What you need to know:
The IMF concern comes at a time when economic shocks are ravaging almost every country in the world due to Covid-19 related disruptions and the Russia-Ukraine conflict, which has resulted in a global supply chain distortion thus resulting into higher commodity prices.
The International Monetary Fund (IMF) has said it is worried that a tighter monetary stance by the central banks in advanced economies will impact capital markets.
Although it supports the move by the central banks in trying to control inflation through tightening liquidity markets.
The IMF concern comes at a time when economic shocks are ravaging almost every country in the world due to Covid-19-related disruptions and the Russia-Ukraine conflict, which has resulted in a global supply chain distortion thus resulting into higher commodity prices.
Uganda is currently experiencing high commodity prices and increase in inflation, which has prompted Bank of Uganda to raise the central bank rate twice as it moves to control inflation.
In its updated World Economic outlook, the IMF said tighter financial conditions trigger debt distress in emerging markets and developing economies.
“As advanced economy central banks raise interest rates to fight inflation, financial conditions worldwide will continue to tighten. The resulting increase in borrowing costs will, without correspondingly tighter domestic monetary policies, put pressure on international reserves and cause depreciation versus the dollar,” the IMF said, noting that such challenges will come at a time when government financial positions in many countries are already stretched, implying less room for fiscal policy support, with 60 percent of low income countries in or at high risk of government debt distress.
This, the IMF noted, that whereas an increase in interest rates rises net incomes, financial institutions are likely to suffer losses as loan origination declines and default rates rise.
“Likewise, higher interest rates and lower tax revenues will push some sovereign borrowers into debt distress. Yet mechanisms to resolve debt distress are slow and unpredictable, hampered by difficulties in obtaining coordinated agreements from diverse creditors over their competing claims,” said the IMF.
Tight money policies have resulted into an increase in borrowing costs and a reduction in tax collection risking at least 60 percent of low income countries into debt distress.
This, the IMF also noted, has resulted into widespread capital flight as offshore investors seek to invest in markets with high yields on government bonds.
Getting ready to act
According to IMF, where external shocks cannot be absorbed by flexible exchange rates alone, policymakers should be ready to act for example, through foreign exchange interventions or capital flow management measures in a scenario where the situation gets to crisis levels.