The International Monetary Fund (IMF) has highlighted that the appreciation of the US dollar is having a more significant negative impact on emerging market economies compared to developed ones. Nigeria, along with Egypt, Iran, Pakistan, Russia, Saudi Arabia, Taiwan, Thailand, and others, are among the countries most affected by this trend.
According to a blog post published by the IMF, the US dollar reached a 20-year high in strength in 2022, leading to major implications for the global economy. For every 10 percent appreciation of the US dollar, linked to global financial market forces, emerging market economies experience a 1.9 percent decline in gross domestic product (GDP) output after one year. This negative impact persists for approximately two and a half years.
The effects of the strong US dollar on emerging market economies occur through trade and financial channels. Real trade volumes in these countries decline more sharply, with imports dropping twice as much as exports. Additionally, many emerging market economies face challenges such as reduced credit availability, diminished capital inflows, tighter monetary policy, and more significant stock-market declines.
The appreciation of the US dollar also affects the current account, which reflects changes in saving-investment balances of countries. In emerging market economies, the fear of letting the exchange rate fluctuate and a lack of monetary policy accommodation amplify the increase in the current account.
As a share of GDP, current account balances (saving minus investment) rise in both emerging market economies and smaller advanced economies due to a depressed investment rate. However, the effect is more substantial and enduring for emerging market economies.
For countries like Nigeria, the strong US dollar and its repercussions on trade, investment, and the current account create significant economic challenges. The IMF’s assessment underscores the need for careful monetary policies and prudent economic management to mitigate the impact of a strengthening US dollar on emerging economies.