A few days ago, political, economic, and social crises broke out in Sri Lanka at the same time. After Sri Lankan anti-government protesters stormed and occupied the president’s official residence and office last weekend, the speaker of the country’s parliament said that President Gotabaya Rajapaksa had announced his resignation, and Prime Minister Rajapaksa had announced his resignation. Neil Wickramasinghe also announced that he would resign. The situation faced by Sri Lanka is not unique. Its “explosion” has also sounded the alarm for other developing countries. People in Albania, Argentina and other countries also took to the streets to protest against inflation. In some countries and regions, global inflation is causing more and more political and social crises.
“The crisis in Sri Lanka is far from over
At present, the crisis in Sri Lanka is still unfolding. The political uproar follows months of public unrest. The South Asian country’s economy is languishing and Sri Lankans have endured months of double-digit inflation, rolling blackouts and severe shortages of fuel and medicine. Sri Lanka’s foreign exchange reserves have been depleted and it is no longer able to pay for necessary imports. In May this year, the country defaulted on its debt for the first time in its history. With gas lines snaking for miles, the government closed schools and limited supplies to essential services in an effort to conserve fuel.
Sri Lanka’s economy is dominated by agriculture and tourism, and its foreign exchange income mainly comes from clothing exports, tourism and remittances from overseas Sri Lankans to the country. The global epidemic has caused a sharp decline in its tourism industry. In 2021, the country’s government requires organic farming and does not allow the use of pesticides and chemical fertilizers, resulting in a nearly half-loss of rice production and a significant reduction in black tea production, which is exported to earn foreign exchange. A series of shocks have sharply reduced its foreign exchange and required the import of high-priced rice, wheat and oil. Eventually, Sri Lanka suffered from a serious shortage of foreign exchange and prices skyrocketed.
Previously, Sri Lankan Prime Minister Wickremesinghe told Congress that the country was bankrupt and that this unprecedented economic crisis would last until at least the end of next year.
According to reports, Sri Lanka currently owes a total of approximately US$51 billion in foreign debt. The International Monetary Fund (IMF) said it is paying close attention to developments in Sri Lanka. As the Sri Lankan government has fallen into debt default, negotiations with the IMF are destined to be difficult.
The crisis faced by Sri Lanka is a microcosm of emerging economies, which are all facing the threat of inflation. In the past, inflation crises often triggered various crises in a country or region.
When the world faces inflation, countries with resources such as Russia and Saudi Arabia will benefit from rising commodity prices. Industrialized countries have strong resistance because they have sufficient foreign exchange reserves, unless the internal economic bubble is large.
There is also a country that faces greater risks. It has neither resource advantages nor manufacturing industry and relies mainly on agriculture and service industries. It will bear the dual pressure of currency depreciation and rising commodity prices and suffer from food and energy crises.
“Developing countries may face a wave of defaults
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Sri Lanka’s “thunder explosion” has also sounded the alarm for other developing countries, which have become increasingly vulnerable to the negative impacts of food shortages, inflation and U.S. interest rate hikes in recent times.
For example, countries such as Zambia and Lebanon are already in crisis and are seeking international assistance (providing loans or debt restructuring). Pakistan’s new government, which came to power in April this year, said the country had narrowly avoided a debt default in recent weeks due to soaring fuel import costs and a severe decline in foreign exchange reserves held by the central bank. In Laos, inflation surged 24% year-on-year in June and dollar shortages are squeezing imports of fuel and other essential goods.
The World Bank recently lowered its economic growth forecast for developing economies to 3.4% from the previous 4.6%, showing the severe economic situation this year. The main reasons are rising food and energy prices, as well as rapidly rising borrowing costs following U.S. interest rate hikes.
The above-mentioned difficulties are widespread in developing countries. Carmen Reinhart, chief economist of the World Bank, said on Saturday: “For low-income countries, the debt crisis is not a hypothetical, but a real risk. ”
Data shows that the number of emerging market countries with sovereign debt at distressed levels has more than doubled in the past six months, meaning investors believe a default is a real possibility.
Another cause for concern is the potential “domino effect” that occurs when fearful investors start pulling money out of these countries. Traders pulled $4 billion from trading in emerging market bonds and stocks in June, marking the fourth consecutive month of net outflows.
A debt default may be followed by a political crisis, as in Sri Lanka, where a population plagued by high inflation and scarcity could become a powder keg of political instability.
“Emerging economies should actively respond to the external challenges they face
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For a long time, the global economy has been a system centered on the United States and the US dollar. Most developing countries belong to the “peripheral countries” on the periphery. Every periodic turmoil in the “central countries” will bring crises to the peripheral countries. This influence and destructive power is mainly reflected in the heavy reliance of peripheral countries on the US dollar, the international currency. Almost every change in US monetary policy will lead to cyclical crises in some countries and regions.
The United States has adopted an infinitely loose monetary policy since 2020 in response to the impact of the epidemic, which has enhanced the financial attributes of global commodities and driven up prices; since this year, the Federal Reserve’s continued interest rate hikes have promoted the outflow of U.S. dollars from emerging market countries, and the U.S. dollar index has been rising. As a result, other countries’ currencies will depreciate, and developing countries will face combined shocks. Those countries that rely on energy and food imports will encounter severe inflation and fiscal and currency crises.
In fact, when “center countries” face systemic risks, they often choose to let other countries serve as “scapegoats” for their internal problems, transferring risks and costs, thereby eliminating cyclical shocks from the “center countries”. “Country” unequal dependence relationship and improve the economic structure.
The real economy is the foundation of a country’s economy, the fundamental source of wealth creation, and an important pillar of national prosperity. Outside of Western economies, resource-poor East Asia relies on manufacturing to achieve economic rise. Manufacturing is the only way for any economy outside of the West to rise.
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