The island nation of Sri Lanka, with a population of 22 million, is currently going through its worst economic and institutional crisis since its independence in 1948. The population, overwhelmed by hardship and angry with its rulers, has responded with massive street protests to ask for the resignation of its main leaders. The growing pressure from him forced his president, Gotabaya Rajapaksa, to flee to Singapore, who once there tendered his official resignation.
Several factors underlie the explosion of this crisis. Over the years, Sri Lanka had accumulated a large amount of foreign debt and its balance of payments was out of balance. The bloody Islamist attacks on Easter Sunday 2019 (269 dead) scared tourism, a key sector in the local economy, which suffered the last straw with the pandemic. To this was added the making of disastrous political and economic decisions.
World records in food and energy prices caused by the war in Ukraine exacerbated the crisis. With hardly any internal and external income, the country was left without foreign currency to import fuel, food and other essential goods.
The island's difficulties have triggered alarms about the impact that the world economic slowdown may have on other weak economies that are also affected by the increase in prices and interest rates, the depreciation of their currencies, high levels of debt or the decline in its foreign exchange reserves.
“Countries with high levels of debt and limited policy space will face additional pressures. Don't look too far, Sri Lanka is a warning sign," IMF Director Kristalina Georgieva warned last Saturday. It is "the canary in the mine", they warn from other international forums. According to a recent report in the Financial Times, $50 billion of sovereign bonds have already flown out in emerging markets so far this year, "the most spectacular net outflow in at least 17 years."
Without leaving the region, one of the countries that worries the most is Pakistan, a regional power with nuclear weapons that is going through moments of political instability. In June, the annual inflation rate reached 21.3%, the highest in 13 years, and fuel prices have risen about 90% since the end of May after the government ended subsidies.
Like Sri Lanka, Pakistan is also facing low foreign exchange reserves, which have nearly halved since August last year. Among the measures adopted, the authorities have approved a 10% tax on large-scale industry for one year to raise some 2,000 million dollars in an attempt to reduce the gap between government income and expenditure, one of the demands IMF key. "If they can unlock these funds, other financial lenders like Saudi Arabia or the United Arab Emirates may be willing to extend credit," said Andrew Wood, an analyst at S
As with Sri Lanka, the role played by China, which holds a quarter of Pakistan's debt, is also important. "Islamabad appears to have renewed a commercial loan against China and this has added to their foreign exchange reserves, and there are signs that they will move closer to China during the second half of this year," Wood added.
Without moving away from the area, other countries of concern are the Maldives, whose economy depends on battered tourism and saw its public debt grow in 2020 above one hundred percent of its GDP; little Laos, which is having serious difficulties paying its foreign loans (Beijing is also one of its biggest creditors) or paying for fuel imports, increasingly expensive due to the Russian invasion of Ukraine; or Bangladesh, where inflation has reached its eight-year high and the government has asked the IMF for a $4.5 billion loan. The Central Bank only has foreign exchange reserves for five months and has announced a policy of limiting imports.
