Sri Lanka faces economic crisis and high food inflation due to COVID-19

Sri Lanka is facing an acute economic crisis due to job and income losses, high food inflation and shrinking finances in the country, according to Sri Lanka’s Development Update (SLDU) of the World Bank. Inflation was stimulated by the government printing money to repay domestic loans and foreign bonds.

The World Bank has also said that the share of people living below the poverty line has likely increased by 11.7% or more than half a million people since the start of the coronavirus pandemic. “The impact was disproportionate among those working in more urbanized areas such as the Western Province, likely due to the large impact on industry and places that had high numbers of poor people before the pandemic. , such as North, East, Uva and Sabaragamuwa. provinces, ”reads the World Bank update.

Districts like Kandy and Ratnapura, which are very rural, also account for a large portion of the new poor after the COVID-19 pandemic, according to the global financial institution. He further added that the vulnerability of the workforce was very high due to high informality and weak safety nets, thus reducing their ability to cope with economic shocks.

“The COVID-19 pandemic has not affected all economic sectors in the same way. Sectoral GDP data and the analysis in Chapter 1 reveal that industries have been more affected than services and agriculture, but there are large variations between sub-sectors. Weak external demand has had an impact on export-oriented sub-sectors. Among industrial sub-sectors, construction and textile manufacturing, which are sensitive to demand shocks and require the physical presence of workers, suffered the largest decline, ”according to the World Bank update.

As a result, credit rating agencies like Moody’s, S&P and Fitch downgraded their respective sovereign ratings of Sri Lanka. Moody’s downgraded its Sri Lankan sovereign rating two notches to Caa1 with a stable outlook in September while S&P downgraded its rating to B- in September and CCC + with a stable outlook in December. Fitch also downgraded Sri Lanka’s sovereign rating to B- in April and CCC in November.

These rating agencies have identified three key factors for which Sri Lanka’s economy is booming. These are increased external vulnerabilities, limited financing options and low budget balances.

The only good thing about this whole scenario is that it can be improved. The World Bank suggested that the government focus on “four priorities for Sri Lanka to further transform its economy, create more jobs and achieve a sustainable path towards poverty reduction and shared prosperity.”

The priorities listed by the World Bank for the Sri Lankan government’s post-COVID recovery efforts are:

  • Increase agricultural productivity and income by supporting farmers’ transition to higher value-added and export-oriented crop mixes.
  • Address barriers to accessing remunerative non-farm employment in rural areas, as they are an increasingly important and potentially productive source of livelihoods.
  • Support broader reforms to increase labor productivity and create jobs that could help improve the quality of jobs.
  • Promote spatial transformation and strengthen inclusion. World Bank Country Director for Sri Lanka and Maldives Chiyo Kanda said: “Investments in human capital – health, education and social protection – are essential to unlock the potential of Sri Lankan children and boost the future productivity and economic growth. “

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