Coping with emerging markets and developing high inflation and debt costs

As the old saying goes, all good things end. Gone are the days of low inflation and easy global financial conditions. Many emerging markets and developing economies (EMDEs) are currently experiencing an unpleasant combination of high inflation and rising debt costs. At 8.5 percent in March 2022, inflation at EMDE reached its highest level since 2008 (Figure 1). In a developed economy, inflation is present This is the highest level since 1991. The global financial situation is tightening, as central banks in major developed economies are expected to raise policy rates faster than previously expected to control inflationary pressures.

Figure 1. Consumer Price Index Inflation, 1990 – 2022

Consumer Price Index Inflation Graph, 1990 - 2022

Sources: Ha, Kose, and Ohnsorge (2021); World Bank.
Note: The last observation is March 2022 and includes year-on-year group median inflation for 81 countries, including 31 developed economies and 50 EMDEs.

In the face of increasing growth potential, EMDEs are likely to continue to struggle with higher inflation and more expensive lending terms. In order to deal with high inflation and borrowing costs, policies in this economy need to be cautious. Calibration, Reliable Framework, and clean Communication. It’s easier said than done, especially when financial space is limited and financial vulnerabilities are prominent. However, adhering to certain policy-making policies can pay large dividends to make these economies more resilient because they operate in unknown waters.

Monetary policy: Tighten carefully

For monetary policy, it will be important to calibrate policy levers into a clear and predictable framework to move inflation forward without stifling recovery. Many EMDEs have already begun tightening monetary policy The war in Ukraine To curb inflationary pressures. The average policy rate in EMDE is now higher than the 2010 average (Figure 2).

Figure 2. Monetary policy rate in EMDE, 2019 – 2022

Monetary policy rate in EMDEs graph, 2019 - 2022

Sources: Bloomberg, Haver Analytics, World Bank.
Note: The sample contains 22 EMDE and nominal policy rate which uses the actual GDP as weight. The last observation is March 2022.

It will be important to move forward, make clear monetary policy decisions, use credible financial structures and protect the independence of the central bank. Manage the cycle In this economy. To strengthen the anchor of low inflation expectations, policymakers need to communicate efficiently.Not just with the financial market, but with it Families And companies.

Monetary policy: Take risks

Financially, policymakers need to reconsider prudent policies to rebuild the reserve buffer and prepare for potential monetary pressures. During the epidemic, at least three-quarters of EMDE regulators applied Tolerance system To prevent a credit crisis. Many governments Supported lending to companies Dealing with liquidity constraints through loan guarantees and payment moratorium.

In light of these previous interventions, banking system exchange rates and rollover risks need to be carefully monitored and, if necessary, mitigated through macro- and micro-prudential policies. Credit quality and non-performing loans need to be reported transparently so that prompt corrective action can be taken. The bank’s capital and liquidity buffers need to be sufficiently strong to be able to absorb the shock. Properly deployed, reserve buffers can help prevent temporary exchange rate pressures.

Monetary policy: Credible planning is committed

Many EMDEs are facing financial policy challenges. The financial situation has deteriorated rapidly due to the epidemic, and these deteriorations will not be completely eradicated by 2022. Despite a strong initial return to growth last year, the EMDE revenue deficit is still 1.1 percentage points higher than GDP in 2019, and Government debt is more than 10 percent of GDP (Figure 3). To partially contain the financial downturn, EMDE already In 2021, monetary policy has been tightenedReleasing about half of the 2020 Fiscal Impulse.

Figure 3. Government debt and revenue deficit in EMDE, 2019 and 2022

EMDEs Bar Graph, Government Debt and Revenue Deficit in 2019 and 2022

Source: International Monetary Fund, Kos et al. (2021), World Bank.
Note: Aggregate weight with GDP in USD for 152 EMDEs (government debt) and 155 EMDEs (deficit). LHS means left scale and RHS means right scale.

The pace and scale of further withdrawal of financial assistance must be subtly calibrated and closely linked to a credible medium-term financial plan. In addition, policymakers need to address investors’ concerns about long-term debt stability by strengthening the financial structure, increasing debt transparency, upgrading debt management functions, and improving the revenue and expenditure aspects of the government’s balance sheet. Inflation expectations are unlikely to be well anchored if there is concern about fiscal stability due to fears of monetary policy constraints, especially where high interest rates indicate volatility. Public debt mobility.

If The recent surge in fuel and food prices continued, Exporters and importers of EMDE products will face diversified policy challenges. Commodity importers may have to bear the brunt of inflation, which may affect growth, while higher commodity prices may control the challenges associated with financial and external imbalances. Exporters need to keep inflation under control amid strong growth behind the rapidly expanding wealth sector. Some high-value fruits need to be invested to increase long-term growth – including human capital – without using distorted energy for subsidies.

Other interventions: Avoid distorted measures

The disruption of global food markets due to export sanctions and war is expected to contribute to rising global food inflation. Trade policy interventions and the use of price controls to keep domestic markets safe from food price shocks can increase international price volatility and Even higher domestic prices. To address food price instability, EMDE policymakers need to strengthen the social security net and increase the resilience of the food system, while avoiding reverse price control measures. Even before the recent rise in commodity prices, price control in EMDE was extensive. This tends to control Distort the market And there are adverse effects of growth and poverty reduction, which often prove difficult to recover from after a crisis. If political considerations make price controls or aimless subsidies inevitable, their long-term losses could be contained if they are introduced with the automatic sunset trend.

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