IMF urges Ghana, other emerging economies to prepare for US Fed policy tightening

Policy tightening is to speed up the recovery of the US economy

Measures by FED would cause capital freight from emerging economies

Emerging economies must employ both monetary and fiscal adjust to combat the effects of US feds policy

The International Monetary Fund (IMF) has urged emerging economies including Ghana to prepare for the policy tightening by the US Federal Reserve Board (Fed).

The Fed in December 2021 accelerated the tapering of asset purchases (reduced in interest rate) to shore up the US economy which was struggling to recover from the effects of the COVID-19 pandemic.

In a statement released on its blog (IMFBlog) on January 10, 2022, the IMF said the Feds policy would have severe impact on the economy of emerging markets.

“The impact of Fed tightening in a scenario like that could be more severe for vulnerable countries. In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the US dollar.

“The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies, as the IMF highlighted in its October releases of the World Economic Outlook and Global Financial Stability Report,” the IMF said

According to the IMF, some emerging economies have started putting in measures to absorb shocks from the quantitative easing by the US Fed including adjustment of their monetary and fiscal policies.

“Some emerging markets have already started to adjust monetary policy and are preparing to scale back fiscal support to address rising debt and inflation,” it said.

It added that “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.”

“In either case, responses should include letting currencies depreciate and raising benchmark interest rates. If faced with disorderly conditions in foreign exchange markets, central banks with sufficient reserves can intervene provided this intervention does not substitute for warranted macroeconomic adjustment.”

Meanwhile, tapering of asset purchases (quantitative easing) by the US Fed would encourage investment in US bonds leading to capital freight for emerging economies.