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Sri Lanka faces economic crisis, high food inflation due to COVID-19

Sri Lanka faces economic crisis, high food inflation due to COVID-19

Sri Lanka is facing an acute economic crisis due to job and earning losses, high food inflation and the country’s dwindling finances, as per the World Bank’s Sri Lanka Development Update (SLDU). 

As per the global financial institution, districts like Kandy and Ratnapura, which are highly rural, also account for a large share of the new poor post the COVID-19 pandemic As per the global financial institution, districts like Kandy and Ratnapura, which are highly rural, also account for a large share of the new poor post the COVID-19 pandemic

Sri Lanka is facing an acute economic crisis due to job and earning losses, high food inflation and the country’s dwindling finances, as per the World Bank’s Sri Lanka Development Update (SLDU).  Inflation has been spurred by the government printing money to pay off domestic loans and foreign bonds.

The World Bank also stated that the share of people living under the poverty line likely increased by 11.7 per cent or by over half a million people since the onset of the coronavirus pandemic. “The impact was disproportionately large among those working in more urbanised areas such as the Western province, likely due to the large impact on industry, and places that had high numbers of poor before the pandemic, such as the Northern, Eastern, Uva and Sabaragamuwa provinces,” the World Bank update read.

As per the global financial institution, districts like Kandy and Ratnapura, which are highly rural, also account for a large share of the new poor post the COVID-19 pandemic. It further added that vulnerability among the workforce was very high on the high informality and weak safety nets, thus, reducing their capability to cope with economic shocks.

“The COVID-19 pandemic did not hit all economic sectors equally. Sectoral GDP data and the discussion in Chapter 1 reveal that industries have been affected more than services and agriculture, but there are large variations across subsectors. Weak external demand impacted export-oriented subsectors. Among industrial subsectors, construction and textile manufacturing, which are sensitive to demand shocks and require workers to be physically present, suffered the largest decline,” as per the World Bank update.

As a result, credit rating agencies like Moody’s, S&P and Fitch downgraded their respective Sri Lanka sovereign ratings. Moody’s downgraded its rating for Sri Lanka’s sovereign rating by two notches to Caa1 with a stable outlook in September whereas S&P brought its rating down to B- in September and CCC+ with a stable outlook in December. Fitch also downgraded Sri Lanka’s sovereign rating to B- in April and CCC in November.

These rating agencies laid down three key factors behind Sri Lanka’s economy being on the tenterhooks. These are – heightened external vulnerabilities, limited financing options, and weak fiscal balances.

The only silver lining in this entire scenario is that it can be improved. The World Bank has suggested the government to focus on “four priorities for Sri Lanka to further transform its economy, create more jobs and achieve a sustainable trajectory toward poverty reduction and shared prosperity.”

Priorities listed by the World Bank for the Sri Lankan government’s post-COVID recovery efforts are:

  • Increase agricultural productivity and earnings by supporting farmers’ transition towards higher-value, export-oriented crop mixes.
  • Address the constraints to accessing remunerative non-farm jobs in rural areas as these are an increasingly important and potentially productive source of livelihoods.
  • Support broader reforms to increase labour productivity and create jobs which could help in improving the quality of jobs.
  • Promote spatial transformation and strengthen inclusion. World Bank’s country manager for Sri Lanka and Maldives, Chiyo Kanda says, “Investments in human capital – health, education and social protection- are key to unlocking the potential of Sri Lankan children and boosting future productivity and economic growth.”

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