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  • Rushmi Rosairo

Special Edition >>>Lessons from Other Economic Crises Around the World

Updated: Apr 9, 2022

Sri Lanka is currently at a very low point. It leads us to wonder, who else is struggling to stay afloat? These are a few situations where economic crises are taking over countries:

Picture Credit: website

The El Salvador situation

El Salvador, a country still healing from a 12-year-long civil war, leaving 75,000 dead, found hope in 2019 in the shape of 37-year-old Nayib Bukele. But unfortunately, relief was not found for most Salvadorans, life did not improve.

Picture Credit: Time website

Despite the 1992 peace accord stipulation against it, President Bukele had taken up using the military for public security operations. He also worked to break the legal restraints limiting his power, replacing many officials with Bukele loyalists. Salvadoran human rights groups and lawyers fear that the sworn in law-makers have severely damaged the fragile democracy, after officials were removed from key offices.

There has also been a drastic increase in gang violence, with gangs exercising territorial control over neighborhoods. The economy is directly impacted due to various factors concerning gang violence, resulting in roughly 40% of the population living in poverty.

Continuous budget deficits and expansionary fiscal policies have made for a rapidly growing public debt-to-GDP ratio. By the end of 2021, Public debt is shown to have increased by 14% of GDP, to about 85% of GDP. Without proper policy actions, the public debt is likely to keep growing.

Ever since the Colón was replaced with the U.S dollar in 2001, it had been smooth sailing, average annual inflation was 2.03%, the lowest rate in Latin America. However, the passage of the Bitcoin law gave way to unnecessary problems. Experts say, given the high volatility of its price, there is a considerable risk associated with using Bitcoin as a legal tender. With the passage of the Bitcoin law, El Salvador’s U.S dollar dominated bonds due in 2023 had plummeted, recently hitting a nine-month low. Moody’s had downgraded El Salvador’s long term foreign-currency issuer and senior unsecured ratings.

The risks of using Bitcoin as a legal tender outweigh the benefits; Banks and other financial institutions could most likely be exposed to huge fluctuations in crypto-asset prices, putting the financial stability at risk. Due to the anonymity provided by crypto-assets, the chances for illicit money, tax evasion, and terrorism financing would be dangerously high. This would jeopardise their financial integrity.

The Venezuela situation

Once the world’s largest oil exporters, Venezuela was one of Latin America’s most prosperous countries. Although decades of poor governing has seen to it that this once rich country has become an economic and political ruin, with the growing autocracy.

Picture Credit: Financial Times website

With over 6 million Venezuelan refugees and migrants worldwide, this has become the second largest external displacement crisis in the world.

With skyrocketing hyperinflation, power cuts, food and medicine shortages, the people of Venezuela have to cut food intakes, and take on debts in order to merely survive. Within 2014 to 2020, GDP had shrunk by approximately two-thirds, and as the global demand for oil continues to curb, experts believe it would decline still by another 5% in 2022. According to a survey done in September 2021, 77% of the Venezuelan population live in extreme poverty (highest rate in Latin America). Studies show that last year the poverty level was at 94%.

According to the data released by the Central Bank in January, Venezuela’s annual inflation rate in 2020 closed at 2,959.8%, and at 686.4% in 2021.

The Lebanon situation

Due to structural issues, corruption, and the political elite’s rent-seeking, Lebanon, once known as the Switzerland of the Middle East, is now on the brink of fragmentation.

Picture Credit: BBC website

The Lebanon Economic Monitor has found that Lebanon’s economic crisis is possibly ranking in the top 3 most severe crises globally, since the mid-nineteenth century. GDP dropped from $52 billion to $21.8 billion in 2021, contracting 58% within just two years. According to the World Bank, such a contraction is “normally associated with conflicts or wars”.

The Lebanese lira (LBP) continues to lose value. Since 2019, the currency has lost more than 90% of its value, losing more than 15% of its value since the start of 2022. Inflation rates ranking 3rd globally (following Venezuela), remain in the triple digits (average 145% in 2021), affecting the middle and lower-income earners in a disproportionate manner. According to the UN, nearly 80% of the population are now below the poverty line.

With rapidly depleting foreign exchange reserves and high costs of import subsidies on food, fuel and medication, a dramatic decrease in basic services has occurred. Unemployment is increasing.

The impact of the Port of Beirut explosion has also affected Lebanon on a national level. Value of damage was around $3.8 to $4.6 billion, with losses of approximately $2.9 to $3.5 billion. Costs of recovery and reconstruction are expected to total $1.8 to $2.2 billion. This affected the key sectors in the country, tourism, financing, housing, and commerce sectors all felt the effects of the explosion.

The situation is threatening the country’s long-term stability and social peace, as Lebanon hits its third wave of displacement in history. Experts fear that the outcome “will be dire, through a loss that is difficult to compensate for the Lebanese human capital, which is the main course in rebuilding the state, society and economy.”

Experts state that in order to recover, Lebanon needs a “credible, comprehensive and coordinated macro-financial stability strategy within a medium-term, macro-fiscal framework.”

April 8th 2022 | 11:00 PM

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