Sri Lanka crisis a warning to 'Asian nations including Bangladesh'
The ongoing economic crisis in Sri Lanka is a warning to other Asian nations and these countries could be at risk of similar trouble, according to the head of the International Monetary Fund (IMF).
"Countries with high debt levels and limited policy space will face additional strains. Look no further than Sri Lanka as a warning sign," said IMF managing director Kristalina Georgieva at the G20 finance ministers' summit in Indonesia on Saturday.
She said emerging and developing countries have also been experiencing sustained capital outflows for four months in a row and these countries now suffer the risk of reversing three decades of catching up with advanced economies and instead falling further behind.
With reference to the remarks of IMF chief Kristalina Georgieva, BBC on Sunday named four Asian countries -- Bangladesh, Pakistan, Maldives and Laos, that worryingly appear to be on a similar trajectory.
Sri Lanka, a country of 22 million populations, had built up a huge amount of debt over the years and last month, became the first nation in the Asia Pacific region in 20 years to default on foreign debt, according to the BBC report
The country is struggling to pay for imports, with inflation soaring about 50 per cent and food prices 80 per cent than a year ago, and its currency value slumped against the US dollar and other foreign currencies.
Sri Lanka had been negotiating with the IMF for a $3b bailout, but talks are currently stalled amidst nationwide political chaos that saw its ex-president Gotabaya Rajapaksa fleeing the country and quitting afterwards.
BBC said, “Many blame ex-president Gotabaya Rajapaksa for mishandling the economy with disastrous policies whose impact was only exacerbated by the pandemic.”
China has been a dominant lender to these developing countries, thus, the country could control their destinies in crucial ways, but it's largely unclear what Beijing's lending conditions have been, or how it may restructure the debt.
The fault lies on China, according to Alan Keenan from International Crisis Group, as the country encouraged and supported expensive infrastructure projects that have not brought 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 they are remedied through constitutional change and a more democratic political culture, Sri Lanka is unlikely to escape its current nightmare," BBC quoted Alan Keenan as saying.
BBC said the same global headwinds - rising inflation and interest rate hikes, depreciating currencies, high levels of debt and dwindling foreign currency reserves - also affect other economies in the region.
Following countries are experiencing similar situations that Sri Lanka saw before the economic crisis.
Bangladesh
Inflation hit an 8-year high at 7.42 per cent in the country in May this year.
With foreign reserves dwindling, the government cut non-essential imports, eased rules to attract remittances from millions of migrants living overseas, and reduced foreign trips for officials.
"For economies running current account deficits - such as Bangladesh, Pakistan and Sri Lanka - governments face serious headwinds in increasing subsidies. Pakistan and Sri Lanka have turned to the IMF and other governments for financial assistance," Kim Eng Tan, a sovereign analyst at S&P Global Ratings, told the BBC.
"Bangladesh has had to re-prioritise government spending and impose restrictions on consumer activities," BBC quoted Kim Eng Tan as saying.
Pakistan
According to BBC, the country has seen soaring price of goods, with annual inflation rate hitting 13-year high at 21.3 per cent in June this year.
Fuel prices rose about 90 per cent since end-May after the government ended fuel subsidies.
Like Sri Lanka, Pakistan also faces low foreign currency reserves that have almost halved since August last year.
Pakistan negotiates with the IMF to resume a bailout programme and the government has imposed a 10 per cent tax on large-scale industry for one year to raise $1.93bn as the country tries to reduce the gap between government revenue and spending - one of the IMF's key demands, according to BBC.
"If they are able to unlock these funds, other financial lenders like Saudi Arabia and the UAE [United Arab Emirates] may be willing to extend credit," Andrew Wood, sovereign analyst at S&P Global Ratings told the BBC.
The ousted former prime minister Imran Khan vowed to fix some of these problems. Last month, a senior minister in Pakistan's government asked citizens to reduce the amount of tea they drink to cut the country's import bills.
Again China is here, with Pakistan reportedly owing more than a quarter of its debt to Beijing.
"Pakistan appears to have renewed a commercial loan facility vis-a-vis China and this has added to its foreign exchange reserves and there are indications they will reach out to China for the second half of this year," BBC quoted Andrew Wood as saying.
Maldives
The Maldives has seen its public debt swell in recent years and that now over 100 per cent of its GDP, according to BBC.
Like Sri Lanka, the pandemic hammered an economy that was heavily reliant on tourism.
BBC report reads, “Countries that depend so much on tourism tend to have higher public debt ratios, but the World Bank says the island nation is particularly vulnerable to higher fuel costs because its economy is not diversified.”
The holiday destination is at risk of defaulting on its debt by the end of 2023, BBC said citing US investment bank JPMorgan.
Laos
The country has been facing the risk of defaulting on its foreign loans for several months, according to BBC.
Rise in oil prices because of the Russian invasion of Ukraine has disrupted fuel supplies, pushed up food prices in Laos where an estimated third of 7.5 million people live in poverty.
The country’s is down by more than a third against the US dollar this year. Higher interest rates in the US have weakened currencies of other countries, increasing the latter’s debt burden and making imports costlier.
Laos is struggling to repay its debt or pay for imports like fuel and the country, according to the World Bank, had $1.3b of reserves as of December 2021. But its total annual external debt obligations are around the same amount until 2025 - equivalent to about half of the country's total domestic revenue, according to BBC.
Moody's Investor Services last month downgraded Laos to "junk", a category in which debt is considered high risk, according to BBC.
China has loaned Laos huge amounts of money in recent years to fund big projects like a hydropower plant and a railway. According to Laotian officials speaking to Chinese state news agency Xinhua, Beijing has undertaken 813 projects worth more than $16b last year alone.
Laos' public debt amounted to 88 per cent of its Gross Domestic Product (GDP) in 2021, according to the World Bank, with almost half of that figure owed to China and experts point to years of economic mismanagement in the country.
But Moody's Analytics has flagged increased trade with China and the export of hydroelectricity as positive developments. "Laos has a fighting chance of avoiding the danger zone and the need for a bailout," economist Heron Lim said in a recent report.
IMF chief Kristalina Georgieva said downside risks will remain and could deepen—especially if inflation is more persistent—requiring even stronger policy interventions which could potentially impact growth and exacerbate spillovers particularly to emerging and developing countries.
The IMF chief said she sees three priorities on how to navigate this extraordinarily challenging environment.
First, countries must do everything in their power to bring inflation down. Failure to do so could risk the recovery and further damage living standards for vulnerable people. Central banks are stepping up. Monetary policy is increasingly synchronized: more than three-quarters of central banks have raised interest rates and have done so 3.8 times. Central bank independence is critical for the success of these policy actions, as is clear communication and a data-driven approach.
Second, fiscal policy must help – not hinder – central bank efforts to tame inflation. With growth slowing down, some people will need more support, not less. So fiscal policy needs to reduce debt while providing targeted measures to support vulnerable households facing renewed shocks, especially from high energy or food prices.
Third, a fresh impetus for global cooperation will be critical to confront the multiple crises the world is facing. The world needs G20 leadership particularly to address the risks from food insecurity and high debt. Food insecurity means hunger for millions of people. Yet it is a solvable problem. Together with heads of the UNFAO, World Bank, WFP and WTO, the IMF called on the international community to step up and work together to support those in immediate need, remove export restrictions, promote food production, and invest in climate-resilient agriculture.
Strong global leadership is also needed to tackle the scourge of high debt, which has reached multi-year highs. More than 30 per cent of emerging and developing countries are at or near debt distress. For low-income countries, that number is 60 per cent. And with tightening financial conditions and exchange rate depreciations, the debt service burden is a harsh – and for some countries – unbearable burden, Kristalina Georgieva said.