Analysis: what is behind the crises in Sri Lanka and Peru?

As the world grapples with the long-term effects of the pandemic and the Russian-Ukrainian conflict, emerging markets and developing economies are more vulnerable to pressure, with the crises in Sri Lanka and Peru being prime examples. , said experts.

Sri Lanka is mired in its worst economic downturn since 1948, with shortages of food, fuel and other basics. The economic crisis in the South Asian nation has escalated into nationwide protests, cabinet resignations and even triggered a state of emergency.

Peru is also facing violent protests over rising food, fuel and fertilizer prices. Protesters, including farmers and transport workers, attacked court buildings and destroyed shops in the South American country.

High inflation is a direct trigger of the crises in Sri Lanka and Peru, Wang Dan, chief economist of Hang Seng Bank China, told CGTN. Both countries depend on energy and food imports, the prices of which have soared due to the disruptions of the Russian-Ukrainian conflict.

Inflation in Sri Lanka hit a record high of 17.5% in February, the highest since 2015, according to the country’s Census and Statistics Department. Meanwhile, Peru’s inflation rose to 1.48% in March, the highest in 26 years, according to Peru’s central bank.

“Ukraine and Russia have been great exporters of food and energy. But the logistics could not come out after the conflict, and Western countries also imposed sanctions on Russia, which affected the ‘supply and demand for international bulk products,’ said Bai Ming, deputy manager. from the International Market Research Institute at the Ministry of Commerce, told CGTN.

Ukraine is one of the world’s largest exporters of sunflower oil, accounting for 42% of global supply, while Russia is the world’s largest exporter of wheat, supplying 14% of the global total, according to the Food and Agriculture Organization of the United Nations. .

Russia is the world’s third-largest oil producer, behind the United States and Saudi Arabia, and is also the world’s largest exporter of oil to world markets and the second-largest exporter of crude oil behind Saudi Arabia, according to the International Energy Agency.

“Some developing countries that need to import raw materials are facing rising bulk commodity prices, and imported inflation will also rise,” Bai said.

Experts are divided on whether public debt is to blame for Sri Lanka’s economic crisis. Wang thought the answer was yes, but Bai said it was just a flashpoint.

“Public debt plays an important role, but it is only one problem among others,” said Josef Gregory Mahoney, professor of politics and international relations at East China Normal University.

Wang explained, “As a net importer of energy, soaring commodity prices quickly depleted its foreign exchange reserves. The tourism sector had been a main source of foreign currency but continued to lag in 2022, making debt repayment more difficult. »

“In addition, the central bank devalued the Sri Lankan rupee in March, preparing for a transition to the floating exchange rate system. The currency is expected to depreciate further in the coming months as the Fed raises the rate of As such, the market widely believes that Sri Lanka will default on its external debts,” the economist added.

The country has more than $4 billion in debt to repay this year alone, including a $1 billion international sovereign bond maturing in July.

The Wall Street Journal has reported that the worsening debt crisis has fueled political controversy over Chinese loans to Sri Lanka, and some Indian media have attempted to portray Sri Lanka as an example of alleged Chinese “trap debt”.

Read more: Experts refute rumors of a ‘Chinese debt trap’ in Sri Lanka

But according to data from Sri Lanka’s Department of External Resources, China held only 10% of the country’s external debt, about the same as Japan, and far less than borrowing from the market and the multilateral bank. of development.

“The Chinese fund aims to support Sri Lanka’s economic development, not to put people into a debt trap. Funds are what developing countries need most, and we are providing the necessary help. Infrastructure projects have played a role in promoting its economic growth,” he added. Bay said.

In Bai’s view, the South Asian nation has been turbulent in recent years and there has been political unrest and fierce competition between ruling and opposition parties.

“In normal times, there can be peace between the two sides. But when the external shock is severe, a small thing can be amplified a lot, and some people will add fuel to the fire,” Bai said.

Professor Mahoney said Sri Lanka suffers from what economists call ‘twin deficits’ – fiscal and trade, where government spending exceeds income and imports exceed exports, and ‘these are not new problems’ .

The problems have been “exacerbated by a pandemic-damaged tourism industry, sharp declines in inward FDI, tax cuts, poorly managed agricultural reforms and inflationary pressures from many sources, including the conflict in Ukraine” , Mahoney told CGTN.

Read more:

Analysis: Sri Lanka is going through the worst economic crisis in its recent history. Why?

“Sri Lanka has partly paid for these problems by depleting its foreign exchange reserves, and many in the country are convinced that widespread government corruption is also to blame,” he added.

Unlike Sri Lanka, “Peru has low debt by emerging market standards, high foreign exchange reserves and a strong central bank. Peru has benefited from higher commodity prices, especially as a top exporter global copper,” Wang told CGTN.

“The major risk [for Peru] is the unstable government, which has a bad relationship with Congress and which lacks a clear economic agenda,” she added.

For Peru, there has been growing instability following an intense polarization that split the government in 2017, according to Mahoney.

“This was followed by waves of corruption scandals and disagreements over reforms, undermining governance in general, which made the nation even more vulnerable to pandemic-related economic pressures and spillover effects between Ukraine and Russia,” he said.

There have already been significant global spillovers from the Russia-Ukraine crisis, Mahoney warned.

“The main problem is slowing growth and accelerating inflation,” he said.

“Most of the world is still struggling to recover economically from the pandemic. According to the IMF, the crisis in Ukraine is creating inflation in fuel and energy prices, hammering tourism industries and making it more difficult to access of developing countries to international capital markets.

“In response, we are likely to see unhealthy mixes of expansionary fiscal and monetary policies – compounded by interest rate hikes by the US Federal Reserve. The result will be more political unrest, with Peru and Sri Lanka as prime examples. “, Mahoney said. CGTN.