What is happening in Sri Lanka?
The country has been under protests due to the sudden and sharp increase
in prices of basic commodities since the 3rd of March 2022.
— The country is hurtling towards bankruptcy
— Daily essentials including food and medicine are scarce
— Political corruption has deepened mistrust in the government
— The double whammy of government and economic instability is further
complicating recovery. ( source )
Sri Lanka's inflation surged to 60.8 per cent in July, up from
54.6 per cent in June
So why is this happening?
“The country doesn't have enough fuel for essential services like
buses, trains and medical vehicles, and officials say it doesn't have
enough foreign currency to import more.” - BBC
Causes:
-Covid 19 pandemic restricted tourism
-Tax cuts in 2019
-Sri Lanka’s focus on providing goods in the domestic market, thus
reducing exports. Thus imports were more than exports, which reduced
the country’s foreign currency.
Solution:
1. Monetary policy – Higher interest rates reduce demand in the
economy, leading to lower economic growth and lower inflation.
2. Control of money supply – Monetarists argue there is a close link
between the money supply and inflation, therefore controlling
the money supply can control inflation.
3. Supply-side policies – policies to increase the competitiveness
and efficiency of the economy, putting downward pressure on
long-term costs.
4. Fiscal policy – a higher rate of income tax could reduce
spending, demand and inflationary pressures.
5. Wage/price controls – trying to control wages and prices could,
in theory, help to reduce inflationary pressures. However, they
are rarely used because they are not usually effective.