Economy in crisis- Why?

By Dr. C. S. Weeraratna
csweera@sltnet.lk

The COVID-19 is a highly critical issue which we are currently facing. However, the economic crisis we are facing too is critical. According to media reports the country’s foreign exchange reserves have dwindled to very low levels. The Petroleum Minister, Udaya Gammapilla, recently said the country lacked enough cash to pay for oil imports. In the near future, it is likely that import of many items will be curtailed due to lack of foreign exchange. .

The present economic crisis can be attributed to many factors. Among these is the fact that our expenditure on imports outpace the country’s exports (see Table 1). We have been importing much above the exports and as a result our Trade deficit continues to fluctuate around US$ 8 billion, in spite of various ministers concerned with finance trade, industries, etc. and many economists in these ministries.

A substantial amount of foreign exchange is spent on importing milk. In 2020 nearly Rs. 60 billion was spent to import milk and dairy products. Instead of implementing an effective plan to increase local milk production, what the then government did was to import cattle. According to newspaper reports, 15,000 cows were imported during the last few years each costing around Rs. 450,000. Most of the cattle imported died due to a deadly disease which is not found in Sri Lankan animals. Millions of rupees in foreign exchange was spent without any benefit to the country. If there was an effective plan to produce milk, locally, a considerable amount of the foreign exchange spent on importing milk could have been saved.

Although Sri Lanka is considered an agricultural country, around Rs. Rs. 300 billion (nearly 10 % of the import) is spent on food imports . A closer look at the imports indicate that around Rs. 50 billion (nearly 15% of food imports) is spent on importing sugar, most of which can be locally produced. The total annual requirement of sugar in the country is around 620,000 t but, only about 50,000 t are produced locally. Instead of implementing an effective programme to increase local sugar production, thereby saving much wanted foreign exchange, the governments continue to import sugar costing the country nearly Rs. 50 billion in foreign exchange annually. In the mean time the Kantale sugar factory has been closed for nearly 2 decades.

In addition to spending Rs. billions in foreign exchange to import milk and sugar, we spend a colossal sum on importing food items which can be locally produced. Among those imported in 2018 are lentils ( Rs. 10 billion), onion ( Rs 12 billion), maize (Rs. 6 billion), chilies (Rs 11 billion), fruits (Rs. 7 billion)

Even herbs, such as katuwelbatu, thippili, etc., which can be produced locally and used for ayurvedic drugs, are imported. In 2017 we have imported nearly Rs. 2 billion worth of medicinal herbs. Most of these can be locally produced and expenditure on imports of these items can be thus reduced.

The various ministries related to agriculture, industries and plantations, during the last 2-3 decades have miserably failed to reduce our expenditure on imports resulting in a shortage of foreign exchange which we are faced with at present..

Increasing exports

The need to increase our export earnings to meet the severe financial crisis we are facing today is obvious and has been highlighted by many . Table 1 indicates that our exports have not increased by any substantial amounts although there are many organisations, such as, Export Development Board which are expected to promote exports. A National Export Strategy (NES) was launched in 2018 to promote exports. With the implementation of NES our exports is expected to reach a sum of 28 billion US dollars by 2022. But not even half of the anticipated has been achieved by 2020.

Exports contribute substantially to the GDP while generating foreign exchange earnings. When Sri Lanka’s exports are compared with those from the countries in our neighborhood, it is observed that, in spite of many comparative advantages there had not been adequate progress in the field of exports..

Although many have highlighted the need to increase our export earnings the main question is what are we going to export . Newspaper reports indicate that the quantity of most of our exports has dwindled during the last few years. Production of tea, our main export product has continued to decrease from 340 million kg in 2013 to around 280 million kg in 2020. . With the implementation of the ban on inorganic fertilisers and pesticides, this value is likely to decrease further in the coming years thereby reducing our foreign exchange earnings.

Rubber production, too, has decreased from 152 million kg in 2012 to around 70 million kg in 2020. As in the case of tea, production of rubber is likely to decrease in the coming years due to a number of factors. Exports of other crops do not show any substantial increase during the last few years. In fact, production of some of these crops has decreased. As indicated in Table 1 our exports has fluctuated round US $ 10 billion annually. If the ban on inorganic fertilisers and pesticides is going to be continued, production of our export crops such as tea is likely to decrease resulting in a drop in export earnings..

Most studies of Sri Lanka’s export sector confirm the importance of diversification. Sri Lanka has a wide variation in soil and climate with 46 agro-ecological zones, each characterized by specific climate and soils making it possible the cultivation of a number of different types of crops which have considerable potential to earn foreign exchange. Although there are many organizations such as the ministry of agriculture, plantation crops, etc. attention has been given only to the traditional crops without appropriate plans to diversify exports except for some ad-hoc projects.

All these data indicate that our export earnings are dwindling and it is sine qua nun that an effective plan is implemented to increase our exports. It is only realistic and integrated strategies that will help the country to address the economic crisis we are facing.