Sri Lanka to issue US$1 billion in relief amid soaring food prices as foreign exchange reserves dwindle

The island nation is struggling to purchase wheat, sugar and milk powder from abroad as the local currency depreciates and inflates its import bill

Headline inflation hit 12 per cent in December. Foreign exchange reserves stand at about US$3.1 billion – enough to pay for just two months of imports

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Sacks of potatoes and onions are seen in a store at Pettah Market in Colombo, Sri Lanka. Prices of essential items have surged in the island nation as it runs out of foreign exchange to pay for imports. Photo: Bloomberg

Published: 11:15am, 4 Jan 2022Updated: 4:10pm, 4 Jan 2022

Sri Lanka will increase pay and pension for government employees, remove some taxes on food and medicine, and provide cash for its poorest citizens as prices of essential items surge in the nation that is running out of foreign exchange to pay for imports.

President Gotabaya Rajapaksa’s government will increase salaries of public sector staff by 5,000 rupees a month (US$25) from January, his brother and Finance Minister Basil Rajapaksa said in a briefing in Colombo late on Monday.

About 2 million people on income support will receive 1,000 rupees each and the administration will also buy crops at higher-than-market rates from farmers who suffer losses due to a government rule to stop fertiliser use.

People queue to buy liquefied petroleum gas cylinders in Colombo, as shortages of essentials grip the island nation amid a lack of foreign exchange to finance imports. Photo: AFP

In total, the package amounts to 229 billion rupees (US$1.12 billion), about 1.2 per cent of gross domestic product, and will be reallocated from the 3.9 trillion rupees budgeted to be spent in the whole of 2022. No new taxes will be announced, Rajapaksa said.

The moves seek to calm public anger about rising prices of wheat, sugar and milk powder, which the island nation is struggling to purchase from abroad as the local currency depreciates and inflates its import bill.

Sri Lanka’s main opposition slammed the relief package, saying it did not address the issue of external liquidity and domestic inflation, which accelerated to 12.1 per cent in December, the second-fastest pace in Asia after Pakistan.

“They are not addressing either of the problems. If they accommodate these wage increases by printing money, inflation may go up further,” said Harsha de Silva, a lawmaker and former minister of economic reforms.

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