The United States Federal Reserve has transformed into a hawkish configuration since the beginning of 2022 to control the inflationary effects of the Russian-Ukrainian war. In March 2022, the Federal Open Market Committee (FOMC) began increasing interest rates by 25 basis points. This overturned the policy of near-zero interest rates to stimulate the post-COVID-19 economic recovery. The FOMC increased interest rates more aggressively in May 2022 by 50 basis points. This was followed by a 75 basis points increase in June 2022 and another 75 basis points rate hike in July 2022. 

The current US Federal interest rate stands between 2.25-2.50 percent. The FOMC has explicitly indicated its intentions of increasing interest rates to more than 3 percent by the end of 2022 to curb consumer price inflation (CPI). This interest rate target is still insufficient for the FOMC to combat an inflation rate of 8.5 percent-the highest level seen in the 21st century. According to Federal Reserve Chairman Jerome Powell it will be “appropriate” for the FOMC to reach a consensus on an “unusually large” interest rate increase during the next FOMC meeting before its slows down on hiking rates. The FOMC is scheduled to meet another three times this year; in September, November and December. I predict that the FOMC will probably increase Federal Fund Rate by at least 50-100 basis points in September 2022 to trigger a recession in the United States in order to achieve the macroeconomic objective of price stability in the short run until commodity prices begin to fall close to pre-war levels.

The European Central Bank (ECB) also appears to mirror the movements of the US Federal Reserve interest rates. On 21 July 2022, the ECB increased interest rates by 50 basis points marking its largest first rate hike in the last decade. I anticipate that the ECB will likely increase interest rates by 50-75 basis points in September 2022. In August 2022, the Bank of England increased interest rates by a whopping 50 basis points marking its largest ever rate hike since 1995. Many other major central banks around the world have implemented contractionary monetary policies as a means to control inflation and strengthen the local currency against a rapidly appreciating US dollar.

Implications for South Asia

These global macroeconomic developments have caused major implications for the region. An observable manifestation of this phenomenon is the evident depreciation of South Asian currencies. The Indian Rupee (INR) has depreciated from 75 INR in April 2022 to 80 INR against the USD. The Pakistani Rupee (PKR) has also been depreciating at a far greater magnitude in the same time period from 183 PKR to 220 PKR. It is worthy to mention that the Pakistani Rupee has made a remarkable recovery against the American Dollar in the last month making it the world’s best-performing currency in August 2002. 

On 1 August 2022 the price of 1 USD was worth 240 PKR within a fortnight the PKR appreciated to 214 PKR against the USD before depreciating and stabilizing at around 220 PKR against 1 USD. This shows that it is unlikely in the short run that there will be a free fall of the PKR against the USD. 

The Bangladeshi Taka (BDT) has also lost its value significantly against the USD. From February 2018 to March 2022, the BDT was trading steadily against the USD between the ranges of 83-85 BDT however, within the last six months the Bangladeshi Taka has depreciated to an all-time low of 95 BDT against the USD. The Sri Lankan Rupee (SRL) has recently experienced its most drastic depreciation against the USD from 200 SRL in March 2022 to 365 SRL in September 2022.

In the case of Bangladesh, the twin effects of the rising value of the USD and the global inflationary wave triggered by the Russian-Ukrainian war have placed the Bangladesh Petroleum Corporation (BPC) on the verge of bankruptcy. This is a major setback for Bangladesh as the BPC was considered the golden goose of Bangladesh being the only state-owned corporation that was running on a profit. The current financial condition of the BPC is not solely to be blamed on international factors but also partly due to mismanagement and poor decision-making. In order to rescue the BPC the Bangladeshi government increased fuel prices by around 50 percent, on 6 August 2022 marking the largest ever energy price hike in a single day since Bangladesh became sovereign in 1971. If the BDT continues to depreciate, or if the international crude oil price increases further then the BPC will be forced to operate at a loss. The economic woes of Bangladesh have forced the deltaic nation to seek a 4.5 billion USD bailout package from the International Monetary Fund (IMF). 

Pakistan has long been facing a balance of payment crisis along with a constantly depreciating currency well before the pandemic. 

India better placed, challenges for Pakistan

The current global financial crisis will make it more difficult for Pakistan to recover from the situation. The economies of Bangladesh and Sri Lanka can be still revived with support from the IMF, a lower USD exchange rate and most importantly cheap oil. However, the same cannot be claimed in the case of Pakistan given its serious infrastructure and structural issues including its antagonistic relations with neighboring India. This is evident if one compares the political economy of South Asian countries prior to the Covid-19 pandemic. 

India against all odds seems to be in a far better position when juxtaposed against other countries in the region. This is due to the large forex reserves held by the Reserve Bank of India (RBI) worth over 500 billion USD though the quantum of the reserves is on a downward trajectory. The Indian method of controlling inflation in the current times can be summarised into three points; 1) to defend the value of the Indian rupee 2) to pursue contractionary monetary policy by increasing the RBI interest rate 3) to secure a steady supply of cheap Russian oil.

South Asian countries are facing an extremely challenging new world order that seeks to exacerbate international socio-economic inequalities. The gains in poverty alleviation and economic development in the region over the last two decades have almost been completely reversed since the advent of the Covid-19 pandemic. South Asia will require at least another decade to recover from the sociological maladies of the post-pandemic global transformations. The looming economic crisis in South Asia may also cause multiple regime changes in the region, potentially producing greater political instability.

(The writer, an analyst on South and Southeast Asian domestic politics and foreign policy, is a Ph.D. candidate at the Institut für Politische Wissenschaft (IPW), Faculty of Economics and Social Sciences, Heidelberg University, Germany. Views are personal. He can be contacted at anishmisrasg@hotmail.com)