Shift to organic farming without buffers, hoarding & profiteering led to food, fuel crisis; economic outlook uncertain!
Ayodhya Ram
When India extended $ one billion worth aid and loans to pull the funds starved Sri Lankan economy out of morass this January, not many would have understood its importance.
But, Sri Lanka’s central bank governor Ajith Nivard Cabraal, heaved a sigh of relief as the olive branch offered by India helped him avert a default with global lenders and in particular China.
For the island nation, adhering to loan repayments was important to prevent an accentuated food and fuel shortage given the non-availability of sufficient agricultural products in different states that in turn led to skyrocketing of commodities prices and runaway inflation.
As reports suggest, India’s emergency financial assistance was offered in terms of currency swap, deferred loan repayments and dedicated lines of credit after the Sri Lankan government led by Gotabaya Rajapaksha made a request to Prime Minister Narendra Modi in late December 2021.
Publicly available data suggests that Sri Lankan government is battling a massive economic, food and fuel crisis owing to some of its own policies. Sri Lanka has the obligation to service US $ 7.3 billion outstanding debt in 2022. This includes bonds worth $ 500 million that were to be discharged in January 2022 and another $ one billion in July this year.
For the moment, Sri Lanka has preserved itself from the ignominy of a payments default that has other serious repercussions as well. But, the latest crisis provides the perfect backdrop to take a deep dive look at the South Asian island economy.
In fact, the economic crisis so acute that Sri Lanka has run out of cash to buy diesel and petrol. The government did not have even the foreign exchange to pay for the two shipments that arrived last week.
Last month, Sri Lankan government had bought 40,000 tonnes of diesel and petrol from India to meet emergency requirements.
Drastic policy changes like imposing a ban on imports of fertilizers and pesticides, decline in revenues from tourism and hospitality, hoardings of essential food items, depreciation of the Sri Lankan rupee, mounting foreign debt have roiled the island economy with families and individuals scurrying for relief and support from the government.
Short supply in basic food items like rice, sugar, milk powder, cooking oil has only brought focus to the crisis that’s in full show. People queuing up outside the supermarkets to buy essential items have hogged headlines. Starvation due to unavailability of food items and limited purchase power is something that the Sri Lanka’s government needs to tackle. Grievously impacted livelihoods and lack of even low paying jobs point to a medium term mess that the country has into.
Policy issues like shift to 100 per cent organic farming phasing out chemicals, fertilizers and hazardous plant nutrients is a laudable move. Inadequate planning and wrong approach to achieving 100 per cent natural and organic farming seems to have played havoc with Sri Lankans lives.
Scaling up the global supply value chain in agricultural commodities and inducing sustainable agricultural practices is reportedly the stated objective of Sri Lankan government’s new policy framework.
Shoddy planning or lack of transition plan during the shift to organic agriculture seems to have contributed to the present economic crisis leading to shortage in food items.
Shift to organic farming should have been done in a phased manner by maintaining stability of agricultural products, adequate buffers and planned counter-measures to tackle the crisis. The transition space was not available for Sri Lanka because of also because of dwindled incomes[1].
Sri Lankan President Rajapaksa had imposed a ban on chemical fertilizer and pesticides citing the many incommunicable diseases[2]. The decision was part of a larger plan to achieve 100 percent organic farming and preserving foreign exchange reserves that got drained owing to import of both food items and farm ingredients like fertilizers. It cannot be possible overnight. Agriculture sector represents 8.36 percent of the county’s GDP[3]. Import of fertilizers has been reduced to $ 8.2 million in 2020 which was earlier $ 32.2 million in 2019[4].
Sri Lankan economy dependent on two streams of foreign exchange earnings: tourism that was hit hard by the coronavirus pandemic for over two and half years. Workers’ remittances were also adversely impacted as several of its citizens employed abroad lost their jobs.
As per Central bank of Sri Lanka statistics, tourism sector earned only US $ 261.1 million last year as against US $ 4.38 billion in 2018. The income from workers’ remittances which is another major source of foreign exchange also fell to US $ 5.491 billion last year from a high of US $ 7.1 billion during 2020. Both were the prime sources for the foreign exchange reserves[5].
Heavy reliance on borrowings from abroad has also impacted the Sri Lankan economy leading to the present food crisis as scarce resources were channeled to repayments.
Earnings, Debt Profile
| Earnings | 2018 | 2019 | 2020 | 2021 | |
| 1 | Tourism | 4,380 USD Mn | 3,606.9 Mn[1] | 682.4 Mn | 261.1 Mn[2] |
| 2 | Workers’ Remittances | 7,015 USD Mn | 6,717 Mn[3] | 7,103 Mn | 5,491 Mn[4] |
| Country / Organization | Year | Loans | |
| 1 | Asian Development Bank | July 2021 | $ 150 million[1] |
| 2 | China | March 2021 | $ 1.5 billion[2] |
| 3 | Bangladesh | June 2021 | $ 200 million[3] |
| 4 | The World Bank | Sep 2020 | $ 56 million[4] |
| 5 | International Monetary Fund | Sep 2021 | $ 787 million[5] |
Sri Lanka borrowed over $ three billion from both multilateral and bilateral sources including Asian Development Bank, IMF, World Bank and countries like China and Bangladesh in less than 12 months.
By far, China has been the biggest lender at US $ 1.5 billion in March 2021. And, most funds mobilized by Sri Lankan government went to service the debt availed from Xi Jingping’s China.
Foreign exchange shortages have forced Colombo to ban import of more than 600 non-essential goods.[6]
Traders’ hoarding and profiteering from essential commodities in part led to food and fuel shortages and inflation in the market. They were also reluctant to sell commodities at rates lower than purchase price prevailing in global markets[7].
Sri Lankan government setting up a commission on essential services and appointment of a former army general as commissioner under the public ordinance to seize food stocks held by traders and regulate their prices had limited impact[8]. The authority having sweeping civilian authorities’ powers did not help either.
In October 2020, Sri Lankan rupee depreciated 7.7 percent against the US dollar. Given that the country majorly depends on imports to meet its demand for essential commodities and the rise of global prices had reportedly led to weakening of Sri Lankan currency against US dollar[9].
Observations:
Multitude of factors including tardy implementation of policies has pushed Sri Lanka into food and fuel crisis and economic mess. A sudden shift from inorganic to organic farming when the country was facing a severe financial crisis seems to be one key factor.
Limited options to generate foreign currency denominated revenues and even borrowings drying up may make life difficult for Sri Lankans in general and the present government. Economic instability in Sri Lanka may not augur well for South Asia.
(Author is a research associate with CIHS)
[1] We need a new agricultural revolution that is not against nature – President at International fora – Presidential Secretariat of Sri Lanka (presidentsoffice.gov.lk)
[1] https://www.adb.org/news/150-million-loan-help-sri-lanka-purchase-covid-19-vaccines
[2] https://www.reuters.com/article/us-sri-lanka-economy-china-idUSKBN2B21UL
[3] https://asia.nikkei.com/Economy/Bangladesh-helps-out-cash-strapped-Sri-Lanka-with-200m-loan#:~:text=DHAKA%20%2D%2D%20Bangladesh%20is%20offering,while%20flexing%20newfound%20economic%20muscle.&text=It%20now%20finds%20itself%20able,island%20nation’s%20%244%20billion%20reserves.
[4] https://www.worldbank.org/en/news/press-release/2020/09/11/world-bank-supports-sri-lanka-with-usd56-million-mitigate-covid-19-impacts
[5] https://www.thehindu.com/news/international/sri-lanka-receives-787-million-sdr-from-imf-and-150-million-swap-from-bangladesh/article36219370.ece
[2] Importation of chemical fertilizers will be stopped completely… – Presidential Secretariat of Sri Lanka (presidentsoffice.gov.lk)
[3] • Sri Lanka – share of economic sectors in the gross domestic product 2010-2020 | Statista
[4] Does Sri Lanka Really Have a Food Crisis? – The Diplomat
[5] External Sector | Central Bank of Sri Lanka (cbsl.gov.lk)
[6] https://youtu.be/Zl6I1pKWJxY
[7] https://www.reuters.com/world/asia-pacific/sri-lanka-targets-hoarders-bad-traders-tackle-food-shortages-2021-09-03/
[8] https://www.presidentsoffice.gov.lk/index.php/2021/09/07/commissioner-general-of-essential-services-is-empowered-to-issue-orders-to-relevant-officials-as-per-the-section-5-of-public-security-ordinance/
[9]https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/statistics/wei/WEI_20211029_e.pdf
[1]https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/statistics/sheets/table2.14.1_20211231_e.xlsx
[2]https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20220211_external_sector_performance_2021_december_e.pdf
[3]https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/statistics/sheets/table2.14.2_20211231_e.xlsx
[4]https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20220211_external_sector_performance_2021_december_e.pdf
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