Sanoj Weeratunge believed his tour company would finally move past Sri Lanka’s recent crises this year. Then, 2,700 miles away, the Iran War broke out, the government raised fuel prices by 35%, and business fell by nearly a third.
“We have had a very difficult road over the past six years to recover and were very hopeful that this would finally be the year where we reach pre-COVID levels. But now this economic shock will affect us,” Weeratunge said from his office in Colombo.
Like Egypt and Pakistan, Sri Lanka is part of a group of low-income countries buffeted by past crises that analysts fear have been pushed back towards trouble as rising costs from the war strain energy imports on which they depend.
Even with the shaky ceasefire in the Gulf, Colombo has brought back fuel subsidies and has brokered a short-term relaxation of the conditions of its International Monetary Fund bailout to buy time.
Other countries will seek to do the same next week in Washington, at the IMF and World Bank spring meetings.
With the crisis, the IMF is prepared to listen and is prepared to provide between USD 20 billion and USD 50 billion of emergency support, IMF managing director Kristalina Georgieva said.
According to former Pakistan central bank governor Reza Baqir, who now advises governments in debt distress, the conflict has affected vulnerable countries from almost every angle.
With oil prices surging by 40%, import bills are rising sharply, while remittances from expatriates in the Gulf are expected to decline. This situation is putting significant pressure on economies as current account deficits widen and currencies face strain. The Egyptian pound has dropped over 10% since the onset of the war, making dollar-denominated expenses for oil, food, fertilisers, and debt payments even more costly. To address this, funding will need to come from foreign currency reserves, increased borrowing, or by reducing other imports.