We all know about the severe debt crisis Sri Lanka has found itself in, the very debt crisis that paved the way to a massive protest led by people that overthrew both the president and the prime minister of Sri Lanka.
The bigger picture, however, looks much more dire and serious. Sri Lanka might be the harbinger of a greater debt crisis, as many countries are finding themselves neck deep in foreign debt that is virtually impossible to service.
In Sri Lanka’s case, the economic crisis might seem like one created within the last couple of years, but in reality, it has been in the making for the last five decades. Drastic tax cuts, pegging the dollar at unfavorable rates, and the overnight fertilizer ban led to an acute economic crisis, which was really a culmination of decades-long mismanagement, corruption, and poor policies.
Ever since its “open economic policy” was adopted in the late 1970s, Sri Lanka has been Asia’s poster boy for neoliberal reform, much like Chile in Latin America. The strategy was the now-familiar one of making exports the basis for economic growth, supported by foreign capital inflows. This led to a significant increase in foreign currency debt, something the IMF and the Davos crowd actively encouraged.
Following the great economic crisis of 2008, low-interest rates in advanced economies led to the availability of cheap credit. During this time period, the Sri Lankan government also relied on international sovereign bonds to finance its own spending. In the eight years between 2012 and 2020, the debt to GDP ratio doubled to around 80%, with a significant portion in its bonds. The disruptions caused by the pandemic and the war in Ukraine made matters much worse by causing export earnings to fall and sharply increasing the price of essential imports, including food and fuel. Foreign exchange reserves plummeted – but the government had to keep paying interest even when it could not import essential fuel.
As we said, the Sri Lankan economic crisis is the harbinger of a much worse storm on the horizon for “emerging markets.” During the past few years, emerging markets of the world relied heavily on low-interest rate debt. Although it looked attractive at the time, such capital came at a higher risk of leaving, as, unlike the EU and US, such capital leaves Low and Middle-Income Countries (LMICs) at the first sign of any problem.
The situation can still be resolved, but it requires urgent action, especially on the part of the IFIs and G7. Speedy and systematic debt resolution actions to bring in private creditors and other creditors, such as China, are needed, as are IFIs doing their own bit to provide debt relief and ending punitive measures such as surcharges. In addition, policies to limit speculation in commodity markets and profiteering by big food and fuel companies must be put in place. Finally, the recycling of special drawing rights (SDRs) – essentially “IMF coupons” – by countries that will not use them to countries that desperately need them is vital, as is another release of SDRs equating to about $650bn to provide immediate relief.
Without these minimal measures, the post-Covid, post-Ukraine global economy is likely to be engulfed in a dystopia of debt defaults, increasing poverty, and sociopolitical instability.
No.820, Mount Cresent,Malabe,Sri Lanka