Sri Lanka’s economic crisis is deepening.This The rupee has fallen to an all-time low Against the US dollar against the backdrop of power outages, food shortages and sky-high prices.This country may have only Despite repayment of $1 billion in bonds, there is still $500 million in foreign exchange reserves Expires in a few months. The situation is expected to stabilize as the International Monetary Fund prepares to intervene. But fears are growing that Sri Lanka could become the first of a series of emerging markets to be plunged into economic turmoil.

The war in Ukraine represents another shock that, in the context of the pandemic, could be enough to send multiple countries into debt distress. The scope of the problem is likely to be global, so solutions need to be of similar size and scope. Unfortunately, gaining enough international political will to fix the loopholes in the world’s sovereign debt relief framework seems like a daunting task.

Russia’s war in Ukraine presents developing countries with a double shock. Oil and food prices soar Importing economies are under pressure, with countries such as Egypt facing the prospect of slashing foreign reserves to cover costs. Most important is the prospect of monetary tightening in developed countries.

In 2013, the simplest hint that the Fed would taper quantitative easing — a so-called tapering scare — was enough to pull money out of emerging markets.What happens when a major event occurs The Fed’s balance sheet shrinks to be observed. However, the outlook is bleak: interest rates will rise and some developing economies may find their debt burdens unsustainable.

The road from there can be grim. Payouts may be cut to repay bonds when they mature. Such austerity tends to exacerbate poverty, cut off growth paths, and trigger unpredictable social unrest.

However, this series of events is not inevitable. First, the IMF should reframe its pandemic strategy and provide flash loans to vulnerable economies. This may be accompanied by less stringent conditions to suit the urgency of the situation, ensuring that countries spend the necessary funds to meet current challenges.

In the medium term, the gap in sovereign debt relief around the world must be filled. It’s no longer enough to just focus on the old Paris and London loan clubs – gone are the days when emerging market creditors were concentrated in this group. China is now by far the largest bilateral lender to developing countries, and bonds have been sold to a range of private investors. According to the World Bank, as of the end of 2020, low- and middle-income countries owed commercial creditors five times as much debt as they owed bilateral creditors.

These lenders will need to cooperate if significant, aggressive debt relief for emerging markets is to be expected. The common framework agreed by the G20 in November 2020 offers a potential tool, but the will to use it is lacking. Creditors remain concerned that their agreement to offer concessions will only serve as a covert means of redistribution to other lenders unwilling to participate.

At a time of growing divisions and priorities elsewhere, hopes of rectifying these issues through a world sovereign debt framework may fade. If so, it would be a shame. Economic turmoil in emerging markets does not necessarily lead to a severe crisis. It’s clear what needs to be done. The task now is to find the necessary political will to do this.