This was the highly specialised economy of Sri Lanka. It had a thriving textiles industry. It was one of the biggest tire producers in the world. And it was known as a world class tourist destination, with average incomes double that of its neighbours.

But now, Sri Lanka’s economy is as good as dead.

Inflation is almost 60%. The government has defaulted on its foreign loans. And the central bank had to let the Rupee crash when it almost ran out of foreign currency reserves.

And Without foreign currency reserves, the country is no longer able to buy crucial imports such as fuel, food & medicine.

And as a consequence, it is experiencing regular power outages, had to close schools, and ration fuel.

So, that raises the question, who killed Sri-Lanka’s Economy?

Four suspects

There are four main suspects.

First, there’s Russia, whose invasion of Ukraine triggered an explosion of fuel and food prices. Second, there’s the United States, whose interest rate hikes are putting enormous pressure on Sri Lanka’s Dollar-dependent economy. Third, there’s China who had quickly become one of Sri Lanka’s biggest creditors. And then, finally, there’s the government itself, which stands accused of corruption and gross incompetence.

Most notably by forcing Sri-Lankan farmers to go “eco friendly” banning fertilizers, and thereby ruining the harvest.

So, let’s closely inspect each of these suspects and see who is the real killer.


The case against Russia is the following.

When, it invaded Ukraine, fuel and food prices went through the roof.

This was a big problem because, while Sri-Lanka had thriving industries, it consistently ran a trade deficit. This means that while it earned foreign currency with textiles, tea, tourism, and tires, it spent much more than that on imports. Imports like fuel and wheat. And To do so, like any net importer, it needed to borrow foreign currency.

So, when, Russia’s war drove up energy and wheat prices, this immediately made Sri Lanka’s trade deficit much worse.

It also meant that foreign investors were no longer willing to lend to Sri Lanka. As a consequence, the government quickly ran out of foreign currency. And without foreign currency, the economy is now literally running out of fuel.

In other words, when Russia invaded Ukraine, it also killed Sri Lanka’s Economy.

Or so, you’d think. Because there are actually a couple of problems with this narrative.

First, unlike some countries in the middle east and Africa, Sri Lanka is not that dependent on wheat imports. After all, it’s diet is mostly rice based. And while rice prices have also been going up steadily, this has been linked to bad weather conditions in, amongst others, China. Not to Russia’s invasion.

Rising fuel prices have clearly been a big problem for Sri Lanka though.

However, in Russia’s defence, it has been selling to Sri Lanka at discounted prices. What’s more, there are plenty of oil-importing nations that have not collapsed after Russia’s invasion of Ukraine.

So, in the end, while Russia’s invasion proved a big problem for Sri Lanka economy, perhaps we should also take a critical look at its geopolitical rival, the United States and in particular its financial sector.


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The case that, actually, the United States killed Sri-Lanka’s economy, is stronger than you might think.

Because, sure, Sri Lanka is pretty far from the United States. However, like most emerging markets, Sri Lanka relies for a large part on the global Dollar based global financial system to fund itself.

And that is what connects the U.S. to the death of Sri Lanka’s economy.

You see, in line with U.S. economic thinking, Sri Lanka relaxed both its capital controls and exchange rate in around 2001. Right after that, the country experienced a surge in private capital inflows.

Now, that sounds like a good thing, right? However, economists have identified two big problems with these types of capital flows.

The first problem is that global private global investors don’t necessarily care about those projects that are macro-economically sustainable. They care about quick returns.

So, it made sense that much of this private investment flowed into Sri Lanka’s booming stock and property markets.

Sectors, that don’t immediately help if you have a big trade deficit.

In fact, they can make the trade deficit worse, by making people feel rich and therefore enticing them to import more.

The second problem is that foreign private capital is known to be short-term oriented and jumpy.

Economists like Helene Rey have shown that an increasingly relying on global financial markets make emerging markets more vulnerable to something that is called the global financial cycle.

The idea of the global financial cycle is that asset booms and busts are more and more aligned globally.

This means that for example if property markets in the US are going up, it is more likely that they are also going up in Europe and also in emerging markets like, in this case, Sri Lanka.

Global financial booms such as these tend to be boosted by low-interest rates in the United States. Conversely, Dollar-based private finance tends to run home when U.S. interest rates rise, setting in motion a bust everywhere.

So, did U.S. interest rate hikes scare international private investors into killing Sri Lanka’s economy?

Well, the timing is just as suspicious as it is with Russia.

The U.S. started raising interest rates to combat inflation at home around March this year. And right after Sri Lanka’s currency started collapsing.

However, there is also some key evidence that might prove that the U.S. and the global financial system is not to blame.

Firstly, while it is easy to say that global private financial investment is just looking for a quick buck. It is undeniable that, Sri-Lanka’s private sector had grown rapidly in these last few years. In 2019, Sri Lanka impressive tourist industry made it so that it was the Lonely Planet’s top tourist destination of the year. Also, it’s IT industry continued to do well throughout the pandemic. And, finally, its textiles industry had grown to be one of the biggest exporters to the United States and Europe.

All of these industries arguably benefitted quite a lot from access to international capital markets.

Furthermore, foreign direct investment into Sri Lanka had already started declining in 2018.

Well before, the US raised its interest rates. In fact, you could even argue that the U.S. saved Sri Lanka, when it started stimulating its economic in response to the Covid-19 pandemic

Precisely at the moment that tourism revenue collapsed for Sri Lanka.

What’s more, in the last few years, Sri Lanka had started borrowing more and more,

not from Western capital markets. But, from China.


So, what is the case against China?

Well, officially, China it has become, just in the span of just a couple of years, it has become, together with its export-import bank, one of the biggest lenders to Sri Lanka.

However, unofficially, we have no idea how big its role really is. You see, China is very secretive about both how much it lends to emerging market economies and under which conditions.

And, just like with private capital inflows, that doesn’t have to be a bad thing, right?

And, unlike, Wall Street’s need for a quick buck, China is known for playing the long game.

Its state-owned banks mainly lend to foreign government and government-affiliated companies. Even better, they typically fund infrastructure projects. And developing countries like Sri Lanka badly need infrastructure projects.

So, how could you hold China responsible for the death of Sri Lanka’s economy?

Well, it stands accused of bad lending practices.

Not funding the infrastructure projects the economy badly needed.

But, funding the infrastructure projects that it’s politicians badly needed to line their own pockets.

It stands accused of not caring whether an infrastructure project can earn enough money to pack back the loan that it lend for it.

As long as the government can pay back in other ways, China doesn’t care.

And, if the government cannot pay back, then, China doesn’t have the reputation that it is willing to write down debt like some Western creditors occasionally do.

Although, it might be willing to forgive the loan in exchange for the infrastructure asset, if it happens to be strategically valuable to China.

The most famous example of this in Sri Lanka is the Hambantota port.

This port was deemed commercially unfeasible. And therefore, no Western or Indian creditor was willing to fund it.

However, the location of this port just so happened to be the home province of former president Mahinda Rajapaksa.

This means that it was actually a very attractive project for the president himself. Not only did it buy good will with his core voter demographics.

But, it also offered lots of opportunities to award ‘work’ for local friendly sub-contractors. So, despite the port clearly not making a lot of economic sense, China’s export-import bank was willing to fund it.

Sadly, but not surprisingly, when the billion-dollar port was finished in 2012 it only drew in 34 ships. So, not surprisingly, when a new government came into power, it could no longer afford to pay the debts to China. Luckily, at that point, China stepped in and bought most of the port and the land surrounding it, for a lease for 99 years.

This is just the most notorious example.

There are many more examples where Chinese loans made projects possible that weren’t very beneficial to the economy, left the country in debt. But, were very beneficial for the Rajapaksa family a members.

So, that is the case against China in a nutshell. Much like the case against U.S. finance, it loaded up Sri Lanka with the wrong kind of debt. But, in this case the debt that made its politicians very rich. And, made the country very poor.

That being said, these are only the negative examples. Just like with private finance, there are also a lot of projects that were great for Sri-Lanka, that were built with Chinese money.

For example, a new terminal in Colombo’s port has arguably helped that port to grow tremendously.

What’s more, there are other countries which borrowed much more from China and that are in far less trouble than Sri-Lanka is now.

Finally, you might have noticed that in all of these cases of China lending to wasteful projects, one name kept coming up. That of the Rajapaksa family.

Rajapaksa Family

Could the Rajapaksas mismanagement actually be the real reason that Sri Lanka was never able to grow a balanced economy?

The case against the family is built on the fact that shortly after Mahinda Rajapakas came to power in 2005, he started installing family members & friends on key government posts.

And, typically, installing family members there means that you are NOT necessarily installing the most competent people. But, rather the most loyal people.

Sure, during Mahinda‘s reign the economy grew at a rapid speed, and even became a middle-income country.

Also, under their reign Sri-Lanka’s civil war finally came to an end. So, no wonder that they were so popular that they could get re-elected for a second term.

However, their increasingly dictatorial tendencies, and terrible government services and corruption led to them being voted out of office in 2015.

But then, after a terrorist attack in 2019, Gotabaya Rajapakas was elected as the new president. And so the Rajapaksa family was back. Now, he promised a hard-line on terrorism as well as sweeping tax cuts.

Which was probably a bit of a mistake given that government’s finances were already running low.

However, there is an even more striking example of the Rajapakas governance incompetence.

You see, with the lofty goal of environmental sustainability, president Gotabaya banned all fertilizers.

Eco farming all the way it seemed.

Although, some have also suggested that this was a move to import less fertilizers.

But, whichever of the two cases really motivated him, this turned out to be a disaster of epic proportions.

Without fertilizers, Sri Lanka’s harvests started failing. Meaning that now not only it turned into an importer of rice, some of its other agricultural exports also started failing.

So rather than saving foreign currency reserves, **this move made Sri Lanka bleed foreign exchange reserves.

So, the case against the Rajapaksas family is that, while they brought stability to the country initially, they completely trashed its economy.

They prioritized borrowing for projects that would make them rich, not the country. They failed to deliver crucial government services. The presided over a culture of corruption. And finally, they pushed the country over the edge by banning fertilizers.

However….. in their defence, you could argue that actually, when the opposition was in power between 2015, and 2019, they didn’t do enough to turn the situation around.

Or, you could argue that a lot of countries have incompetent governments, and that Sri-Lanka was just extremely unlucky because first it was hit by a terrorist attack and then tourists completely stayed away after Covid-19. What’s more it was it was then hit by a fuel and food shock thanks to Russia, an interest rate shock thanks to the United States and, finally, all of that Rajapaksa corruption was only possible thanks to Chinese money.

But, do you buy those excuses?

The Vote

Because, now, it is up to you. You have heard the four main narratives. You’ve heard the pros and the cons.

Now, its time to cast your votes.

Who is mainly responsible for the death of Sri Lanka’s economy?

Check out the first comment under this video for a link to a poll on Twitter.

Or, if you are eager to get my personal opinion on this or other matters,

then consider becoming a Patron or member of this channel. This will also give you access to an exclusive Discord community where I hold a monthly live Q&A session.

Finally, if you want to know more about why developing countries fail, check out this video over here about the economy of Afghanistan or this video over here about the dangers of financial globalization.