Context:

Sri Lankan President Gotabaya Rajapaksa has declared an economic emergency to contain soaring inflation after a steep fall in the value of the country’s currency caused a spike in food prices.

Relevance:

GS-II: International Relations (India’s Neighbours, Foreign Policies and Developments affecting India’s Interests), GS-II: Polity and Constitution (Constitutional Provisions, Emergency Provisions)

Dimensions of the Article:

  1. About Sri Lanka’s Economic problems
  2. About the Economic Emergency in Sri Lanka 
  3. What is Currency Depreciation?
  4. Financial Emergency in Indian Constitution (Article 360)

About Sri Lanka’s Economic problems

  • Sri Lanka, a net importer of food and other commodities, is witnessing a surge in COVID-19 cases and deaths which has hit tourism, one of its main foreign currency earners.
  • Partly as a result of the slump in tourist numbers, Sri Lanka’s economy shrank by a record 3.6% in 2020. And in 2021, the Sri Lankan rupee has fallen by 7.5% against the US dollar.
  • According to bank data, Sri Lanka’s foreign reserves fell to less than to just over 2.5 Billion $ in 2021 from over 7.5 Billion $ (a decrease of 5 Bn $) in 2019.
  • Sri Lanka is also the first country in the region to raise interest rates amid a pandemic to help shore up its currency, the Sri Lankan Rupee (LKR),

About the Economic Emergency in Sri Lanka 

  • The Sri Lankan President declared the state of emergency under the public security ordinance to prevent the hoarding of essential items, including rice and sugar.
  • The government has appointed a former army general as commissioner of essential services, who will have the power to seize food stocks held by traders and retailers and regulate their prices.
  • The military will oversee the action which gives power to officials to ensure that essential items, including rice and sugar, are sold at government-guaranteed prices or prices based on import costs at customs and prevent hiding of stocks.
  • The emergency move followed sharp price rises for sugar, rice, onions and potatoes, while long queues have formed outside stores because of shortages of milk powder, kerosene oil and cooking gas.
  • The wide-ranging measure is also aimed at recovering credit owed to State banks by importers.

What is Currency Depreciation and what are it causes?

  • Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies.
  • Economic fundamentals, interest rate differentials, political instability, or risk aversion can cause currency depreciation.
  • Orderly currency depreciation can increase a country’s export activity as its products and services become cheaper to buy.
  • Currency depreciation in one country can spread to other countries.
  • Countries with weak economic fundamentals, such as chronic current account deficits and high rates of inflation, generally have depreciating currencies. Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But an abrupt and sizable currency depreciation may scare foreign investors who fear the currency may fall further, leading them to pull portfolio investments out of the country. These actions will put further downward pressure on the currency.
  • Easy monetary policy and high inflation are two of the leading causes of currency depreciation. When interest rates are low, hundreds of billions of dollars chase the highest yield. Expected interest rate differentials can trigger a bout of currency depreciation.
  • Central banks will increase interest rates to combat inflation as too much inflation can lead to currency depreciation.
  • Additionally, inflation can lead to higher input costs for exports, which then makes a nation’s exports less competitive in the global markets. This will widen the trade deficit and cause the currency to depreciate.

Financial Emergency in Indian Constitution (Article 360)

  • If the President is satisfied that a situation has arisen whereby the financial stability or credit of the country or any part of it is threatened, he/she may declare a financial emergency. 
  • Proclamation in this case also has to be approved by the Parliament as in the case of two other cases of emergency.
  • During the Financial emergency, the executive authority of the Union shall extend to giving of the directions to any state to observe such canons of financial propriety as may be specified in the direction or any other direction, the president may deem necessary for the purpose.
  • Such directions may include those requiring the reduction of salaries and allowances of the Government servants and even those of the Judges of the Supreme Court and High Courts.
  • A financial emergency has never been proclaimed in India.

-Source: The Hindu

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