ISLAMABAD: Pakistan and some other countries under heavy debt trapped in US Dollars.
Pakistani rupee has depreciated by as much as 20% this year and the Thai baht by more than 6%…
A stronger dollar has made it more expensive for developing countries, especially lower-income countries, to meet their dollar-denominated debt obligations, according to a report published by China Economic Net (CEN) on Saturday.
Meanwhile, the U.S. Federal Reserve Board and the Federal Open Market Committee (FOMC) released the minutes of the committee meeting for July 2022. It shows that policymakers remain committed to raising interest rates as high as necessary in order to bring consumer prices closer to their 2% goal.
“Participants agreed that there was little evidence to date that inflation pressures were subsiding,” the minutes said, hinting at another round of rate hike in September.
The Fed has already raised interest rates four times this year, including two 75-basis-point hikes in June and July, in an effort to control the highest inflation in four decades.
The unusual move has stoked concerns that the U.S. is leveraging the dollar’s status as the premier international currency to diffuse inflation worldwide, leaving vulnerable countries with high foreign debts caught in the debt trap.
Since March 2020 the Fed resumed its zero-interest rate policy and implemented unlimited quantitative easing (QE) to deal with the impact of the COVID-19 pandemic.
The Fed’s balance sheet expanded more than 1.1 times from $4.2 trillion at the beginning of March 2020 to $8.9 trillion at the end of February 2022, leading to a considerable credit expansion and liquidity of the U.S. dollars in the international market.
This massive and continuing surge of capital outflows to emerging and other developing economies prompts them to take on more debt and increase their foreign exchange exposure, attracted by low borrowing costs.
Most of the capital inflows are in the nature of portfolio investments, which are prone to sudden and volatile movement and put emerging economies at greater risk.
While the western world has captured high returns from the rapid growth of the emerging economies, the latter are entangled in debt.
There were economists warned of the risks of interest rate changes in the developed world and exchange rate volatility that may exacerbate the debt burden of the developing countries. And it happens eventually, triggered firstly by the downward pressure on the global economy due to the COVID-19 pandemic and increasing geopolitical conflicts, and then interest rate hikes from the U.S. Fed.
There are signs of capital flight from emerging economies since the interest rate hikes and the US’ large-scale balance sheet contraction. Provisional figures compiled by the Institute of International Finance (IIF) show that international investors in emerging market equities and domestic bonds have seen cross-border outflows of $10.5bn this month, taking total outflows over the past five months to more than $38bn – the longest period of net outflows since records began in 2005.
The most immediate impact of the greenback outflow is the depreciation of some currencies. The Philippine peso has fallen about 5% this year, making it the worst performer among Asian emerging-market currencies. The Pakistani rupee has depreciated by as much as 20% this year and the Thai baht by more than 6%…
A stronger dollar has made it more expensive for developing countries, especially lower-income countries, to meet their dollar-denominated debt obligations.
They fall into the loop of borrowing new debt to repay old debts and are stuck in the vicious cycle of low exchange rates and high-interest rates.
