Deterioration in external financial position of countries

Deterioration in external payments position of countries

Nature

Much of the deterioration in the payments position has been due to the exceptionally severe and long recession and the rise of interest rates to unprecedented levels. Such deterioration not only reduces the availability of external savings and drains off domestically generated savings, in a number of countries it also adversely affects domestic savings performance.

Background

The deterioration in countries’ external financial positions gained global attention during the 1980s debt crises, when mounting external imbalances and unsustainable borrowing led to widespread defaults, particularly in Latin America and Africa. Subsequent financial crises, such as the Asian financial crisis of 1997 and the Eurozone debt crisis, further highlighted the vulnerability of national economies to external shocks, prompting international institutions to intensify monitoring and analysis of cross-border financial flows and sovereign debt sustainability.

Incidence

In recent years, a growing number of countries have experienced significant deterioration in their external financial positions, marked by widening current account deficits, declining foreign exchange reserves, and increased reliance on external borrowing. This trend has affected both developing and developed economies, raising concerns about global financial stability and the risk of sovereign debt crises. The problem is particularly acute in regions vulnerable to commodity price fluctuations and volatile capital flows, underscoring its worldwide significance.
In 2022, Sri Lanka faced a severe external financial crisis, with foreign reserves plummeting to record lows and the country defaulting on its external debt obligations. This crisis led to acute shortages of essential imports and widespread economic hardship.

Claim

The deterioration in the external financial position of countries is a critical and urgent problem that cannot be ignored. It threatens global economic stability, undermines development, and exposes nations to devastating crises. Mounting external debts, shrinking reserves, and persistent trade deficits erode confidence, fuel social unrest, and limit governments’ ability to respond to emergencies. Immediate, coordinated action is essential to prevent widespread hardship and irreversible damage to the world’s financial system.

Counter-claim

The so-called "deterioration in external financial position of countries" is vastly overstated and hardly a pressing concern. Global economies are resilient, and fluctuations in external balances are routine, often self-correcting through market mechanisms. Alarmism over these shifts distracts from more urgent domestic issues like education and healthcare. Obsessing over external financial positions is unnecessary; countries have ample tools to manage such changes without significant long-term consequences.