How could a rising dollar harm developing economies during Donald Trump’s presidency? Analysts predict increased challenges for highly indebted African countries.
The tax reduction policies anticipated during Donald Trump’s second term, which begins on January 20 as the 47th President of the United States, could lead to an appreciation of the US dollar. This would have far-reaching consequences for the rest of the world, raising production costs for importers and fueling inflation.
This would also make it harder for many low-income countries to service their debts, especially loans denominated in dollars, which must be repaid with weaker local currencies.
Karim Karaki, head of the Economic Recovery and Transformation team at the European Centre for Development Policy Management, explained to DW how this could happen.
“More than 50% of sovereign debt in low- and middle-income countries is denominated in foreign currencies, primarily the dollar. As the dollar rises, the cost of debt servicing increases,” Karaki stated. “This means governments spend more on debt servicing and less on development investments,” he added.
In this context, Africa would be one of the regions most affected by the stronger dollar. Currently, nine countries are already struggling to pay their debts. Another ten are at “high risk” of insolvency, according to the World Bank.
Karim Karaki noted that, over the past two or three years, as the dollar appreciated, countries began spending more on debt servicing than on healthcare and education. “Beyond the impact on social sectors, this reduces the ability of countries to invest in and support their private sectors, as well as economic transformation, which also affects job creation,” he explained.
Difficulty Accessing Capital
In a study published this week, David Omojomolo, an emerging markets economist at London-based Capital Economics, warned that some African countries would struggle to regain access to global capital markets.
Several African governments, including those of Kenya, Zambia, Ghana, and Ethiopia, are barred from accessing global financial markets due to their high debt levels.
David Omojomolo highlighted that the Angolan government recently warned of its struggle to balance debt servicing with daily expenditures. Meanwhile, the Kenyan government was forced by street protests in June to backtrack on its proposal to increase taxes to reduce national debt. Since then, Nairobi has committed to debt servicing to offset the budget deficit.
Ethiopia, the Republic of Congo, Mozambique, Somalia, Sudan, South Sudan, Zimbabwe, and Chad were classified by the World Bank in 2023 as countries in debt distress. Zambia defaulted on about $12 billion in debts in 2020 at the height of the COVID-19 pandemic and is now restructuring its debt with international and private creditors, including China and France.
DW, 22/11/2024