Sri Lankan Economic Emergency: Is 100% Organic Farming a Cause?

Brajesh Mohan
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Sri Lanka Economic Emergency: Is 100% Organic Farming a Cause?


Why In News?
  • Sri Lanka’s government declared an economic emergency last week amid rising food prices, a depreciating currency, and rapidly depleting forex reserves. 
  • Sri Lanka’s Parliament on Monday (September 6) approved a national emergency declared by President Gotabaya Rajapaksa on August 30.
  • President Gotabaya Rajapaksa has called in the army to manage the crisis by rationing the supply of various essential goods.
  • The Sri Lankan government, however denied that the country was facing a food shortage, underlining that the Public Security Ordinance on the supply of essential goods was imposed only to stop their hoarding.
  • Sri Lanka imports many of its essential food items, including pulses, sugar, wheat flour, vegetables, and cooking oil.
Why is Sri Lanka’s economy in trouble?

Fall of Tourism Industry
  • Sri Lanka, a net importer of food and other commodities, is witnessing a surge in COVID-19 cases and deaths which has hit tourism, one of its main foreign currency earners.
  • The tourism industry, which represents over 10% of the country’s Gross Domestic Product and brings in foreign exchange, has been hit hard by the coronavirus pandemic. 
  • As a result, forex reserves have dropped from over $7.5 billion in 2019 to around $2.8 billion in July this year. 
  • With the supply of foreign exchange drying up, the amount of money that Sri Lankans have had to shell out to purchase the foreign exchange necessary to import goods has risen. 
  • So the value of the Sri Lankan rupee has depreciated by around 8% so far this year. It has to be noted that the country depends heavily on imports to meet even its basic food supplies. 
  • So the price of food items has risen in tandem with the depreciating rupee.
President Gotabaya Rajapaksa's 100% Organic Farming decision 
  • In a bid to cut down on imports is also being seen as one of the factors that influenced the government’s decision in April this year to announce that the country will become the first in the world to practice 100 per cent organic farming.
  • The government’s ban on the use of chemical fertilizers in farming has further aggravated the crisis by dampening agricultural production. 
  • While the decision to throw out chemical fertilizers will help the country save on $400 million in annual imports, the plan has agricultural producers in the country worried over yields.
  • Many, such as Sri Lankan tea expert Herman Guarantee, believe that the forced push towards organic farming could halve the production of tea and other crops and lead to a food crisis that is even worse than the current one.
  • Tea is Sri Lanka's biggest single export, bringing in more than $1.25 billion a year, accounting for about 10 percent of the country's export income.
  • Farmers say Sri Lanka's exports of cinnamon and pepper will also be affected by the organic drive.
  • Sri Lanka supplies 85 percent of the global market for Ceylon Cinnamon, one of the two leading types of spice, according to United Nations figures.

Forex crisis in Sri Lanka
  • In recent weeks, the prices of most essential goods have been skyrocketing due to the falling local currency and high global market prices driven by the COVID-19 pandemic. The government blames traders for hoarding.
  • Sri Lanka's foreign reserves fell to $2.8 billion at the end of July, from $7.5 billion in November 2019 when the government took office and the rupee has lost more than 20 percent of its value against the US dollar in that time, according to bank data. 
  • Its private banks have reportedly run out of foreign exchange to finance imports, crucial to a country of 21 million that rely on international imports for food, fuel and other basic supplies.
  • As a result, in March last year, the government banned imports of vehicles and other items, including edible oils and turmeric, an essential spice in local cooking, in a bid to save foreign exchange.
  • Importers still say they have been unable to source dollars to pay for the food and medicines they are allowed to buy. Two weeks ago, the Central Bank of Sri Lanka increased interest rates in a bid to shore up the local currency.
  • This increase over the last 12 months directly contributed to rising inflation in Sri Lanka, which increased from 5.7 percent in July to 6 percent in August, according to data from the Department of Census and Statistics.

High Inflation and Rising Debt
  • The printing of Rs 800 billion by the Central Bank of Sri Lanka over the last 18 months to ease the economic crisis has increased liquidity in the economy. 
  • But this infusion of money, and the consequent increase in demand without a corresponding increase in supply, has led to a sharp spike in inflation.
  • This in turn has devalued the currency, made imports costlier, added to the debt and put the forex reserves under more pressure.

What has been the government’s response to the crisis?
  • The Sri Lankan government has blamed speculators for causing the rise in food prices by hoarding essential supplies and has declared an economic emergency under the Public Security Ordinance. 
  • The army has been tasked with the duty of seizing food supplies from traders and supplying them to consumers at fair prices. 
  • It has also been given the powers to ensure that forex reserves are used only for the purchase of essential goods. 
  • The government has refused to end its aggressive push for complete organic farming claiming that the short-term pain of going organic will be compensated by its long-term benefits. 
  • It has also promised to supply farmers with organic fertilizers as an alternative. 
  • Further, Sri Lanka’s central bank earlier this year prohibited traders from exchanging more than 200 Sri Lankan rupees for an American dollar and stopped traders from entering into forward currency contracts.

Will Sri Lankan govt response solve the economy crisis?
  • The move to make Sri Lanka a country with a 100 per cent organic farming agriculture sector is expected to aggravate the economic crisis. It will reduce domestic food production significantly and cause a further rise in prices.
  • Other steps such as capping of prices of food items will cause severe shortages as demand exceeds supply at the price fixed by the government. People are already queuing up outside shops to buy essential goods due to a shortage of supplies.
  • Deployment of the army with the power to seize supplies from traders will take the incentives from the traders to bring in fresh supplies. This will further cause a drop in supplies and an increase in the prices of food items.
  • Further, the ban by the Central Bank of Sri Lanka on forward contracts and spot trading of Sri Lankan rupees at above 200 rupees to an American dollar may further fuel the crisis. Due to the ban, if a trader wants to pay more than 200 Sri Lankan rupees for an American dollar to import food or essential item will not be able to conduct the trade.



Reference Article : TH, IE

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