Who will follow Sri Lanka into a debt crisis?

Sri Lanka will not be the last country to plunge into a debt crisis. The island nation defaulted in May this year as soaring global food prices and a slowdown in tourism caused by Covid-19 collided with years of bloated government spending. Inflation is at 54.6% and basic necessities such as food and medicine are in short supply.

Which countries could follow? The situation is particularly acute in Africa, say Danny Bradlow and Magalie Masamba on The Conversation: “22 countries are either in debt distress or at high risk of debt distress,” according to data from the International Monetary Fund (IMF). While the bulk of African debt is owed to rich country governments or “multilateral institutions like the World Bank”, a growing share is held by private investors.

“The amount of bonds issued by African states on international markets has tripled in the last ten years.” These instruments were purchased by “insurance companies, pension funds, hedge funds” and investment banks. The countries with the most fragile debt positions are Mozambique, Zimbabwe, Malawi and Zambia. Governments borrowed freely after the financial crisis, says The Economist. “In 2019, public debt stood at 54% of GDP in the emerging world.” Budget deficits then skyrocketed amid the pandemic, but now the bill is coming due. A global slowdown and “tighter financial conditions will be more than some governments can bear”.

Debt relief is on the international agenda, but the problem is that lending is less transparent than before due to China’s emergence as the world’s largest bilateral creditor. Work by Sebastian Horn and Christoph Trebesch of the Kiel Institute and Carmen Reinhart of Harvard University suggests that “nearly half of Chinese loans abroad go undeclared”.

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John A. Bogar