After the government declared “bankruptcy” and the prime minister and president resigned one after another, Sri Lanka ushered in a new government. On July 20, local time, the Sri Lankan parliament held a vote to elect a new president. Interim President Ranil Wickramasinghe was elected as the new president of Sri Lanka.
In the past six months, this island country, which once belonged to the middle- and high-income countries in South Asia, has fallen into the predicament of high debt and difficulty for its people under the multi-dimensional blow.
At present, even if Sri Lanka has formed a new government, some research experts are still worried about the future situation of the South Asian countries represented by it. One”.
The situation in Sri Lanka did not change overnight. In late May this year, after Sri Lanka defaulted on its sovereign debt, its political and economic situation also fell into turmoil.
On July 5, the then Prime Minister of Sri Lanka (now the new President of Sri Lanka) Wickremesinghe declared the country’s bankruptcy while saying that the unprecedented economic crisis would last at least until the end of 2023.
After that, thousands of protesters in the Sri Lankan capital Colombo stormed the presidential residence and set fire to the prime minister’s residence. The president and prime minister also announced their resignation due to the turmoil, and the country entered a state of emergency for a time.
Media reports mentioned that Sri Lanka defaulted on its sovereign debt for the first time since 1948 on May 19 because it could not repay the debt and interest due. The news pointed out that Sri Lanka’s total foreign debt is 51 billion US dollars, but the available foreign exchange reserves are less than 50 million US dollars as of May, that is, the foreign debt scale is high, and the foreign exchange reserves are low. cost, the problem of insolvency is severe.
Wickremesinghe previously said that Sri Lanka currently has enough rice stocks for five months and imports for three months. If there is no solution for the next 4 months, Sri Lanka will have to rely on other alternatives. At the same time, Sri Lanka is also facing the problem of importing fertilizers, which cost US$600 million, but the current government only has US$300 million.
A more popular understanding of national bankruptcy is that the country is in a situation of insolvency. Wang Se, an assistant researcher at the South Asia Institute of the China Institute of Contemporary International Relations, said that similar to the bankruptcy of an individual or enterprise, the bankruptcy of a country also means a weakening of its credit, and the conditions will become more stringent when applying for assistance from an international organization. . But the difference is that a sovereign state does not “go out of business” and clear its debt as its economy goes bankrupt.
On July 12, local time, in Colombo, Sri Lanka, local people queued up to buy natural gas.
On July 11, local time, two days after protesters in Colombo, Sri Lanka stormed the presidential palace, thousands of people gathered in the capital to visit the presidential palace.
”Living in the pain of high food prices and supply shortages, people can become a powder keg of political instability.” Bloomberg’s report commented on this.
In an interview with a reporter from China Report, Wang Se also said that with the new president taking office in Sri Lanka, its next political trend still needs to be observed, but it is certain that the domestic turmoil in Sri Lanka will still exist for some time.
Wang se believes that this round of crisis in Sri Lanka is caused by the superposition of internal and external factors, which spread from the economic crisis to the political field, thus triggering a national crisis. “I have been ill for a long time.” He admitted to reporters that under the changes in the external environment such as the new crown pneumonia epidemic and the conflict between Russia and Ukraine, the development model of Sri Lanka’s single economic structure and long-term reliance on debt has been severely impacted. The terrorist attack in Colombo, the capital of Sri Lanka in 2019, gave the South Asian island nation, which relies on tourism, a heavy blow.
Inside Sri Lanka, the government’s response to the crisis has also been criticized. Former President Rajapaksa has implemented fiscal deficits and tax cuts since 2019, resulting in a significant reduction in government revenue. At the same time, in order to realize the green transformation of agriculture, Sri Lanka has banned pesticides and herbicides since April last year, which directly led to a sharp drop in its agricultural production and had to buy imported food at high prices.
In addition, Sri Lanka’s welfare system is also considered to be one of the “straw” that crushed the entire country’s economy. In the interview, Hu Shisheng, director of the South Asia Institute of the China Institute of Contemporary International Relations, introduced that in Sri Lanka, the national social welfare promised by the political party to the people for the election has always carried a heavy burden on the finances, and many funds that should have been used for investment and production were therefore used. for public consumption. Hu Shisheng mentioned that at this stage, the high welfare system has become a long-term pressure for many South Asian countries, including Sri Lanka. If the welfare system is difficult to handle properly, there may still be economic risks to the country in the future.
Wang Se also mentioned to reporters that the economic and political crisis that Sri Lanka is going through should serve as a warning to the international community, especially South Asian countries. He said that the domestic turmoil in Sri Lanka is a test for cooperation in the entire South Asia region. If it is not handled properly, the turmoil in Sri Lanka may have spillover effects, leading to political and economic crises in the entire region.
trigger the alarm
A less optimistic situation is that due to the continuation of the new crown pneumonia epidemic and international geopolitical conflicts, many countries have fallen into the dilemma of debt default and foreign exchange shortage.
In Turkey, its inflation rate (hereinafter referred to as “inflation rate”) hit a 24-year record high, once soaring to 78.62%; in Maldives, its public debt level has exceeded the total GDP for one year; with a population of 220 million Pakistan also experienced the highest inflation rate in 13 years at 21.3%. In addition, Laos, Myanmar and other countries are also in a deadlock.
Food, fuel and financial crises triggered or exacerbated by the Russia-Ukraine conflict could destabilize poorer countries, leading more than 70 countries to follow Sri Lanka’s lead in defaulting on their debts, UN data shows.
Hu Shisheng told the “China Report” reporter that when faced with the turbulent international situation, some smaller economies are prone to expose their political and economic fragility. “The situation faced by developing countries is very severe.” Hu Shisheng said that a broken window effect is easy to form between countries now, and the domino effect caused by the Sri Lanka crisis is also very likely to occur.
International Monetary Fund (IMF) President Georgieva has warned that Sri Lanka’s bankruptcy may not be an isolated case. At the G20 finance ministers and central bank governors meeting on July 16, Georgieva called the situation in Sri Lanka a warning that countries with high debt levels and limited policy space will face more in the future. pressure.
She also mentioned that nearly a third of emerging market economies are facing debt distress due to the challenging global economy.
”To a certain extent, Sri Lanka is the epitome of a developing country.” Wang se admitted to reporters that for most countries, energy and food imports are just in demand, and the reorganization of the global supply chain caused by the conflict between Russia and Ukraine is superimposed on the new crown pneumonia. The impact of the epidemic has caused these countries to experience double fiscal deficits, and then a serious fiscal crisis.
Typically, under financial pressure, Pakistan has applied to the International Monetary Fund to resume the rescue plan, and since last month has called on people to drink less tea to reduce tea imports. With the decline in foreign exchange reserves, the Bangladeshi government also announced measures to reduce non-essential imports and attract remittances from overseas diasporas.
Compared with other South Asian countries, Hu Shisheng believes that Sri Lanka has a certain economic foundation, superior geographical location, and an important strategic position at the “Crossroads of the East Sea”. Some infrastructure facilities have been completed and need to be “returned”, and its domestic labor quality Relatively high, if we can seek effective help, there is a “promising prospect” to restore the usual economic state.
In Wangse’s observation, similar to the situation in Sri Lanka, the economic situation in the Maldives is also “very dangerous”. Public information shows that the contribution of tourism revenue to Maldives’ GDP has remained at 25%-30% for many years, and it is its main source of foreign exchange income. However, since the outbreak of the new crown pneumonia, the fragile economic structure of the Maldives has shown its shortcomings.
The latest “World Economic Outlook” report is pessimistic about global economic growth in 2022, and the growth forecast is lowered to 3.2%, down 0.4 percentage points from the forecast released in April 2022; the global growth forecast for 2023 is lowered to 2.9%, down 0.7 percentage points from the forecast issued in April 2022.
The World Bank also warned that the coronavirus pandemic has also exacerbated the risks posed by rising debt burdens in developing countries, requiring a concerted global effort to avoid new crises in these economies.
Hu Shisheng infers that even Sri Lanka, which has a “good foundation”, needs to face a practical problem: the people of Sri Lanka should have a clearer understanding of the country’s situation, otherwise the more turbulent the country is, the more turbulent the country can provide. The country’s distrust will also intensify, and the resulting industrial chain will be more likely to be transferred and replaced. “It will take at least a year for Sri Lanka to recover,” he said.
”It is not inevitable that more countries are on the verge of bankruptcy.” Wang se pointed out to the reporter of “China Report” that the first step of consensus is that both the government and the people should understand the severe economic situation facing the country, and having a stable government is important to the country. Applying for international aid as soon as possible can also help. As far as the government is concerned, measures such as tightening public spending, raising interest rates to curb inflation, and reducing welfare spending can be appropriately taken to tide over the difficulties.
At the same time, at the international level, international organizations such as the G20, AIIB, IMF and other international organizations should also have a consensus to jointly deal with challenges and provide assistance to these countries facing crisis. Ayhan Kose, acting vice president for equitable growth and financial institutions at the World Bank, also called for this consensus: “The international community needs to act quickly and forcefully to ensure that the recent debt accumulation does not lead to a series of debt crises.”
Wang Se said that the spillover effect of the instability of the global international grain and oil supply chain caused by the ongoing conflict between Russia and Ukraine is still affecting many countries around the world. In his view, what the current international community needs is to work together to resist risks. “This is an important revelation brought to us by the situation in Sri Lanka.” Wang Se said.