CEPA Perspectives on Sri Lanka’s Crisis-led Poverty- by Sirimal Abeyratne

Sri Lanka had maintained a steady downward path of its poverty levels and, promised for an early achievement of Sustainable Development Goals (SDGs) on poverty reduction. At the eve of its economic crisis, Sri Lanka was approaching the “last mile” of poverty alleviation drive. As per the official statistics on poverty (based on 2002 living standard data), only 3.2 percent of people were considered to be poor in 2019. According to international poverty line of US$2.15 a day (based on 2017 PPP), the number of poor accounted for only 1 percent of the total population in the same year. Then the country was hit by a global health crisis – COVID pandemic in 2020-2021, that was followed by the foreign debt crisis leading to declare the suspension of foreign debt obligations in April 2022. The resulting economic crisis was unprecedented. In addition to its macroeconomic implications, the economic crisis was the biggest setback to the country’s poverty alleviation effort so that the outcome of poverty reduction over the past few decades made an unexpected U-turn.

Eradication of poverty at its bottom is a more complex task even in high-income countries because the specific causes of poverty at that level are likely to be missed out by the traditional poverty reduction approaches. On the other hand, post-crisis approaches to poverty and vulnerability are also different from the traditional poverty alleviation strategies. This is because crisis-ridden poverty and vulnerability are widespread and are related more to the loss of incomes and jobs. While efficient short-term strategies are required in order to mitigate the poverty implications, more importantly effective poverty reduction depends more on improving capabilities of the people and unlocking growth potentials with reforms.

The evidence from post-crisis studies agree in general on the issue of severe upsurge in Sri Lanka’s poverty and vulnerability. The impact of COVID pandemic on poverty is, however, a global issue. It has added about 70 million new people to the total number of 648 million in extreme poverty in 2019 (World Bank 2022:3). However, Sri Lanka, having faced with double crises – the COVID pandemic and the subsequent debt crisis, deviated significantly from the world’s poverty outlook at the time. While the COVID pandemic hit the Sri Lankan economy as elsewhere in the world in 2020/21, the subsequent collapse of the economy due to debt crisis has aggravated the poverty issue.

Economic contraction has wiped out US$ 17.6 billion from the country’s US$ 94.7 billion economy during 2018-2022. The multiplier effects of economic contraction resulted in a loss of people’s incomes, jobs and livelihoods. Shortages of essential supplies including fuel and electricity brought hardship to people’s day-to-day lives and living standards on the one hand, and paralyzed production and distribution on the other hand. Annual rate of inflation that was running within the Central Bank’s target range of 4 – 6 percent, escalated to 46.4 percent annual average in 2022. By implication, the hyperinflation has wiped out people’s real incomes, not temporarily but permanently. Although, there was no significant increase in nominal incomes, cost of living as measured by the average monthly consumption expenditure nearly doubled within two years, swelling from Rs. 91,880 in 2021 to Rs. 176,253 in 2023 (CBSL 2023:12).

It is not only the economic crisis but also the short-term policy responses to the crisis that has contributed to the current state of poverty. In the midst of the crisis, immediate policy responses such as direct and indirect tax hikes, expenditure cuts, monetary policy tightening, and the implementation of cost-reflective energy and utility prices all have played a crucial role in aggravating poverty. They have pushed even the middle-class wage earners whose living styles and standards are based on their long-term average incomes, into a status of “hidden poor” which is not usually captured in poverty statistics.

According to World Bank (2022), about 15 years of Sri Lanka’s achievement in poverty reduction, based on the international poverty line of US$3.65 a day, has been reversed by the COVID pandemic and the economic crisis. As more than a quarter of the population has been pushed down below the poverty line, the number of poor increased from 2.5 million in 2019 to 5.7 million in 2022. A survey by LIRNEasia (2023), shows that the number of poor has increased from 3 million in 2019 to 7 million in 2023, as per the updated national poverty line, based on 2012/13 data.

Along with rising poverty, the share of non-poor people who were above the poverty line has increased significantly, depicting the increased risk of vulnerability to potential income shocks. The evidence also suggests an increased income inequality showing that the crisis impact on lower-income categories is greater than that on higher-income categories. Apart from the increase in consumption expenditure, income and job losses against the economic crisis have contributed to the increase poverty. According to a survey by the UNICEF (2022), crisis had an adverse impact on job security, more on daily and weekly wage-earners than on monthly wage-earners, resulting in income losses reported by 77 percent of the respondents. The coping strategies that have been adopted by the poor included not only borrowings, selling assets, and pawning valuables, but also reducing expenditure on basic needs including cutting down on meals and medicines.

Crisis-led initiatives

The government’s attempt to address poverty implications of the crisis started with short-term cash transfers, and moved into an improved version of a poverty alleviation programme: The cash transfer programme was a response to the loss of incomes and jobs due to lockdown during the COVID time, while the government had to face two types of constraints in executing the policy measure:

• The first is the budgetary constraint that compelled the government to rely on borrowings from the Central Bank, which resulted in an excessive money growth during 2020-2021. Given the massive scope and scale of the cash transfers in aggregate form, its impact on the subsequent macroeconomic imbalances was extraordinary.
• The second is the absence of established institutional and operational mechanisms for data reporting. This has resulted in poor-targeting of the social protection programmes and a greater scope for interferences and identification errors. World Bank (2022) noted that if Sri Lanka had an institutional framework and social registry in place to govern social protection programmes, the impact of social assistance would have been much improved.

At the second stage of social protection programme in the backdrop of economic crisis, the government initiated “Aswesuma” welfare benefit scheme in 2023. Social protection is a key area in the reform package for economic recovery and progress implemented by the government as supported by the four-year extended fund facility (EFF) arrangement that the government has entered with the IMF. The Aswesuma scheme is intended to improve the institutional mechanism and operations, by upgrading and unifying the existing programmes for cash transfers to transitional, vulnerable, poor and severely poor social groups. Technology-based data reporting and cash transfer systems adopted in the programme are expected to improve its targeting and time-bound operations.

CEPA’s Research Agenda

While CEPA strives to contribute to development policy with its research-based inputs and to disseminate knowledge products in the relevant subject area, particularly in the recent past it has been engaged in research work on the following areas: basic services and social protection; natural resources, climate change and poverty; livelihood and employment; labour migration; social cohesion and reconciliation; gender and development.

CEPA has streamlined and expanded its research agenda in line with the post-crisis poverty issue and the emerging requirements for new perspectives on poverty alleviation. Among other things, its current research activities on poverty are expected to cover the following areas:

• Analyses on post-crisis poverty issue of Sri Lanka focusing on multifaceted poverty, inequality, vulnerability and other relevant issues of social protection
• Assessment of the efficiency and effectiveness of the available social protection programmes, implementation issues, and monitoring issues and developing insights into better practices
• Research on the medium-term strategies for unlocking the country’s potentials for growth as means of effective poverty alleviation through income generation and employment creation
• Research on capacity building for poor and vulnerable segments of population in order to prepare them for facing new challenges and for integrating with benefiting from the growth process
• Supporting the poverty alleviation programme of Sri Lanka through undertaking research, disseminating research outputs, contributing to policy-making and capacity-building.