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Inflation in Sri Lanka skyrockets- an analysis

Earlier on August 30th last year, Sri Lanka declared a national financial emergency after a steep fall in the value of the country’s currency which caused a food crisis.


 


 Sri Lanka's consumer prices increased to a record 14 percent in December, surpassing a previous high of 11.1 from November, official figures were disclosed on Saturday as the food and fuel crisis worsened.


To understand the reasons behind inflation we must first understand what inflation entails.


Inflation is commonly defined as a persistent increase in the general price level over a long period. It is one of the most researched topics in economics.


It is a key macroeconomic variable that has serious implications on growth and income distribution.


 High levels of inflation can cause a series of adverse impacts on the standard of living of people. It also affects the proper functioning of economic activities, leading to low levels of economic growth and development. High inflation can also bring about negative social and political consequences.


  Controlling inflation or achieving price stability has been regarded as an important objective of Sri Lanka's overall economic policy since independence.


 When reviewing the past experiences of inflation during the post-independence period of the country, it is clear that the rate of inflation has been subjected to fluctuations due to changes in both domestic and international factors.


 Particularly during the post-liberation period, the rate of inflation, as measured by the Colombo Consumers’ Price Index (CCPI), has remained high and volatile and thus has emerged as a major problem within the economy.


Controlling the rate of inflation is important for a stable macroeconomic environment. Volatile inflations make it difficult for individuals as well as business firms to correctly predict the future rate of inflation. In addition, accurate predictions of inflation rates are important for policymaking and implementation.


Controlling inflation first requires the reasons to be understood clearly. Let us highlight the main reasons behind the high inflation in the island country.


 



  • Inflation has been spurred by the government printing money to pay off foreign bonds and debts. Writing in Colombo gazette, Sunil Gupta said the country has to pay USD 33 billion in debts, causing extreme pressure on the government. To pay the debts, more money was printed causing a spike in prices of everyday essentials.

  • The low growth rate, currently at 4 percent is another reason.

  • The most pressing problem is Sri Lanka's huge sums of debt to other countries mainly China. It owes China more than USD 5 billion in debt and last year took an additional USD 1 billion loans to reduce the acute financial crisis.

  • Most of Sri Lanka's revenue comes from the export of garments, tea, tourism, apparel, rice production, and other agricultural products. Pandemic has caused these exports to lower in rate.


1.     Garments and textile: the apparel and textile industry mainly exports to the united states and Europe. When the pandemic hit all countries took back on their international exports as the packages could act as carriers making Sri Lanka's revenue production difficult.


2.     Tourism: tourism is the biggest industry in Sri Lanka and due to lockdowns and flight cancellations, the revenue that comes from tourism has also been reduced.


3.     Agriculture: the government recently decided to shift completely to organic farming. This came at the wrong time as it threatened crop crash and poor produce at a time when there is already a crisis. Sri Lanka's effort to become the first fully organic farming country has threatened both the rice and tea industry. Tea plantation owners fear that crops could fail further adding to the crisis. Master tea maker, Herman Gunaratne, one of the 46 experts picked by the president for organic farming has said that:” the consequences for the country are unimaginable.”


4.     Fertilizers and pesticides: these products and other key imports including vehicles and spare parts have been stopped by the government as there is foreign currency shortages.


These include the major reasons for the inflation.


In recent weeks, the daily essentials’ prices have skyrocketed due to the falling local crisis and high global market price. The country’s reserve has run out of foreign exchange which is extremely important as most of their food ad essentials are imported.


It is estimated that foreign currency reserves will completely deplete in 2022 and the country will need to take a loan of USD 437 million to repay the debts.


After the official announcement of the crisis, the military was asked to regulate the prices of rice and essential items.


The world bank estimates that around 500,000 people have fallen below the poverty line since the beginning of the pandemic.


The world bank has asked the country to follow the below points to increase their economic position:


· Increase agricultural productivity and earnings by supporting farmers’ transition towards higher value, export-oriented crop mixes.


· People living in rural areas to be provided with non-farming opportunities as they are a potentially productive source of livelihood.


· create jobs that will help improve the quality of jobs.


· Strengthen inclusion.


World bank’s country manager for Sri Lanka and the Maldives, Chiyo Kanda says “investments in human capital, health, education, and social protection- are key to unlocking the potential of Sri Lankan children and boosting future productivity and economic growth.


Thus economic crisis that is deepening by the hour has made people fend for mere essentials making the lives of the middle class difficult as the prices keep on increasing.


 


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