Sri Lanka is the first domino to fall in the face of a global debt crisis | Sri Lanka


The departure of Sri Lankan Prime Minister Mahinda Rajapaksa follows weeks of protests and a deepening crisis. There is no bankruptcy system for states, but if there was, the South Asian country – down to its $50m (£40m) in reserves – would be the first to use it.

A team from the International Monetary Fund (IMF) this week began working with officials in Colombo on a bailout package that will include a tough reform package as well as financial support. But as the IMF and its sister organization, the World Bank, know very well, this is not just about the mismanagement of an individual country. They fear that Sri Lanka is the canary in the coal mine.

Around the world, low- and middle-income countries are grappling with a three-pronged crisis: the pandemic, the rising cost of their debt, and the rising food and fuel prices caused by the invasion. of neighboring Ukraine by Russia.

World Bank President David Malpass explained his concerns at the organization’s spring meeting last month. “I am deeply concerned about developing countries,” Malpass said. “They face sudden increases in energy, fertilizer and food prices, and the likelihood of interest rate increases. Everyone hits them hard.

The UN has sought to quantify the problem. Its trade and development arm – UNCTAD – said in a recent report that 107 countries were facing one of three shocks: rising food prices, rising energy prices or tightening. financial conditions. Of these, 69 faced all three: 25 in Africa, 25 in Asia and the Pacific, and 19 in Latin America and the Pacific.

The list of countries that appear vulnerable is long and varied: the IMF has opened bailout talks with Egypt and Tunisia – both major wheat importers from Russia and Ukraine – and with Pakistan, which has imposed power cuts due to the high cost of imported energy. Sub-Saharan African countries closely watched are Ghana, Kenya, South Africa and Ethiopia. Argentina recently signed a $45 billion debt deal with the IMF, but other Latin American countries at risk include El Salvador and Peru.

For months it was speculated that Turkey would be the first domino to fall, but despite a 70% annual inflation rate and an unconventional approach to economic management, it still holds. Unlike some other threatened countries, Turkey is able to feed its own population.

Richard Kozul-Wright, Director of the Globalization and Development Strategies Division at UNCTAD, said: “Countries have internal problems, but most shocks have nothing to do with them. The pandemic and the war have nothing to do with these countries, but have led to a huge increase in borrowing.

The World Bank said nearly 60% of low-income countries were over-indebted or at high risk before Russia invaded Ukraine, while the cost of servicing loans is rising sharply, especially for countries that have accumulated foreign currency debts. . The war in Ukraine has led investors to seek the safe haven of the US dollar, driving down the value of emerging market currencies. Higher interest rates from the Federal Reserve, the US central bank, have compounded the problem.

Emerging market crises are nothing new, but Kozul-Wright said the international community was ill-prepared to deal with a looming debt problem. “The system can only deal with these issues on a country-by-country basis,” he said. “But these are systemic issues and there is currently no way to address them systemically.”

This can be expensive. Sri Lanka is the first country to buckle under the mounting economic pressures unleashed by the war in Ukraine. It is unlikely to be the last.


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