While the developed countries are feeling the heat in terms of meeting public-health needs with regard to COVID-19, the developing countries were a lot less prepared for the pandemic. With narrow social safety net programmes, both in terms of coverage and targeting, the ‘helicopter money’ or direct cash handout in developing countries may ultimately give little cushion to significant proportions of populations around/below the poverty line – and out of work in the presence of needed and deepening lockdowns – as home stay-ins prolong, especially when the most sure way of ending the pandemic in the shape of a vaccine is at least a year away.
A combined demand and supply shock has meant that developing countries relying on exports or remittances have seen inflow of foreign earnings take a major hit already. This has put pressure on the currencies of both emerging markets, and frontier markets (one tier below the emerging markets), whereby for instance, during the current year Turkish Lira fell by 11.8 percent against the US dollar, with more drastic drops seen in Indonesian Rupiah by 15.4 percent, Russian Rouble 18.7 percent, Mexican Peso 24.4 percent, Brazilian Real 24.8 percent, and South African Rand 25.4 percent. Similarly, Pakistani Rupee has been depreciating against the US dollar; it has declined by 8 percent since March 7.
Similarly, developing countries dependent on some natural resource commodities including oil have been hit significantly on the back of demand squeeze and supply glut. According to Bloomberg, “Projections for global oil demand for April suggest a decline of at least 20 million barrels a day – or more than 20% of overall demand worldwide.”
On the supply side – in line with the prediction of Henry Kissinger that many international institutions may not survive the COVID-19 pandemic – the fracturing of OPEC+ group and 10 non-OPEC members meant that rather than coming together as in the past to manage supply, oil producers are now working in isolation, and the needed response on an aggregate level could not be reached.
As a consequence, for the first time since February 2016, oil prices fell below $30 a barrel. And the situation is unlikely to change much, given supply and demand projections in the near future, at least, due to the anticipated stickiness of the pandemic.
The International Monetary Fund will need a major injection of capital. Its existing $1 trillion firepower is inadequate with more than 80 countries already sounding it out for help
At the same time, foreign reserves in developing countries have been hit hard as ‘hot money’ or portfolio investment continues to fly to safer climes (developed countries), and rather quickly. In this regard, according to Bloomberg, “Outflows from emerging market funds totaled more than $83 billion in March ($53 billion in bonds, $31 billion in equities), according to data from the International Institute of Finance.”
This is indeed a worrying sign, and it is important that some sort of mechanism of the nature of swap lines is quickly adopted under the overall intermediation of International Monetary Fund (IMF) to avert any future risk concerns of defaults, so that re-circulation of this hot money back to the developing countries could be ensured.
A major hit on foreign reserves in the developing countries in turn will be in the shape of repayments on debt, which will be exceedingly difficult for these countries given the pandemic and its dire consequences in terms of exports earnings, remittances, and domestic revenues.
Unless the world ‘stays’ the repayments on debts, it is difficult to see any letup in the already rising built-up in the shape of greater pressure on domestic currencies, which could even lead to an ‘unintended stay’ facing creditors in the shape of debt crisis and with it defaults by debtor countries.
It is therefore important that an intended ‘stay’, in the shape of at least debt moratoriums by creditor countries, is offered to the developing countries at the earliest possible. Such a crisis is all the more likely given the weakening position of developing countries to raise portfolio investment in the wake of COVID-19’s adverse impact reflected also in developing countries’ yield spreads on sovereign debt.
To deal with a very likely debt crisis in developing countries, Nobel Laureate in economics, Joseph Stiglitz, recently recommended a stronger response by the international community, both in terms of creditor countries providing meaningful ‘stays’ to debt repayment obligations of developing countries, and the IMF playing a greater role.
In John Donne’s immortal words, ‘No man is an island …’ Nor is any country – as the COVID-19 crisis has made abundantly clear. If only the international community would get its head out of the sand
In this regard, he has argued: “First, full use must be made of the International Monetary Fund’s Special Drawing Rights, a form of “global money” that the institution was authorized to create at its founding… A standard SDR issuance – with some 40% of the SDRs going to developing and emerging economies – would make an enormous difference.
But it would be even better if advanced economies like the United States donated or lent (on concessionary terms) their SDRs to a trust fund dedicated to helping poorer countries. One might expect that the countries providing this assistance will attach conditions, in particular, that the money not go to bailing out creditors…
It’s also crucial that creditor countries help by announcing a stay on developing and emerging economies’ debt service… Such stays are just as important internationally as they are domestically. Under current conditions, many countries simply cannot service their debts, which, in the absence of a global stay on repayment, could lead to massive, rolling defaults.”
Such an action is all the more important by the IMF since, according to Bloomberg, “A global safety net is needed to keep funding available for low-income countries. The International Monetary Fund will need a major injection of capital. Its existing $1 trillion firepower is inadequate with more than 80 countries already sounding it out for help. Confidence is low in the IMF after last year’s failed $57 billion bailout of Argentina, but it remains the best vehicle for the G20 to use in a 2009-type response to a global financial crisis.”
Moreover, State Bank of Pakistan is required to take a leaf out of the Bank of England’s book by making direct financing to government on a temporary basis – on need basis as decided with government – by bypassing the bond market in this time of grave crisis in an overall effort to support the government in meeting the overall economic, and increasing social protection needs.
In this regard, according to the Financial Times, ‘the UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus, with the Bank of England to directly finance the state’s spending needs on a temporary basis.’
Overall, an internalized response is indeed needed, especially for supporting the developing countries, and in turn the overall global economy. In this regard, Stiglitz very aptly indicated recently: “In John Donne’s immortal words, ‘No man is an island …’ Nor is any country – as the COVID-19 crisis has made abundantly clear. If only the international community would get its head out of the sand.”
Dr. Omer Javed is an institutional political economist, who previously worked at International Monetary Fund, and holds a Ph.D. in Economics from the University of Barcelona. He tweets at @omerjaved7. This article originally appeared at Business Recorder and has been republished with the author’s permission. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.