The debt-hungry administration of President Akufo Addo is in for another bad news as the International Monetary Fund (IMF) urges emerging economies including Ghana to prepare for the policy tightening by the US Federal Reserve Board, the Fed.
The Fed in December 2021 accelerated the tapering of asset purchases (reduced in interest rate) to shore up the US economy which was struggling to recover from the effects of the COVID-19 pandemic.
Tapering of asset purchases (quantitative easing) by the US Fed would encourage investment in US bonds leading to capital freight for emerging economies. This means, the US currency, the dollar is expected to get stronger and inevitably worsen the plights of countries holding huge debts in US dollars.
“The impact of Fed tightening in a scenario like that could be more severe for vulnerable countries. In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the US dollar,” the IMF said in a statement released on its blog on January 10, 2022.
“The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies, as the IMF highlighted in its October releases of the World Economic Outlook and Global Financial Stability Report,” the IMF said
According to the IMF, some emerging economies have started putting in measures to absorb shocks from the quantitative easing by the US Fed including adjustment of their monetary and fiscal policies.
“Some emerging markets have already started to adjust monetary policy and are preparing to scale back fiscal support to address rising debt and inflation,” it said.
Ghana is currently crippled under monumental public debts sourced by the Akufo Addo administration within five years of its tenure. The country has a debt overhang of about GHC 300 billion or some 80% of its GDP.
This level of debt essentially puts Ghana in the bracket of severe debt distress and would struggle to recover its growth projections with movements announced in the US Fed.
“In response to tighter funding conditions, emerging markets should tailor their response based on their circumstances and vulnerabilities. Those with policy credibility on containing inflation can tighten monetary policy more gradually, while others with stronger inflation pressures or weaker institutions must act swiftly and comprehensively,” the IMF stated.
“In either case, responses should include letting currencies depreciate and raising benchmark interest rates. If faced with disorderly conditions in foreign exchange markets, central banks with sufficient reserves can intervene provided this intervention does not substitute for warranted macroeconomic adjustment.”