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How Did Sri Lanka’s Economy Collapse in 2022? Causes & Economic Reforms
Where Is Sri Lanka? What Are Its DemographicsSri Lanka is an island nation in the Indian Ocean, and it’s off the southeastern coast of the Indian subcontinent….
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Where Is Sri Lanka? What Are Its Demographics
Sri Lanka is an island nation in the Indian Ocean, and it’s off the southeastern coast of the Indian subcontinent. In an area of about 25,000 square miles (slightly larger than West Virginia), its main sources of income from exports are textiles, garments, and tea leaves.
Out of a population of 21 million people, about 8.2 million are employed, with a quarter working in agriculture. The country's population is rapidly aging, with the number of elderly people (65 and older) predicted to reach 25.7 percent of the population by 2050, compared to 13.4 percent in 2015.
An Overview of Sri Lanka’s Economy
Sri Lanka’s economy was valued at $85.2 billion in 2021, holding steady from previous years in spite of the effects of the COVID-19 pandemic on tourism, one of its biggest contributors to earnings. Breaking it down by sector, services accounted for more than half of gross domestic product at 58.3%, followed by industries (25.9%); agriculture, forestry and fishing (6.9%); and taxes less subsidies on products (8.9%). In 2021, foreign debt totaled around $35 billion.
Economic Background
Starting in the 1970s, Sri Lanka started to liberalize its economic policies, and the government pushed for an open economy, in which goods and services would trade freely, and barriers to entry such as tariffs would break down. It wasn’t until after the end of the civil war in 2009, when the government defeated the Tamil Tigers—a separatist group seeking an autonomous state within Sri Lanka—that the economy started to gain momentum.
In the post-conflict era (after 2009), economic growth briefly accelerated, and per-capita income doubled. But not every aspect of the economy was moving strongly. Sri Lanka is a resource-poor nation, and its reliance on agriculture adds little value to the economy. For decades, the government has been running fiscal and current account deficits, which means that it has relied heavily on borrowing to finance government spending, at times taking out loans with particularly high interest rates.
These twin deficits have plagued the government’s ability to get itself out of debt. The government has for years mismanaged tax collection and provided few meaningful attempts to diversify and generate revenue. Remittances from abroad have helped to prevent the current account—the broadest measure of trade in goods and services—from widening. That secondary income accounts for a big chunk of GDP. The nation imports more than it exports, and the central bank has had to use up its precious stores of foreign exchange reserves to make payments on imported goods and servicing debt.
Political Background
In the post-conflict era, Sri Lanka had plenty of opportunities to build on the momentum of the end of the civil war to focus on economic development. The head of state, President Mahinda Rajapaksa, ruled from 2005 to 2015 and was credited with ending the decades-long internal conflict, but his government was plagued with accusations of graft, corruption, and economic mismanagement.
For example, his government increased its defense budget during peacetime rather than channel spending toward infrastructure projects. His family’s businesses were accused of benefiting from favorable government projects that could have gone to other contractors who had no ties to the president.
After Mahindra’s term, a new president helped to briefly put the budget in surplus. But Mahinda’s older brother, Gotabaya Rajapaksa, was elected and took office in November 2019, implementing a tax reform that lowered income tax rates on top earners and put the fiscal budget further into deficit.
What Caused Sri Lanka’s Economic Crisis?
Many factors contributed to Sri Lanka’s economic collapse in 2022. When looking at a developing country’s ability to protect itself from shocks to the financial system, foreign exchange reserves are particularly important. A nation’s current account is also a leading indicator of economic growth and its currency. Examining Sri Lanka’s current account and foreign reserves can help to explain what led to the country’s economic decline.
Current Account Deficits
Sri Lanka has been facing deficits in its current account for decades, partly due to the government’s inability to diversify sources of income. Its main exports are textiles, garments, and tea leaves, and the nation has little manufacturing output.
Services remain the biggest contributor to GDP, but a quarter of Sri Lankans are disproportionately employed in agriculture. The government has relied on importing more goods than it can export, putting the nation’s current account persistently at a deficit.
In the graph below, Sri Lanka has experienced only a few quarters of surpluses from 2012 to the second quarter of 2022. Financing the deficit usually means borrowing from abroad to cover the shortfall.
Foreign Currency Reserves
With the current account in deficit, foreign investors have little reason to hold onto Sri Lankan rupees. The country has had to exchange much of its own currency for dollars to pay for imported goods, and that has led to the depreciation of the rupee. Billions of dollars pour into the economy via remittances from Sri Lankans working abroad each year. Still, maintaining foreign reserves is a challenge due to the pressures of foreign debt repayment, which is typically in dollars, and payments for imports, such as gasoline, other crude oil fuel products, and fertilizers.
In the graph below from November 2013 to November 2022, monthly reserve levels reached a peak of $9 billion in April 2018 before gradually dropping to a low of $1 billion in November 2021.
COVID-19: A Turning Point in the Economy
The COVID-19 pandemic upended Sri Lanka’s economy, further complicating the nation’s finances and ability to make payments. Inflation started to creep up in 2021 amid supply-chain disruptions, and maintaining foreign reserves became difficult due to a drop in tourism and declines in remittances.
The consumer price index, an inflation benchmark, increased at a more than 10% annual rate beginning in December 2021 (eventually topping at almost 70% in September 2022). To rein in runaway inflation, the central bank started to tighten monetary policy in early 2022 aggressively, and the resulting rising interest rates would have a detrimental impact on lending—squeezing businesses out of their ability to borrow to finance their operations, and, in turn, curbing economic growth.
Acceleration Into Economic Collapse in 2022
Social unrest began to emerge in the form of public protests in early 2022. The government attempted to quell protests by banning social media, declaring a state of emergency, and setting curfews, but these efforts were futile.
With foreign reserves at their lowest levels in years, the government had little funding to help pay for goods from abroad, notably fuel. Long queues started to form at gasoline filling stations, and power outages became common, affecting businesses and their output.
In March 2022, the central bank abandoned hopes to protect the rupee from further depreciation, setting the currency into freefall. In April, the government—with foreign reserves hovering just above $1 billion and few funds available to make payments—stopped serving its overseas debt, pushing the country toward default. By May, a dollar fetched about 365 rupees, compared to about 200 rupees two months earlier.
The public called for Gotabaya Rajapaksa to step down as president, which he did in July. A new president was in power, but financial problems persisted, and the government was too broke to deal with them.
The International Monetary Fund stepped in and served as a lender of last resort by providing a $2.9 billion loan to Sri Lanka in September to help the country meet its payments. The emergency relief, though, came with certain conditions for economic reform, including changing the tax structures to collect more income and improving fiscal transparency.
Can Sri Lanka Recover From Its Economic Crisis?
With the IMF’s relief package and austerity measures in place, Sri Lanka can begin navigating its path to economic recovery. Many other countries have faced similar hardships, and in most cases, it took years to right their economies.
One of the benefits of a depreciating currency is that Sri Lanka’s goods and services become cheaper to buy in terms of foreign money, and that might help to steer the current account into surplus. Diversifying its economy to include other forms of revenue generation could become a priority under the IMF economic reform plan.
Still, challenges remain on the political front, and much depends on political leaders’ willingness to change. Whether the new government will deviate from past policies under previous administrations remains to be seen.
default pandemic covid-19 economic recovery subsidies economic growth monetary policy tariffs gross domestic product gdp recovery global trade interest rates oil
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Comments on February Employment Report
The headline jobs number in the February employment report was above expectations; however, December and January payrolls were revised down by 167,000 combined. The participation rate was unchanged, the employment population ratio decreased, and the …
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Prime (25 to 54 Years Old) Participation
Since the overall participation rate is impacted by both cyclical (recession) and demographic (aging population, younger people staying in school) reasons, here is the employment-population ratio for the key working age group: 25 to 54 years old.
The 25 to 54 years old participation rate increased in February to 83.5% from 83.3% in January, and the 25 to 54 employment population ratio increased to 80.7% from 80.6% the previous month.
Average Hourly Wages
The graph shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees from the Current Employment Statistics (CES). Wage growth has trended down after peaking at 5.9% YoY in March 2022 and was at 4.3% YoY in February.
Part Time for Economic Reasons
From the BLS report:"The number of people employed part time for economic reasons, at 4.4 million, changed little in February. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs."The number of persons working part time for economic reasons decreased in February to 4.36 million from 4.42 million in February. This is slightly above pre-pandemic levels.
These workers are included in the alternate measure of labor underutilization (U-6) that increased to 7.3% from 7.2% in the previous month. This is down from the record high in April 2020 of 23.0% and up from the lowest level on record (seasonally adjusted) in December 2022 (6.5%). (This series started in 1994). This measure is above the 7.0% level in February 2020 (pre-pandemic).
Unemployed over 26 Weeks
This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 1.203 million workers who have been unemployed for more than 26 weeks and still want a job, down from 1.277 million the previous month.
This is close to pre-pandemic levels.
Job Streak
| Headline Jobs, Top 10 Streaks | ||
|---|---|---|
| Year Ended | Streak, Months | |
| 1 | 2019 | 100 |
| 2 | 1990 | 48 |
| 3 | 2007 | 46 |
| 4 | 1979 | 45 |
| 5 | 20241 | 38 |
| 6 tie | 1943 | 33 |
| 6 tie | 1986 | 33 |
| 6 tie | 2000 | 33 |
| 9 | 1967 | 29 |
| 10 | 1995 | 25 |
| 1Currrent Streak | ||
Summary:
The headline monthly jobs number was above consensus expectations; however, December and January payrolls were revised down by 167,000 combined. The participation rate was unchanged, the employment population ratio decreased, and the unemployment rate was increased to 3.9%. Another solid report.
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Immune cells can adapt to invading pathogens, deciding whether to fight now or prepare for the next battle
When faced with a threat, T cells have the decision-making flexibility to both clear out the pathogen now and ready themselves for a future encounter.
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How does your immune system decide between fighting invading pathogens now or preparing to fight them in the future? Turns out, it can change its mind.
Every person has 10 million to 100 million unique T cells that have a critical job in the immune system: patrolling the body for invading pathogens or cancerous cells to eliminate. Each of these T cells has a unique receptor that allows it to recognize foreign proteins on the surface of infected or cancerous cells. When the right T cell encounters the right protein, it rapidly forms many copies of itself to destroy the offending pathogen.
Importantly, this process of proliferation gives rise to both short-lived effector T cells that shut down the immediate pathogen attack and long-lived memory T cells that provide protection against future attacks. But how do T cells decide whether to form cells that kill pathogens now or protect against future infections?
We are a team of bioengineers studying how immune cells mature. In our recently published research, we found that having multiple pathways to decide whether to kill pathogens now or prepare for future invaders boosts the immune system’s ability to effectively respond to different types of challenges.
Fight or remember?
To understand when and how T cells decide to become effector cells that kill pathogens or memory cells that prepare for future infections, we took movies of T cells dividing in response to a stimulus mimicking an encounter with a pathogen.
Specifically, we tracked the activity of a gene called T cell factor 1, or TCF1. This gene is essential for the longevity of memory cells. We found that stochastic, or probabilistic, silencing of the TCF1 gene when cells confront invading pathogens and inflammation drives an early decision between whether T cells become effector or memory cells. Exposure to higher levels of pathogens or inflammation increases the probability of forming effector cells.
Surprisingly, though, we found that some effector cells that had turned off TCF1 early on were able to turn it back on after clearing the pathogen, later becoming memory cells.
Through mathematical modeling, we determined that this flexibility in decision making among memory T cells is critical to generating the right number of cells that respond immediately and cells that prepare for the future, appropriate to the severity of the infection.
Understanding immune memory
The proper formation of persistent, long-lived T cell memory is critical to a person’s ability to fend off diseases ranging from the common cold to COVID-19 to cancer.
From a social and cognitive science perspective, flexibility allows people to adapt and respond optimally to uncertain and dynamic environments. Similarly, for immune cells responding to a pathogen, flexibility in decision making around whether to become memory cells may enable greater responsiveness to an evolving immune challenge.
Memory cells can be subclassified into different types with distinct features and roles in protective immunity. It’s possible that the pathway where memory cells diverge from effector cells early on and the pathway where memory cells form from effector cells later on give rise to particular subtypes of memory cells.
Our study focuses on T cell memory in the context of acute infections the immune system can successfully clear in days, such as cold, the flu or food poisoning. In contrast, chronic conditions such as HIV and cancer require persistent immune responses; long-lived, memory-like cells are critical for this persistence. Our team is investigating whether flexible memory decision making also applies to chronic conditions and whether we can leverage that flexibility to improve cancer immunotherapy.
Resolving uncertainty surrounding how and when memory cells form could help improve vaccine design and therapies that boost the immune system’s ability to provide long-term protection against diverse infectious diseases.
Kathleen Abadie was funded by a NSF (National Science Foundation) Graduate Research Fellowships. She performed this research in affiliation with the University of Washington Department of Bioengineering.
Elisa Clark performed her research in affiliation with the University of Washington (UW) Department of Bioengineering and was funded by a National Science Foundation Graduate Research Fellowship (NSF-GRFP) and by a predoctoral fellowship through the UW Institute for Stem Cell and Regenerative Medicine (ISCRM).
Hao Yuan Kueh receives funding from the National Institutes of Health.
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Stock indexes are breaking records and crossing milestones – making many investors feel wealthier
The S&P 500 topped 5,000 on Feb. 9, 2024, for the first time. The Dow Jones Industrial Average will probably hit a new big round number soon t…
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The S&P 500 stock index topped 5,000 for the first time on Feb. 9, 2024, exciting some investors and garnering a flurry of media coverage. The Conversation asked Alexander Kurov, a financial markets scholar, to explain what stock indexes are and to say whether this kind of milestone is a big deal or not.
What are stock indexes?
Stock indexes measure the performance of a group of stocks. When prices rise or fall overall for the shares of those companies, so do stock indexes. The number of stocks in those baskets varies, as does the system for how this mix of shares gets updated.
The Dow Jones Industrial Average, also known as the Dow, includes shares in the 30 U.S. companies with the largest market capitalization – meaning the total value of all the stock belonging to shareholders. That list currently spans companies from Apple to Walt Disney Co.
The S&P 500 tracks shares in 500 of the largest U.S. publicly traded companies.
The Nasdaq composite tracks performance of more than 2,500 stocks listed on the Nasdaq stock exchange.
The DJIA, launched on May 26, 1896, is the oldest of these three popular indexes, and it was one of the first established.
Two enterprising journalists, Charles H. Dow and Edward Jones, had created a different index tied to the railroad industry a dozen years earlier. Most of the 12 stocks the DJIA originally included wouldn’t ring many bells today, such as Chicago Gas and National Lead. But one company that only got booted in 2018 had stayed on the list for 120 years: General Electric.
The S&P 500 index was introduced in 1957 because many investors wanted an option that was more representative of the overall U.S. stock market. The Nasdaq composite was launched in 1971.
You can buy shares in an index fund that mirrors a particular index. This approach can diversify your investments and make them less prone to big losses.
Index funds, which have only existed since Vanguard Group founder John Bogle launched the first one in 1976, now hold trillions of dollars .
Why are there so many?
There are hundreds of stock indexes in the world, but only about 50 major ones.
Most of them, including the Nasdaq composite and the S&P 500, are value-weighted. That means stocks with larger market values account for a larger share of the index’s performance.
In addition to these broad-based indexes, there are many less prominent ones. Many of those emphasize a niche by tracking stocks of companies in specific industries like energy or finance.
Do these milestones matter?
Stock prices move constantly in response to corporate, economic and political news, as well as changes in investor psychology. Because company profits will typically grow gradually over time, the market usually fluctuates in the short term, while increasing in value over the long term.
The DJIA first reached 1,000 in November 1972, and it crossed the 10,000 mark on March 29, 1999. On Jan. 22, 2024, it surpassed 38,000 for the first time. Investors and the media will treat the new record set when it gets to another round number – 40,000 – as a milestone.
The S&P 500 index had never hit 5,000 before. But it had already been breaking records for several weeks.
Because there’s a lot of randomness in financial markets, the significance of round-number milestones is mostly psychological. There is no evidence they portend any further gains.
For example, the Nasdaq composite first hit 5,000 on March 10, 2000, at the end of the dot-com bubble.
The index then plunged by almost 80% by October 2002. It took 15 years – until March 3, 2015 – for it return to 5,000.
By mid-February 2024, the Nasdaq composite was nearing its prior record high of 16,057 set on Nov. 19, 2021.
Index milestones matter to the extent they pique investors’ attention and boost market sentiment.
Investors afflicted with a fear of missing out may then invest more in stocks, pushing stock prices to new highs. Chasing after stock trends may destabilize markets by moving prices away from their underlying values.
When a stock index passes a new milestone, investors become more aware of their growing portfolios. Feeling richer can lead them to spend more.
This is called the wealth effect. Many economists believe that the consumption boost that arises in response to a buoyant stock market can make the economy stronger.
Is there a best stock index to follow?
Not really. They all measure somewhat different things and have their own quirks.
For example, the S&P 500 tracks many different industries. However, because it is value-weighted, it’s heavily influenced by only seven stocks with very large market values.
Known as the “Magnificent Seven,” shares in Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla now account for over one-fourth of the S&P 500’s value. Nearly all are in the tech sector, and they played a big role in pushing the S&P across the 5,000 mark.
This makes the index more concentrated on a single sector than it appears.
But if you check out several stock indexes rather than just one, you’ll get a good sense of how the market is doing. If they’re all rising quickly or breaking records, that’s a clear sign that the market as a whole is gaining.
Sometimes the smartest thing is to not pay too much attention to any of them.
For example, after hitting record highs on Feb. 19, 2020, the S&P 500 plunged by 34% in just 23 trading days due to concerns about what COVID-19 would do to the economy. But the market rebounded, with stock indexes hitting new milestones and notching new highs by the end of that year.
Panicking in response to short-term market swings would have made investors more likely to sell off their investments in too big a hurry – a move they might have later regretted. This is why I believe advice from the immensely successful investor and fan of stock index funds Warren Buffett is worth heeding.
Buffett, whose stock-selecting prowess has made him one of the world’s 10 richest people, likes to say “Don’t watch the market closely.”
If you’re reading this because stock prices are falling and you’re wondering if you should be worried about that, consider something else Buffett has said: “The light can at any time go from green to red without pausing at yellow.”
And the opposite is true as well.
Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
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