In response to rising inflationary pressures, advanced nations, most notably the United States, have quickly tightened monetary policy. However, the consequences of this policy shift are posing significant issues for emerging markets and developing economies (EMDEs) such as Ghana.
In its June 2023 Global Economic Prospects Report, the World Bank emphasized the negative consequences of tighter financial conditions in the United States, which lead to higher domestic interest rates, wider risk spreads, and a decrease in equities prices in Ghana and other EMDEs.
The World Bank report underscored the interconnectedness of global financial markets, where actions taken in advanced economies have a far-reaching impact on EMDEs. One significant consequence of the tightening measures is the increased cost of servicing dollar-denominated debt.
As US interest rates rise, Ghana and other EMDEs face higher interest payments, compounded by the appreciation of the US dollar, further amplifying the burden of repaying dollar-denominated debt in domestic currency terms. This currency depreciation can potentially exacerbate inflationary pressures, necessitating additional monetary tightening by EMDEs central banks.
These repercussions, as stated by World Bank, pose a major danger of financial crisis, particularly for EMDEs that are already vulnerable.
The World Bank disclosed that as a result of these trends, numerous countries have already encountered financial pressures and, in some cases, defaults.
The COVID-19 epidemic aggravated the situation by causing an upsurge in debt levels throughout EMDEs, with government debt hitting all-time highs. As a result, EMDEs have grown increasingly vulnerable to rising global interest rates, exacerbating the difficulties they face in managing their economies and financial stability.
According to World Bank, the increase in US interest rates can primarily be attributed to persistently high levels of inflation and the Federal Reserve’s adoption of a more assertive tightening stance.
The report emphasized that recent turbulence in the global banking sector has further complicated the trajectory of US monetary policy.
In the event that banking stresses intensify, the Federal Reserve may be compelled to pause or even reverse its current tightening measures. Such a shift in policy direction could introduce additional uncertainty into the already complex landscape of global monetary policy.
Spillover Effects Of US Monetary Policy Tightening On EMDEs Like Ghana
World Bank in its report noted that for EMDEs like Ghana, these developments create a highly challenging environment. Higher interest rates, coupled with increased risk aversion and financial strains, pose significant obstacles to economic growth and stability.
The Global lender also revealed that policymakers face the delicate task of managing monetary and fiscal policies effectively to mitigate the risks associated with tightening global monetary conditions.
It further communicated that implementing measures to strengthen domestic economies, including structural reforms, diversification of revenue sources, and prudent debt management, becomes imperative in navigating these turbulent times.
More so according to World Bank, fostering international cooperation and support mechanisms becomes crucial in addressing the challenges faced by EMDEs, adding that “Collaborative efforts among advanced economies, international financial institutions, and EMDEs themselves are vital to providing the necessary assistance and resources to navigate this period of heightened uncertainty.”