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World Bank Paints Grim Economic Picture For Dozens of Low to Middle-Income Countries: New Report

Published: May 16, 2022
People queue up to buy kerosine for domestic use at a supply station after authorities relaxed the ongoing curfew for a few hours in Colombo on May 12, 2022. - The country of 22 million people is in its worst economic crisis since independence with severe shortages of food, fuel and medicines and long power cuts. (Image: ISHARA S. KODIKARA/AFP via Getty Images)

The World Bank has released its annual report, this year titled, “Finance For an Equitable Recovery,” detailing the financial fallout — due to the COVID-19 pandemic — currently being experienced by dozens of low- to middle-income countries, and warns that a looming debt crisis threatens to impoverish hundreds of millions of people.

This year, more than 70 low-income countries will be required to make extra debt payments of almost $11 billion, an increase of 45 percent from 2020 following a significant rise in borrowing in 2021. 

In addition to mounting sovereign debt, unstable financial systems in numerous countries have left them more vulnerable to rising inflation and interest rates which are rising in response to historic inflation. 

The report says that the COVID-19 crisis “led to a dramatic increase in sovereign debt, with average total debt burdens among low- and middle-income countries increasing by roughly 9 percent of GDP during 2020, compared with an average of 1.9 percent of GDP per year over the previous decades.”

“This increase in debt burdens has serious implications,” particularly for low-income countries who were already facing deteriorating economies prior to the pandemic. 

Sri Lanka a sign of what’s to come

What’s currently unfolding in Sri Lanka may be a sign of what’s to come for dozens of other low-income nations.

According to the report, almost 70 percent of all businesses in Sri Lanka are expected to fall into arrears on their debts after experiencing sales plummet near 80 percent last year, largely due to the pandemic.

On May 16, newly appointed Prime Minister of Sri Lanka, Ranil Wickremesinghe, told his crisis-hit nation that the country is down to a single day of reserves in petrol.

“We have run out of petrol…At the moment, we only have petrol stocks for a single day,” he said according to the Economic Times

He added that the country failed to raise funds to pay for three shipments of oil. Ships are currently waiting outside the Colombo harbor for payment in order to unload their cargo.

“The next couple of months will be the most difficult ones of our lives,” Wickremesinghe said, adding that, “I have no desire to hide the truth and to lie to the public.”

The crisis was predicted

The debt crisis for many countries was predicted. A collapse in tourism and revenues from the service sector, caused by the pandemic, hit the poorest countries the hardest. 

While many low-income countries were offered loans to weather the storm many were reluctant to take on more debt. 

Debt suspension initiatives were offered to postpone about $20 billion owed by some 73 countries between May and December 2020. However, only 42 countries received the relief totalling around $12.7 billion. 

The cost of borrowing is starting to affect many country’s ability to secure goods and services.

Not unlike Sri Lanka, Ghana’s economy is on the brink of collapse and Nigeria is experiencing a huge spike in the cost of basic foods, largely blamed on the country’s President Buhari, who managed to triple the nation’s debt since he took office in 2015.

While debt was a major concern prior to the pandemic, the international response to the pandemic only served to make matters worse.  

South Africa the next Sri Lanka?

South Africa is perhaps the next country to fall into dire need. According to the World Bank report, businesses in the nation saw their sales plummet by 80 percent during the pandemic and over 90 percent of all businesses are expected to fall into arrears on their debt over the next six months. According to the report, South Africa is the worst performing country in these metrics. 

The country is already experiencing power cuts. On Monday May 16, the country announced it would be moving to “Stage 4” power cuts citing “further loss of generating capacity,” Reuters reported. 

According to Jan Oberholzer, Chief Operating Officer for Eskom, the country’s electricity public utility, the utility has experienced eight major breakdowns at its power stations, exacerbating strain on an already fragile power system.

Oberholzer said that the country is dipping into its emergency fuel reserves and that the country is currently “burning two million litres of diesel per day,” according to the South African Government News Agency. Skyrocketing diesel prices threaten to make an already dire situation worse. 

South Africa’s Minister of Public Enterprises, Pravin Gordhan is warning that Eskom could resort to “stage 8” load shedding, meaning the country could experience blackouts up to 12 hours a day, in order to avert a total collapse of the country’s electricity grid. 

While not nearly as bad as Sri Lanka, South Africa’s foreign reserves did experience a significant drop in April, from $55.388 billion to $54.626 billion, the country’s Reserve Bank said on May 9.