The deepening economic crisis in Sri Lanka, exacerbated by the island nation’s default on its foreign debt and domestic factors such as rising food prices, has prompted protests and could be a sign of things to come in emerging markets and the U.S.
Two of the largest credit rating agencies in the world, Fitch and S&P global, sounded an alarm last week that the South Asian island nation was about to default on its debts and was facing its worst economic crisis in more than 70 years.
Several issues have created a perfect economic storm in Sri Lanka including years of foreign-debt-fueled government spending, badly timed tax cuts, policies that hurt crop yields and a precipitous drop in tourism revenue during the coronavirus pandemic. All these have dried up the country’s foreign reserves.
The war in Ukraine delt another blow to Sri Lanka’s economy, sending fuel and food prices soaring. Insurmountable financial challenges hit households hard, resulting in protests and rioting.
Members of Sri Lanka’s opposition political party held an anti-government protest rally in Colombo, Sri Lanka, on April 19, 2022, calling on the president and his powerful family to quit over the country’s economic crisis, according to the Associated Press.
The Indian Ocean island nation of 22 million people faces rolling blackouts for up to 13 hours a day as the government scrambles to secure foreign exchange to pay for fuel imports.
Analysts say that such scenes of economic meltdown will not be limited to Sri Lanka alone but could be witnessed across other developing nations and even the U.S., where inflation is already causing havoc for policymakers who are being forced to hike interest rates and stifle growth in the process, The Economist reported.
“There are going to be defaults. There are going to be crises. When we are hit by shocks like this, anything is possible,” said Kenneth Rogoff, a Harvard University economist, during a recent International Monetary Fund (IMF) panel discussion.
“The thing which has been weighing against having any systemic problem at the moment has been the interest rates globally remaining low … but it’s less and less true for emerging markets and developing economies,” Rogoff added.
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Ceyla Pazarbasioglu, IMF director of strategy, policy and review, said while the Brenton Woods institution was not anticipating a global debt crisis, it remained a “very concerned” about the risk.
About 60 percent of low-income countries — defined as the roughly 70 nations that qualified for a global debt-payment suspension program during the pandemic — were at high risk of debt distress or already in distress in 2020, up from 30 percent in 2015, according to the IMF.
“A lot of these countries with HEAVY debts in USD, will collapse,” tweeted Jamarlin Martin, CEO of The Moguldom Nation. “These countries will have to be restructured, like America but America has more time. Inflation, food & fuel shortages, & political unrest will hit more countries than most think.”
Photo: Members of Sri Lanka’s opposition political party National People’s Power participate in an anti-government protest rally in Colombo, Sri Lanka, April 19, 2022. Sri Lanka’s prime minister said Tuesday the constitution will be changed to curtail presidential powers and empower parliament as protesters continued to call on the president and his powerful family to quit over the country’s economic crisis. (AP Photo/Eranga Jayawardena)