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IMF urges nations to preserve foreign reserves as dollar surges
Currencies

IMF urges nations to preserve foreign reserves as dollar surges

14.10.2022
The US currency has soared almost 15% this year, on course for the biggest gain since the early 1980s
Nations across Asia and Latin America have been tapping their foreign reserves in an effort to shore up their currencies
Nations across Asia and Latin America have been tapping their foreign reserves in an effort to shore up their currencies
Photo credit: AFP

Governments need to hold on to their foreign exchange holdings for potentially worse bouts of outflows and market volatility in the future even as the dollar surges, according to the International Monetary Fund.

The warning came in a blog post by IMF First Deputy Managing Director Gita Gopinath and the fund’s chief economist, Pierre-Olivier Gourinchas, who urged governments to reinstate swap lines with advanced economy central banks or avail of the IMF’s precautionary lines to ensure they have liquidity. While temporary interventions can be appropriate, other reforms will be needed, the duo said. 

“Those with large foreign-currency debts should reduce foreign-exchange mismatches by using capital-flow management or macroprudential policies, in addition to debt management operations to smooth repayment profiles,” the IMF officials wrote. Around half of all cross-border loans and international debt securities are denominated in dollars, they wrote.

They sounded the cautionary note as leaders and regulators from across the globe meet in Washington for the IMF and World Bank’s annual fall meetings, where the economic trouble inflicted by the strengthening dollar is overshadowing discussions. 

The US currency has soared almost 15% this year, on course for the biggest gain since the early 1980s. Nations across Asia and Latin America have been tapping their foreign reserves in an effort to shore up their currencies. Total foreign currency holdings by emerging and developing economies slid by over 6% in the first seven months of this year, according to the IMF.

Weaker local currencies against the greenback is stoking price gains as well. On average, the estimated pass-through of a 10% dollar appreciation into inflation is 1%, the fund estimates.

“Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies,” the IMF officials noted.

©2022 Bloomberg L.P.


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