Lessons from Sri Lanka

Sri Lanka’s imploding economy reads like part of the story of Max and Moritz, a cautionary tale from Germany of two feral prankster kids who terrorise their neighbours. 

The boys start by tying bread crusts together and throwing them to an old widow’s chickens. The birds get strangled by the string so she plucks and cooks them.

While her attention is diverted for a moment, the boys steal the cooked chickens. The widow’s dog starts barking when it witnesses the crime; she finds the chickens gone, assumes the dog is to blame, and beats it. 

There are any number of parallels to be drawn with Sri Lanka. One is that Sri Lanka has strangled its economy through gross mismanagement. The country relies heavily on imports yet has insisted on maintaining an inflexible tariff regime, one of many own goals. 

Not that its lenders, specifically China (the old widow?) seemed to worry. After all, you may not pay today and you may not pay tomorrow, but pay you will.

It is true that no-one could have predicted the 2019 Easter bombings in Colombo or the pandemic, but Sri Lanka’s tourism industry — its main economic driver — took a big hit from both. If nothing else, this showed the country needs to spread its eggs across more baskets.

The crisis is a warning to all whose debts are coming due. The unfortunates on that list include Argentina (what Reuters calls the “sovereign default world record holder”), Kenya, Ghana, Ukraine, Laos, Pakistan and Egypt, whose debt-to-GDP ratio is an eye-watering 95%. Egypt, by the way, has spent heavily on infrastructure projects that include a monorail across Cairo — with much support from China.

Many loans are due in the next few years. Inflation is rocketing. Markets are in turmoil. The chickens are coming home to roost. Or, put another way, the widow has a big stick.