Pakistan, including some other indebted countries trapped in the US dollar
ISLAMABAD: Pakistan and some other heavily indebted countries trapped in US dollars.
The Pakistani rupee has depreciated by 20% this year and the Thai baht by more than 6%…
A stronger dollar has made it more expensive for developing countries, especially low-income countries, to repay their dollar-denominated debts, according to a report by China Economic Net (CEN) on Saturday.
Meanwhile, the US Federal Reserve Board and the Federal Open Market Committee (FOMC) released the minutes of the committee’s meeting for July 2022. It shows that policymakers remain committed to raising interest rates as well. higher than necessary in order to bring consumer prices closer to their level. Target 2%.
“Participants agreed that there was little evidence to date that inflationary pressures were easing,” the minutes read, alluding to another round of rate hikes in September.
The Fed has already raised interest rates four times this year, including two 75 basis point hikes in June and July, in a bid to control the highest inflation in four decades.
The unusual move has fueled fears that the United States is leveraging the dollar’s status as the premier international currency to diffuse inflation around the world, leaving vulnerable countries with high foreign debts caught in the debt trap. .
Since March 2020, the Fed has resumed its zero rate policy and implemented unlimited quantitative easing (QE) to deal with the impact of the COVID-19 pandemic.
The Fed’s balance sheet grew more than 1.1 times, from $4.2 trillion at the start of March 2020 to $8.9 trillion at the end of February 2022, driving a huge expansion in US dollar credit and liquidity in the international market.
This massive and continuous wave of capital outflows to emerging and other developing economies is prompting them to take on more debt and increase their exposure to currencies, attracted by low borrowing costs.
Most capital inflows are in the form of portfolio investments, which are subject to sudden and volatile movements and expose emerging economies to increased risk.
While the Western world has captured high returns from rapidly growing emerging economies, the latter are mired in debt.
Some economists have been warned of the risks of interest rate swings in the developed world and exchange rate volatility that could add to the debt burden of developing countries. And it does eventually happen, triggered first by the downward pressure on the global economy from the COVID-19 pandemic and increasing geopolitical strife, then by Fed interest rate hikes. American.
There are signs of capital flight from emerging economies since interest rate hikes and the large-scale contraction of the US balance sheet. Provisional figures compiled by the Institute of International Finance (IIF) show that international investors in emerging market equities and domestic bonds saw cross-border outflows of $10.5 billion this month, bringing total outflows over the past five months at more than $38 billion – the longest stretch of net outflows since records began in 2005.
The most immediate impact of the exit of the greenback is the depreciation of certain currencies. The Philippine peso has fallen around 5% this year, making it the worst performer among Asian emerging market currencies. The Pakistani rupee has depreciated by 20% this year and the Thai baht by more than 6%…
A stronger dollar has made it more onerous for developing countries, especially low-income countries, to repay their dollar-denominated debts.
They fall into the loop of borrowing new debt to pay off old debt and are stuck in the vicious cycle of low exchange rates and high interest rates.