Sri Lanka is exhibiting a crisis.
What is the crisis, and why are they experiencing it?
The main problems that Sri Lanka is suffering are shortages and severe inflation. Savings are being wiped out through inflation. Commodities are hard to come by.
Why are they experiencing this crisis?
Primarily through government mismanagement. Secondarily through bad luck.
Sri Lanka’s economy depends upon the following:
- Rice exports
- Foreign Remittances (Sri Lankans working abroad sending money back home to mom)
A nation’s economy is like a person’s economy. You have to take in enough money to pay for things. If you take in a lot of money, you can buy a lot of things and times are good. If you don’t take in any money, you can’t buy anything and times are bad.
It’s very much like losing your job: you’re broke.
What happened to Sri Lanka is that three things came together about the same time to do damage to their economy.
A few years ago, the government decided to go organic with regard to fertilizers. They listened to the hippies and wanted to be the first country to be “chemical fertilizer free”. When they did that, the yield of their crops plummeted. They therefore didn’t have enough crops to sell. The result was that net income for the economy went down.
Then there was the pandemic. When the pandemic hit, tourism obviously plummeted. In addition to that the pandemic forced closure of borders worldwide. Sri Lankans who work outside their own country and then sent money back to the country through foreign remittances were unable to do so.
Thus, plummeting exports, decreased tourism, and decreased foreign remittances plunged the economy of Sri Lanka into chaos. The government and people didn’t have enough money coming in, and their country wasn’t resilient enough to be self-sufficient; consequently, Sri Lanka had to borrow money to stay afloat.
It’s like when you want to eat and you’re broke. You have to put money on the credit card.
Of course, Sri Lanka had been borrowing money before the pandemic, before these crises, but now they had to borrow more.
The problem that Sri Lanka faces now is that the people of the world now know that Sri Lanka is a debtor nation and unable to pay. Consequently, they are unwilling to loan more money or even sell them goods. Thus the shortages.
It’s kind of like when you run up a tab at a store and never pay. Sooner or later the store is going to cut you off.
Here is a nice picture that depicts trade balance and what it does to a nation.
When you have shortages in the economy, the price of the goods goes up. It goes up because you have, relatively speaking, too much money chasing a smaller amount of goods.
In other words, the price of gasoline and food goes up.
When the price goes too high, the people become unhappy. They start to assemble and riot. Other countries notice this and become frightened. They wonder whether they should continue to sell there.
What most governments do in a time of crisis like this is to devalue their currency. Essentially what the nation does is print up lots of paper money so as to give to the people. That way they can afford things. In addition, devaluing the currency makes it easier for foreign countries to buy your products. That’s because their (the other country’s) currency has greater purchasing power for your goods.
Of course, other nations are watching what is going on. They see that the currency of Sri Lanka is being devalued. They are not interested in that because when a country devalues its currency, it becomes more difficult for the people of the country where the currency is devalued to buy foreign products.
Here is a diagram that demonstrates the effects of devaluing or depreciating a currency.
Of course, devaluing the currency is only a short term band-aid. Devaluing the currency only leads to further devaluation. It’s like a dog trying to catch its tail. The harder the dog runs, the more its tail slips away.
What is needed is often what leaders reluctantly engage in: Thought.
Sri Lanka’s leaders needs to sit down and think about its economy. They need to ask themselves where they want to be five and ten years down the road. They need to ask themselves what type of economy will work for the people of Sri Lanka.
Is it sustainable to rely principally on tourism and foreign remittances? Most countries that rely on tourism are generally poorer countries. Foreign remittances put you at the mercy of another nation. In that scenario you are not an owner, but an employee.
Is it possible for Sri Lanka to be more self-sufficient? Can Sri Lankans do for themselves what others will not?
Sri Lanka’s crisis is illustrative of the problems with globalism as it currently exists. A more self-sufficient country can help immunize Sri Lanka against the breakdown of communication channels with other nations such as what occurred with the pandemic.
The answer is not to borrow your way out of the problem. Should Sri Lanka decide to borrow their way out through the IMF, they will put themselves in a dependent position. Further compounding the problem is that the IMF is run by crooks who play hardball.
If Sri Lanka goes the way of the IMF, the IMF can start dictating the shots in Sri Lanka. They can impose austerity measures; they can influence elections; they can rape Sri Lanka for centuries.
Currently, many people from Sri Lanka and India are angry at the Chinese because the Chinese refuse to restructure Sri Lanka’s debt to China. Maybe the Chinese know something that the people of Sri Lanka do not: It’s better to eat the pain now and pay your debts. Doing so will force the leaders of Sri Lanka to rethink their economy.
Furthermore, why should China restructure the debt until they see that Sri Lanka has made substantive reforms in their policy? Restructuring Chinese debt without substantive change only kicks the can down the road. In fact, it puts Chinese investment in greater peril.
So what would I recommend for Sri Lanka to get over the short term crisis.
- Slow pay your current debts. Paying something is better than paying nothing.
- Sell off the Gucci shoes and unnecessary assets.
- Get rid of HBO and other luxury expenses.
- Pay off the debts that have the lowest balances yet biggest monthly payments. What you want to do is restore gain – the ability to take in more than you play out.
- Ramp up production. You have to go back to work.
- Sell future tourism packages on the cheap today.
- Sell future rice today on the cheap.
- Sell some real estate.
- License out your minerals.
- Slowly, slowly, slowly take money out of circulation. This can be accomplished by raising interest rates which effectively sequesters money away inside banks.
- Start sharing amongst your citizens. Everybody has to be in this together.
Above all, do NOT borrow your way out of debt. Do not let those fuckers at the IMF get their hooks into you.
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