analysis | Sri Lanka is a small preview of the global default crisis

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S. Jeeva, a high school teacher, spent two days under the scorching sun lining up for a gas grill in the northern Sri Lankan capital. He, along with thousands of others, was waiting for a delivery that never came. Meanwhile, many of his students, who will be taking important national exams on Monday, joined anti-government protests on the waterfront along Colombo’s iconic Galle Face Green.

Both are symbols of the economic and political crisis sweeping the country. Decades of corruption and fiscal mismanagement put the country into default on May 19th.

Jeeva says protesting and demanding better government is a student’s democratic right. Everyday life was so hard that it was impossible to study. A 32-year-old language teacher told me. On the street next to him are endless rows of empty blue LPG gas cylinders. These teenagers need to think about their future and prepare for college. Instead, they worry about how the island nation will come out of debt.

What happens in Sri Lanka is far more important across borders. The global market sees a growing debt burden as countries grow post-pandemic, a harbinger of potential defaults across developing countries.

So what will default countries look like in 2022?

Armed soldiers are on the streets and lined up for days to buy gasoline and cooking oil. Yields are reduced by 50% because farmers can’t afford to cultivate their crops or have fuel to transport what they produce so they can grow enough on their own.

Pharmacies are running out of drugs. Hospitals are dangerously short of life-saving drugs and devices. Income is shrinking and inflation is accelerating above 30%. Parents are only eating one meal a day so their children can eat three, and doctors report that patients are rationing essential medicines for serious diseases like heart disease and diabetes.

Protesters may not burn the house of the ruling Rajapaksa family as they did on May 9, but there are daily protests demanding the resignation of President Gotabaya Rajapaksa across the country (his brother Mariinda has stepped down as prime minister. Police and security forces have They are fighting back with water cannons and tear gas, a tactic that risks driving the country into a broader revolt.

Voted by Lonely Planet as the world’s best travel destination for 2019, how can Sri Lanka run out of foreign currency reserves and run out of debt? There were warning signs from the moment the powerful Rajapaksa clan regained control of the country after an overwhelming victory in the November 2019 elections. Their divisive dynasty politics combined with questionable financial decisions (including large capital market borrowing, which now accounts for about 38%). Debt – go a long way in explaining the path to ruin.

That’s right. The epidemic was a disaster for an economy that relied on tourism, as was the 2019 Easter Sunday bombing that brought the return of the Rajapaksa dynasty. According to Ahilan Kadirgamar, a political economist and senior lecturer at Jaffna University, Sri Lanka’s interest on borrowing over decades is now nearly equal to the principal.

Importantly, Sri Lanka has lost an institution that started with the International Monetary Fund (IMF), the World Bank and bilateral lenders China, India and Japan. Kadirgamar says the state has never set conditions for its own development. Since 1965, there have been 16 IMF agreements. “It’s much more desperate this time,” he said. “Even though the ship is out of our port, we can’t even pay for the next fuel shipment.”

Kadirgamar says there are many other emerging market economies with similarly unsustainable debt that are facing the possibility of default. “The chaos between Ukraine and Russia on a scale never seen in recent history is unraveling around the world.” The international community is watching this situation and asking, ‘Can the crisis in Sri Lanka be resolved through a framework that can be applied to other countries?

In South Asia, Pakistan is facing an economic crisis. If the government does not raise oil prices, it will be in danger of default in just three months. To avoid this situation, the IMF program is needed. The World Bank noted in March that 12 developing countries may not be able to pay off their debts next year. The biggest challenge for these countries, like Sri Lanka, is the restructuring of the national debt.

The G7 economic powers announced support for debt relief efforts to Sri Lanka on 19 May. Applications may also come from the fourth meeting in Tokyo on Tuesday. a matter of local interest. Meanwhile, Sri Lanka is negotiating with the IMF for a bailout that will help negotiate debt restructuring with creditors. The country has previously said it will need between $3 billion and $4 billion this year to get out of the crisis, but the actual size of the debt has yet to be exposed.

Only last week did new Prime Minister Ranil Wickremesinghe (sixth in the post) disclose previously unknown debt of $105 million to a maturing bank of China. That said, as Lakshini Fernando, Senior Vice President and Economist, Asia Securities, told me, Sri Lanka was actually defaulting on $183 million, not the $78 million previously thought.

Fernando said the situation will only get worse in the short term, especially for day workers who are most vulnerable to inflationary pressures. “The only way the population is shrinking is when we have gasoline and there is no longer a shortage of food,” she said. However, since Sri Lanka has a very small economy, a large, immediate US dollar aid could quickly stabilize the situation.

Then it is up to the government to ensure that structural reforms are made to prevent Sri Lanka from returning to the IMF for an 18th time. And on a global scale, the international community must intervene to try and stop the domino effect that national defaults no longer have in emerging economies.

More from Bloomberg comments:

• How four powerful brothers brought an island nation down: Ruth Pollard

• Tropical paradise brings a storm to the teacup: Andy Mukherjee

• America, China, Russia and an avalanche of history: Niall Ferguson

This column does not necessarily reflect the views of the editorial board or Bloomberg LP or its owners.

Ruth Pollard is editor of Bloomberg Opinion. Previously, she was the South and Southeast Asian government team leader for the Sydney Morning Herald’s Bloomberg News and Middle East Correspondent.

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