Dark clouds of debt loom over India’s neighbourhood 

South Asia is in dire straits. From the high mountain peaks of Nepal and Pakistan to the flat sandy beaches of Sri Lanka and Maldives, the economies of South Asia are facing the crises of both inflation and interest rates rising and currencies depreciating, and what is worse, a dearth of foreign exchange reserves to pay their import bills with. 

Sri Lanka is very much in focus today. Cash-strapped and with forex reserves down to zilch, Sri Lanka, on 12 April 2022, announced a pre-emptive default of all its foreign debt, totaling USD 51 billion, as an emergency measure. It is now hoping for a huge IMF bailout, that could help it tide with the acute shortages of food and fuel within the country.  

Sri Lanka’s forex crisis is much to do with the country’s persistence in paying for imports and interest on loans out of dwindling reserves, when it would have been more pragmatic for it to have rescheduled and rearranged debt. It was overly depending on the tourism industry, to rebound, to avoid a disaster. But the prolonged Covid pandemic and the war in Ukraine belied its hopes, and actually manifested its worst fears. 

Sri Lanka’s recently appointed Prime Minister Ranil Wickremesinghe told parliament, this month (June 2022), that his cash-stricken government will need at least USD 5 billion over the next 6 months alone, as the economic crisis has affected millions of livelihoods across the island. 

Of the USD 5 billion, USD 3.3 billion would be needed just for fuel imports, whilst USD 900 million would be needed for food, USD 250 million for cooking gas and USD 600 million more for fertiliser, he said.  

Sri Lanka’s debt crisis has been the fallout of its wholeheartedly subscribing to China’s Belt and Roads Initiative (BRI) projects like Hambantota Port and Colombo Port City, under which Chinese financers lent large amounts of money with rigorous terms of repayment. In 2021-22, Sri Lanka’s debt repayment to Beijing amounted to USD 2 billion, and China’s unsatiating interest in foreign assets led to the lease of Hambantota Port to China for 99 years.   

Sri Lanka’s external debt to gross domestic product (GDP) ratio is at an alarming 58 percent (in 2022). Its government debt to GDP ratio, in the same year, is at 107 percent. China accounts for 10 percent of its gross external debt.    

China’s `string of pearls’ strategy in South Asia, of pumping in loans at commercial rates, has taken its toll on Pakistan as well. China’s share in Pakistan’s total external debt of USD 122 billion is a staggering 27.4 percent. Servicing loans and paying for imports, Pakistan’s total forex reserves plummeted to USD 16.4 billion in April 2022, from USD 24 billion last year. Its ratio of external debt to GDP stood at nearly 35 percent as of the beginning of the year (2022). 

Pakistan, that features in World Bank’s list of 10 largest borrowers, is now heavily indebted to China. China is unscrupulously using its debt-trap diplomacy to foreclose huge assets in Pakistan. Under the BRI, the China-Pakistan Economic Corridor project aims to connect Gwadar Port in Baluchistan to the Xinjiang province in China.   

A quickly depreciating Pakistani rupee that has now breached the Rs 200-to-the-dollar mark, will compound costs of debt servicing while making imports dearer. Pakistan’s trade deficit stood at USD 39 billion in 2022, thanks to the populist policies of ex-Prime Minister Imran Khan. Pakistan, too, is knocking at IMF’s doors for a bailout. So imminent is the situation that one of the first priorities of the new Prime Minister, Shehbaz Sharif, was to seek Saudi help over and above the loan of USD 4.2 billion that the Saudis have extended to Pakistan. 

Nepal, too, is in the throes. Nepal’s foreign exchange reserves have fallen by 18 percent in mid-March 2022 since last July, enough to last for just six months of imports. Inflation in the country, at 7 percent, is the highest in the last 67 months with crop loss due to the last floods adding to its food-fuel inflation already exacerbated by the Ukraine-Russia war. 

The Nepalese government has imposed a ban on import of all luxury items such as cars, cosmetics, gold and silver among other things. It has also announced an additional holiday, reducing the work week to a five-day schedule to tide over the fuel shortage. In terms of external debt, Nepal is following Sri Lanka into the abyss, with its external debt-to-GDP ratio rising to 40 percent in 2022 from 25 per cent in 2015. 

Nepal is also part of the Chinese BRI; and Nepal has been pressing China recently for grants rather than loans. Since China offers loans under the BRI at a higher interest rate with a short payback period, Nepal has not been too keen a borrower.  

Nepal has the advantage that it is categorised as a low-income country rather than a developing country, and, thus, qualifies for cheap loans from multilateral agencies. It is not yet desperate for commercial loans. However, in July 2020, the World Bank upgraded Nepal to a lower-middle income country in its country classification after Nepal’s per capita income reached USD 1,090. After Nepal’s upgrade to a lower-middle income country, the maximum interest rate to be charged by multilateral donors such as the World Bank and the Asian Development Bank has risen by 0.5 percentage points.  Nepal faces the dilemma of losing its right to concessional loans from multilateral agencies like the World Bank and Asian Development Bank once it graduates to being a developing country. 

Like Sri Lanka, Nepal was also hard-hit by the Covid pandemic, as it is a tourism-driven economy. 

Another South Asian economy that is heavily reliant on tourism and is facing a potential economic meltdown is Maldives.  Maldives is highly vulnerable to external and macroeconomic shocks due to its dependence on tourism and limited sectoral diversification. What is a bigger worry is that 20 percent of its tourist arrivals are from Ukraine and Russia, that are at a standstill because of the war between Ukraine and Russia.  

Rising fuel costs across the globe are also not a good portent for Maldives, as oil imports constitute the highest portion of its GDP. Total debt to GDP in the Maldives exceeded 100%, with the ratio of external debt at a daunting 67 percent in January 2022. Maldives owes over USD 1 billion debt (20 percent of its total external debt) to Beijing, while its total foreign debt stands at USD 5.6 billion (January 2022), according to the World Bank. The government of Maldives has been insisting that there is currently no risk of default. However, US investment bank, JPMorgan, has prognosticated that Maldives is at a risk of defaulting by the end of 2023. 

As for Afghanistan, its economy has collapsed for all purposes, and it is going through a severe humanitarian crisis. There are no statistics coming out of Afghanistan, but UN estimates have it that 23 million of its 40 million people are facing acute starvation. And, according to some reports, 90 percent of its workforce is unemployed. For a country where international development assistance constituted 43 percent of GDP and 75 percent of public expenditure before the Taliban took over in August 2021, the running dry of international funding, what with aid agencies scrambling to keep finances away from the Taliban, has left the country utterly cash-strapped and unable to feed its masses.    

One silver lining to the dark clouds that loom over India’s immediate neighbourhood of South Asia is Bangladesh. Bangladesh’s GDP growth rate between 2016-2019 was a commendable 7-8 percent. In 2020, it fell to 2.38% largely due to the pandemic, and bounced back to 5.47% in 2021. Bangladesh had a credit-worthy external debt of USD 78.4 billion (October 2021). The country has so far kept forex reserves and external debt at more sustainable levels (external debt to GDP ratio as of October 2021 was 22 percent). India, itself, has a total external debt of USD 507 billion, and a manageable 21.1 percent ratio of external debt to GDP.  

For India, an economic crisis in South Asia could trigger millions of refugees from across the Palk Strait with Sri Lanka and through its porous border with Nepal. For South Asia’s beleaguered economies, their woes have come at a time when war and pandemic are rife, causing food and fuel prices to inflate, and export markets to shrink. To compound their problems, the dollar is strong and the US Fed has hiked interest rates, making debt and debt-servicing costlier. The exigencies of the day for these hapless economies are – tough fiscal policies, and an unsavoury tightening of belts.