• Lived realities of the people continue to deteriorate 
• Increase in people mortgaging possessions: Prof. Athukorala

Sobering statistics

• Drought-affected cultivated paddy lands: 51,055.19 acres
• Other crop damage: 424.70 acres 
• Families in 19 districts facing drinking water scarcity: nearly 90,000
• Individuals in 19 districts severely affected by drought: 306,934
• Total accumulated value of pawned gold by mid-2023: Rs. 650 b

Despite statistics from the Department of Census and Statistics claiming a drop in inflation, the lived realities of the general public appear to be deteriorating rapidly. 

Following on the heels of the economic crisis, the prevailing drought has exacerbated the situation, with the Agriculture Ministry announcing that the amount of cultivated paddy lands where crop damage has occurred due to the drought has increased up to 51,055.19 acres as of 22 August. 

Further, the Agricultural and Agrarian Insurance Board has mentioned that the amount of crop damage of other crops is 424.70 acres and the amount of crop damage of paddy and other crops is 51,479.89 acres.

Amidst this, the Disaster Management Centre (DMC) said that as of Thursday (31), nearly 90,000 families in 19 districts are currently facing drinking water scarcity due to prevailing dry weather conditions. 

The DMC further noted that 306,934 individuals in 19 districts have been severely affected by the drought in the country.

Mortgaging 

A significant indication of worsening ground realities has manifested in an increase in people mortgaging their possessions, University of Peradeniya Department of Economics and Statistics Prof. Wasantha Athukorala pointed out. 

Speaking to The Sunday Morning, Prof. Athukorala said: “The total accumulated value of pawned gold was around Rs. 250 billion. This number has increased to Rs. 650 billion by the middle of 2023,” he said. 

“This clearly shows that the people in the country don’t have other income sources, and the value of their income has drastically decreased due to inflation. Earlier, they made use of such possessions for emergency purposes. People kept such possessions in the financial sector, i.e. the official banking sector or other places and borrowed money. However, recently, even to meet their daily consumption expenditure, educate their children, cover health expenditure, and agricultural activities, people have had to borrow money after keeping these things in banks or other places.

“At that time, the interest rate was also very high. Therefore, the cost of doing this was very high, unlike today, where the interest rate is a little bit lower and the Government has regulations to maintain it at about 18%. At that time, however, it stood at about 25-30%.” 

Prof. Athukorala also noted that those in the agriculture sector were especially hard hit, since they had obtained money in this manner and invested in agricultural activities in the hopes of securing a yield and receiving an income, but had been foiled by the drought and other factors, leaving them with no options for recovery. 

Addressing what had caused people to mortgage gold and land, Prof. Athukorala noted: “The value of most lands and properties have decreased rapidly. Many are trying to sell their land and mortgage it, since they wish to convert their assets.” This process of converting assets into cash is typical in countries going through crisis situations. 

Secondly, he noted that many Sri Lankans were migrating, meaning that they required funds for it. “Therefore, they sell whatever land they have or they mortgage their property and go abroad. As such, the sale of land is not merely for consumption purposes, but for other purposes such as migration.”

Prof. Athukorala further noted that in his research, those in the plantation sector had shared that by 2022, they lacked the gold to mortgage, since by then they had already mortgaged what they had. “Therefore, by 2022 and 2023, this poorer segment of the population no longer possesses gold. The middle class, who have a particular way of life, find themselves unable to maintain this lifestyle due to inflation and other issues. Therefore, they have to convert their assets into cash and use this to maintain their lifestyle.”

According to Prof. Athukorala, the middle class became the primary victims of this situation in 2023. 

He believes that this is due to a combination of various Government policies and rising inflation, as well as the dramatic increase in interest rates, which means that ordinary people are unable to borrow money easily with the cost of borrowing skyrocketing. 

He further noted that the drought would have a significant impact, although Government statistics only showed a partial picture, since it did not estimate the drought’s impact on long-lasting crops or the plantation sector. 

Twin issues

In this backdrop, the country is ill-prepared to deal with the long-term impacts of its present crop of problems, Prof. Athukorala shared. “As per my calculations, the Government has not taken any steps to change the direction of the economy; we are still going in the same direction that we were before. 

“We have twin structural issues in the economy. One is the budget deficit; in order to minimise the budget deficit, revenue has to be increased and expenditure decreased. When comparing the initial six months of 2022 and 2023, our income has increased by 43%. However, our recurrent expenditure has increased by 48% (capital expenditure has decreased by 7%, which is also not good).  

“There is no growth potential in recurrent expenditure, which is expenditure just to maintain the economy. The increase of our recurrent expenditure is greater than the increase of income. Previously, we had a higher budget deficit, causing greater borrowing. This is happening again; we have increased our expenditure more than our income.

“As a result, within the last month, the Government has borrowed Rs. 1,000 billion from the domestic market. Out of this, Rs. 350 billion has been borrowed within the last few days – 28 and 29 August. At the end of the day, it is the future generation who has to repay this Government borrowing.”

With people mortgaging their prized possessions, the long-term impacts could be significant, Prof. Athukorala noted. 

“Typically, in developing countries, people keep gold for various purposes. One objective is to demonstrate your social position. In countries like Sri Lanka, this is done especially by the middle class. The middle class also accumulates gold in order to minimise future risks. They save gold for their children or convert it into money immediately in an emergency. 

“When it comes to the poorer people, especially plantation workers and daily wage labourers, whatever they had was kept for emergency purposes. This was the main purpose for accumulating gold. 

“At present, both the middle class and the lower income earners have put their gold in the formal and informal sector, but now they lack the income to recover the gold. Previously, they had an income from various sources and they could recover the gold at the end of the year or month. Accordingly, their risk minimisation strategy is no longer functional.  

“This will impact their children’s education, health, and contribute to increasing poverty in the country. It will have a long-term impact in many ways,” Prof. Athukorala cautioned. 

“Similarly, the land market has now deteriorated rapidly, primarily because many have sold their land to go abroad or they wish to sell or mortgage their land for money. Therefore, property prices have decreased rapidly.”

A suffering middle class

Meanwhile, University of Kelaniya Department of Economics Associate Professor H.M. Nawarathna Banda noted that with the lowered income and high cost of living, it was likely that people would be compelled to mortgage their possessions in this manner. 

“Despite claims that inflation has dropped, it is not evident when considering the goods in the market. Accordingly, it is likely that people have to mortgage their gold and other possessions in order to find money since they have no other sources of income and their purchasing power has reduced,” he said, noting that it would be mostly the middle class who would be compelled to mortgage gold and land. 

“Having to sustain themselves by mortgaging their possessions means that when they try to recover these possessions, they will become indebted once more,” he asserted. 

Speaking to The Sunday Morning on a previous occasion, Department of Census and Statistics Prices and Wages Division Director Dr. Nirosha Dissanayaka emphasised that lowering inflation did not translate to lowered prices. 

Addressing how prices have failed to show a significant decrease despite easing inflation, Dissanayaka said: “When declaring inflation, we only indicate a decline in inflation and not a decrease in prices of goods and services. Inflation indicates the speed with which prices increase. It does not indicate a reduction in prices of goods.”