In the News

Inflation - Sri Lanka in economic emergency as food prices soar

Geoff Riley

1st September 2021

The Sri Lankan government is introducing government-controlled prices in a bid to stem inflation in an economy hit hard by a depreciating currency and the damaging impact of covid on their tourist-dependent economy.

Sri Lanka is a net importer of food and energy and the sharp depreciation of their currency against the US dollar has led to a spike in the cost of imported products.

This is a good example of how currency weakness can feed through quickly to hit the basic living standard of millions of people on low incomes.

And a weaker currency can increase food prices further down the line. An example is the increased cost of imported fertiliser used in the Sri Lankan farm sector.

The decision by the Sri Lankan government is an example of intervention justified on perceived grounds of equity in the distribution of scarce resources.

Will it work? Do price controls - however temporary - solve some of the structural problems facing their economy?

The Sri Lankan central bank has started to raise interest rates in a bid to control inflationary pressures - their annual rate of inflation has climbed to 6%.

Sri Lanka has declared an economic emergency empowering the authorities to seize stocks of staple foods and set their prices, to contain soaring inflation after a steep devaluation of its currency due to a foreign-exchange crisis

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

© 2002-2022 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.