A global debt crisis is coming – and it won’t stop in Sri Lanka | Jayati Gosh
Jn January, even before Sanjana Mudalige’s salary as a saleswoman at a mall in Colombo, Sri Lanka was cut in half, she had pawned her gold jewelery to try to make ends meet. . Eventually, she quit her job, as the travel expenses alone exceeded the salary. Since then, she has gone from using gas for cooking to chopping firewood and only eats a quarter of what she used to eat. Her story, reported in the Washington Post, is one of many in Sri Lanka, where people watch their children go hungry and their elderly parents suffer from lack of medicine.
The human costs of the crisis only really captured international attention when the massive popular uprising earlier this month, known as Aragalaya (Sinhala for “struggle”), led to the peaceful overthrow of President Gotabaya. Rajapaksa. His family had ruled Sri Lanka with an iron fist, albeit with electoral legitimacy, for over 15 years, and are now being blamed by the national and international media for the desperate economic mess the country finds itself in.
But blaming the Rajapaksas alone is too simple. Certainly, the aggressive majoritarianism they unleashed, along with the alleged corruption and major economic policy disasters of recent years (such as drastic tax cuts and bans on fertilizer imports), have been crucial elements of the economic meltdown. But that’s only part of the story. The root and underlying causes of the crisis in Sri Lanka are barely mentioned by most mainstream commentators, perhaps because they reveal uncomfortable truths about how the global economy works.
This is not a crisis created by a few recent external and internal factors, but decades of preparation. Since adopting its “open economic policy” in the late 1970s, Sri Lanka has been at the forefront of neoliberal reform in Asia, as has Chile in Latin America. The strategy was the now familiar one of making exports the basis of economic growth, supported by inflows of foreign capital. This led to a significant increase in foreign currency debt, which the IMF and the Davos crowd actively encouraged.
In the period following the 2008 global financial crisis, when low interest rates in advanced economies led to the availability of cheap credit, the Sri Lankan government relied on international sovereign bonds to finance its own expenses. Between 2012 and 2020, the debt-to-GDP ratio doubled to around 80%, with an increasing share in obligations. The payments owed on these debts kept rising relative to what Sri Lanka could earn from its exports and the money sent home by Sri Lankans working abroad. The disruptions caused by the pandemic and the war in Ukraine have worsened the situation, causing export earnings to plummet and sharply increasing the price of essential imports, including food and fuel. Foreign exchange reserves plummeted – but the government had to keep paying interest even when it couldn’t import essential fuel.
Seen in this light, it is clear that Sri Lanka is not alone; on the contrary, it is only a harbinger of an impending storm of over-indebtedness in what economists call “emerging markets”. The latest period of incredibly low interest rates in advanced economies has meant that more funds have flowed into the “emerging” and “frontier” markets of the wealthier world. Although this has found cheerleaders in the international financial institutions (IFIs), it has always been a problematic process. Indeed, unlike places like the EU and the US, capital leaves low- and middle-income countries (LMICs) at the first sign of trouble.
And these countries have been much more damaged economically by the pandemic. Advanced economies were able to deliver massive countercyclical measures – think of the UK furlough scheme – because financial markets effectively allowed and even encouraged them to do so. By contrast, the LMICs were prevented from significantly increasing their fiscal outlays – because of these same financial markets, which threatened the possibility of credit downgrades and capital flight as government deficits grew. In addition, they have had to deal with significant declines in export and tourism earnings and tighter balance of payments constraints. As a result, their economic recovery has been much more moderate and economic conditions remain mostly dire.
Half-hearted attempts at debt relief, such as the debt service moratorium in the early part of the pandemic, have only postponed the problem. There has been no significant debt restructuring. The IMF laments the situation and does almost nothing, and it and the World Bank make the problem worse by their own rigid insistence on repayments and the appalling system of surcharges imposed by the IMF. The G7 and the “international community” have been absent from action, which is deeply irresponsible given the scale of the problem and their role in creating it.
The sad truth is that “investor sentiment” moves against poorer economies, regardless of the actual economic conditions in specific countries. Private rating agencies amplify the problem. This means that contagion is all too likely and will affect not just economies that are already struggling, but a much wider range of LMICs that will face real difficulties in servicing their debt. Lebanon, Suriname and Zambia are already in formal default; Belarus is on the edge of the abyss; and Egypt, Ghana and Tunisia are seriously over-indebted.
Many countries with low per capita income and high absolute poverty face stagflation. Billions of people are increasingly unable to afford basic nutritious food and cannot afford basic health care expenses. Material insecurity and social tensions are inevitable.
The situation can still be resolved, but it requires urgent action, especially from the IFIs and the G7. Rapid and systematic debt resolution actions to attract private creditors and other creditors, such as China, are needed, just as the IFIs are doing their part to provide debt relief and end punitive measures such as surcharges. In addition, policies to limit speculation in commodity markets and the profits of big food and oil companies need to be put in place. Finally, the recycling of Special Drawing Rights (SDRs) – essentially “IMF coupons” – from countries that will not use them to countries that desperately need them is vital, as is another release of SDRs equivalent to about $650 billion to provide immediate relief.
Without these minimum measures, the post-Covid and post-Ukraine global economy risks being engulfed in a dystopia of defaults, rising poverty and socio-political instability.