How Sri Lanka’s Financial Crisis Could Become the World’s

The International Monetary Fund team arrived that same day to begin negotiations over a possible bailout, but a rescue looks quite far off because the IMF economists still struggling to see how the country could ever get on top of its debts. And if Sri Lanka is at one end of the global economic spectrum, today is definitely the other. I've been in Doha for the Kutar Economic Forum, and you'd have to say the war in Ukraine had treated

them very well. With Europe now scrambling to source gas from Cathar, not President putin the world even seems to be coming around the idea of the Gulf state hosting this year's World Cup. Bloomberg Simone Foxman has a report in a few minutes on the many billions the Qataris have spent making this tournament a success. She also asked whether it's remotely plausible to expect a lasting legacy in

the form of stronger work of rights. First, here is our South Asia government reporter Sudi Ranjan Sin in Colombo. The streets of Colombo, the capital of Sri Lanka, are ringing with protests. For months of foreign currency crisis has devastated this island nation. Fuel is hard to come by. It could take days in a line to get fuel or cooking gas. Food prices have skyrocketed. The price of bread has traveled in the last few months. Cooking gas

is scarce and many are back to using firewood. Now people want answers how did Sri Lanka unload style for economic development in Asia fall? So far? I am on the streets at golf acecreen, the iconic street meandering past the sea. Thousands of people have gathered and many more are marching in. The Crowds are shouting in unision around me, calling their leader as thieves and puppets. First, give me

your name and what do you do. You're an engine? Yeah, and I met Naomi Going, a young software engineer at the demonstration. Both her parents are sick and she's struggling to get old of medicine they need. We the citizens, have come to a position that we rather die or put up a fight because we will not get food. We are not having any transport, we will not get any internet. Mostly we don't have medicine. It's really hard

to see somebody die without medicine. Because you you have the money, you don't have a place to buy the medicine. So this is our last fight. We are putting up our last fight. Like many others, Naomi dialects anger at the Raja packs of family and blames in the country's worst economic meltdown in decades. So you may know, but I will repeat it. Our president, our Prime Minister, and most of our MP's belongs to the same family family.

We are under a corrupted regime. The Raja Paksas have been at the helm of fri Lanka for over two decades until recently, as many as six Raja Paksas held top government positions overseas se of the national budget that includes President Gotabaya Raja Pucks. So if the corrupted regime is still in power, we will be not having any hope. Onns will also be mis managed, so we can't see that there may but removing the president won't save every problem.

Sri Lanka's crisis is years in the making. Problems traced to Raga Pukss first days in office. After his election in twenty nine, he slashed taxes to post local business, making good on a populist campaign promise a galloping Today people are crushed under the heavyweight of taxes. We hope to change the income tax law, which no longer suits the country, and reduce the tax burden for everyone. Instead

of multiple taxes, we will introduce a single one. We will abolish the pay as you earn income tax on workers at the state and private sectors. But when the panemic hit, the economy took a tumble. Remittances and tourism dollars dried up, pinching off revenue and forcing the central government to print money. The government also decided to transition to organic farming at the worst time possible. A ban on import of chemical fertilizer pretty much finished Sri Lanka's

agricultural sector in the background. Increased indebtedness to China for infrastructure projects has not helped. To top it off. The tax cut the Draga Pucks has posted two years ago totally backfired. The nation's foreign exchange reserves are depleted. Last month, the nation defaulted on payments for the first time since that was when it achieved independence from the British Empire.

To stay flowed, economists estimates that Sri Lanka needs as much as six billion dollars this year from the International Monetary Fund and major creditors, including China, Japan, and India. Now, President Rather Pucks and as ministers are trying to secure a pailout from the i m F, but people don't feel confident about the future. Last month, inflation neared. Here is nami again. Yeah, this is my last fight. This country has never been defaulted, and now the country's default

and we are going through tough time. The general public is going to tough time. My industry is fairing and we have problems of finding our normal day to day transport, food and medicine. So yeah, I might also migrate even though I'm here fighting. Okay, this is my last fight. I'm putting up my last fight for my life. Protesters are making waves now. The president is the only Rajapaksa left in office. His brother Mahinda, a strongman who served

as Prime minister, resigned last month. Hours later violence would engulf the nation. Meanwhile, political opponents are also putting pressure on the Raja government. So you are the She's a bureau chief, I reported form Sagi. Prima Dasa is the leader of the largest opposition party. He said, even though Sri Lanka is technically a democracy, today's issues are part of a deeper rot when you look at the causes of the present economic devastation, one of which is power concentration,

singular decision making. Power concentrated in the hands of the executive, his stutus, his cohorts and surrogates. You can't have this type of decision making being further perpetuated because it maybe the cause of many more crises. So what's the solution? And dostril Anka even have a road map. Sergeant tells me his party is ready to push for the president to step down and for a fresh mandate, but he's also worried about other important stuff. We only worried about

the people suffering. Let's all, we don't go around brandishing the word elections, elections, elections. People don't want elections, they want solutions. But at the end of the day, to resolve this, uh well, if I may use an American political term, gridlock, I think a fresh man date is the only answer. But there again, we have to look at at least having some sort of basic communities for people to live. We have to ensure that human lives are preserved and that people are able to live. There

should be livability. Now, Sri Lanka is struggling to keep its head above the water. On one hand, President Roger Paksa has made it clear he's not going anywhere before its term ends. On the other, the interim government has raised taxes again and it is pushing for a bailout from the I m F. To that end, the i m F has sent a team to Colombo this week to discuss any potential aid, but the fund is hesitant to lend money while the country's politics is still in

a limbo. However, the dogs go, Sri Lanka is unlikely to sort out its problem anytime soon. By the day to day reality, so Sri Lanka's twenty two million people couldn't look any harsher. Authorities have worn of a severe for shortage by September, and officials are already stockpiling supplies. One thing is certain. Unless the shortage of basic goods ease, the protests across the island will only grow. Yeah from Colombo, sent for Bloomberg News. So I have our chief emerging

market economist. Here's the add doubt to chapter. Some of the issues raised by the Sri Lanka crisis. I mean, yet, we had a very clear sense from that piece of the dire straits that a Lanka finds itself in and the im effort there as we speak and actually don't seem very close to a deal at all, because the numbers are so challenging for Sri Lanka. And you look across the universe of all emerging market economies, are we going to see a lot of similar crises? Who else

is in the danger zone today? The environment for global debt for emerging markets is really not favorable. Stiff and Stephanie, we have a lot of emergent markets. Indeed, the rest of the world has accumulated large stock of debt since the pandemic. You have global interest race, arising local interest race, arising currencies in emerging markets are weakening and that's increasing the burden of servicing foreign debt. And we have the default and Sri Lanka potential default in Russia which could

trigger contingent elsewhere. Silanka is already down. Who could be next? While we looked at the universe of emergent or frontier markets looking for countries that have high stock of debt as well as rising interest rates, and we identified five countries that could be at risk to These are Tunisia, Our Salvador, Ghana, Ethiopia, and Pakistan. Some of these countries are already struggling economically and have political instability um and

others could be next the warriors. These countries are rather small for the global economy. The work the warriors is star small and it gets bigger and it moves to other and bigger countries. Well, I was going to ask you because obviously one of the questions is always, you know, do we have international resources to help these countries? And we went through COVID and there was a really a lack of global coordination around supporting developing countries around that.

I mean, there's a exit there's an effort to get vaccines to developing countries, but its way behind target um. Do we have any chance of having enough money to support the kind of countries that they get the number of countries that they get to get into trouble? Well, I said, that's a big question, right, because the world is more fragmented today, the lenders are more fragmented. Some of them hold out to debt in the whole of recovering more of the debt um. So that's that's the

big question. Whether we can have quick restructuring and quick uh you know, restructuring of debt. And let's take the case of Sri Lanka for example, our South Asia economists and Kusha klan Asha Gupta estimated that Sri Lanka needs to make is disustainable to prevent it from rising indefinitely. It needs a haircut of so everyone who had lent money to Sri Lanka loses half of their original investment exactly.

That sounds quite big, it sounds pretty bad. But if you look at the historical episodes of debt restructuring from ten, that's actually in the middle of the rage. But also so Sri Lanka is not an outlier in that sense. But also if you look at how long it took the duration of negotiations until they managed to settle debt, it took about two years. So it's still early days for Sri Lanka and figure others then will take us

a while to get through this. Yeah, I mean you raised a good point that it's just got there was sort of the old day before our time. I think that you know, in this sort of eighties debt restructuring, you've sort of got the sense you could get a hand There were more or less a handful of big banks that had lent to these developing countries in the Latin American debt crisis, for example, and there were governments

who later you might have to negotiate with. But now to have investors from all over the globe, and as you say, there's these kinds of so called vulture funds who actually make their money almost from from going in and buying up the debt that might get written down and then sort of holding out for the best deal possible. And I guess we should say there's an added wrinkle to this, which I think will probably try and focus on in a more detailed where in a future program.

But China, as we know, has been lending to a lot of developing countries around the world. We haven't necessarily even got a good sense of how much they've lent or on what terms, and that question mark is raised when you're thinking about doing these kind of a negotia Asians. I think they even lent money to Sri Lanka, So

that's another complication. Yeah, and it makes it more difficult to know exactly the size of haircut, what kind of interest rates are being paid, and especially if we look at the economies that are being vulnerable, these are the small sort of frontier economies were already there's a there's a lack of data transparency and added another layer of you know, on the lending side, you don't know who

gave what on what terms. That makes it more difficult to actually assess the sustainability of debt in these countries, and it is I think it is going to be an issue if if if China, so far at least, they have not been willing to go in on these multilateral agreements to write down debt and they've wanted to do their own thing, and I know that's sort of raising eyebrows and the international monetary firm, because what if you end up with a situation where Sri Lanka is

getting its debt that it owes to other countries and to the I m F written down but still paying its China debt. It's going to be interesting. I suspect we're going to come back to this. We're going to do of a handbrake turn because we're here in Katar speaking in person, which is and it makes a nice change.

But I guess you'd have to say, if Sri Lanka has been one of the biggest losers outside of Europe from Russia's invasion of Ukraine, Cattar has been a big willow, which doesn't really seem fair given how rich it was to start with. What does this desperate need for Europe to find new sources for its fuel supply mean for Katar's economy. Um, it's another slice of luck for for cutters.

So if you look at the development of the other economy, they developed their liquefied natural gas facilities and that drove growth up to two and tent They stopped expanding these facilities and then they won the World Cup, and the World Cup started a construction boom, and you can see it's still still here on the streets and everywhere around everywhere is just building sites exactly and that's gonna happen

in November December. So there's allays A question the last few years is what is going to drive growth on other After the World Cup and they started expanding their energy facilities again like FID natural gas facilities. The question then in two thousands seventeen, who's going to buy this? We have the war in Ukraine and there's so much demand for gas that they can't keep up with demand.

So it's another slash of luck in the country that has one of the highest GDP per captain in the world, and that could drive growth for a few years down the down the line. But it's important to know which it's not just others benefiting from this. Is alsless neighbors around here, um, you know, with higher all prices, with the you know, places like Dubai, places like Saudi Arabia

are experiencing a rebounding growth. Um. So this region is booming again on high all prices and of course as all the Russians pouring into Dubai, so that it's a win win for for everyone here. Well, thank you very much. Yeah, It's true that it wasn't long ago that planes to and from Katta were banned from even entering the airspace of its neighbors, and football fans and human rights activists were queuing up to complain about that decision to award

cut World Cup. But now the World Cups almost upon us, and the mood music does feel rather different. Here's bloom Bags, Simon Foxman. If you fly into Doha from the north, you'll see the two reasons all eyes are on Cutter. Right now, on your right a brand new eighty thousand seat stadium rising from the desert that will host the final of the World Cup in December. To your left, if you're lucky, you can make out tankers lined up in the Persian Gulf to collect super chilled natural gas.

Football and an increasingly indispensable fuel may have little in common, but between them they could mark a dramatic turnaround and Cutter's fortunes. The win to organize the two twenty two FIFA World Cup is nearly Since the moment the World Cup was awarded, Cutter has been beset by criticism, first over allegations of corruption and the bidding process, then over concerns about human rights violations and the decision to move the tournament from summer to winter for time. Some even

speculated that the tournament would be taken away. Here's Lisa Cleavinis, the president of the Norwegian Football Federation, delivering a scathing speech in Noha in March of this year. There is no room for employers who do not secure the freedom and safety of World Cup workers. No room for leaders that cannot host the women's game. No room for hosts that cannot legally guarantee the safety and respect of lgbt

Q plus people coming to this theater of dreams. Five months out, there's no longer doubt that FIFA World Cup will be held in Cutter as planned. Construction on the country's seven new stadiums has been completed and an eighth has been refurbished, but the country is still scrambling to wrap up road projects and make new apartment buildings ready for occupancy, ideally before the games begin. Cutter's government has spent a staggering amount of money on infrastructure ahead of

the World Cup. There's the stadiums themselves, of course, but other projects a metro system and airport expansion, and the construction of a new planned megacity called lu Sale have each cost tens of billions of dollars. Uber Khan, a senior investment director at Al Ryan Investment who's based in Cutter, estimates the government spent over three hundred and fifty billion

dollars ahead of the event. That money has been spent on essentially, in many cases building transport infrastructure that was very badly needed. Father had already in prior to two thousand and ten. The population had doubled over a relatively short period of time given the earlier expansion in gas llergy infrastructure and lergy production capacity. So the country hadn't kept up with that growth, and so there was very

serious and significant infrastructure bottled. Some of that money is still at work here on the street in Dojan's West Bay district. It's not quite nine am, and work on road projects is already starting to slow down. An hour from now, the small army of laborers will have disappeared. That in itself something new. Public outcry over depths of low income construction workers has prompted reforms, including limiting the hours that laborers can spend working outside in the summer heat.

It's already a hundred and two degrees fahrenheit in a few hours will be hundred and fourteen. Last year, Counter also introduced the first universal minimum wage in the Gulf No and that it's not based on nationality or gender. It's two hundred and seventy four dollars per month. Other rules of trying to impose workplace safety standards force companies to pay workers on time, stamp out predatory employee recruitment fees, and allow workers at all salary levels to change jobs

without employers permission. They've had mixed success global attention focusing on the World Cup, the uproar likely hasn't ended. Amen Mossy chero Glu, an associate professor at American University and a macro economist at Atlantic Council, predicts that rising interest in corporate environmental, social and Government standards or e s G may translate into pressure on the ground from these companies.

And I think that the governments in division government they will respond and pay attention to those requests coming from these company. Reforms to the labor market aren't just crucial for the low income workers. If the country wants to make use of all the new apartments and hotels it's built, it has to draw talent and tourists. We're talking about you know, you know, probably a million of workers are going to leave the country because there's no more walk

opportunities for them in the country. So I think it's about that the small group of people who are going to stay, and they're going to be mainly in the service industry and a little in the infanc in construction and construction diversification the holy grail of economic stability in the Persian Gulf as leaders try to prepare their economies for a world that needs less oil and gas. It's also a goal that seems less relevant with oil and

natural gas and short supply after Russia's invasion of Ukraine. Still, Clutter's finance Minister Aliyah Kuwari warns that the country can expect the influx of cash prompted by rising energy prices to continue indefinitely. We have a very discipline, you know, fiscal policy plan in a medium term plan for the country and this is based in a long term planning and spending and we are very disciplined about our spending and our fish country reforms. So we're not changing our

plans as a result of this high oil prices. Cutter is still five months away from having this global spectacle on its own soil, but President Putin may have already helped to answer the question of what will support the economy when all the fans have gone home in Doha. Simone fox Men, Bloomberg News from to Sri Lanka. The best of times and the worst in today's global economy. That was this episode of Stephanomics. We'll be back next week.

In the meantime, do please rate the show if you like it, and check out the Bloomberg terminal news website. It's Bloomberg UK now in the UK for more economic news and views on the global economy. You can also follow our economics on Twitter. This episode was produced by Mangus Hendrickson, Summer Sadi and Young Young. Special thanks to Simone Foxman, Cud Suddie Ran Jansen, Anusha Underci and Jeanette Rodriguez.

Mike Sasso is executive producer of Stephanomics and the head of Bloomberg Podcast is Francesca leav Ve.