Thursday 01 Jun 2023
By /
main news image

This article first appeared in Forum, The Edge Malaysia Weekly on May 9, 2022 - May 15, 2022

Sri Lanka’s economic crisis had been brewing for some time before the recent social unrest erupted. The writing was on the wall, but it was either misunderstood or underrated. Either way, the impact has been devastating and may take years to undo. Moreover, the situation has worsened from being an economic crisis to a humanitarian one.

The anatomy of an economic meltdown and social disaster consists of these: food, fuel and medicine shortages, currency collapse and long power cuts, while poverty ramps up and inflation spirals at a record rate. The price of rice has increased by 93%, chicken and lentils by 55% and gas by 50%.

This tragedy is a good lesson for Malaysia. Some of the structural symptoms experienced by Sri Lanka are uncannily like those in this country. So, unless they are addressed, Malaysia may take a similar path.

These are the major takeaways for Malaysia. First, food security works in a dynamic system that comprises highly interconnected elements operating in a feedback loop. The elements include politics, trade, economic policy, natural resources, climate change, governance and external factors.

The UN has encapsulated this network of interactions in the concept of “food systems” which, it warns, are vulnerable to collapse. This was proved in Sri Lanka due to the country’s high debt ratio (110% of GDP) and very low foreign reserves (US$2.3 billion, a reduction of 70%), making food and fuel imports unaffordable. The rising commodity prices worsened the situation. The correlation between these elements and food security is largely underrated.

The impact of external factors is equally damaging, causing a cascading effect. This was seen particularly during the pandemic, which caused supply chain disruptions and the drying up of revenue for the tourism sector, which accounted for about 10% of the country’s GDP. Furthermore, the pandemic disrupted foreign workers’ remittances to their families.

The Russia-Ukraine conflict has added to the suffering, causing petrol and gas prices — hence, transport and energy costs to consumers and manufacturers — to soar. As a result of these factors, the real income of consumers has declined significantly.

Second, economic mismanagement on the part of the Sri Lankan government accentuated the slow growth of the overall economy, including food production. The Asian Development Bank had cautioned the country for its twin deficits — budget and current account — that is, the country’s national expenditure exceeded its national income and its production of tradable goods and services was inadequate to pay for its imports. The twin deficits limited the scope of the budget to address the adverse impact of the pandemic and low level of foreign exchange reserves.

Also, it is said that Sri Lanka failed to seek the International Monetary Fund’s help earlier, which could have prevented the crisis from ballooning to its current scale. Mega infrastructure projects built on borrowings from China not only drained scarce domestic resources but also resulted in a foreign exchange crisis and long-term indebtedness to China (which accounted for 10% of Sri Lanka’s foreign debt). Malaysia, too, is indebted to China to the tune of RM44 billion.

Third, abrupt policy changes shock any ecosystem. The worst inflictions on Sri Lanka’s food security were its government’s overnight policy switch to organic farming and total ban on the imports of fossil-fuel-based fertilisers and agro-chemicals. This hurried policy change caused a significant decline in their staple — rice — by 14% due to a fall in the average yield from 3.38 tonnes per hectare to 2.92 tonnes per hectare. The reduction drove the country to import from India, Bangladesh and Myanmar, incurring abnormally high freight costs, which ironically was above the cost of importing fertilisers and chemicals. The high cost of food security outweighed the good intention of promoting organic farming.

Fourth, this hasty decision-making reveals the Sri Lankan government’s misjudgement of the importance of evidence-based policy decisions. Local experiences show that the impact of organic fertilisers on soil fertility takes time to show results and varies according to geophysical conditions. Hence, there is a need to engage with various stakeholders and conduct policy simulation studies on the impact of organic inputs on yield, farmers’ income and rice supply to the country. A number of policy scenarios must be simulated to gauge the impact on various food crops and industry players, including the public sector, and to estimate the gains and losses of such a policy.

Fifth, governance is at the crux of the crisis in Sri Lanka’s economic institutions. The country’s ruling political party is dominated by the Rajapaksa dynasty led by President Gotabaya Rajapaksa and supported by his younger brother and Finance Minister Basil Rajapaksa.

Malaysia’s situation was even worse when the prime minister’s and the finance minister’s portfolios were held by the same person. This was true under both the premiership of Tun Dr Mahathir Mohamad and Datuk Seri Najib Razak. The dual appointment gave birth to the world record kleptocratic crimes at 1MDB, as well as other forms of corruption and leakages.

In Sri Lanka, it is estimated that 40 of the president’s family members hold government posts apart from the cabinet, involving the third and fourth generations of the Rajapaksa clan. It was estimated that about 70% of the government’s procurement was the result of corruption. The involvement of the Rajapaksa clan in these acts of corruption is difficult to rule out.

Lavish investments in mega projects and leakages in development funds have left the agricultural and food sectors unattended. This is particularly seen in farm institutions such as extension services, credit facilities, cooperatives, farming infrastructures and agricultural technology adoption and innovations.

Equally important is attention to the farmers’ welfare and livelihood such as primary healthcare, education and childcare programmes. A similar observation is applicable to Malaysia, where 90% of the padi farmers and smallholders are in the B40 (bottom 40% income group) category.

In short, Malaysia’s economic scenario may not be as severe as that of Sri Lanka. But some of the structural weaknesses, particularly in governance, are equally bad. Using the systems thinking perspective, these bad macroeconomic factors and economic mismanagement partially explain the poor performance of our food sector. But what can go wrong will go wrong, says Murphy’s Law. However, Sri Lanka’s crisis shows us what to avoid to ensure a sustainable and resilient economy, and hence food security, in the future.

Professor Datin Paduka Fatimah Mohamed Arshad is a research fellow at Universiti Putra Malaysia’s Laboratory of Agricultural and Food Policy Studies

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Text Size