Strong US Dollar Slows Economic Growth in Emerging Economies, Says IMF

The International Monetary Fund (IMF) says the appreciation of the US dollar affects emerging market economies more adversely than developed economies.

Emerging markets include Nigeria, Egypt, Iran, Pakistan, Russia, Saudi Arabia, Taiwan and 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 read.

“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 tended to suffer worsening credit availability, diminished capital inflows, tighter
monetary policy on impact, and bigger stock-market declines.

The international financial institution also said that US dollar appreciations impact the current account, which captured 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 magnified 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 read.

“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.