"There was no gasoline, I couldn't afford food, I had to starve, and I had to use electricity for 10 hours a day." This is a life scenario that sri Lankans are experiencing.
The island nation of 22 million people is facing its worst economic crisis in decades. Crude oil, food, and medicine are in severe shortages, the government has shut down non-essential public services to save fuel, and even schools have been forced to close.
At a railway station in Colombo, Sri Lanka, on March 31, people check train information by faint lights after a power outage at the ticket office. Image source Xinhua News Agency
On the 13th, the Sri Lankan Prime Minister's Office confirmed that President Gotabaya Rajapaksa has left the country, and Prime Minister Vikramasinghe will exercise presidential powers in accordance with the provisions of the Constitution. As early as July 6, local time, Vikramasingha had already said in his speech to parliament that "the Sri Lankan state has gone bankrupt and the economic crisis of food, energy and medicine shortages will continue until the end of 2023".
A modern sovereign state can actually "collapse" because it cannot repay its debts and cannot afford to buy things.
On February 4, the Sri Lanka Independence Day military parade was held in Colombo. Image source Xinhua News Agency
The "tears of the Indian Ocean" dried up
This is the first time since Sri Lanka's independence in 1948 that it has suffered a national financial bankruptcy and is mired in an economic crisis. At the end of 2009, this tropical country with beautiful beaches ended its 26-year civil war and began to develop with peace of mind. Misty hills, beaches and ancient cities have made Sri Lanka a prestigious holiday destination in South Asia.
Over the years, tourism has gradually become an important industry in Sri Lanka, creating a large number of jobs and becoming the third largest source of foreign exchange earnings in Sri Lanka. Especially after 2010, Sri Lanka's tourism revenue climbed from US$576 million in 2010 to US$4.381 billion in 2018, directly contributing 5.6% of the country's GDP. In pre-pandemic 2019, Sri Lanka received 1.91 million tourists and had a total tourism revenue of US$3.606 billion, down 17.6% from US$4.38 billion in 2018.
On October 12, 2020, medical workers take samples of COVID-19 for workers at a railway station in Colombo, Sri Lanka. Image source Xinhua News Agency
However, from 2020, the epidemic swept the world, countries were shut down, and Sri Lanka's tourism industry suffered a collapse. In 2020, Sri Lanka's total tourism revenue plummeted to US$682 million, and continued to plummet to US$261.4 million in 2021, less than a fraction of what it was before the pandemic. The collapse of tourism has directly led to massive unemployment, and Sri Lanka's tax revenues have plummeted.
The decline in income is not terrible, and what is even more terrible than the decline in income is that spending is expanding. Years of war have left Sri Lanka's economic structure poorly structured, and although it is self-sufficient in food, it is heavily dependent on imports in coal, oil and manufactured goods. The second mountain that crushed Sri Lanka was soaring oil prices.
In Colombo, Sri Lanka, on July 5, tricycles line up to refuel. Image source Xinhua News Agency
Since the outbreak of the Russo-Ukrainian War, international oil prices have risen by more than 80%, which has quickly depleted Sri Lanka's foreign exchange reserves. Just by buying oil, Sri Lanka's foreign exchange reserves cannot be held back.
Imports are inseparable from us dollars and foreign exchange. Without U.S. dollar foreign exchange, you can't buy gasoline.
People wait to buy gas on the outskirts of Colombo, sri Lanka's capital, on May 20. Image source Xinhua News Agency
Why does the state go bankrupt?
Sri Lanka's own economic mismanagement is also one of the important reasons.
Sri Lankan authorities have been borrowing money from international financial organizations since the 1960s to maintain economic operation and development, which has created a "double deficit" situation in which Sri Lanka's fiscal deficit and trade deficit remain high. That is, Sri Lanka's state expenditure exceeds its national revenue and is forced to rely on external debt and international capital inflows to keep it afloat.
At the beginning of 2021, Sri Lanka already had a shortage of foreign exchange. At that time, in order to prevent the rapid outflow of foreign exchange, Sri Lanka announced a ban on fertilizer imports, resulting in a sharp failure in agricultural harvests, including tea, which also generated a little foreign exchange earnings. The government had to spend more foreign exchange to import food, resulting in an even greater shortage of foreign exchange.
Empty streets in Colombo, Sri Lanka, on May 6. Image source Xinhua News Agency
In mid-April 2022, Sri Lankan authorities announced that they were temporarily in arrears in external debt pending restructuring of these obligations under the International Monetary Fund's (IMF)-backed economic adjustment plan.
Sri Lanka's total external debt is already as high as $51 billion, but its total fiscal revenue in 2021 is only $14.6 billion. Even if all Sri Lankan civil servants, public institution personnel and the army do not receive salaries, do not eat or drink, and do not maintain taxes, it will take 3 and a half years to pay them off. But this is unrealistic. If even civil servants are not paid, the country will simply collapse.
The old debt could not be repaid, the new debt could not be borrowed, and Sri Lanka could only watch the country's economy collapse. In the days of resource scarcity, the expansion of the local money supply began, resulting in high inflation, which was as high as 45.3% in May. Some economists pointed out that Sri Lanka's real inflation rate is second only to Zimbabwe and should exceed 128%, with food, medicine and fuel prices leading the way.
A girl lights a kerosene lamp at her home in Colombo, Sri Lanka, on March 31. Image source Xinhua News Agency
According to media reports, in March this year, the semester examinations of Sri Lankan students were indefinitely postponed because the government did not have enough dollars to import paper; Subsequently, the national street lights were also turned off to save electricity and fuel; In June, due to fuel and food shortages, the government announced that for the next three months, civil servants would take a home-based holiday to farm the land every Friday.
Since July 10, Sri Lanka has stopped selling fuel to ordinary people, becoming the world's first country to "cut off fuel" since the 1970s.
Where do the next dominoes fall?
Indeed, Sri Lanka is far more than sri Lanka, a developing country plagued by economic and debt problems, and Latin American countries, which are also suffering from global inflation, are not optimistic.
Peru's dollar bonds, which have become the second worst-performing bond in the world after Sri Lanka, have fallen more than 10 percent this year. Due to high domestic inflation, Peru's central bank recently announced that it has raised its key interest rate by 0.5 percentage points to 6%, and the cost of borrowing has increased by 575 basis points. Inflation rose to its fastest pace in 25 years, exacerbating social tensions.
Soldiers set up checkpoints on the roads of Lima, the Peruvian capital, to check on passing vehicles. Image source Xinhua News Agency
In addition to Peru, colombia, Argentina, Ecuador, Uruguay and many other Latin American countries have exceeded 50% of the external debt ratio, far exceeding the international safety line of 20%. Belize and Grenada are among the countries with severe debt problems and may even be unable to repay their external debt by the United Nations Development Programme and the World Bank.
Zimbabwe's inflation rose to 191.6 percent in June as the country's central bank decided to raise its policy benchmark rate from 80 percent to 200 percent, raising rates by 12,000 basis points. This year, the bank's cumulative rate hike reached 14,000 basis points, the highest in the world. And announced the official reintroduction of the US dollar as legal tender.
Egypt, the Most Populous Country in the Middle East, has plunged currency and inflation has been high. The World Bank warns that a 30 percent increase in food prices could lead to a 12 percent increase in poverty, and Egypt, with a population of 103 million, currently hovers around a third.
People pass by a currency exchange office in Cairo, Egypt, on March 21. Image source Xinhua News Agency
Lebanon is also "doomed". As early as April this year, the deputy prime minister of Lebanon declared the country bankrupt. The World Bank warns that Lebanon's current economic crisis is likely to be one of the three worst in the world since the mid-19th century.
In the past 25 years, there have been at least 54 sovereign defaults worldwide, involving 28 sovereign states. The cause of the sovereign debt crisis is not only the economic crisis, financial collapse, political conflict, and huge deficits may cause the country to fail to pay back.
The COVID-19 pandemic is not over, the conflict between Russia and Ukraine is still intensifying, after Sri Lanka, who will be the next domino of the world debt crisis?