According to the head of the International Monetary Fund (IMF), Sri Lanka is amid an intense and unprecedented economic crisis that has sparked massive protests and forced its president to step down after fleeing the country and other countries. There may be a risk of similar troubles.
“Countries with high debt levels and limited policy space will face additional stress. See Sri Lanka as a warning sign,” IMF Managing Director Kristalina Georgieva said on Saturday.
He said that developing countries have also faced continuous capital outflows for four months, jeopardizing their dreams of catching up with developed economies.
As it grapples with a foreign exchange crisis, Sri Lanka struggles to pay for vital imports such as food, fuel and medicine for its 22 million people. Inflation has risen by almost 50%, with food prices rising 80% more than a year ago. This year, the Sri Lankan rupee has depreciated against the US dollar and other major global currencies.
Many blame former President Gotabaya Rajapaksa for mishandling the economy with disastrous policies, the effects of which were only amplified by the pandemic.
Over the years, Sri Lanka has built up massive amounts of debt – last month, It became the first country in the Asia Pacific region to default on foreign debt in 20 years.
Officials were in talks with the IMF for a $3 billion (£2.5 billion) bailout. But amid political turmoil, this conversation has stopped for the time being.
But the same global adverse conditions – rising inflation and rising interest rates, depreciating currencies, high debt levels and dwindling foreign exchange reserves – also affect other regional economies.
China has been a significant lender to many developing countries and can significantly control their fortunes. But it is unclear mainly what Beijing’s lending terms are or how it might restructure the debt.
Where China is at fault, according to Alan Keenan of the International Crisis Group, is in encouraging and supporting costly infrastructure projects that have not delivered significant economic returns.
“Equally important has been their active political support for the ruling Rajapaksa family and its policies… These political failures are at the heart of Sri Lanka’s economic collapse. Until they are remedied through constitutional change and a more democratic political culture, Sri Lanka is unlikely to escape its current nightmare.”
Worryingly, other countries appear to be on a similar trajectory.