Did ESG really topple the government of Sri Lanka?

The recent and dramatic events in Sri Lanka have led some to allege that the country fell under the spell of “ESG”, “Green Terrorists”, and other interesting phrases, leading to the collapse of the national government and the flight from the country of its President. While there is every reason to point to the ban on chemical fertilizers as a contributing factor to the drama in the streets, ESG principles (Environmental, Social, and Governance) most assuredly did not collapse a national government.

The Sri Lankan government brought its collapse upon itself, following decades of fiscal and economic mismanagement accelerated by a rise in authoritarian control of the State. Although he won office in a democratic election, President Gotabaya Rajapaksa promptly consolidated power in the family by appointing his brother – coincidentally, the former President – as Prime Minister. (In the US we call this nepotism, not democracy.) The President then introduced a proposal to change certain Constitutional provisions which would have had the effect of consolidating power in the Presidency while diminishing the inherent checks-and-balances of a strong legislative and legal structure. This led an already restive and angry population, tired of repression, to become ripe for mobilization.

Reports by the World Bank and Cornell University identify three issues which played a decisive role in Sri Lanka’s collapse: a foreign exchange crisis (the national coffers were almost depleted); a high external debt burden complicating the exchange rate crisis, and the shock value of the too-rapid introduction of a ban on chemical fertilizers.

Dealing quickly with the first two – the foreign exchange crisis in turn stems from the ongoing issues of terrorism in Sri Lanka (a 2019 attack had virtually overnight collapsed tourism, a key source of foreign exchange). The COVID pandemic continued to devastate tourism, while at the same time the government turned to its foreign exchange reserves to service its foreign debt obligations, thereby draining the coffers.

Turning now to the nub of the issue, the impact of the government’s so-called embrace of ESG principles. Let me be clear – there was no wholesale embrace of ESG principles. Had there been, regulations also would have been promulgated regarding salaries and working conditions for rural laborers, government institutions charged with enforcing such regulations and protecting workers’ rights would have been empowered, and the general working conditions on Sri Lankan farms would have been noticeably improved. None of that happened.

Rather, in what appears to be an attempt to augment agricultural exports (a source of foreign exchange) and perhaps position Sri Lanka to renegotiate some of its IMF and World Bank financial obligations in exchange for its excellent emissions rating, the President decreed that chemical fertilizers were banned and only organically farmed produce would be acceptable.

History clearly shows that any policy, when introduced abruptly, without proper preparation and support, will have a shock value. History also clearly shows that a shock of this sort to a major element of an already fragile economy with underlying systemic issues will almost certainly have an extremely negative effect. And indeed, this was the case in Sri Lanka.

However – inflation, fuel shortages, excessive foreign borrowing and the depletion of foreign exchange reserves – the real culprits in the Sri Lankan problem – had absolutely nothing whatsoever to do with ESG principles.

So therefore, the answer to the question is “No, ESG did not collapse Sri Lanka’s government.”

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10 responses

  1. Stephen Lautens Avatar
    Stephen Lautens

    A great inaugural article from Mel Sanderson, Professor at the Thunderbird School of Global Management in Arizona. Melissa served as a senior diplomat, trained in cultural and linguistic communications, including as Charge d’Affaires in charge of the US Embassy in Kinshasa, Democratic Republic of the Congo. Looking forward to reading more insights from her as a regular contributor to InvestorIntel.

  2. tracy weslosky Avatar
    tracy weslosky

    Brilliant. Thank you Mel for your commentary, and welcome to InvestorIntel.com!

  3. Don Avatar

    But actually the ban on chemical fertilizers was the problem. All the other attributes were there before and after. One can always point to this that or the other characteristic. However, the the claim that it was THE WAY the ban was implemented was the problem is absurd. ESG incentives hang as carrots for any country to grab at whether democratic or not. Moreover, banning chemical fertilizers whether done slowly or quickly, whether communicated more or less would have caused the same outcome. EY published a report just last praising Sri Lanka’s ESG initiatives. Sri Lanka banned and partially lifted the ban on nitrogen fertilizers. Yes there is much corruption in Sri Lanka and ESG is just an additional tool introduced that assist the corrupt in generating payouts. The very nature of ESG is top-down and is not grassroots driven economics. It is insensitive to price discovery or open market movements. That is why is failed and will continue to fail again and again. ESG is a bubble. Short sellers are starting to focus on ESG funds the same way they focused on EV startups and SPACs.

  4. Raj Avatar

    I don’t agree to this report. Ms Sanderson should have done a proper research to find out the real reason as to why Sri Lankan economy collapsed instead of making assumptions by reading someone else’s reports.
    Reason for shortage of foreign reserves were due to the Rajapaksha regime looting public funds and taking Dollars out of the country over a period of 10 years. (according to STAR organisation, Stolen Money Recover Initiative, Rajapaksha family has stollen USD30 billion from 2005 till 20014) Same way the top layer civil servants were also involved in looting the public funds (over US dollars 50 billion) and investing in other countries. These people have been working with national banks to move money out and setting up offshore account in many countries, mainly in Seychelles.
    2019 the world economic index showed Sri Lanka as a fragile nation with a score of somewhere in the region of 86 pnts. In 2019 Easter attack temporarily effected the Tourism Industry, however 2020 Covid pandemic brought the Tourist Industry to a halt. This was the third biggest foreign earnings to the country. But due to Covid migrant workers in the Middle East were asked to leave and that was the major foreign income generator for Sri Lanka and that effected badly to the overall economy.
    In 2019, following his election as President, Gotabaya Rajapaksa’s administration introduced swingeing tax cuts to personal and corporate taxation, as well as to VAT; the latter being slashed from 15% to 8%. The consequence was inevitably a dramatic and immediate decline in tax revenues (which were already at a low level ) from 11.6% in 2019 to 8.1% of GDP in 2020. By 2021 the fiscal deficit had swollen to over 12% of GDP – roughly double what it had been in the five years pre-2019. Latter part of 2020, credit rating agencies had downgraded Sri Lanka to near-default status with the result that the country was largely excluded from international capital markets. Yet, despite losing access to international capital markets, Sri Lanka continued to pay sovereign bondholders by drawing down foreign reserves, even settling a bond payment of $500 million in early 2022. In fact, it has been alleged that businessmen connected to the government benefitted from International Sovereign Bond payments as bonds were sold to them at a 50% discount even as they subsequently reaped a 300-400% return simply through quarterly interest payments. ( Basically alleged fraud committed in ISB payments). By this time the Central Bank was running out of foreign reserves and had less than a Billion dollars in the CB. Importers could not import goods due to dollar shortage, this was the real reason why Rajapaksha and the Civil Servants decided to ban Fertiliser importation and force the framers to use compost. It was a massive cover up by all the top Civil Servants including Central bank officials. Worst thing is no one in Sri Lanka knew how to make compost, the government took advantage out of this situation again and started to supply river mud (looks like peat but peat) packed in 50 kg bags to farmers at price of USD 10, Rajapaksha business henchmen became overnight milliners. This is what contributed to the Sri Lankan food shortage. The usual rice harvest was reduced by 60% due to this issue. Although the President Rajapaksha is no longer there, the corruption has not stopped, the new President Ranil Wickramasinghe is continuing what Rajapaksha’s left behind.

    1. panaka_09 Avatar

      Thank you sir. You should have written this article. I am watching the development of the consequences leading to the current situation and your analysis is 110% to the point.

  5. H Smith Avatar
    H Smith

    Propaganda – ESG played a large role in Sri Lanka and is playing a role in Germany’s energy problems

    1. Ron Avatar

      Agreed 100%.

  6. Simple Avatar

    “While there is every reason to point to the ban on chemical fertilizers as a contributing factor to the drama in the streets, ESG principles (Environmental, Social, and Governance) most assuredly did not collapse a national government.

    The Sri Lankan government brought its collapse upon itself, following decades of fiscal and economic mismanagement accelerated by a rise in authoritarian control of the State.”

    This is ESG. Authoritarian Control of the State.

    No one should follow your reporting. You destroy your own argument with your argument. Congratulations, you have failed up.

  7. Ted Kazcyinsky Avatar
    Ted Kazcyinsky

    How, pray tell, did Sri Lanka have such a high ESG score when it was going bankrupt? Perhaps ESG is a farce designed to force compliance and add barriers to entry.

  8. Francois Avatar

    ESG was the drop that made the vase overflow, the last straw. Even if it Sri Lanka had multiple blows and were in a bad situation, they tried to use ESG to improve themselves and it backfired. If ESG didn’t exists, they would not have collapsed so abruptly, end of story. ESG is corporate evil and about controlling ideologies. I don’t agree with the biased opinion of the author.

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