The President’s issuance of Emergency Regulations this week with a view to rationing the supply of and imposing price controls on essential food items sent shock waves through the country, evoking ‘nightmares’ of the 1970-77 era. But the writing was on the wall. Only those in denial of the build-up to this economic crisis would [...]


‘Food emergencies’ and strangulating the open economy


The President’s issuance of Emergency Regulations this week with a view to rationing the supply of and imposing price controls on essential food items sent shock waves through the country, evoking ‘nightmares’ of the 1970-77 era. But the writing was on the wall. Only those in denial of the build-up to this economic crisis would not have seen it coming.

Those familiar with the ‘socialist’ experiment of that era will recall the precious ration card which provided every family with limited subsidised quantities of rice, sugar, kerosene, flour, and dhal; the endless queues for bread and cloth; and the draconian foreign-exchange controls and exit permits. Senior citizens may well recall how they had to wait anxiously for the next ship to arrive with their food. Hence the jocular use of the term ‘ship-to-mouth’ economy.

The economic liberalisation of 1977 pioneered by President Junius Jayewardene transformed the country — for good and bad. He was quick to claim that Sri Lanka was the first South Asian country to establish Free Trade Zones. Most Asian countries were also far behind and nations like communist Vietnam and even communist China followed suit, aggressively opening up the economy.

In the process, within three decades, these other countries, big and small, have become success stories while Sri Lanka has stumbled badly along the way. Today, the Government has reverted to adopting an inward-looking economic policy which has failed elsewhere.

The 1977 economic reforms saw an initial burst of healthy growth and the ‘take off’ of the economy. But it became sluggish in the late 1980s, with a dismal growth rate of 2.7% per annum from 1986 to 1989. The impact of the accelerated Mahaveli and other infrastructure programmes was inadequate as key reforms on the export side were not implemented. The economy was also reeling under the impact of dual insurgencies in the north and the south.

By 1989 the economy was in danger of a severe collapse.  Does one go to the IMF or not? The same argument exists today as it did then. This was the quandary facing the then new President Ranasinghe Premadasa. Like now, the then Central Bank Governor vehemently opposed it. But the President, running out of options, invited the IMF and sent his trusted Secretary to the Treasury and a capable team to conduct the negotiations.

The IMF reforms were going to be painful in the short run, especially for low-income families. President Premadasa understood this instinctively and created a safety net for the poor known as Janasaviya. While the IMF focused largely on stabilisation of the economy, the President launched a massive garment export-industry programme, providing employment to rural women but also creating the initial base for diversifying exports.

The IMF-negotiated reforms were put in place. The Rupee was ‘floated’ and it depreciated from Rs. 33 to Rs. 40 from end 1988 to end 1989 – an unprecedented increase of over 20% percent. Today, in the 40 plus years since liberalisation, a percentage depreciation of that magnitude has not taken place within one calendar year. The economy was stabilised despite initial shocks. Over the 1990-1994 period, it grew at around 6% per annum while exports doubled, despite a ‘war’.

The country has always gone to the IMF when faced with a severe foreign exchange crisis. In all these situations the stabilisation measures achieved their purpose, but growth was modest because the respective governments failed to implement a coherent growth strategy with exports at its centre unlike in 1990. In effect, all these IMF-supported programmes ended without much tangible impact due to these governments preferring to offer handouts ‘from the moon’ especially at election-time.

The sitting President and his government were elected with a huge popular mandate. The Government’s economic policy, alas, is reflected in following key components: (a) ban ‘inessential’ imports and license importation of several other goods, including essentials such as sugar (with the list expanding over time); (b) permit all manner of capital inflows; and (c) allow commercial banks to finance imports only with surrendered export earnings or from their foreign borrowings. Armed with these measures, the Government’s financial wizards expected that demand for imports could be managed with the banks acting prudently and that further currency depreciation and its inflationary impact could be contained.

But markets have no respect even for the best laid plans. In 2021, the crude oil price spiked to $70/barrel while the increase in international food prices amounted to around 40 percent over the 2020 level. In the first half of 2021, imports of oil, intermediate goods, and investment goods were $2.2 billion higher than in the first half of last year, resulting in acute stress in the Sri Lankan foreign exchange market. The banks, in turn, were compelled to ration dollars to their favoured customers and those with political clout.

No wonder that a ‘black market’ is currently thriving in foreign currency. After months of procrastination, the Central Bank moved the indicative exchange rate to Rs 210/$ on September 1. But depreciation of less than 5 percent may not be sufficient to reduce demand as exporters and banks are quoting way over this rate.

Every major inflationary period is associated with a widespread shortage of goods. The main cause of the present shortage of essential goods is the import licensing requirement and the scarcity of dollars in the market to finance imports. Money printing of Rs 800bn is another contributory factor in triggering food inflation of about 15 percent during the last one and half years.

The Government’s response to the shortages and food inflation is to double down on price ceilings, announce direct imports of rice, sugar, dhal and distribute items through Sathosa. Long queues seen during the past week to purchase limited quantities of food items from state outlets were eerily reminiscent of the pre-1977 period. Apart from legal impediments on the regulations enacted under the Public Security Ordinance, the Government is in the disquieting process of sealing and sequestering wholesale trade and importers’ food stocks.

The Government is in a dilemma: Would it travel deeper along the path of further tightening the noose on the four decade-old open economy expecting things will eventually turn alright thereby worsening the plight of the bottom half of income earners, or learn from the lessons of the past and change direction?


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