U.S. Monetary Policies Making Emerging Economies Vulnerable: IMF

BEIJING: The tightening of monetary policies by the U.S. at a time when other countries are easing theirs could make emerging economies “vulnerable” as many of their firms and banks have sharply increased their borrowings in dollars in the last five years, the IMF Chief warned today.

Speaking at the opening of China Development Forum here, Christine Lagarde said, the world has yet to achieve full economic recovery as global growth continues to be weighed down by high debt, high unemployment and lackluster investment.

Referring to IMF’s recent forecast to cut global growth to 3.5 per cent and 3.7 per cent in 2015 and 2016 despite the boost from cheaper oil and stronger US growth, she said the global recovery remained fragile because of significant risks.

“One such risk emanates from the expected tightening or normalisation of U.S. monetary policy at a time when many other countries are easing monetary conditions,” she said on the U.S.’ plans to raise interest rates.

“This asynchronous monetary policy may trigger excessive volatility in global financial markets. The divergence of monetary policy paths has already led to a significant strengthening of the U.S. dollar.

“Emerging markets could be vulnerable, because many of their banks and companies have sharply increased their borrowing in dollars over the past five years,” Lagarde who was in India last week said.

Stating that some of the unconventional monetary policies, including large purchases of government debt, had strong, positive spillovers on the global economy after the 2007 economic crisis, she said those policies prevented a financial market meltdown and supported the recovery in advanced economies and beyond.
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