EduCounting

Episode 166: The Clan Who Destroyed A Resplendent Island

How Sri Lanka went bankrupt

SHOW NOTES

In this episode, we look at what caused Sri Lanka to go bankrupt, why their currency dropped in value at such a fast rate and the lessons we can learn from their mistakes.

It’s easy to forget how lucky we are in America, especially when it comes to money.

But what happens when a country isn’t so lucky, what happens when a country goes bankrupt?

In this episode, I look at the history of Sri Lanka, what caused Sri Lanka to go bankrupt and why their currency dropped in value at such a fast rate…“Rule number one of personal finance, make more than you spend.” – Ben Jones

Time Stamps:
00:36 – The history of Sri Lanka.
02:01 – How Sri Lanka became bankrupt.
03:34 – How much prices have increased in Sri Lanka.
04:02 – What caused prices to soar in Sri Lanka.
04:50 – The biggest reason for personal bankruptcy.
05:20 – The dangers of cutting VAT.
06:10 – The problems with printing more money.
07:18 – How COVID affected the Sri Lankan economy.
08:50 – What happened when Sri Lanka cut farmer’s fertilizer usage.
10:15 – Countries that have recently gone bankrupt.

Connect with Ben Jones:

 

TRANSCRIPT

DADWelcome back to Money with Mak & G.  Thanks for being here. Don’t forget to show us some love, maybe a “Like”, a positive review, or if that doesn’t work at least send us some good thoughts.

Sometimes I forget how incredibly lucky we are as a country, and then I see something in the news that reminds me.  The war in Ukraine is definitely one of them.  There are so many parts of the war that touch the world, and we’ve talked about that before.  But, what about the bankruptcy of a country?

When I have time, I’m fascinated by why something happens.  And, if you’ve been watching the news a little bit, you would have heard that Sri Lanka, an island country that is located in the Indian Ocean about 20 miles South-East of India.  

It has an interesting history but became independent in only 1948 under the name Ceylon, and then changed its name to Sri Lanka in 1972. It didn’t want to have the name it had as a colony under British rule.  So, “Lanka” is an ancient name for “Island” and Sri was added to it because it meant “resplendent”, which means attractive and impressive through being richly colorful or sumptuous.  Thank you Oxford dictionary!!  Hey, if we would’ve kept the name we had before our independence, we would’ve been called the “United Colonies”,  GO UC!! UC!! UC!!

Sri Lanka isn’t big. It’s about the size of West Virginia with the population of Florida.  

So, this tiny resplendent island, under its new name hasn’t been around for as long as ME!!!  I was born before 1972.  That’s super young, right???  We want kids and parents to be responsible with their money.  Ugh, I can hear it right now, the aches of moans of being responsible.  But, hey, this little island nation didn’t act responsibly, and it’s getting hammered, which is the same thing that happens to a person when they don’t mind their own spending.  

So, we have a country that is being led by the “Rajapaska clan” in which three brothers named Basil, Gotabaya, and Mahinda Rajapaska held the most influential positions, and they were accused of corruption and financial mismanagement.  The family had dozens of other relatives holding top spots in the government. Bad decisions were made, and it is believed that several of them put a little extra cheddar in their pocket as they robbed the country of money along the way. This clan has been in power for about 20 years. But Gotabaya didn’t know how to lead well especially when it comes to money. 

He was the President and he first went into hiding, resigned, and now has fled the country which I think he’s in Singapore or the Maldives. But, he’s gone.  The older brother, Mahinda was the prior President and became the Prime Minister while his brother was President, and he has been forced to quit too. Wow.

People are CRAZY angry, and it looks like they should be.  There are videos online of what looks like 1,000s upon 1,000s of people taking over the President’s home and then, get this, swimming in the pool.  That would be like people taking over the White House, and swimming in its pool. Before today, I didn’t know it had one, but supposedly it’s located on the South Lawn near the West Wing.

Ok, people can’t buy what they need, as prices have soared.  So much so, that most people are only able to afford to eat one, yes ONE meal a day because prices jumped over 80%.  We should remember Supply and Demand.  If the Supply is cut, and demand remains the same for food, prices will go up. So, no food, no gas or fuel to cook food or for cars and trucks to transport things, and no medicines.  

Wow, how does this all start?  Well, just like personal finance, it can be from bad decisions, an unexpected event, possibly more bad decisions to get out of the situation, another unexpected event, or some other combination and you can’t fix it.

There are kind of two definitions of bankruptcy. One says you owe more than your worth, and the other says you can’t pay your bills.  MC Hammer, the famous singer during my time, “Stop Hammer Time”, went bankrupt, and he couldn’t pay his bills, but had a lot of assets. He couldn’t sell them fast enough to make payments on his debt.  He did have a staff of 200 people to manage his mansion at a mere cost of ½ million dollars a month.  So, not good financial choices. Really?  Do you really need 200??

But, when we think of personal bankruptcy, the biggest reason is actually medical bills.  They get so big with or without insurance, we can’t keep up with them.  

We’ve all made bad decisions, and hope we’ve learned from them.  I bought a brand new diesel truck for a business once, which I didn’t need, learned my lesson, sold it, took my lumps, and have my 12-year-old Prius that I drive around in, saving gas money daily.  And, learning a bit about finance and money is key.  Do you think there are any similarities with Sri Lanka.  Heck yes!!!

The President became popular by fighting and winning a war, and he had his brother who was President. So he was well known. His campaign promised to cut their VAT tax, which is like our sales tax, from 15 to 8%.  That’s almost half.  If you didn’t know, that’s huge and VAT provides a ton of revenue!!

Ok, if the government is taking in less money due to lower taxes, that means it can’t spend as much. Just like for us, we can’t spend more than we take in.  Unless Sri Lankans start buying twice as much to make up the difference, that’s trouble.  But, he didn’t want advice from anyone, and even though people with knowledge about how taxes and spending work said it would fall apart, he didn’t listen.  So, guess what? Do you hear the printing presses start???

Ok, he started printing more money.  WHAT? Can he do that?  Sure, we do.  But if you beef up supply and the demand doesn’t go with it, then your money gets weaker. It can turn out worse.  For example, the Sri Lankan Rupee is around 360 to buy 1 dollar.  But, let’s just say one rupee bought one dollar.  After printing double your current supply of rupees, it now takes two rupees to buy one dollar. You have twice as much money, but it takes twice as much for each dollar.  So, same place, and a lot of times worse.

So, they have less revenue from taxes, they try to print money and the President doesn’t listen again.  Now, people outside the country, who know how money works can see they’re having issues. The President now borrows money.  And we know bad debt, which doesn’t help you grow is like a weight around your neck.  For us, that’s credit card debt. Sri Lanka borrowed from China and some other places.

Sri Lanka, like the rest of us, got hit with COVID, which cost all of us TONS of money.  The government had to buy masks, and put lots of people to work helping which all had to get paid.  The cost of vaccinations.  The cost of other medical care.  Business shutdowns, where people couldn’t work, so they couldn’t sell stuff which means they can’t pay taxes.  

We have things that happen in our lives we don’t expect.  As mentioned earlier, you could get sick, and that hits you hard.  Or you lose a job for one reason or another.  

So, now they have little coming in, their money is losing value, COVID put the hurt on them and they’re trying to figure it out.  They also had some bombs go off on Easter several years earlier that killed tourists and some were Americans. Now people are scared to go to Sri Lanka even though it’s resplendent.

We have to talk about spending too.  They had some huge projects, like building a port that would allow all kinds of big ships in.  They thought it would boost their economy with jobs, taxes, and more.  It wasn’t managed well, lost money, and never finished. It was a very bad decision with no benefits.

Lots of money going out, not enough coming in.  That’s rule number one of personal finance. Make more than you spend. An emergency fund is a top priority on our list too, and they didn’t have one for COVID or the Easter bombings. To be fair, nobody really had the money for COVID, but Sri Lanka was falling fast.

Plus, here’s one that was very interesting Gotayaba decided to cut the usage of fertilizers for farmers.  I think it was part of an agreement to get some money from the International Monetary Fund, which is like a bank for countries.  So, without any warning or advice from experts, the pres made it illegal to use fertilizers. That reduced the food produced, mostly rice and bananas, by 30% last year.  Millions of farmers went bankrupt and needed help from the government. That’s almost a third less food. Which they now needed to buy from other countries.

That turned out to be a bad decision.  Since they’re an island, they have to import food, energy, and medicine because most of the time they don’t have those resources.  Without any money, they have a huge problem.  Japan seems to be stepping up with India to help out, and only time will tell if they can get back on track. But, in 2019 some very smart people saw this coming and predicted the fall.  Sometimes it takes years to get on solid footing and but it can quickly go wrong.  That’s why remaining diligent with a good plan and being disciplined are such important words to live by when talking about personal finance.

I don’t want you to think Sri Lanka is the only country that has gone bankrupt. It is pretty rare, but over the last 40 years, here are a couple of countries that also went bankrupt:

  1. Lebanon in 2020
  2. Iceland in 2008
  3. Argentina in 2001
  4. Russia in 1998
  5. Mexico in 1982 

Each of those stories are interesting to tell as well, but we’ll have to save that for another time.  Thanks for listening and we’ll see you next time for more Money With Mak & G!!!  BYE!!!

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