Washington: 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.
The IMF is holding its annual meetings this week, bringing global finance and central bank chiefs - along with their development and banking counterparts - to the US capital at a fragile moment for the global economy.
The IMF on Tuesday cut its forecast for worldwide growth in 2023 and said that policies to tame high inflation may add risks to the global economy. Even President Joe Biden said this week that the US, the world’s biggest economy, could suffer a “very slight” recession.