2022
Current Economic
Situation of Sri Lanka
[DOCUMENT SUBTITLE]
LAKSHI WIJETUNGE
[COMPANY NAME] | [Company address]
Introduction
Economic situation in a country means how the people in that particular country fulfilled their
unlimited wants with the scarce resources of that country. According to the new findings and
economic reports 2020-2021 we can say that the current situation of Sri Lanka is in an economic
crisis.
When its come into the economic situation in a country we have to talk about many variables
such as inflation rate, interest rate, money supply, employment rate, foreign exchange rate,
economic growth rate, GDP (gross domestic production), Balance of payments, Government
Spending, Foreign debt etc..
Inflation
Inflation is the amount that the cost of goods and services within an economy has increased over
a given time period. Sri Lanka’s annual inflation climbed to 14.2% in January of 2022 from
12.1% in the previous month. It was the highest inflation rate since November of 2008.Inflation
was driven by monthly increases of prices of items in both Food and Non-food
categories. Subsequently, Food inflation increased to 25.0% in January 2022 from 22.1%
in December 2021, while Non-food inflation increased to 9.2% in January 2022 from 7.5% in
December 2021.In 2018 inflation rate in Sri Lanka was 2.14%.
In fact, current pandemic situation increases the food prices in several ways. The most immediate
reason in consumers’ ‘Panic Buying’ assuming the country is going to be locked down.
Specially, the panic buying created a huge excess demand in the market which was unable to
settle by the market mechanism. Secondly, domestic production and distribution mechanism
have been drastically affected by lock-down condition and therefore price levels started
increasing rapidly. Thirdly, closing down of seaport and airports and import restrictions imposed
by the government significantly reduce imports and also increase the price of import
commodities. Moreover, sever depreciation of Sri Lanka rupee further increases the price of
import commodities resulting higher pressure on domestic price levels.
If we classify the inflation, there are three types of inflation.
(1) Moderate inflation
Normally, this type of inflation is not bad for a country because when the economic
growth happens inflation is inevitable. Usually, moderate inflation rate remains between
1%- 7%.
(2) The galloping inflation
This is the kind of inflation that Sri Lanka is facing now. It is dangerous for a country.
Usually, this type of inflation progress at a rapid pace for a period of time affecting
middle- and low-income classes families badly. This can lead to economic depression in
the future.
(3) The hyper inflation
If the inflation in Sri Lanka keeps increasing at this rate, there is a possibility to occur a
hyper inflation in the country in the future which means a inflation that is very high and
keep accelerating day by day. It quickly decreases the real value of the local currency, as
the prices of all goods increase. Ex- inflation in Zimbabwe
In addition to that, another way that inflation in our country can be described as the demand pull
inflation. As the prices of goods and services are increasing , the government prints more money
without increasing the production. So, the money supply increases and therefore, the demand for
goods and services increases. As a result of too much money chasing too few goods, the excess
demand occurs and the prices of the goods and services keep rising. As the effects on this
situation, currently, the investments and savings are decreasing in Sri Lanka. This situation has
badly affected specially for the fixed income earners and people who have fixed deposited their
money due to decreasing of the money value. As a whole the international competitiveness for
Sri Lanka has reduced.
interest rate
The interest rate is the amount that a lender charges a borrower, and it is a percentage of the
initial loan amount. The interest rate on a loan is typically noted on an annual basis known as
the annual percentage rate (APR).
Lending interest rate in 2018 for Sri Lanka was 9.00 %, in 2019 was 8.00%, in 2020 was 5.50%.
Because of the corona pandemic situation, the business and suppliers became demotivated and
the supply of good and services decreased. That’s why the government decrease the interest rate.
money supply
Money supply is all the currency and other liquid instruments of a country's economy on a
measured day. It includes both cash and deposits that can be used almost as easily as cash.
Annual change in money supply in Sri Lanka in 2018 was 13%, in 2019 was 7% and in 2020 was
23.4%. Which means the money supply has skyrocketed in Sri Lanka right after the covid
pandemic due to the government decreasing the interest rate as I mention earlier.
unemployment rate
The unemployment rate is the percentage of the labor force without a job. When the economy is
in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the
economy is growing at a healthy rate and jobs are relatively plentiful, it can be expected to fall.
foreign exchange rate
In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or rate) between
two currencies is the rate at which one currency will be exchanged for another. It is also regarded
as the value of one country's currency in terms of another currency.
economic growth rate
The economic growth means increase in production capacity of the goods and services in a
country over time. The economic growth rate is the percentage change in the value of all of the
goods and services produced in a nation during a specific period of time, as compared to an
earlier period. It is used to measure the comparative health of an economy over time. The
economic growth rate is calculated by:
The GDP of year 2 – The GDP of year 1
× 100
The GDP of year 1
The economic growth rate of 2021 is 1.6% whereas the economic growth rate of 2020 is 4.5%.
Therefore, though the economy has grown comparing to the last year, it is clear that the speed
of increasing the economic growth has reduced massively in Sri Lanka currently. We can see
the easter attack in 2019 and Covid 19 pandemic situation in 2020 has affected our Sri Lankan
economy badly. Imapact- unemployment reduced because production increase demand increase
Inflation increase environmental pollution exploitation of the poor import increase
GDP (gross domestic production)
Gross domestic product (GDP) is the total monetary or market value of all the finished goods
and services produced within a country’s borders in a specific time period. As a broad measure
of overall domestic production, it functions as a comprehensive scorecard of a given country’s
economic health. 2019 88billion 2020 92
Balance of payments
The balance of payments (BOP), also known as the balance of international payments, is a
statement of all transactions made between entities in one country and the rest of the world over
a defined period, such as a quarter or a year. It summarizes all transactions that a country's
individuals, companies, and government bodies complete with individuals, companies, and
government bodies outside the country.
Government Spending
Government spending refers to money spent by the public sector on the acquisition of goods and
provision of services such as education, healthcare, social protection, and defense.
Foreign debt
Foreign debt is money borrowed by a government, corporation or private household from
another country's government or private lenders. Foreign debt also includes obligations to
international organizations such as the World Bank, Asian Development Bank (ADB), and the
International Monetary Fund (IMF). Total foreign debt can be a combination of short-term and
long-term liabilities.