Sri Lanka crisis is just a harbinger, other countries with high debt might follow – IMF

The IMF chief Kristalina Georgieva made these straightforward remarks at the G20 Finance Ministers, and Central Bank Governors (FMCBG) held in Indonesia, which kicked off on July 15.

Sri Lanka is in the midst of a massive economic crisis that has sparked widespread protests and prompted the president to resign after he fled the country – but other countries could be at risk of similar problems, according to the head of the International Monetary Fund (IMF).

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“Countries with high debt and limited policy space will face additional strains. Sri Lanka is a good example,” IMF Managing Director Kristalina Georgieva said Saturday.

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She said many developing countries have also experienced persistent capital outflows for four months in a row, threatening their dreams of catching up with advanced economies.

The war in Ukraine and the sanctions of the West against Russia have intensified, exerting added pressure on commodity and food prices, she said, adding that continuing pandemic-related disruptions and renewed bottlenecks in global supply chains are weighing on economic activity, reported NewsWire.

Sri Lanka has been facing the worst economic crisis since independence in 1948, leading to an acute shortage of essential items like food, medicine, cooking gas, and fuel across the island nation.

The country is struggling with a foreign exchange crisis and has difficulty paying for essential imports such as food, fuel, and medicine for its 22 million people. Inflation has skyrocketed 50 percent, and food prices are 80 percent higher than a year ago.

This year, the Sri Lankan rupee has depreciated sharply against the U.S. dollar and other major world currencies.

In April, the nearly-bankrupt country announced that it is suspending nearly US$7 billion foreign debt repayment due for this year out of about US$25 billion due through 2026, Sri Lanka’s total foreign debt.

The economic crisis has particularly impacted food security, agriculture, livelihoods, and access to health services. Food production in the last harvest season was 40 – 50 percent lower than last year, and the current agricultural season is at risk, with seeds, fertilizers, fuel, and credit shortages.

Sri Lanka is one of the few nations named by the Food and Agriculture Organization (FAO), which is expected to go without food due to the global food shortage expected this year.

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Officials had been negotiating a US$3 billion bailout package with the IMF. But those talks are currently stalled in the face of political chaos.

However, the same global headwinds – rising inflation and interest rate hikes, depreciating currencies, high debt, and dwindling foreign exchange reserves – are hitting other regional economies.

China is a significant lender to several of these developing and emerging economies and could therefore have a decisive impact on their fate. However, it is largely unclear what terms Beijing will lend or how it will restructure its debt.

Therefore, it is expected that in the coming weeks and months, more countries will no longer be able to withstand the economic and financial pressure and collapse. A chain reaction that will eventually affect the industrialized countries as well.

After all, Western banks and insurance companies are also active in these countries, and migration pressure must not be neglected either.