ECONOMYNEXT – Sri Lanka is to harvest a good rice harvest in the upcoming main (Maha) cultivation season but paddy stocks from two previous seasons are still with farmers and collectors, President Ranil Wickremesinghe said.
“I see now that we will get a good harvest in the Maha season,” President Ranil Wickremesinghe told parliament.
“That is also a problem, because we have some leftover rice stocks from the recent Yala (minor) season and the previous Maha season.”
“Now there can be situation of excess rice, we have to protect the farmers. On the other had we will have food to reduce malnutrition.”
Sri Lanka’s rice farmers do not grow and internationally traded grade of rice and bumper harvests do not lead to export booms but calls for trade restrictions on the hungry and helpless to ‘protect’ their incomes.
Rough rice (paddy) prices have fallen to around 80 rupees a kilogram, from over 120 rupees at the height of the crisis earlier in the year when large volumes of money was injected to the banking system to sterilize interventions and pay state workers.
Food Price Crisis
Though supplies are coming back to normal, because soft-pegging macro-economists destroyed the rupee from 200 to 360 to the US dollar by printing money for two years to keep interest rates down, prices are double before from the liquidity injections or ‘stimulus’ started.
The malnutrition is coming from monetary instability involving the collapse of the anchor-conflicting ‘flexible exchange rate and not a problem in the real economy as excess food supplies show.
Sri Lanka’s chicken farmers are also looking for export opportunities.
Sri Lanka is now in the worst the worst currency crisis triggered it the history of its intermediate regime (flexible exchange rate) central bank.
With salaries not keeping pace, incomes many sectors, mostly salaried workers including daily wage earners are too low to afford food whether or not they are plentiful, leading to malnutrition especially of the children of poor families.
The phenomenon has a been a recurring problem in the country after the soft-pegged central bank was set up 72 years ago.
Before 1980, when depreciation became fashionable in Washington policy making circles (now called a flexible exchange rate and BBC policy at that time), import controls were the main threat to food supplies, not soaring prices and lagging wages.
Food Trade Controls
In the 2022 currency crisis soft-pegging macro-economist in a mistaken strategy then banned ‘open account imports’ threatening food supplies ranging from lentils to onions and sugar to wheat that usually come from South Asia and Dubai, driving up prices.
But Wickremesinghe then opened account imports, preventing a real food crisis from taking place, allowing money flowing through traditional gross settlement systems (Undiyal/Hawala) to be easily prioritized for food.
Food imports in Sri Lanka are only around 100 to 150 million dollars a month which is about third of monthly worker remittances and about 10 percent of total exports.
However the central bank under Governor Nandalal Weerasinghe took the required action to liberalize rates allowing credit to slow and stabilize the external sector.
The government also raised energy prices to keep in line with flexible exchange rate collapse (also a recurring phenomenon) and raised taxes to reduce domestic credit (also recurring action).
President Wickremesinghe and his advisors focused their efforts on getting loans from foreign lenders to buy fertilizer for farmers after he took over as Prime Minister and later President.
Fertilizer supplies are important in a currency crisis not just to produce food as normal but the construction sector usually has to be smashed to stop balance of payments deficits and to stop the rupee from falling further.
When rural workers engaged in construction return home to farming areas availability of fertilizer will help them keep in employment.
Open Market Injections
Construction and other sectors undergo an artificial boom when a soft-pegging central bank suppresses rates with its open market operations and sells downs reserves when the currency peg comes under pressure.
Selling reserves and printing money through open market operations to stop rates going up – an action called ‘sterilized intervention’ – effectively injects what classical economists called ‘fictitious capital’ into banks and artificially pushing up credit and imports further by effectively re-financing private sector activities with central bank credit.
The new money to sterilize interventions over-extending a credit cycle and encourages more imports.
In the current crisis Sri Lanka’s Consumer Affairs Authority, by imposing price controls, disrupted sectors like poultry sector and created black markets.
President Wickremesinghe has so far not taken any actions to abolish the CAA or its price controlling powers which goes against his ‘social market economy’ strategy. (Colombo/Dec09/2022)