International Economics: IB Economics

Sri Lanka has defaulted upon its foreign debt, failing to meet outstanding debt interest obligations of $78m due on Wednesday. As a result, the economy's ability to borrow will be massively affected, with substantial development implications. 

The government is negotiating with the IMF, and the current inflation rate of 30% is likely to climb further as the currency weakens, and living standards fall further. 

The sorry state of the Sri Lankan economy pains me - as someone who lived there for three years, and can still sing the Sri Lankan national anthem. 

The country is experiencing extended power cuts, lacks fuel and the once-buoyant tourist sector is on its knees, as the country lacks foreign exchange to buy these items. As a result, the rupee has depreciated significantly, and this adds further cost pressures for both exporters and consumers alike. 

However, the real issues are deep-seated - arguably, Sri Lanka has been badly governed for many years - with the democracy still in the hands of a narrow clique of dynastic politicians who've dominated the country for many, many years. And until this is resolved, I find it highly unlikely that the country will be able to move on. 

It seems that it's Doomsday in Sri Lanka with the Prime Minister stating that the country has one day's worth of petrol left. Think of this: how would transport being at a standstill affect an economy? 

And then there's the admission that, in order to pay public sector salaries, the government are going to have to print money. What are the implications of this for inflation, the value of the Sri Lankan rupee and macroeconomic objectives more generally. And how is this likely to affect investment in the economy?

To many this seems like a financial crisis that has built up since the coronavirus pandemic. To be honest, having lived in Sri Lanka, I'd argue that the roots of the crisis go much, much deeper and reflect the dynastic nature of Sri Lankan politics post-independence.