Forex Crisis Around The World

Pakistan: The International Monetary Fund may have bailed Pakistan out of bankruptcy for now but the economy is in tatters.  A similar IMF bailout of $3 billion averted a default in 2023 but the country, mired in political crisis too, needed one more bailout this year. The latest $7 billion multi-year loan is a drop in the ocean considering that at least 60% of the tax revenue will go into repaying old debt. In May 2024, the IMF estimated that Pakistan will need at least $123 billion in external financing till 2029. The country's GDP fell to $374.904 billion in 2023-24 from the $375.44 billion in 2022. Despite being on a downtrend, inflation stood at 9.6% in August. The pain on the population will only get worse before it gets better. The forex reserves are back above $10 billion, including a $1 billion tranche from IMF, for the first time since April 2022 but that's won't even cover three months of imports.

 

Bangladesh: The country's total debt stands at $156 billion, a five-fold increase since 2008 and they are rated as "junk" by global rating agencies like S&P Global. The sovereign rating was downgraded even before the latest political crisis led to a regime change. As a result, the country's forex reserves have fallen from $32 billion in January 2023 to $20 billion in September 2024. The central bank has devalued the Taka in the last few years, but that hasn't helped so far. The Asian Development Bank expects inflation to rise to 10.1% in FY25, largely due to elevated food prices. There is also a fear of a run on the banks due to rising number of unpaid loans. While there is no debt crisis right now, the economy is worsening and it needs a quick fix. The country has a $4.7 billion lifeline approved by the IMF, which would be released over three and half years ending in 2026.

 

Maldives - which is heavily reliant on tourism, is now burdened with an external debt that has surged to 110% of its gross domestic product (GDP).
Maldives foreign exchange reserves have plunged to just $440 million—barely enough to cover six weeks of imports—creating a real threat of default.

Credit agencies such as Moody’s and Fitch have downgraded the Maldives' ratings, citing its high risk of financial collapse, drawing ominous comparisons to Sri Lanka's crisis in 2022.

 

Sri Lanka  - More than 18 months after defaulting on its external debt payments, Sri Lanka’s macroeconomic position has improved, but remains very fragile.

Economic activity bounced back in the third quarter, after eight consecutive quarters of contraction. Growth is likely to be negative for 2023 as a whole (-3.6%), but is likely to reach nearly 3% in 2024, boosted in particular by a reduction in inflationary pressures (2.6% y/y in H2 2023 vs 37.1% in H1 2023) and the easing of monetary policy.

Meanwhile, external accounts have consolidated. Officially, FX reserves reached USD4.4 billion in December 2023, the equivalent of 2.9 months of imports of goods and services, from just USD1.9 billion a year earlier.

But this improvement is fragile. First, excluding currency swaps, “usable” reserves cover only 1.3 months of imports according to the IMF. Secondly, the recovery in external accounts results mainly from international financial aid, the suspension of payments of debt principal on the government’s external debts, the reduction in imports (a consequence of the economic crisis) and restrictions the central bank has imposed on imports, capital outflows and foreign exchange. These restrictions remain in force, even though they have been significantly relaxed since the summer. With the return to growth, we would expect an increase in the current account deficit.

COUNTRIES FACING BANKRUPCY RISK

Venezuela: The country's debt currently stands at $154 billion, which the country began defaulting in 2017. Its GDP has declined from $372.59 billion in 2012 to $102.33 billion in 2024. It was Latin America's wealthiest country at one point in history and today it's in the throes of bankruptcy led by an authoritarian leader who declared himself a winner in July, triggering a political turmoil that threatens an already slow economic recovery. The economy expanded by 5% last year and is expected to grow by 4% this year. The easing of global sanctions is partly responsible for the improved economic performance. The oil-rich country is also in talks to restructure its debt. Meanwhile, 82% of the country's people live in poverty and while the inflation is cooling down, the price rise is still 25% more than a year earlier, according to latest data from the central bank.

 

Argentina: The South American country has defaulted thrice on its sovereign debt in the 21st century. It owes over $400 billion to creditors. It has had several debt restructurings in the past, the most recent being in 2023. President Javier Milei's reforms have brought down yearly inflation from 300% to 236% in eight months. But that is still high by normal standards. The economy, too, has started to grow, albeit slowly. However, poverty levels have crossed 52.9%. Due to the uncertain economic outlook, Oxford Economics sees a 75% chance of a default in 2025 and 2027.

 

Zambia: The Southern African country defaulted on its Eurobond debt in 2020. This year, it also became the first country to restructure its $6.3 billion external debt. But the country faces significant challenges. Its stock of external arrears reached 26% of GDP by 2023, which the IMF says is unsustainable. Moreover, the country is yet to restructure at least $3.3 billion in commercial loans. The IMF believes that a failure to restructure commercial loans and certain clauses in the 2024 debt restructuring deal could bring Zambia on the verge of another default.

 

Ghana: The African country's total debt stands at $44 billion—70.6% of the GDP. It defaulted on most of its external debt in December 2022, plunging the economy into a crisis. Debt costs and inflation surged. Ghana's forex reserves dwindled from $9.7 billion in 2021 to $5.9 billion by 2023. The economy is now recovering, with the GDP growth for January- June 2024 averaging 5.8%. Inflation has fallen to its lowest since 2022. The IMF argues that its $3 billion package, approved in May 2023, has helped the economy. The country's prospects seem brighter after recently reaching a $13 billion debt restructuring deal. The lenders will let go 40% of the debt as part of the deal, according to a Financial Times report.