EMERGING ECONOMIES LIQUIDITY CRISIS : ECONOMY
NEWS: As poor nations' default wave peaks, cash
shortage could take its place
WHAT’S IN THE NEWS ?
The IMF is concerned about a
growing liquidity crisis in emerging economies, despite the
resolution of some debt defaults.Rising debt costs and limited
external funding threaten development, climate efforts, and trust in
governments, especially in low-income countries.
Post-COVID
Sovereign Defaults:
- Countries like Ghana, Sri
Lanka, and Zambia defaulted on debt, leading to restructuring. Concerns
about liquidity shortfalls persist, affecting development and trust in
governments.
Rising
Debt Service Costs:
- In 2022-2023, countries like
Angola, Brazil, Nigeria, and Pakistan paid more on external debt than they
received in financing, creating a debt crisis and limiting refinancing
options.
Global
Financial Safety Net Concerns:
- The IMF's safety net is
insufficient to handle financial distress in emerging economies. There are
calls for additional funding and better liquidity support.
Factors
Contributing to the Crisis:
- Western Countries'
Hesitation:
Developed nations are hesitant to increase financial aid due to budget
constraints.
- China’s Reduced Lending: China has cut back on
lending, creating a funding gap for developing nations.
- Rising Interest Rates: Higher global interest
rates have made refinancing more expensive, with countries like Kenya
borrowing at unsustainable rates.
Current
Efforts:
- IMF & World Bank: The IMF has reduced
borrowing costs by cutting surcharges, and the World Bank plans to expand
lending capacity.
- Development Banks: Banks like the
Inter-American Development Bank (IDB) and African Development Bank (AfDB)
are pushing for Special Drawing Rights (SDRs) to boost lending.
Implications:
- Countries are cutting social
spending (education, health, infrastructure) to service debt.
- Economic stress is causing
social unrest and political instability, especially in Kenya and Nigeria.
Inter-American
Development Bank (IDB):
- Established in 1959,
headquartered in Washington, D.C.
- Focus: poverty reduction,
sustainable development, infrastructure, regional integration.
African
Development Bank (AfDB):
- Founded in 1964,
headquartered in Côte d’Ivoire.
- Focus: energy, food
security, industrialization, integration, improving quality of life.
Source
: https://economictimes.indiatimes.com/news/international/business/as-poor-nations-default-wave-peaks-cash-shortage-could-take-its-place/articleshow/114412604.cms?from=mdr