A Gathering of Storms: The Impact of COVID-19 Pandemic on the Balance of Payments of Emerging Markets and Developing Economies (EMDEs)

Abstract

The aim of this article is to track the impact of the COVID-19 pandemic crisis on EMDEs focusing on the performance of their Balance of Payments (BOPs). EMDEs are facing simultaneous hits in their BOPs as they try to cope with the domestic impact of the COVID-19 pandemic. Those impacts call for a rethinking of some aspects of the Keynesian Approach to BOPs while strengthening the view of international financial markets as hierarchical and volatile institutions. The external impacts can be summarized in four channels: (i) The unprecedented capital flight which has led to depreciation, scarcity of hard currency, debt problems and rising spreads in domestic currency; (ii) the fall in commodity prices, a major component of the export basket in most EMDEs; (iii) the contraction in global aggregate demand and supply, which together with lower commodity prices lead to reduced export earnings; and (iv) the decrease in remittances, a major supply of hard currency in several EMDEs and Low-Income Countries (LICs). The concomitant impact of these “storms” has limited the capabilities and efficiency of governments to adopt fiscal and monetary stimulus packages and to respond to the sanitary requirements. Government reactions are also clogged by the large weight of the informal sector in EMDEs.