‘Sudden shift to organic farming like time bomb waiting to explode’
Moving into organic farming might have needed a more calibrated approach and the sudden transition was extremely problematic due to lack of farming infrastructure, dependence on imported agrochemicals, lack of access to modern techniques and agricultural literacy.
“Although the transition towards organic farming seemed like an environmentally friendly sustainable step, the sudden shift was like a time bomb waiting to explode,” R. A. A. Jayalath, Assistant Governor, Central Bank of Sri Lanka said.
This has not only disrupted the country’s resilience in some agricultural commodities such as rice and tea but also has had a ripple effect on other macroeconomic parameters, Assistant Governor
Jayalath told a seminar organized by Centre for Banking Studies, held under the theme, ‘Confronting the Current Foreign Exchange Crisis in Sri Lanka ; Lessons from Global Experience.
New methods of production were more costly with lower yields and hence the agricultural policy resulted in serious downward adjustment of its harvest, for instance the rice production quickly fell by 20 % and increased rice prices by almost 50 % in the recent months.
He said the low productivity and excess demand in the agricultural sector had to be satiated with imports of necessary food items in abundance, in the absence of sustainable forex reserves. Moreover, he said Sri Lanka’s early reluctance to seek an IMF package had arguably made things worse and reduced its options to avoid the current meltdown.
In addition, heavy and continuing borrowings by the government to bridge the fiscal deficit over the years has made monetary policies and exchange rate management, having limited effectiveness in managing fallout of funding the fiscal gap.
He said further that subsequent to the global financial crisis in the presence of low interest rates in the developed market, Sri Lanka shifted its strategy significantly towards foreign market borrowings, exposing the country towards global credit cycles.
“Although we witnessed rapid economic growth, the majority of favor came from borrowed funds and at the same time invested in most non-tradable -sectors or slow revenue generating sectors.
This was clearly reflected in the trade balance. Soon after we moved on to the commercial borrowings particularly after the country lost its access to concessional borrowings with its graduation to middle-income country. In early 2000 the most borrowings were commercial. We didn’t have access to local borrowings from multilateral agencies.”
When the concessional loans declined, he said the economy increasingly shifted towards commercial loans mostly by way of the International Sovereign Bonds, and other overseas borrowings. While the domestic public debt levels remain mostly stable, foreign debt became the primary driving force in the Sri Lankan economy. Accordingly, foreign debt to GDP ratio increased from 30 in 2014 to about 50 in 2020.
Although Sri Lanka’s foreign debt to GDP ratio has witnessed a significant reduction over the last two decades, the change in the structure and composition of high levels of external debt has made the economy more vulnerable to currency crisis in the last few years and consequently in 2021 economy had net repayments to foreign creditors. Therefore the entire budget deficit was financed by domestic sources.
“It’s a kind of domestication of external obligations and the majority was financed by sources like the central bank of Sri Lanka or the monetary finance. Fiscal consolidation to revenue enhancement as well as expenditure rationalization becomes usual under such circumstances such measures were hard to come by.”
Instead the significant amount of monetary financing by the central bank has resulted in worsening inflation and exchange rate outcome. In this environment, the tax cuts that were introduced in the 2019-20 period was a previous policy error in my view, he said. Total impact of such tax cuts was over Rs. 600 billion and some suggest it was Rs. 800 billion and tax revenue to GDP ratio has declined to 7.7 % in 2021. This has led to a host of economic issues, ranging from soaring inflation, currency depreciation. “I think there are many reasons for the current crisis of Sri Lanka’s economy, however they could have been avoided if he acted on time,” he added.