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Thinkpad: Turmoil

From Sri Lanka, to Nepal and Pakistan, the neighborhood is seeing economic turmoil.

Ocean waves in Texas, U.S. (Photographer: Luke Sharrett/Bloomberg)
Ocean waves in Texas, U.S. (Photographer: Luke Sharrett/Bloomberg)

Happy weekend.

We hope most of you are enjoying the long weekend. If you are reading Thinkpad in the midst of that, you deserve rewards points. Not that we have any to give away. But if we did, we'd give you some.

Here in India, we mostly stay occupied with what's happening locally. There is always so much happening! There is reason, though, to look around the neighbourhood this week.

From Sri Lanka to Nepal and Pakistan, a number of neighbouring nations are in economic turmoil. So are a number of low-income nations across the world.

Sri Lanka, this week, said it would stop making payments on its external debt, to save foreign exchange to pay for food and fuel imports. The country has seen its foreign exchange reserves slip to just $1.94 billion.

While the Covid-19 pandemic precipitated the crisis, the country's economic fundamentals were shaky even before it. Tax cuts had led to a dwindling of revenue and external debt, for a nation with GDP of $81 billion, had risen to over $50 billion. You can catch up on what led to the crisis here.

While China was the first go-to point for Sri Lanka, as the crisis precipitated, the nation has sought help from India and is now knocking on the doors of the IMF. India, on its part, has extended an existing $400 million swap line via the Reserve Bank of India, State Bank of India and Exim Bank, which have given loans to the nation for emergency needs.

Eventually, the extent of help India will be willing to provide will presumably come down to geopolitics and balancing China's influence over the island nation.

Trouble is brewing in Nepal as well.

The central bank's latest update on macroeconomic conditions paints a grim picture. Inflation is double what it was a year ago, the trade deficit has increased by a third and foreign inflows and remittances are down. Here too, forex reserves have fallen to under $10 billion.

Alarm bells are also ringing after the central bank governor was suspended over some foreign payments the government wanted made.

Pakistan's economic conditions have also been perilous for some time. Here, too, reserves have fallen and cover just about two months of imports. The country needs to urgently secure a credit line from the IMF, say investors.

With a number of low-income nations calling on the IMF's doors, the fund has begun discussions with a few that are in urgent need of debt restructuring, Bloomberg reports.

In December, the IMF had cautioned that 60% of low-income countries are at high risk or already in debt distress as a consequence of the Covid-19 pandemic. The fund had also called for improvements to the G-20 debt restructuring framework and asked that creditors in wealthy nations agree to accelerate debt restructurings and suspend debt service while the restructurings are being negotiated.

Call it the long tail of the Covid crisis.

Back home, the holiday shortened week brought news of a spike in inflation. At near 7%, with the threat of going higher, inflation is now a real problem. Nearly half of the consumer price index basket of goods has inflation running above 6%, Pallavi Nahata wrote. Even your summer mangoes haven't been spared!

The central bank has already pivoted and a repo rate hike may now follow in the June policy review, say economists.

Yes, we have our problems but nowhere near the problems our neighbours do. So, while we complain about our economic policy making plenty, perhaps we should take a moment to appreciate it too.

Till next week.