Sri Lanka is in the midst of a deep and unprecedented economic crisis, which has sparked massive protests and forced its president to resign after fleeing the country – but other countries may face similar difficulties, according to the head of the International Monetary Fund (IMF), BBC reported.
“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 on Saturday.
She also stated that developing countries have been experiencing sustained capital outflows for four months in a row, putting their hopes of catching up with advanced economies in jeopardy.
However, the same global headwinds affecting other economies in the region – rising inflation and interest rate hikes, depreciating currencies, high levels of debt, and dwindling foreign currency reserves – affect other economies in the region.
China has been a dominant lender to several of these developing countries and thus has significant influence over their destinies. However, it is unclear what Beijing’s lending conditions have been or how it may restructure the debt, according to the BBC.
According to Alan Keenan of the International Crisis Group, China is to blame for encouraging and supporting costly infrastructure projects that have not produced significant economic returns.
Fuel prices in Pakistan have risen by approximately 90% since the end of May, when the government discontinued fuel subsidies. It is attempting to cut spending while negotiating with the IMF to resume a bailout programme.
The economy is struggling as the cost of goods rises. The annual inflation rate reached 21.3 percent in June, the highest level in 13 years.
Pakistan, like Sri Lanka and Laos, has low foreign currency reserves, which have nearly halved since August of last year.
“If they are able to unlock these funds, other financial lenders like Saudi Arabia and the UAE may be willing to extend credit,” Andrew Wood, sovereign analyst at S&P Global Ratings told the BBC.
Again, China plays a role, with Pakistan owing Beijing more than a quarter of its debt, according to the BBC.
“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,” Wood added.
The Maldives’ public debt has risen in recent years, and it is now well above 100% of GDP.
The pandemic devastated an economy that was heavily reliant on tourism, as it did in Sri Lanka.
Countries that rely heavily on tourism tend to have higher public debt ratios, but the World Bank says the island nation is especially vulnerable to higher fuel costs due to its undiversified economy.
According to the BBC, the holiday destination is at risk of defaulting on its debt by the end of 2023, according to US investment bank JPMorgan.
In Bangladesh, inflation reached an 8-year high in May, reaching 7.42 percent.
With reserves running low, the government has moved quickly to limit non-essential imports, relaxing rules to attract remittances from millions of migrants living abroad, and reducing 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,” he said.
Rising food and energy prices are threatening the world economy, which has been devastated by the pandemic. Now, developing countries that have borrowed heavily for years are discovering that their shaky foundations make them especially vulnerable to global shockwaves.
