"The food shortage emergency that was declared yesterday is actually a symptom of a much larger macroeconomic problem in the country. And that is the dwindling foreign exchange reserve and the inability to respond to it in a timely and adequate fashion. Srilanka is using its foreign exchange reserve to meet its debt and interest rate obligation.
As a result, the foreign exchange resources that are available to import goods for citizens to consume is limited" Said Rehana Thowfeek, an analyst at Verite research to the Wion news. What is this Sri Lanka's economic emergency? How did the island nation fell into this situation? What are the steps taken by Sri Lankan government? Let's look at answers to all these questions.
What is Sri Lanka's food emergency?
The country of Srilanka has declared an economic emergency resulting in a massive food shortage. People are standing in long queues outside ration shops just for basic food supplies like cooking oil. If you are thinking why don't they import short items from other countries, then you should learn that Sri Lanka is out of money as well, and by money, we mean Sri Lanka's forex reserve.
Sri Lankan banks are out of foreign exchange reserves. Foreign exchange reserve is the number of dollars in the hand of the government which it can use to settle international trades. Say for example if the Srilankan government decides to import essential items from foreign countries, then they will have to pay them dollars and that's exactly what they are short of.
The emergency regulations issued under the public security ordinance by president Gotabaya Rajapaksa allow government officials to seize food stocks held by traders and arrest people who hoard essential food. All ration shop owners are warned to sell essential foods like sugar, oil, paddy, wheat, etc. only at government-regulated prices.
The president has also appointed a Major general to handle food distribution and hoardings. The government has also imposed a 16-day curfew amid rising covid-19 cases. The gravity of the situation can be understood by the government's request for people to minimize the use of fuels so that they can buy vaccines and medicines.
How did the island nation fell into this situation?
Sri Lanka's forex reserve has fallen to just $2.8 billion at the end of July 2021. To give you a perspective, Bangladesh has 43.9 USD bn in Jul 2021 as forex reserve. The reason behind such a low dollar reserve of Sri Lanka is that it has been in a huge trade deficit for a long time. The government had to ban the import of some basic items like toothbrushes, vinegar, wet wipes, strawberries, sugar, and spice turmeric to save the remaining forex reserve.
Tourism, which is a huge earning source for the country and contributes up to 10% of the total GDP has also been hit due to the covid pandemic.
The Sri Lankan government has to pay 2 more debts of $1.5 bn each in the next 12 months. This is in addition to the local debt. Srilankan rupee is depreciating at an all-time high which would result in the debt being more costlier. The central bank of Srilanka said in July that they have to spend $1 bn to repay government bonds that are maturing this year.
Whenever a country needs money, it issues bonds. According to Investopedia.com, "A government bond is a debt security issued by a government to support government spending and obligations. Government bonds can pay periodic interest payments called coupon payments. Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them."
Sri Lanka did the same. But its plan failed as it failed to pay 92% of its 50 billion Sri Lankan bond auction on August 30. The reason behind this failed auction is the sharp decline in Sri Lanka's credibility.
Sri Lanka uses most of its forex reserve to pay out the interest rate of its debt. Out of those interests, a large part of the amount goes into China's pocket. Experts fear that this emergency could be the result of Chinese loans given to the country at an unreasonable price. The Sri Lankan government never discloses the rates at which it is borrowing money from Beijing.
Between 2005 and 2015, Sri Lanka borrowed billions of dollars from China accumulating mountains of debts for its infrastructural projects. Sri Lanka was forced to hand over its strategic Hambantota port on a 99-year lease to a Chinese company in 2017. That was because it failed to repay the $1.4 billion debt to Beijing used to build it.
The government's debt rose to 101% of GDP last year, up from 86.8% in 2019. Credit rating agencies are concerned, they may not be able to repay the debt. Bloomberg reported a month back that there is a 27.9% chance of debt default.
What are the steps taken by Sri Lankan government?
To sum up, this economic crisis is a result of several factors accumulated over time. Signals were present already but the government failed to take serious measures. There are several steps taken by the government now. They have banned the import of several items such as fertilizers.
It is also looking to borrow more money from several countries. Sri Lankan central bank is printing more and more currency. Senior officers are making sure that the remaining resources are distributed in a fair manner to the citizens. Will these measures help the Sri Lankan economy and how long this crisis will continue, remains to be seen.