WASHINGTON, United States
Emerging economies should gird for possible rough times as the US Federal Reserve prepares to raise interest rates and world economic growth slows because of the Omicron variant of Covid-19; the IMF warned Monday.
The International Monetary Fund, which is
scheduled to release updated economic forecasts on January 25, said that for
now global economic recovery from the ravages of the pandemic should continue
this year and next.
But "risks to growth remain elevated by
the stubbornly resurgent pandemic," IMF economists Stephan Danninger,
Kenneth Kang and Helene Poirson wrote in a blog post.
The highly contagious Omicron strain has spread
like wildfire around the world since mid-December, causing record numbers of
new Covid cases in the latest wave of the global health crisis.
Omicron, which seems to cause less severe
disease than previous strains of the coronavirus, is causing countries to
reinstitute health measures that hamper economic growth.
"Given the risk that this could coincide
with faster Fed tightening, emerging economies should prepare for potential
bouts of economic turbulence," the economists said, as these countries are
also confronting elevated inflation and substantially higher public debt.
The Fed has signalled that it will raise key
interest rates sooner and more aggressively than it had planned, in order to
counter rampant inflation in the US that is hitting US households and
consumption -- the engine of economic growth in America.
Higher interest rates mean financing costs for
some emerging economies with dollar-denominated debt will rise.
These countries are already lagging behind in
the global economic recovery and thus less able to absorb added expenditure.
"While dollar borrowing costs remain low
for many, concerns about domestic inflation and stable foreign funding led
several emerging markets last year, including Brazil, Russia, and South Africa,
to start raising interest rates," the IMF said.
Quicker Fed rate hikes could rattle financial
markets and cause tighter financial conditions on a global scale, the blog
says.
The risk is there will be a slowing of demand
and trade in the US, as well as capital flight and a depreciation of the dollar
in markets of emerging countries.
The IMF recommended that emerging economy
nations "tailor their response based on their circumstances and
vulnerabilities."
And central banks that are raising interest
rates to fight inflation should engage in "clear and consistent
communication" so people better understand the need for price stability,
the international lender said.
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