Sri Lanka Declares Economic Emergency, Know Reasons Behind Skyrocketing Food Prices

New Delhi:  At a time when the ongoing Coronavirus pandemic has left the global economy gasping for breath, Sri Lanka has declared an economic emergency to help tackle soaring inflation after currency devaluation led by spike in food prices worsened the situation in the island nation.

Why Sri Lanka declared economic emergency?

As the nation stared at economic crisis, President Gotabaya Rajapaksa ordered emergency regulations to counter the hoarding of sugar, rice and other essential foods. The emergency also came in force as a result of private banks running out of foreign exchange to finance imports, as per news agency AFP.

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The emergency move came amid sharp price rise for sugar, rice, onions and potatoes and the country witnessed long queues outside stores owing to shortages of milk powder, kerosene oil and cooking gas. The state of emergency has been declared under the public security ordinance and came into effect from midnight on Tuesday.

One of the reasons behind rising prices of many essential items over the last 12 months was the increase in the foreign exchange rate, Sri Lanka’s department of Census and Statistics stated, as reported by Reuters.  

In order to implement the emergency order, the government has appointed a former army general as commissioner of essential services, who will hold the power to seize food stocks held by traders and retailers and regulate their prices, presidential spokesperson Kingsley Ratnayake informed.

While the military will overlook officials in charge to ensure that essential items, including rice and sugar, are sold at government-guaranteed prices or prices based on import costs at customs and prevent hiding of stocks.

The economy also contracted by a record 3.6 per cent in 2020 because of the pandemic and partly due to ban of imports of vehicles and other items in March, including edible oils and turmeric, an essential spice in local cooking, in a bid to save foreign exchange.

How inflation is linked to devaluation of currency?

The country witnessed the prices of most essential goods skyrocketing due to the falling local currency and high global market prices due to pandemic.

This also prompted the government to ban many imports because of a foreign currency crunch. Traders were also blamed for hoarding that gave way to rising food items. The Sri Lankan rupee has fallen by 7.5 per cent against the US dollar in 2021, as per the AFP report. The Central Bank of Sri Lanka recently also raised interest rates to boost the local currency.

Importers have faced difficulty in sourcing dollars to pay for the food and medicines they are allowed to buy. 

According to bank data, Sri Lanka’s foreign reserves fell to USD 2.8 billion at the end of July, from USD 7.5 billion in November 2019 at the time of new government taking charge and the rupee has lost more than 20 per cent of its value against the US dollar in that time.

While Energy Minister Udaya Gammanpila urged motorists to use fuel sparingly which will enable the counrty to use its foreign exchange to buy essential medicines and vaccines.

Sri Lanka is a net importer of food and other commodities has witnessed a steep rise surge in Covid-19 cases and deaths which has hit tourism, one of its main foreign currency earners.

(With inputs from agencies)