The sight of protesters swimming in a Presidential pool and sampling the contents of a lordly kitchen may seem amusing, but the reality is hard and likely to be duplicated elsewhere. It's not just the massive corruption that political elites regularly indulge in – it’s the likely breakdown of society and life as we know it, worsened by a war hundreds of miles away. Don’t forget, Sri Lanka was once as stable – and even better off – than many Indian states. But now, this.
Sri Lanka’s downslide through mismanagement is a story in itself, brought out by the Asian Development Bank (ADB), whose title, “A Tale of Two Deficits”, said it all. That’s the red light flashing when a country’s national expenditure exceeds its national income, and its production of tradeable goods and services drops. There is all this and a debt of some $11 billion to China of a total of $51 billion in foreign debt. As the crisis began to mount, Colombo asked for relief, but to no response from Beijing.
As the Russia-Ukraine war goes on with sanctions and the like, global growth is projected to slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023.
Developing economies are paying the bigger price. As per data, petrol is up 63% in Sudan, 50% in Sierra Leone, and 42% in Ghana. In the UK, it’s up by 9%.
In Pakistan, prices of high-speed diesel, petrol and kerosene have gone up by a massive 83%, 56% and 73%, respectively, since 26 May. And while Nepal is also suffering the ‘Ukraine shock’, the Bangladesh Petroleum Corporation (BPC) was losing about Tk 90 crore per day.
Despite the repeated balance of payments crises, the economy began to progress reasonably well, even in the shadow of the COVID-19 pandemic in early 2021. Then came the war in Ukraine. That came like a hammer on a shaky nail, and a downslide followed, with diesel prices rising 60%, which not just ate into electricity generation (which accounts for 40% of imports), freight and its inevitable downstream add-ons, but also grounded fishermen as oil simply dried up. This was despite emergency credit lines from India. Sri Lanka simply could not keep up with the war.
The Developing World Is Paying the Heaviest Price
As the war goes on with sanctions and the like, global growth is projected to slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than what was projected in January. The International Monetary Fund’s (IMF) most recent World Economic Outlook report has a dismal warning. It notes:
"Beyond 2023, global growth is forecast to decline to about 3.3 per cent over the medium term. War-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies."
To put this all simply, it’s a lot worse for developing economies, for they are paying the bigger price. As per data, petrol is up 63% in Sudan, 50% in Sierra Leone, and 42% in Ghana. In the UK, it’s up by 9%.
South Asia Sizzles
Now look at our neighbourhood. Dawn reported in mid-June that with the third cut in subsidies in 20 days, prices of high-speed diesel, petrol and kerosene have gone up by a massive 83%, 56% and 73%, respectively, since 26 May. These are dangerous times for Pakistan, with the Global Risks Report brought out by the World Economic forum putting debt as the country’s primary challenge. Public debt stands at 80% of GDP, and the dollar value slid to more than PKR 200.
But some tough reforms are underway, and things may change if politicians can keep severe political disorder at bay, if the climate remains less ‘unfriendly’, and if there isn’t another bout of COVID-19 infections, all of which add up to rather a lot of ‘ifs’.
Another neighbour, Nepal, is also suffering the ‘Ukraine shock’. An IMF team reported that while Nepal’s post-COVID-19 economic recovery continues, “the impact of the war in Ukraine is exacerbating existing vulnerabilities and impacting Nepal’s import-reliant economy, increasing inflation, and decreasing international reserves”. Nepal’s currency has taken a deep dive, prompting fears that it could lead to a balance of payments crisis. The trade deficit expanded 34.5% year-on-year to 1.16 trillion Nepali rupees ($9.5 billion, €8.8 billion) as import costs surged.
The danger? Kathmandu may take to blaming Delhi – since its currency is pegged to the Indian rupee – even as its foreign exchange reserves dwindle. The problem? The COVID-19 pandemic has already diminished external financing to poor countries like Nepal by $700 billion, which is equivalent to the combined GDPs of 36 of the world’s poorest economies. The war is only going to worsen those figures.
Bangladesh's Story
Others in South Asia are also in danger. Bangladesh proved to be remarkably resilient during the COVID-19 pandemic but is now suffering a direct impact from rising fuel prices, a record rise in prices of staples and a volatile fertilizer market. The country's power minister said in June that the Bangladesh Petroleum Corporation (BPC) was losing about Tk 90 crore per day. The government raised diesel prices in November 2021 by about 23%, with the inevitable fallout.
As for India, the same report also cited the debt crisis of large economies as a primary danger. Further, it notes a lack of action on climate – remember that a promise to ‘feed the world’ as the war started had to be walked back on as a bumper wheat crop was destroyed by heat. Worse, countries like India are now ramping up coal production, the dirtiest source of energy, to meet energy shortfalls – as is China, which is not just guzzling coal but is also having to face up to a slowing economy as per its own sources. Some might see that as a factor that cancels out all the bad news. But it’s not good news for the world economy.
Do We Need a New World Body?
Even as Sri Lanka melts down, at the recent G-20 conference, IMF Managing Director Kristalina Georgieva was trying to persuade China and other members to speed up debt relief for heavily indebted countries, warning that a failure to do so could unleash a damaging “downward spiral”. In other words, she was warning that no man is an island in a dangerous economic sea. What pulls down one could push another into a precipitous fall. Consider that China is the world's largest sovereign creditor and private-sector creditor.
As of 2017, China became the world’s largest official creditor, surpassing the World Bank and the IMF. Loans are typically commercial, and an expert study notes that nearly 50% of its lending is not reported in the most widely used official debt statistics. For China not to fail, it has to ease up on others.
Then, there’s another statistic. The United States has the largest voting bloc on the IMF board, with 16.5%. Others are Japan with 6.2%, Germany with 5.3%, and France and the UK with 4% each. Barring Japan, and perhaps France, these are also the countries who refuse to bring Russia into a negotiated end to the war. It is tempting to call out Russian leadership as 'war criminals', but calling names will not stop the dangerous slide. It is time to cry halt and force an end to the war.
One way to do so is to have all concerned join forces and begin negotiations with both sides through a mechanism other than the United Nations. Remember, the UN arose out of a debilitating World War. This is now the third time that continental Europe has dragged everyone into a third 'World War' – yes, that’s what it needs to be called. Maybe that will force in some accountability as nations fall like a pack of cards, and maybe then we can have a new world body, even if it is in shabby clothes.
(Dr Tara Kartha is a Distinguished Fellow at the Institute of Peace and Conflict Studies (IPCS). She tweets @kartha_tara. This is an opinion article and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)