The International Monetary Fund (IMF) and the World Bank have lent a record amount of money to the world's poorest countries to help them cope with the pandemic, food inflation and the repercussions of the war in Ukraine.
Now, economists are sounding the alarm over concerns that the world's biggest lenders are stretching themselves too thin in trying to bail out emerging market economies. This, they said, leaves the two institutions with little space to maneuver should future crises arrive. In line with this, government officials around the world were asked to ensure sufficient capacity for future emergency responses.
The IMF has already committed $258 billion to 93 countries since the onset of the pandemic, with another $90 billion to 16 countries since Russia's invasion of Ukraine. Not all committed funds have been lent out yet, with the IMF recording $135 billion of outstanding loans, up 45 percent from 2019 and more than double the amount in 2017.
Former IMF Chief Economist Kenneth Rogoff said that while there is no big emerging-market crisis and banks have the capacity at the moment, they would be "very stretched" if countries head into more turbulent waters.
"If China were to come to the IMF needing a program, or the U.K. or some large country, suddenly, they'd be cash-strapped," he said.
The World Bank, on the other hand, has increased its lending by 53 percent since 2019 to a record $104 billion in September.
Economists want the two banks to tighten their pockets as the possibility of a global recession will result in many countries having bouts of payment problems. A former World Bank official said the institutions need to go back to their original function, which is to be lenders of last resort.
Demands on both institutions could mount. Higher energy and food prices caused by Russia's invasion of Ukraine have driven up costs and limited food supply in developing countries. Moreover, the Federal Reserve's rapid interest rate increases have raised the costs of those borrowed in dollars, forcing many emerging market central banks to raise their own interest rates to limit currency depreciation and higher import prices.
Emerging markets worry about weakening currencies
Central bankers from emerging markets also said they worried that continued interest rate increases from the Fed will weaken their currencies and make them less attractive for investment.
At an event sponsored by the Institute of International Finance, Bank of Mexico Deputy Governor Irene Espinosa Cantellano said: "A lot of capital has gone to reserve currencies, and this is just the tip of the iceberg in terms of what might happen if there is a need to tighten [policy] even more rapidly."
Meanwhile, Hungarian Central Bank Deputy Governor Barnabás Virág said policymakers have raised the base interest rate to 13 percent in an attempt to prop up the currency. This is well above the Fed's previous policy rate of between three to 3.25 percent.
"All of us would like to know what will be the Fed reaction in the coming months because the strength of the dollar keeps the pressure on our currencies," he added.
Emerging markets are now struggling to borrow from private lenders as their governments issue $88 billion of debt through Sept. 30 this year, which is just over half the level in the equivalent period last year and the smallest since 2015. Companies that are unable to roll over foreign debts are also at risk of bankruptcy.
More than 60 percent of low-income countries, defined as roughly 70 nations that qualified for global debt-payment suspension, are now in distress or at risk of distress as they are unable to meet their financial obligations. This is roughly double the 2015 levels, as per IMF.
"This raises the risk of a widening debt crisis in these countries – harming their people, as well as global growth and financial stability," IMF Managing Director Kristalina Georgieva said. (Related: A GLIMPSE OF THE NEAR FUTURE: Global collapse may follow pattern of Sri Lanka economic crisis.)
This year, the world's 73 poorest nations owe $44 billion in debt service fees to bilateral and private lenders, which is more than the amount they receive in foreign aid.
"Debt service is taking away from the resources they would have for health, education, social protection, for climate, and importantly, for growth," said World Bank President David Malpass.
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