Stronger US Dollar Making It 'Harder' for Emerging Nations to Service Their Foreign Debt, IMF Warns

Experts mainly attribute the increasing strength of the US dollar to the aggressive monetary tightening policy by the Federal Reserve. The American central bank hiked the interest rate by 75 basis points last month to combat inflation caused by high commodity prices. The US dollar this month achieved parity with Euro for the first time since 1994.

The rising exchange rate of the American dollar vis-à-vis other major currencies makes it “harder” for emerging market economies to service their external debt, Pierre-Olivier Gourinchas, the chief economist of the International Monetary Fund (IMF), said on Wednesday.

“What we are seeing is a pretty significant increase in the number of countries that are in a situation of debt distress… A number of emerging market economies are in such a situation,” Gourinchas said during an online space hosted by financial publication Bloomberg.

The IMF economist underlined that many of these countries are in the low and middle-income group, including crisis-hit Sri Lanka, which announced a default on its foreign debt obligations in April owing to depleting forex reserves and rising global commodity prices spurred by knock on effects of western sanctions against Russia over the special military operation in Ukraine.

“We have had shock upon shock. They had to deal with the pandemic first, high energy prices. A number of them are net energy importers and food importers,” Gourinchas noted.

“The fiscal space was eroded to start with. A number of them get to situations where it is very difficult to service the debt. For those of them who have dollar-denominated debt, the servicing becomes even harder,” he remarked.

According to IMF’s Global Debt Database, the global debt rose to $226 trillion in 2020 owing to the economic hardships imposed by the COVID-induced shutdowns and other restrictions. The annual rise in global debt in 2020 was the highest since World War II.

The IMF official predicted that the number of countries which would avail debt restructuring through IMF will “increase” going forward.

Gourinchas further warned of “unrest” and other “real-time consequences” of debt distress in many of the countries facing such precarious economic situations, citing the example of recent protests in Sri Lanka, Argentina as well other Latin American countries.

“That is also of particular concern to us. We are deeply concerned about the impact of the crisis on the poor and vulnerable,” he stated.

The remarks come a day after the IMF downgraded the global growth forecast to 3.2 per cent and 2.9 per cent in 2022 and 2023 respectively. Further, the Washington-based financial institution upgraded its inflationary projection to 6.6 per cent in advanced economies and 9.5 per cent in emerging and developing economies.

The IMF has said that rising inflationary projection was prompting the central banks the world over to tighten the monetary policy and hike interest rates, with the US Federal Reserve affecting one of the most aggressive rate hikes among all the central banks in years.