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Will the IMF deal help Sri Lankans?

Colombo, Sri Lanka – “We’ve seen people struggling for food on our dining trips, it’s very hard to watch,” co-founder of a charitable organization that provides regular meals to the poor in the country told Al Jazeera.

“Parents have asked the schools we serve us meals to increase the number of meals served during the week because children do not get proper meals when they are home during the weekend,” says Nadeeka Jayasinghe of the Community Meal Share Trust.

On Thursday, Sri Lanka and the International Monetary Fund (IMF) reached a staff-level agreement on a $2.9 billion 48-month extended financing facility that will also help it secure short-term funds from other donors. But, even as the country has taken the first steps in obtaining financial assistance from the International Monetary Fund, the day when residents can resume their normal lives is still a long way off.

A recent assessment by the World Food Program in Sri Lanka found that nearly 30 percent of the country’s 22 million people are now food insecure, with one in four people regularly skipping meals to be able to afford them. This is the plight of many poor and “newly poor” Sri Lankans who have suffered from high rates of inflation, shortages, job and income losses.

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“The data seems to suggest that by the end of the year, half of the population could slip below the new poverty line,” Indrajit Coomaraswamy, the former governor of the Central Bank of Sri Lanka, told Indian news site The Wire in July.

The inflation rate at the end of July was 66.7 percent while the national food inflation was 82.5 percent in the same period. The government recently approved an electricity tariff increase, as the state-owned Ceylon Electricity Board faces rising power generation costs amid severe debt levels.

Kerosene prices, which were not increased in line with other fuels earlier this year, recently increased from LKR 87 (US$ 0.24) to LKR 340 (US$ 0.93) per liter. Water tariff increase for September has been announced to cover the increased cost of distribution due to higher fuel prices.

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Jayasinghe started her charitable organization in March of this year after noticing that many urban communities were struggling to make ends meet due to rising prices and a shortage of cooking gas. While the Trust has been able to expand its coverage thanks to generous international and local donors, the cost of sourcing and transporting food has been increasing, and the cost of a single meal has gone from 250 Sri Lanka Rupees (US$0.68) to 350 Sri Lankans (US$0.95 (or equivalent in local currency)) during the past four to five months.

While the government doubled its allocation for student meals to Sri Lankan rupees 60 ($0.16) per meal, “It is impossible to provide a nutritious meal even for that price. An egg alone costs 50-60 rupees. Schools are not the only ones struggling, and Jayasinghe is also receiving requests from Major government hospitals and maternity clinics to provide high protein foods like eggs and yogurt to patients.

People stand in line while receiving food in the community kitchen
Many urban communities struggle to pay for food and rely on community kitchens [File: Adnan Abidi/Reuters]

Import bans, price ceilings and quotas

The government has introduced a series of new measures to try to manage prices and commodity shortages in the country, including rationing, import bans and price caps.

There is currently a quota-based fuel rationing system in place, where a weekly fuel allowance is allocated to each registered vehicle depending on the type of vehicle. However, this has left many people who depend on the constant supply of fuel for their businesses puzzled.

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For example, a taxi driver Al Jazeera spoke to recently said that his weekly income fell from 30,000 rupees ($82) to 5,000 rupees ($14) because the fuel ration restricts how much he can drive. The man, who has not been named, says his family now only eats two meals a day to manage costs.

Last week in an effort to curb foreign currency inflows, the government indefinitely banned the import of 300 items, including dairy products and electronic server equipment.

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“They are trying to manage the trade balance without getting any external lines of credit anymore,” Anushka Wijesina, an economist in Colombo and co-founder of the Smart Future Center, told Al Jazeera. “It is not unusual for such restrictions to exist for a limited time – other countries do this as well to guard against balance of payments problems.”

Wijesina said his concern is that these latest policy measures could take hold. There is no reasonable way out of it, and sometimes it becomes actual industrial policy and misplaced import substitution. Since the emergence of COVID in March 2020, we have imposed import restrictions in one form or another. What is this sunset plan? ” He said.

Egg price caps have recently been imposed in an attempt to lower prices on consumers; Poultry and egg farmers have spoken out against this decision.

The cost of producing an egg is now around Rs 50 [$0.14]which is above the maximum retail price of Rs 43 [$0.12]said Amjad Athas, a small egg farmer in Puttalam district in northwest Sri Lanka. “We’re not trying to make huge profits, we’re struggling to break even at this point.”

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For example, feed costs have tripled and the quality of feed now available has been greatly depleted. “American soybean is a key ingredient for managing the protein balance in chickens, but it is now a luxury with exchange rates and import bans. Now the available feed is mainly rice polisher and cheap ingredients, even locally produced corn is not widely available…. The prices of medicines and vitamins have also gone up. Significantly it is not widely available.

Amjad, who runs the farm with his brother, says they and many other small farms they know are considering closing because they simply cannot keep up with the heavy losses. “Over the past year we have not invested in new batches of birds because we are not making any profits,” he said.

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People waiting in line to buy gasoline at a gas station
The government has imposed price caps and quotas on a range of things, including fuel [File: Dinuka Liyanawatte/Reuters]

The road ahead

The International Monetary Fund has identified the economic reforms Sri Lanka needs to undertake to correct the permanent fiscal and current account deficits. Some of the steps include increasing tax revenue, raising energy prices so that costs are covered, expanding social safety nets, and restoring the independence of the central bank and monetary policy authority. It also provides assistance to bridge political loopholes that invite corruption.

This will also serve as a starting point for formal negotiations with the external creditors of the beleaguered country over an appropriate and sustainable debt restructuring plan.

However, the $2.9 billion in financing, which will be disbursed in tranches, is still at least four to six months away and depends on Sri Lanka ending – and getting IMF approval – its debt restructuring plan and reform package.

While this package is a drop in the ocean of Sri Lanka’s needs and will only provide a “small respite”, putting in place the plan, and ensuring that the government adheres to it, will help catalyze funds from multilateral institutions “that can be used to provide relief to vulnerable groups,” Wijesinha said.

Several multilateral organizations have already intervened. The Asian Development Bank, for example, announced earlier this week that it would reallocate $200 million in funding to provide cash grants and food vouchers for the next three months.

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“Short-term support is very urgent to avoid a humanitarian crisis,” Peter Brewer, the International Monetary Fund’s mission chief in Colombo, said at a press conference on Thursday.

But so far, these amounts are still negligible, and a return to pre-pandemic normal is still a distant goal. However, Jayasinghe, who runs the charity that provides food to the poor, is keeping her fingers crossed that the funding will provide “much needed relief” to schoolchildren and the vulnerable communities her organization is trying to feed.

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