Thread by @ChayuDamsinghe

Why bad policy put us in this mess, a 🧵with examples.

#SriLankaCrisis #SriLankaEconomicCrisis #GoHomeRajapaksas #GoHomeGota

Before 2019, SL's annual gov revenue exceeded expenses similar to how if someone with a 130k salary, had 140k expenses and 60k in loan payments.

(1/25)

So this fellow (let's assume it's a guy), is short about 70k each month. He has to borrow it, 70k every single month. Obviously, that's stupid and not sustainable - because that means the 60k in payments he has, keeps growing each month.

So what does he do?

(2/25)

Does he find a second job to supplement his income (increase taxes)? Does he work harder to try and get a promotion (increase productivity)? Does he look at his expenses and realise, maybe I shouldn't be buying fancy cars (expressways) and phones (lotus towers)?

No lol

(3/25)

He tells his boss (oligarchs in SL), hey, I know paying my salary reduces your profit, so give me a 95k salary instead. So then, when you are richer boss (corporate profits rise), you can maybe give me more money yay!

Obviously that's ridiculous.

(4/25)

Remember his expenses? Some of it is actually good, eg- he's donating to a charity (pro-poor policies).

But some of it is bad, he's bailing out his friends who keep telling him "bro I have a great business idea" (eg SL Airlines loss), and of course, all the cars too.

(5/25)

Now he's taken a salary reduction, he has to borrow even more. But now, the credit bureau (rating agencies) look at his ridiculous financial decisions and say, what the hell, this fellow is stupid (downgrades). So now no bank lends to him (shut out of markets)

(6/25)

He says, "no bro, trust me I have a plan" and says, "when my boss gets rich, he'll be able to increase my salary even more" (hoping that GDP will increase tax revenue). But the boss uses the money to buy himself a new house, business expenses of course (unproductive GDP).

(7/25)

He struggles along, but then, he gets sick (pandemic). He needs money to pay bills. If he had his old salary, he could have managed, but now he's stuck.

Ah but wait! His rich family that spoilt him can just give him money! (CBSL printing money)

(8/25)

Of course, for legal reasons, he still has to "pay back" the money, but we all know he's going to just ask his mummy for money again for that (continuing to print money to repay debt)

But all is fine, he gets all the money he needs, and everything is amazing, right?

No

(9/25)

Another issue is not only his salary and expenses, but that he also has some dollar payments he needs to make. He has to pay for his Netflix after all (imports) and part of his "loan payments" are in dollars (yeah, just loans).

So he has to balance both (twin deficits)

(10/25)

Getting sick meant that his cousins who used to visit and give him a few dollars, don't turn up any more (tourism fall). Because his entire loan situation is terrible, his credit card limit is reduced (loss of confidence).

(11/25)

The only dollars he has is the 10% bonus in his salary which thankfully, he didn't reduce (exports) and the money he gets from his brother overseas (remittances). Oh and anything he can beg from his friends (bilateral support).

(12/25)

Now he's missing rupees for his expenses, as well as dollars for his expenses+loans.

So he thinks, hey, let me keep borrowing from my family for the rupees (budget monetization) and I'll focus on the dollar side for now.

But what does he do?

(13/25)

Does he talk to the bank and say, hey, I have all these loans I can't meet, I lost my income due to my own stupidity, this is what I'm going to do to fix it, can I have some relief? (IMF+restructure?)

No, of course not, why would you assume he has sense?

(14/25)

Instead, he says, I will only accept dollars in 100 dollar notes, don't give me small amounts (imperfect analogy to exchange rate pegging).

Obviously, noone believes in his lunacy, and he loses out on all the dollars he could have got.

(15/25)

His brother who sent him money? Now he sends less because why go through the hassle of sending him 100 dollar notes? (remittance falls)

His bonus? HR is a bit concerned and wants to withhold his bonus for a bit, but he goes in and steals it anyway (exporter conversion)

(16/25)

Everything is chaotic and the bank now confiscates his credit card (no foreign financing).

He screams conspiracy but well, it's all him

(17/25)

He had an RFC account with a few dollars in it, and now he's paying off his loans using that (reserves drawdown). It's almost over now.

Hey, what about my netflix? Can't I cut down on that? (Import bans)

(18/25)

The issue is that he sometimes uses his netflix just to stay sane (essentials). Sometimes needed for work (export inputs). His friends also use it so that they don't have to pay for it (import substitution raw materials).

So what can he even cut on? Nothing really

(19/25)

Remember all that money he was getting from his family? I mean, it's all rupees, so he can use it to get any subscriptions he likes right? (import demand rising)

(20/25)

But now he has even fewer dollars, and everyone thinks he's too risky to give even SOME dollars to.
So now they ask for a risk premium to even work with him (depreciation). He refuses, but of course, behind his back, his wife pay that premium anyway (black market rates)

(21/25)

Hey, his family just realised maybe giving him all this money is a bad thing! (stopping money printing)

Now everything sucks.

He loses his job for his terrible decisions (recession)

(22/25)

He can't watch his netflix comedy that keeps him from going insane (essentials shortage).

No one even wants to talk to him (collapse in confidence).

His wife pays whatever premium she can since she wants to eat after all (unofficial depreciation).

(23/25)

Remember, all this happened because he took the asinine decision to reduce his salary, because noone wanted to give him dollars after that (obviously, who would give any money to an idiot).

It got worse when he took free money from his parents and wasted it away.

(24/25)

He might not get out of this easily, but why should his stay-at-home wife and kids suffer?

They should get a divorce, struggle through difficulty and find a job, cut down expenses and do the things he never did. Maybe find a new husband too.

#GoHomeRajapaksas

(25/25)

Addendum:

Of course, his expenses were high from before 2019 too. But when you're in a fragile state, what absolute clown would go and do everything he can to make it worse?

Addendum: By forcing his friends to pay for their own netflix instead of mooching off him (let market forces work), he can cut down on his netflix cost without harming himself or his wife and kids.

Error correction: I've done a really stupid error here - our gov EXPENSES exceeded revenue, not the other way around. But that typo aside, everything else is accurate