic project “a dream with unimaginable social, political and economic costs”. He said Sri Lanka’s food security had been “compromised” and that without foreign currency it is “worsening day by day”.

Experts say the problem for rice is also acute while vegetable growers are staging near daily protests over reduced harvests and pest-affected crops.

“If we go completely organic, we will lose 50 percent of the crop, (but) we are not going to get 50 percent higher prices,” Gunaratne said.

Plantations minister Ramesh Pathirana said the government hoped to provide organic compost in place of chemical fertilisers.

Farmers say Sri Lanka’s exports of cinnamon and pepper will also be affected by the organic drive.

Sri Lanka supplies 85 percent of the global market for Ceylon Cinnamon, one of the two leading types of the spice, according to United Nations figures.

Still, Rajapaksa remains confident in his course, telling a recent UN summit that he was confident that his organic initiative will ensure “greater food security and nutrition” for Sri Lankans.

He has called on other countries to follow Sri Lanka’s move with the “bold steps required to sustainably transform the world food system”.

Forex crisis

In recent weeks, the prices of most essential goods have been skyrocketing due to the falling local currency and high global market prices driven by the COVID-19 pandemic. The government blames traders for hoarding.

Sri Lanka’s foreign reserves fell to $2.8 billion at the end of July, from $7.5 billion in November 2019 when the government took office and the rupee has lost more than 20 percent of its value against the US dollar in that time, according to bank data. Its private banks have reportedly run out of foreign exchange to finance imports, cruicial to a country of 21 million that rely on international imports for food, fuel and other basic supplies.

As a result, in March last year the government banned imports of vehicles and other items, including edible oils and turmeric, an essential spice in local cooking, in a bid to save foreign exchange.

Importers still say they have been unable to source dollars to pay for the food and medicines they are allowed to buy. Two weeks ago, the Central Bank of Sri Lanka increased interest rates in a bid to shore up the local currency.

This increase over the last 12 months directly contributed to rising inflation in Sri Lanka, which increased from 5.7 percent in July to 6 percent in August, according to data from the Department of Census and Statistics.

Sri Lanka, a net importer of food and other commodities, is witnessing a surge in COVID-19 cases and deaths which has hit tourism, one of its main foreign currency earners. The government has also declared a 16-day curfew until 6 September.

With inputs from agencies