The debt stress on South Asian economies

Currently, Sri Lanka has defaulted on its sovereign debts as the ongoing economic and political crisis in the country, Pakistan is looking for avenues to avoid defaulting on debt, and Bangladesh already asked for a preemptive loan from the International Monetary Fund, Rupee saw its all-time low as India is facing trade deficit. South Asia is being troubled with economic and political stress. The Covid 19 pandemic is one of the primary reasons for the current economic stress that South Asia is facing. The pandemic has led to the deployment of public resources on a major level. According to the World Bank, in the South Asia region, Pakistan and Sri Lanka are the highest external debt repayment ratio to exports and remittances. According to the report released by the world bank on Hidden Debt of South Asian economies, is in the form of state-owned enterprises (SOEs) and state-owned commercial banks (SOCBs), and public-private partnerships (PPPs). The SOEs and SOCBs might call for support in the form of bailouts and any terminated PPPs require a large number of funds to settle the payments with the public. The SOE sector in South Asian countries like India and Pakistan is double the international benchmark.  80% of the losses recorded by the SOEs are from the top 10 SOEs in the country in South Asian economies. The World Bank recommended to these countries leverage public capital more responsibly to advance economic development. The recommendations are in a framework called PITA, which stands for purpose, incentives, transparency, and accountability.

The failed off-balance sheet operations of the central governments and subnational governments which are operated by SOEs, SOCBs and PPPs will send the government into distress, which calls for either bailout or reduced economic activity. Governments mostly chose the bailouts because of their political agendas. The unclear mandates which are part of the regulations of the off-balance sheet operations hinder financial accountability and fair monitoring.

After the pandemic, only high skilled labour was able to retain their jobs or find new opportunities in South Asia and unskilled workers mostly didn’t return to their jobs after the pandemic. Afghanistan is facing a humanitarian crisis, and Pakistan has been facing a political crisis with the change of regime internally. Sri Lanka went into an economic and political crisis due to the balance-of-payments crisis. Sri Lanka which gets most of its commodities by importing them from foreign nations faced a drastic decrease in the influx of foreign currency as tourism shut down during the Covid-19 pandemic. The tourism sector accounts for 10% of the nation's GDP and is one of the primary sources of foreign currency. The economy of Sri Lanka shrunk by more than 3%. The inflation reached 9.9% in November 2021 and its 81 billion dollars in foreign reserves were depleted to $ 1.6 billion.

The World Bank in 2021 suggested that “South Asia must Reform Debt-Accumulating State-Owned Banks and Enterprises to Avert Next Financial Crisis” in a press release. According to them the efficiency of the state-owned commercial banks in South Asia Ia well below the international benchmark. The countries in South Asia owe less money to foreigners as they borrowed majorly in local currencies.

The 1997 financial crisis which originated in Thailand, seemed like an isolated event but sent panic across the world and shook the global market as Thailand's currency was devaluated. Many investors pulled out and lenders asked for early repayments, even the investors in emerging markets at that like Russia and Latin America also pulled out.

Currently, India is facing demand-pull and cost-push inflation, the supply chain has been struggling since the Pandemic and it was visible in Especially the semiconductors, which led to the rising prices of mobile phones, laptops and other electronic devices. India imposed a ban on Wheat exports as the 2 of the world’s largest Wheat exporters are currently at war (Russia-Ukraine). There are shortages in fertilisers and rare metals as well, this spooked the investors and affected the market negatively.

The International Monetary Fund is currently in negotiations with the most battered economies like Sri Lanka and Pakistan. Sri Lanka is seeking a bailout package and a team from IMP is visiting Sri Lanka from 24 Aug to 31 Aug. they will assess the ability of the country to repay the debt and look for assurance from creditors. Pakistan currently has commitments of over $38 billion and its present forex reserves dropped to $8 billion, an almost a 50% drop from February. The country is expecting its forex reserves to go up if the IMF approves the loan tranche of $1.17 billion. Pakistan asked for exemptions from some of the targets set by IMF for approving the loan.

Pakistan and Sri Lanka are facing political unrest and the region is slammed by fuel and food shortages. The ongoing conflict between Russia and Ukraine also contributed to this situation. The governments started rationing electricity not only in Sri Lanka but in Pakistan and Bangladesh too. Pakistan increased its fuel prices by 100% and electricity charges by 50%, Bangladesh is facing a slow down in the export orders of its garment industry which accounts for more than 80% of the exports of the country. People are blaming the governments for the economic mismanagement.

Myanmar:

The humanitarian needs, value-chain disruptions and diminished workforce and food security threw Myanmar into an economic meltdown. Destruction of resources due to protests also added to the crisis. The sanctions from the west and the outflow of capital from the country reduced productivity and made the situation more complex. Capital depreciation was experienced in the country due to the political coup. The cost of fuel was increased by around 30-35%. Many essential commodities' price was increased 2 or 3 times the previous prices. Only 1% growth has been projected since 2021 September. The foreign investments have decreased and the business climate has been devastated. The sanctions are affecting the businesses controlled by the Myanmar military. The government is expected to announce the  Myanmar Economic Recovery Plan (MERP) for the coming financial years. It is going to contain 30 goals and 430 action plans.

Bhutan:

After two years of tourism shut down the forex reserves of the Himalayan nation Bhutan. The country decided to ban all vehicles except for unitality, earthmoving, and agricultural machinery. The remittances have decreased by 2.5% in the last 2 years. The forex reserves shrunk to $970 million from $1.46 billion in April 2021. The Bhutan constitution mandates the government to have forex reserves enough for 12 months of essential imports. Current reserves are enough for 14 months but it is closer to the minimum limit. India and Bhutan have a special economic relationship, Bhutan does most of its trade using Indian ports and even when imposing restrictions both countries tend to give special concessions to each other.

Nepal:

Nepal is facing a severe economic crisis externally and internally, the banks in Nepal are not able to extend loans to the productive sectors too because of the liquidity crunch. The banks extended INR 11 billion loans in 2022 mid-January-mid-February when compared to the INR 187 billion in mid-August-mid-September there is a drastic decrease. The inflation in the country rose to 7.14%. the spending on fuel for government agencies, ministries and public enterprises has been reduced by 20%. Nepal is mostly dependent on imports for food grains even though it is an agricultural country, and the agricultural imports from India increased by 10%. Because of the increase in imports, the trade deficit escalated to $9.5 billion. The forex reserves of the country reduced to $9.6 billion from $12 billion in the same fiscal year of 2021-22. At the current level of forex reserves, the country can only sustain its essential imports for 6 months. The country already accepted a grant of $69 million from The United States Agency for International Development (USAID) for infrastructure. Even a two-day weekend policy was being implemented by the government to save fuel and reduce consumption.

Few governments already imposed import restrictions, and more restrictions on imports can be expected. The countries need to attract more Foreign Direct Investment (FDI), strengthen their foreign exchange resources by implementing Millennium Challenge Corporation and revive the tourism industry. The countries need to implement multiple economic stimulus programmes. A prolonged economic crisis in countries like Bhutan, Nepal and Pakistan can push it towards a crisis similar to the ongoing crisis in Sri Lanka. Unless the geopolitical tensions like Russia Ukraine war ease up and a normal supply chain is established the economic turmoil. The forecast for the South Asian economies is not encouraging but the policies that are currently being implemented by a few countries like Bhutan and Nepal have potential. India on the other hand is not entirely having an external or internal crisis because of having bigger forex reserves than other South Asian countries. The small neighbouring countries like Bhutan and Nepal are heavily relying on India for trade and any decisions made by India will affect these countries more than other countries. India should extend its help to these countries as they are strategically important states when viewed from a China-India point of view. As China is not coming to the rescue of the neighbouring countries India should take the opportunity to repair its relations with these countries and secure their trust.

Pic Courtsey-Raymond Klavins ta unsplash.com

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