Kristalina Georgieva, managing director of the International Monetary Fund, has said that interest rate hikes by the Federal Reserve could “throw cold water” on already weak economic recoveries in certain countries.
Georgieva, speaking via videoconference at The Davos Agenda virtual event on Friday, said an increase in U.S. rates could have significant implications for countries with higher levels of dollar-denominated debt.
She said it was therefore “hugely important” that the Fed was clearly communicating its policy plans to prevent surprises. Higher U.S. interest rates could make it more expensive for countries to service their dollar-denominated debt.
On a panel moderated by CNBC’s Geoff Cutmore, Georgieva said the IMF’s message to countries with high levels of dollar-denominated debt was: “Act now. If you can extend maturities, please do it. If you have currency mismatches, now is the moment to address them.”
She added that her biggest concern is for low income countries with high levels of this debt, highlighting that two-thirds were now either in “debt distress” or in danger of falling into it — that’s twice as many as in 2015.
The IMF expects the global economic recovery to continue, Georgieva said, but stressed that it was “losing some momentum.”
As such, she suggested that a New Year’s resolution for policymakers should be “policy flexibility.”
“2022 is like navigating an obstacle course,” she said, given risks such as rising inflation, the Covid-19 pandemic and high debt levels. The IMF warned in December that global debt hit $226 trillion in 2020 — the largest one-year rise since World War II.
With regards to inflation, Georgieva stressed that the problem is country specific. Prices are rising at startling speeds in a number of countries: euro zone inflation hit a record high of 5% in December, the U.K. inflation rate hit a 30-year high in the same month and the U.S. consumer price index rose at its fastest pace since June 1982.
“That country specificity is what makes 2022, in a way, even more difficult than 2020,” Georgieva said.
“[In 2020] we had similar policies everywhere because we were fighting the same problem — an economy in standstill … In 2022, conditions in countries are very different, so we cannot anymore have the same policy everywhere, it has to be country specific and that makes our job 2022 so much more complicated.”