Sri Lanka - Taking a deep hole and making it deeper

 An interesting case study from How Sri Lanka’s overnight flip to total organic farming has led to an economic disaster by Samyak Pandey.  The subtitle is "President Gotabaya Rajapaksa was forced to impose an economic emergency on 31 August to contain soaring food inflation, and currency devaluation and forex reserves crisis."

The absence of any comment on weather and how it might have affected production declines causes me to be concerned that this might be a one sided argument but otherwise it maps to both theory and past experience.  

New Delhi: Sri Lanka has been hit by a serious economic emergency even as it struggles to tackle the Covid-19 pandemic.

Dwindling foreign exchange reserves, a sinking currency and soaring food inflation have come together to create a crisis which is unprecedented even by the record of the island nation that was torn by civil war for decades.

The surge in food prices and a real fear of hoarding of essential food items was the last straw that forced President Gotabaya Rajapaksa to impose the economic emergency on 31 August under the public security ordinance.

At the root of this economic catastrophe is a bizarre overnight flip by Rajapaksa’s government on 29 April to ban the import of chemical fertilisers and any other agrochemicals to make the Indian Ocean nation the first in the world to practice organic-only agriculture.

The result: prices of daily food items like sugar, rice and onions have soared over twice, with sugar even touching record Rs 200/kg; kerosene oil and cooking gas prices are surging; tea crops are predicted to fail in October; and there are fears over a hit to production of other crucial export crops like cinnamon, pepper, rubber, cardamom, cloves, nutmeg, betel leaves, cocoa, and vanilla.

These developments come amid a 30 basis points rise in the month-on-month inflation in the country, jumping to 6 per cent in August from 5.7 per cent in July. Its foreign reserves plunged 62% to $2.8 billion in July against $7.5 billion in November 2019. Moreover, the Sri Lankan rupee has fallen 7 per cent against the US dollar this year.

It looks like the government will respond to the consequences of its disastrous policy decision in April in the same fashion that Statists always do - tackle hoarding, impose price controls, take over production, etc., making a bad situation worse.

There are some negative externalities to freedom and free markets but they sure beat the catastrophe of authoritarian central rule.