Weeks ago, in my inner circle of friends with whom we engage on an intellectual discourse on matters of great public interest, a member asked an interesting question.
That is, can a country really go broke or completely bankrupt? The context of this question was around the economic crisis that was evolving in Sri Lanka and the paradox of our big infrastructure projects with their attendant debt costs.
Unfortunate as the case is, this question seems to have been answered conclusively with the events of the past few days.
With the fleeing of the Country’s President Gotabaya Rajapaksa, Prime Minister Ranil Wickremesinghe (currently also acting as president) announced the country is bankrupt. The country has already defaulted on interest payments on international debts and closed down major essential government services.
On the streets, the people have taken over to ‘kuji-enjoy’ on the disgraced Presidents’ and the Prime Ministers’ official residences and offices.
They seem to find some sort of fun on these encroachments despite the hard economic circumstances that they find themselves trapped in.
While there are pointers that the external shocks of Covid-19 and the Ukraine-Russia conflict have to some extent complicated matters for the Island nation, experts agree that the real origin of the crisis is triple-fold: bad policies, crony/dynastic politics and plain economic mismanagement.
For instance, the escaped president introduced populist tax cuts in 2019 that significantly damaged the country’s revenues and pushed for a disastrous agricultural policy change into organic farming to preserve dollar reserves against imports of fertilizers.
However, what appears to be the main waterloo in the Sri Lankan crisis were huge debt financed infrastructure projects and debt-driven economic growth. The country has seemingly had a modest economic growth rate averaging at about 4.9 per cent over the last two decades since 2002.
It was also self-reliant on rice production, the stable food for her 22 million people until the impact of the shift to organic farming drastically cut farm productivity. As the crisis continues to unfold, it is becoming apparent that the Hambantota port development and Colombo port city projects were mostly politically motivated as opposed to their commercial viability.
These two projects are estimated to account for about 20 per cent of the country’s foreign debt and held by the Chinese. The authorities have since leased out the projects to the Chinese constructors for a 99 year lease, in a non-debt–equity swap arrangement.
This means the debts remain outstanding and would have to be paid. The external debt burden is also thought to have pushed the Sri Lankan government into now failed debt restructuring agreements with the International Monetary Fund that were riddled with painful conditionality’s.
Of interest in this article is not how to solve the problems of Sri Lanka though, I trust her people are better placed to deal with that. We have equally our own issues here some estimated 3,024 miles nearly to the East of the Island nation. The question we need to ask here is what lessons can we learn from this crisis? Could there be some correlational pointers as to how the crisis was manufactured?
Painful as they are, economic crises offer great opportunities for study in the world of economics. Many derivations that economists rely on to design models or tools of economic analysis are based on assumptions of potential scenarios that in theory could happen. Actual crisis offer practical case studies that could be applied to prevent such shocks in future or prepare policy makers for suitable response frameworks.
While the unfolding crisis in Sri Lanka is not entirely isolated, it offers a rare moment when a country runs literally out of money. This will be subject to intense research for many days to come.
Here, I shall only endeavor to deduce vital learning points for policy makers and political elites without going into structured study to draw comparatives. From where I sit, five important lessons are worthy picking.
One, populist campaign rhetoric has its place, real governance and management of an economy has to be based on sound economic logic and objectively verifiable evidence. In the case of Sri Lanka, populist tax-cuts have proved fatal when weighed against the hard economic realities of the country.
This is especially important through the ongoing campaign season where we have heard several populist promises that portray the candidates as if not well advised on the true state of the economy. It would be advisable for the next president elect, whoever that maybe, to seek honest and candid evidence as a matter of priority once sworn into office.
Two, debt comes with major obligations that demand utmost responsibility on the part of public managers. The question of public debt will remain a dark cloud on the Jubilee administration whichever way anyone may look at it. Similar to the Sri Lankan type of growth, the past 10 years growth is clearly driven by debt financing for huge infrastructure projects with no evidential significant trickle-down effect.
Stand-alone infrastructure monuments that are not supported by growth in productivity in other sectors like agriculture, manufacturing, trade and sub-national economic interconnectivity provide bad returns on investment and lack value for money.
In any case, many of these projects are riddled with corruption, cost padding and opaqueness as to their true contractual obligations to the state and responsibilities of the vendors. It is also widely acknowledged that majority of this projects are vendor driven, raising serious credibility questions as to their commercial viability.
Enough of poor leadership
Three, extractive political institutions have an expiry date. From the street protests, it is evident that the Sri Lankan people have had enough of the dominance/dynastic leadership of the now exiled Rajapaksa family that has held the country’s power for over two decades now.
The conduct of the people in the official residence and office of the president are quite telling. The problem of extractive political systems is that they consolidate the income and wealth of the country into the hands of privileged few elites who perpetuate and sustain the marginalization of the masses.
I am on record here on the futility of untamed greed that profits a few at the expense of everyone else. Ultimately, every society has its endurance limits.
Four, inclusive growth insures the individual and collective wealth of the nation in the medium and long term. This lesson is founded on the wonder of the abundance mentality in society. Unfortunately and tragically so, hoarding national wealth by few privileged elites is a social disease fueled by greed that contravenes well established norms of economics.
If everybody in the society has a fair chance to accumulate enough disposal income, it means more purchasing power in the economy.
This translates into good business in many sectors of the economy and expanded economic opportunities for majority if not all.
Finally, this ought to be both an individual and collective lesson to us all on the vanity of personal greed. The manifestation of the wisest man ever documented in human history, in the Biblical accounts in the book of Ecclesiastes, that human greed is all vanity.
It is perhaps wise to invest more on better societal welfare than to waste our lifetime chasing to feed individual voids for power and material things.