Analysis-Dollar drought haunts frontier economies


As Pakistan spiralled into crisis this year, Wilson Muthaura pressed its government to put the tea Kenya’s KTDA co-operative produces 3,400 miles away on a list of essentials that would grant importers access to precious U.S. dollars.

His urgent lobbying reflects anxiety about a scarcity of dollars – the lifeblood of global trade – across emerging market and developing economies (EMDEs) that is impeding commerce and piling pressure on local currencies and sovereign debtors.

The World Bank estimates that one in four EMDEs have effectively lost access to international bond markets, a key source of hard currency needed to pay for oil and commodities like food.

It has halved growth forecasts for some economies hurt by the credit squeeze, the product of a global flight to safety as interest rates rose to combat inflation that surged last year when economies reopened after COVID and Russia invaded Ukraine.

Affected countries are also likely to see foreign direct investment being curbed, said Charlie Robertson, head of macro strategy at FIM Partners in London.

Without dollars from KTDA’s customers in Pakistan, its biggest market, the co-op that produces 60% of Kenya’s tea, would have struggled to pay its own bills.

“We were actually hit,” Muthaura said, explaining that KTDA had to rent extra warehouse space after sales slumped. Kenyan shipments of tea – its major export – have fallen by a fifth over the last year, according to the local regulator.

While customers usually pay up front and in dollars, “we had to resort to letters of credit with those buyers from Pakistan”, said Muthaura.

His efforts in Islamabad paid off, but KTDA is seeing similar strains emerging in Egypt, its second-biggest market, where three steep currency devaluations have raised worries about Cairo’s ability to service dollar debt.

The spike in global interest rates has already tipped Sri Lanka and Ghana into defaulting. Tunisia is teetering. Nigeria could soon be spending half or more of government revenues on interest payments. Even Kenya itself is seen at risk.

“Frontier economies are suffering from surging import bills exacerbated by a tightening of global financial conditions and a general flight to safety,” said David Willacy, a foreign exchange trader at StoneX in London.


Although the dollar’s share as a global reserve currency has dropped to 59% from 70% over a decade, it continues to dominate global trade.

And because it is widely accepted and broadly holds its value, it remains strongly favoured among ordinary citizens in developing countries.

The emergence of parallel exchange rates or an unofficial market to buy dollars and other major currencies is often an early sign a country is running into problems.

“If I want dollars, I have to buy on the black market, which is expensive,” said Arouluwa Ojo, a student in Nigeria’s capital Lagos taking online lessons with a British university.

Africa’s biggest economy is a major oil exporter that sells its crude in dollars. But because it lacks refinery capacity, it has to import fuels, so hard currency is tight.

Nigeria has long had a web of multiple exchange rates which it is now trying to untangle, having also devalued its naira currency again last week.

Argentina’s recurring crises mean it has had parallel exchange rates for years, while in Cuba and Venezuela a mix of deep economic problems and U.S. sanctions mean dollars or euros are often needed to buy goods from medicines to meat.

With Cuba’s big foreign exchange earner, tourism, still recovering after the pandemic, a widening gap between those with and without access to hard currency is helping drive a record exodus of migrants from the island to the United States.


A country burning through foreign currency reserves is another widely acknowledged sign of stress.

Specialist firm Chaucer, which provides political risk insurance, estimates that 91 of 142 countries have seen their FX reserves shrink in the last 12 months, over a third by more than 10% – a trend amplified by a rising dollar.

A plunge of around 70% in Bolivia’s reserves has spawned queues at banks and currency exchange shops as some merchants stopped accepting local currency.

“It is better for our clients to come with dollars, because with bolivianos it is not going to add up,” said La Paz TV salesman Ronal Mamani. “We don’t know exactly where the exchange rate is.”

Countries like Sri Lanka, Lebanon, Pakistan, Ukraine and Turkey have imposed capital controls, while Ethiopia, its problems exacerbated by civil conflict, banned imports of dozens of goods, including cars, to conserve money for food and fuel.

Some countries are trying to break or circumvent the dollar’s stranglehold.

Since Western sanctions cut Russia off from the global banking system, China and India have paid for Russian oil in other currencies, while Ghana is paying for oil with gold.

Brazil’s President Luiz Inacio Lula da Silva has 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 may discuss that proposal at a Johannesburg summit in August, although it is unlikely to become a reality soon. But the group is seeking closer ties with countries like Saudi Arabia as it positions itself as a counterweight to the West.


Dollar shortages are nearly always tied to worsening debt problems.

Echoing the World Bank, JPMorgan (NYSE:JPM) calculates that 21 countries with a combined $240 billion of international debt are now effectively locked out capital markets – a near record.

International Monetary Fund chief Kristalina Georgieva said recently the lender is seeing more requests for aid, adding: “The IMF becomes the source of protection.”

In Africa, where the tough conditions attached to IMF loans have made some countries wary of relying on the Fund, politicians including Kenya’s president William Ruto have also argued for a trade payments system using local currencies.

“Why are we bringing dollars in the middle of our trade?” said Ruto, blaming dollar use for trade bottlenecks.

Argentina has said it will pay for Chinese imports in yuan. But China’s capital controls – and the unrivalled depth of U.S. financial markets – mean its currency is unlikely to challenge the dollar as a global force soon.


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