Sri Lanka, India, Pakistan grapple with rising prices as new Omicron variant threatens to sweep South Asia
- Food shortages and a looming economic crisis in Sri Lanka mean only India, China or the IMF can come to its aid
- Pakistan’s opposition parties say people are reeling from ‘back-breaking inflation’ and in New Delhi, watchman Arvind Thakur can no longer afford tomatoes
Retail inflation jumped to 9.9 per cent in November, a 12-year high, stoked by a 17.5 per cent rise in food prices. As of this month, Sri Lanka had just US$1.6 billion in its foreign exchange reserves, equal to less than one month of imports. The island nation of 22 million people is a net importer of food, with much of its wheat, sugar and milk powder coming from overseas. And with the Sri Lankan rupee down 27 per cent from early 2020, import bills have skyrocketed as well.
The foreign exchange debacle is threatening to plunge the country into default. “The economic situation in Sri Lanka is going from bad to worse, with a surge in inflation undermining the credibility of the central bank and making a debt default all the more likely,” said Gareth Leather, senior emerging markets economist at Capital Economics.
Last month, in the first major protest against Sri Lanka’s strongman president Gotabaya Rajapaksa’s government since it swept to power in November 2019, thousands of demonstrators thronged the capital to vent anger over rising prices and food shortages.
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To shore up its foreign reserves, the government has taken a string of draconian steps, declaring a “state of emergency” to control food prices; slapping broad import bans on food, fuel, vehicles and medicines; imposing curbs on imports of mobile phones, clothing and household appliances; and announcing strict controls on foreign currency leaving the country.
Sri Lanka’s central bank was the first in Asia to increase interest rates amid the pandemic, raising its key rates in August last year by 50 basis points. But since then the bank has held rates steady, fearful of choking growth it projects will reach 5 per cent this year following last year’s 3.6 per cent contraction – despite increased prices.
Analysts say the probability of a debt payment default – the country owes US$6.9 billion in foreign currency debt to be repaid next year and US$26 billion through to 2026 – in the coming months has increased.
Separately, The Press Trust of India said Sri Lanka was negotiating with India and Oman to open credit lines for fuel purchases. It has also reached an agreement to settle US$250 million in oil debt it owes Iran using tea exports.
But Fitch said: “even if all these sources are secured, we believe it will be challenging for the government to maintain sufficient external liquidity to allow for uninterrupted debt servicing in 2022.”
W.A. Wijewardena, a former deputy governor of Sri Lanka’s central bank, said it may be too late for IMF aid to solve the immediate crisis. “Our present problem is how we will survive after the next four weeks. For that, quick bilateral assistance of adequate size should be obtained either from India or China,” he told a recent economic forum.
“However, it’s still the IMF that’s the most affordable, cheaper and effective option” longer-term, he said.
A regional problem
Shades of Sri Lanka’s current woes can increasingly be seen elsewhere in the region. In India, wholesale prices have accelerated by the fastest pace in three decades, climbing by 14.2 per cent year on year in November. Harvest shortfalls caused by bad weather, higher global commodity prices, persistent supply-chain knots and a sliding rupee have all made imports costlier.
“We’re not buying tomatoes right now because they’re so expensive,” he said.
While India’s retail inflation is 4.9 per cent, still comfortably below the central bank’s 6 per cent cap, economists forecast prices will keep rising over the coming months in the country of nearly 1.4 billion people. But India’s central bank is maintaining what analysts call a “super-dovish” stance, prioritising economic growth over inflation, and keeping the key repo rate – the one it uses to lend to commercial banks – at a record low 4 per cent.
“The economy remains highly exposed to new outbreaks either of Omicron or potential successor [variants],” said Shilan Shah, another senior emerging-markets economist at Capital Economics. New restrictions to contain the virus would also push up inflation, economists say.
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In the three years since Prime Minister Imran Khan took office promising a “New Pakistan”, the rupee has cratered by more than 70 per cent, including 15 per cent since May. The rupee’s dive has been a disaster for the import-dependent nation of 220 million, sharply reducing its foreign purchasing power while propelling its trade deficit to an all-time peak.
Consumer price inflation jumped 11.5 per cent in November from the previous year, well above the central bank’s 6 per cent target, and economists see prices sticking to an upwards trajectory even with government subsidies on staples. Since 2018, according to the statistics bureau, sugar prices have soared 83 per cent, flour 50 per cent, chicken 60 per cent, beef 50 per cent and edible oils 133 per cent.
To try to cool price rises and arrest the rupee’s fall, the central bank has been aggressively tightening monetary policy, hiking its key interest rate this month by 100 basis points after increasing it by 150 points last month and 25 basis points the month before.
The political fallout from soaring prices, stagnating wages and unemployment – the Pakistan Institute of Development Economics calculates joblessness at 16 per cent compared to the government’s claim of 6.5 per cent – is being felt at the ballot box, with ex-cricketer Khan’s ruling party recently being trounced in local polls in its northwestern of Khyber-Pakhtunkhwa province.
Despite monetary tightening that could curtail growth, the government is still forecasting a 5 per cent expansion for the country of 220 million people. It hopes the economy will stabilise with a US$3-billion loan from Saudi Arabia and a deal with the IMF to revive a US$6 billion funding package. The IMF has said it will unlock a US$1-billion tranche as long as Islamabad increases taxes, including on petrol, and boosts electricity tariffs, steps that will further fuel inflation.