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Economic Meltdown and Ukraine

May 7, 2022 | Expert Insights

In April this year, three of India's neighbours faced serious economic challenges. Sri Lanka defaulted for the first time on her international loans, which amounted to $51 billion. Prime Minister Imran Khan of Pakistan lost the vote of confidence, and the new government inherits depleting foreign exchange reserves of $11 billion, barely enough to cover two months' cost of imports. Nepal also has a new government with depleting foreign exchange reserves estimated at $9.7 billion, just enough to cover the cost of imports for six months.

This economic malady is not restricted to South Asia; there are at least five other countries that are facing an economic crisis and depleting foreign exchange reserves, including Lebanon, Argentina, Belize, Zambia, and Surinam.

Therefore, there are some important lessons for global monetary and fiscal policy here.


The IMF and World Bank estimate that there are about 35 countries which are in debt crises, in one form or another, of which nine or ten are severe. Pakistan and Sri Lanka are on that list. Nepal is on the list of 35. Several countries are in Latin America, but most of them are in Africa.

This economic depredation cannot be entirely blamed on the Russian-Ukraine conflict. Says Mr Shiv Shankar Menon, a former foreign secretary and national security adviser, “This is a problem that predates the Ukraine war. It's a problem that we've been flagging for some time. It's been raised at the G seven, at the G 20. I hope that when we get around to hosting the G 20 next year, we do something about this because this is a fundamental systemic problem. And the rich and those to whom this money is owed, the debts are owed, have not actually done very much. They put a moratorium on repayments for a while during the pandemic. But even that seems to be running out now for most of them. And they have not rolled over or worked out repayment or written off these debts of the poorer countries. So this is a real crisis, as we have this combination of crises.”

Economic Meltdown and Ukraine

Different countries have different forms of this debt crisis. China itself has a debt crisis because local governments have borrowed tremendously, with an overall debt that is well over 200 per cent of GDP, which is an extremely high figure. But even the U.S. debt has ballooned tremendously in the last ten years. This is actually a problem that needs an international solution. "And this is where the international institutions, whether Breton Woods or whoever, actually need to get their heads around the problem before we are faced with a real collapse of the financial system in our immediate neighbourhood,” warns Mr Shiv Shanker Menon.

Sri Lanka's problem, of course, and Pakistan'sproblem are compounded by irresponsible borrowing and behaviour by their own government. Apparently, they didn't look at the long-term consequences. "They looked at the immediate political gains of borrowing, building some of these vanity projects, and they are now in the hole, and they find they can't repay,” explains Mr Menon.

Sri Lanka has now approached the IMF and has promised to bide with its advice. The Chinese, who are among the biggest debtors of Sri Lanka, have not yet stepped up to rescue Sri Lanka. India has actually stepped up to offer credit lines and to help Sri Lanka, both by supplying food and energy but also by making her financially at least capable of tidying over the present moment.

But India on its own cannot solve the problem. The problem must be solved by Sri Lanka and ultimately by finding new sources of revenue. Sri Lanka's problem is that she used to depend on tourism, which, of course, collapsed with the pandemic, and on commodities. Commodity prices went rock bottom and including things like tea and so on, and remittances from the Gulf area dipped dramatically. Many of her workers were sent back when the pandemic hit and when the Gulf economies slowed down. None of these three sources of income is likely to pick up in the immediate future. So, Sri Lanka must find alternate sources of revenue.

Pakistan has a slightly different problem. Pakistan's official figures and the official situation is one problem, but 80 per cent of this economy is great. It's off the books so that people survive, despite the figures showing a horrible situation.

Pakistan's problem is that she’s heavily indebted to China. She will have to rework those loans and see how she does that. And the rest of the world is not willing to give Pakistan money just to repay the Chinese.“And some of those loans were really quite strange. Power loans, for instance, were export credits given to Chinese companies to build power plants in Pakistan with a fixed rate of return and a 16 per cent rate of return with a sovereign guarantee by the state of Pakistan. And it's unprecedented. Sovereign never saw any of this money. It went straight from the export guaranteed corporation straight to the Chinese companies who built the plant and pushed off,” explains Mr Menon.

What it means to India is that the ceasefire along the LoC is holding because Pakistan has other things to do. But that's not a very stable basis for a relationship from the Indian point of view.


  • Pakistan must deal with energy pricing issues and also renegotiate her debt with China while trying to work with the IMF. Along with the economic crisis, in the case of Pakistan, there is also a political crisis.
  • While in the Sri Lankan case, the political crisis is a result of economic mismanagement, in Pakistan, both are parallel and feed off each other. And Pakistan has, at the same time to deal with the resurgent Pakistani Taliban (TTP), who now feel the wind in their sails after what they've done in Afghanistan and see no reason to compromise. So, you have a security problem, a debt problem, a financial problem, a political crisis, and to top it, an interim government until they get to their elections.
  • India should concentrate on what is important in the long run, which is integrating the economies of the subcontinent with its economy so that India enjoys the fruits of a peaceful periphery within which it can develop and improve its own and its neighbours' prosperity.