What's up guys and welcome back to wall street millennial on this channel, we cover everything related to zoxin investing ever since russia invaded ukraine in late february this year, economists have been warning of the dire economic consequences. Of particular concern is the massive increases in energy and food prices, as exports from both countries have been curtailed significantly. This will have a major impact on developing nations in africa and asia, who are already in a precarious financial situation as a result of the pandemic, and now these fears are no longer theoretical. The southeast asian nation of sri lanka is currently experiencing a near complete collapse of its political and economic systems facing severe shortages of food, fuel and medicine.

The economy is grinding to a halt and millions of residents face the prospect of starvation. Tens of thousands of protesters have taken to the streets demanding the resignation of president godabaya rajapaksa. The crisis in sri lanka can be partially blamed on the disastrous economic policies of the current administration, as well as coven-related declines in the country's tourism industry. But the russia-ukraine invasion was a straw that broke the camel's back.

Turning the previously prosperous nation into a failing state in this video, we'll take a look at the ongoing crisis in sri lanka and what other countries are the most vulnerable in uncertain times like these? It's more important than ever to manage your workflows and maximize your productivity. That's why we've partnered with clickup to produce this video over the past few years, the number of apps and software tools that people use both at work and in their personal lives has exploded. For example, you might use slack for communications, google sheets for spreadsheets dropbox for file sharing and a whole host of other tools. Click up integrates all these tools into one easy: to use no code platform which you can use for everything you can create tasks, calendars, docs, spreadsheets and timelines.

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Sri lanka is an island nation with a population of about 22 million people, while their economy has traditionally been dominated by the agricultural sector over the past 20 years, they have made significant progress in the tourism and manufacturing sectors since the turn of the millennium, the size Of the island nation's economy has more than doubled, with the average citizen's annual income increasing from two thousand dollars per year in two thousand to four thousand dollars in 2019.. This made it one of the most successful and fastest growing countries in southeast asia. In 2019, gotobaya rajapaksa was elected president, a member of the center-right slpp party and a former military officer goodabaya, had grand plans to further accelerate economic growth. One of his first major policy decisions was to implement large tax cuts.

This included increasing the tax-free income allowance, which reduced the number of taxable citizens by a third. There was also a decrease in the corporate income tax from 28 to 24 and an elimination of a special two percent tax that was intended to fund infrastructure projects. While the reforms were meant to spur economic growth and investment, they couldn't have come at a worse time when the pandemic hit. In 2020, sri lanka instituted various travel restrictions in curfews to limit the spread of the disease.

The restrictions were very effective and sri lanka outperformed most other countries as far as preventing infections and deaths. As of today, the total number of cumulative coveted deaths in the island nation stands at 768 per million. That's only about one quarter of the three thousand deaths per million people in the us gotabaya and his slpp political party were credited with the competent handling of the pandemic and they won an overwhelming victory in 2020 parliamentary elections securing an almost two-thirds majority, but the coveted Restrictions did not come without a cost. The tourism sector ground to a near halt, resulting in an estimated 200 000 job losses in 2020.

The contraction in the economy, combined with the tax cuts, resulted in the government's tax revenue plummeting. At this point, the current level of government spending was necessary to keep the economy afloat during covid. The only way to balance the budget would be to walk back the tax cuts. That would be a politically untenable option, as it would be tacitly admitting that the policy was a mistake.

So sri lanka did what many governments do in the face of financial difficulties. They instructed their central bank to start printing money to fund their widening budget deficits. The international monetary fund or imf grew increasingly concerned about the country's financial situation and warned the government to stop printing new money and vice which fell on deaf ears. The imf had bailed the country out multiple times in the past.

It was concerned that the situation would repeat itself as the government borrowed more and more money and the economy contracted during 2020, the debt to gdp ratio surpassed 100 percent, which is a very high level for a developing country. Developed countries like the us can sustain very high debt levels for long periods of time even far beyond 100 of gdp. That's because the us borrows money in its own currency. As the former federal reserve chairman alan greenspan said, the us will never default on its debt because they can always print the money.

Countries like sri lanka are not afforded this luxury. Much of sri lanka's debt is owed to foreign creditors and is denominated in foreign currencies. Such as the us dollar foreign lenders, typically don't want to lend in the domestic currency, as they fear that the government could inflate the currency and end up paying them way less than they borrowed in real terms. The sri lankan government generates tax revenues in sri lankan rupees if the rupee depreciates relative to the dollar, this makes it much more difficult to pay its foreign debts.

Because of this, it is very important for them to have significant reserves of foreign currencies to support the value of the domestic currency. In times of financial stress. One of the ways that president gotabaya wanted to solidify sri lanka's economy was to increase domestic food production to reduce their reliance on imports. This would help their balance of trade and make them less susceptible to currency crises.

To do this, he allowed government-owned forest lands to be deforested and turned into farmland. While this angered some environmental activists and made economic sense, the more available farmland there is, the more food will be produced domestically helping sri lanka's food independence, while this policy made sense. His other major food policy was very difficult to understand. In april of 2021, the godubaya government banned the import of chemical fertilizers saying that the entire country would turn to organic farming.

This made sri lanka, the first major country to completely ban chemical fertilizers. The sri lankan agriculture sector depended heavily on imported chemical fertilizers and pesticides for the production of rice, tea and rubber tea and rubber are cash crops which formed a major part of the country's exports. The government believed that chemical fertilizers caused cancer and importing them from other countries is bad for their balance of trade. The idea was that they could switch to domestically produced organic fertilizers.

The problem is the organic fertilizers aren't nearly as effective as the chemical ones, and the supply of organic fertilizers was not nearly enough. Millions of farmers saw their crops fail, causing a food insecurity crisis in the country. The 2021 harvest of rice was down 50 from the prior year. Millions of small farmers are going bankrupt.

They simply don't have enough money to plant the next crop. While they used to be self-sufficient. They are now importing. Hundreds of thousands of tons of rice and domestic prices have skyrocketed to make matters even worse.

Sri lanka has very little domestic oil production. It relies heavily on imports of petroleum products like gasoline and diesel fuel going into 2022. Sri lanka's economy was barely limping by with the russian invasion of ukraine, prices of both fuel and food skyrocketed. Turning the island nation's economic troubles into a full-fledged crisis.

They are now experiencing shortages of just about everything. As sri lanka's exports declined and their imports rose, they started to run budget deficits. This put pressure on the valueless sri lankan rupee. In the past, the central bank tried to peg the currency at a rate of 200 rupees per us dollar.

Currency pegs can work. If you manage them properly, when demand for your currency decreases, you have to decrease the supply of the domestic currency and increase interest rates. This will maintain the equilibrium, but will cause a painful economic contraction. Sri lanka was trying to have its cake and eat it too.

By maintaining a currency peg, while at the same time recklessly printing, more rupees, the currency peg became a farce and people started trading on the black market at much lower exchange rates. Eventually, the sri lankan central bank ran out of us dollar reserves and was forced to abandon the peg with the rupee depreciating by more than 40 percent. The situation is getting extremely dire, with long lines at the gas stations and empty shelves at grocery stores. The government is rationing, their limited electricity supply by implementing regularly planned blackouts.

In a recent interview with sky news, the former sri lankan energy minister said that the country's foreign reserves have been completely exhausted and they are on track to run out of food within one to two months. Of course, when the currency collapses, inflation will skyrocket after being stable for the past decade, consumer prices surged by almost 40 in the first few months of 2022, and are expected to hit over 100 for the full year. In early april, the entire cabinet of ministers resigned in protest of the crisis, but president godabaya has refused to step down. Despite increasing protests against him, it is now estimated that he has an approval rating of less than 10 percent, while many protesters are demanding a new presidential election, it's unclear if this would even be possible.

The previous election cost 7 billion rupees, which paid for paper transportation and election staff. Given the current situation, they may not have the resources to hold an election, even if godabyah agreed to step down on may 20th. Sri lanka defaulted on its external debt. For the first time in its history, this is a major disaster.

Once a government defaults, it will be very difficult for them to borrow money in the future and if they can, it will be at much higher interest rates. In addition to the cabinet ministers, prime minister, mahinda rajapaksa, who is also president godabaya rajapaksa's brother resigned, he was replaced by renewal wekramensing. A politician from a very different political party. Wikra minsing is clear-eyed about the current situation.

He completely blames the prior administration for their disastrous economic policies and is currently in talks with the imf, india and china for aid. While the situation is dire, it looks like there might be some hope for a recovery. They have already secured about 1.5 billion dollars. In credit lines and other assistance from neighboring india and a few hundred million dollars from china they're seeking a four billion dollar loan from the imf.

If they can secure this they'll be able to buy food and fuel for at least another few months to avert a famine. Importantly, the government has reversed its disastrous ban on chemical fertilizers. If they get a bailout, they can use this money to import foreign fertilizers and sell it to farmers at subsidized prices. If they can increase their fertilizer imports back to 2019 levels, agricultural production could double and the country will once again be food.

Secure. Sri lanka is a democratic nation and until recently had a rapidly growing economy, they have also successfully paid off their two previous bailouts in 2009 and 2016.. The current situation was mostly self-inflicted. There is no reason to believe that the economy couldn't recover now that these policies have been reversed.

So while the situation looks bleak now, if they can get through to the next rice harvest, things will get a lot better. Alright guys that wraps it up for this video, what do you think about this situation in sri lanka? Do you think they can make a comeback? Let us know in the comments section below, as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.