The Washington-based lender also counseled the Central Bank
of Nigeria and the apex banks of emerging economies to raise their benchmark
interest rate in preparation for the Fed policy tightening
According to The Whistler, the multilateral lender gave the
advice in a report titled, ‘Emerging economies must prepare for Fed policy
tightening.’
It noted that emerging markets with high public and private
debts, foreign exchange exposures, and lower current-account balances had been
seeing larger movements of their currencies relative to the US dollar in recent
months.
As a result, the IMF said the combination of slower growth
and elevated vulnerabilities could create adverse feedback loops for emerging
economies.
The IMF said, “Some emerging markets have already started to
adjust monetary policy and are preparing to scale back fiscal support to
address rising debt and inflation.
“In response to tighter funding conditions, emerging markets
should tailor their response based on their circumstances and vulnerabilities.
“Those with policy credibility on containing inflation can
tighten monetary policy more gradually, while others with stronger inflation
pressures or weaker institutions must act swiftly and comprehensively.”
The IMF said heavily indebted countries might need to start
fiscal adjustment sooner and faster.
The advice is coming as the value of the currency has
dropped to N414.26 at the CBN official foreign exchange window, down from the
N410 which the bank adopted in May last year.
At the last Monetary Policy Committee meeting held in
November last year, the CBN retained its benchmark lending rate at 11.5
percent.
The rate was cut in September 2020 from 12.5 percent to
encourage output growth after the country slipped into recession.
Ordinarily, in the past, the apex bank would raise interest
rates to fight rising inflation which is at 15.99 percent as of October 2021.
The CBN governor Godwin Emefiele had said that the monetary
authority was faced with the dilemma of tackling inflation and output growth.
Emefiele had said, “So far, evidence has not supported the
rising inflation to monetary factors but rather, evidence suggests non-monetary
factors (structural factors) as the overwhelming reasons accounting for the
inflationary pressure.”
But the IMF in the new report said, “To manage these
trade-offs, emerging markets can take steps now to strengthen policy frameworks
and reduce vulnerabilities.
“For central banks tightening to contain inflation
pressures, clear and consistent communication of policy plans can enhance the
public’s understanding of the need to pursue price stability.
“Countries with high levels of debt denominated in foreign
currencies should look to reduce those mismatches and hedge their exposures
where feasible.
“And to reduce roll-over risks, the maturity of obligations
should be extended even if it increases costs. Heavily indebted countries may
also need to start fiscal adjustment sooner and faster.”
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