On July 5, Sri Lankan Prime Minister Wickremesinghe told parliament that the country was bankrupt and that the unprecedented economic crisis would last until at least the end of 2023. Four days later, large-scale protests broke out in Colombo, the capital of Sri Lanka. Local people, who were increasingly dissatisfied with the status quo, rushed into the Presidential Palace to demonstrate and protest. The Prime Minister’s residence was also set on fire that night. Subsequently, Prime Minister Wickremesinghe and President Gotabaya Rajapaksa, who had been in office for only two months, resigned on July 13 and 14, respectively.
Since the outbreak of the new crown epidemic, Sri Lanka’s national development has been severely impacted. At the end of 2021, the country’s foreign exchange reserves were at a level of only $1.6 billion, prompting widespread concerns about whether Sri Lanka was on the verge of bankruptcy. The spillover effect from the outbreak of the Russian-Ukrainian conflict in February 2022 is considered by foreign media to be the “last straw” that led to the country’s bankruptcy.
Trapped in a “vicious circle”
Sri Lanka used to be an “excellent student” in national development in South Asia, and has been trying to find a new development orientation, but in the process of transformation, it has faced the dilemma of excessive debt growth and consecutive “black swan” events.
In the late 1970s, Sri Lanka’s industrialization began to accelerate. At that time, the export-oriented character of the country’s economy was obvious, but the civil war that broke out in 1983 disrupted the country’s development process. In 2009, Sri Lanka, which finally ended its civil war, tried to reposition its development direction, but found that due to rising labor costs, its labor-intensive industries, mainly textiles, could no longer compete with neighboring Bangladesh and India. In order to transform, the then President Mahinda Rajapaksa proposed the “Mahinda Vision” as Sri Lanka’s medium and long-term plan in the same year. The vision proposes to take advantage of Sri Lanka’s advantageous geographical location and make it “a sea and air hub for global commerce, energy and knowledge”. The prospect was put forward at the same time as the global economic recession triggered by the subprime mortgage crisis in the United States in 2008. Major economies in the world have introduced relatively loose monetary policies in response to the crisis. At this time, capital in the international market is abundant, and Sri Lanka has been able to pass a relatively low cost. Raise large amounts of capital from international markets to improve domestic infrastructure. With the simultaneous launch of many infrastructure projects, the Sri Lankan construction industry has maintained a strong growth momentum.
However, the country’s manufacturing industry has grown slowly, and the problem of a single export structure has not been resolved. The failure to create more goods for foreign trade has made it difficult for Sri Lanka to rely on its own trade revenue to repay international borrowings. In principle, as long as Sri Lanka can continue to borrow new debts from the international market to repay old debts, the country’s debt repayment crisis will be postponed indefinitely. In 2013, the United States announced to withdraw from the quantitative easing monetary policy, the borrowing cost in the international market began to rise, and the debt crisis began to follow Sri Lanka.
Since then, the ensuing “black swan” events have severely hit Sri Lanka’s economic development. Severe floods on 17 May 2017 hit the country’s agricultural development, which accounts for only 8% of Sri Lanka’s gross domestic product (GDP), but absorbs one-third of the country’s workforce It is also the direct or indirect livelihood of 80% of Sri Lanka’s population. On April 21, 2019, eight consecutive terrorist attacks occurred in Colombo, the capital of Sri Lanka, which severely impacted the country’s tourism industry. As Sri Lanka’s largest source of foreign exchange, tourism has contributed nearly 12% to its GDP in recent years. . The global pandemic of the new crown epidemic in 2020 has caused the number of overseas tourists to Sri Lanka to plummet by 90%, and has not yet recovered. At the same time, in 2021, the Sri Lankan government has also promulgated a ban on inorganic fertilizers and pesticides that are deviated from the country’s actual situation, resulting in a nearly 50% reduction in the country’s agricultural production scale, intensified food shortages and rising food prices, and further push up inflation. . In February 2022, the outbreak of the Russian-Ukrainian conflict caused international food and fuel prices to continue to rise, which additionally increased Sri Lanka’s import costs.
As a result, Sri Lanka has fallen into a “vicious circle”: the more difficult the domestic economy is, the more it needs external financial assistance; but because of the domestic economic difficulties, international rating agencies continue to downgrade its sovereign credit rating, making its borrowing costs rise, making international capital The country is “avoiding it”. Finally, on May 19, 2022, Sri Lanka defaulted on its sovereign debt for the first time since independence in 1948.
Spill over the world
In April 2022, the United Nations Crisis Management Group issued a report stating that the conflict between Russia and Ukraine has had a chain reaction around the world. The world’s 1.7 billion people and 107 countries, mainly developing countries, are facing food, energy shortages and financial turmoil. risk. Among the 107 countries listed in the report, 35 of the world’s 46 less developed countries are among them, and 40 of the world’s 58 island countries are among them. Among these countries, countries with fragile economic foundations may even face the risk of a combination of three crises. In the Asia-Pacific region alone, there are 25 similar economies, including Sri Lanka. However, Sri Lanka is also the only country in the South Asian region to be included in the United Nations list of upper-middle-income countries. In this sense, Sri Lanka is also in crisis or linked to its own policy mistakes.
Sri Lanka is not the only country facing the current crisis in South Asia. In the past two years, Bangladesh has been considered to be “outstanding” in South Asia due to its steady and rising development. However, after the outbreak of the Russian-Ukrainian conflict, the country’s trade deficit began to expand rapidly. In April this year, a spokesman for the Central Bank of Nepal said that if the economic situation of Ruoni cannot improve, its foreign exchange reserves will also be rapidly depleted.
The economic situation in Pakistan is of particular concern. Since the 1950s, Pakistan has experienced frequent balance of payments crises due to chronically high fiscal and current account deficits. Pakistan’s savings rate is at a low level all year round. In order to meet domestic consumption and investment needs, the Pakistani government can only borrow at home and abroad at the same time. Therefore, high debt has always been a prominent problem in the Pakistani economy. In fiscal year 2019, the total domestic and foreign debt of the Pakistani government was as high as 93.2% of GDP, of which foreign debt reached 41.6%. Pakistan’s economic operation has been in a relatively fragile state.
But compared with Sri Lanka, Pakistan, which is facing a crisis, appears to be more calm. This is mainly due to the fact that Pakistan has repeatedly experienced assistance to its economy from international institutions such as the International Monetary Fund (IMF) and has rich experience. At the same time, 80% of Pakistan’s debt comes from bilateral loans from international institutions and China, Japan and other countries. Therefore, when the debt is restructured, Pakistan’s negotiation is easier to advance, and the reorganization conditions are relatively favorable. In 2019, Pakistan received US$6 billion in bailout funds from international institutions in batches. If Pakistan’s balance of payments tightens again due to the conflict between Russia and Ukraine, it does not rule out the possibility that the project will speed up the disbursement of funds in the later period.
Although strong countries such as Singapore, Thailand, Vietnam, and India are not in danger of crisis at the moment, the conflict between Russia and Ukraine has also had a negative impact on the economic recovery of these countries in the “post-COVID-19 era”. Two months after the outbreak of the Russian-Ukrainian conflict, the international crude oil price has doubled compared with the same period last year, and while the international food price is on the rise, due to Argentina, India and other countries restricting exports to ensure their own food security, the international market has hoarded a lot of oil. The phenomenon was further exacerbated. The accumulating inflationary pressure, combined with the capital outflow pressure caused by the Fed’s interest rate hike, has caused Singapore, Vietnam and other net importers of oil, wheat and corn to raise interest rates. India was once considered the country with the strongest economic recovery in the post-epidemic era, but more than 85% of its oil demand still relies on imports. Faced with inflationary pressures, India has to raise interest rates. Economic growth forecast for the fiscal year fell to 8.2% from 9%.
At present, the spillover effect brought by the conflict between Russia and Ukraine has spread all over the world. More and more facts have proved that the lack of a global consensus will make it difficult to solve many global problems. It is hoped that all parties will make joint efforts to realize a ceasefire and stop war in the Russian-Ukrainian conflict as soon as possible through dialogue and consultation, and join hands to build a world of peace, development, cooperation and win-win results.
