The swift tightening of monetary policy in advanced economies, especially the United States, in response to high inflation poses grave challenges to emerging markets and developing economies (EMDEs) such as Ghana.
According to the World Bank, the tightening of financial conditions in the United States and the associated increase in risk aversion spill over to EMDEs, leading to higher domestic interest rates and risk spreads as well as lower equity prices.
“Increases in U.S. interest rates also boost the cost of servicing dollar-denominated debt—both directly, by raising interest payments, and indirectly, by pushing up the foreign exchange value of the dollar, which increases the domestic-currency cost of repaying dollar debt”, it explained in its June 2023 Global Economic Prospects Report.
It added that currency depreciation may also exacerbate inflation, requiring additional monetary tightening by EMDE central banks.
These spillovers, it continued, can heighten the likelihood of financial distress in EMDEs, especially in those with pre-existing vulnerabilities.
“Indeed, these developments have already contributed to financial strains and even default in several countries. EMDEs have become particularly exposed to rising global interest rates, as the COVID-19 pandemic gave further impetus to a broad-based surge in debt levels in EMDEs, with government debt reaching record highs”, it added.
Increase in US interest rates due to inflation
The report further said persistently high U.S. inflation, along with the Fed’s pivot toward a more aggressive tightening stance, suggests that increases in U.S. interest rates over the past year and a half have been driven predominantly by inflation and reaction shocks.
“That said, the recent period of turmoil in the global banking sector has further complicated the path of U.S. monetary policy. If recent banking stresses were to intensify, the Fed could pause or even reverse its tightening of monetary policy”, it mentioned.
Latest Stories
-
Ghana close to signing MOU with bilateral creditors on debt restructuring – IMF MD
9 mins -
Don’t allow Eurobond holders to twist your arm – IMF Boss to Akufo-Addo
39 mins -
Government to license Starlink to operate in Ghana – Ursula Owusu-Ekuful
46 mins -
Report on the formation of a Trust Corridor for innovation exchange and trade across Africa launched
2 hours -
67 lecturers receive training in content development for online teaching and learning
2 hours -
Internet Disruptions: Freight Forwarders in Tema demand waivers on demurrages due to delays
2 hours -
Electricity metres should be given to citizens for free – Bernard Mornah
2 hours -
Support GIADEC to develop Ghana’s Integrated Aluminium Industry – Asantehene
3 hours -
African Games 2023: Ghana set up final against Nigeria in women’s football competition
3 hours -
Experts rule out human activity in undersea fibre cut – Ursula tells Parliament
3 hours -
Modern Floors Ghana CEO Basil David Anthony honoured by Entrepreneurs Foundation Ghana
5 hours -
Ensuring Telco Connectivity Resilience: Ghana’s Plan-Z path forward
5 hours -
Inter-School Reading Quiz: 16 schools seal qualification for Round 16 stage
6 hours -
African Games 2023: Benjamin Azamati and Barnabas Aggerh cruise to men’s 100m final
7 hours -
Former CJ Kwasi Anin-Yeboah chairs KNUST governing council
7 hours