How Sri Lanka’s financial crisis offers insight into struggling economies

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Sri Lanka is not the only economy in serious trouble, as the prices of food, fuel and other basic commodities have soared with the war in Ukraine. Alarm bells are ringing for many economies around the world, from Laos and Pakistan to Venezuela and Guinea

Bangkok: Sri Lanka desperately needs help to overcome its worst crisis in recent memory. Its schools are closed for lack of fuel to get children and teachers to classrooms. Its efforts to engineer an International Monetary Fund bailout have been hampered by the severity of its financial crisis, its prime minister has said.

But it’s not the only economy in serious trouble, as prices for food, fuel and other basics have soared with the war in Ukraine. Alarm bells are ringing for many economies around the world, from Laos and Pakistan to Venezuela and Guinea.

Some 1.6 billion people in 94 countries are facing at least one dimension of the crisis in food, energy and financial systems, and about 1.2 billion of them live in severely vulnerable “full storm” countries. to a cost-of-living crisis and other longer-term stresses, according to a report released last month by the UN Secretary-General’s Global Crisis Response Group.

The exact causes of their woes vary, but all share the growing risks from soaring food and fuel costs driven by Russia’s war on Ukraine, which hit just as disruptions to tourism and other business activities due to the coronavirus pandemic were fading. As a result, the World Bank estimates that per capita incomes in developing economies will be 5% below pre-pandemic levels this year.

Economic tensions are fueling, meanwhile; short-term, higher-interest borrowing to help fund pandemic relief programs has added to the debt load of countries that are already struggling to meet their repayment obligations. According to the UN, more than half of the world’s poorest countries are in debt distress or at high risk.

Some of the worst crises occur in countries already devastated by corruption, civil war, coups or other calamities. They get confused, but with an excessive burden of suffering.

Here’s a look at some of the economies that are in dire straits or most at risk.

AFGHANISTAN

Afghanistan has been reeling from a severe economic crisis since the Taliban took control as the United States and its NATO allies withdrew their forces last year. Foreign aid – long a mainstay – stopped virtually overnight and governments piled on sanctions, halted bank transfers and crippled trade, refusing to recognize the Taliban government. The Biden administration has frozen $7 billion in Afghan currency reserves held in the United States. About half of the country’s 39 million people face life-threatening levels of food insecurity and most civil servants, including doctors, nurses and teachers, have not been paid for months. A recent earthquake killed more than 1,000 people, adding to these miseries.

ARGENTINA

About four in 10 Argentines are poor, and its central bank is dangerously short of foreign exchange reserves as its currency weakens. Inflation is expected to exceed 70% this year. Millions of Argentines survive largely on soup kitchens and state welfare programs, many channeled through politically powerful social movements linked to the ruling party. A recent agreement with the IMF to restructure $44 billion in debt faces questions over concessions that critics say will hamper the recovery.

EGYPT

Egypt’s inflation rate soared to almost 15% in April, causing hardship, especially for almost a third of its 103 million people living in poverty. They were already suffering from an ambitious reform program that includes painful austerity measures like floating the national currency and cutting subsidies for fuel, water and electricity. The central bank raised interest rates to curb inflation and devalued the currency, adding to difficulties in repaying Egypt’s large external debt. Egypt’s net foreign exchange reserves have fallen. Its neighbors Saudi Arabia, Qatar and the United Arab Emirates have pledged $22 billion in deposits and direct investment as aid.

LAOS

Tiny, landlocked Laos was one of the fastest growing economies until the pandemic hit. Its debt levels have increased and, like Sri Lanka, it is in talks with its creditors on how to repay billions of dollars in loans. This is an urgent question given the country’s weak public finances. Its foreign exchange reserves are equal to less than two months of imports, according to the World Bank. A 30% depreciation of the Laotian currency, the kip, aggravated these woes. Rising prices and job losses due to the pandemic threaten to deepen poverty.

LEBANON

Lebanon shares with Sri Lanka a toxic combination of monetary collapse, shortages, punishing levels of inflation and rising hunger, petrol queues and a decimated middle class. It, too, endured a long civil war, its recovery hampered by government dysfunction and terrorist attacks.

The proposed taxes at the end of 2019 sparked longstanding anger against the ruling class and months of protests. The currency began to sink and Lebanon failed to repay around $90 billion at the time, or 170% of GDP, one of the highest in the world. In June 2021, with the currency having lost almost 90% of its value, the World Bank declared the crisis to be one of the worst the world has seen in over 150 years.

MYANMAR

The pandemic and political instability have rocked Myanmar’s economy, particularly after the military seized power in February 2021 from the elected government of Aung San Suu Kyi. This has resulted in Western sanctions targeting military-controlled commercial farms, which dominate the economy. The economy contracted by 18% last year and is expected to barely grow in 2022. More than 700,000 people have fled or been driven from their homes by armed conflict and political violence. The situation is so uncertain that a recent World Bank global economic update excluded forecasts for Myanmar for 2022-2024.

PAKISTAN

Like Sri Lanka, Pakistan is in urgent talks with the IMF, hoping to revive a $6 billion bailout that was put on hold after Prime Minister Imran Khan’s government was toppled in April. Soaring crude oil prices pushed up fuel prices which in turn drove up other costs, pushing inflation over 21%. A government minister’s call for a cut in tea consumption to reduce the $600 million bill for imported tea has angered many Pakistanis. Pakistan’s currency, the rupee, has fallen about 30% against the US dollar over the past year. To gain IMF support, Prime Minister Shahbaz Sharif raised fuel prices, abolished fuel subsidies and imposed a new 10% “super tax” on major industries to help repair the country’s tattered finances. By the end of March, Pakistan’s foreign exchange reserves had fallen to $13.5 billion, equivalent to just two months of imports. “Macroeconomic risks are strongly tilted to the downside,” the World Bank warned in its latest assessment.

TURKEY

Deteriorating public finances and a growing trade and capital account deficit have compounded Turkey’s problems with high and growing debt, inflation – at over 60% – and high unemployment. The Central Bank has resorted to using foreign exchange reserves to stave off a currency crisis, after the beleaguered lira fell to historic lows against the euro US dollar at the end of 2021. The tax cuts and fuel subsidies to cushion the blow of inflation have weakened public finances. Families are struggling to buy food and other goods, while Turkey’s foreign debt is around 54% of its GDP, an unsustainable level given the high level of public debt.

ZIMBABWE

Inflation in Zimbabwe has soared to more than 130%, raising fears that the country could revert to the 2008 hyperinflation that reached 500 billion percent and compound the problems of its already fragile economy. Zimbabwe is struggling to generate an adequate inflow of greenbacks needed for its largely dollarized local economy, which has been battered by years of deindustrialization, corruption, low investment, low exports and high debt. Inflation has left Zimbabweans wary of currency, adding to the demand for US dollars. And many are skipping meals as they struggle to make ends meet.

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