International Economics: IB Economics

This World Bank clip looks at the importance of debt, particularly sustainable debt, in promoting development. Debt can play an important role in generating the funds for investment but it needs to be carefully managed, and the role of the World Bank’s International Development Association (IDA) is to co-ordinate this, and ensure fiscal sustainability in doing so, although there are concerns that in some countries debt has grown at an unsustainable rate. 

The World Bank yesterday highlighted the fact that an absence of data in 40% of low income countries has meant that tackling debt has become increasingly difficult. This comes at a time when many developing economies have had to take on more debt to tackle the coronavirus pandemic.

A lack of perfect information will make life difficult for investors in these economies, and for their governments too, if they are unable to have clear sight of the extent of their debt repayments. 

After a couple of articles last week, one about the debt crisis in Sri Lanka, one about the fear that China has the ability to lend to the extent that it can create a debt trap for developing economies, it seems as though the two story intersect, with Sri Lanka asking China to restructure its debt, and making a number of other concessions in the hope that the Chinese agree.

The Sri Lankan economy is increasingly looking to China - the greatest number of tourists coming to the country pre-Covid were Chinese and the extent to which it imports from China has dramatically increased. 

However, the bottom line is that a lot of the Chinese investment, particularly in the President's hometown of Hambantota, was ill thought out - on the Sri Lankan side and only now are the pigeons coming home to roost.