Rising energy and food prices, higher interest rates and the Ukraine war are putting several states under pressure, including Russia, Turkey and Egypt. Some are already facing national bankruptcy. The World Bank puts together a $170 billion aid package.
Everyday life in Colombo currently means standing in line. Only those who have patience for five, six, seven hours a day at 30 degrees in the blazing sun will be rewarded in the end – with rice, meat or vegetables, petrol for the car or hygiene items. Everything is tight right now in the island nation of Sri Lanka off the coast of India. “If you get sick, you won’t get any medication in the hospital,” says Paikiasothy Saravanamuttu, head of the Center for Policy Alternatives (CPA), in an interview with Der Spiegel, “everything that is urgently needed to live is virtually no longer available. Those who don’t stand in line take to the streets and demonstrate against the government.
Sri Lanka’s problem is only partly homegrown. When Mahinda Rajapaksa was elected president in 2019, one of his first acts was to cut taxes. This tore a hole in the treasury, which over time widened into the developing country’s worst economic crisis since 1948. During the Corona crisis, tourists, who are Sri Lanka’s most important source of income, were forced to stay away. For the past six months, the island nation has also been feeling the effects of rising energy prices, and with the Ukraine war, food has also become noticeably more expensive.
Sri Lanka is an extreme case, but not the only country that is getting into serious economic difficulties. The island state is on the verge of national bankruptcy. Other countries such as Pakistan, Tunisia, Ethiopia, El Salvador and Ghana are not much further away, according to an analysis by the financial news agency Bloomberg. But even larger emerging countries have serious problems. At the top of the list is Russia, which largely put itself in this position by invading Ukraine and imposing sanctions that followed.
But threats are also growing in Turkey, Egypt, the Philippines, Vietnam and even Poland. The World Bank and the International Monetary Fund warned in unison last week that “there is a huge increase in the mountains of debt, especially in the poorest countries.” IMF chief Kristalina Georgieva said 60 percent of all developing countries are in “debt distress”. There’s a term the organization uses when the loan installments a country has to pay each year account for more than half of its economic strength. Anyone who has to spend so much money to service their debts no longer has it to help their country.
There are three reasons that are currently bringing so many countries to the brink of bankruptcy:
The fact that the mountains of debt in emerging and developing countries have risen so sharply is due to the corona pandemic, as is the case in Germany. On the one hand, many countries lost important sources of income such as tourism, factories had to close and trade routes were destroyed. On the other hand, the pandemic brought enormous costs to compensate for these shortfalls, to treat the sick and to get vaccines. Despite everything, a country like Germany can afford to spend hundreds of billions of euros in such a phase – developing countries cannot.
The fact that the Fed is raising the US key interest rate is primarily a domestic political decision. But it has repercussions throughout the world. Because as long as interest rates in the USA were close to zero, investors invested where there were even better returns – and these were mostly emerging and developing countries. If interest rates in the USA now rise, many investors will withdraw their money from abroad and invest it in the USA again. All other countries lack a lot of money for the expansion of infrastructure, health or education. Bloomberg has calculated that Argentina, Turkey, Brazil, Egypt and Colombia are most at risk of such capital flight.
At first glance, the fact that Russia invaded Ukraine has little to do with countries in Africa, Asia and South America. In fact, these countries are collateral damage. Due to the war, the prices for oil (8 percent), natural gas (45 percent) and many building materials from wood to aluminum have increased significantly. Worse still, Russia and Ukraine are important suppliers of wheat and other foods to developing countries. The supply of food is now faltering and prices are rising. For wheat, around 27 percent more is being demanded on the world market today than at the end of February. People in poorer countries can hardly afford it. There is also a lack of affordable fertilizers to grow food in sufficient quantities. Their production requires expensive natural gas.
“We can see disaster coming,” says John Lipsky. The economist was number two at the IMF for years. However, his old employer and the World Bank are trying to prevent the worst from happening. The World Bank announced a $170 billion aid package last week. It is the largest aid program in the organization’s history, even larger than the Corona aid of the past two years. It is to be paid out over the next 15 months, a third by the end of June. The money should also be used to pay analysts and consultants who help the individual states.
However, it will take much longer for the crisis to be over. “It will take about three to six years before we can speak of a kind of normality again,” says Saravanamuttu for Sri Lanka. And that only applies, he qualifies, if the right reforms are tackled now. That might be too long for many of his fellow citizens, but “I don’t see any other possibility”.
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