Sri Lanka's political and economic situation and news1. What Sri Lanka reveals about the risks in emerging markets
A number of developing economies face growing pressure from soaring energy and food
costs and a stronger US dollar
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In a more optimistic era, the overthrow by Sri Lankans of a feckless government they
blamed for their country’s economic collapse might have been called a Velvet Revolution. It
began last Saturday when tens of thousands descended on the largest city Colombo and
poured into public buildings, including President Gotabaya Rajapaksa’s official residence,
amid chants of “Gota, go home”.
The president had fled for his safety, but in scenes reminiscent of many 20th-century regime
collapses, the crowds hunkered down in the palace, sitting behind the president’s desk,
bathing in his pool, and showering in his bathrooms.
By week’s end Rajapaksa was indeed gone — first on a military jet to the Maldives, then to
Singapore, from where he finally tendered his resignation via email. With the military
showing restraint, by this Friday protesters were leaving the government buildings.
While the country appears to have moved away from the brink of violent confrontation, the
economy is still mired in a profound crisis. Sri Lanka now needs a new government to rebuild
its economy, starting with agreeing an IMF facility, a credible government plan to rein in
rampant inflation, and balancing a government budget that ran in deficit of more than 10 per
cent of gross domestic product in 2020 and 2021.
Protesters storm the Sri Lankan prime minister’s office in Colombo. While the country
appears to have moved away from violent confrontation, the economy is mired in a profound
crisis © Rafiq Maqbool/AP
But Sri Lanka’s economic and political woes are far more than a national problem — they
are a dramatic example of the potential difficulties looming in a number of other emerging
markets.
If the string of economic shocks that have battered the global economy are hard enough to
manage in rich countries, there is even more cause for worry in many of the poorer and
emerging economies that are home to the majority of the world’s population. Economic
pressures bring political instability — and today economic pressures are everywhere.
After the unprecedented disruptions of the pandemic, the global economy was already
suffering the frictions of reopening on still vulnerable supply chains. All that was before
Vladimir Putin invaded Ukraine.
2. A war in one of the world’s biggest food exporters, coupled with harsh western sanctions on
Russia and Putin’s manipulation of energy exports, has sent commodity prices — foodstuff,
energy goods and industrial metals — rocketing. With inflation high, the US is raising rates
and the dollar is getting ever stronger, which in the past has often been a spark for economic
crises in the developing world.
“Emerging markets as an asset class are always the most sensitive to either economic or
political risk. The way I look at Sri Lanka is the extent to which it is a canary in the coal
mine,” says Tina Fordham, a geopolitical strategist and adviser at consultancy Fordham
Global Foresight.
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