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How Sri Lanka's Economic Collapse Raises Alarm Bells For Other Emerging Markets - YouTube
Channel: CNBC
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Sri Lanka is facing the worst
economic collapse of its modern
[7]
history.
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Country's most chaotic day in
months of political turmoil.
[12]
Tens of thousands of people
storming the presidential palace
[15]
and Prime Minister's home.
Protesters holding President
[18]
Gotabaya Rajapaksa responsible
for the nation's economic
[21]
meltdown, setting off acute
shortages of essential items
[25]
like food, fuel, medicine, and
other necessities.
[28]
Sri Lanka's parliament has voted
six time Prime Minister, Ranil
[31]
Wickremesinghe as the new
president. He is going to be
[34]
replacing Gotabaya Rajapaksa who
resigned last week after months
[38]
of protests in the country.
[39]
Motorists took top drivers and
taxi drivers queue for fuel and
[44]
jostle for fuel in this queue
that I hear is stretching four
[48]
to five kilometers and this is
the economic reality that the
[51]
new president of Sri Lanka has
to fix.
[55]
This is due to long standing
structural weaknesses
[58]
exacerbated by a series of
idiosyncratic shocks. Sri
[63]
Lanka's crisis can be a warning
sign to other developing
[66]
nations, because in many ways,
it's a classic emerging market
[70]
crisis.
[80]
The Rajapaksa family dominated
Sri Lankan politics effectively
[84]
from the mid 2000s from 2005
onwards when Mahinda Rajapaksa
[89]
came to power.
[89]
After the civil war in Sri Lanka
ended in 2009, he had absolute
[95]
control over every department
and every ministry of the
[99]
government of Sri Lanka. So he
ruled as an absolute ruler
[103]
without much of accountability.
And he brought in his brothers,
[109]
his nephews, and even his son
played a very important role in
[114]
governing SriLanka both as
ministers as well as power
[118]
behind the throne. And people
were really fed up with what
[121]
they were seeing that their
ruling family was doing.
[128]
Gotabaya Rajapaksa in his
campaign, he made a promise of
[131]
tax cuts.
[132]
I think the tax cuts were
designed to be populist and
[136]
maybe there was some idea that
it would spur growth.
[140]
Sri Lanka has state-owned
enterprises that are hugely loss
[145]
making. They have regulated
industries. State controlled of
[149]
a lot of arenas of the financial
and economic sector. Just before
[154]
the Covid shock hit, these tax
policies were put SriLanka in a
[159]
place where government revenues
fell even further, it was
[163]
getting harder and harder to
service.
[164]
Today we want to talk about one
of the most important aspect of
[168]
this crisis, and that was
imposing a ban on the import of
[173]
chemical fertilizers and
pesticides. In April 2021, a ban
[177]
was imposed. Sri Lankan
government suddenly decided and
[182]
declared that nationwide no
chemical fertilizers and
[186]
pesticides will be imported
anymore. All the farmers will
[190]
have to use organic pesticides
and fertilizers.
[194]
I think the ban on chemical
fertilizers was sold as a shift
[198]
to organic fertilizers and being
projected to as an environmental
[203]
move. But I think the the real
reason for the ban on chemical
[207]
fertilizers was to save on
foreign exchange because Sri
[210]
Lanka was already having trouble
meeting its sets of its
[214]
obligations.
[214]
It was an ad hoc policy change
on the part of the Sri Lankan
[217]
government, enacted almost
overnight without any planning
[221]
without any expert input.
[230]
So from 2010 until 2019, Sri
Lanka's tourism sector actually
[235]
performed remarkably well.
[237]
It was growing very rapidly, up
until the Easter bombings in
[242]
2019. So that was an unexpected
attack for Sri Lanka because
[248]
prior to that, Sri Lanka did not
have any significant Islamic
[251]
terrorist activity. And so this
was an idiosyncratic event that
[256]
had impacts at least in the
short and medium term on the
[260]
tourism sector.
[261]
But then the most critical thing
was the Covid, which stopped all
[267]
tourism everywhere in the world.
So everyone was hit. And Sri
[271]
Lanka was no exception. Problem
with Sri Lanka was its
[274]
dependence on tourism for
foreign exchange earnings. This
[278]
crisis was kind of precipitated
by the fact that that earning
[282]
just got wiped out overnight for
not only you know, a few months
[288]
but years and Sri Lanka's
tourism industry hasn't come
[292]
back at all to the same levels
that it as it was before 2019.
[298]
In terms of a path forward or in
the short and medium term Sri
[305]
Lanka needs to get its debt
under control or debt payments
[309]
under control. The goal of the
negotiations with the IMF is for
[314]
that to happen. The Sri Lankan
government is trying to
[317]
negotiate an extended fund
facility or EFF. So the EFF is
[321]
designed to assist countries in
exactly the sort of crisis that
[325]
Sri Lanka is in. The Sri Lankan
government should have gone to
[328]
the IMF sooner, but it was
clearly not willing to pay the
[331]
political cost. But now there's
no other choice.
[336]
What is going to be needed is
essentially an injection of
[338]
funds and Sri Lanka cannot meet
its debt obligations. So some of
[342]
the creditors are just going to
have to carry-in the losses.
[346]
In terms of the role of China,
so even though debt from China
[350]
is not the biggest chunk of Sri
Lankan debt, they're the largest
[353]
bilateral lender. And in terms
of what kind of concessions
[358]
lenders are willing to give
China's decisions will matter a
[361]
lot. So whether they are party
to the negotiations, or we'll
[367]
have separate negotiations with
separate conditions for the Sri
[371]
Lankan government is yet to be
seen.
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Is Sri Lanka's economic
collapse, ringing alarm bells
[383]
for emerging markets? I think
the alarm bells for emerging
[386]
markets has been ringing for
quite a while. We have been
[389]
ignoring those. Pakistan was
another country, which is very
[393]
much in a very poor economic
condition. Ongoing protests in
[397]
parallel, I would say, against
food and fuel price rises.
[401]
Many countries had similar
problems in terms of losing
[406]
courses of foreign exchange, you
know, having the public finances
[409]
negatively affected.
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So what's changing now is that
we're coming out of this low
[414]
interest rate environment,
interest rates are going to be
[417]
higher going forward. And many
of these emerging markets will
[421]
have foreign currency
denominated or dollar
[423]
denominated debt. And the dollar
is strengthening because of the
[427]
current monetary policy regime
in the US. So all of these,
[431]
together with a few
idiosyncratic shocks, could make
[435]
another emerging market go into
crisis. And the next one might
[439]
not be a relatively small
country like Sri Lanka.
[445]
The Sri Lankan crisis is a sign
to other countries in the world,
[449]
especially other developing
countries with high levels of
[452]
debt and political instability
that things can go really wrong
[457]
really quickly. It is also a
lesson for international donors
[461]
and other organizations that
they need to get their act
[463]
together when they have to help
countries in prices. This is not
[470]
going away anytime soon. We have
just starting a very difficult
[474]
phase of global economic
downturn.
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