The International Monetary Fund (IMF) on Monday urged Nigeria and other emerging markets with stronger inflation pressures or weaker institutions to swiftly let currencies depreciate and raise benchmark interest rates.
In a post published on Monday, the IMF urged central banks to clearly and consistently communicate their plans to tighten policy, adding that countries with high levels of debt denominated in foreign currencies should look to hedge their exposures where feasible.
The Bretton Woods institution said it expected robust U.S. growth to continue, with inflation likely to moderate later in the year.
The IMF is due to release fresh global economic forecasts on January 25.
The global lender noted that the new Omicron variant has raised additional concerns of supply-side pressures on inflation. Last month, the Federal Reserve referred to inflation developments as a key factor in its decision last month to accelerate the tapering of asset purchases.
“These changes have made the outlook for emerging markets more uncertain. These countries also are confronting elevated inflation and substantially higher public debt,” the IMF said.
“Average gross government debt in emerging markets is up by almost 10 percentage points since 2019 reaching an estimated 64 percent of GDP by end 2021, with large variations across countries.
“But, in contrast to the United States, their economic recovery and labor markets are less robust. While dollar borrowing costs remain low for many, concerns about domestic inflation and stable foreign funding led several emerging markets last year, including Brazil, Russia, and South Africa, to start raising interest rates.”
The IMF maintained that inflation will likely moderate later this year as supply disruptions ease and fiscal contraction weigh on demand, adding that the Fed’s policy guidance that it would raise borrowing costs more quickly did not cause a substantial market reassessment of the economic outlook.
Should policy rates rise and inflation moderate as expected, history shows that the effects for emerging markets are likely benign if tightening is gradual, well telegraphed, and in response to a strengthening recovery,” it said.
Emerging-market currencies may still depreciate, but foreign demand would offset the impact from rising financing costs, the IMF added.
Emerging economies must prepare for U.S. interest rate hikes, it said, warning that faster than expected Federal Reserve moves could rattle financial markets and trigger capital outflows and currency depreciation abroad.