The world is collectively experiencing repercussions of a fragile global economy. Global markets are facing issues they have not seen since the 1990s.
Inflation, rising energy costs, and the effects of the war in Ukraine are plunging countries like Sri Lanka, Egypt, Tunisia, and Peru into turmoil.
According to Bloomberg, during the COVID-19 pandemic, countries borrowed billions to help manage the fallout brought on by the virus; as U.S. interest rates skyrocketed, debt-servicing for developing nations resulted in capital outflows. To add insult to injury, the war in Ukraine, which has sent shockwaves through the world and resulted in increased food shortages, energy spikes, and fuel spikes, shows no signs of stopping anytime soon.
Countries are feeling the weight of the economic situation and the myriad of issues that have pushed countries like Sri Lanka to the brink of defaulting on their bonds. According to Bloomberg Economics Sri Lanka is not alone; emerging economies like Pakistan, Tunisia, Ethiopia, and Ghana are close to following suit. The International Monetary Fund (IMF) released a map of countries it has included in its debt relief plans. Many of those countries face the possibility of default.
According to Quartz, “The World Bank looks at the bond payments each country has due and compares those expenses to the country’s reserve and fiscal deficit to judge how much leeway the country has to pay back its debts. Over the next year, it expects a dozen or so countries to go into default.”
There is hope for these countries, as commodity exporters will benefit from higher prices. According to Trading Economics, however, guards must remain up as current issues, such as China’s extended COVID-19 quarantines and possible recession in Europe and the U.S., have tremendous impacts on the global economy.
According to Bloomberg, “The world’s top economic policymakers are sounding the alarm. The dominant themes at the spring meetings of the International Monetary Fund and World Bank in Washington this week are a slowing global economy and the rising risks — seen and unseen — facing developing nations.”
IMF assessed its thoughts on the war in Europe in the latest World Economic Outlook. In their depiction, the war in Ukraine was like “seismic waves” rolling over the global economy. The IMF also brought up the global economy’s prospects of experiencing a “doom loop,” which, according to Greenleaf Trust, is “the circle of vulnerability where a country’s banking system can be severely hurt by volatility in the price of the sovereign bonds they hold for reserves resulting in a contraction in lending provided by the banks.” The World Bank backtracked and lowered its expected global growth earlier this month. It also announced that it would create a $170 billion rescue package for nations most affected by the crisis.
Bloomberg quoted John Lipsky, long-time second in command at IMF, who said, “We can see this train wreck coming towards us.” The combination of real-economy shocks and financial-market tightening, he said, is “going to push a large number of low-income countries into the need for debt restructuring.” Marcello Estevão, the World Bank’s global director for macroeconomics, trade, and investments, commented that it will be difficult for struggling foreign economies to restructure debt due to the debt owing to private lenders instead of large governments.
As of now, the biggest looming default as far as emerging economies are concerned is Russia. As Putin’s war rages, the country was hit by sanctions limiting its ability to pay its foreign debts in U.S. dollars. However, Russia’s case is unique because it fell into default due to sanctions and not an inability to fund its debts.
Sri Lanka, however, is in true crisis as it attempts to navigate hard-hitting global economic issues that threaten to plunge the country into a more profound economic crisis. As the country’s currency is down 40% this year, tough choices are being made: paying investors or covering food costs. Sri Lankan citizens are calling for the removal of President Gotabaya Rajapaksa, though the government is working to obtain aid from the IMF, China, and India.
According to Aljazeera, Sri Lanka is facing its toughest economic outlook since it first gained independence from British rule in 1948. Citizens of Sri Lanka are calling for the end of a nepotistic government and pushing for an all-party interim government instead.