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Lessons from Sri Lanka

The economic situation in Sri Lanka is so dire that millions of people have taken to the streets, forcing the president to flee the country. For other economically struggling, heavily indebted developing countries, the moral of the story is that moderate pain now is better than severe pain later.

WASHINGTON, DC – A tragedy is unfolding in Sri Lanka. Citizens must queue for food and pharmaceuticals, vehicle owners cannot fill their tanks, and there have been rolling power outages. The economy is paralyzed, and because the country’s debts are already unsustainable, it cannot borrow. The country is suffering the world’s worst economic crisis since World War II.

The situation is so dire that millions of people have taken to the streets. The president has fled the country, and now parliament has elected a new, but unpopular, replacement. If all goes smoothly (a big if given the events of recent weeks), the International Monetary Fund can come to Sri Lanka’s aid with a rescue loan package (allowing for the purchase of essential imports) and a program to achieve sustainable fiscal, monetary, and exchange-rate policies.

Sri Lanka’s plight serves as a lesson to other governments. When a country’s economic problems are obviously becoming insurmountable, postponing a reckoning through various piecemeal measures will only make matters worse in the end.