In a blogpost titled ‘A Disrupted Global Recovery’ discussing its World Economic Outlook Update report, the International Monetary Fund (IMF) advised Nigeria and other developing economies with large foreign currency borrowings and external financing need to prepare for turbulence in financial markets.
The IMF said, “As the monetary policy stance tightens more broadly this year, economies will need to adapt to a global environment of higher interest rates.
The Washington-based lender also said countries such as Nigeria should consider extending their debt maturities as a means to contain foreign exchange fluctuations.
The IMF added that, “In some cases, foreign exchange intervention and temporary capital flow management measures may be needed to provide a monetary policy with the space to focus on domestic conditions. With interest rates rising, low-income countries, of which 60 per cent are already in or at high risk of debt distress, will find it increasingly difficult to service their debts.
READ ALSO: Dangote Refinery to Commence Processing Before September
“The G20 Common Framework needs to be revamped to deliver more quickly on debt restructuring, and G20 creditors and private creditors should suspend debt service while the restructurings are being negotiated.”
According to the fund, as the policy space diminishes in many economies, fiscal deficits are expected to shrink in most countries. It therefore added that fiscal priority should be given to the health sector, and medium-term fiscal frameworks should ensure that public debt remains sustainable.
The Washington-based lender in its world economic report notes that less accommodative monetary policies in advanced economies are set to pose challenges for central banks and governments in Nigeria and other emerging markets.
It said, “Less accommodative monetary policy in advanced economies will pose challenges for central banks and governments in emerging markets and developing economies.
“Higher returns elsewhere will incentivize capital to flow overseas, putting downward pressure on emerging markets and developing economy currencies and rising inflation. Without commensurate tightening, this will increase the burden on foreign-currency borrowers, both public and private. But the tighter policy also brings costs at home, as domestic borrowers will find credit harder to come by.
“Overall, tighter policies will likely be appropriate in many emerging markets and developing economies to stave off the threat of persistently higher inflation.”
The IMF noted that emerging markets were more resilient with higher reserves, but financial vulnerabilities would remain, especially in countries that have higher public and private debt.
IMF added that as interest rates rise, debt service burdens could rise significantly in the year and public finances will come under strain in the coming months and years, as global public debt has reached record levels to cover pandemic related spending at a time when tax receipts plummeted.
IMF pointed out that higher interest rates will also make borrowing more expensive, especially for countries borrowing in foreign currencies and at short maturities.
