Sri Lanka's debt crisis is a warning to the world

Sri Lankans protest outside the president's office in the capital Colombo. AP

For anyone trying to understand the widespread social anger seen in Sri Lanka in recent days, Gota-Go village is a good place to start. The steadily growing collection of tents pitched outside President Gotabaya Rajapaksa's office in the capital Colombo serves as a rallying point for thousands of people that have taken to the streets. On Monday, Christian nuns marched in protest by the site, as Buddhist monks and Muslim men joined nearby. All are expressing anger at high inflation, a lack of services and utilities, poor health care and a wider economic crisis.

Prime Minister Mahinda Rajapaksa, the President's brother, has offered to talk to protesters, but the situation is unlikely to improve soon. As of yet, no viable opposition can be found and faltering state institutions and wider mismanagement and corruption show no signs of abating.

Looming over all of this is an impending default on foreign debt repayments, which, if it happens, will worsen the crisis. The situation became more critical when the country's central bank governor said on Tuesday that Sri Lanka will temporarily suspend payments, so that its limited foreign reserves could be spent on essential imports.

Next week, the country will start talks with the IMF to ease the situation. More than Sri Lanka will be on IMF officials’ minds, however, as the fund confronts similar situations in emerging economies across the globe. The World Bank has said that as many as 12 developing countries could be unable to service foreign debt over the next year.

It is perhaps unsurprising. The World Bank also reports that Covid-19 caused global indebtedness to rise to a 50-year high. If the pandemic laid the groundwork, the war in Ukraine could become the perfect trigger for an acute crisis in a number of countries, as supply chains are further strained and commodity prices continue escalating. Developing economies account for 40 per cent of global GDP, heightening the risk of contagion to the rest of the world.

Without managing what they owe, at-risk economies will spend increasingly more of their already-low national income on debt repayments, not development. Once the burden becomes too great, escaping a vicious cycle of defaults becomes difficult. Lebanon, which defaulted in March 2020 and whose financial crisis continues to worsen, is a good example. The over-reliance on imports also makes the situation worse for many of these countries.

Solutions are complex and unattractive for corrupt or incompetent governments. At home, coffers need to be filled, often by raising taxes, which then have to be collected more efficiently from citizens and made harder to dodge by large companies profiting from lax regulation.

But outside their control are international financial systems that need to evolve to work better. First, expert-led advice should be offered early on to break unsustainable cycles and boost resilience in the face of unpredictable global crises. The operations of international organisations must also evolve. The IMF's debt service relief programme spent billions throughout the pandemic and helped 90 countries, hugely important in maintaining as much economic stability as possible. It should be extended as part of a longer-term assessment of where the world's economy is today.

It is clear that Covid-19 is still a health crisis, which is why it should still be considered an economic one, too. Gota-Go village might be a very local protest, but many of the problems that pushed people to set it up are replicated in a number of countries around the world. And if its organisers are not listened to, the ensuing economic instability from which they are suffering might go global, too.