The recent floods have worsened the economic conditions of the poor while impeding economic recovery and management. The torrential rains, floods, landslides, and collapse of buildings have worsened the living conditions of a large number of people in 20 of the 25 districts. The worst affected were the poor. The consequences of the natural disaster [...]

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Economy battered by floods; fresh challenges to economic management

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The recent floods have worsened the economic conditions of the poor while impeding economic recovery and management.

The torrential rains, floods, landslides, and collapse of buildings have worsened the living conditions of a large number of people in 20 of the 25 districts. The worst affected were the poor. The consequences of the natural disaster would retard economic growth and worsen the hardships of the poor, especially the living conditions of many rural families who have been devastated. It is the responsibility of the government to help the affected people.

The government has already pledged Rs. 40,000 per affected household. In addition, the government will have to bear the cost of infrastructure reconstruction, compensation and assistance to farmers, and reconstruction of damaged buildings. The financial cost of these would be considerable.

Finances

The government’s financial position would be undermined by the enormous increase in these expenditures, poor relief, and the expansion of the Asawesuma relief. The destruction of crops would further increase the prices of rice and vegetables while reducing farmer incomes.

Fiscal deficit

The increase in expenditure due to these natural disasters, the promised increases in wages and social security, and the proposed reduction of income taxes, VAT, and indirect taxes would undoubtedly widen the fiscal deficit. How will the government comply with the International Monetary Fund conditions? Will the IMF be sensitive to these difficulties and readjust and modify its conditions to continue its Extended Finance Facility (EFF)?

Economic growth

The expected economic growth of 4% may be difficult to achieve owing to these challenges.

The setbacks to agriculture and the losses suffered by farmers and rural households are serious and inevitable. The situation has made the economic objectives of the government more onerous. As a result of the enormous economic challenges, the realisation of the expectations of the people may be delayed.

On the one hand, economic output would be retarded by the loss in output, especially of agricultural produce. On the other hand, government expenditure that is required to be contained needs to be increased to give flood relief and compensate the households affected by the floods. A considerable amount of expenditure would be needed to repair, reconstruct, and renovate destroyed buildings and infrastructure.

Agriculture

Any harm to agriculture, which is often described as the backbone of the economy, though it contributes less than 7 percent of the economy, not only affects those in farming but the economy as a whole.

Paddy and vegetable cultivation have been seriously affected. It has come at a time when the Maha cultivation had been at an early stage after the sowing. The nature and extent of the damage vary in different parts of the country. The damage could be less in areas where the paddy plants have grown compared to areas where the paddy plants are at an early stage. Vegetable cultivation was seriously damaged by the excessive rain and flooding.

The blow to the Maha paddy crop comes amid a crisis in paddy marketing. Millers are said to be hoarding large stocks of rice and are not releasing them to the market to keep the prices of popular varieties of rice high.

Retail prices of popular rice varieties have risen sharply. The import of about 70,000 metric tonnes of rice is expected to moderate prices.

There are several problems with this market-based solution. Will the quality of imported Indian rice be acceptable, and will it prompt rice millers to release their stocks? The loss of lesser Maha crops may prevent such release with the expectation of continuing increases in prices.

A further difficulty is the alleged corruption in the two state-owned enterprises, the CWE and the STC. In the past, the cooperatives released rice to private traders, and the availability of rice for consumers was limited. Will this happen again?

The extent of the crop damage and reduced production remains unclear. In some regions where early planting took place, the paddy plants had grown sufficiently to withstand the flooding and even benefit from it.

Silver lining

Amid this encircling gloom, the good news is the improvement in the external finances. At the end of November, external reserves had risen to US$ 4.6 billion, the trade balance had improved, and exports had risen while imports had decreased in the first ten months of this year. The external reserves have been bolstered by the increase in remittances, investment inflows, and earnings from tourism and ICT services. These are significant gains.

Conclusion

The path to economic growth is a difficult and onerous one. The continuation of the IMF agreement and adoption of pragmatic policies are imperative to achieve growth and ameliorate the conditions of the poor and low-income earners. The President has outlined the policies of the government. Their implementation is difficult but imperative.

 

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