It all started with fertiliser, which caused a vegetable shortage, then milk powder, which led to a shortage in dairy, rice, sugar, and now even gas. It is now a question of what is not in shortage. Covid-19, which has wreaked havoc on global supply chains, gets a lot of the blame for this.
As it turns out, the global economy can go a little haywire when a once-in-a-generation pandemic rolls around. The virus scrambled supply chains, squeezed off international travel, and shut down businesses and services. Now, even as the world is recovering from these shocks, Covid-19 is still surging and resurging, and combined with other disruptions – like climate-related events – supply chains are still being sorted out.
Currently Sri Lanka, an island nation of 22 million people, is facing an unprecedented economic crisis. Its foreign exchange reserves dropped to around $ 1.6 billion by the end of November 2021, only enough to pay for about a month’s worth of imports.
As a result, the Government has been forced to restrict the import of several essential commodities – including food items – in a desperate bid to hang on to its vital dollar reserves. This move, combined with increasing fuel and freight costs, has pushed the price of essentials such as milk powder and rice much higher.
Inflation is everywhere but in different sectors and different times, since it comes from supply chain disruptions and that depends on when demand normalises in each country, which in turn depends on the pandemic. As a result, inflation is pushing up the prices of essential goods such as food, transport, and utilities. Currently, more than two-thirds of people around the world are feeling the squeeze, according to new research. As the cost of living rises, the poorest in society are suffering most – but the lack of resources appears to have affected even the rich.
The food shortage
Speaking in a local context, Advocata Chief Operating Officer (COO) Dhananath Fernando explained that in Sri Lanka, there are many people whose income is spent mainly on food.
“A working class citizen would spend most of their income on food, but for an upper-middle class citizen, their food bill too will increase, but with their income, it is a lesser percentage that is spent on food.” He also stated that the reason for food inflation is the shortages we are experiencing.
Elaborating further, he explained that since the working class income is stagnant and the cost of living is increasing, they will be worst hit by this economic crisis. “They will go hungry, not to the point of dying of starvation, but they will have to skip out on meals,” he commented.
He further told us that in Sri Lanka, the cost of living – mainly food inflation – is 22%. Simply, if one spent Rs. 10,000 on food last year, now it would be roughly Rs. 12,000.
Fernando stated that the food shortage comes about by the dollar shortage in the country. “Since banks can’t open LCs (letters of credit), they are unable to import our products, thus creating a shortage,” he said, adding that when this happens, shops will hold on to their products and try to sell them with a high profit margin.
Giving us some insight into what exactly is causing the dollar shortage, he told us that Sri Lanka has many mounting debts to pay back this year. “The Central Bank is trying to pay these debts back with the limited dollars we have, but we also have to settle our creditors, import items, and keep the currency afloat with the remaining money.”
Inflation around the world
Currently, inflation all over the world is concerningly high. Fernando told us that it is not just a problem in the US but it is especially high in Japan and the UK as well. He named Covid-19 to be the leading cause of this issue and commented that obviously, when you print more and more money, inflation will be high.
He also told us that we cannot compare – for example – the inflation in Japan versus the inflation in Sri Lanka. “Where in Japan, it is at 4%, here it’s in the double digits at 12%. At the same time, our economy and their economy are not the same,” he said. It’s also worth noting that yen and US dollars are very strong currencies; one can pay with this currency anywhere in the world but it is not the same with a rupee.
Fernando stated that the challenge for us, with all the money printing we have done, has dried out our reserves. Putting it simply, Fernando noted: “If you give the people Rs. 5,000, they will spend it on say, dhal. In the second round, the dhal trader will have to import more. This way, we are putting pressure on foriegn currency, which thereby adds pressure on the exchange rate.”
Since the pandemic has been anything but dependable, the question of when this volatility will end is a difficult one to answer.
