To solve a global economic unwinding, the world must learn to focus on more than one crisis at a time.
University students take part in a demonstration demanding the resignation of Sri Lankan President Gotabaya Rajapaksa over the country’s massive economic crisis in Colombo, Sri Lanka, on May 19. ISHARA S. KODIKARA/AFP via Getty Images
Many Western leaders are behaving as though there is one crisis in the world: Russia’s invasion of Ukraine. While some are waking up to the widespread knock-on effects for food and energy security, there is little bandwidth, it seems, to address the underlying looming crisis: a global economic unwinding driven by the COVID-19 pandemic, climate breakdown, and degradation of the international political and economic system that has been at least a decade in the making.
Together, these crises have put scores of countries at serious risk and lit a fuse where those risks intersect with authoritarianism and poor governance. Sri Lanka is a case in point. The country owes over $50 billion to government creditors such as India, China, and Japan, and private bondholders—and it is no longer making interest payments.
The reasons for its economic woes are complex. Sri Lankan President Gotabaya Rajapaksa’s family has dominated the country for much of its recent history through a populist, security-centered regime criticized for economic mismanagement, corruption, and its brutal campaign to end the civil war in 2009. Its conduct during the conflict has been the subject of several United Nations reports, which point to credible allegations of war crimes and human rights abuses.
Under the Rajapaksa family’s rule, Sri Lanka has incurred a string of Chinese debts, including for white elephant projects that have yielded little to no income—one such project close to the Rajapaksas’ hometown was dubbed “The World’s Emptiest International Airport” by Forbes. When COVID-19 struck, they ploughed on with sweeping tax cuts as tourism collapsed—wiping out state revenue and personal incomes.
Two years on, the country has run out of foreign exchange. Last week, it was down to its last 24 hours of gasoline stocks. Medicine and food supplies are critically low. Despite ample warning and mounting protests, the government held out for too long before approaching the International Monetary Fund (IMF), and none of the structural and governance reforms are in place that might allow an IMF program a realistic chance of success. Instead, the government continues to struggle under a caretaker setup that lacks a clear public mandate.
While Sri Lanka’s woes are as much of its own making as fueled by global trends, they are an ominous marker of what’s to come in a world that seems able to handle just one crisis at a time—and often not even that.
Rising food prices and shortages, a consequence of the Russia-Ukraine war and COVID-19, as well as security-induced supply chain disruptions, are driving large parts of the developing world toward a cost-of-living and sovereign debt crisis with likely drastic consequences.
According to Bloomberg, “At least 14 developing economies … have debt yields at an excess of 1,000 basis points over US Treasuries, a threshold for bonds to be considered distressed.” The U.N. has warned that 1.7 billion people in 107 countries are at serious risk of food, fuel, and financial insecurity: a fifth of the global population and more than half of the organization’s member states.
Each country has a different story for why it faces turmoil. Ghana, a well-managed economy with generally good governance, is in trouble because of its virtues. It could borrow commercially, so it did, and it now faces a debt crisis. Rich countries are also not immune. In March, high energy costs led to strikes and protests in France, Greece, and Spain.
Egypt, a former wheat exporter, is now the world’s biggest importer as climate pressures combine with dramatic price increases due to Russia’s invasion of Ukraine. Before the crisis, Russia and Ukraine supplied 30 percent of global wheat exports, and Ukraine is also one of the World Food Program’s biggest suppliers of sunflower oil and other foods.
Many of these countries are likely to end up in the same emergency ward. And, a bit like our health services in the face of COVID-19, our global financial hospital is overwhelmed, with equipment (funds) and staff (leaders) in short supply.
Multilateral bodies such as the U.N. and World Bank must act to prevent widespread suffering while supporting political, economic, and governance reforms that citizens across developing countries are demanding.
In Sri Lanka, as with other countries that will find themselves in similar circumstances, the U.N., the World Bank, and the Asian Development Bank can all take action to mitigate the crisis in the short term. But, in a country like Sri Lanka with a history of diverting aid, they must align the terms of their support to ensure goods and services are delivered in a transparent and accountable manner—and reach all communities. Otherwise, they risk bailing out corrupt politicians instead of people in need.
In the medium term, this relief must include an offramp that allows for a credible government with broad support to enact policies that will create a viable economic and political future for Sri Lanka. Here, the IMF plays a key role. It should see the Sri Lankan people as its partners and ensure that the governance reforms included as part of its package reflect their will. The World Bank, in turn, can help with technical support and financing to help these reforms become reality.
Already, civil society groups have called for sensible measures such as eliminating the much-maligned executive presidency, increasing the independence of institutions, empowering anti-corruption bodies, and going after stolen government assets. Calls for justice for the tens of thousands of people killed, tortured, and disappeared in Sri Lanka are also growing louder. The IMF should take heed and consider the people its true partner in any deal—in any country. After all, it is the public that will ultimately repay the IMF.
In the longer term, Sri Lanka and other nations will require debt restructuring. Here, creditor nations, and the G-20 in particular, must improve upon the existing “Common Framework,” which has offered too little, too late, and nothing at all to middle-income countries such as Sri Lanka. At a minimum, any country that enters restructuring should expect an immediate debt repayment standstill and ultimately debt reductions matched to a realistic plan for economic growth. Private creditors and China must participate, and if they do not, the IMF should step in to lend to the country anyway, on the condition that those holding out are not repaid.
Such action is predicated on political support by rich countries. But too many governments are looking away, trying to ride a wave of patriotism over Ukraine but without the vision, will, skill, or bandwidth to respond at scale on this other front, which threatens global stability perhaps as much as Russia’s invasion. To win, we need to prevail on both.
Last week, G-20 finance ministers missed an opportunity for progress on debt. While the United States led an important debate at the U.N. on the food crisis, the discussion descended into a blame game. The measures touted are welcome, but they will surely be greeted with cynicism by people still waiting for COVID-19 vaccines, let alone debt relief and climate finance.
In 2021, the IMF issued a record $650 billion of Special Drawing Rights to boost global liquidity by giving IMF members a line of credit they can use to borrow against. But rich-country pledges to make such funds available to low-income countries have fallen far short of this, and not a cent has been disbursed.
Even Afghanistan, which dominated the news cycle last year, appears largely forgotten, with the U.N.’s humanitarian appeal only half funded as 95 percent of people there go hungry, with shocking reports of people selling children and organs. Meanwhile, countries like Chad and South Sudan rarely make it onto the global agenda.
We must be able to focus on more than one thing at the same time. And yet we continue to prevaricate on mechanisms that would increase our capacity for response, such as a global emergency platform that would convene stakeholders from all sectors, or flexible funding to ensure humanitarian aid is not predicated on media coverage. Programs to support human rights and democratic governance are woefully underfunded.
Here in the United Kingdom, the omens are less than good: A government that has been an effective cheerleader on Ukraine has announced a dismal new development strategy that mimics, on a much smaller scale, what it sees in China’s aid and trade model. Foreign Secretary Liz Truss says the U.K. won’t mirror the tactics of “malign actors” but that it will “match them.”
If this reading is uncharitable, so is the U.K.’s decision to desert the anti-poverty work for which it was renowned and nearly halve its multilateral aid spending—while calling on international institutions to “scale up” their response to the global food crisis.
This is compounded by yet another ideologically driven exercise to slash the civil service, having already shuttered its international development ministry and folded the sorry remains into the Foreign Office. Sri Lanka is not the only country that must ensure its quest for stability does not entrench the failing regimes that have led to the current plight.
These challenges are immense: a world of constrained resources, diminished governmental capacity, and mounting domestic issues in the European Union and United States, such as the resurgent threat posed by former U.S. President Donald Trump to the Biden administration. The signs are inauspicious: Efforts to restore international COVID-19 funding were stymied again by the U.S. Congress last week. Washington and its Western counterparts are one-issue towns at present. As crises multiply, they cannot afford to be this short-sighted.
Mark Malloch-Brown is the president of the Open Society Foundations. Twitter: @malloch_brown