By Sari Zeineddine | Staff Writer

The Fed had already taken the path to increase interest rates after a huge expansionary monetary policy to fight Covid-related impacts on economic growth. One can’t underestimate the importance of such a decision in affecting global cash flows and debt flexibility of emerging countries, especially those with dollar-dominated debts, and global recovery from Covid. Besides, ongoing talks signal a more aggressive tightening policy for the Fed, with an estimated increase of interest rates to 2.2% at the beginning of the following year.

This decision’s impacts and the Ukraine-Russia crisis are already taking place and triggering a response worldwide. For instance, Sri Lanka unilaterally suspended external debt payments claiming that it would use its reserves for more necessary activities, such as importing essential goods.

Beyond Sri Lanka: A global threat

One might argue that Sri Lanka’s case can’t be generalized since its economy is tourism-independent and exposed; therefore, the leading cause was the Ukraine crisis and its impacts on the commodities market. However, advanced economies are not in good shape as well. The Japanese Yen encounter an unprecedented depreciation against the dollar: USD/JPY made a 20-year high this week. The bank of Japan insists on maintaining a loose monetary policy to promote a fast recovery from covid-era. Hence traders are moving away from JPY to USD as the US federal reserve is in a tightening cycle.

On the other side, China which is home to many investors, is now experiencing tremendous outflows even though it had the fastest covid-recovery. Foreign investors have sold a record amount of Chinese bonds in February. Therefore, as we see, the world in general and especially emerging markets are subject to a pull-money effect on an unprecedented scale that is putting pressure on their economic recovery and their currencies.

Capital Flows: an indicator of crises

Capital flows to low-income countries and emerging economies (including China) have been falling since the end of the 2008 crisis. In 2011, $1.3trn went into the so-called global south. However, in 2020 this amount has decreased to $900bn, a 30% fall. If we exclude China, capital flows to these countries will be more significant (In 2020, aggregate financial flows to China rose 32% to $466 billion). Hence the Ukraine-Russia conflict and the increase in prices worldwide will increase the risk of defaults and economic recessions, particularly stagflations. Sri Lanka, Asia’s largest high-yield bond issuer, followed Zambia. Ecuador, Belize, and Suriname. Egypt has also asked for support from the IMF.

Undoubtedly, a global recovery from covid-era is no longer a straightforward issue, and recoveries are more than utopic now. As the Asia and pacific department director at the IMF stated,  “Fed’s higher interest rates will slow down Asia’s recovery and growth. I don’t think Asia will be the only continent suffering, the global economy is absolutely not in a good shape.”