Since the start of the Covid-19 pandemic, the majority of developing economies have seen their foreign exchange reserves significantly decrease, according to Financial Times analysis of central bank data from 75 countries, collected via Haver Analytics.
More specifically, import cover ratios – a standard comparable measure of foreign exchange reserves – fell by 25% or more in 39 of the countries. Bolivia witnessed the sharpest fall in its foreign exchange reserves, followed by Sri Lanka, Lebanon, Pakistan and Kyrgyzstan (in that order), which all saw a decline of at least 75% from March 2020.
The depletion of reserves limited the ability of these countries to finance their fiscal deficits and imports of food, fuel and other essential goods, which is one reason why Lebanon and Sri Lanka have seen widespread protests and rising poverty levels over the past two years.
This trend is matched by the ongoing, and growing, divergence in foreign direct investment (FDI) between developed and developing economies.
The pandemic simply worsened a pre-existing issue: the steady and significant downturn in global FDI since 2016, backdropped by an ecosystem that has, for decades, always been skewed towards developing nations, the source of most globally deployed capital.
Of particular concern is the fact that, since start of the pandemic, developing countries saw the greatest decrease in greenfield FDI. This has been a devastating blow for the world’s lowest-income nations.
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Greenfield FDI is key to their economic development since, of all types of FDI, it creates the most jobs and value-add, generally speaking. In the developed world, mergers and acquisitions are, by far, the most predominant form of FDI (as well as the type of FDI that recovers fastest from economic shocks). However, in the least-developed economies there are fewer homegrown (or headquartered) companies being snapped up by businesses in advanced economies, hence the emphasis on greenfield FDI across lower value-add sectors, in particular the lower end of agriculture, industry and manufacturing.