Sri Lanka's economy continues to deteriorate, inflation rate spikes in July

The economic situation has continued to deteriorate in Sri Lanka, with the headline inflation rate spiking to another record high in July, World Food Programme (WFP) said on Tuesday.

This rate of 66.7 per cent marked yet another alarming jump, from 58.9 per cent in June (based on the latest year-on-year National Consumer Price Index [NCPI]), according to WFP.

The impact of rising inflation and prices on the population could translate into an even worse food security situation. Already, 6.3 million people are food-insecure, based on WFP and FAO's Crop and Food Security Assessment Mission. These numbers could mount even further without urgent intervention.

 

The WFP said the crisis will have a substantial impact on children, with risk of losing access to nutritious meals.

According to the latest World Bank assessment, Sri Lanka is ranked fifth among the 10 countries with the highest food price inflation in the world.

In its Food Security update, the World Bank said trade policy actions on food and fertilizers have surged since the beginning of the war in Ukraine. Countries actively used trade policy to respond to domestic needs when faced with potential food shortages at the beginning of the COVID-19 pandemic.

As of July, Sri Lanka is experiencing significant shortages in the domestic food supply.

In Sri Lanka, agricultural production has decreased by 40 per cent to 50 per cent because of fertilizer shortages, and there is a lack of foreign exchange to purchase food imports.

"Fertilizer and fuel (for land preparation, transport, and harvesting activities) shortages are expected to limit the food supply. Some relief is coming from the first shipment of 44,000 tonnes of urea supported by Indian credit (and 21,000 tonnes is expected to arrive soon). There has been an increase in demand for Indian rice, with roughly 9.6 million tonnes shipped this year," the assessment says.

Exporters, concerned that export restrictions will be introduced (as has been done for wheat), are moving quickly to open letters of credit and have signed contracts to export 1 million tonnes of rice from June through September 2022. Moreover, food price inflation reached 80 per cent in Sri Lanka.

This comes as food price inflation remains at a multiyear high in South Asian countries including Pakistan. The first Ukrainian grain shipment is underway, but challenges to food security persist.

According to the World Bank assessment, the agricultural, cereal, and export price indices globally were stable over the past two weeks, with the agricultural and cereal price indices 1 per cent higher than two weeks ago.

Domestic food price inflation remains high around the world, with high inflation continuing in almost all low and middle-income countries and the share of high-income countries with high inflation increasing sharply.