“The global economy is literally and metaphorically, staring down the barrel of a gun.” So began an economic report by the United Nations Committee on Trade and Development (Unctad) in March that has turned out to be nothing short of prophetic.
“Stopping the war in Ukraine, rebuilding its economy and delivering a lasting peace settlement must be the priorities,” it said. “But the international community will also need to deal with the widespread economic damage that the conflict is already causing in many parts of the developing world; damage that will only intensify as the conflict persists.”
It is difficult to see the spectacular fall of the unpopular Sri Lankan president Gotabaya Rajapaksa last week as anything other than the first truly visible symptom of the macroeconomic and indeed social crisis that it is beginning to unfold in emerging economies.
Shortages, the lingering impact of the Covid-19 pandemic and unprecedented food and fuel price shocks are all playing a part in the underlying malaise. But with the global interest rate environment in a state of flux as western central banks scramble to get runaway inflation under control, another element is coming into play: debt.
Just a few weeks after the Russian invasion of Ukraine, Unctad warned that rising interest rates could spell disaster for countries with high levels of public and publicly guaranteed debt relative to exports for a couple of different reasons.
Naturally, borrowing costs for those countries will shoot up. But equally, rate hikes are likely to force governments and central banks in developing nations to adopt increasingly hawkish policies in a bid to create fiscal space or stop capital from flowing out of the country with the burden of such policies falling squarely on the shoulders of the world’s poorest households. Among the middle-income countries that Unctad identified as being particularly vulnerable in this regard were Egypt, Pakistan and yes, Sri Lanka, which has struggled in recent years to service its nearly $50 billion foreign debt pile after being effectively locked out of the bond market in 2020.
The trouble is that the average proportion of public and publicly guaranteed debt in the external debt of developing countries was 64.4 per cent in 2020. That increases to 76.2 per cent in the case of low-income countries. There are also significant doubts about whether the global financial system’s clunky, often extempore, mechanisms for dealing with sovereign debt crises – mechanisms that will be all-too familiar to Irish people, given our bailout experiences – are suited to the current set of complex global issues. Sri Lanka is just the beginning.
