Under the Radar: Sri Lanka’s drought threatens credit downgrade.
With around half of national rice paddy acreage affected (1.5 million acres), the cost of this effort will account for between 0.1 and 0.2% of GDP; this does not include relief efforts for other crops.
In order to combat food shortages, the government has accepted food and water aid from India, Indonesia, Pakistan and Thailand as well as increased food imports.
To encourage imports Sri Lanka has cut import taxes on rice from 15 to 5 rupees per kilo.
Another issue are the government price controls on rice which, while fixing prices between Rs 70 and Rs 80 per kilo of various types of rice, risks unrest.
Having purchased rice at higher wholesale prices prior to pricing limits, millers are now being forced to sell at a loss.
On February 13th, some 120 leading millers refused to sell at government prices, calling for between Rs 80 to Rs 90 per kilo, and demanding to meet with President Maithripala Sirisena.
The drought has also led to an energy crisis in Sri Lanka, as reservoirs are only at 29% capacity.
The effects of the drought have derailed Sri Lanka’s efforts to tackle systemic overspending, with the government projecting a 17% increase in spending, versus a 0.6% increase in 2016.
As a result the drought is hampering Sri Lanka’s efforts to reduce the budget deficit to 4.6% – a key goal of the country’s $1.5 billion IMF loan.