© Reuters. Workers pick green tea on a farm in Githunguri, Kiambu County, Kenya, June 8, 2023. REUTERS/Monica Mwangi
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Written by Duncan Meriri and Mark Jones
NAIROBI/LONDON (Reuters) – As Pakistan plunges into crisis this year, Wilson Muthura has pressed its government to put tea produced by Kenya’s KTDA cooperative 3,400 miles away on a list of essentials that will give importers access to precious US dollars.
His urgent lobbying reflects concern about a scarcity of dollars — the lifeblood of global trade — across emerging market and developing economies (EMDEs) that is impeding trade and piling pressure on local currencies and sovereign debtors.
The World Bank estimates that one in four emerging market and developing countries has effectively lost access to international bond markets, a major source of the hard currency needed to pay for oil and commodities such as food.
And it has halved growth projections for some economies hit by the credit crunch, the product of a global journey to safety as interest rates rose to fight inflation that jumped last year when economies reopened after COVID and Russia invaded Ukraine.
Affected countries are also likely to see a curb on foreign direct investment, said Charlie Robertson, head of macro strategy at FIM Partners in London.
Were it not for the dollars from KTDA’s customers in Pakistan, its largest market, the cooperative that produces 60% of Kenya’s tea, would have struggled to pay its own bills.
“We’re really hurt,” Muthura said, explaining that KTDA had to rent additional storage space after slumping sales. Shipments of Kenya’s tea — its most important export — have fallen by a fifth over the past year, according to the local regulator.
While customers usually pay in advance and in dollars, Muthura said, “we had to resort to letters of credit with these buyers from Pakistan.”
His efforts in Islamabad have paid off, but KTDA is seeing similar pressures emerge in Egypt, its second-biggest market, where three sharp devaluations have raised concerns about Cairo’s ability to service dollar debt.
The sharp rise in global interest rates has already pushed Sri Lanka and Ghana into default. Tunisia is swinging. Nigeria may soon spend half or more of government revenue on interest payments. Even Kenya itself is considered at risk.
“Frontier economies are suffering from high import bills exacerbated by tightening global financial conditions and a general flight to safety,” said David Willacy, foreign exchange trader at StoneX in London.
Black market
Although the dollar’s share as the world’s reserve currency has fallen to 59% from 70% over a decade, it still dominates global trade.
Because it is widely accepted and widely valued, it remains a firm favorite among ordinary citizens in developing countries.
The emergence of parallel exchange rates, or an informal market for buying dollars and other major currencies, is often an early sign that a country is in trouble.
“If I want dollars, I have to buy on the black market, which is expensive,” said Arulua Ojo, a student in the Nigerian capital Lagos who is taking classes online with a British university.
Africa’s largest economy is a major oil exporter that sells crude in dollars. But because it lacks refining capacity, it has to import fuel, so hard currency is scarce.
Nigeria has long had a web of multiple exchange rates that it is now trying to sort out, having also devalued its naira currency again last week.
Repeated crises in Argentina mean it has had parallel exchange rates for years, while in Cuba and Venezuela a combination of deep economic problems and US sanctions mean the need for dollars or euros to buy items from medicine to meat.
With Cuba’s large foreign exchange income, tourism, which is still recovering after the pandemic, the widening gap between those without access to hard currency is helping to drive a record exodus of immigrants from the island to the United States.
Reserves are burning
A country burning through foreign exchange reserves is another widely recognized sign of stress.
Chaucer, which provides political risk insurance, estimates that 91 of 142 countries have seen their foreign exchange reserves shrink in the past 12 months, by more than a third, by more than 10% – a trend amplified by the rising dollar.
The drop in Bolivia’s reserves by nearly 70% has led to queues at banks and exchange shops as some merchants have stopped accepting the local currency.
“It’s better for our customers to come in dollars, because with the boliviano it won’t double,” said Ronal Mamani, a sales representative for La Paz TV. ‘We do not know exactly where the exchange rate is.’
Countries such as Sri Lanka, Lebanon, Pakistan, Ukraine and Turkey imposed capital restrictions, while Ethiopia, whose problems were exacerbated by civil strife, banned the import of dozens of goods, including cars, to save money for food and fuel.
Some countries are trying to break or circumvent the dollar’s grip.
Since Western sanctions cut Russia off from the global banking system, China and India have paid for Russian oil in other currencies, while Ghana has been paying for oil in gold.
Brazilian President Luiz Inacio Lula da Silva floated the idea of a common currency for the BRICS group of emerging economies, saying in April: “We need a currency that gives countries more calm.”
The BRICS countries may discuss this proposal at the Johannesburg summit in August, although it is unlikely to become a reality soon. But the group seeks closer ties with countries like Saudi Arabia because it presents itself as a counterweight to the West.
commercial bottles
Dollar shortage is always associated with worsening debt problems.
Similar to the World Bank, JPMorgan (NYSE:) estimates that 21 countries with a combined $240 billion in international debt are now virtually locked into the capital markets — nearly a record.
Recently, the head of the International Monetary Fund, Kristalina Georgieva, said the bank is seeing more requests for assistance, adding: “The IMF is becoming the source of protection.”
In Africa, where harsh terms attached to IMF loans have made some countries wary of relying on the fund, politicians, including Kenyan President William Ruto, have called for a commercial payments system that uses local currencies.
“Why do we bring in dollars in the middle of our trade?” Ruto said, blaming the use of the dollar for the trade bottlenecks.
Argentina said it would pay for Chinese imports in yuan. But China’s capital controls – and the unparalleled depth of US financial markets – mean its currency is unlikely to challenge the dollar as a global power soon.