Covered by The Week.
There is an argument to be made for a direct link between the decline in the island country’s foreign exchange reserves and the empty aisles in shops—the ban on the import of chemical fertilisers. It was reportedly part of Sri Lanka’s effort to be more judicious with its forex reserves. Going forward, the ban is expected to cause serious problems for Sri Lanka’s tea industry. Plantation owners fear their crop could fail as early as October, without chemical fertilisers. This would have a severe economic impact on the three million labourers who pick leaves. In fact, central Sri Lanka—Kandy and the hilly country—rely completely on income from tea and rubber.
While the shortage of food and other essentials is more easily noticeable, experts said there are other signs of trouble, too. The central bank had recently put restrictions on banks, preventing them from declaring profits until accounts had been audited. Economists assert that this is indicative of a looming banking crisis.
K.D.D.B. Vimanga, policy analyst at the Advocata Institute, a think-tank based in Colombo, said: “If reforms are brought in immediately at the macroeconomic level, the crisis will not worsen. It is high time we reform or perish.” He told THE WEEK that the economic crisis was caused by two factors—persistent fiscal deficit and external current account deficit.
Sri Lanka’s new finance minister, Basil Rajapaksa, had, on September 8, addressed the “severe foreign exchange crisis”. He informed parliament: “The data from the central bank shows the country’s net foreign exchange reserves are close to zero.” He added that the government’s revenue had fallen “between 1,500 and 1,600 billion rupees” from the estimate, because of Covid-19. “We are facing a severe external crisis as well as a domestic crisis with revenues falling and expenses continuing to rise,” he said.