The current economic malaise is spreading around the world. Azerbaijan has called help from the international monetary fund. Nigeria is approaching the World Bank for aid. Saudi Arabia is slashing public spending and is considering sales of state assets. In the case of Venezuela, it has already reached a basket case. What has happened to this country? Inflation is running in triple digits. There are three official rates for the currency. The GDP growth is -10%. Oil exports which provided the hard currency has fallen significantly. The imports have dropped from $ 50 billion to $ 30 billion, a 40% contraction. There are severe shortages of medicine, foods, milk and rice.
President Maduro is doing all his best to save the country from going bankrupt. The default in payment would threaten the regimes existence. This could make the creditors seize the assets and oil cargoes thus choking off the revenues. The government has adopted severe austerity measures to pay off sovereign debt. However they need to pay $ 10.5 billion to China which they are not in a position to do so. The only solution available is to expect the oil prices to recover from the lows.
A lesson to learn for resource exporting countries. Their budgets assume both the quantity and the price for the exported items. This has failed miserably in deflationary economy as prices of commodities have gone lower significantly. So their total exports shrink. It is not easy to adjust to lowering the imports. This results in trade deficits. Along with this is the fall in FDI which is hurting development.
This current recession is very severe. The central banks have to find new tools other than lowering the interest rates. The outflow of foreign exchange must be curbed. Otherwise they will run out of foreign exchange. Recovery from this recession can happen only if the demand in the developed countries pick up.
The Indian economy is currently robust, but it is not clear whether this will sustain as our exports are falling steadily for the last 13 months. FIIs have also taken a significant portion of the money which they had invested in the market. The inflow of FDI has slowed down. Our reserve of 350 billion is all borrowed money which included FII, ECB and NRI money. The oil price collapse will result in millions of Indians returning from the Middle East which used to be a big foreign exchange earner. China’s devaluation is imminent and may push the rupee also lower.
It will not be a surprise that many country’s economies will face severe hardships in the months to come. The intervention of IMF, World Bank looks imminent.
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