Global economic crises and need for financial structure overhaul - EDITORIAL

UNCTAD in its update Trade and Development Report released on 12 April warns that developing countries are facing years of difficulty as the global economy slows down amid heightened financial turbulence. Many developing countries face a deepening development crisis as soaring debt levels and higher servicing costs squeeze productive investment in both the public and private sectors. 

A shortfall of international liquidity has already turned unforeseen shocks into a vicious financial cycle in some countries.   
UNCTAD found that 81 developing countries (excluding China) lost $241 billion in international reserves in 2022, an average decline of 7%, with over 20 countries experiencing a drop of over 10% and in many cases exhausting their recent addition of Special Drawing Rights (SDRs).   
Meanwhile, borrowing costs, measured through sovereign bond yields, increased from 5.3% to 8.5% for 68 emerging markets. Overall, external creditors’ pressure on developing countries to reduce fiscal deficits is expected to increase.   

UNCTAD has highlighted that debt distress will result in a development crisis and wider inequalities - with 39 countries paying more to their external public creditors, than what they received in new loans - causing an adverse impact on public investments and social protection.   
Over the last decade, debt servicing costs have consistently increased relative to public expenditure on essential services. The number of countries spending more on external public debt service than healthcare increased from 34 to 62 during this period.   
Our country is one among these states.   

At the end of World War II, the Western bloc countries, set up the International Monetary Fund and the World Bank to protect the financial architecture of the colonial powers. The biggest shareholders in the organisations today are the governments of the US, Europe and Japan.   
Since 2008, we have seen the European debt crisis, followed by the Covid-19 pandemic, the steep rise in fuel prices and inflation in developed economies. Its ill effects are felt in the developing world. For instance our country’s exports to Europe has not increased this year.   

As president Wickremesinghe mentioned at the ‘Berlin Global Dialogue’, that’s how badly we are affected.   
Today the IMF and the World Bank exist primarily to finance loans to developing countries. But these loans are tied to “structural adjustment” programmes calling for privatisation, deregulation, cuts in social spending and labour flexibility”, which lead to more turmoil in those countries.   
The two institutions (set up as mentioned earlier,) at the end of World War II, no longer reflect the realities of the present day where China is a rising super power. The rise of China has led to tensions between the two.   

The IMF and the World Bank structured as they are - weighted to meet the needs of the West and dependent on US capital - are unable to tackle the needs of developing nations. Even UNCTAD has called for a revamp of the present international financial architecture.   
China’s Belt Road Initiative (BRI), which aims to stretch around the globe linking Pakistan, Bangladesh, India, Sri Lanka to isolated Central Asian countries and then on to Europe offers new trade possibilities. Participation in the initiative, could usher in a new era of trade and growth for developing economies in Asia. It could also help Lanka out of its present economic crisis.   

But, geopolitical clashes between the US and the West (which controls the IMF and World Bank) on one side, and China on the other, prevents Lanka from participating fully in the initiative, given its dependence on the goodwill of the IMF.   
It was probably in this light President Wickremesinghe speaking at the ‘Berlin Global Dialogue’ said the existing global financial institutions and mechanisms of today are not equipped to deal with countries facing crises including bankruptcy.   

Hence his call for the setting up of a new mechanism.   
As Wickremesinghe emphasised, there needs to be a comprehensive dialogue between the Western nations and China, the US and China and Europe and China to address the critical global problems of today.   
We can only hope that such can be the reality.