Sri Lanka is facing its worst financial crisis in more than 70 years. Food prices in the island nation rose by a record 30 percent in March alone. This is what basic necessities now cost in the country of 22 million people.
The cost of living in the tourism-dependent country has become unbearable for many. Thousands have recently taken to the streets in massive protests across the country demanding the president’s resignation.
There is a lot of dissatisfaction with the powerful Rajapaksa familywhose members hold various high positions in the government, including President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa.
In the face of public anger, the cabinet of ministers resigned in its entirety on Monday and a new finance minister was appointed. On Tuesday he also resigned.
Parliament said it would debate the ongoing crisis until Thursday. Protesters surrounded the parliamentary complex on Tuesday, demanding solutions to the economic crisis.
Sri Lanka was already dealing with the highest rate of inflation in Asia due to lockdowns during the COVID pandemic and the decline in the tourism industry before Russia’s war against Ukraine added to his woes.
A squeeze on foreign exchange caused food and fuel shortages, with people queuing for miles outside gas stations and power outages of up to seven hours.
Growing external debt
In January this year, Sri Lanka aappealed to china to reschedule your debt. In February, he borrowed $500 million from India to buy oil. On March 18, IIndia gave Sri Lanka a $1 billion line of credit to pay for essential items like food and medicine.
In February, Sri Lanka had only $2.31 billion in its foreign reserves, according to its central bank. With debt payments of around $7bn due in 2022, including $1bn in international sovereign bonds (ISBs) due in July, Sri Lanka may find itself short of usable reserves.
At $12.55 billion, ISBs account for the bulk of Sri Lanka’s foreign debt, with the Asian Development Bank, Japan and China among the top lenders.
In a review of the country’s economy last month, the International Monetary Fund (IMF) said public debt has reached “unsustainable levels” and foreign exchange reserves are insufficient for short-term debt payments.
Rising food prices
Sri Lanka’s food inflation in March was 30.2 percent, meaning the average price of food costs 30 percent more compared to the previous year, a record high. By comparison, food inflation was -1.4 percent in March 2019.
Essential items, even locally produced ones, have become unaffordable for many. The price of white rice, a common staple in Sri Lanka, has increased by 93% since 2019. Chicken and lentils have increased by at least 55% and 117%, respectively, since 2019.
Nisha Shari, a self-employed disabled woman living in the city of Kandy, said she finds it extremely difficult to make ends meet.
“Because I have mobility problems, I can’t use public transport, so I usually use a three-wheeler. [automobile] to move. That costs me 1,000 rupees. [$3.25] from home to the city since the price of fuel went up,” he said.
“I need adult diapers and other health accessories, but some of these are not available to buy right now. It’s hard to afford even a nutritious meal in this situation.”
The crisis has also brought the country’s free healthcare system to the brink. On 85 percent of its pharmaceutical products are imported, according to the International Trade Administration.
Long blackouts mean many doctors are forced to treat patients with flashlights. Other equipment such as catheters, anesthetics and gloves are also running low.
Fuel and cooking oil prices
In March, the state-owned Ceylon Petroleum Corporation raised the price of a liter of gasoline from Rs 137 in 2021 to Rs 254 ($0.45 to $0.85; or from $2.04 a gallon in 2021 to $3.86). . The price of diesel has also increased from Rs 104 per liter the previous year to Rs 176 ($0.34 to $0.58; or from $1.54 per gallon in 2021 to $2.63).
A standard 12.5kg household cylinder of cooking gas rose from Rs 1,493 ($4.9) in 2021 to Rs 2,750 ($9) in 2022. Many Sri Lankans are switching to fuelwood and kerosene alternatives as that cooking gas is now too expensive.
“It is a struggle to even prepare the food that one buys at a high price. All businesses, including micro-businesses that depend on a reliable supply of electricity, are in difficulty,” economist Rohan Samarajiva told Al Jazeera.
“Economic reforms will be painful. Therefore, it is vital to implement a targeted social safety net program to protect the poor from the rising cost of living,” he added.
Weak currency and record inflation
The purchasing power of the Sri Lankan rupee has been greatly eroded. The central bank has expanded the broad money supply by 40 percent in the past two years, eroding its value. The rupee lost further momentum last month when the government sharply devalued it ahead of debt restructuring talks with the IMF.
In the official exchange rate, 310 rupees buys one US dollar, but on the black market the price exceeds 350.
In March, Sri Lanka’s inflation rate rose to 18.7% from 15.1% in February, its highest level since October 2008.
Inflation in Sri Lanka had not entered double-digit territory since 2008. Food inflation had never exceeded 15 percent until now.
The COVID-19 pandemic had already affected many households with stagnant or, in many cases, severely reduced income.
The huge increase in prices can be attributed to the government’s decision in October 2019 to remove price controls, which suppressed inflation for many years.
In addition to that, the import bans in March 2020a failed organic agriculture policy decision, as well as increases in global commodity prices, have contributed to inflationary pressure.
The controversial former head of the Sri Lankan central bank, Ajith Nivard Cabraalhe resigned three days ago along with a cabinet of ministers and is now succeeded by respected banker Nandalal Weerasinghe.
There is now hope that the monetary authority will return to orthodox policy making, which is likely to boost the central bank’s credibility both domestically and internationally.
The government is set to start talks with the IMF this week, but without a finance minister in place, the outlook remains unclear.
Public calls for the president and prime minister to resign continue to go unheeded and protests grow more tense.
Sri Lanka heads into the Sinhala and Tamil New Year festivities next week, but with skyrocketing prices, shortages of essential items and a lack of solutions, the economic and political situation could worsen.