Humanitarian issues in a crisis economy
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While the peaceful and disciplined nature of the public protest has been gradually fading away, Sri Lanka’s rate of inflation was reported to be 54.6 per cent for the last month, June 2022. It is the highest rate of inflation among all Asian countries; even in the world, Sri Lanka is among the top-10 inflationary countries, all having the rate of inflation over 50 per cent.Achieving over 50 per cent rate of year-on-year inflation for a single month means that, within a period of 12 months – that is from June last year to June this year, on average the prices have increased by over 50 per cent. In other words, the value of money in your hand has depreciated by more than half; so, you need more than double the amount of money you spent 12 months ago to maintain your purchases.
The rate of “food inflation” is reported to be over 80 per cent, compared with the rate of “headline inflation” as mentioned above. This means that the food prices have increased more rapidly that the average prices of all consumer goods categories which are used in order to calculate headline inflation.
Matters get worse not only because of high inflation, but also because of the loss of people’s businesses, work and livelihoods and, as a result their incomes. Therefore, the people of Sri Lanka have been battered by both high inflation and loss of incomes. The supply shortages in the domestic market and its downward spiral effects on production and transportation have been instrumental in pushing the economy further down and the resulting increase in hardship.
In a nutshell, Sri Lankans have become poorer than they were about a year ago due to high inflation. While everyone has become poorer, the people in the lower income categories and vulnerable groups such as widows and children should have fallen into acute poverty. Many of those “middle-income” earners who were living above the national poverty line, must have also now fallen below the poverty line, increasing the country’s poverty ratio.
Humanitarian crisis
It was just a couple of weeks ago that Christian Skoog, UNICEF Representative for Sri Lanka told ABC Television Australia that he has “…worked in South Sudan, Somalia and Yemen, while this is a crisis like none other”. Many would take what he said as “the situation in Sri Lanka is worse than those African countries”. If that was what he meant, even though we don’t have facts and figures to substantiate what he said, it is true that Sri Lanka is now in a real humanitarian crisis.
The UNICEF agency has already launched a global appeal to address the urgent needs of the most vulnerable population within the next few months. The aim of the global appeal for humanitarian assistance to Sri Lanka is to save 1.7 million children’s lives and support them with food, nutrition, healthcare, safe drinking water, education, and mental health services.
I must say that Sri Lanka pioneered in compiling socioeconomic data long before many other countries in Asia commenced it; still it may be done in the same way, but we need to wait months and years to look at our “outdated” socioeconomic data to take policy decisions for the future and to guide the international agencies. The world around us has moved fast and, report “real time” data which help them to monitor and act.
Given the lack of “real time” data, on the basis of its own survey findings the UN Office for the Coordination of Humanitarian Affairs issued a report on June 9, 2022 on Sri Lanka’s Food Security Crisis. The UN report finds that as a result of Sri Lanka’s economic crisis, around 5.7 million women, men, girls and boys – a quarter of the total population of the country -, are “now in urgent need of humanitarian assistance”.
The COVID-19 pandemic issue and the subsequent economic crisis have battered the Sri Lankan people with job and income losses. These factors have directly affected the people’s ability to afford food and other essentials along with the increase in food inflation by 73 per cent during the past two years. The poor have become increasingly vulnerable to the unfolding food security crisis; the UN survey results show that poor households have reduced their food consumption, including skipping meals due to increasing food insecurity problem.
“Prices respond slowly”
Many would ask the question as to why Sri Lanka has been facing such an alarming high inflation. I can pinpoint four possible factors underlying the current high inflation, although there have been no in-depth studies carried out so far in order to distinguish the contribution by each factor.
- The first is the domestic supply shortages. It has a local issue of subdued agriculture production and productivity due to the fertiliser ban. The external dimension of the supply shortage is the lack of foreign exchange to sustain the country’s imports. As we have discussed earlier in this column, the shortage of fuel, gas and electricity has disrupted production and transportation multiplying the supply shortage and feeding the inflation.
- The second is the fast depreciation of the rupee against the US dollar. As reported in the recent past, the Central Bank tried holding it by releasing the foreign exchange until the stock dried out. Once it was left for the market in early March 2022, just within two months the rupee exchange rate against the US dollar depreciated by over 75 per cent; over the past two years since June 2020, the depreciation has been nearly 100 per cent. With this unprecedented depreciation of the exchange rate, the prices of all imports should rise proportionately.
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The third is the so-called money printing. It’s a basic macroeconomic statement that “prices respond slowly”. This means that there is a “time lag” between the act of money printing and its translation into inflation. Over the past two and half years, the Central Bank has lent to the government in net terms over Rs.2,500 billion, which is counted as the net increase in money printing. Perhaps, now it may be the time for prices to respond to that after a time lag, and it would continue in the future as well. - The fourth is the price hikes in the global markets. International fuel and food prices started increasing since 2021, apparently the world is under inflationary pressure. Since mid-2021, the US, the Euro area and the UK all have experienced an unprecedented increase in inflation rate reaching 10 per cent; even Japan which had decades of deflationary pressure is also experiencing over 2 per cent rate of inflation.
Economic cost of “Aragalaya”
While the Sri Lankan economy is set to fall from the pan to the fire in its economic crisis, the ongoing public protest – the Aragalaya, as well as the resulting political crisis – has added new fuel to the crisis. The economic crisis has been an underlying factor that triggered mobilisation of people to the 3-month old public protest and the worsening political instability in turn appears speeding up the country’s current economic crisis.
The possibilities of resolving the current political instability seems far from over contrary to what was initially assumed to be. Besides, the talks for pre-mature elections, Constitutional reforms as well as the expected “system change” may take longer than expected, while their outcome seems uncertain. With all that, Sri Lanka is currently plunging into a catastrophic economic, social and humanitarian crisis.
As the political priorities have shifted away from the initial economic crisis, there is no sight in the foreseeable future of a robust economic programme that would address the economic crisis at its source. I don’t mean the preparation for an IMF programme; what I mean is a reform programme to address the “foreign exchange crisis” directly.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on
Twitter @SirimalAshoka).
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