Today, let’s talk about Sri Lanka in crisis. This island country in the Indian Ocean has rarely been in the eyes of people globally before, but recently it has had a double-meaning explosion.
The Prime Minister of Sri Lanka addressed the parliament on July 6, acknowledging that the country is bankrupt and the current severe economic crisis will last at least until the end of 2023. When the people who were tormented by high prices and high inflation heard that this kind of hard life would last at least more than a year, their uncontrollable anger broke out, and took to the streets one after another. Many people from other places came to the capital Colombo to participate in demonstrations.
On July 9, a large number of angry demonstrators stormed the presidential palace, and President Gotabaya Rajapaksa fled the capital before things spiraled out of control. The demonstrators who did not find the president rushed into the presidential secretariat and the presidential palace. On the same day, leaders of Sri Lanka’s political parties held an emergency meeting, calling for the immediate resignation of President Rajapaksa to quell the political crisis.
The president’s approach to the crisis is – to slip! On July 13, he and his wife and four bodyguards fled to the Maldives on a military plane. Their whereabouts are unknown, so Prime Minister Wickremesinghe became the acting president and then declared a national emergency. The Sri Lankan parliament resumed its session on July 15. On the 20th, it was confirmed that Acting President Wickremesinghe had won more than half of the parliamentary votes and became the official president. He took office on the 21st. This is the current situation in this Indian Ocean island country.
It is said to be a thunderstorm with “double significance” because it is not only the investee country with the largest explosion in China’s “One Belt, One Road” strategy so far; it is also the first country to collapse due to policy mistakes in responding to the epidemic since the new crown pandemic. , is the explosion of the COVID economic crisis. Sri Lanka was known as “Ceylon” before 1972, with a population of nearly 22 million; its GDP in 2020 was only US$80.7 billion; its per capita GDP was US$3,682, ranking 148th among 216 countries and regions. At this point, the context is also very clear.
Although its economy was devastated by the epidemic, the root cause is a deformed economic structure and excessive debt. The structural reasons already exist. COVID is only a key blow, and the existing problems show results. Since the Rajapaksa brothers took over the Sri Lankan political arena in 2005, funds from China have poured in, and the ratio of national debt to GDP has risen from 71.6% in 2010 to 101% in 2020. From the debt ratio of public books. From China seems not too high, only 10%, although it is the largest debt holder, comparable to Japan.
However, in a report in March this year, the French Guangguang estimated that the actual amount of Chinese loans to Sri Lanka is more than that. Just after the economic crisis broke out this year, Sri Lanka also hoped to obtain a loan of 1 billion US dollars from China. The CCP’s greatest effort in Sri Lanka is the famous case of Hambantota Port. Hambantota Port is the hometown of the Rajapaksa brothers. To repay the debt of the project, the port and the surrounding 60 square kilometers of land were leased to China on a 99-year lease to offset the debt. The deal is considered one of the most high-profile achievements of the Belt and Road project, China’s foothold in the heart of the Indian Ocean, laying a wedge for expanding influence.
The first blow to Sri Lanka from the COVID-19 pandemic has been to wipe out tourism, which accounts for 5% of Sri Lanka’s GDP and is a major source of foreign exchange. But the huge external debt ($51 billion as of April this year, which is huge for Sri Lanka) has resulted in annual loan contracts maturing and debt interest payments. The tourism industry was cleared, and the US dollars in the government’s pockets were not enough to spend immediately, so President Rajapaksa did two extremely two and extremely daunting things: the first was to stop the import of chemical fertilizers and pesticides, saving dollars.
The country switched to organic farming. This stupid move caused the production of tea, another important export commodity of Sri Lanka (a commodity that earns foreign exchange), to plummet by 20%, and the unfortunate epidemics and the war between Russia and Ukraine disrupted global food production, food prices soared. As a result, the ban on the import of chemical fertilizers left Sri Lanka with 400 million US dollars, but it has to spend an additional 450 million US dollars to import food, which is a bad deal.
The second stupid thing is to give big tax cuts to businesses and individuals. Tax reduction is a necessary measure to stimulate the economy, but it is not always good for tax reduction. At least two conditions must be matched with the tax reduction policy. First, there must be a way to maintain the government’s operation after the tax reduction. Public debt, foreign debt, thin the government or selling some state-owned assets to raise money, in short, you have to find a way. The second is to take into account the task of debt repayment. After the tax cut, the government’s fiscal revenue plummeted. If you are facing debt repayment, how to solve this problem? However, the extremely stubborn president of Sri Lanka did not consider these two matters at all. As a result, although the tax was reduced, the price of goods rose. Not only did companies and ordinary families not get any benefits, but they lost money, and it was another bad deal.
The final blow came from rising oil prices. The fuel that Sri Lanka needs is imported, the country is in short supply of foreign exchange, and oil prices have risen again due to Western sanctions against Russia. There were long queues at gas stations across the country, and as soon as transportation was stagnant, the prices of all necessities of life went up and down, and 22 million people were caught in dire straits. So this scene in Sri Lanka today has a clear thread. In March 2022, Sri Lanka has a total of US$4 billion in external debt and US$4.6 billion in domestic debt to be repaid, but its foreign exchange reserves are only US$1.9 billion. Insolvent, the government went bankrupt.
First, they misestimated the “historical opportunity”. The Rajapaksa brothers sincerely regarded the rise of China as an opportunity and believed that they could take advantage of the contradiction between India and China to make a profit from it. ) to get rich quickly. The Rajapaksa brothers started by suppressing the resistance of the Tamil ethnic group. They are strong men in government. They install relatives in government departments and run the country as a family business. In this system, the sudden influx of foreign investment is very easy to breed corruption, and the CCP also deliberately attracts local dignitaries in this way.
Therefore, a large amount of these investments flow into personal pockets, and the projects themselves lack scientific evaluation, such as the construction of the Hambantota Port, the signature project. The first phase of construction, two batches of loans from China before and after more than 1.2 billion US dollars, started in 2008 and was completed in 2010, but due to wrong market estimates and poor management, the new port is not enough to compete with other ports on the route, very few There are ships docked. As of 2016, the cumulative loss of more than 300 million US dollars, so only in 2017 did the port and the associated land leased to China drama. This operation has been dubbed by some as a “debt trap,” a hole dug deliberately for Sri Lanka. The lender didn’t expect the project to be profitable. From the very beginning, it exaggerated the value of the project, making you overly indebted, and when you can’t repay the debt, your house and land will go to the creditor.
But people dig holes for you, you have to jump, and you have to drill for traps. The source is that you misunderstood historical opportunities. When a big man stands at your door, waving green dollar bills at you and saying, “You’re messing with your brother and having meat to eat, you think you’ve run into a noble person, and you can only blame your lack of discernment.”
The second is the mistakes in the response policy during the epidemic, which is rash and reckless, has no overall view, and is very radical at the same time. Banning the import of chemical fertilizers and pesticides is the rhythm of being fooled by the concept of “organic agriculture”, and it is the rhythm of hammering oneself. From the point of view of behavior, if China’s Xi Jinping is a fan of Putin and follows Putin, then the Rajapaksa brothers in Sri Lanka are fans of General Secretary Xi and follow Xi Jinping. This is quite understandable. The so-called “strongman leaders” are themselves a circle, and they admire and imitate each other.
Every step of Sri Lanka’s key mistakes, China has, and went earlier than Sri Lanka, and the accumulated structural problems are more serious. The first is the use of debt as a driving force for economic development. Sri Lanka’s economic aggregate is small and its domestic borrowing capacity is limited, so the proportion of foreign debt is high. China, on the other hand, has a large volume and is more dependent on domestic debt. The government-level debt is mainly the invisible debt of the local government. Through the so-called local financing platform, the local government initiates an investment and construction company, guarantees it with state-owned land and the local government’s fiscal revenue, and then issues the bonds.
These companies have repayment debts. Difficulties drag local governments down the quagmire. We have talked about the invisible debts of local governments before, but I won’t go into details today. Household debt is mainly driven by high housing prices. The other category is industry-based debt, in which the government requires banks to make policy-based lending to the real estate industry, the steel industry, and other industries that the government wants to protect. Before the COVID-19 pandemic in 2019, the total debt scale of Chinese society, calculated by different calibers, reached 237% to 300% of China’s GDP, accounting for 15% of global debt, and the main part of this huge debt was ultimately owned by Chinese companies. with family.
Then there is the miscalculation of historical opportunities. The 10 years that Xi Jinping has been in power are the 10 years when he believes that “the east rises and the west descends” when he thinks that he can give up the line of keeping a low profile and no tossing, and it is a time to go out of the world and compete with the United States for world leadership. right time. Therefore, the “One Belt, One Road”, a bottomless project that burns money, was launched. Of course, I have to say this, but some people are still unhappy, maybe it’s the implementation of Xi Jinping? The judgment on the historical opportunity of China’s rise is not necessarily wrong. The problem with this judgment is that, first of all, you must look inward to see if there is a solution to the structural problems of your society. Only the inner breakthrough is a breakthrough, and the opportunity is coming, not your wallet or your own. The ups and downs of America. The harm of looking outward is that it is easy to be carried away by superficial appearances and throw yourself into a competition that cannot be paid for.
The “Greater East Asia War” launched by Japan is also a mistake in judging historical opportunities. Hitler’s overwhelming success on the European battlefield and the Soviet Union’s disastrous defeat in the early stage of the Soviet-German war made the Japanese army think that it had obtained an unprecedented historical opportunity. Japan’s industrial capacity and mobilized resources are not enough to support its war against the United States. Taking one step forward is a trap.
The wrong response during the epidemic can be described as outrageous. We have talked a lot about the loss of zero in the YouTube show, and I will not repeat it today. There is also a ban on Australian coal imports, which has caused power shortages and factory shutdowns in China; and hammered a series of industries that are dynamic in the market. Any one of these measures, in a small country like Sri Lanka, would be enough to cause a disastrous catastrophe. However, China has a large population and a large body, and the government’s control ability is stronger than that of Sri Lanka, so it can withstand more rounds of tossing.
Internal structural problems have not been resolved, and external crises have been encountered, coupled with unrelenting tossing, the remaining question is where is the tipping point of a full-scale crisis? Sri Lanka is small in size and has few variables. It looks like a bowl of clear water at a glance. It is the shortage of foreign exchange caused by the repayment of foreign debts, which has caused all the problems. In China, such a single problem may not be enough to trigger a global crisis. From the current point of view: the real estate that is not saved and must be used as a living horse doctor is an important tipping point.
It integrates thousands of complaints, and it will lead to many other thunderbolts. Unsalvageable unemployment is also a tipping point, especially among youth. China’s social contradictions have their unique way of developing, but one of the thinking that needs to be rid of is that it is not because you are too old that you have made all the mistakes made by others, and there are no consequences. The experience in recent years, from HNA to Evergrande, has increasingly proved that “too big will not fail” is a wrong belief, that size will not automatically eliminate mistakes, and that becoming bigger cannot replace correcting mistakes.
