How Sri Lanka went Bankrupt - Futurists Mini Newsletter

Sri Lanka is now bankrupt.

Food inflation has risen above 50% while massive protests are on the streets. Chaos, anger, poverty, and destruction dominate the country.

How did this all begin? And what can the Malaysian government learn from this?

1) A person is declared bankrupt when they are unable to repay their debts.

This declaration is usually imposed by a court order, and the individual’s assets (house, car, etc) will be liquidated to pay off their creditors.

But when a country is unable to repay its debts, the entire nation’s economy takes a hit.

With no international courts to turn to, credit rating agencies will degrade the nation’s reputation, cutting off future access to credit from international markets.

This will decimate the nation’s economic growth.

2) Sri Lanka’s crisis began in 2019.

To win political favor and ‘spur economic growth’, the government abolished several taxes and slashed rates from 15% to 8%.

With majority of the nation’s revenue deriving from tax, the new rates wiped out most of the govt’s earnings.

3) This forced the government to rely on the tourism industry for income (which was pretty lucrative back then).

But then came Covid 19.

Flights cancelled and tourist spots closed, the govt began to drain the nation’s foreign reserves to keep the economy afloat.

4) Allow me to digress.

Foreign reserves are crucial to a country. It serves as the nation’s backup funds during an emergency.

They are also used to pay off debts and maintain competitively priced exports.

To date, most of the world’s reserves are held in US Dollars.

5) Sri Lanka’s reserves were drained by 70% in the span of 2 years.

Credit rating agencies begin to doubt the nation’s abilities to repay their debts.

These agencies downgraded Sri Lanka’s rating from 2020 onwards, locking them out of the international financial markets.

6) The problems only got worse.

Last April, the government abruptly banned chemical fertilizer imports, claiming that it was to end the fight against the fertilizer mafia and ‘embrace organic farming’.

The ban backfired on the economy. Without pesticides and pest controls, farmers were unable to produce healthy crops.

As a result, Sri Lanka’s agricultural chain (which accounted for 30% of the labor force and 8% of GDP) faced huge setbacks.

The govt resorted to imports & started a food aid program – more money out of the country.

7) Sri Lanka also has heavy debts with other nations.

With little foreign reserves left, the government ramped up the money printer and inflated its currency to repay debts.

8) The bombshell was revealed in May when the central bank governor of Sri Lanka said: “until there is a debt restructure, we cannot repay.”

The country is left in turmoil.

Inflation stood at 40% and sparked nationwide protests, while the country's currency plunged.

9) Now left with nowhere to turn, Sri Lanka’s finance minister requested for a bailout from the International Monetary Fund (IMF).

President Gotabaya Rajapaksa declared that he will resign on Wednesday shortly after protesters stormed his residence on Saturday.

10) To recap: The origin of Sri Lanka’s bankruptcy is entirely voluntary and man-made.

The govt has managed destroy the country in less than 2 years, but they continue to shower blame on the Covid 19 pandemic and plead ignorance.

These are the consequences of centralized planning and the usage of unsound money.

A similar pattern is seen in Malaysia.

Politicians enact unsound policies and lay blame on others. Example: rising prices of chicken and cooking oil.

Is it then, only a matter of time before our nation goes bankrupt too?

- END -

Sources for further readings can be accessed here.

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