As western countries retreat from international aid, China is poised to swoop with its ‘belt and road’ programme

There is not a country that has escaped the combined economic shocks of Covid-19 and the global spike in oil and food prices triggered by Russia’s continuing invasion of Ukraine. Painful for wealthy countries, for low- to middle-income countries it risks being existential. Sri Lanka – mired in crisis – last week defaulted on its debt for the first time in its history.

While its collapsing economy is as much a product of its corrupt politics as of global economic trends, Sri Lanka is also a worrying bellwether for the instability elsewhere that may be triggered by declining economic security in countries with high levels of poverty.

The situation facing Sri Lanka’s citizens is dire. Soaring inflation has taken the price of basic goods out of reach for many, and extreme shortages of food, medicine and fuel mean people have to spend hours queuing in the extreme heat while shops have been forced to close. For months, there have been peaceful anti-government protests, driven by anger with the political elite. But in recent weeks, they have turned violent; one politician has been killed by a mob, and others have had their houses set alight.

This crisis has been long in the making: the product of 20 years of unsustainable levels of borrowing to fund unwise projects, and levels of taxation that have been too low. This made Sri Lanka particularly vulnerable to the impact of Covid, including on its tourism industry. Additionally, the current administration cut taxes further just before the pandemic, and banned the import of chemical fertilisers in April 2021, which has had a ruinous impact on Sri Lanka’s domestic food production, making it even more reliant on expensive imports.

There are other countries where political turmoil and economic vulnerabilities mean that further economic shocks will lead to more hardship for their populations, with the risk of triggering instability and violence. Global food prices rose by more than 30% in 2021, and the war in Ukraine pushed up wheat and maize prices by almost 20% in the course of just one month this year. The economic impact of Covid, already bad, is far from over: lockdowns in Chinese cities such as Shanghai and Shenzen have disrupted supply chains worldwide.

Russia’s aggression in Ukraine has reawakened western commitment to the Nato alliance as a way of promoting global security. But that is not enough: wealthy countries such as the US and the UK need to be alive to the impact of these global economic trends on lower- and middle-income countries, not just because they have a moral duty to do more to alleviate global poverty, but also out of self-interest with a view to security risks. Instead, the chancellor, Rishi Sunak, has cut £4.2bn from the British aid budget, breaking the Conservative manifesto pledge to keep aid spending at 0.7% of gross national income. Countries such as Syria, Bangladesh and South Sudan saw their aid from the UK reduced overnight by 69%, 62% and 49% respectively, and the UK has cut £1.5bn of aid from a World Bank programme focused on helping poorer countries recover from Covid. Last week, the foreign secretary, Liz Truss, published a government white paper on international aid spending that proposes halving UK spending on multilateral agencies such as the UN and the World Bank to redirect aid spending towards the UK’s own trade interests.

Western retreat from international aid will leave more room for China to fill the gap. Lending to countries such as Sri Lanka through its “belt and road” infrastructure programme is a key part of China’s strategy to increase its soft power. In a world of increasing economic insecurity, Britain’s cuts to international aid are not just immoral, but short-sighted in the extreme.

The Guardian

“Right now, the problem of inflation cannot easily be solved by tightening the interest rates. It can be tightened in some cases, the government is trying to do it in the case of wheat by putting an export ban,” says Swaminathan Aiyar, Consulting Editor, ET Now.

How real is the fear of the rising rates and the slowing growth which is making the markets of the world very nervous?
We are at the highest rate of inflation – some people will say for five years, for ten years, for fifteen years. The wholesale price index for April had just come in at 15:05%. The consumer price index 7.8%. These are extraordinarily high rates and there is nothing special about India.

In America, where the target inflation is 2%, their latest inflation rate came down a little to 8.3%. So there is global inflation. Prices of commodities of all kinds, prices of services, manufacturing and everything has been going through the roof in the last 12 months. The inflation had begun even in 2021 and then after the Ukraine war started in February, it accelerated even more.

So the world is caught in a huge inflationary trap right now with the physical shortage of a large number of commodities which was building up over time and over and above those physical shortages, there has been the shock of the war and the sanctions imposed on Russia which is an important supplier of a number of items.

The Black Sea which is one of the greatest supply routes out of Russia and Ukraine that has been blocked by the war. On top of everything else, China has committed a kind of hara-kiri by having a complete lockdown in an attempt to stamp out Covid and so on its own, there is a separate supply shock because there is no production going on in China.

So these different strands have all come together for a gigantic shock. Two things are happening at the same time; on the one hand, demand is going down because there is a lack of production. There is a lack of production as the prices have gone up and China has got into a self-made recession; it’s a hara-kiri recession of its own. Meanwhile, with the prices going up, all the central banks are having to raise their rates.

So we are in a situation where on the one hand there is a recessionary trend, recession is coming because demand is falling. At the same time, prices are going up. Some people call this stagflation. In the case of India, we are hit both ways. We were hoping that it would be a very good year for growth, the IMF was saying India will be the fastest growing major country and perhaps that will still be the case, but earlier they were hoping for 9% growth and now people say maybe 7%, 7.5%, or maybe 6%.

We are in a tough position right now as the inflation is rising fast because inflation is rising everywhere else in the world and because of that we cannot escape it alone and the recessionary trend is also coming the world over and we cannot escape that. We are perhaps better positioned to withstand the problem that some other countries can’t. We will not collapse like Sri Lanka or Pakistan but we are certainly in trouble.

Do you think the situation is in control of the central banks and can they control inflation by just raising the rates?
Raising interest rates is not going to solve the supply problem. If there is an overheated economy with too much demand, then one can slow down that demand by raising interest rates and making it difficult for people to buy. But that is not the case today. It is not like we have an overheated economy and there is too much demand. In fact, there is not enough demand. Take a look at the corporate sector. The results that are coming in show the auto sector is not in good shape, demand is not there therefore the production is coming down.

There is a shortage in some areas like metals and so on but even there, the prices have come down very sharply. So right now, the problem of inflation cannot easily be solved by tightening the interest rates. It can be tightened in some cases, the government is trying to do it in the case of wheat by putting an export ban. The international price of wheat is something like Rs 40 a kilo and if we freely allow the export of wheat from all our surplus buffer stocks, we can have a huge export boom but then if the Indian price equates with the world price at Rs 40 a kilo, there will be mayhem and riots on the streets.

SO the government has tried to do supply management by saying we will stop all exports of wheat. This I think was a bad move. It should have been more gradual and they should be allowing some exports but right now that is one thing that they can do. They have put a ban to improve the supply of wheat and this can help to reduce inflation on that front. Beyond that, we will have to live with the global trends and cannot wish away the global trends.

The government up to a point can reduce import duties or excise duties on edible oil. It can do that in the case of crude oil, petrol, diesel. But all this would be a limited amount of relief. It is not that prices will come down but one can limit the extent to which the prices rise.

Beyond that, we will have to wait for this war to play out and for this business cycle to play out, those are items beyond your control.

The Economic Times