Stunted dollar affects economies on the frontline

In the midst of a crisis in Pakistan, Wilson Muthaura, a prominent figure, urged the Pakistani government to include the tea produced by Kenya’s KTDA co-operative on a list of essential items.

This list would enable importers to access crucial U.S. dollars. Muthaura’s urgent appeal reflects the growing concerns over the scarcity of dollars, which serve as the lifeblood of global trade.

This scarcity is particularly impacting emerging market and developing economies (EMDEs), hindering commerce and creating significant pressure on local currencies and sovereign debtors.

The World Bank reports that around 25% of EMDEs have lost their ability to access international bond markets, which are vital for obtaining the necessary foreign currency to cover expenses related to essential commodities like oil and food.

The credit squeeze resulting from a global flight to safety, triggered by rising interest rates to combat inflation after the reopening of economies following the COVID-19 pandemic and Russia’s invasion of Ukraine, has led to the halving of growth forecasts for some economies.

Charlie Robertson, the head of macro strategy at FIM Partners in London, warns that affected countries are likely to experience a reduction in foreign direct investment. The absence of dollars from KTDA’s Pakistani customers, who represent its largest market, would have posed significant challenges for the co-operative responsible for 60% of Kenya’s tea production.

Muthaura explained that KTDA had to rent additional warehouse space due to the decline in sales. According to the local regulator, Kenyan tea shipments, a major export, have decreased by 20% over the past year.

To cope with the situation, KTDA resorted to using letters of credit instead of the usual upfront dollar payments from Pakistani buyers. While Muthaura’s efforts in Islamabad were successful, similar strains are now emerging in Egypt, KTDA’s second-largest market.

Currency devaluations in Egypt have raised concerns about Cairo’s ability to service its dollar debt.

The increase in global interest rates has already resulted in instances of default in Sri Lanka and Ghana, and Tunisia is currently on the brink of potential default.

Nigeria could soon find itself spending more than half of its government revenues on interest payments, and even Kenya itself is considered to be at risk. David Willacy, a foreign exchange trader at StoneX in London, states that frontier economies are facing surging import bills exacerbated by tightening global financial conditions and a general flight to safety.

Although the dollar’s share as a global reserve currency has declined from 70% to 59% over the past decade, it continues to dominate global trade due to its wide acceptance and stable value.

Ordinary citizens in developing countries still strongly favor the dollar for these reasons.

The emergence of parallel exchange rates or unofficial markets to purchase dollars and other major currencies often signals that a country is encountering difficulties.

Arouluwa Ojo, a student in Nigeria’s capital, Lagos, who takes online lessons with a British university, highlights the challenges of accessing dollars.

He explains that he has to resort to the expensive black market to obtain dollars when needed.

Nigeria, as Africa’s largest economy and a major oil exporter, faces tight hard currency availability due to its reliance on fuel imports and limited refinery capacity.

The country has long grappled with multiple exchange rates, and recently devalued its currency, the naira, once again in an attempt to resolve this issue.

Countries like Argentina, Cuba, and Venezuela have dealt with parallel exchange rates for years due to recurring economic crises and U.S. sanctions.

In these countries, dollars or euros are often required to purchase essential goods such as medicines and meat.

Cuba, which heavily relies on tourism as a foreign exchange earner, is experiencing a significant wealth disparity between those with access to hard currency and those without, leading to a record number of migrants leaving the island for the United States.