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28th of November 2022

‘This is how Sri Lanka, Pakistan, and Laos went bankrupt’

In the village, we used to hear people moving to Tarai/going to Muglang by selling their property because of economic bankruptcy. This is the case for individuals. But in the case of countries, the topic of economic collapse is interesting.

In the case of countries, going bankrupt means losing foreign currency reserves and not being able to import the basics. The condition of not being able to meet the basic expenses is called bankruptcy. This bankruptcy is only from the perspective of foreign currency exchange. Although the countries have their assets, built structures, and cash with them, they are bankrupt based on convertible currency wherever traded.

Sri Lanka has an economy of 80 billion dollars. The central bank does not even have 5 million dollar reserves. On the other hand, in Nepal, there is a reserve of 10 billion because of remittances in an economy of 35-40 billion dollars. It is said that Nepal can sustain 6/7 months of imports. But the condition of Sri Lanka is not like that as the country itself fell apart. Sri Lanka is not in a position to sustain even a month’s worth of imports.

Likewise, Pakistan also has an economy of 250 billion. But they couldn’t sustain more than a couple of months. Moreover, Laos is also in the same situation. Therefore, to counter the economic crisis, imports had to be extensively curtailed and basic expenses also had to be stopped. Saying that there is an embargo on everything, people believed that the country has collapsed and nothing seems to be done.

How did Sri Lanka, Pakistan, and Laos get to this situation?

Looking at the record of development carried out in the last 4-5 decades, although the growth rate has been slightly subdued, the average life expectancy, and per capita income has not decreased. Likewise, the mortality rate has not increased. In the case of Sri Lanka, the per capita income remains at 3700/3800 dollars.

If this economic crisis continues, it will continue to decline. However, the achievements made in the last few decades remain the same. Hence, the crisis is temporary. In Sri Lanka, the crisis occurred because of focusing extensively on infrastructure with the hope to catch up with the development that has lagged for two or three decades after the end of the Tamil rebellion. Similar is the case with Pakistan and Laos.

Mattala Airport in Sri Lanka was built with extensive loans to accommodate 1 million passengers.

But it is said that only 12 people came to the airport on the first day. In Pakistan, 64 billion dollars worth of China-Pakistan Economic Corridor (CPEC) was spent on 15 major projects, including energy, roads, and special economic zones from the top to the bottom of Gwadar. Much was spent on loans from China. Since developing countries will have to catch up quickly in development activities, they took loans from other countries which made them financially easier. Countries including Sri Lanka received easy loans. There was abundant money for them.

Everything was pretty good in the beginning in Sri Lanka. But gradually the leaders turned out to be arrogant and corrupt and started misruling their country. The lone they received was used haphazardly. The same thing happened in Laos. A $6 billion railway was built from Vientiane in Laos to Kunming in China.

The possibility of a large number of tourists coming and transporting goods seems less likely. This is a big and ambitious project in a country with a population of 6 million and a small market. Likewise, a project worth 64 billion was started in Pakistan at once. The plans were ambitious. But such invested infrastructure should earn in dollars.

Such projects should be able to make the economy viable. Such loans should increase domestic production and increase export because you have to pay the interest on the loan taken. But this did not happen. In the case of Sri Lanka, it seems that there is no tradable surplus generated. The reason for this is that the ruling class became arrogant and corrupt. This is what easy money flow does. This is what happens after starting projects on a whim without listening to feedback from any stakeholders including the government. As a result, these countries economically collapsed.

The Russian-Ukraine war also had an impact on Sri Lanka. The third largest number of tourists coming to Sri Lanka are from Russia and Ukraine. Laos also has 53 percent debt to China. 15/18 percent is from International Sovereign Bonds (ISB). Eventually, this has a connection with the international credit rating. Nepal does not have an international credit rating yet however, Laos has a such rating. That is why Laos received a loan from ISB and therefore takes rule of law, good governance, etc. more seriously.

To pay off the debt in dollars, a country should be able to bring in infrastructure investment and foreign investment in special economic sectors that generate income in dollars. Investments in roads and ports should increase exports and repay debts.

What can Nepal learn from these countries?

Countries should not take loans randomly. They had to “look at the throat and swallow the bone”. Likewise, they should maintain discipline and consistency in international sovereign bonds. The tax rate in Sri Lanka was reduced at once. The corporate tax rate was reduced from 28 to 24, the income tax from 25 to 18, and the VAT was reduced from 15 to 8. The market will punish such practices.

(The viewpoint expressed by economist Dr. Swarnim Wagle at the Policy Dialogue-2022 presentated by Nepalwatch. The program is broadcasted every Wednesday at 8:40 PM on Nepal Television.Wagle has worked as the chief advisor for UNDP’s Asia Pacific Region.)

 

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