Sri Lanka is deeply embroiled in a crisis. Fuel shortages have led to protests. Food protests have led to riots. The President fled the country and then resigned by email. A new President was just elected on Wednesday, July 20, but he is no outsider – he has been Prime Minister six times already.
The crisis appears to be the result of a convergence of factors, all hitting simultaneously in just the past couple of years: a collapse in tourism revenue due to COVID, greater fossil fuel expenses due to high global prices, and a catastrophic change in farming practices away from fertilizer-intensive agriculture to organic, “regenerative” practices, to name the biggest culprits.
But other underlying causes have been slowly unfolding for decades: the construction of coal-fired powered plants in a land that did not previously have them, ports and other infrastructure built with foreign money, and a government that has seemed indifferent to, if not actively complicit in, the growth of the country’s problems.
How did the country get to this point? What are its options going forward? What can other parts of the world learn from their example? Let’s start by looking at the big picture…
An Island-Wide Overview
Sri Lanka is an island nation off the southeast tip of India that sits along some of the world’s busiest maritime trading routes, connecting East Asia to the Middle East and Europe. As a result, it is a trade-driven economy, where imports and exports of goods and services, as a percentage of gross domestic product, are more than double the level of the United States.
With a population of 22 million, its economy has been growing in recent years, with GDP per capita going from less than half the world average in 1980 to about 75% of the world average by 2018.
The biggest exports are clothing apparel (more than 40% of exports), tea (11%) and rubber (8%). Combined, these three categories of products make up about 60% of Sri Lanka’s exports. The largest single category of imports are ‘Fuels and mineral oils’, making up over 13% of imports.
Combined, product imports of about US$16 billion in the years prior to COVID exceeded product exports ($11 billion) by about $5 billion. But tourism made up much of the difference, with service exports exceeding imports by about $4 billion. And then COVID hit. Over just a few months, the disruption of tourist travel caused tourism revenue to collapse by more than 80%, severely affecting the country’s income balance.
Meeting the Demon at the Crossroads of Pandemic, Organic Farming, and Energy Prices
COVID’s financial effects on tourism spread to the general economy, profoundly affecting the agricultural sector. In an effort ‘to become the world’s first 100 percent organic food producer’ and to preserve foreign currency reserves, in June 2021, the government banned several key imports, including “fertilizer and pesticides… vehicles and spare parts”. According to Aljazeera, “the tea crop hit a record 160 million kilos (352 million pounds) in the first half of 2021, thanks to good weather and old fertiliser stocks but the harvest started falling in July.” (Organic food revolution in Sri Lanka threatens its tea industry )
“The ban has drawn the tea industry into complete disarray,” Herman Gunaratne, a master tea maker who advised the government on its ‘organic revolution’, is quoted as telling Aljazeera in September 2021. “The consequences for the country are unimaginable.”
Regrettably, the people of Sri Lanka no longer need to imagine what those consequences might be, as they came quickly. Within months, tea exports had fallen about 20% to their lowest levels in over twenty years. (Sri Lanka tea exports lowest in 23 years) Rice production dropped 20% in six months. Sri Lanka used to be self-sufficient in production of rice, a staple food, but now they must import it. (Sri Lanka’s organic farming disaster, explained)
The Aljazeera report adds that “organic tea costs 10 times more to produce and the market is limited”. In studying disruptions, RethinkX has found that a 10X difference in price for the same product or service has always resulted in the cheaper alternative rapidly replacing the costlier one, greatly expanding the overall market in the process. Unfortunately in this case, the government’s agricultural policy was trying to do the exact opposite: replace a cheaper technology with a more-expensive one, which would likely significantly reduce the size of the market.
In Sri Lankan mythology, the dog-faced demon Maha Sona haunts graveyards, the intersections where three roads meet, and other spooky places to find human prey, who he kills by crushing or by afflicting illness. Now Sri Lanka is both crushed and affected by a deep illness. The crossroads where it met Maha Sona is the one where the COVID pandemic, organic farming, and dependence on low fossil energy prices meet.
With their main service industry (tourism) hobbled, and one of their main product export industries (tea) in crisis, Sri Lanka found it increasingly difficult to pay for fuel imports, in terms of not only oil products and gas for vehicles and cooking, but also coal to produce electricity. Even worse, all of these energy commodities have seen sharp rises in price in recent months.
Sri Lanka got no electric power from coal until they built a coal-fired power plant in 2011, and then expanded it in 2014, until coal constituted about 25% of the island’s electricity production, in a country with better solar power production potential than Panama, Portugal, or Greece.
Combined, these crises related to the diminishing returns in the incumbent industries, domestic political and economic mismanagement, and geopolitical bottlenecks, have proven too much to handle. The results: riots, economic chaos, and political disorder.
Where to from here?
It is understandable why Sri Lanka did not invest heavily in solar power in 2011, when panel prices were more than five times higher than they were in 2021. In all fairness, the additional coal-generated power served them well in that time. In 2020, 100% of Sri Lankans had access to electricity, compared to about 85% ten years prior. Tourism (which demands ample and stable power) boomed. So did the apparel manufacturing industry (which also demands ample and stable power). Tea exports were up in that time too. So were per capita incomes in general.
But now the system has come crashing down and in this crisis, the people of Sri Lanka have the opportunity, even the imperative, to remake their electric grid, agricultural policies, and transport system.
Sri Lanka’s unprecedented economic collapse thus provides us a window into what can happen when a society does not understand or respond to the unfolding energy, transport and food disruptions, and how they are at once accelerating the obsolescence of incumbent industries, while also creating new opportunities as they rewrite the economic and geopolitical landscape. What is happening to Sri Lanka serves as a warning to other societies.
The country has only two real choices:
1. Remain dependent upon foreign imports of fuel and fertilizer, and hope that the pandemic disappears, that energy prices drop, and that life quickly returns to how it was a few years ago, almost by magic.
2. Move toward energy and food independence by building a fossil-fuel-free energy system based on solar power, wind power and batteries (SWB), and use its clean energy to produce fertilizer and electrify the nation’s road transportation.
The most important insight here is that option 2 does not entail a simple one-for-one substitution, but a completely new system free from the scarcity-driven constraints of extraction-age industries, paving the way for a new era of abundance.
RethinkX’s research shows that a 100% SWB system optimized using the Clean Energy U-Curve will have 3 to 5 times as much generating capacity as today’s grid. By designing the system to get through the worst times of the year, it will produce a surplus of electricity throughout the rest of the year – to electrify transportation and other forms of energy use. And, crucially, all of that surplus electricity will be virtually free because solar panels generate power at near-zero marginal cost. We call this huge surplus of clean, nearly-free energy Super Power, and it is going to change everything – not just in the energy sector, but across every value chain energy touches throughout the global economy.
For Sri Lanka, there are some specific benefits of harnessing a 100% SWB system: for example, SWB allows hydrogen gas to be produced from water electrolysis, rather than from natural gas (methane) as the starting material. And hydrogen is the key element needed to make ammonia fertilizer.
Ammonia is made from nitrogen and hydrogen and we get the nitrogen from the air. Currently, the hydrogen comes mostly from natural gas. Natural gas (methane) is carbon and hydrogen. To produce ammonia fertilizer, then, we keep the hydrogen and release the carbon in the form of carbon dioxide, which contributes to climate change.
But in a 100% SWB system generating a huge surplus of clean nearly-free energy, we can split water (H2O) to get hydrogen (and put oxygen into the atmosphere instead of carbon dioxide). SWB Super Power therefore can lay the foundation for creating abundant fertilizer, cheaply and efficiently, eliminating expensive natural gas and eliminating carbon dioxide emissions from fertilizer production.
For Sri Lanka, this would mean not only economic stability and independence from expensive foreign imports, but also a return to the time, as it was not long ago, when the people of Sri Lanka were more in charge of their own destinies than they are buffeted by every gale of international chaos.
Embracing the clean disruption of energy, food, and transportation will not be expensive, but rather it will save Sri Lanka billions of dollars. It would mean more energy than ever before, cheaper than ever before. It would mean cheap, locally-produced fertilizer. And it would mean cheap, clean transportation.
Sri Lanka has a difficult road ahead, and it will need international assistance to resolve the current crisis. But rather than just return to the old energy, food, and transportation system whose dependencies on foreign imports made it vulnerable in the first place, the country now has an extraordinary opportunity to choose a brighter path forward.
By embracing the disruptions of energy, food, and transportation, Sri Lanka can rebuild around new, clean technologies that localize production and foster independence instead. The new technologies will not merely replace older, dirtier ones on a one-to-one basis, but will form an entirely new system that is cheaper, cleaner, and more resilient. By investing in the energy, food, and transportation systems of the future instead of the past, Sri Lanka can seize opportunity amidst this crisis to lay the foundation for a new and lasting prosperity.