Mattu pongal (Tamil New Year Festival) in Deraniyagala, Sri Lanka. This year, those who prepared the meal told that there were fewer vegetables than they'd usually serve, because of the skyrocketing prices. Image via Instagram by Amalini, used with permission.

This post was first published by Sri Lankan academician Professor Wasantha Athukorala in Groundviews, an award-winning citizen media website. An edited version is published here as part of a content-sharing agreement with Global Voices.

Sri Lanka is experiencing its worst economic crisis since independence with a rapidly declining economic growth rate coupled with widening deficits in the balance of payments, government budget and investment and savings. The real Gross Domestic Product (GDP) was reported to be -3.6 percent in 2020 and 3.7 percent in 2021. The GDP growth for the first half of 2022 is -4.8. According to the latest South Asia Economic Focus and the Sri Lankan Update, the real GDP is expected to fall by 9.2 percent in 2022 and a further 4.2 percent in 2023. The volatile political situation as well as increased fiscal, external and financial sector imbalances cast significant doubt on the economic outlook. The ongoing economic crisis has impacted negatively on living conditions and is expected to increase poverty substantially.

The Department of Census Statistics (DCS) estimates the Official Poverty Line (OPL) for each month in the country; however, the survey is not being conducted this year. Therefore, there is no official information available to understand the poverty situation in the country. Meanwhile, the World Bank argues that the economic recovery in 2021 was insufficient to return poverty to its pre-crisis levels. Their simulations show that the ongoing financial crisis may increase poverty to 25.6 percent in 2022, equivalent to over 2.5 million people falling into poverty between 2021 and 2022 and bringing poverty back to close to 2009 levels of 57.9 percent.

Given that there is no scientific evidence about the poverty situation in the country, a research team of the University of Peradeniya including Prof. Muditha Karurathna, Prof. Tilak Bandara, Dr. Shyamantha Subasinha and Mrs. Lakshika Wiragoda, under the leadership of Prof. Wasantha Athukorala (myself) conducted a study in this area. It estimates the poverty headcount ratio for July 2022 using the official poverty line data given by the Department of Census and Statistics (DCS) Sri Lanka. The basic methodology adopted for this study had several steps. First, we identified OPL for July 2022 which is LKR 13,138 (USD 35.76 per month = $1.19 per day). This means that a family of four requires at least LKR 52,552 (USD 143) per month to meet their minimum consumption requirement, which was LKR 31,652 (USD 86.14) in 2021 (a 66-percent increase in seven months).

We were able to determine the total number of households under OPL using this method. Our estimates considered only the lower bound of the income groups. Therefore, this represents the lower limit of poverty in the country.

Average households’ monthly income has decreased from LKR 76,390 (USD 207.87) in 2021 to LKR 72,720 (USD 97.88) by July 2022. Meantime, inflation has increased by 52 percent between January 2022 and July 2022. During the same period, food inflation increased by 60 percent while non-food inflation increased by 45 percent. The OPL increased by 66 percent during the same period. All this provides evidence that the steepest rise in poverty levels took place after January 2022.

When considering the decile groups (income) in the country, the first and second decile groups (lowest) were under the poverty line by the end of 2021 (approximately 1.14 million households or 4.56 million individuals). The third and fourth decile groups and more than 140,000 of the households who were in the fifth decile group have come under the poverty line between January and July 2022. This implies that approximately 1.28 million households or 5.12 million individuals have come under the poverty line within this seven-month period. According to the OPL, people living in households whose real per capita monthly total consumption expenditure is below LKR 6,966 (USD 18.95) in the year 2019 are considered as living in poverty. Accordingly, 11.9 percent of households were in poverty, which was 681,800 households and 3,042,300 (14.3 percent) individuals. Our new estimates using the income approach show that number of households whose income level is less than OPL is approximately 2,422,500, which is 42 percent of the total households in the country. This includes approximately 9,690,000 (44 percent) individuals.

The interim budget presented by the Minister of Finance recently has given some attention to direct cash transfers to poor households. These include providing immediate relief to around 3.2 million people affected by the current economic situation. Under this, monthly the Samurdhi (prosperity) allowance has been increased to an amount ranging between LKR 5,000 (USD 13.61) to LKR 7,500 (USD 20.42) per month for approximately 1.7 million Samurdhi-receiving families. Apart from that, LKR 5,000 (USD 13.61) was provided per month temporarily to around 726,000 families who were on the waiting list for Samurdhi benefits. The allowance paid for the elderly, disabled and kidney patients, and was increased to an amount ranging between LKR 5,000 (US$ 13.61) to LKR 7,500 (US$ 20.42) per month. Temporary assistance of LKR 5,000 (US$ 13.61) will be arranged for the people who are on the waiting list. This is evidence that the social protection programs are progressing; however, they should be rigorously focused on the requirements of needy families. When considering the prevailing inflation, this type of small cash transfer is approximately 9 percent of their minimum expenditure requirement and does not meet their minimum needs.

Our research does not provide sufficient evidence to explain the country’s poverty distribution by sector or district. However, it is clear that most low-income people have reduced the number of meals they eat, shifted to low-quality, low-cost commodities and reduced their children’s health and education spending. The government recently increased both indirect and direct taxes. This has had a negative impact on the country’s middle-income group, as well. Rural households try to survive by gathering various items from their own backyard gardens but such opportunities do not exist in cities. As a result, households in urban areas are severely impacted by the food crisis. Children and pregnant mothers, in particular, were at high risk of nutritional deficiencies because the quantity and quality of food intake in lower-income groups suffered greatly during this period.

The country is in a critical situation. Food inflation, job losses, limited fertilizer supply and a drop in remittances have disproportionately impacted poorer households. The current tax structure changes (increased direct and indirect taxes) have exacerbated the situation. It is obvious that all marginalized groups suffer greatly. More than three million fisheries families, more than one million plantation sector families and approximately 300,000 daily wage earners, for example, are direct victims of the crisis. Approximately 20 percent of the population lives in slums (as a percentage of the urban population). With time, this group may become more violent and resort to unethical or illegal means of earning a living.

Micro, Small and Medium Enterprises (MSMEs) accounted for more than 75 percent of all businesses, provided 45 percent of all jobs and contributed 52 percent of the GDP in Sri Lanka. MSME establishments numbered 1.017 million (this includes 935,000 micro-enterprises and 71,000 small enterprises) and it is approximately 99.7 percent of the total non-agricultural sector establishments. The MSME sector provides livelihood to nearly 2.23 million people, which is more than 75 percent of the total private sector employment in the non-agricultural sector (DCS, 2020). This sector is severely affected by the recent tax revision, rate changes in telephone, electricity and water, and inflation, as well as the prevailing economic crisis.

Sri Lanka must address long-standing economic weaknesses within a sound macroeconomic policy framework yet to be developed. The government is currently renegotiating its debts with bilateral creditors including China and Japan and multilateral such as the ADB and the World Bank. After establishing the IMF credit line, the country is expected to stabilize its economy by lowering inflation, resolving the balance of payments and exchange rate crises and essentially putting forth a recovery plan.

The country’s political crisis has remained an impediment to the ongoing process. Certain essential measures such as improved governance and eliminating corruption are still not given proper attention. Therefore, I would expect that the situation will worsen without having a turning point in the system.