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Where Is the Global South’s Rescue Brigade?

While US regulators rush to protect the depositors of failed domestic banks, many others around the world have been left to deal with the effects of the US Federal Reserve’s interest-rate hikes on their own. As in past systemic crises, this one is revealing major flaws in the international financial system.

WASHINGTON, DC – Over the last few months, a G7 economy (the United Kingdom), a midsize US bank (Silicon Valley Bank), a small African economy (Ghana), a lower-middle-income South Asian economy (Pakistan), and the fastest-growing global services sector (technology) have all faced short-term cash constraints. Monetary-policy tightening in the United States – where the Federal Reserve raised interest rates by 475 basis points in the space of a year – has produced knock-on effects around the world. But the stark disparities in how these effects are being treated speak volumes about current global financial arrangements.

The decade of low interest rates prior to 2022 led many countries and businesses to amass debt in the interest of boosting economic growth and creating jobs. But no bonanza lasts forever, and this one came to a halt when inflation began rising in the US. Now, interest-rate hikes in the US and Europe are causing severe credit distress in developing countries.

Many currencies have depreciated against the dollar by over 30%, as investors have withdrawn from emerging and frontier markets in a flight to safety. Emerging-market economies’ debt-servicing costs have increased by more than $1 trillion in less than a year. Reserves as a share of imports have dropped, and inflation in Africa has risen to over 14% in the low-income countries in 2022.