Full-Blown Crisis In Fragile Frontier Economies From Ukraine War: Report

The fallout of the Russia and Ukraine war has just tipped two of the world's poorest countries into full-blown crises, and the list of those at risk - and the queue at the International Monetary Fund's door - will only get longer from here.

They may be far from the fighting in Ukraine. Still, a mass resignation of Sri Lanka's cabinet on Monday and drastic weekend manoeuvres by Pakistan's Prime Minister Imran Khan to avoid his removal show how far the economic impact spreads.

Both Sri Lanka and Pakistan have seen their long-festering public disquiet about economic mismanagement come to a head. Still, there is a double-digit list of other countries in the danger zone.

A handful of those countries were already on the brink of debt crises in the wake of the COVID pandemic; however, the war's resulting surge in energy and food prices has undoubtedly made things worse.

Turkey, Tunisia, Egypt, Ghana, Kenya and others also import the majority of their oil and gas, as well as basic foodstuffs, such as wheat and corn, which have all, soared between 25 per cent and 40 per cent this year, have also been facing heavy pressure.

Mounting costs of imports and subsidies for those everyday essentials had already convinced Cairo to devalue its currency by 15 per cent and seek IMF help in recent weeks. Tunisia and a long-resistant Sri Lanka have asked for assistance too.

Ghana, still reluctant to approach the Fund, sees its currency slide. At the same time, Pakistan, a country already with 22 IMF programmes, is almost certain to need more, has now sunk into turmoil again.

"This energy shock is certainly contributing to the political uncertainty in Sri Lanka and Pakistan," said Renaissance Capital's chief economist Charlie Robertson, flagging it as a critical factor for Egypt and Ghana.

"It wouldn't surprise me if more countries were impacted," he added, citing Jordan and Morocco, where a relatively sizable middle class makes them sensitive to political change.

Hunger In Africa

IMF Managing Director Kristalina Georgieva has warned that "war in Ukraine means hunger in Africa".

The IMF's sister organisation, the World Bank, has also said a dozen of the world's poorest countries may now default over the next year, which would be "the largest spate of debt crises in developing economies in a generation."

Oil, gas, wheat and corn prices have soared. 

Overindebted "frontier' economies", as the least developed group of countries are referred to, now owe $3.5 trillion — some $500 billion above pre-pandemic levels, the Institute of International Finance (IIF) estimates.

Pakistan and Sri Lanka already spent the equivalent of 3.4 per cent and 2.2 per cent of their respective GDPs on energy before the pandemic. In Turkey, the figure was an even more significant 6.5 per cent, and with oil prices having been above $100 a barrel for months now, the pressures are getting worse.

Every additional $10 spent on a barrel of oil adds 0.3 per cent to Turkey's current account deficit, according to the IIF. For Lebanon, it is 1.3 per cent, while rating agency Fitch estimates that the cost of electricity subsidies in Tunisia could surge to over 1.8 per cent of its GDP this year from 0.8 per cent.

Unrest

Food prices are a biting problem too. They were already rising as countries emerged from lockdowns, exacerbated in some regions by droughts.

With Ukraine and Russia accounting for 29 per cent of the world's wheat exports and 19 per cent of maise shipments, prices of these have gone up another 25 per cent to 30 per cent this year.

Egypt buys over 60 per cent of its wheat overseas, four-fifths from Russia and Ukraine. After devaluing its currency and approaching the IMF, President Abdel Fattah al-Sisi's government has also just fixed bread prices to contain runaway food costs.

"For many countries, these (energy and food price) rises will have repercussions for budgets, subsidies, and political and social stability," said Viktor Szabo, an emerging market portfolio manager in London.

"If you don't control prices, you can have unrest; just think back to the Arab Spring and the role of food prices there."

With global borrowing costs also rising rapidly as major central banks start to raise interest rates, Max Castle, a fixed income portfolio manager at Mediolanum Irish Operations, said several emerging markets commodity importers might have little choice but to seek help.

"It is the right situation for the IMF to intervene in supporting the more vulnerable countries – particularly the ones with a current account deficit," he said.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)