A Currency Crisis Could Brew in EM if Fed Chairman Powell Raises Rates

Posted on 11/25/2021

Turkey may not be the only country facing a currency crisis. The Turkish lira crashed to a record low of 13.44 to the U.S. dollar on November 23, 2021. Investors are worried about the aggressive monetary policies of Turkey’s central bank. The lira was trading at 12.7272 to the U.S. dollar at 4 p.m. local time on November 23, 2021, and was down around 15% on the day at one point. The Turkish lira continues to depreciate rapidly.

The U.S. Federal Reserve is lined up to begin tapering the pace of its asset purchases this month. Prospects of higher interest rates in the U.S. could pose a problem for emerging market countries that have debt in U.S. dollars. Many emerging markets have tried avoiding this mistake by borrowing more in their local currencies. Countries such as Egypt, Romania, Turkey, and Sri Lanka could be at most risk due to an exchange rate crisis risk. For example, the main opposition party in Sri Lanka – United People’s Force – demonstrated in Colombo on November 23, 2021 to protest against deteriorating economic conditions that have resulted in low foreign reserves, as well as high food and energy prices. Sri Lanka has faced shrinking foreign exchange reserves, which according to data released earlier this week, have fallen to the lowest since 2009 in October.

According to IMF data, the world economy experienced an estimated 3.3% decline in 2020, compared to just 0.08% during the world recession of 2009. While the COVID-19 pandemic reduced wealthy countries’ per capita incomes by 2.8% a year, developing countries (excluding China) suffered a 6.3% per capita income loss annually, pushing 97 million more people into extreme poverty.

Keywords: Federal Reserve System.

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