ECONOMYNEXT – Sri Lanka could face higher food prices and food shortages after authorities banned open accounts and DA/DP trading, importers have warned as the country tried to emerge from a currency crisis by raising interest rates and killing personal loans.
Despite severe foreign exchange shortages, the country did not face food shortages until May 2022 as food importers in the main wholesale market in Colombo somehow fed the nation.
Of the roughly US$1.7 billion to US$1.9 billion earned by the country’s exporters and overseas workers each month, only about US$200 million a month is spent on food.
Without a mechanism to prioritize the allocation of foreign exchange for food, many importers have channeled remittances from the Middle East through the undiyal system to feed the nation, sources familiar with the process say.
Because of this, the country did not face serious food shortages, but drugs, which were subject to price controls, went off the shelves as the rupee fell. Monthly drug needs are estimated at about $25 million, or about half a fuel ship.
Above all, importers who have long-standing relationships with regional suppliers ship goods at short notice.
Food suppliers were willing to lend to their local counterparties because of the strong intergenerational relationship.
Groceries like onions and potatoes are also perishable and will rot in bins if not cleared away quickly, while importers go from bank to bank looking for dollars, the grocers said.
Some groceries were spiked at Pettah market on Friday, wholesalers said.
Sri Lanka may trigger drug-like food shortages with new trade controls: Bellwether
Economic analysts had previously warned that price controls and bans on DA/DP imports were the easiest way authorities could create food shortages.
The import ban came after the central bank hiked interest rates to stop money printing and personal credit began to fall.
Sri Lanka has an interim-regime central bank, which has caused monetary instability and social unrest since its inception in 1950.
The country suffered from balance of payments problems within two years of its inception, an exchange control law was enacted in 1952 and a ‘Hartal’ was held in 1953. (Colombo/May 20, 2022)