COVID-19’s Reality Shock for Emerging Economies: Measures to Deal with Dependence on External Funding

The spread of COVID-19 to emerging economies has brought back their excessive dependence on external financing. Such dependence, a long-standing problem exemplified by the large number of crises experienced in the emerging world space since the 1970s, seemed to have been overcome in an era of ample dollar liquidity. However, COVID-19 has brought to light a different reality, with massive capital outflow from the emerging world due to their potential weaknesses in the light of the pandemic but also a global dollar shortage which hit the world in May. COVID-19 is having a massively negative impact on emerging economies’ growth prospects, their exports and fiscal accounts. Several factors put emerging economies at risk of a sudden reduction in dollar liquidity amid the COVID-19 outbreak.