Weakening currencies in emerging markets to hamper recovery from coronavirus: IMF

Weakening currencies in emerging markets to hamper recovery from coronavirus: IMF

Decreasing exports, combined with supply and demand disruptions are expected to weaken the local currencies of emerging markets and developing economies (EMDEs) in the short term, said an International Monetary Fund (IMF) report released on Tuesday.

Amid the ongoing COVID-19 crisis, EMDEs have faced an unprecedented shock of collapsing global demand and commodity prices, capital outflows, major supply chain disruptions and a generalised drop in global trade, which drove their currencies to witness a sharp weakeness, according to the IMF.

Building on its dataset, the IMF demonstrated that the short-term gains from weaker currencies may be limited in EMDEs, where firms price their international sales and finance themselves in a few foreign currencies, notably the US dollar, so-called Dominant Currency Pricing and Dominant Currency Financing.

In this regard, the IMF's analysis found that the share of US dollar trade invoicing across EMDEs far exceeds their share of trade with the US, given their growing role in the global economy, increasingly relevant for the international monetary system.

"Exporting firms that use the US dollar or euros for both pricing and financing are naturally hedged as liabilities and revenues move in tandem when exchange rates fluctuate. This means foreign currency financing is