| |
Contributions from
the Column
Studies and reports
Dollar decline threatens emerging economies
Access to water – a human right
Rural women: Resistance to free trade
Churches: Making development aid more efficient
05/2005 |
|
[ Development finance ]
Falling dollar puts middle-income
countries at risk
Last year, developing countries recorded their strongest economic growth in more than 30 years with a healthy six percent. East and South Asia showed the greatest growth rates with more than eight and just under seven percent respectively. Growth in Latin America rose from less than two percent in 2003 to almost six percent. Sub-Saharan Africa recorded barely four percent growth, and thus only half of the growth rate which economists consider necessary to halve poverty by 2015.
The World Bank believes that the greatest current risk to economic development, in emerging markets above all, is the downwards trend of the dollar. In its 2005 Global Development Finance Report, the Bank warns that an abrupt slump, resulting in increases in US interest rates, could reduce inflows of capital in emerging economies considerably.
One reason is that devaluation of the US dollar reduces the value of developing countries’ foreign exchange reserves, most of which are in dollars. Reserves have grown dramatically over the last five years. In 2003 and 2004 alone, poor countries accumulated $ 670 billion and increased their reserves by 70 percent to over $ 1.5 trillion USD. Almost 40 percent went to China and a further 47 percent to other middle income countries. However, low-income countries have also increased their currency reserves noticeably (see figure).
Moreover, a sustained fall in the dollar (particularly if it accelerates) could lead the Federal Reserve in Washington to increasing key interest rates. The result would be a reduction in private capital inflows to developing countries.
That, in turn, could trigger a strong increase in interest rates for middle-income country bonds as well as downgrading by rating agencies. Consequently, borrowing costs would rise for the countries affected.
What makes this scenario particular gloomy is the fact that bond inflows are becoming increasingly important for middle-income countries. World Bank figures show that, in 2004, they were higher than gross inflows from bank loans for the first time. The Bank emphasises that, in the past (for instance, before the Asian crisis), similar indications of imbalances were overlooked and crisis signals were reacted to too late.
The recent fall of the dollar, however, economically benefits countries which have high foreign debts in dollars, if their currencies are not pegged to the US currency. There are approximately 100 developing countries to which this applies. For them, the ratio of debt to gross domestic product (and similarly of debt service to exports) has fallen by an average of one percentage point since the year 2002. However, the World Bank points out that this effect is, in many countries concerned, more than compensated by the simultaneous decrease in value of the central bank’s foreign currency reserves.
The risks from disruptions on bond markets are less threatening for low-income countries because they depend mainly on grants and concessional development loans. As far as official inflows are concerned, the World Bank notes a clear trend towards grants since 2001 along with a diminishing significance of loans. It is mainly Sub-Saharan Africa which has benefited from the increase in aid payments since 1998, having received 60 percent of the increase. However, a large part of that was used to stabilise post-conflict situations, so funds for “true” development cooperation increased only slightly.
The World Bank report puts total official and private net capital flows in developing countries at 324 billion dollars for 2004 – an increase of 15 percent over the previous year. Inflows were thus at the same level as they were in 1997 when the Asian crisis started.
As a group, developing countries once again showed a positive current account balance, mainly because of the foreign exchange purchases. This means that in 2004, just as in all other years since 2000, poor countries transferred more money to industrial countries than vice versa – some 105 billion dollars in total. (ell)
|
