Pressure can burst a pipe or make a diamond

“Pressure made the diamond,” entertainer Diana Ross said in 1971. “And pressure busts pipes, you know,” San Francisco 49ers defensive lineman Gary Johnson said in 1985. Ross was responding to an interview question about the difficulty of maintaining success as a prominent entertainer. Meanwhile, Johnson was referring to pressure on another football team’s quarterback. Respectively, Ross and Johnson meant that pressure could bring out the best or the worst.

Currently, several countries are on the verge of buckling under economic pressure. Sri Lanka, an island country in South Asia with a population of close to 22 million people, became the first to buckle. Following weeks of unrest, the country’s Prime Minister, Mahinda Rajapaksa, was forced to resign on Tuesday 9th May. Rajapaksa then had to be rescued several hours later by security forces after protesters tried to gain access to his private residence. Sri Lanka is reeling from the impacts of the COVID-19 pandemic, costly debt and rising food and fuel prices. The Guardian reports that Sri Lanka is down to its last $50 million of reserves, meaning that the country is facing bankruptcy.

Across the world, many countries, especially low- and middle-income countries, are struggling with the three-pronged crisis pounding Sri Lanka. At the World Bank’s spring meeting in April, its president, David Malpass, expressed his deep concern for developing countries. According to Malpass, “They are facing sudden price increases for energy, fertiliser and food, and the likelihood of interest rate increases. Each one hits them hard.”

The United Nations Conference on Trade and Development (UNCTAD), in a recent report, said that there were 107 countries facing at least one of three shocks: rising food prices, rising energy prices or tighter financial conditions. According to UNCTAD, all three shocks were being faced by 69 countries – 25 in Africa, 25 in Asia and the Pacific, and 19 in Latin America and the Caribbean.

For its part, the International Monetary Fund (IMF) has opened economic rescue talks with Egypt, Tunisia and Pakistan. The IMF is also keeping a close eye on several Sub-Saharan African countries, including Ghana, Kenya, South Africa and Ethiopia. In Latin America, Argentina recently signed a $45 billion debt deal with the IMF, however, other Latin American countries potentially on the brink include El Salvador and Peru.

The world’s largest and most advanced economy, the United States (US), is also feeling the pressure. On 4th May, in a bid to tackle runaway inflation, the US Federal Reserve announced the sharpest rise in interest rates in over two decades. This rate hike will push the federal funds rate to a range of 0.75%-1%. The Economist Intelligence Unit expects the Fed to raise rates seven times in 2022, reaching 2.9% in early 2023. CME Group, an American global markets company, projects that US interest rates will rise to 2.75%-3% by the end of 2022.

Given America’s central role in the global economy, including with respect to financial markets, as its Central Bank increases interest rates, the cost of borrowing money for governments, businesses and consumers will become more expensive.

For example, even for consumers outside of the US, mortgage and credit card rates are likely to rise over the next few months. For persons holding bonds, the price of existing bonds will probably fall, making them less attractive. However, on the bright side, US rate hikes suggest that the time is also ripe to invest and re-invest money in new bonds which offer higher yields.

In this high-pressure environment, it sometimes feels like survival of the fittest. International Monetary Fund Managing Director, Kristalina Georgieva said in March 2022 that countries with “fairly strong fundamentals,” should be resilient. However, she also fears that weaker economies will suffer.

For several countries, and their citizens, a considerable amount of pain awaits, and things will get worse for some before they get better. In the short-term, the state would likely have to step in to offer as much relief as possible. However, for the medium-to-long-term, countries cannot shy away from doing the work to improve their fundamentals, such as boosting the productive sectors, attracting quality investments and weaning themselves of fossil fuel dependence.

Joel K Richards is a Vincentian national living and working in Europe in the field of international trade and development.
Email: joelkmrichards@gmail.com