The World Bank has forecasted a continuous tightening of the monetary policy in Emerging Market and Developing Economies (EMDEs), including Ghana.
According to the World Bank, slowing inflation is set to cause the global real policy rates to gradually rise from their current deeply negative levels, hence leading to an expected tightening of the interest rate that monetary authority sets in order to influence the evolution of the main monetary variables in the economy.
“Global inflation has been pushed higher by demand pressures, including earlier policy support and supply shocks, as well as disruptions to both global supply chains and the availability of key commodities.
“Elevated inflation tends to inflict the greatest harm on low and middle-income households as it often outstrips growth in wages, which these households disproportionately rely on.”
World Bank
Although inflation is likely to gradually moderate through the year, world bank predicts high core inflation in many countries to be unexpectedly persistent in its rise.
The Bretton Wood institution, which comprises of all institutional structures responsible for providing support to rebuild the shattered postwar economies, has urged monetary and financial authorities in EMDEs to continuously calibrate domestic monetary conditions, taking into account the effects of both domestic tightening and cross-border spillovers from higher policy rates in advanced economies.
The institution further pointed out that, a shifting policy mix in advanced economies where more supportive fiscal policy could add to inflation pressures represents a potential added challenge.
“Tightening financial conditions and depreciation pressures are likely to lead to a further rise in EMDE financial volatility and an increased probability of balance of payments strains, financial crises, and economic downturns.
“Some EMDEs monetary authorities may have limited the rise in inflation and averted disruptive exchange rate dynamics through relatively early and swift increases in policy rates.”
The Bretton Wood institution
Adding up, the Bretton Wood institution further disclosed that in countries where inflation remains elevated, authorities may have to continue tightening monetary policy to support macroeconomic stability and to prevent inflation expectations from becoming de-anchored.
Emerging Market and Developing Economies’ Fiscal Policy Challenges
According to the World Bank, governments in EMDEs face the difficult task of supporting vulnerable households and meeting other public spending needs while shoring up fiscal sustainability.
“EMDEs debt levels rose sharply during the Covid-19 pandemic, with the median rising from 49% of Gross Domestic Product in 2019 to 55% of GDP in 2022, compounding earlier increases.
“With fiscal deficits that are still above pre-pandemic averages, debt levels are set to remain elevated, and many economies are vulnerable to rising borrowing costs, especially those with already high debt servicing costs and sizable external or foreign.”
World Bank
World Bank in its projections as well stipulated EMDEs’ activities to further fall even below its pre-pandemic trend over the forecast horizon. Moreover, per capita income growth is expected to be slowest where poverty is highest, it stated.
“In EMDEs, growth prospects have worsened materially, with the forecast for 2023 downgraded 0.8 percentage point to a subdued 3.4 percent. The downward revision results in large part from weaker external demand and tighter financing conditions.”
World Bank
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