10 months ago

Global debt crisis and South Asia

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In early July this year, the Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva said "there is a growing risk of a debt crisis" due to borrowing amid the Covid-19 pandemic, tightening monetary policy and the rising cost of servicing debt in US dollars. She further added that some 30 per cent of developing and emerging markets, and 60 per cent of low-income countries are at or near debt distress.

According to the IMF, global debt surged to US$226 trillion in 2020 indicating a 28 percentage points rise from the previous year to 256 per cent of global GDP. Also, according to the Institute of International Finance (IIF), the global finance industry association, global debt reached  US$303 trillion in 2021. This was the biggest one-year debt surge since the Second World War, according to the IMF. Borrowing by governments or public borrowing accounted for slightly more than half of the increase.

Covid-19 primarily led to this unprecedented borrowing. It is indeed true that borrowing already was also surging even before the pandemic. According to the World Bank the current wave of borrowing is the world's fourth since 1970. The IMF warns that global debt is at dangerously high levels across governments, businesses and households.

The global economic and financial outlook for years ahead has rather deteriorated due the fear of the US and other advanced economies descending into recession and financial turmoil. In fact, several prominent Wall Street institutions have now decided that a recession is their baseline scenario as well as the Bank of England.

Under these circumstances with rising debt levels, a global debt crisis looms ahead because as monetary policy is being tightened by most central banks at the same time, rising interest rates will squeeze out highly debt leveraged firms, financial institutions and governments into bankruptcy and default. With such high levels of debt, governments are not in a position to use expansionary fiscal tools. In fact,  all fiscal tools have already been used up.

Now the global economy is facing slowing growth and rising inflation, raising the concerns of a 1970s style stagflation leading to a stagflationary global debt crisis. Monetary policy tightening in the US and EU has sharply increased the cost of borrowing, especially countries in the Global South. Rising interests rates in the US and EU have already caused capital flights from these countries over the last few months to the tune of US$20 billion or more according to the IIF. If interest rates continue to rise, the trend is likely to continue as investors look for safer place and better returns.

With rising debt levels financial stability of countries around the world is increasingly threatened and global shocks further add to that increasing instability. Countries in the Global South  have been the worst hit countries during previous debt crises. These countries when get into debt distress, a situation when countries are unable to fulfil their financial obligations such as repayments due on debt, they experience protracted recession, high inflation, high unemployment and very slow growth. According to the IMF, 30 per cent of emerging market economies and 60 per cent of low-income countries are already in or nearing debt distress.

Between 2010 and 2020 public debt of developing countries has increased from an average of 4.2 per cent to 62.3 per cent of GDP. More than one third of the increase, equal to 8.3 percentage points took place in 2020 alone. As public debt increased, so did the resource allocated to meet creditor claims. It is estimated that the share of government revenues in developing countries to meet external debt servicing increased three folds from 6.6 per cent to 17.4 per cent between 2011 and 2020. Unlike previous debt crises in the Global South like in Latin America in the 1980s, the current turmoil has private lenders at the centre of turmoil.

Now a storm of economic forces is interacting to impact on countries in South Asia with rising inflation and interest rates and unsustainable debt. In fact, no economic crisis just appears on the horizon one day, it builds up over time. The portents of economic disaster in Sri Lanka were on display during the recent economic and political upheaval where appalling government failure sent the country into a US$35 billion debt default and severe food and fuel shortages. Sri Lanka is a perfect example of a developing country collapsing under economic stress.

Long standing poor governance and corruption in Sri Lanka has combined with economic crises, rising inflation, and food and fuel shortages that led to snap the threads  of political, economic and social stability. The result is unrest, riots, collapse of the government and forcing the President of the country to flee.

Sri Lanka has a long history of struggling with debt burdens, especially debts from the West. Having already gone through 16  economic stabilisation programmes with the IMF, a US engineered and controlled institution, the country is now preparing itself to go through the same process for the 17th time. Definitely, those 16 structural adjustment programmes have not worked.

Sri Lanka was the second country after Pinochet's Chile to embrace the "Washington Consensus' or more precisely it has been pursuing the neoliberal economic doctrine in its economic management since the  early 1980s. In fact, the Sri Lankan economy for many decades  has been managed by the IMF since the country achieved its independence in 1948. As of 2021, a staggering 81 per cent of Sri Lanka's foreign debt was owned by US and European financial institutions along with the US'   two Asian sentinel states deployed against China, Japan and India. China accounts for only 10 per cent of Sri Lanka's foreign debt. Yet, the US corporate media and the mainstream media in India and Japan are spreading the bogey of the "Chinese debt trap".

Sri Lanka is unlikely to be the last country to face economic, social and political strife in South Asia. Countries that are run poorly and in severe economic distress with high debt burdens are the ones, according to analysts, likely to face similar turmoil in the near future. Sri Lanka is the harbinger of a coming storm of debt distress not only in South Asia but also countries in the Global South.

The past period of very low interest rates in advanced economies facilitated increased flows of funds to low- and middle-income countries such as countries in South Asia from richer countries. These flows largely  flowed to new developmental states who significantly moved away from the historical experience of the East Asian Development Model. In fact, a very perplexing problem has emerged for these developmental states' quest for external debt financed economic growth centred around their ability to cope with currency crises notwithstanding rising external debt burden.

Such large flows of foreign credit have always been a problematic issue for these new developmental states despite being encouraged by international financial institutions from the West. This is simply because unlike places like the US and EU, capital leaves low- and middle-income countries including developmental states at the first sign of any problem. Private credit rating agencies further amplify the problem creating a contagion effect affecting countries beyond the countries that are experiencing problems in servicing their debts.

Sri Lanka's woes are part of a global gloomy pattern that is playing out in countries of South Asia.  In fact, the collapse of Sri Lankan economy is the likely start of many other developing market economies' sovereign debt crises where Sri Lanka is the first domino to fall.

 Another South Asian country, Pakistan now sits at the top closely approximating the current economic crisis in Sri Lanka. Foreign exchange reserves to import food and fuel now shrunk to about US$9 billion and the currency depreciated by 25 per cent against the US dollar. With an inflation rate now at 25 per cent, the currency is likely to depreciate further. Pakistan is now scrambling for an IMF bailout  to avert a debt default as the currency plummets.  Pakistan, Like Sri Lanka is a long standing client of the IMF. It has also asked its Middle-Eastern friendly countries like Saudi Arabia and the United Arab Emirates to provide loans.

The current account deficit of Pakistan stood at US$4.1 billion in the first quarter of this year. As the currency depreciates, that pushes up food and fuel prices as imports become more expensive and further widens the current account balance. Pakistan, like Sri Lanka, is stressed due to high external debt/GDP ratio which stood at 35 per cent at the beginning of the year compared to Sri Lanka's 58 per cent. Like in Sri Lanka, Pakistan's economic problems have been in the making for decades. A set of poor economic policy choices and perennial political instability further added to its economic woes. Since 1950, Pakistan so far has received 22 economic bailouts from the IMF-- far more than Sri Lanka, yet the country is in a deep economic crisis now.

Despite achieving robust economic growth in recent years, Bangladesh  is now faced with the widening current account balance, declining foreign exchange reserves, a depreciating currency and rising inflation. Climate change also poses a formidable risk for the country. In fact, Bangladesh ranks as the 7th most vulnerable country from the climate change induced impacts.  With rising global food and fuel prices, Bangladesh will have to buy food and fuel at higher prices negatively impacting on the current account balance and the foreign exchange reserves consequently causing the taka to depreciate further.

At the same time Bangladesh exports are also facing uncertainties due to global economic slowdown, US sanctions on Russia and global transport bottlenecks. All these will cause further rises in price levels. The inflation rate stood at 7.56 per cent in June this year. Bangladesh recorded its all time high current account deficit at US$18.70 billion during the 2021-22 financial year (July-June).  A widening trade deficit coupled with decreased remittances contributed to this current account deficit. Bangladesh's external debt stood at US$91 billion at the end of 2021.

In May 2021, Bangladesh extended a US$200 million currency swap facility to Sri Lanka to mitigate the country's foreign exchange shortage and now with  an external debt to GDP ratio of 21.8 per cent,  Bangladesh surprisingly is the latest country in South Asia to seek a loan from the IMF of US$4.5 billion for budgetary and balance payment support as well as to mitigate the effects of climate change.

It is also reported that Bangladesh  sought assistance from the World Bank and Asian Development Bank (ADB) to the tune of US$1.0 billion from each to bolster its foreign exchange reserves which now stands at US$ 39.7 billion, a figure disputed by the IMF. Bangladesh also sought assistance from Japan.

After recording the strong economic growth in 2020 and 2021, the India economy is progressively losing momentum due to rising food and fuel prices. The inflation rate is 7 per cent. India has also seen its rupee plunge to all time lows as its trade deficit balloons. The external debt to GDP ratio stood at 19.9 per cent early this year.  India's foreign exchange reserves stands at US$573 billion. Also, India is  experiencing capital outflows as interest rates continue to rise in the US.

For weeks India sweltered under high temperature from June to July this year impacting on wheat  production. Now there is a growing fear that a "Chapati" crisis may be brewing in India as indicated by the Economic Times. Overall, the Indian economy is performing better than anticipated in view of the economic crises currently faced by most of its neighbours. But rising commodity prices still pose a downside risk.

Nepal, a country with a population of 29.2 million as estimated in 2021, is also facing widening current account deficits, rising inflation. reduced remittances and tourism earnings and declining foreign exchange reserves at US$9 billion which can  cover for six months of imports. Nepal also has imposed import restrictions on goods considered to be luxury goods to stem the  flow of imports when export earnings are declining. External debt of Nepal stood at US$8.9 billion early this year.

Rising global food and fuel prices have caused Nepal's GDP and employment to contract. Household consumption declined at a faster rate than GDP contraction causing increased poverty. Fuel and fertiliser shocks are far more prominent in the decline of GDP in Nepal.

Maldives, another South Asian Country heavily reliant on tourism like Sri Lanka and Nepal, is also facing a rising external debt burden with a debt/GDP ratio of 146 per cent.  The country is now in danger of debt default as food and fuel prices continue to rise. With an external debt burden of US$2.5 billion, according to the IMF, the risk of external debt distress is high for Maldives.

As inflation and interest rates continue to rise, currencies depreciate, current account deficits widen and the US led NATO proxy war against Russia in Ukraine continues, external debt distress in varying degrees is likely to continue for countries in South Asia. Also, unlike previous debt crises in the Global South in the 1980s, in many instances private lenders are at the centre of the current debt crisis and that brings in a new dimension to debt rescheduling.

Now three countries in South Asia that have asked for the IMF's structural adjustment packages need to factor in that these packages are designed to weaken the relationship between the government and the market in  affected countries and promote the neoliberal model as envisaged in the "Washington Consensus". It is to be noted that neoliberalism was born in Chile in the mid 1970s, but under the present Boric government it is going to die there.

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