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Economic Emergency In Sri Lanka

Updated: Sep 22, 2021

Sri Lankan President Gotabaya Rajapaksa announced a 'financial emergency’ as the nation falters from an economic crisis worsened by the pandemic on September 1 and declared Major General Niwunhella as Commissionaire General Essential Services. But, what caused the unexpected financial emergency in the island country?


What caused the economic crisis in Sri Lanka?


Sri Lanka, renowned for its panoramic coastline and mountains, relies intensely upon the tourism industry for its foreign exchange reserves.


Over 10 per cent of the nation's Gross Domestic Product (GDP) is connected with the tourism sector. But the COVID-19 pandemic has hit the travel industry hard across the world and Sri Lanka has likewise been contracted. Sri Lanka is an importer of food and different items. Also, since the Sri Lankan rupee has dropped by 7.5% compared to the US dollar this year, this has brought about a significant food shortage as private importers have hoarded essential items expecting a sudden benefit.


According to the Central Bank of Sri Lanka, the country's foreign exchange reserves tumbled to USD 2.8 billion at the end of July, from USD 7.5 billion that existed in November 2019 and the Sri Lankan rupee lost more than 20% of its worth against the US dollar.


Along with the soaring prices of food essentials and the low foreign exchange reserves, Sri Lanka’s high debt burden led to the economic crisis.


Government’s response to the economic crisis and its effects

The Sri Lankan President proclaimed Major General Niwunhella as Commissionaire General Essential Services. He undertook to ensure that hoarded food items by private authorities are seized. The decision is to help the public authority direct retail costs and give the public necessities at moderate prices.


Importers are begging the public authority to lift the emergency to avoid the shortage of supply but the public authority confronting the anger of normal residents is in no state of mind to tune in.


The surge in food prices and shortage of necessities has resulted in huge rows outside shops selling sugar, onions, rice, potatoes, kerosene oil. The public authority considers the greed of opportunists the reason for the ongoing situation.


President Gotabaya’s decision earlier this year to boycott the use of chemical compounds for agriculture and become the first-ever country in the world to go completely organic has led to teething issues. It is likely to result in a major fall in domestic food production and a resultant increase in prices. This adversely influenced production of staples like rice. It is additionally likely to affect Sri Lanka’s tea produce.

Sri Lanka's national bank recently forbade dealers from trading in excess of 200 Sri Lankan rupees for an American dollar and prevented traders from going into forwarding money contracts which might additionally influence the essential supplies. Also, without forwarding agreements, which assist dealers with offloading the danger of fluctuations in the currency onto proficient speculators, a number of traders might be reluctant to import necessary supplies.


The monetary crisis in Sri Lanka is one of the significant issues faced by the reigning Rajapaksa family as brokers, traders. The surge in the prices of food essentials like rice, sugar, potatoes, onions and kerosene oil and the shortage of supply is hurting the common man.


By- Gauri Khanna & Gurbani Kaur

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