Declaring Bankruptcy on April 12, 2022 Was Merely Accepting the Fact and Moving On
Posted on December 20th, 2023
Dilrook Kannangara
Excessive devotion to a person leads to irrational behavior. Doctors and ambulance staff around the world experience assault from loved ones of deceased patients for merely pronouncing the patient dead. Some people irrationally believe that the dead are still alive until pronounced dead by a doctor, so it is the fault of the doctor! This is the same mentality of some Lankan politicians and their supporters. They argue that the April 12, 2022 declaration of bankruptcy was the root cause of bankruptcy! Such irrational people cause more harm than good to the nation. They should stick to what they are skilled at and not venture into economic matters.
Sri Lanka was well and truly bankrupt by January 2022 when its foreign reserves fell dangerously low after the repayment of an ISB bond loan in the same month against expert advice. For the first time in the history of Sri Lanka, foreign reserves fell to zero useable reserves just a few months later. It didn’t happen suddenly; it was a long time coming. Sri Lanka’s foreign reserves were $8.6 billion in November 2019 and within just 2 years and 2 months fell to near zero. This is a great mystery as since 2020 the country was under severe import restrictions. What happened to that $8.6 billion within just 26 months?
Other signs of bankruptcy were also up on the horizon. Credit rating agencies kept downgrading Sri Lanka’s credit rating. That was for good reasons as the nation’s foreign reserves kept depleting. Instead of fixing the problem, responsible people for it confronted credit rating agencies! Again, totally irrational behavior. Another sign of bankruptcy before it actually materialized was the very large amount of money-printing since 2020. It was unprecedented even in Lankan standards. Someone had assumed that if money was the problem the solution was to print more money!
Severe restrictions on agrochemicals since 2021 was another sign of impending bankruptcy. Although the government concocted the organic yarn for public consumption, the decision to restrict agrochemicals was due to decreasing foreign reserves. Other factors of production including oil and gas, spare parts and electronics were also restricted to save decreasing foreign reserves. However, the government kept paying billions of dollars in loan interest and repayments leading to bankruptcy.
What is worse is when factors of production are restricted it collapses the economy and the country can never overcome bankruptcy. The only way to overcome bankruptcy was to stop repaying loans and instead paying off trade creditors (for oil, gas, vehicles, spare parts, agrochemicals, etc.).
Approaching Bangladesh and other poor countries for short term loans in 2021 was yet another sign of bankruptcy. Getting a loan from Bangladesh was unthinkable until 2021.
Economics experts who have educational qualifications in economics and experience in economics consulting warned the government to seek a debt restructure and stop repaying debt since 2020 as the nation was heading towards total bankruptcy and anarchy. However, the government paid no heed. Instead, the government listened to soothsayers, unqualified talkers of economic affairs and politicians.
Comparing Sri Lanka with Pakistan (which did not declare bankruptcy) is foolish. Pakistan’s comparable credit ratings were Caa3 (Moody’s) and CCC+ (S&P) whereas for Sri Lanka they were Ca (Moody’s) and SD (S&P). Caa3 is a better score than Ca and CCC+ is a much better score than SD. Clearly Sri Lanka was bankrupt and Pakistan was not.
By declaring bankruptcy (accepting reality), Sri Lanka recovered. Today foreign reserves are $3 billion thanks to sensible action including debt restructuring. In percentage terms that is the highest increase in foreign reserves the country has ever seen. Had it traded in bankruptcy without declaring it, no foreign seller would sell anything to Sri Lanka which would have taken the nation back to Stone Age without fuel, agrochemicals, medicines, etc.
Another unwise argument is the decision to float the Sri Lanka rupee. The decision to devalue the Sri Lanka rupee was taken in March 2022 when the country could not afford to sustain it by wasting meagre dollars. It was not a decision imposed by anyone but by necessity. It is similar to a parent telling his child that they can no longer afford a private education due to money problems. If a currency is not floated, the government has to keep selling its dollar reserves and buying rupees in the international market. The moment the government runs out of dollars, the rupee must be either floated or allowed to totally crash. Those were the only options available. Between a total crash of the local currency and a float, the latter was obviously better.
Finally, people should not trust politicians who are responsible for bankruptcy (Supreme Court decided so) and politicians who supported those politicians who caused bankruptcy. They are part of the problem. They are not the solution and can never be the solution. All they can do is to blame each other (despite the Supreme Court decision) and hide their culpability. People should learn economic matters from economics experts and from their own learning.
However, remarkably Sri Lankans seem to have known these facts deep inside them despite not knowing the names of economics concepts. People knew about gravity long before Newton though they did not name it or theorize it. Systematically people got rid of specifically those responsible for Sri Lanka’s bankruptcy and anarchy 18 months before the Supreme Court decided on exactly the same set of culprits. It is called collective conscience – a key and one of the oldest economics theories – The Division of Labour in Society”, Émile Durkheim, 1893. That is truly remarkable!