Preserve vital foreign reserves as dollar rises, cautions IMF

WASHINGTON: The IMF has urged countries to preserve vital foreign reserves to deal with potentially worse outflows and turmoil in the future, amidst appreciation of the US dollar and depreciation of other major currencies, including the Indian rupee.

In a blog post by the First Deputy Managing Director of the IMF Gita Gopinath and the global lending body’s Chief Economist Pierre-Olivier Gourinchas, they said that in such a fragile environment, it is prudent to enhance resilience. Although emerging market central banks have stockpiled dollar reserves in recent years, reflecting lessons learned from earlier crises, these buffers are limited and should be used prudently.

“Countries must preserve vital foreign reserves to deal with potentially worse outflows and turmoil in the future. Those that are able should reinstate swap lines with advanced-economy central banks,” they said in a blog post.

Countries with sound economic policies in need of addressing moderate vulnerabilities should proactively avail themselves of the International Monetary Fund’s precautionary lines to meet future liquidity needs. 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, they wrote.

Notably the dollar is at its highest level since 2000, having appreciated 22 per cent against the yen, 13 per cent against the Euro and 6 per cent against emerging market currencies since the start of this year.

“Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the dollar in international trade and finance,” Gopinath and Gourinchas said in the blog post.