Damien Grant: We're following in Sri Lanka's footsteps

Thursday, 14 July 2022

A man shouts anti-government slogans during a protest outside the president's home in Sri Lanka in March. Economic disaster triggered months of protests and unrest across the country, leading to the collapse of the government.

Damien Grant is an Auckland business owner and a regular opinion contributor for Stuff, writing from a libertarian perspective.

OPINION: Ayn Rand wrote that we can ignore reality, but we cannot ignore the consequences of ignoring reality.

There is an awful tragedy unfolding in Sri Lanka this week that is the end point of three years of ignoring reality. It is time to look beyond the dramatic images coming out of the capital Colombo and understand what happened.

Sri Lanka is a wonderful place. I took my long-suffering wife and our mutual dependent there in December 2019.

I loved the country. It has a longer and richer history than we in the West comprehend, and although we took a guided tour, our interactions with Sri Lankans outside the hospitality sector revealed an optimistic, chatty and spiritual population.

Sri Lankan Prime Minister(and former president) Mahinda Rajapaksa, centre, with his younger brother, President Gotabaya Rajapaksa, right, in August 2020. Under the family’s rule, Sri Lanka has been plunged into an epic economic crisis.

* Sri Lanka's political chaos persists as crisis talks go on

* Storming the palace and then tidying up: Sri Lanka’s civil uprising

Today the country is a failed state. It is a remarkable transformation in such a short time. What went wrong?

Damien Grant with his son Xavier during a trip to Sri Lanka in late 2019, contributing to the country’s then-booming tourism sector.

Let’s start with Gotabaya Rajapaksa, a former general who won the civil war against the Tamil Tigers amid allegations of unsavoury military practices. He was elected president in November 2019 and appointed his brother as prime minister, which was only fair, as the same brother had appointed him as defence minister when he was president.

The president and his brothers (there was more than one in cabinet) set about to revitalise the economy.

They cut taxes aggressively, which, frankly, I am okay with. VAT, equivalent to our GST, was cut from 15 to 8%. Many other reductions followed.

A tea picker at work in Sri Lanka. The country’s tea industry was among those hard hit by a government edict banning artificial fertiliser and turning to organic agriculture.

Thing is, if you cut taxes it is prudent to also cut spending. The Rajapaksa administration did the opposite.

They substantially raised civil service pay, embarked on infrastructure spending and cut not a single rupee from the state’s budget.

They turned to the bond market to cover the shortfall, only to find no-one was that keen to lend to a country on a collision course with fiscal reality.

A vegetable market in the Sri Lankan capital, Colombo, where food has been scarce and inflation rampant.

No problem, though. The Rajapaksas would just print the needed cash.

There was a small technical difficulty. The previous government had, somewhat churlishly, passed a law putting the control of the central bank outside the control of the Minister of Finance, who, at this time happened to be the president’s brother.

Family is important, and what is the use of political office if you can’t swing a few jobs for the relatives?

The law was changed in 2020 and the central bank lost its independence. The money printing began.

The precise level is difficult to pin down, but it appears equivalent to a third of the nation’s GDP over two years.

To those running things in Colombo this looked excellent. Taxes were down, spending up.

Modern monetary theory, the economic equivalent of homeopathy, was being adopted everywhere. Uncle Sam was printing money, so was the EU, why not Sri Lanka?

The next problem was the reluctance by those selling goods into Sri Lanka to be paid in Sri Lankan rupees. As well as petrol, one of the most critical imports for Sri Lanka was chemical fertiliser for the agricultural economy: tea for export and rice for domestic consumption.

New Zealand’s prime minister is renowned for her empathy, but will it continue to satisfy voters when harsher realities bite?

The Rajapaksa family were not deterred. Claiming that he was worried about a rise in kidney disease caused by chemical fertiliser, a dubious and possibly bogus claim, the president made a virtue signal out of necessity and declared his country would be going organic.

He established a taskf orce to create sustainable solutions to climate change. Everyone loves taskforces.

He was embraced by the environmental elites and had the added benefit of not having to find foreign currency to pay for expensive imported chemical fertiliser.

Sri Lanka earned a stellar ESG (Environmental , Social and Governance) score from the World Economic Forum, making them a stand-out in this metric of idiocy.

Great. Except you cannot eat platitudes and Facebook likes.

The move to organics had predictable results. Production sank precipitously. Food, it appears, comes from farmers and not supermarkets. When output falls, prices rise.

According to the New York Times, rice increased in price by a third and other staples like tomatoes and carrots now cost five times what they did a year ago.

By late 2021 things were desperate. The organic mandate was scrapped, but the damage was done. There were no stockpiles of chemical fertiliser and no cash with which to buy any. The country ran out of petrol and couldn’t afford to import food to replace the failed domestic crops.

Three quarters of its population has been forced to reduce their food intake. Inflation is out of control. The government has ceased to function. The president fled to the Maldives.

Now, there were other problems. Covid hit tourism, as did a terrorist bombing in 2019, but lots of developing nations had to cope with these challenges and none of them have degenerated the way this country has.

Sri Lanka has not been following some fringe radical economic and environmental plan. They have been following what today is considered mainstream and uncontroversial in the monetary, fiscal and environmental sphere.

The only difference is in the speed of implementation. The end point will be the same.

Like New Zealand, Sri Lanka pursued policies because they were popular amongst the cultural elites. It didn’t matter that they were idiotic, doomed to fail and destined to create misery.

What matters isn’t if a policy will work, but the intentions of the person implementing it.

We all know our prime minister is empathetic, caring, and wishes us all the very best, and for many voters that is enough. Until the consequences bite and they can’t pay the mortgage, inflation destroys their real wage and eventually employers begin to fail.

We are not better than Sri Lanka. There is nothing that gives New Zealand the freedom to ignore reality and not pay the price.

We start with a far higher economic base, which gives us more time to change course, but if we continue to implement the same policies we will enjoy the same outcome.