The Canary in the Coal Mine?

The chaos in Sri Lanka

Sri Lanka is in turmoil. The mob have stormed the residence of the country’s president, who has subsequently agreed to step down. The catalyst was sharply rising food prices, a phenomenon we see pretty much everywhere (Exhibit 1). Therefore, one is entitled to ask the question – is Sri Lanka ‘just’ the canary in the coal mine, telling us what to expect in many other countries in the months to come?

The simple answer to that question is “no”, although things are not that simple. I will explain later why the case of Sri Lanka is not an isolated incident, but let me start with Sri Lanka. Rising food prices have indeed acted as a catalyst, but they are not the root cause. Years of fiscal mismanagement and corruption, endless borrowings (mostly from China), large fiscal deficits and a tendency to fund those deficits by printing money are the true underlying causes of the current mayhem. The fact that the tax rate has been lowered (rather indiscriminately, I may add) has only made an already difficult situation worse.

Exhibit 1: Real Global Food Price Index , 2014-16 average = 100
Source: McKinsey & Company

Why we shouldn’t ignore what is happening in Sri Lanka