In July 2022, the beautiful island nation known as the “Tears in the Indian Ocean,” with foreign exchange reserves with only one day of gasoline, the president escaped in the shock of the people – why would a country go bankrupt?
Sri Lanka, a country praised by Kyle Polo as "the most beautiful island in the world", once had enviable development prospects: blue coastline, high-quality Ceylon black tea and rich gemstone resources. Yet just in the summer of 2022, this country of 22 million people declared bankruptcy, becoming the most shocking case of economic collapse of the century.
Vehicles lining up for kilometers in front of gas stations, medical equipment stopped running in hospitals, and angry protesters on the streets-all this is a cruel contrast to the former "model students of developing countries". What made this pearl of South Asia suddenly fall?
Talent: Sri Lanka once held a hand of good cards
Opening Sri Lanka’s history, you’ll be amazed at its so superior conditions.
Located in the strategic position of the main route of the Indian Ocean, it has been a trade transit route since ancient times. Merchant ships from Europe and the Middle East to East Asia all dock here for supplies, and Sri Lanka easily enjoys the dividends of transit trade.
Unlike Singapore, which also rose by transit stations, Sri Lanka also has fertile land. It is one of the three largest tea-producing countries in the world. Ceylon black tea is world-famous, as well as cash crops such as rubber and coconut, which are high-profit export commodities.
Not to mention its envious tourist resources: eight world heritage sites, long golden beaches, lush lowland hills.
Even the industrial foundation is quite good-rich in gemstones, and the garment processing industry is booming, making OEM works for well-known European and American brands. In 2018, the per capita GDP of Sri Lanka reached US$4000, and it was praised by the international community as "South Asia's most promising emerging economy."
02 Crisis foreshadowing: 26 years of civil war and hidden dangers of excessive welfare
Beneath the glamorous appearance, the crisis has long been laid.
From 1983 to 2009, the 26 years of civil war injured the country. More than 150,000 people were killed and $200 billion in economic losses equal to five times the GDP of 2009.
At the same time, the Sri Lanka government has implemented a series of welfare policies that exceed its affordability: free medical care for all, food subsidies, education exemptions, and near-free public transportation. These policies won the hearts and minds of the people in the short term, but laid the ground for the fiscal crisis.
More fatal was the political familyization, in 2005, when Mahinda Rajapaksa was elected president, opening the era of family rule.The end of the civil war accumulated unparalleled political capital for him, but also made him see the country as a "family business".
03 The series of disasters: terrorist attacks, epidemics and policy mistakes
In 2019, Sri Lanka’s nightmare officially began.
In April, a series of terrorist attacks targeted foreign tourists and Christians in Colombo, including the capital, killed 253 people. The tourism industry suffered severe injuries, with the number of visitors dropping by 50% and losing up to $1.5 billion.
In the same year, Mahinda’s brother, Gottabaja, promised a “significant reduction in taxes” to be elected as new president, fulfilling his pledge to exempt 33.5% of the country’s population from paying taxes, resulting in a sharp decline in state treasury income andining high social benefits.
Then, the new coronavirus globally erupted, leaving the already deadly tourism industry "dead on the spot". the global demand for tea, rubber, clothing declined, while the prices of food, fuel and other essential goods continued to rise.
The Last Grass: Organic Agriculture Reform and the War of Russia
In the face of the crisis, the response of the government is disastrous.
In April 2021, Sri Lanka, despite expert opposition, suddenly announced a complete ban on fertilizer imports and promoted the so-called "100% organic agriculture".
At the same time, the government started printing money crazily. Without an increase in goods, this triggered hyperinflation. The Sri Lanka rupee has devalued to a record low, making it more difficult to repay foreign debt.
Russia is the world’s largest producer of fertilizers, and the war has led to international prices of food, oil and fertilizers rise.Russian tourists originally accounted for the first and third place of Sri Lanka tourists, which is undoubtedly an escalation.
Debt Rise: From Loan Day to Bankruptcy Crisis
Sri Lanka's external debt has soared from US$11 billion to US$56 billion in 15 years. By 2021, external debt will account for 120% of GDP-meaning that you owe twice as much money as you earn.
Foreign exchange reserves evaporated sharply from US$2.36 billion in January 2022 to only one day's gasoline consumption. Garment processing, as the second largest source of foreign exchange, can earn US$5.42 billion per year. However, due to the interruption of oil and electricity, factories have stopped production, forming a vicious cycle.
Regarding external debt, data shows that Japan is Sri Lanka's largest creditor country, accounting for 11% of its external debt, followed by China with 10%. However, Japan's loan interest is only 0.7%, and the repayment period is 34 years; while China's loan average interest is 3.3%, and the repayment period is 18 years. This difference has sparked widespread discussion in the international community.
Sri Lanka’s bankruptcy is a tragedy intertwined with natural disasters: political family rule, misguided economic policies, terrorist attacks, global outbreaks, Russian-Ukrainian wars... These factors collapse like dominoes.
This country’s lesson warns the world that even if one hand holds a good card, the wrong decision can lead to a total loss.For the general public, national bankruptcy is not an abstract concept, but an endless lineup in front of a gas station, stalled equipment in hospitals and empty shelves in supermarkets.
The story of Sri Lanka continues, and its journey to rebirth is long and tough, but hopefully, just like the vast Indian Ocean surrounding this island country – a dark night – will finally come to the dawn.