February 24 will mark a year since Russian tanks entered Ukraine, the beginning of Moscow’s all-out invasion of the neighboring country. Notably, although Ukraine already exists as a sovereign state, it continues to suffer round-the-clock shelling.
But apart from these thousands of civilian deaths, millions of refugees and massive infrastructure damage in Ukraine, countries beyond their borders are feeling the adverse effects of war.
Due to the second impact of the Russian invasion, the currencies of dozens of countries depreciate against the US dollar in 2022, increasing the cost of imports.
Luc Verfaille, who owns a home appliance company in Cape Town, South Africa, told Al Jazeera that “to offset the higher costs from the rand [South Africa’s currency] depreciation, we had to cut costs, including staff.”
Given the complex interplay between geopolitics, commodity prices, and financial markets, Russia’s invasion sent shockwaves across the global economy, including in the developing world. It must be acknowledged that the effects both within and between developing countries are different. However, there have been some common challenges, including from higher commodity prices.
Even before the war, the global post-COVID-19 recovery boosted commodity markets. Pent-up demand from national shutdowns and massive economic stimulus programs has fueled a rapid rise in prices. These trends were amplified by the war.
For example, the energy component of the S&P Goldman Sachs Commodity Index ended 2022 10% higher than it was at the start of the year. From January to June, it increased by 68%. Given Russia’s key energy market position in 2021 – accounting for 14% and 18% of global oil and gas production respectively – the war has caused uncertainty over limited supply.
However, Russia’s hydrocarbon production has been largely unaffected by the military conflict, and the increase in sanctions has so far had a negligible impact on “resilient” energy supplies. Russia, according to the International Energy Agency. For the most part, Moscow has managed to reroute Europe’s pipeline exports to emerging market countries such as India, China and Turkey – albeit at a discount to market prices.
Meanwhile, across the European Union, gas flows from Russia fell by 80% between May and October. Pipeline restrictions have threatened many energy-intensive industries and European countries have used liquefied natural gas (LNG) to prevent factories from shutting down.
Food and energy importers are dealt a blow
The scramble for new European supplies of LNG has sent prices up in the spot (or spot) market. The benchmark spot price for Asian LNG hit a record high last year, leaving many developing countries in the region facing power shortages.
Marcello Estevao, the World Bank’s global director of macroeconomics, trade and investment, said energy importers Pakistan and Bangladesh have “hanged up, but cannot afford to pay for many goods. spot like the rich European countries”.
Although estimates vary, Pakistan’s international reserve position could be enough to cover just three weeks of energy imports at current prices.
“On the one hand, energy importing countries have been excluded. Some will probably be forced to tighten their belts,” added Estevao. “On the other hand, hydrocarbon exporters in the Middle East and Africa have received a boost from higher energy prices… Especially those with spare capacity to increase production.”
For some energy exporting countries, such as Nigeria and Angola, higher oil prices are partially offset by the increased costs of maintaining expensive gasoline subsidies. Obviously, oil-importing countries with petrol subsidies in place, such as Kenya and Ethiopia, are even worse off.
Similar tensions have emerged in countries with large food subsidy programs. Before the war, Russia and Ukraine were among the world’s leading suppliers of barley, corn and sunflower. The supply of these and other staples was severely affected by the Russian invasion.
The two countries account for nearly 30% of global wheat exports in 2021. But due to Russia’s blockade of Ukraine’s Black Sea ports, a major grain shipping route, wheat prices have risen 35% in 2022 compared to year ago, hit a record high in March.
Countries like Tunisia, Morocco and Egypt – one of the world’s biggest wheat importers – have been hit hard. About two-thirds of Egypt’s population receives five loaves of bread, known as eish baladi, per day for as little as $0.50 a month, far below market costs. The difference is covered by a bread subsidy program, which cost the government $2.8 billion last year.
Last June, Egypt’s finance minister noted that rising wheat prices would increase the cost of the country’s bread subsidy program by $1.5 billion in 2022-2023. Moaning under the weight of expensive food programs, the government was recently forced to accept a $3 billion loan from the International Monetary Fund (IMF).
As with other IMF programs, the conditional lending is “financial consolidation”. Provided that the Egyptian government adheres to the program of cutting state spending, the country will receive periodic loans over the next four years. Although austerity measures often accompany IMF programs, they have been criticized for exacerbating social unrest.
‘World hunger is still severe’
“In countries with excessive wheat subsidies, price increases have had financial and humanitarian costs. Overall, world hunger remains severe, said Maximo Torero, chief economist at the Food and Agriculture Organization of the United Nations (FAO).
In 2022, the FAO annual food price index, which measures changes in international food prices, was up 14.3% year-on-year and 46% higher than in 2020. The result was 222. Millions of people worldwide experienced severe food insecurity last year.
“The international community needs to adopt a portfolio approach to improve food resilience in developing countries,” said Torero, referring to international trade bodies, development banks multilateral and even private corporations. “First, agricultural and disaster insurance programs could be improved. Second, it is necessary to diversify sources of food imports and remove export restrictions. And third, we can recover better by investing more in the agricultural systems of developing countries.”
IMF loans become more expensive
Meanwhile, war-induced inflation prompted the US Federal Reserve, as well as other leading central banks, to raise interest rates. Over the past 11 months, the Fed has raised its benchmark interest rate by about 4.5 percentage points in an attempt to slow price gains.
Lured by higher yields in the US, investors have withdrawn from financial assets of developing countries. The financial exodus resulted in widespread currency devaluation for developing countries against the US dollar. Besides higher import prices, a depreciating country’s currency also makes it more expensive to pay off foreign debt.
To cover the shortfall, mature emerging economies such as Brazil and India have issued bonds in their own currencies. To prevent devaluation, they also withdraw large amounts of international reserves. But for most developing countries, these measures are not an option.
With little ability to borrow from international private lenders, formal institutions such as the IMF have stepped in to fill the gap. An analysis of IMF lending by Boston University shows that, by the end of 2022, the volume of loans disbursed by the IMF totaled $95 billion in 27 separate programs. This is larger than the credit balance at the end of 2021, which is already the highest in annual history.
“One problem for developing countries,” as former Argentine Finance Minister Martin Guzman observed, “is that IMF lending is also becoming more expensive.” He was referring to the IMF’s international reserve currency, called the Special Drawing Right (SDR).
The SDR ratio is a weighted average of borrowing costs from the five countries that make up the IMF’s reserve currencies. “In 2022, IMF lending rates will increase in tandem with tight monetary conditions in four of those five countries,” he said, referring to the United States, United Kingdom, Japan, and China. and the euro area.
Guzman added that “the IMF lending to poor countries should avoid triggering inflationary cycles” from the advanced economies that make up the SDR basket and instead focuses on balance of payments challenges in borrowing countries.
“In response to a significant number of sovereign defaults in the years to come,” says Guzman, “an independent debt management agency is needed rather than a lending institution like the IMF that could preside over the decision.” restructuring in a “timely and effective” manner.
Based on a set of standardized legal principles, global bankruptcy courts can provide enhanced creditor-debtor coordination compared to the current market-based approach.
Although this idea has received support from the United Nations, it is unlikely that the United States and the United Kingdom – under their law most government bonds are issued – will cede sovereignty to the courts of the United Nations. them for a supranational agency. But as Guzman pointed out, “the system we have now leaves countries in debt too little and too late.”
Coupled with an uneven recovery from COVID-19, soaring food and energy prices and a widespread currency devaluation, the war in Ukraine has only added to an already hostile environment for developing countries. development is struggling with debt.
