The economic crisis in Sri Lanka is not limited to the South Asian nation. From Europe to Asia to Africa, many emerging economies are slipping into chaos, and here’s what experts predict will happen next.
Sri Lanka’s worst economic crisis since it gained independence threatens to spread across the developing nations, triggering what experts have warned could be “a crisis of mega proportions”.
The South Asian nation is the first developing country to see widespread chaos and government collapse as a result of “mismanagement”, “rising inflation”, “surging food and fuel prices”, and “higher interest rates” caused by Russia’s invasion of Ukraine, the Financial Times (FT) said.
Following the economic crisis, experts warn a swathe of developing countries could be pushed to the brink as Russia’s invasion of Ukraine combined with food shortages, debt, fuel scarcity, and forex crisis continues to increase the cost of living for millions of people.
This is because many “low- and middle-income countries” are struggling with the same “three-pronged crisis” that is affecting Sri Lanka, namely “the pandemic, the rising cost of their debt, and the increase in food and fuel prices caused by Russia’s invasion.
Before we move on to the list of low- and middle-income countries slipping into chaos, let’s take a quick look at what plunged Sri Lanka into such chaos.
WHAT CAUSED THE LANKA CRISIS
According to The Week, The Rajapaksas ruled Sri Lanka’s political scene amid charges of oppression, nepotism, and corruption. But the main trigger was the economic mismanagement, worsened by counter-productive Chinese loans. Eventually, the country defaulted on its debt in May.
- Sri Lanka focused on domestic markets instead of selling goods abroad. So, export incomes remained low, and import bills kept growing.
- In April 2019, the Easter Sunday terror attacks hit Sri Lanka’s tourism industry, one of its biggest foreign currency earners. The import-reliant nation soon began to struggle to source goods.
- In November 2019, President Gotabaya ordered sweeping tax cuts that meant a loss of one million taxpayers and massive revenue in a country already crippled by chronic budget deficits.
- Then came the Covid-19 pandemic that dried up the inflow of tourists and depleted foreign currency reserves, causing Sri Lanka’s debts to spiral.
- In 2021, the government tried to stop the outflow of foreign currency by banning chemical fertiliser imports. It also asked farmers to use organic fertilisers instead.
- This sparked colossal crop failures. Buying food stocks from abroad made the foreign currency shortage worse.
AFRICAN COUNTRIES THAT COULD FOLLOW SRI LANKA INTO ECONOMIC CHAOS
Like Sri Lanka, many African countries might find themselves staring down the barrel of economic doom following the World Bank’s prediction that many developing countries are at risk of experiencing a financial crisis.
This is partly because Covid pushed countries to borrow more money for their pandemic response, as the cost of servicing borrowing has risen steeply. As a result, many countries like Nigeria and Zambia are doing what Sri Lanka did – announcing tax rebates and energy subsidies to quell unrest. This has led many experts to believe that nations like Egypt, Tunisia, Burkina Faso, Mali and Chad “are close to the brink”.
Alarms have also been raised about the economic situation in Kenya, Ethiopia and South Africa, where a “spillover” from the Ukraine conflict could “damage the country’s financial stability”. According to reports, countries like Somalia and Ethiopia, dependent on imports from Russia and Ukraine, have been experiencing the worst drought for 40 years. As a result, over 15 million people face acute hunger, while Oxfam and Save the Children survey estimated that one person is already dying every 48 seconds.
While trade disruption will badly impact countries in sub-Saharan Africa, experts warn that inflation, debt, and forex crisis could be the domino that pushes millions of Africans into an untenable situation.
The IMF has recently announced that it will downgrade its global growth projection for both 2022 and 2023 in its World Economic Outlook update later this month, adding that it will be a tough 2022 and the possibility of a tougher 2023 is quickly materialising.
If that happens, the government and heads of state should expect political and social turmoil to follow in some regions – and the ripple effects to be devastating.