Debtor luck next time? Meeting Sri Lanka’s new president

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Hello and welcome to the Intelligence from the Economist. In London, I'm Jason Palmer.

And in New York, I'm John Fassman. Every weekday we provide a fresh perspective on the events shaping your world.

Turkey has been limping from one currency crisis to the next since 2018. Foreign investors have cashed out. Inflation has hit 80%. Yet somehow the economy has kept going and growing. We ask how the country keeps defying economic gravity.

And at the age of 96, Britain's Queen Elizabeth is slowing down. This year, her crown attended Parliament's opening without her. So Prince Charles has taken on more royal duties. We ask how well he's been able to follow in his mother's footsteps.

But first. For years, Sri Lanka's troubles had gone from bad to worse. Mired in a debt crisis, its citizens endured shortages of food, fuel and basic services. All while a dynastic family clung to power, the Rajapaksas. Last month, after extended protests, demonstrators stormed the presidential palace, refusing to leave until the president had resigned. The fall of Gotabaya Rajapaksa was cheered by thousands on the streets of the capital, Colombo. And since then, a new president has been sworn in. Five time prime minister and now President Ranil Vikramasinghe is charged with turning the country around. Since he took office, the violence has dwindled and Colombo is a far more peaceful place. The new president is also taking steps to address Sri Lanka's colossal debt, announcing yesterday that he would ask Japan to help open discussions with Sri Lanka's main creditors. The country has a mountain to climb, but things are at last starting to look up for its people.

The last time I visited the President's office, the president and indeed most government officials were not in it. Instead, the front had been occupied by protesters. They'd set up a little library with books that had been donated by members of the protest movement from all over the country. We had to climb over a little wall to get into the grounds and then climbed up the stairs into the building.

Leo Morani is our Asia editor.

This time was quite different. This time there was a police check post outside where we showed our credentials. We walked in with escorts and guards. We went up a little lift and we were shown into the President's office, which was occupied this time by the President himself. The difference between the first visit and the second visit were like night and day.

So it sounds as if the presidential office itself was different. The feeling in Colombo, the capital, was different. In the country as a whole was different. What brought it about so quickly?

So the President says there's three main things that have helped bring about this change. The first was just reintroducing law and order. People were tired of the chaos. People were tired of not being able to go anywhere or do anything, of not knowing who's running the country, of not really having a government.

A lot of people are losing out on small traders, people who couldn't go to work and they wanted to see there was law and order in the country. They want to get back to work. That's the main thing. They had complaints about the government, but when President Gotabe left, they're willing to give another chance and the election.

So political stability and law and order are one thing. The second thing which is really important was dealing with the fuel crisis. Now, it's not as if Sri Lanka has magically solved its money problems. Cash is not flowing into its coffers. It's not buying fuel from everywhere. But certain things have helped. There is definitely more fuel coming in than there was the last time we were there. But equally, it's just the purchase of fuel is better organized. Last time there were days long queues. You would go down the street and there were cars or auto rickshaws stretching as far as the eye could see. Now what they've done starting August 1st, is introduce a QR code system so every motorist Depending on the type of vehicle, has a certain quota of fuel that they're allowed per week and as a result they don't have to just wait indefinitely in lines. And the third thing he says is that people wanted honesty.

Basically you didn't tell them the truth. You didn't tell them that we are going for a hard time.

The last government pretended like there wasn't really a problem for the longest time until they had no choice but to admit there was a problem. But even then they tried to carry on as usual. They thought they could stay in power. Mr. Vikramasinghe has done is be very honest with people. Even before he became president, when he was Prime Minister, he said, look bankrupt, were going to have a tough time. After becoming president, he's reiterated that things are going to be hard, things are going to get difficult before they get better. And in that way he thinks people are better prepared to accept some of the difficulties they will have to endure.

So there's this sense of calm, of order, of understanding who's running the show? What is it now that he can do? What are the problems he faces now that at least there's some order?

The President's first task is to complete negotiations with the IMF so that some money can flow into the country, first of all. Secondly, so that there's a bit of investor confidence. And thirdly, it gives him a basis with which to then go and negotiate with private lenders. He also has to deal with bilateral lenders, of whom China and Japan are the biggest. India is another big one. All of this helps increase business confidence and helps bring the economy to something like working again. China, of course, is a sticking point. China has lent lots and lots of money to poor and middle income countries. Many of them are now in trouble, often for similar reasons. Spiking commodity prices, rising interest rates, weakening currencies due to a strengthening dollar, and so on and so forth. However, China recently agreed to write off some of the money owed to it by Zambia. That's given a lot of hope to countries around the world that this has set a precedent. But the President cautions that the same model might not apply to Sri Lanka because Zambia is a low INC country while Sri Lanka, despite all of its troubles, remains a middle income one. All of these things he has to get through purely on the economic front.

And what about beyond that?

The President knows that certain reforms have to be made. A deal with the IMF is not going to happen. Otherwise taxes need to go back up in 2019. The previous president had slashed them, which was one of the things that contributed to the crisis that Sri Lanka finds itself in. The tax base needs to be widened. New taxes need to be introduced.

We'll have to come and tax the capital. That will bring some of the income, the revenue in by about mid next year. It will go beyond the tax rate we have in 2018, widening further, and they keep widening gradually.

He also wants to sell off state owned enterprises such as the national airline, government owned insurance company, the government stake in the telecoms firm. He wants to bring in a big bankruptcy law. So there's all of these things for which he needs Parliament support. But these are politicians we're talking about, right? And they're concerned with their own careers. They're concerned with keeping their seats in Parliament. And not all of them see why they should share the responsibility for the pain they're about to inflict in Sri Lanka. So this will be another difficult task. The President needs to do all of this, and then he's also being more ambitious.

It's not worth dragging this out for a long time. Take a deep cut, but ensure that you can get recovery going by people. When you make changes, make it deep. Take all the changes you have to make and then allow it to come up.

He doesn't just want to bring Sri Lanka back to the level it was before the crisis. He's hoping to use the crisis as an opportunity to put in place a whole bunch of reforms that will also boost growth, boost competitiveness, boost exports, and spur the Sri Lankan economy onto ever greater heights.

It all sounds very, very ambitious. But even before the acute crisis, Sri Lanka did have all of these sort of crises. How doable is this giant program of reform?

Some of the people we spoke to in Colombo, economists and other sorts, were skeptical about much of this. They were skeptical about the timeline, that a deal with the IMF will be reached by September, as the President hopes it will. They're skeptical that he can gain the support of Parliament for all of the things he wants to do. He's also got to take people along with him and it cannot be ruled out that at some point they might come back onto the streets. The President talks about turning Sri Lanka into another Singapore. Now, that's the sort of thing you will hear from a lot of politicians and policymakers across Asia. He himself knows that. He admits that perhaps a better start would be to get to the levels of, say, Thailand or Malaysia or Vietnam. But most Sri Lankans would probably be happy getting back to the levels of prosperity they enjoyed in about 2019, before the various crises started for the country.

Leo, thanks very much for joining us.

My pleasure as always, Jason.

Turkey is a country of economic conundrums. It was one of the few big economies to grow at all in 2020. Its manufacturing sector has expanded. But all this growth belies a troubling trend. Inflation is sky high and living standards are plummeting. Products that used to be staples like fruit and meat have quickly become luxuries. Conventional wisdom dictates that monetary authorities raise interest rates to rein in the cost of living. But yesterday, Turkey's central bank shocked economists by announcing a cut of 1 percentage point in the hours following the lira hit its lowest level in months, all while bank officials talked of maintaining growth. Economists the world over are now scratching their heads at the decision.

President Erdogan is the world's first practical modern monetary theorist.

He is putting modern monetary theory into effect. So far, it hasn't worked very well for him or for the odd as the decision seems. In some ways, the move should come as no great surprise. It follows an economic plan laid out by President Recep Tayyip Erdogan, the man who has turned conventional wisdom on its head.

The most salient thing about Turkey's economy right now is inflation is close to 80%, and it's got there pretty quickly. About six or seven months ago, it was running at about 20%.

John O' Sullivan writes about economics for the Economist.

Generally, when you have inflation of these sorts of rates, you get an economy that just runs into the buffers. What's very interesting about Turkey is that real GDP was up 11% last year. Industrial production was very strong in the year to make. So despite this very, very high rate of inflation, Turkey's real economy is actually, it seems, still growing quite strongly.

So tease that out for us. Why is Turkey's economy still growing despite this enormous inflation rate?

Turkey has always been a fairly high inflation economy. So this is not entirely new. You had inflation, these sorts of rates right through the 1990s, for example. And so companies in particular are used to to dealing with this kind of monetary instability, so they're able to adapt to it fairly quickly. On the consumer side, I think the picture is going to be a lot more difficult when the lira, that is Turkey's currency, fell towards the end of last year, when Turkey Central bank started cutting interest rates, I think a lot of Turkish consumers could see what was coming down the pipe. They know that when the lira goes down, inflation goes up, and you need to find ways to protect your wealth against that inflation. That's coming your way. And one of the ways of protecting yourself is simply to buy a lot of durable goods, buy cars, buy white goods. These things will hold their real value. So that explains a lot on the spending side. And there's a third aspect to this, which is the falling exchange rate. The weak lira has actually been very good for exports. So exports have been booming. And part of that story is the difficulties that we've seen and reported on in China, supplying the rest of the world with various goods, all the bottlenecks because of COVID and so forth. Turkish businesses are certainly seeing some additional demand from companies who are using Turkey as an alternative source of supply to China.

And, John, we've discussed President Erdogan's unorthodox economic beliefs before on the show. Just remind us what they are and how they're affecting the situation.

So President Erdogan, originally Prime Minister Erdogan, has been around in Turkish national politics for nearly 20 years now. And over time, he has first of all bullied and latterly directed the central bank towards keeping interest rates unduly low. And he has been quite insistent on his rather unorthodox economic theory that it's high interest rates that cause high inflation. Well, you could pretty much argue that the last six to nine months has been a test case of that Turkey, under Erdogan's direction, has cut interest rates and inflation has just completely exploded, really, in a matter of months. So the evidence seems to be not bearing out his theory, but nevertheless, he has rather doubled down on it. In an interview a couple of months ago, it decried people who believed that there was a link between interest rates and inflation as either illiterate or traitors. So the sense is that despite the evidence going rather against his theory, Erdogan is doubling down on that theory. This is very much against the global trend where inflation has gone up and interest rates are racing up pretty much everywhere. To catch up with it, Turkey is doing something rather different. It's a very strange experiment, and it doesn't seem to be working terribly well.

And presumably, despite the growing economy, inflation is having a real effect on people. Who's bearing the brunt?

Well, this is one of the really great evils of inflation, which is it arbitrarily redistributes wealth in ways that are really deeply unfair and socially corrosive. Relatively wealthy householders keep money in foreign currency deposits. They'll have gold coins, they'll have property, which is a reasonably good hedge against inflation. But the further you go down, the income scale, the more people do not have the ability to stop their wealth being eroded by inflation. The poorest people generally keep whatever savings they have in currency, and it's currency that's losing the value quickly. So the people who are pretty well off are buying things that either hold their value or even improve it, in the case of the dollar. And the poorest people just simply have their savings wiped away and are struggling ever harder to make ends meet.

And so what does this mean, do you think, for Erdoan's political future? He and his party are up for election in less than a year. Is inflation going to doom him, do you think?

One feels it ought to look, the opinion polls are pretty clear on this. The standard play for someone in Erdogan's position is what you might call a macroeconomic populist, which is growth at all costs. Don't worry about inflation, don't worry about external deficits, don't worry about budget deficits. When things go wrong, you blame foreigners. The polling that I've seen suggests that by and large, the Turkish population is not buying that there's a majority of people that hold him responsible for inflation, which isn't surprising given he's been pretty vocal about his theory of what causes it. And his AK Party is behind an alliance of six opposition parties in the polls. He himself loses in head to head polls against any plausible presidential candidate. So you would think things are looking not very good for Erdogan. The problem is no one can quite reconcile themselves to the idea that he will reconcile himself to that kind of defeat. And he has some form on this. He has locked up political opponents. He has done an awful lot to bully the media and suppress free speech. Most of the people we talked to for this longer piece on the Turkish economy did not want to be named. So it's not a very nice environment there. And Turkey is still struggling to get hold of foreign investment for a borrowing to cover their external deficit, their external fuel bill. If you look at Turkish assets, look at the stock market. It is relatively cheap pretty much compared to any emerging market, and emerging markets are generally cheap, but no foreigners are buying right now. It seems that the smart money is not yet convinced, notwithstanding the opinion polls, that he will go. He might lose, but he may not go.

Thanks so much for joining us today.

Thanks, John.

It's strange to imagine a world where Queen Elizabeth II doesn't rule over the United Kingdom. For the past 70 years, she's acted as a dutiful servant of God and a busy one. In 2011, she fulfilled a whopping 831 engagements, opening hospitals, waving to schoolchildren and so on. But in 2021, she managed just 184, which means the man due to be king is somewhat busier.

As Her Majesty Queen Elizabeth is getting older, she is doing less and less. And because she is doing less, then Prince Charles is mattering more.

Catherine Nixie writes about Britain for the Economist.

Monarchies really don't like regencies. A Regency is when someone just takes over and rules instead of the King or Queen, when they're incapacitated for some reason, but they are an inevitable part of any royal system.

Why the opposition to regencies?

Monarchies tend to hate regencies because they really spoil the royal myth. If it's tough persuading your people that you're God's chosen representative on earth, it's even harder yet to persuade them that you're just standing in for God's chosen representative for a bit while the other one is indisposed. The other reason that monarchies don't like regencies is that they rarely go well. England's regents and royal stand ins have, for example, managed to lose the nation vast amounts of wealth, the King they were supposed to be looking after, and on one particularly careless occasion, they managed to lose dominion in France.

So I have to ask, if monarchies hate them so much, why are regencies used?

They have to happen because it often happens that the monarchy can't rule or can't reign. And they used to happen because the monarch was too young to rule, and today it's likely to be because they're too old. We have a Regency act now. We didn't used to, but it's the 1937 Regency act and it states that a Regency can happen if it's decided that the monarch is, by reason of infirmity of mind or body, incapable for the time being, of performing the royal functions.

So does that mean, Catherine, that you are now living in a Regency?

No, it does not mean that we are yet living in a Regency, because behind the scenes, on a day to day constitutional basis, the Queen is continuing to be very much in charge. And that constitutional bit matters. Being Queen is not just about wearing yellow and waving at people in crowds. She has these powers. They're called royal prerogatives in the jargon, and loads of them barely matter at all. But there are some royal duties that actually do matter. For example, the nation would mind quite a lot if the Queen failed to appoint Prime Minister, or to dissolve Parliament, or to give royal assent to legislation. So she's still doing most of the important constitutional bits. What she's doing much less of is the hand waving, the flesh pressing, the meetings and greetings and all of that kind of stuff. But that's not actually that trivial, because that is what most people notice about their monarch. So what it looks like in public, as one of the constitutional experts I spoke to put it, is it looks like we have a shadow Regency.

So how is the shadow region, Charles living up to his mother's legacy?

Well, not always that well. Charles doesn't always do brilliantly when compared to his mother. He has some very august titles. His full title is Charles. His Royal Highness, Prince of Wales, Duke of Cornwall, Duke of Rothesay, Duke of Edinburgh, Earl of Chester, Earl of Carrick, Earl of. I think you say this Merioneth, but I might be wrong. Baron of Renvrew, Baron Greenwich, Lord of the Isles and Great Steward of Scotland. But he's not always seen as great as all that by his critics. And some people call him the Prince of Wales, as in somebody who's always wailing, complaining. And the criticism of Charles is sometimes cruel, so it can overlook his good qualities. Everyone says he works very hard and his environmentalism, which once looked like the hobby of a crank, is starting to look extremely prescient. But the criticism isn't totally baseless. He has done some breathtakingly silly things. One of the most recent was accepting money in a suitcase from a Qatari politician. And now there is no suggestion of wrongdoing by either party. But it didn't look that good. And that kind of thing undermines not just his authority, but that of the whole firm. I think while the Queen lives, it is really hard for Charles to compete with her. She has had an incredibly long and successful reign and few would begrudge her more rest. But they may feel more ambivalent about her stand in.

Catherine, thanks so much for joining us today.

Thank you for having me.

That's all for this episode of the Intelligence. The show's editors are Marguerite Howell and Chris Impey. Our sound engineer is Will Rowe, with help this week from Timo Sila. Our senior producers are Sam Westron, Jack Gill and John Jo Devlin. Stevie Hertz is our US Audio correspondent and our creative producer is William Warren. Our producers are Rory Galloway, Alize Jean Baptiste and Kevin Kors, with extra production help this week from Emily Elias and Elna Schutz. We'll all see you back here on Monday.