The pandemic generated recessionary or recession-like economic conditions in most regions of the world during its height. Vaccine inequity, a lack of debt moratoriums/relief, a lack of SDRs and overall financing, and a lack of climate finance have all meant that developing countries are still struggling to get their economic growth and macroeconomic stability back on track, even after more than two years of the COVID pandemic, a global commodity supply shock, and the aggravating effect of Russia’s war in Ukraine.
At the same time, developing countries were already facing a rising debt situation before the pandemic, which has only become more unsustainable in many developing countries, as well as rising import costs and interest rates globally as a result of primarily supply shock-driven high inflation – and in the case of developed countries overall, over-board stimulus injection causing demand-pull inflation, in addition to supply-side, cost-push inflation – foreign exchange reserves, ‘Pakistan’s currency dropped beyond 200 a dollar for the first time as IMF rescue uncertain,’ according to a recent Bloomberg report titled ‘Pakistan Rupee collapses past 200 a dollar as IMF bailout questionable.’ Policymakers are in discussions with the International Monetary Fund to resurrect a dormant lending program. With inflation already at 13%, Prime Minister Shehbaz Sharif would have to boost fuel prices, which risks inflaming popular outrage. If the uncertainty persists, the rupee might go as low as 210 per dollar, according to Samiullah Tariq, head of research at Pakistan Kuwait Investment Co.
The benchmark KSE-100 index has been falling for the previous five weeks.
While an interest rate hike is necessary to combat high inflation in many developed countries, they appear to have adopted a more stringent monetary policy stance than is necessary, given the significant role of cost-push inflation at the back of global commodity supply, which has been amplified in the aftermath of Russia’s invasion of Ukraine. While this is likely to have stagflation promoting consequences for these developed countries as well, the lack of a soft approach to interest rate hikes, as well as a signal about the extent to which they are likely to be increased, has resulted in significant leakage of otherwise much-needed foreign portfolio investment (FPI) from developing countries in general, and Pakistan in particular, compounding their already difficult situation.
Furthermore, in many emerging nations, the possibility of default is increasing. For example, in Pakistan, import cover—the number of months of imports that can be done with existing foreign exchange reserves—has gone significantly below the minimum recommended level of 3 months, according to international best practices, it is too little over 1.5 months! Even though Sri Lanka has defaulted on its debt obligations, many emerging countries are in a similar predicament. ‘The departure of prime minister, Mahinda Rajapaksa, followed weeks of protest and a developing crisis,’ according to a recent piece in The Guardian titled ‘Sri Lanka is the first domino to fall in the face of a global debt crisis.’ There is no state bankruptcy system, but if one existed, the South Asian country, which is down to its last $50 million (£40 million) in reserves, would be the first to utilize it. A delegation from the International Monetary Fund (IMF) met with authorities in Colombo this week to discuss a rescue that will include a rigorous reform plan as well as financial assistance. But, as the IMF and its sister organization, the World Bank, are well aware, this is about more than a single country’s mismanagement. Sri Lanka, they believe, is the canary in the coalmine. Low- and middle-income nations throughout the world are dealing with a three-pronged crisis: the pandemic, the growing cost of their debt, and the rise in food and gasoline costs brought on by Russia’s invasion of Ukraine.’
UNCTAD allegedly said that developing nations required $2–3 billion in financing until December 2020, but it is now late May 2023, and the financial demands have most likely escalated since poor countries have gotten no meaningful financing or debt relief so far. Lack of inclusive growth, in particular, coupled with an overabundance of interest rate hikes and rising cost-push inflation, has resulted in a likely increase in poverty and inequality.
The growing degree of economic stability in emerging nations has also resulted in increased political instability in several countries, such as Sri Lanka to a greater extent and Pakistan to a lesser extent, but still fairly high. So, when the world needed to unite against the existential threat of climate change and likely more pandemics in the future, a lack of global economic thinking – for example, no vaccine apartheid, and more debt relief and financing provided to developing countries – has left the world starkly divided between developed countries. Overall, facing a difficult economic situation in terms of years of neoliberal assault, and with consequences, the world is starkly divided between developed countries.
Years of neoliberalism in general, resulting in weak regulatory frameworks that check the ‘profit-over-people’ mindset of global supply chains, as well as the negative impact of pandemics in causing supply shock, Russia’s invasion of Ukraine, and climate change, have all added to the risk of a serious global food crisis. Already, decade-high food prices are wreaking havoc on developing nations, both in terms of reducing their import cover and in the form of growing levels of imported inflation in total inflation.
For example, climate change has had an impact on wheat output in Pakistan, while the conflict has resulted in considerable increases in wheat prices, which may lead to more imports on the one hand and higher purchases on the other. The Economist recently published a piece titled “The Coming Food Catastrophe,” which stated, “The conflict is pounding a global food economy weakened by COVID-19, climate change, and an energy shock.” Ukraine’s grain and oilseed exports have mostly ceased, and Russia’s are under threat. The two countries account for 12% of all traded calories. Wheat prices, which had risen 53% since the beginning of the year, jumped another 6% on May 16th after India announced that shipments would be limited due to the drought. On May 18th, UN Secretary-General António Guterres warned that the following months might bring “the specter of a worldwide food scarcity” that could continue for years. The high cost of staple goods has already increased the number of individuals who are unable to eat enough to 1.6 billion. Nearly 250 million people are on the verge of starvation. All of this will have a devastating impact on the poor.
Households in developing economies spend 25% of their budgets on food, with sub-Saharan African households spending up to 40%. Bread accounts for about 30% of total calories in Egypt.’
For example, one of the most important steps that rich, advanced countries, and multilateral should take is to quickly initiate a meaningful debt moratorium/relief process to improve an otherwise difficult debt situation in developing countries, and to include the private sector at an early stage of such discussions, given that the proportion of private-sector debt in developing countries’ overall debt portfolio has increased significantly over the last decade.
At the same time, the IMF should play a larger role in ensuring that the improved SDR allocation from August, the majority of which went to industrialized nations, is redirected to poor countries. Furthermore, the rich, advanced nations should strive to provide a lot closer to, if not entirely, the whole committed sum of $100 billion in yearly climate funding to developing countries. Also, the IMF and other multilateral must recognize that the economic situation of developing countries— which feeds into political instability in general—necessitates the implementation of counter-cyclical policies and that the above steps, among others, should be implemented as soon as possible to enable developing countries to provide needed stimulus and implement much- needed counter-cyclical policies.