The International Monetary Fund (IMF) says the appreciation
of the US dollar affects emerging market economies more adversely than
developed economies.
Emerging markets include Nigeria, Egypt, Iran, Pakistan,
Russia, Saudi Arabia, Taiwan, Thailand, among others.
In a blog post published on Wednesday, the Bretton Woods
institution said the dollar’s strengthening to a 20-year high in 2022 had major
implications for the global economy.
The IMF said for every 10 percent of US dollar appreciation linked to global financial market forces, emerging market economies faced a gross domestic product (GDP) output decline of 1.9 percent after one year.
“In emerging market economies, a 10 percent US dollar
appreciation, linked to global financial market forces, decreases economic
output by 1.9 percent after one year, and this drag lingers for two and a half
years,” the post reads.
“In contrast, the negative effects in advanced economies are
considerably smaller in size, peaking at 0.6 percent after one quarter and are
largely gone in a year.”
The IMF said in emerging market economies, the effects of
the strong dollar spread via trade and financial channels.
The institution said the countries’ real trade volumes
decline more sharply, with imports dropping twice as much as exports.
The IMF said many emerging market economies also tend to
suffer worsening credit availability, diminished capital inflows, tighter
monetary policy on impact, and bigger stock-market declines.
The international financial institution also said that US
dollar appreciations impact the current account, which captures the change in
saving-investment balances of countries.
The IMF said in emerging market economies, the fear of
letting the exchange rate fluctuate and lack of monetary policy accommodation
magnify the increase in the current account.
“As a share of gross
domestic product, current account balances (saving minus investment) increase
in both emerging market economies and smaller advanced economies, because of a
depressed investment rate (there is no clear systematic response for saving),”
the post reads.
“However, the effect is larger and more persistent for
emerging market economies.”
The IMF said more flexible exchange rates and more anchored
inflation expectations can alleviate the effects of a strong dollar.
The institution urged emerging market economies to commit to
improving fiscal and monetary frameworks, including enhancing central bank
independence and capital flow management measures.
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