Take stock of a lot of outrageous economic events that occurred in the world throughout 2022, but this event is estimated to be not known by many people, there is a country in the world in 2022 with a vigorous credit system collapse, declared bankruptcy, this country is - Sri Lanka.
Aerial view of Sri Lanka
Sri Lanka is a small island country with a population of only 22 million in the south of India, friends who like to travel know that the country has beautiful scenery and prices are not expensive, has always belonged to the world's favorite tourist destinations, the entire tourism accounts for 22% of Sri Lanka's GDP, when the epidemic came in 2020, the entire country's GDP tourism income stagnated, which is the first reason.
Although tourism has hit Sri Lanka hard, it will not go bankrupt. So let's talk about the second reason, which is that Sri Lanka is a country that is very dependent on trade because of its geographical location as an island country, and many things need to be maintained by imports, the most important of which is energy and food. Let's try to recall that the biggest crisis in 2021 happened to be the food crisis and the energy crisis, and the price of energy and food continued to rise.
The people of Sri Lanka
First of all, most of the energy and food purchased in the world are used as dollar standards, because the soaring price of food and energy has made Sri Lanka's dollar foreign exchange reserves continue to decline sharply, and the Sri Lankan government found that if it continues to develop, the problem of national treasury revenue will be very serious, so in July 2021 introduced a policy of banning the import of chemical fertilizers and pesticides, in order to allow people to use organic agriculture to develop and completely achieve self-sufficiency. Although the wishful thinking is loud, but the people of Sri Lanka have long relied on imported fertilizers to farm, the break of the traditional form has made the Sri Lankan country suddenly reduce food production by 30% in 2021, Sri Lankans without food went in another direction, directly imported grain rice products, this treatment result makes the originally saved dollar reserves become more expensive, seeing the treasury dollar reserves continue to decrease, the Sri Lankan government is forced to embark on a road of no return - printing money.
The national currency of Sri Lanka
The Sri Lankan government has frantically printed money to repay various loans at home and abroad, resulting in ultra-high inflation in Sri Lanka that has reached 69.8%, knowing that most countries in the world are in the range of 3%-5%.
Normally, the national currency will depreciate under high inflation, but the Sri Lankan government forcibly intervened that the official exchange rate between the currency and the US dollar remained unchanged in order not to prevent the national currency from depreciating. In this case, the sudden outbreak of the Russian-Ukrainian war in 2022, the energy crisis and food crisis intensified, the world's energy and food prices skyrocketed, the Sri Lankan government raised interest rates by 7%, the purpose of the interest rate hike is to curb economic consumption and let people save money More importantly, the purpose is to allow global foreign capital to inject capital into it to get a respite, but in fact, the impact of interest rate hikes is quite large, it will amplify the ability to repay the entire national debt.
You must know that every time Powell of the beautiful country raised interest rates last year, the global financial circle was in an earthquake, and it took many times for a large country like the beautiful country to increase it to 4.5%, which Sri Lanka raised interest rates by 7% can be imagined. However, global foreign capital is cautious and smart, have entered a more secure beautiful country, not to mention Sri Lanka and even other EU countries have been harvested by the US dollar this group of interest rate hikes, this if you are interested, I will write a separate article to talk about the story behind the interest rate hike.
Therefore, although Sri Lanka raised interest rates by 7%, the US dollar foreign exchange reserves in the treasury are still continuing to decrease, and more importantly, capital has fled when it smells of danger, so as of April 2022, the entire Sri Lankan treasury has only 1.9 billion US dollars in foreign exchange reserves, but the US dollar foreign debt due to repayment is as high as 8.6 billion, which has shown that the country can no longer afford to pay off foreign debt. As a result, the government had no dollar reserves to buy food, oil, energy, and necessities, and by April, Sri Lanka began to default on foreign dollar bonds continuously, accumulating up to $50 billion in foreign debt by June 2022.
During this period, the people of Sri Lanka were short of food, had no necessities, endured 15 hours of power outages every day, because the country had no oil fuel supply, the government strictly ordered cars and even buses on the streets, and the people of Sri Lanka lived in dire straits every day. They may be expecting the moment when the country's economy will recover, and this hope was dashed in July 2022, when the Sri Lankan government announced a total collapse of the country's economy, the president and prime minister had resigned, and more than 100,000 angry Sri Lanka people who heard the news rushed to the streets and occupied the president's house, finding that the president had already run away, leaving only the overwhelmed Sri Lankan people.
Angry Sri Lankans stormed the presidential palace
In 2023, the economic crisis is still ongoing, Sri Lanka is a microcosm of a developing country that is extremely dependent on energy, food and daily necessities, and then more countries facing lack of materials and resources will fall into a huge test, and then Sri Lanka is the first "bankrupt country" but definitely not the last.