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The worsening economic crisis in Sri Lanka:

By Lakshila Wanigasinghe

Empty supermarket shelves, endless queues to buy basic necessities and overnight camping around gas stations are now regular attractions in Sri Lanka. As the economy continues to crumble with no viable short-term solutions in sight, levels of frustration among citizens continue to rise.

The country’s worst economic crisis since independence has hit Sri Lankans from all walks of life, but the fallout is hitting the poor with greater intensity. If urgent action is not taken to support the most vulnerable right now, more Sri Lankans will fall into poverty, increasing long-term intergenerational poverty. This blog identifies some of the most pressing challenges facing the poor and vulnerable amid the current crisis and outlines policy options to safeguard their well-being.

Background

Sri Lanka’s current economic crisis is the result of years of mismanagement, corruption, short-sighted policy making and a general lack of good governance. Inadequate foreign exchange reserves at the Central Bank of Sri Lanka and loss of access to international capital markets led the country to default on its debt for the first time in its history. Unchecked external borrowing, tax cuts that have widened the existing budget deficit, the ban on imports of chemical fertilizers and the sudden floating of the Sri Lankan rupee are among several factors that have contributed to the economic collapse. Tourism, as well as garment and tea exports – some of Sri Lanka’s main sources of income – have been affected in recent years due to various internal and external factors such as the 2019 Easter Sunday attacks followed by COVID- 19 in 2020. Today’s economic crisis presents multiple challenges, including serious threats to nutrition, food security, healthcare and education.

Impacts on vulnerable people

The rapid depreciation of the Sri Lankan rupee and the inability of wages to keep up with inflation have dramatically lowered living standards. Inflation, as measured by the Colombo Consumer Price Index (ICCP) for June 2022, was 54.6% compared to 39.1% the previous month. Moreover, food inflation reached an alarming level of 80.1% in June 2022.

The ability to earn a living wage is hampered by insufficient fuel supplies. This, combined with rising transport costs and overcrowded public transport, has left workers struggling to get to work. Day laborers such as three-wheeler drivers sit in fuel queues for days, losing productive work hours. Regular power outages affect the ability of small business owners to conduct their business and lead to the complete shutdown of their operations. Cooking gas and kerosene shortages, rising commodity prices and supply shortages are changing people’s consumption habits, forcing many families to cut back on consumable and non-consumer expenditures. The inability to receive adequate food due to the rising cost of living affects children’s health and could lead to higher malnutrition rates in the future. Apart from this, continuous school closures are hampering the education of children, especially at the village level where most families do not have the technology for digital learning.

Short term relief

Sri Lanka has been facing a reversal in poverty levels since the COVID-19 pandemic and faces the risk of many new groups following suit, as well as those who are already poor falling further into poverty. Therefore, immediate measures must be taken to support the poor and secure their livelihoods to some extent. As current budget restrictions pose a challenge to support all groups in need, emergency relief efforts must be targeted to the most vulnerable so as not to further cripple the economy. Providing cash transfers is one such relief option. They were very popular as a global emergency response during COVID-19. While Sri Lanka has also embraced this as a response to the pandemic, the key in this context would be to provide an adequate amount of cash to the most deserving households. While this may include a significantly high number of families at risk due to mounting inflationary pressure, unfortunately only those in dire need of support should be on the receiving end at this time. As such, authorities will have to make tough choices to correctly identify deserving households. Financing these cash transfers will require the allocation of a portion of funds from foreign aid, loans and other humanitarian assistance received by Sri Lanka.

Following the declaration of a three-day weekend for public sector employees, mainly to use their time to cultivate consumable crops at the household level, the provision of in-kind support such as seeds and fertilizers for culture is another option. As with cash support, these initiatives should be targeted to the poorest who are unable to reach the required nutritional levels. However, there is a problem with those families who do not have suitable plots of land for cultivation. Initiatives on how to overcome space constraints should therefore be considered. One option is to create community gardens which can be introduced in Grama Seva offices at the village level, schoolyards, etc. Proper organization, attribution and follow-up are imperative to the success of these initiatives.

Although this is an unpopular solution, temporary rationing measures will have to be put in place, especially for high-demand products such as fuel, gasoline, milk powder and medicines, etc. . necessities. Excessive purchases often leave the poor on the losing side since they do not have sufficient funds to buy beyond their immediate needs. Therefore, rationing will help maintain sufficient supplies for low-income groups such as daily wage earners. While it is important to support the poor and vulnerable at this time, it is imperative to ensure that limited budgetary and other resources are used effectively. Furthermore, these steps must be taken alongside efforts to ensure political stability and debt sustainability in order to restore international confidence in Sri Lanka. This will encourage support from the global community to help Sri Lanka overcome this crisis.

Link to full blog – https://www.ips.lk/talkingeconomics/2022/07/18/sri-lankas-deepening-economic-crisis-the-plight-of-the-poor/

Lakshila Wanigasinghe is a research fellow at IPS and focuses on poverty, social welfare, development, education and health. She holds a Master’s degree in Economics with a concentration in Development Economics and a Bachelor’s degree in Economics with a concentration in International, Finance and Law and Economics from Southern Illinois University Carbondale (SIUC), USA. (Discuss with Lakshila – [email protected])