The International Monetary Fund (IMF) recommended Nigeria and other emerging nations with higher inflation or weaker institutions to allow currencies to decline quickly and hike interest rates.
The IMF advised central banks to explain their plans to tighten policy in a post published on Monday, adding that nations with substantial levels of debt denominated in foreign currencies should attempt to hedge their exposures when possible.
The Bretton Woods institution forecasted continued strong growth in the United States, with inflation projected to decline later this year.
On January 25, the International Monetary Fund (IMF) will announce new global economic predictions.
The new Omicron model has sparked fresh concerns about supply-side inflation pressures, according to the global lender. The Federal Reserve cited inflation trends as a major reason in its decision to accelerate the reduction of asset purchases last month.
“As a result of these shifts, the future for developing markets has become more unclear.” These nations are also dealing with high inflation and a significant increase in public debt, according to the IMF.
“Average gross government debt in developing economies has increased by about 10% since 2019, and is expected to reach 64 percent of GDP by the end of 2021, with considerable variances among countries.”
“However, their economic recovery and labor markets are less robust than those in the United States.” While many developing nations’ dollar borrowing costs remain low, worries about domestic inflation and steady external funding drove many emerging markets, notably Brazil, Russia, and South Africa, to begin hiking interest rates last year.”
The IMF maintained that inflation will likely moderate later this year as supply disruptions fade and fiscal contraction weighs on demand, and that the Fed’s policy guidance to raise borrowing costs more quickly did not cause a significant market reassessment of the economy’s prospects.
“Should policy rates increase and inflation decline as projected,” it wrote, “historical demonstrates that the consequences on emerging markets are likely to be benign if tightening is gradual, well-telegraphed, and in response to a strong recovery.”
Emerging-market currencies may continue to decline, but increased financing costs will be offset by overseas demand, according to the IMF.
It warned, quicker than expected Federal Reserve movements might unsettle financial markets, triggering capital outflows and currency devaluation overseas, and emerging economies must prepare for interest rate rises in the United States.
