What's going on in Sri Lanka and why is it important?

What's going on in Sri Lanka and why is it important?

While the world is pumping billions of dollars into the Russia Ukraine war the economic fallout is being felt in different parts of the world. The price of oil, energy, food, and all other consumer items has increased and will continue to do so. Dollar-on-dollar inflation is at least 10%. While all focus is on the fringes of the extended European continent with two developing countries fighting each other the peoples of a country in Asia are literally fighting for their lives.

Sri Lanka has gone banktrupt. It needs about ten billion dollars this year to stop it from becoming a failed state. Sri Lanka's economic demise could lead to economic contagion in the region unless something is done about it. Nepal, the Philippines, and some others could be next in a very quick domino effect. Why did this happen?

Unfortunately, the IMF and the World Bank, and the regional development bank, the ADB has let this once model economic country go bankrupt. Yes, Covid affected Sri Lanka's tourism industry, the Russia Ukraine war, exploding energy costs, and poor domestic political and administrative leadership helped as well.

Sri Lanka's bankruptcy is not altogether the fault of these financial and development institutions, however. The IMF needs to be approached first before it can fulfill its lender of last resort role which Sri Lanka did only when it was too late. The World Bank and the Asian Development Bank and the new guy in town the AIIB - Asian Infrastructure Investment Bank based on their articles of formation can only intervene once an IMF program can be agreed to.

These institutions took or had to take a reactive position and let the crisis play out and once Sri Lanka defaulted required that the right people or firms with financial and legal knowledge and responsibility/accountability be in place to conduct economic policy negotiations. Sri Lanka apparently lacked these human resources and had to recruit foreign advisers/consultants.

In the meantime, the major global powers that lend to the developing world: China, Japan, and the Western world watched from the sidelines and refinanced their outstanding loans rather than restructure. India, a country not known for development finance stepped in and chose to help with fuel, food, and financing help to arrest economic contagion in the region. China had promised to assist but chose to observe from the sidelines as well.

The train wreck happened as everyone watched, and some of the incompetent politicians left or were forced out, the Sri Lankan people went on a rampage on the streets protesting the lack of such basic needs such as food, medicines, electricity, and petrol, etc. and after several rounds of martial law and police/army intervention, the saga continues. The Sri Lankan Government is trying to sell assets like state-owned airlines, ports, and other businesses. Asset sales take time meanwhile the Government needs to get people off the streets and back into income-generating positions if it is to convince lenders/donors that there is a sustainable business plan out of this mess. An injection of funds is necessary quickly. Private lenders will require 30% dollar-based annual interest rates to warrant lending risks. Buying Sri Lanka Rupee denominated paper will require even higher interest rates as the Government is printing money to ensure its own survival.

Countries, organizations, and regional stakeholders need to act now to stop a domino effect of economic contagion affect in Asia, starting with Sri Lanka. Covid spread from China, and the Russia Ukraine war is not Sri Lanka's fault. Americans and Europeans will suffer a bit by paying higher prices for fuel, food, and medicines but Sri Lankans will die due to lack of availability. That's what's at stake. That's why Sri Lanka is important.