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Authors: Chen Wei Li and Kowsalya Ganesan
Editor & Region Head: Gingee Babu Sasthaa (Uday)
Earlier this year in August, Sri Lanka officially declared the worst economic crisis it has ever faced in the 73 years since its independence from Britain (Wion Web Team, 2021), amidst a depreciating currency, rapidly depleting forex reserves and soaring food prices (Perumal, 2021a). The Rajapaksa government imposed a state of emergency in Sri Lanka after its bungled response to a brewing foreign exchange crisis cascaded into food shortages. The surge in food prices and a real fear of hoarding of essential food items was the last straw that forced President Gotabaya Rajapaksa to impose the economic emergency on 31st August, under the public security ordinance.
Background – How did the economic crisis even come about?
It all began with Sri Lanka’s long-standing trade deficits with countries like China and India among its top import partners, contributing close to 25% each to Sri Lanka’s import volumes (O’Neill, 2021). The cumulative deficit in the first seven months of 2021 widened to US$4.922 billion from US$3.471 billion recorded over the same period in 2020 (Gunaratna, 2021), as import expenditure expanded faster than export earnings. Ergo, the accelerating import flows played a key role in sharply weakening the Sri Lankan rupee (LKR) by close to 8% (Perumal, 2021b), as the constant outflow of LKR used to purchase imports continually increased its currency supply in the forex market. Not to mention, Sri Lanka has been subject to mounting external debt over the past decade (Figure 1). With its currency gradually weakening against other major currencies, repayments became more costly in local terms (AP, 2021a) due to the reduction in value of the LKR; paying in LKR was also undesirable as it would further increase its supply in the forex market, risking further currency devaluation.
Figure 1: External Debt as % of GDP in Sri Lanka (FocusEconomics, 2021)
As such, the government resorted to clearing its debts by dipping into its forex reserves . However, after the country was forced to lock down following the spread of COVID-19, the collapse of the once-prosperous tourism industry, which accounts for more than 12% of the country’s GDP (Bhat & Thomas, 2021a), dealt a major blow to foreign currency earnings. Tourism is one of the country's main foreign exchange earners, but with travel restrictions, tourism earnings plunged to just $957 million in 2020, down from $3.6 billion the previous year (Mushtaq, 2021a), failing to generate enough revenue to pay off the debts. In a mere span of 2 years, forex reserves fell 63% from over $7.5 billion in 2019 to approximately $2.8 billion in July 2021 (Perumal, 2021c), and a whopping $1 billion of those remaining meagre reserves was used to meet debt repayments (Diaz & Todd, 2021a).
Amid a deepening currency crisis, coupled with the supply of foreign exchange drying up, the import bills were skyrocketing and the amount of money that Sri Lanka had to shell out to finance imported goods rose (Perumal, 2021d), with the LKR is down. The country’s foreign exchange reserves have dwindled to barely enough to cover less than three months of imports, at a time when big repayments of its foreign debts are falling due, hence placing a strain on its financial system (AP, 2021b). The expected recovery in the tourism industry is also predicted to be delayed further due to uncertainties associated with the resurgence of the pandemic globally (Bhat & Thomas, 2021b). As a last resort, this forced the Sri Lankan government to impose an indefinite import ban last year to save hard currency (Mushtaq, 2021b). These drastic measures were a desperate attempt meant to chip away at a trade deficit that has been deepening the country’s financial quandary for years (Francis & Mallawarachi, 2021a). However well-intentioned this move was, what was meant to be a means to an end spelt the beginning of an even greater setback.
Agricultural Crisis – Rollout of the 100% Organic Farming Programme
On 29 April 2021, President Rajapaksa made the abrupt announcement of a ban on the import of chemical fertilisers and agrochemicals, along with other imports like palm oil, sugar, strawberries and toothbrushes (Francis & Mallawarachi, 2021b), as part of Sri Lanka’s 100% Organic Farming programme: an ambitious initiative launched by the government in a bid to be the first producer of organic-only agriculture globally (Ramakumar, 2021a). Drawn in by attractive positive externalities like the mitigation of negative health effects and the reversal of environmental degradation arising from the usage of chemical fertilisers (Sri Lanka Export Development Board, 2020), the government sought to position Sri Lanka as a forerunner in organic farming in hopes of getting a headstart and building a competitive edge in the sector. This push was also largely driven by Sri Lanka’s need to drastically reduce imports into the country and stabilise its foreign exchange reserves, with a target of reducing US$400 million a year on imports through the ban of agricultural chemicals (AP, 2021c).
Adverse Impacts – The perils of organic farming and socio-economic distress
In a few short months, however, reality caught up with the rhetoric and disaster followed. The motivations of the Sri Lankan government may have been benevolent; yet what followed amounted to be cataclysmic.
Low agricultural yields:
The shift threatened its prized tea industry and triggered fears of a wider crop disaster that could deal a further blow to the beleaguered economy. A survey conducted among Sri Lankan farmers highlighted that 85% farmers expected their future harvests to plummet with the implementation of the ban (Verité Research, 2021a) and 44% of them were experiencing a decline in harvests (Pandey, 2021a). Unsurprisingly, crops began to face trouble; on average, crops in Sri Lanka have witnessed reduction in yields somewhere between 19% and 25% (Yadav, 2021a). Plantation owners expected their crops to fail as soon as October (Pandey, 2021b) and crop production was predicted to be slashed by nearly half (Francis & Mallawarachi, 2021c). On top of a loss in earnings, a crop failure would cause huge unemployment and place the livelihoods of numerous farmers in jeopardy — within the tea industry alone, 3 million people are employed to pick tea leaves by hand (Diaz & Todd, 2021b).
Compromised food security- food shortage and price inflation:
By and large, Sri Lanka typically depends on considerable volumes of food imports to meet even its basic supplies every year (Kumarasinghe, 2021). Already aggravated by import restrictions limiting the ability to buy foreign produce, food shortages were expected to further rise from the reduced domestic production of staple crops such as rice, pepper and cinnamon (Al Jazeera, 2021).
With the nominal prices of food items already rising in tandem with the depreciating rupee, shortages are further pushing prices higher for many consumer goods, from bread to construction materials to gasoline (Francis & Mallawarachi, 2021d). Month-on-month inflation rose to 6% in August, mainly due to high food prices (BBC News, 2021). Prices of daily food items such as sugar, rice and onions have doubled (Pandey, 2021c), subsequently raising concerns about panic buying and hoarding.
Drop in exports:
Domestic production is critical for any food-importing country facing a foreign exchange crisis (Pai, 2021). In Sri Lanka’s case, it is all the more important because as the country’s largest agricultural export, tea would normally yield around $1.25 billion a year – approximately 10% of its export income (Pandey, 2021c). While the intention of the ban was to reduce imports, the drastic fall in agricultural produce has instead unintentionally reduced exports from the country on the side (Yadav, 2021b). In an open letter by the Sri Lanka Agricultural Economics Association (SAEA) warning the government of the devastating impacts of the ban, the economists conducted an analysis that revealed how the ban would decrease GDP by 3.05% in the country (Ramakumar, 2021).
Causes – Delving into the reasons behind the programme’s failure
The underlying reason for the disastrous consequences from the ban was the lack of proper planning and assessment prior to the implementation. 90% of farmers in Sri Lanka use chemical fertilisers and only 20% have knowledge on how to transition to organic farming (Verité Research, 2021), surely such an abrupt ban will cause many farmers to be at a loss as to how to continue producing crops. The ban also completely halted imports of chemical fertilisers, instead of seeking to progressively reduce imports that may enable farmers to have more time in shifting their production methods.
In addition, organic farming significantly increases costs and tends to yield less sellable food in the short term (Röös et al., 2018). A sudden shift to organic farming is unfeasible given the shift in markets and lack of demand for significantly more expensive organic produce. Considering the economic conditions of Sri Lanka where over 20% of children below 5 years of age are underweight (Kumara, 2021), providing affordable food on a large scale may be of greater priority in the short term.
Conclusion – Critically reflecting and moving forward: Is organic farming desirable?
Desperate times call for desperate measures, but not reckless ones. The implementation of the Organic Farming Programme was forcefitted into the goal of reducing imports, yet the government failed to consider the widespread ramifications across the economic, social and environmental dimensions when a massive ban was imposed abruptly.
Following significant resistance by farmers and recognition of the severe damage that has resulted, Rajapaksa’s government has begun to undo its measures and minimise the damage inflicted on society. On 31 May, Cabinet once again approved the “import of carbonic fertilisers, natural minerals and chelated herbal trace minerals” (Ramakumar, 2021).
Ultimately, organic farming remains a positive vision and trend, with benefits including improved soil quality, greater biodiversity, and reduced energy consumption. However, according to environmentalists and farming experts, the transition to organic farming is a long and extended one, requiring at least 2 years to complete (Diaz & Todd, 2021). Approximately two-thirds of farmers have also indicated their support for Sri Lanka’s organic vision, but this necessitates continuous support and a nationwide effort to shift towards organic farming (Diaz & Todd, 2021). Moving towards a green economy remains a favourable option as the world is plunged into a global climate crisis, but it is not a straightforward goal that can be achieved mindlessly and hastily, let alone overnight.
References
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