27 May 2022

Sri Lanka Is an Omen

Mark Malloch-Brown

Many Western leaders are behaving as though there is one crisis in the world: Russia’s invasion of Ukraine. While some are waking up to the widespread knock-on effects for food and energy security, there is little bandwidth, it seems, to address the underlying looming crisis: a global economic unwinding driven by the COVID-19 pandemic, climate breakdown, and degradation of the international political and economic system that has been at least a decade in the making.

Together, these crises have put scores of countries at serious risk and lit a fuse where those risks intersect with authoritarianism and poor governance. Sri Lanka is a case in point. The country owes over $50 billion to government creditors such as India, China, and Japan, and private bondholders—and it is no longer making interest payments.

The reasons for its economic woes are complex. Sri Lankan President Gotabaya Rajapaksa’s family has dominated the country for much of its recent history through a populist, security-centered regime criticized for economic mismanagement, corruption, and its brutal campaign to end the civil war in 2009. Its conduct during the conflict has been the subject of several United Nations reports, which point to credible allegations of war crimes and human rights abuses.

Under the Rajapaksa family’s rule, Sri Lanka has incurred a string of Chinese debts, including for white elephant projects that have yielded little to no income—one such project close to the Rajapaksas’ hometown was dubbed “The World’s Emptiest International Airport” by Forbes. When COVID-19 struck, they ploughed on with sweeping tax cuts as tourism collapsed—wiping out state revenue and personal incomes.

Two years on, the country has run out of foreign exchange. Last week, it was down to its last 24 hours of gasoline stocks. Medicine and food supplies are critically low. Despite ample warning and mounting protests, the government held out for too long before approaching the International Monetary Fund (IMF), and none of the structural and governance reforms are in place that might allow an IMF program a realistic chance of success. Instead, the government continues to struggle under a caretaker setup that lacks a clear public mandate.

While Sri Lanka’s woes are as much of its own making as fueled by global trends, they are an ominous marker of what’s to come in a world that seems able to handle just one crisis at a time—and often not even that.

Rising food prices and shortages, a consequence of the Russia-Ukraine war and COVID-19, as well as security-induced supply chain disruptions, are driving large parts of the developing world toward a cost-of-living and sovereign debt crisis with likely drastic consequences.

According to Bloomberg, “At least 14 developing economies … have debt yields at an excess of 1,000 basis points over US Treasuries, a threshold for bonds to be considered distressed.” The U.N. has warned that 1.7 billion people in 107 countries are at serious risk of food, fuel, and financial insecurity: a fifth of the global population and more than half of the organization’s member states.

Each country has a different story for why it faces turmoil. Ghana, a well-managed economy with generally good governance, is in trouble because of its virtues. It could borrow commercially, so it did, and it now faces a debt crisis. Rich countries are also not immune. In March, high energy costs led to strikes and protests in France, Greece, and Spain.

Egypt, a former wheat exporter, is now the world’s biggest importer as climate pressures combine with dramatic price increases due to Russia’s invasion of Ukraine. Before the crisis, Russia and Ukraine supplied 30 percent of global wheat exports, and Ukraine is also one of the World Food Program’s biggest suppliers of sunflower oil and other foods.

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