Who will follow Sri Lanka into a debt crisis?

Sri Lanka defaulted on its debt in May as soaring global food prices and a tourism slowdown collided with years of profligate state spending. Which countries could follow?

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 tourism slowdown caused by Covid-19 collided with years of profligate state spending. Inflation is running at 54.6% and essentials such as food and medicine have run short.

Which countries could follow? The situation is especially 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 most African debt is owed to governments in rich countries 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 have been bought  by “insurance companies, pension funds, hedge funds” and investment banks. The countries with the shakiest debt positions include Mozambique, Zimbabwe, Malawi and Zambia. Governments borrowed freely after the financial crisis, says The Economist. “In 2019 public debt stood at 54% of GDP across the emerging world.” Budget deficits then soared 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 trouble is that lending is less transparent than it used to be because of China’s emergence as the world’s biggest bilateral creditor. Work by Sebastian Horn and Christoph Trebesch of the Kiel Institute and Carmen Reinhart of Harvard University suggests that “almost half of China’s lending abroad is unreported”.

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