Black Sea Grain Initiative has been renewed - for now. Credit: Ihor Oinua/Unsplash

By Alexander Kozul-Wright
GENEVA, Mar 22 2023 (IPS)

Given the complex interplay between geopolitics and financial markets, Russia’s invasion of Ukraine in February 2022 sent shockwaves across the global economy. Admittedly, the implications both within and between countries have varied. However, there were some common denominators, including higher commodity prices.

Price disruptions were particularly severe for ‘soft’ agricultural commodities. During peacetime, Russia and Ukraine produced a large amount of the world’s grain, supplying 28 percent of globally traded wheat and 75 percent of sunflower products. Before the war, they were also among the world’s top providers of barley and corn.

After the start of hostilities, exports of grain were severely disrupted. For four months, Russian military vessels blocked Ukrainian ports. Supply constraints triggered market volatility and price rises. Wheat, for instance, reached a record high in March 2022. This left millions of people, particularly in developing countries, at the frontline of a food crisis.

Then, in July 2022, two agreements were signed: one was a memorandum of understanding between the UN and Moscow to facilitate global access for Russia’s food and fertilizer exports; the second was the Black Sea Grain Initiative (BSGI), signed by Russia and Ukraine, facilitating the safe export of grain and other foodstuffs from Ukrainian ports via the Black Sea.

Brokered by the UN and Turkey, the BSGI opened a protected maritime corridor through Ukraine. The agreement assuaged concerns about global grain supplies and led to price declines. Over 900 ships of grain and other foodstuffs have left Ukraine’s major ports since last summer.

Prior to the conflict, between 5-6 million tons of grain were exported from Ukraine’s seaports every month, according to the International Grains Council. By the end-2022, Ukraine had once again reached its historical exporting capacity (at just under 5 million tons). Production responses elsewhere also helped to increase global supplies.

Still, Ukrainian exports to developing countries remain below pre-war levels. And while unblocking the trade corridor did help to address food insecurity in 2022, export backlogs were significant. Today, grain prices (while they have come down in recent months) remain elevated.

Against this backdrop, negotiations between UN officials and Russian Federation representatives – headed by Deputy Foreign Minister Sergei Vershinin – kicked off in Geneva last Monday on a possible extension of the BSGI. Subsequent to a four-month renewal last year, the deal was set to expire on March 18^th.

Earlier this month, UN Secretary-General Antonio Guterres highlighted the deal’s importance. He stressed that “it contributed to lowering global food costs and offered critical relief to people…, particularly in low-income countries.” Ukraine’s president, Volodymyr Zelensky, also called for the initiative to be extended.

For their part, Russian officials argued that ‘hidden’ sanctions – targeting fertilizer firms and the country’s main agricultural bank – have undermined commodity exports. By way of background, exemptions were carved out for some Russian food and fertilizer products after Western sanctions first targeted the Kremlin in February 2022.

In Geneva, delegates stressed that over-compliance and market avoidance by private companies had resulted in Russian commodity exports being under-traded. They noted that sanctions on its payments, logistics, and insurance systems created a barrier for Moscow to sell its grains and fertilisers in international markets.

In response, they requested that national jurisdictions enhance exemption clarifications for food and fertilizers products. “I think it’s a fair request,” says Jayati Ghosh, professor of economics at the University of Massachusetts, Amherst. “Hidden sanctions are impeding Russian financial transactions and undermining allegedly exempted exports.”

When the BSGI was last renewed in November, Russia threatened to renege on the deal unless hidden sanctions were addressed. While they eventually agreed to an extension, Moscow has since insisted that its own agricultural exports (notably ammonia) be included in the BSGI as a condition for its renewal.

Under the deal’s latest iteration, Russia’s pre-condition went notably unaddressed. Moscow, in turn, agreed to extend the deal for just two months. Ukraine, meanwhile, issued conflicting statements on the matter. Over the weekend, Deputy Prime Minister Oleksandr Kubrakov tweeted that the agreement had been extended for four months.

So far, the UN has not specified the length of the renewal, but “this could be the last time an extension is agreed,” according to Ghosh. “Russia is probably going to use this latest agreement as a threat. Rejecting a third extension in the spring may force the international community to listen to their concerns”.

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In the southern city of Taiz, 11-month-old Ameer Hellal receives WFP supplementary food for malnutrition. Photo: WFP/Albaraa Mansoor

By Alexander Kozul-Wright
GENEVA, Mar 3 2023 (IPS)

At a high-level UN event, global donors pledged US$1.2 billion in aid operations to Yemen in 2023. Millions of Yemenis require humanitarian assistance as the country continues to suffer from the fallout of a prolonged civil war.

While the Humanitarian Affairs and Emergency Relief Coordinator Martin Griffiths noted that the UN had received 31 commitments during the conference on February 30, 2023, in Geneva, the amount pledged remains well below the organisation’s target of US$4.3 billion.

The conflict in Yemen started in 2014 when Iranian-backed Houthi rebels – representing the country’s Zaidi Shia Muslim minority – seized the capital, Sanaa. The war intensified in 2015 when a Saudi-led coalition intervened on behalf of the government against the Houthis.

Owing to repeated Saudi-led bombardment campaigns and deep territorial divisions (half of the country remains under Houthi control in the north and the other half under government control in the south), Yemen’s economy has ground to a halt.

Last year, exogenous factors also led to steep falls in Yemen’s Rial relative to the U.S. dollar, pushing inflation up to 45 percent. Elsewhere, food prices surged by 58 percent. In 2022, 13 million people in Yemen relied on the UN’s World Food Program for basic staples.

To date, the conflict has killed more than 375,000 people, sixty percent from indirect causes (mainly from malnutrition and disease). The war has also razed the country’s civilian and physical infrastructure, including its oil sector – Yemen’s only source of foreign exchange.

Last year, warring parties agreed to an UN-brokered cease-fire. Though it expired in October, the six-month truce led to a reduction in casualties. It also enabled commercial traffic to flow through the port of Hodeida, increasing the supply of goods and aid into the country.

A slight improvement in food security at the end of last year meant two million fewer Yemenis suffered from acute hunger. The number of people in famine-like conditions also dropped from 161,000 to zero. But progress remains fragile.

Yemen continues to rely on foreign aid. “More than 21 million people, or two-thirds of the country’s population, will need humanitarian assistance in 2023,” said UN secretary-general António Guterres.

Among those in need, more than 17 million are understood to be living below Yemen’s poverty line. Meanwhile, an estimated 4.5 million Yemenis are internally displaced, largely due to climate-change-related events.

According to the UN, Yemen is “highly vulnerable” to the effects of rising global temperatures (notably arid weather). In recent years, severe droughts have exacerbated food shortages caused by the war.

Yemen Remains in Need of External Support

The UN’s US$4.3 billion funding objective is nearly double what it received last year. Looking ahead, reliance on external aid will be particularly acute in 2023 due to constrained oil exports linked to Houthi attacks on government-held oil terminals last October.

This week’s conference took place as the country’s rival groups agreed to an informal suspension of hostilities. Efforts are underway to declare a lasting peace after the parties failed to extend their UN-backed peace agreement last year.

“We have a real opportunity to change Yemen’s trajectory and move toward peace by renewing and expanding the truce,” noted Guterres at the pledging event, co-hosted by Sweden and Switzerland.

The meeting was attended by officials worldwide, including U.S. Secretary of State Antony Blinken and Germany’s Foreign Minister Annalena Baerbock. In his speech, Blinken called on donors to step up their contributions, citing last year’s funding shortages.

The UN missed its financing target for Yemen by US$2 billion last year. Blinken also urged the international community to help restore Yemen’s economy, suggesting this would “reduce people’s suffering over the long term.”

“Large-scale investment will be needed to rebuild Yemen’s physical infrastructure. Securing peace, however, remains the top priority. “Without it, millions will continue to face extreme levels of poverty, hunger and suffering,” added Blinken.

Meanwhile, the UN secretary-general warned that aid funding would not provide a panacea for Yemen.

“Humanitarian assistance is a band-aid. It saves people’s lives but cannot resolve the conflict itself.”
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The International Monetary Fund (IMF) and the World Bank share a common goal of raising living standards in their member countries. This week, the two international institutions will convene in Washington DC (through October 16) for their annual meeting. The strength of the US dollar will be a key talking point. By adjusting their lending practices, these institutions have a unique opportunity to relieve suffering in the world’s poorest countries.

By Alexander Kozul-Wright and Ruurd Brouwer
GENEVA, Oct 11 2022 (IPS)

In the last week of September, emerging market (EM) bond fund outflows hit $4.2 billion, according to JP Morgan, bringing this year’s total to a record $70 billion. The exodus, set off by a rising U.S. dollar, is heaping pressure on low-income countries.

The greenback’s rise has been fuelled by interest-rate hikes by the Federal Reserve. Since March, the Fed has raised rates by three percentage points, prompting global investors to move their funds into U.S. financial assets and away from (riskier) EM investments.

While economists continue to wrangle over their U.S. growth forecasts, this ‘flight to quality’ has sent financial shockwaves across the developing world, already straining under elevated costs for food and fuel – typically priced in U.S. dollars. Moreover, attempts by EM policy makers to stem the dollar’s rise have largely failed.

Over the course of this year, central banks around the world have drained their U.S. dollar reserves at the fastest rate since 2008. To stem currency depreciations, they have also raised interest rates aggressively. In Argentina, for instance, policy makers raised rates to 75% last month. To little avail.

The MSCI Emerging Market Currency Index, which measures the total return of 25 emerging market currencies against the U.S. Dollar, is down nearly 9 percent from January 1st. The Egyptian pound has depreciated by 20% over the same period, according to Bloomberg data. In Ghana, the Cedi has fallen by 41%.

On top of higher imports costs, a plunging currency makes the servicing of dollar- denominated debt more expensive. This concern may seem abstract to people in advanced economies. In developing nations, however, the effects are painfully real.

As the dollar appreciates relative to other currencies, more domestic currency (in the form of tax revenues) has to be generated to service existing dollar debts. For low-income governments, budget cuts have to be implemented in the hope of avoiding sovereign default.

Currency depreciations have the power to strongarm authorities into reducing health and education spending, just to stay current on their debts. This leaves officials with a grim choice: either risk unleashing a full-blown debt crisis, or confiscate essential public services.

Given the painful costs of insolvency, governments tend to prioritize austerity over bankruptcy. Together with the oft-publicized effects of lost access to foreign investment, subdued growth and high unemployment, sovereign default also imposes severe social tolls.

In August, the World Bank published a paper measuring the decline in country living standards – looking at access to food, energy and healthcare – after state bankruptcies. The paper showed that ten years after default, countries experience 13% more infant deaths per year, on average, compared to the synthetic control (counterfactual) group.

Admittedly, more developed emerging markets like Brazil and India can issue bonds in their own currency to limit budget cutbacks. In most of the world’s poor countries, however, financial markets are too shallow to support domestic lending.

With no recourse to borrow from private creditors, public bodies like multi-lateral development banks (MDBs) usually step in to fill the gap. Indeed, almost 90% of low-income countries’ (LICs) funding takes the form of concessional, or non-commercial, loans from official lenders.

Even accounting for these favourable terms, financial pressures are beginning to build outside of well-known hot spots like Lebanon, Sri Lanka and Pakistan. As it stands, LICs have outstanding debts to MDBs and other official creditors to the tune of $153 billion (mostly denominated in USD).

Given the exogenous trigger for capital outflows from developing countries this year, multi-lateral lenders need to be more innovative. Where possible, they should use their robust credit ratings to assume greater risk by lending to poor countries in domestic currencies.

Failing that, they could lend in synthetic local currencies. These instruments index dollar debts to local exchange rates, allowing borrowers to service liabilities in their own currency while ensuring that creditors receive payments (both interest and principal) in dollars.

Synthetic currencies can improve debtor credit profiles by limiting foreign capital outflows and, by extension, improve debt management capacity. In particular, they boost economic resiliency by making government finances less a function of international currency volatility.

Multilateral financial institutions have been tasked with designing a stable international monetary system to try and ease global poverty. But the loans provided by these groups undermine their own mission, as dollar debts force currency risk onto the countries least able to handle it.

This week, the World Bank and the IMF will convene in Washington (October 10-16) for their annual meeting. The strength of the USD will be a key talking point. By adjusting their lending practices, these institutions have a unique opportunity to relieve suffering in the world’s poorest countries.

Alexander Kozul-Wright is a researcher at Third World Network and Ruurd Brouwer is Chief Executive Officer at TCX, a currency hedging firm (https://www.tcxfund.com).

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A woman paints a mural for Peace and Reconciliation in Colombia. Credit: UNMVC/Jennifer Moreno

By Alexander Kozul-Wright
GENEVA, Aug 9 2022 (IPS)

For the first time in its contemporary history, Colombia has a left-wing government. The presidency of Gustavo Petro, who took the reins August 8, marks a significant break from the political status quo. He also represents a stiff test for U.S. influence in Latin America.

Colombia is Washington’s most enduring ally in the region, and in recent years their relationship has been built around combatting the nation’s drug cartels. But despite major efforts to curb supply, Colombia remains a top source of cocaine for the United States.

The United Nations Office on Drugs and Crime (UNODC) recently estimated that Colombia’s cocaine harvest hit a record high in 2020. On the back of new coca varieties (the base ingredient for cocaine) and better cultivation techniques, Colombia’s potential output reached 1,228 tonnes in 2020. This was triple the 2010 level and four times greater than in the early 1990s, when Pablo Escobar was at the height of his infamy.

Since launching its controversial ‘war on drugs’ in 1971, successive Republican and Democratic administrations have supplied more than $13 billion in military and economic aid to Colombia. To little avail.

According to a 2021 United States’ Drug Enforcement Agency report, over 90 percent of the cocaine seized in the U.S. originates from Colombia. The U.S. remains the biggest consumer market for Colombian cocaine.

Petro is among those who have denounced the U.S.’s counter-narcotics strategy as counterproductive. In particular, he’s taken aim at US-backed aerial fumigation campaigns to destroy coca fields.

He favours expanding crop substitution programs that provide credit, training and enhanced land rights to rural farmers. For Petro, tackling Colombia’s violent drug trade is bound up with the county’s historic land ownership inequality.

He has also been an ardent critic of Colombia’s free-trade agreement (FTA) with the U.S. for pushing farmers into coca production and for exacerbating Colombia’s over-reliance on fossil fuel and coffee exports.

At the same time, imports from America’s highly subsidized agricultural sector have displaced whole segments of Colombia’s agrarian economy, forcing thousands of farmers into coca production.

Petro’s election campaign called for “smart tariffs” to protect Colombia’s rural farmers from U.S. imports and, by extension, criminal activity. “The free trade agreement signed with the United States handed rural Colombia to the drug traffickers,” he told the Financial Times in May. What’s more, he noted that “agricultural production cannot be increased if we do not renegotiate the FTA.”

An ex-member of the M-19 guerrilla group, Colombia’s new president has vowed to tackle asymmetric trade relations in line with land reform and the drug trade. But he will likely face severe opposition from the armed forces, who themselves fought leftist guerrilla movements during Colombia’s 52-year civil conflict.

Further, the military have a longstanding role in the U.S.-led war on drugs. For his part, Petro has accused Colombia’s top brass of corruption and human rights abuses, even since the Government-Farc peace treaty of 2016.

Elsewhere, the President faces a divided congress and deep hostility from landowning elites. It will require skilful manoeuvring to unite a fractured country around his domestic policies. And even if Petro can generate sufficient national support around his policy aims, he would still need to convince the Biden administration to back-track on the U.S.’s ideological commitment to free trade.

So, what cards can Petro play?

His opening gambit is likely to be a financial argument. While cocaine overdoses claim far fewer lives than opioids, the fiscal costs associated with interceding cocaine into the U.S. are staggering.

Navy and Coast Guard seizures alone cost American taxpayers US$56 billion in 2020, to say nothing of land border expenditures. State funds are also used for cocaine-linked policing, incarcerations and medical treatment.

The current geopolitical landscape may also provide Petro with an unlikely Trump card. Given President Joe Biden’s condemnation of Russia’s invasion of Ukraine, he will be careful avoid pushing Colombia (which he has described as a security “linchpin”) into a closer embrace with Cuba and Venezuela, who are diplomatically aligned with the Kremlin.

To isolate Russia even further, Biden will likely soften America’s stance in renegotiating its FTA with Colombia.

Last month, senior representatives from the Biden administration met with Petro to discuss, among other things, the FTA. While the U.S. has taken tentative steps towards renegotiating the deal, Petro should be wary of a favourable result.

Over the past twenty-five years, an intricate web of government and military bureaucracy has been constructed around U.S.-Colombian counter-narcotics operations. It will be difficult to disentangle.

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Excerpt:

A woman receives a dose of a COVID-19 vaccine at a health clinic in Garowe, Somalia. As scientists continue to investigate the Omicron COVID-19 variant, the World Health Organization (WHO) last week urged countries not to panic but to prepare for its likely spread. Credit: UNICEF/Ismael Taxta

By Alexander Kozul-Wright
GENEVA, Dec 7 2021 (IPS)

On 25 November, news emerged from South Africa of a new COVID-19 variant. It has since been identified as Omicron, a Greek alphabet derivation the World Health Organization (WHO) reserves for virus variants “of concern”.

For now, scientists are still racing to understand Omicron’s virulence. There is, however, growing concern that its high number of mutations make it more transmissible and more resistant to existing vaccines (or previous infections) than other variants.

Currently, these worries are based on preliminary analysis emerging from South Africa, where the new variant was first detected. Further data monitoring will be needed to inform countries about appropriate policy responses. But irrespective of whether Omicron panic is justified, economic shockwaves have run ahead of the disease.

The virus has already sent jitters through financial markets in advanced economies and complicated the policy stance of central bankers in Europe and the USA. In the global South, meanwhile, some regions are likely to be more affected than others. Three key observations underscore where economic risks are the greatest.

The first is a threat of renewed country lockdowns. To date, COVID-19 has tightened the fiscal space available to many developing countries. Recent inflationary pressures have also put paid to further monetary policy loosening.

Lockdowns would be particularly damaging in Latin America, therefore, as macro-financial policies across the continent are approaching an upper-bound.

Although Omicron has not yet been detected in China, its presence there would almost certainly prompt Beijing to double-down on its ‘zero tolerance’ strategy, resulting in local lockdowns and reduced consumption.

If authorities decided to reimpose restrictions comparable to those observed in August 2021, following an outbreak in Nanjing, the toll on growth would be considerable – economists slashed China’s quarterly growth expectations at the time due to city-wide closures.

While other countries lack China’s willingness to choke off economic activity, under-funded health care systems may force developing country governments to impose social distancing to try and limit pressure on hospitals.

Here, countries in Sub-Saharan Africa and South Asia are least well prepared, as vaccine rates remain particularly low (from 1-30 percent).

The second factor relates to trade. Omicron could dampen the recent gains in global trade, which UNCTAD forecasts will increase by 23% in 2021 from the year before, due to the easing of pandemic restrictions and economic stimulus packages.

However, UNCTAD’s forecast did not consider an outbreak of Omicron. A fresh wave of lockdowns would be particularly damaging in East Asia, where intra-industry value chains are deeply connected. With global supply chains still vulnerable, further supply disruptions across China – which accounts for roughly one-fifth of world merchandise exports – would pare back world trade.

Tourism could take a big hit over the coming weeks if governments continue suspending travel routes. Shrinking foreign exchange earnings would be especially hard felt in the Caribbean, the Middle East and North Africa, where tourism makes up a relatively large share of national income, compared to other developing country regions.

The third angle relates to financial market fluctuations. The VIX index, a measure of Wall Street’s expected volatility one month into the future, has risen by 47% since 24 November. Meanwhile, the yield on 10-year US Treasury securities, which move with in line growth and inflation expectations, fell 13% over the same period.

Jitters have been apparent in a broad array of financial market barometers. The prices of developing country currencies and commodities – both considered risky assets – have nosedived over the past two weeks, with oil benchmarks on both sides of the Atlantic down 10-15% since the discovery of Omicron.

A sustained period of falling energy prices would undermine OPEC countries’ net export and fiscal balance positions.

The upshot is that a slump in global risk appetite would undermine developing countries’ growth prospects. What’s more, any shift to higher pandemic spending would lead to a rise in bond yields, causing financial conditions to tighten even further. This would be especially problematic for countries with large external financing costs like Ghana and Turkey.

On the other hand, concerns it may also stall the rebound in advanced economies could delay the normalisation of monetary policy by the US Federal Reserve and the European Central Bank, which would ease the pressure on developing countries to adopt more aggressive monetary tightening.

The COVID-19 crisis continues to expose the disparity in fiscal and monetary firepower available to developed vs. developing economies. And while the severity of Omicron remains in doubt, this latest variant risks further undermining global growth convergence.

Alexander Kozul-Wright is a consultant for the Third World Network (TWN)

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Credit: wwww.imf.org

By Alexander Kozul-Wright
GENEVA, Oct 15 2021 (IPS)

The guardians of the global economy convened in Washington this week to discuss their latest global growth forecasts. The World Bank-IMF Board of Governors meetings have been squarely focused on the global response to COVID-19, with economists warning of slowing momentum in wealthy nations and grossly uneven recoveries across the developing world.

Still, since February 2020 governments around the world have deployed US$16 trillion in fiscal support measures to combat the pandemic. These vast sums have provided emergency lifelines to health care systems, businesses, and households.

High fiscal expenditure and low tax revenues raised government debt in 2020 to a record 97% of world GDP. It is projected to stabilise at 99% this year, according to the IMF’s latest Fiscal Monitor, published Wednesday. The report also contends that “exceptional policy responses triggered by the pandemic pose a challenge for discerning the best path forward for fiscal policy.”

Typically, governments deploy a two-pronged approach to fund spending: they can either borrow more or raise taxes (or both). Quantitative Easing (QE) represents another, unconventional policy choice that authorities have turned to in recent economic crises.

QE is shorthand for a set of unorthodox monetary policies in which a central bank purchases government debt (as well as other assets) to increase money supply and lower interest rates. It is designed to spur consumption and investment and, in turn, shore up GDP growth.

While central banks in advanced economies (AEs) have deployed QE since the 2008 financial crisis, constraints are more binding in emerging markets (EMs) economies.

EMs lack the deep financial markets observed in AEs, relying instead on foreign investors (attracted by high interest rates) to cover deficits. As such, measures designed to lower interest rates are seen to deter foreign investors and place downward pressure on domestic currencies.

What’s more, EM governments with access to central bank financing are, rightly or wrongly, thought to exercise less fiscal discipline than their AE counterparts. In turn, rampant quantitative easing risks undermining monetary policy credibility.

In large part, this concern underscores why EM policy makers attribute so much importance to central bank independence – a nebulous concept under normal circumstances, let alone in a crisis, but critical when thinking about the impact debt monetization can have.

First, the erosion between fiscal and monetary policy risks stoking runaway inflation by expanding the monetary base. And second, even if government bond yields are not immediately driven up by money creation, it could happen over the medium-term, raising the cost of future debt financing.

The trade-off between continuing to support economic activity and preserving fiscal space (room in the government budget for extra spending) is therefore thornier for EMs than AEs. “EM central banks are trying to find ways of financing their budgets without being accused of printing money”, says Yilmaz Akyuz, former chief economist at UNCTAD.

“Just as in 2009, the IMF is already talking about returning to ‘normal’ central bank policies”, he noted. Indeed, another IMF report published this week cast aspersions on EM quantitative easing, decrying a lack of policy experience and warning about the “threat of exiting these types of programs.”

But despite the Fund’s repeated exhortations, the central bank of Indonesia (BI) recently pledged to continue buying trillions of rupiah (billions in US$ equivalent) worth of government debt. The ‘burden-sharing’ agreement, unveiled in July 2020, was designed to help finance the 2020 fiscal deficit in the wake of Covid-19.

Last year, BI purchased long-dated government bonds in both primary and secondary markets, in addition to rebating interest payments for certain types of debt. Overall, BI financed roughly half of Indonesia’s 6.1% (of GDP) deficit in 2020, lowering debt repayment costs and providing greater scope to respond to the pandemic.

Back in 2020, the bond-purchasing scheme was deemed a “one-off”, and was widely expected to conclude this year. In August 2021, however, the central bank pledged to extend deficit financing into 2022.

Since August, the price of both government bonds and the rupiah have remained relatively stable. And so long as investors maintain their trust in BI independence and the government’s commitment to fiscal sustainability, Indonesia’s experiment with unorthodox economic policy looks set to continue.

Alexander Kozul-Wright is a consultant for the Third World Network (TWN)

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