Other Asian nations could be in danger « Khabarhub
COLOMBO: Sri Lanka is in the midst of a deep and unprecedented economic crisis that has sparked huge protests and seen its president resign after fleeing the country – but other countries could be at risk of similar problems, according to the head of the International Monetary Fund (IMF).
The BBC quotes IMF Managing Director Kristalina Georgieva as saying: “Countries with high debt levels and limited policy space will face additional constraints. Look no further than Sri Lanka as a warning sign.
She said developing countries had also seen sustained capital outflows for four consecutive months, jeopardizing their dreams of catching up with advanced economies, writes the BBC’s Suranjana Tewari.
Sri Lanka is struggling to pay for crucial imports like food, fuel and medicine for its 22 million people as it battles a currency crisis, according to the BBC report.
Inflation has soared by around 50%, with food prices 80% higher than a year ago. The Sri Lankan rupee has lost value against the US dollar and other major global currencies this year, he said.
Many blame ex-president Gotabaya Rajapaksa for mismanaging the economy with disastrous policies whose impact has only been exacerbated by the pandemic.
According to the report, over the years Sri Lanka has accumulated huge debt – last month it became the first country in the Asia-Pacific region in 20 years to default on its external debt.
Officials had negotiated a $3bn (£2.5bn) bailout package with the IMF. But those talks are currently stalled amid political chaos.
But the same global headwinds – rising inflation and interest rates, currency depreciation, high debt levels and dwindling foreign exchange reserves – are also affecting other economies in the region.
China has been a dominant lender to many of these developing countries and could therefore crucially control their destiny. Buy, it is largely unclear what Beijing’s loan terms have been, or how it might restructure debt.
According to Alan Keenan of the International Crisis Group, China’s fault is in encouraging and supporting expensive infrastructure projects that have failed to produce major economic returns.
“Equally important has been their active political support for the ruling Rajapaksa family and its policies… These political failures are at the heart of Sri Lanka’s economic collapse, and until corrected by constitutional change and a more democratic political culture, Sri Lanka is unlikely. to escape his current nightmare.
Worryingly, other countries appear to be on a similar trajectory.
The landlocked East Asian nation of more than 7.5 million people has faced the risk of defaulting on its foreign loans for several months.
Today, a rise in oil prices due to the Russian invasion of Ukraine has put further pressure on fuel supplies, driving up the cost of food in a country where an estimated one-third of the population lives in poverty.
Local media reported long queues for fuel and said some households were unable to pay their bills.
Laos’ currency, the kip, has fallen by more than a third against the US dollar this year, writes BBC’s Tewari.
Rising interest rates in the United States strengthened the dollar and weakened local currencies, increasing their debt burden and making imports more expensive.
Laos is struggling to repay these loans or pay for imports like fuel. The World Bank says the country had $1.3 billion in reserves as of December last year.
But its total annual external debt obligations are about the same amount until 2025, equivalent to about half of the country’s total domestic income.
As a result, Moody’s Investor Services downgraded the communist-ruled nation to junk status last month, a category in which debt is considered high risk.
China has lent Laos huge sums of money in recent years to fund big projects like a hydroelectric power station and a railway. According to Lao officials speaking to Chinese state media Xinhua, Beijing undertook 813 projects worth more than $16 billion last year alone.
Laos’ public debt stood at 88% of its gross domestic product (GDP) in 2021, according to the World Bank, nearly half of which was owed to China.
Experts point to years of economic mismanagement in the country, where one party – the Lao People’s Revolutionary Party – has held power since 1975.
But Moody’s Analytics pointed to increased trade with China and the export of hydropower as positive developments: “Laos has a fighting chance to avoid the danger zone and the need for a bailout.” , said economist Heron Lim in a recent report.
Fuel prices in Pakistan have risen by around 90% since late May after the government ended fuel subsidies. It is trying to rein in spending as it negotiates with the IMF to resume a bailout program.
The economy is struggling with the rising cost of goods. In June, the annual inflation rate reached 21.3%, its highest level in 13 years.
Like Sri Lanka and Laos, Pakistan also faces low foreign exchange reserves, which have almost halved since August last year.
He has imposed a 10% tax on large-scale industry for a year to raise $1.93 billion as he tries to narrow the gap between government revenue and spending – one of the main IMF requirements.
“If they are able to unlock these funds, other financial lenders like Saudi Arabia and the United Arab Emirates [United Arab Emirates] might be willing to extend credit,” Andrew Wood, sovereign analyst at S&P Global Ratings, told the BBC.
Former Pakistani Prime Minister Imran Khan, who pledged to address some of these issues, was ousted from power, although the faltering economy was not the only reason for this.
Last month, Pakistan’s prime minister asked people to reduce the amount of tea they drink to reduce the country’s import bills.
Here again, China plays a role, Pakistan owing more than a quarter of its debt to Beijing.
“Pakistan appears to have renewed a commercial loan facility with China which has added to its foreign exchange reserves and there are indications that it will contact China for the second half of this year,” added Wood.
The Maldives have seen their public debt swell in recent years and it now well exceeds 100% of their GDP.
As in Sri Lanka, the pandemic has hit an economy heavily dependent on tourism.
Countries that rely so heavily on tourism tend to have higher public debt ratios, but the World Bank says the island nation is particularly vulnerable to rising fuel costs because its economy is not diversified.
US investment bank JPMorgan said the vacation destination was at risk of defaulting on its debt by the end of 2023.
Inflation hit an 8-year high in May in Bangladesh, reaching 7.42%.
With supplies dwindling, the government moved quickly to curb non-essential imports, easing rules to attract remittances from millions of migrants living abroad and cutting overseas travel by officials.
“For economies with current account deficits – such as Bangladesh, Pakistan and Sri Lanka – governments face serious headwinds to increase subsidies. Pakistan and Sri Lanka have turned to the IMF and other governments for financial assistance,” Kim Eng Tan, sovereign analyst at S&P Global Ratings, told the BBC.
“Bangladesh had to reprioritize public spending and impose restrictions on consumption activities,” he said.
Rising food and energy prices threaten the pandemic-ridden global economy. Today, developing countries that have borrowed heavily for years are finding that their shaky foundations make them particularly vulnerable to global shock waves, Tewari writes.