Is the Global South's Economy About to Collapse?
Do you remember the 1980s? Gloria Steinem, theater, extreme fashion, heavy metal, breakdancing, and mixtape? A strange era which is still widely celebrated. But not in Latin America where they consider the 80s, “The lost decade”. Why? Because they faced a terrible financial turmoil. A debt typhoon, which eroded their economies. What was the trigger? Two large oil price shocks. Skyrocketing oil prices disrupted their finances, created big deficits [and surpluses] took their foreign debt to unprecedented highs and pushed their economies to the point of collapse.
Mexico was the first country to fall. In 1982, it declared that it would not be able to pay its debt. What followed was a series of sovereign defaults in Latin America. One country after another was engulfed in the debt crisis: Brazil, Chile, Argentina, Colombia, Venezuela, Peru, and Ecuador. All of them fell like dominoes. They faced deep recession, high inflation, mounting debt, unemployment, and slow economic growth. Three decades on is history about to repeat itself. Look around you. Developing countries are struggling with a sovereign debt crisis. One of them has already succumbed around six months ago: Sri Lanka! Its economy has collapsed. Ballooning debt and shrinking foreign reserves. There isn't enough money to pay for basic necessities. Of course, this crisis is of Sri Lanka’s own making. The mismanagement of finances and colossal corruption, they spent more than the national income. They allowed deep tax cuts and destroyed their economy.
But the world did not help. Look at the global factors at play: the pandemic-induced slow down, the growing cost of borrowing, and the Russia-Ukraine conflict which has increased food and fuel prices. These factors compounded the Sri Lankan crisis and they still persist. The fear is that the Sri Lankan crisis could mutate! Experts say, Colombo is just the canary in the coal mine. More countries are set to fall and that the entire developing world is at risk.
On the 15th of February, exactly nine days before Russia’s “special operations” began in Ukraine, the World Bank issued a warning that developing nations face a looming debt crisis. World Bank named 70 countries, 70 low and middle income countries facing debt repayments worth $ 11 billion. The report said this burden could crush their economies in 2022. Nine days later, Russia’s operations against Ukraine started. The conflict disrupted supply chain, threw the financial markets into disarray and triggered a global oil crisis. The economic forecasts became darker and stalker. In March, the United Nations released a report that stated there were 107 countries that face at least one of the following three risks:
Number 1: Rising food prices,
Number 2: Rising energy prices,
Number 3: Tougher financial conditions.
107 countries face these risks. Together, they represent 1.7 billion people. That's more than one-fifth of humanity. There are 69 countries that face all the three risks: food, energy, finance. 69 countries could go the Sri Lankan way. That would be 25 in Africa. 25 in the Asia-Pacific, and 19 in Latin-America. What are some examples of these countries?
We will start with Egypt. The Land of Pharaohs. Egypt is in the grasp of a financial crisis. It is the world's largest importer of wheat. Russia and Ukraine were its top suppliers. As they fight now, the supplies are running out. In May, Egypt said that its wheat reserves would not last more than three months!
Next we have Tunisia, the birthplace of the Arab Spring. Its economy is overheating. Foreign debt accounts for 100% of its GDP. The trade deficit has widened to $800 million. Inflation stands at 7%. Fuel prices at record highs. Experts say Tunisia could soon face civil unrest. The same warning has been issued for Lebanon. The Switzerland of West Asia - well not anymore. In 2020, the Beirut blasts destroyed Lebanon's largest grain storage silos which caused food prices to go up by 11 times as well as the Lebanese currency to lose 90% of its value. Public debt grew to 360% of the GDP. The war in Ukraine complicated things further. Lebanon, imported 80% of its feet from Ukraine. Those supplies have fallen. There’s bread shortage and a scarcity of sunflower oil. Lebanon has been forced to take a $150 million dollar loan from the World Bank to ensure food security.
Then we have Argentina. Inflation is paralyzing its economy. External debt is mounting. Argentina has defaulted on debt repayments nine times. To avoid a tenth default, it has gone to the IMF. It wants to refinance a $45 billion loan. It may give Argentina brief reprieve, but it will not settle the looming civil unrest. Analysts say that Argentina is staring at a long and cold winter this year.
Some other Latin American countries are also at risk like El Salvador and Peru. They face hyperinflation in commodities, tumbling bonds, food shortages, detonating prices, and mass unemployment, very much like Sri Lanka. Reports say both countries could soon face civil unrest.
In sub-Saharan Africa, Ghana, Kenya, South Africa, Ethiopia could be the worst hit. In Ghana, debt levels are soaring, interest payments are choking the economy. A debt crisis looks imminent in Kenya. The debt has climbed to $70 billion at 70% of its GDP. Six months ago, they got a $244 million loan from the IMF to weather this economic storm. In South Africa, the debt has reached 80 % of its GDP. There's a looming threat of state collapse, a re-run of the 2021 civil unrest.
Next comes Turkey. Their currency (Lira) is sliding, the debt is soaring upwards of 54% of the GDP. Inflation has touched 70%, GDP growth forecast cut to 3.3%. There's also a food shortage. Turkey is getting 50,000 tons of wheat from India. And these are just a few examples.
The World Bank says that in the next 12 months, as many as a dozen developing economies may not be able to service their debt. This will be the largest debt crisis in a generation!
Here’s the prognosis: The entire world is in a debt distress. National budgets are at a breaking point. Some governments are being forced to cut spending. Others are borrowing more to stay afloat. What can we do to stop this? How can the world prevent a debt typhoon? Here is a road map with five solutions that if implemented urgently, the collective result would be constructive in both short as well as long term.
Manage borrowing and lending better. Creditor should offer contingency plans to borrowers, plans to pause re-payments if the borrower faces financial difficulties.
Introduce better ways to manage shocks and crises. Low income countries are always vulnerable to external crises. A high proportion of their debt is in foreign currency. This makes their economy's vulnerable to external changes. We need to develop a mechanism which insulates them from such shocks. A mechanism to restructure unsustainable deaths better.
Expand the common frameworks eligibility criteria. What is that? It's a framework established by the G20. It is supposed to help poor countries restructure their debt. So far, this framework applies to only 73 of the poorest countries in the world. It should be expanded. It should cover other highly indebted countries. Also vulnerable, lower middle, income countries.
Promote alternatives to borrowing. Lower-income countries face major public financing short forms, even for basic public things like health care and education. Studies say if these countries improve effective and equitable tax collection, they can reduce the need for borrowing.
Increase accountability and transparency. Both for borrowers and lenders. For instance, the World Bank is often raised concerns over the terms of lending by Chinese creditors. A 20/20 one study found that Chinese contracts include unusual confidentiality clauses. No secret there! They allow the lenders to influence the borrower's domestic and foreign policy. Sri Lanka is a classic example. It let China dictate its domestic policy in return for money and this needs to end. We need a framework which protects countries from falling into debt traps laid by the likes of China. For far too long, the world has looked the other way.
Debt crisis in developing economies is now a security issue. Relief comes too little and too late and this must change. We need pre-emptive action and approach that prevents such crises. This is the biggest lesson from the pandemic. Any crisis can have a domino effect. A small event in a far-off land can trigger an unstoppable chain reaction. So Sri Lanka may have just have just been a beginning. There's no saying where it ends.