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Sri Lanka, a south Asian country, has reserves now only totaling $50 million and faces bankruptcy and sovereign default. Unfortunately, industry experts fear this is the beginning of a global debt crisis ushered in by the pandemic, rampant food and fuel price inflation, and global increases in interest rates.
To help Sri Lanka, an International Monetary Fund (IMF) delegation met with country officials to discuss a relief package that would include financial support and be predicated upon a hard-hitting set of economic reforms.
Unfortunately, many low- and middle-income countries potentially face the same fate. Recently, the World Bank president shared deep concerns for developing countries shocked by the increasing cost of servicing debt, and nearly unparalleled increases in the price of food, fertilizer, and energy, in part brought upon by Russia’s invasion of Ukraine. Experts fear the plight of Sri Lanka ominously signals what is to come for others.
The World Bank estimates 60% of the lowest-income countries now experience financial distress. Russia’s invasion of Ukraine has not helped. Investors fleeing to safety use the US dollar as a safe haven for capital. The US dollar appreciates, and, at the same time, emerging market currencies depreciate. Compounding the problem is restrictive US monetary policy increasing interest rates, and, subsequently, the cost of debt.
The United Nations recently attempted to estimate the magnitude of the potential crisis. Researchers found 107 countries at risk due to at least one of the three following macroeconomic shocks: more restrictive financial conditions, the cost of feeding the nation, and energy price inflation. Sixty-nine countries were exposed to the ill-effects of all three of these. They include 19 countries in Latin America, 25 countries in Asia and the Pacific, and 25 countries in Africa.
Rescue talks have begun with some countries on the list. For example, rescue talks between Egypt and Tunisia – both highly dependent on Russia and Ukraine wheat imports – and the IMF have begun. Similar talks begin with Pakistan, which recently has had to cut power due to the rising cost of energy imports. Additional countries on the watch list include Ghana, Kenya, South Africa, Ethiopia, El Salvador, and Peru. And, recently, the IMF negotiated a $45 billion debt deal with Argentina.
While emerging market crises are not a new phenomenon, the extent of the potential emerging crisis worries the UN. Previously, crises largely were confined to one or two countries at a time. Now, the UN fears a global, systemic crisis which the world may not be prepared to face.
