IMF and South Asian Economies- The Bailout Urge

Before extending to Hong Kong and South Korea, the South-East Asian crisis first hit Thailand before quickly engulfing the economies of the whole region, including Malaysia, Indonesia, the Philippines, and Singapore. Twenty-five years later, we are witnessing South Asia's economy engulfed in a catastrophe.

Tourism and remittances were badly affected due to the COVID-19 pandemic and  are significant to the economies of countries like Sri Lanka and Nepal. Moreover, the Russian invasion of Ukraine has increased the price of oil and other commodities as the pandemic has subsided. As Sri Lanka is facing bankruptcy, Pakistan is in turmoil, and Bangladesh is also seeking the help of the International Monetary Fund. Troubled South Asian economies are dealing with several issues, including inflation, growing current account and budget deficits, and sluggish growth. These economies are also running out of foreign exchange reserves to pay for oil expenses. A crisis in these South Asian economies affects not just the economy but also political environment. However, the administrations in many of these nations have encouraged political instability rather than concentrating on addressing the economic crisis.

SOUTH ASIAN ECONOMIES-

SRI LANKA-

The sovereign debt crisis in Sri Lanka has devastated the island nation's economy and caused months of political turbulence and social unrest. The country went into default in May when its foreign reserves were nearly depleted, and it has since had difficulty obtaining imports of goods like fuel and medications. Food inflation is at an all-time high, and people already having financial difficulties are particularly hard impacted by rolling blackouts, long lines for gas, and other daily inconveniences. The COVID-19 pandemic, which wiped out foreign exchange gains from tourism and global inflation contributed to the collapse of Sri Lanka's economy. However, the country's precarious financial situation had already begun to develop due to a buildup of debt from infrastructure spending and significant tax cuts that reduced tax revenue. Sri Lanka used foreign sovereign bonds more and more as its debt mountain rose to refinance previous debt at practically commercial rates. Since the Cabinet of Ministers resigned, the economic crisis has become political. President Gotabaya Rajapaksa resigned due to public outrage. According to political experts, the public put great pressure on the ministers over the government's claim of mishandling the economic crisis brought on by the lack of foreign exchange reserves.

PAKISTAN-

The Pakistani rupee has been losing its value against the US dollar, and the IMF's failure to deliver a vital $1.17 billion tranche to Islamabad on time has worsened the country's economic situation. The IMF had declared that it would achieve a tentative understanding with the country to resurrect the $6 billion rescue plan. However, the IMF executive board must first approve the agreement. The entire debt and obligations of the nation have reached Rs 53.5 trillion, including the debt of Rs 23.7 trillion incurred by former Pakistani Prime Minister Imran Khan. Despite receiving $2.3 billion from China, the State Bank of Pakistan's foreign exchange reserves dropped to single digits in July. Furthermore, Pakistan's economy will implode if the UAE, Saudi Arabia, or even the Chinese remove their $2.3 billion. The new Cabinet of Pakistan has been trying to meet international standards to get help from different countries and these financial organizations.

BANGLADESH-

Bangladesh's economy has long been among the fastest-growing in the world. However, the country has been severely impacted by the war in Russia and Ukraine's effects on the international economy. Due to its heavy reliance on imported petroleum and other necessities like cooking oil, wheat, and other food products, South Asia has been particularly susceptible. Import expenses have increased due to rising food and energy prices, which have also increased the current account deficit, which is currently at $17 billion. The taka, the currency of Bangladesh, has fallen over 20% in value versus the US dollar during the last three months. The declining foreign exchange reserves, which were down to approximately $39 billion as of July 20 from $45.5 billion a year earlier and were enough for a little over five months' worth of imports, are adding to the strain.

The Nepal Rastra Bank said that the country's average inflation rate for the previous 67 months and the first eight months of the current fiscal year 2021–22 were both 7.14%. Due to the growth in the prices of petroleum products, consumers are feeling the heat of rising prices. The greatest category of imports into the nation is petroleum goods, which account for 14% of all imports into Nepal. Prices for these products are rising due to the continuing conflict between Russia and Ukraine. The COVID-19 epidemic had a particularly negative impact on Nepal's tourist sector, which is a significant source of foreign exchange. However, the growth in imported goods has caused Nepal's foreign currency reserve to decrease rapidly due to the lack of exportable goods. Foreign exchange reserves have been steadily decreasing as imports have increased and remittances have decreased. The nation's foreign exchange reserves decreased 16.3% over the first eight months of the current fiscal. Even though the key economic indicators are still bleak, Nepal is unlikely to experience the same conditions as Sri Lanka or Pakistan.

Bhutan's economy originally started to improve as COVID-19 restrictions loosened. However, now it is struggling with the effects of the Ukraine crisis, which has driven up the price of crude oil and grains globally. Bhutan, which depends on imports to satisfy its food needs, brought in $30.35 million worth of grains from India in 2021, mostly rice and wheat. Worries about a further increase in local prices have been exacerbated by recent limitations on wheat exports imposed by India. Bhutan's economic progress has been hampered by a stringent Zero-COVID policy and the immunization of nearly 90% of the population. The $3 billion economy shrank for two years by 3.7% in the fiscal year that ended in July 2020/21 and by 2.4% the year before increasing the number of people living in poverty.

ROLE OF INTERNATIONAL MONETARY FUND-

Following Pakistan and Sri Lanka, Bangladesh was the third nation in South Asia to request financial assistance from the IMF. The nation requested $4.5 billion from the IMF and assistance with its budget and balance of payments. The IMF has stated that it will only assist if the criteria it demands are favourable to the nation and consistent with its development strategy. 

After the World Bank stated that it would be unable to provide the country with new funding without "deep structural reforms that would focus on economic stabilization, as well as on addressing the root structural causes that created this crisis," Sri Lanka recently stated that the bailout discussions with the IMF have resumed. Sri Lanka is currently insolvent and experiencing a death spiral in its economy. According to data made public last month, year-over-year inflation in July reached a record 60.8%. A rescue by the IMF is urgently needed.

In order to resurrect a $6 billion bailout plan, the International Monetary Fund announced that it had struck a preliminary staff-level agreement with Pakistan. To prevent a default like Sri Lanka's, the government has been discussing with the IMF since May under newly elected Prime Minister Shahbaz Sharif. According to the report, Pakistan will be qualified to receive a crucial instalment of around $1.17 billion. The IMF will also increase the bailout's worth from $6 billion to $7 billion, according to the statement, subject to the IMF's executive board's approval, which is often seen as a formality.

EFFECT ON INDIA-

In addition to the $1 billion that India provided to assist with necessary imports, Sri Lanka has requested a credit line of $1.5 billion. In order to import necessities like rice, wheat flour, pulses, sugar, and medications, India has said it will agree to the request for a new credit line. India has provided Sri Lanka with a $400 million currency exchange and a $500 million credit line for gasoline imports this year in addition to the credit lines. Since approximately 7% of India's exports travel to South Asia, the crisis will affect the country's international trade. India would also be asked to provide money to these struggling economies. The economic crisis will bring India's foreign policy with these nations to the test.

A crisis in South Asia is likely to have a modest global impact. South Asian economies, in contrast to South-East Asian economies, have not fully integrated with the global economy in terms of trade and financial flows. Because of South Asia's poor growth rate, foreign lenders and investors that previously aggressively loaned to and invested in South-East Asian nations have shown little interest in the region.

CONCLUSION-

Economically, the South Asian region is dealing with decreased export revenues, mostly due to the COVID-19 pandemic and increasing export expenditures, particularly since the shock to commodity prices brought on by the invasion of Ukraine by Russia. This is not feasible with limited foreign exchange reserves. Sri Lanka, Pakistan, and Nepal must continue to tighten their financial belts and their political stability should be a priority as well. Each had a moment of populism, but this has now been discredited by the citizens of the countries.

There are several lessons to be learned from the 25-year South-East Asian crisis. First, the nations must uphold macroeconomic stability and take action when the economy starts to overheat. Sadly, most South Asian nations have significant external debt, and it has frequently been suggested that they should refrain from borrowing in foreign currencies. Seeking quick assistance from the IMF or the World Bank is prudent, but these countries also need to reform their economies according to the standards and requirements of these organizations. Though export-import and trade flow is somehow affected in the entire region, it remains to be seen how the IMF responds to these urges and how these governments act to tackle this disaster. 

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Pic Courtsey-IDSA GIS LAB

(The views expressed are thoSe of the author and do not represent views of CESCUBE.)