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The TLDR: Sri Lanka is in the middle of a dire food crisis that could throw the island nation into a tailspin. There are severe shortages of essentials, and the government has declared an emergency—grabbing extraordinary power in the guise of crisis management. But this is really a story about foreign exchange, not food.
The root cause: a foreign exchange shortage
Putting aside all the complicated numbers, Sri Lanka’s big problem is fairly straightforward.
One: It is an island nation heavily reliant on imports to meet its basic needs. The country imports everything from sugar to wheat, dairy products, milk powder and medical supplies. So it needs foreign exchange to pay for essentials.
Two: However, its foreign exchange reserves are dangerously low. As of now, the government has only enough dollars to cover less than two months of imports. According to financial experts, “For investors it’s a question of when, not if, they run out of FX reserves.” And the Sri Lankan rupee is down 7.3% this year—which makes purchasing imports more costly. Foreign reserves fell to $2.8 billion at the end of July, from $7.5 billion in November 2019. It has since blipped up to $3.55 billion, but that’s only because it drew money from the International Monetary Fund.
Three: To make matters worse, Sri Lanka is in severe international debt—and many of those loans come due soon. For starters, there’s the $1.5 billion of foreign bond payments due in January and July, 2022—which is part of a total of $3.6 billion in foreign debt which matures next year. Point to note: the country’s debt burden has grown from 39% of Gross National Income (GNI) in 2010 to 69% in 2019. And 80% of the government revenues go toward interest payment.
The Covid effect: One of the key underlying causes for this forex crisis is a tourism industry devastated by the pandemic—which came on the heels of the Easter attacks. Tourism accounts for 5% of the Sri Lankan economy—which shrank by 3.6% last year due to Covid restrictions. The pandemic has struck a lethal blow to all major sources of foreign exchange earnings—including exports and worker remittances.
The knock-on effect: A massive food crisis
The prices of basic commodities like rice and vegetables have risen sharply. And there are long queues outside stores due to shortages in milk powder, kerosene and cooking gas. Here’s how bad it is:
“Prices of essential commodities—including rice, dhal, bread, sugar, vegetables, fish— have risen several times during the pandemic, and more rapidly in recent weeks. Local varieties of rice—a staple item—currently cost about LKR 120 (Rs 44) a kg, while common vegetables such as onion and potato are priced over LKR 200 (Rs 73) per kg. A kilo of fish costs nearly LKR 700 (Rs 255).”
The government’s response: Making everything worse
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