1. What triggered the concern?
A post-pandemic inflation spurt is a recipe for strains in countries that need US dollars for energy, medicine and food imports. Food costs account for about 40% of consumer spending in countries like sub-Saharan Africa, more than double that in advanced economies. In a bid to tame higher prices, the US Federal Reserve begins its most aggressive series of rate hikes in two decades, helping to boost the dollar and depress other currencies. So debt servicing costs are skyrocketing – just after developing countries borrowed billions in foreign currencies to fight Covid-19.
2. Did the pandemic cause this?
The health crisis has certainly created a backdrop of social tension, which is one of the reasons economists are beginning to suspect a broader trend in the upheaval hitting some of the world’s poorest corners. Peru, which has had one of the highest Covid death rates in the world, was rocked by weeks of violence in March and April as farmers and truck drivers protested rising fuel and fertilizer costs.
The current dynamics can trigger panic attacks and sudden capital flight from the most exposed countries among international investors. These are countries like Egypt, the world’s largest wheat importer and one of the IMF’s largest borrowers in recent years. After Russia’s invasion of Ukraine spurred global commodity prices, the country’s central bank allowed the Egyptian pound to weaken by more than 15% in hours, raising benchmark interest rates for the first time in five years amid an outflow of hard currencies.
4. Where else is there trouble?
Sri Lanka is seen as a prime example of how food and fuel shortages can spark violent street protests and destabilize an unpopular government. The South Asian nation defaulted on its external debt in May for the first time since gaining independence from Britain in 1948. A handful of other nations, including Pakistan, Tunisia, Ethiopia, Ghana and El Salvador, were at risk of following suit, according to Bloomberg Economics. In mid-June, government bonds were trading in about 15 emerging markets with yields at least 10 percentage points higher than US Treasuries, a benchmark for distress. That compared to six a year earlier. While the direct impact of a series of defaults on the global economy would be small, explosions in developing countries have historically spread well beyond their starting points. Such was the case in 1997, when currency devaluation in Thailand sparked a broader Asian crisis, ending the 32-year rule of Indonesian President Suharto and eventually leading to Russia’s default.
In a way, the rise in global commodity prices has been a boon to resource-rich regions like Latin America. Beef and copper exports rose rapidly in places like Brazil and Chile. But with much of the region’s fuel and fertilizer imported, there is concern that higher prices may still feed into each other. In Brazil, where tensions are running high ahead of October’s elections, President Jair Bolsonaro’s government used unexpected commodity gains to expand aid to the poor after a rise in gasoline prices helped push inflation above 12% in April to press.
6. What is the answer?
The World Bank mobilized a $170 billion crisis response package in April, more than the $157 billion spent on its initial Covid-19 response. Other countries began bailout talks with the IMF. And though many wealthy nations allowed developing countries to repay debt while they grappled with the virus, there has been slow progress on a plan designed to help indebted nations restructure their debt. A total bill of $35 billion is due this year. The World Bank in April, in a revision of a pre-pandemic forecast, predicted that the combination of forces will mean that 75 to 95 million people who would have been lifted out of extreme poverty this year will remain at that level.
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