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IMF explains the role of US dollar in slowing economic growth in emerging economies

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The appreciation of the US dollar is having an adverse effect on emerging market economies. The International Monetary Fund (IMF), explained the impact in a blog post.

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.

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“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.

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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.

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“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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