Sanoj Weeratunge thought that this year would finally be the one where his tourism agency would turn the page on successive crises in Sri Lanka. That was before the conflict in Iran erupted more than 4,000 miles away, causing the government to hike fuel prices by 35 percent and its business to fall by almost a third.
“The road to recovery has been very difficult over the last six years and we were really hoping to finally reach pre-COVID levels,” says Mr. Weeratunge from his office in Colombo. “But this economic shock will now impact us.”
Sri Lanka, like Egypt and Pakistan, belongs to this group of low-income countries already marked by crises. Analysts fear seeing them plunge back into turmoil, while the energy imports on which they depend become more expensive under the effect of the war.
Despite the fragile ceasefire established this week in the Gulf, Colombo has reintroduced fuel subsidies and negotiated a temporary relaxation of the conditions of its bailout plan with the International Monetary Fund (IMF) in order to give itself a breath of fresh air. Other nations are expected to seek similar concessions next week in Washington, during the spring meetings of the IMF and World Bank.
The IMF says it is ready to listen and expects to have to release between $20 and $50 billion in emergency support due to the crisis, its managing director, Kristalina Georgieva, said on Thursday.
CALL FOR HELP
Reza Baqir, a former governor of Pakistan’s central bank and now an adviser to governments in debt difficulties, says the conflict is hitting vulnerable countries from almost every angle.
The 40% surge in oil prices is causing the import bill to explode, at the very moment when remittances from expatriates in the Gulf are likely to decrease and when economies, in general, are experiencing a sharp contraction.
As current account deficits widen and currencies weaken – the Egyptian pound has plunged more than 10% since the start of the conflict – dollar payments for oil, food, fertilizer and debt servicing become even more onerous.
These expenses must then be covered by foreign exchange reserves, by increased debt or by a drastic reduction in other imports.
What is needed, according to Mr. Baqir, is “a credible declaration from institutions like the IMF stating that they are ready to support these countries. And I think the sooner the better.”
Pakistan’s gross reserves stood at $16.4 billion at the end of March. This amount is not enough to cover three months of basic imports, but JPMorgan points out that this figure is actually negative when the central bank’s foreign currency liabilities are included.
Gasoline prices suffered a second consecutive increase there and schools closed for half of March. At the same time, public administrations have moved to a four-day week and are now prohibited from purchasing new furniture or air conditioners.
Islamabad’s final worry, however, lies in the imminent repayment of a $3.5 billion loan to the United Arab Emirates. If it fails to refinance it, its finances will come under increased pressure, given its $7 billion program with the IMF, says Jeff Franks, former head of the Fund.
“I am sure that for Pakistan and Egypt, if they manage to meet with the managing director or other senior officials of the IMF next week, they will emphasize the seriousness of this shock to their stability,” added Mr. Franks.
“DIFFICILE À GÉRER”
As in Sri Lanka, rising prices are causing discontent among populations in traditionally unstable Pakistan and elsewhere.
“Everything has become expensive,” laments Maviq Hussain, a meal deliveryman in Karachi. “It’s difficult to manage daily expenses.”
For Egypt, the hard blow also affects tourism, which generated 19 billion dollars last year. Not forgetting the potential impact on the Suez Canal and a colossal debt burden, which was already expected to absorb 60% of revenues this year.
The nearly $30 billion in payment arrears represent more than half of Egypt’s foreign exchange reserves. Around $8 billion in foreign capital has already fled the country since the start of the war, Moody’s noted last week.
The IMF welcomed Cairo’s decision to let its currency play the role of “shock absorber”. But with the energy import bill doubling, observers expect Egypt to be one of the most active countries in Washington next week.
“It is in no one’s interest to be rigid in conditionality and let these countries collapse,” Franks said.
In the streets, residents exhausted by the crises simply hope that the pressure will ease.
Kelum Dissanayaka, a 37-year-old father of three in Sri Lanka, starts his day as a VTC driver and delivery man at 4 a.m. But the explosion in costs and fuel rationing have forced him to suspend payment for the lease of his tuk-tuk for two months.
“It has become very difficult to live,” he says.
