Crisis in Sri Lanka a warning to other countries with high debt levels and limited policy space: IMF chief

IMF chief Kristalina Georgieva has cited the example of the unprecedented economic crisis in Sri Lanka to warn other countries that they could also face a similar situation in the face of high debt levels and limited policy space.

"I wish the global economic outlook was as bright as the sky in Bali, but unfortunately, it is not. The outlook has darkened significantly, and uncertainty is exceptionally high. Downside risks about which the IMF had previously warned have now materialised," International Monetary Fund Managing Director Georgieva said at the meeting of G20 Finance Ministers and Central Bank Governors in Indonesia.

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"Countries with high debt levels and limited policy space will face additional strains. Look no further than Sri Lanka as a warning sign," Georgieva said on Saturday.

The comments from the IMF MD came as Sri Lanka is going through its toughest economic crisis and is in a hard position where it cannot pay for its essential imports, fuel, food and medicine due to an acute forex crisis. The government declared bankruptcy in mid-April by refusing to honour its international debt.

President Gotabaya Rajapaksa was forced out of power last week due to his poor handling of the economy. Georgieva said that developing nations had also been experiencing sustained capital outflows for four months in a row, putting their dreams of catching up with advanced economies at risk.

While she did not directly indicate the names of any nations, the same global headwinds - rising inflation and interest rate hikes, depreciating currencies, high levels of debt and dwindling foreign currency reserves – have affected other economies in the region, the BBC reported.

Pakistan is one of the nations, which has been witnessing a shaky economy for some time now. Fuel prices in Pakistan are up by around 90 per cent since the end of May, after the government ended fuel subsidies. It's trying to rein in spending as it negotiates with the IMF to resume a bailout programme, the report said.

The economy is struggling with the rising cost of goods. In June, the annual inflation rate hit 21.3 per cent, the highest it has been in 13 years, the report added.

Maldives and Bangladesh are two nations which are on the verge of witnessing an economic crisis if situations are not brought under control. The Maldives has seen its public debt swell in recent years and it's now well above 100 per cent of its GDP.

Like Sri Lanka, the pandemic hammered the economy of the Maldives that was heavily reliant on tourism. On the other hand, in Bangladesh Inflation has hit an 8-year high in May in Bangladesh, touching 7.42 per cent, the report said.

With reserves dwindling, the government has acted fast to curb non-essential imports, relaxing rules to attract remittances from millions of migrants living overseas and reducing foreign trips for officials, the report said.