Dominic /Goagoseb
In Latin America, they regard the 1980s as a lost decade because they faced financial turmoil at the time.
A debt typhoon eroded their economies, triggered by two major oil price shocks.
Rising oil prices messed up their finances and created large deficits.
This brought their external debt to unprecedented levels and pushed their economies to the point of collapse.
Mexico was the first country to fall in 1982, declaring it could not pay its debts.
What followed was a series of sovereign defaults in Latin America.
One country after another was gripped by the debt crisis.
Brazil, Chile, Argentina, Colombia, Venezuela, Peru and Ecuador all fell like dominoes.
They faced a deep recession, high inflation, rising debt, unemployment and slow economic growth.
Will history repeat itself three decades later?
Developing countries around the world are currently struggling with an external debt crisis.
Tragically, Sri Lanka has already collapsed.
Sri Lanka: A case study
At the moment, Sri Lanka’s economy has collapsed.
Debts are exploding, foreign exchange reserves are shrinking and there is not enough money for basic necessities.
Of course, the crisis is of Sri Lanka’s own making.
The government mismanaged public finances, spending more than national income and allowing deep tax cuts, ruining the economy.
Unfortunately, global factors also played a crucial role.
The economic slowdown caused by the Covid pandemic, the rising cost of borrowing and the Russian-Ukraine conflict that has pushed up food and fuel prices disrupted supply chains, thrown financial markets into disarray and triggered a global oil crisis.
These factors have exacerbated and continue to exacerbate the crisis in Sri Lanka.
On 15 February, exactly nine days before Russia started a military operation in Ukraine, the World Bank issued a warning with the realisation that developing countries are facing a looming debt crisis.
The World Bank named 70 low- and middle-income countries facing US$11 billion in debt repayments.
Furthermore, the report states that this strain could crush their economies in 2022.
Then in March, the United Nations released a report showing that there are 107 economies exposed to at least one of the following three risks.
Number one, rising food prices; number two, rising energy prices and three, tougher financial conditions.
These countries represent 1.7 billion people, more than a fifth of all humanity.
Sixty-nine developing countries are exposed to all three risks; in the worst case, they can all go the way of Sri Lanka.
According to the World Bank, as many as a dozen developing countries can default on their debts in the next 12 months.
This will be the biggest debt crisis, as the whole world is in debt crisis.
National budgets are on the brink; some governments are being forced to cut spending, while others are borrowing more to stay afloat.
Preventing a debt typhoon?
First, manage borrowing and lending. Lenders should offer borrowers contingency plans – plans to suspend repayments if the borrower encounters financial difficulties.
Second, promoting alternatives to borrowing.
Low-income countries face large public funding gaps – even for basic public needs such as healthcare and education.
Improving tax collection can reduce the need for more borrowing
Third, introduce better ways to deal with shocks and crises.
Low-income countries are always vulnerable to external crises.
A high proportion of their debt is in foreign currency.
This makes economies vulnerable to external changes.
We need to develop a mechanism to protect them from such shocks, a mechanism to better restructure unsustainable debt.
Finally, food for thought.
The debt crisis in developing countries is now becoming a security issue.
Relief comes too little and too late – and that needs to change.
We need preventive measures; this is the most important lesson the pandemic has taught us.
Every crisis can have a domino effect.
A small event in a distant country can set off an unstoppable chain reaction, so perhaps Sri Lanka is just the beginning.