Compass Money: Sri Lanka’s Government Deregulates Prices to Tackle Shortages

Sellers and consumers in Sri Lanka have struggled with shortages of necessities as a result of the COVID-19 pandemic. (Flickr)

To tackle Sri Lanka’s growing food shortages and increasing black market food sales, its government cabinet decided to deregulate the price of key food items on October 8. Goods including sugar, milk powder, petroleum gas, and wheat flour were chosen for this move. 

The COVID-19 pandemic caused an economic crisis in Sri Lanka, for the country had earned a significant portion of its national income from tourism. Sri Lanka typically imports more than it exports, meaning the government needs reserves of foreign currencies to pay for imported goods. The drop in tourism led to the evaporation of much of these foreign currency reserves. As a result, Sri Lanka could no longer pay to import the same amount of goods, creating shortages of necessities such as food, medicine, and gas. 

Furthermore, in April, the government attempted to promote organic farming by imposing a ban on importing pesticides and chemical fertilizers. However, this also contributed to Sri Lanka’s shortage of necessity goods. Since suppliers were running low on products to sell, they raised prices immensely. Some suppliers even hoarded goods, waiting to sell them until prices rose even more. It became extremely challenging for the average consumer to afford necessity goods.

These shortages and economic challenges propelled Sri Lanka’s government to declare a state of emergency on August 31. The government then took action, collecting necessities from warehouses and selling these goods at set maximum prices in state-run markets. This move frustrated some suppliers, for they obtained the goods they sold at high prices and needed to sell them at even higher prices to make a living.

However, the lower prices at state-run markets exacerbated the shortage. The prices for these items were lower than the unregulated market prices, meaning that the quantity demanded for these goods was less than the quantity supplied, creating a shortage.

The government-created shortage frustrated consumers, as they often waited in long lines at markets only to leave empty-handed. Deregulation means the prices of these food items will rise back to the unregulated market price, hopefully easing the shortage.

Some economists say the government might need to obtain a bailout so that Sri Lankan consumers can gain access to necessities soon. Health experts say that food shortages have the potential to create long-term health problems like growth and developmental issues, while shortages of medicine have only worsened the COVID-19 pandemic.