Sri Lanka is in the midst of an unprecedented economic crisis. This sparked massive protests and the president's resignation after fleeing the country. But other countries could be in similar trouble, according to the head of the International Monetary Fund.
“Countries with high debt and limited policy space will face additional pressure, and Sri Lanka is a warning,” IMF Managing Director Kristalina Georgieva said on Saturday (July 16). Day) said so. Developing countries have also experienced four consecutive months of capital outflows, putting their dream of catching up with advanced economies at risk,
she said. Sri Lanka is struggling to pay for critical imports for its 22 million people, including food, fuel and medicines, while struggling with a foreign exchange crisis. Inflation has soared by about 50 percent, and food prices are 80 percent higher than a year ago. Sri Lanka's currency, the rupee, has also fallen sharply this year against the dollar and other major global currencies.Many blamed former President Gotabaya Rajapaksa's disastrous policies on dealing with the economy, and the Covid-19 pandemic has only exacerbated its damage. Sri Lanka has accumulated huge debts over the years. Last month, it became the first country in the Asia-Pacific region to default on its foreign debt in 20 years. Officials have been negotiating a $3bn (£2.5bn) bailout with the IMF, but those talks have stalled again amid the political crisis.
But the world faces the same headwinds — rising inflation, soaring interest rates, currency devaluations, high debt and dwindling foreign exchange reserves — all affecting other economies in the region. China has been a big creditor to several of these developing countries, and can therefore control their fortunes in crucial ways. Still, it is largely unclear what the terms of Beijing's previous borrowings, and how those debts can be restructured.Alan Keenan, a researcher at the International Crisis Group, believes that China's fault lies in encouraging and supporting expensive infrastructure projects that have not yielded significant economic returns.
"Equally important is that they are politically active in supporting the Rajapaksa family's rule and policies... These political failures are at the heart of Sri Lanka's economic collapse, which is being remedied through constitutional changes and a more democratic political culture. Sri Lanka has never been able to escape its current nightmare before." Worryingly, other countries appear to be on a similar trajectory.
Laos:
The landlocked East Asian country with a population of more than 7.5 million has been at risk of failing to repay foreign loans for months. Now, fuel supplies have been further squeezed by higher oil prices due to Russia's invasion of Ukraine, pushing up food costs in Laos. An estimated one-third of the country's population lives in poverty. Local media reported long lines of people waiting to buy fuel, and said some families couldn't pay their bills. Laos' currency, the kip, has fallen sharply, having lost more than a third against the dollar this year.
Higher U.S. interest rates bolstered the dollar while weakening countries’ local currencies, increasing their debt burdens and making imports more expensive. Laos, already heavily indebted, is struggling to repay those loans and pay for imports like fuel. The World Bank said the country had $1.3 billion in reserves as of December. However, Laos' annual external debt will be about the same amount until 2025 - equivalent to half the country's domestic income. As a result, Moody's Investors Service last month downgraded the communist regime country to "junk," a level of debt considered at risk. China has provided Laos with huge loans in recent years to finance major projects, such as a hydroelectric power station and a railway. Last year alone, Beijing undertook 813 projects worth more than $16 billion, according to Lao officials who spoke to Chinese state media Xinhua. Sri Lanka's president flees six questions you need to know about the causes and consequences of the crisis Sri Lankan protesters storm the presidential residence, the president and prime minister announce their resignation,
According to World Bank data, Laos' public debt has reached 88 percent of its gross domestic product (GDP) in 2021, with nearly half of that owed to China. Experts point to years of economic mismanagement in the country. The Lao People's Revolutionary Party has been a one-party dictatorship since 1975. But Moody's Analytics said the strengthening of trade with China and the export of hydroelectric power were positive developments. “There is a silver lining in Laos to avoid falling into the danger zone and needing a bailout,” economist Heron Lim said in a recent report.
Pakistan:
Oil prices in Pakistan have risen about 90 percent since the end of May, after the government ended fuel subsidies. The country is trying to rein in spending while talking to the IMF to continue a bailout program. Rising prices are making it difficult for the economy. Annual inflation reached 21.3 percent in June, the highest in nearly 13 years. Like Sri Lanka and Laos, Pakistan also faces low foreign exchange reserves, which have been cut by nearly half since last August. The country has levied a 10 percent tax on big companies for a year to raise $1.93 billion in an attempt to narrow the government's overspending -- one of the IMF's core demands. "If these funds can be unlocked, other financial lenders, such as Saudi Arabia and the United Arab Emirates, may be willing to extend their credit lines," Andrew Wood, an analyst at S&P Global Ratings, told the BBC . Former Prime Minister Imran Khan, who has vowed to address some of these issues, has been ousted, although economic instability is not the only reason for it. Last month, a senior Pakistani government minister asked citizens to drink less tea to ease the country's import burden.China is again playing a role, as Pakistan reportedly owes more than a quarter of its debt to Beijing. "Pakistan appears to have renewed its one-to-one commercial loan facility with China, which has boosted its foreign exchange reserves, and there are signs that it will turn to China again in the second half of the year," Wood said.
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Bangladesh:
Inflation in Bangladesh hit an eight-year high in May at 7.42%. As reserves dwindled, the government moved quickly to curb non-essential imports, ease restrictions on currency exchange for the millions of migrants living abroad and reduce overseas travel by officials. “For economies that are dealing with current account deficits, such as Bangladesh, Pakistan and Sri Lanka, governments face serious resistance to increasing subsidies. Pakistan and Sri Lanka have turned to the IMF and other governments for financial support, S&P Global Ratings' sovereign analyst Kim Eng Tan told the BBC. "Bangladesh has had to re-prioritize government spending and impose restrictions on consumer activity," he said. Rising food and energy prices are threatening a world economy battered by the global pandemic. Now, developing countries that have long borrowed heavily in foreign debt are finding themselves particularly vulnerable to global shocks on weak foundations.
Maldives :
The Maldives' public debt has ballooned in recent years and is now well above 100% of its GDP. Like Sri Lanka, the global pandemic has hit an economy heavily dependent on tourism. Countries so reliant on tourism generally have high public debt ratios, but the World Bank says the island nation is particularly vulnerable to high oil prices because its economy lacks diversity. US investment bank JPMorgan said the resort is at risk of defaulting on its debt by the end of 2023.
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