Countries with strong linkages to the U.S. more sensitive to global shocks – Report
HARARE – Greater financial integration can complicate the management of domestic financial conditions, the analytical chapters of the Global Financial Stability Report released by the International Monetary Fund today says.
The report provides insights on the influence countries retain over their domestic financial conditions in a globally integrated financial system. Financial conditions refer to the ease of obtaining finance and measuring them can be valuable for appraising the impact of policy and economic prospects.
“Policymakers may need to take external factors into greater consideration when pursuing domestic objectives… global financial integration may make it harder for domestic policymakers to control financial conditions at home – for example, it may hamper transmission of monetary policy”, says the report.
Zimbabwe, for instance, which uses nine foreign currencies, and without an autonomous currency of its own, is typically dependent on the financial developments of many countries, which poses various risks. The report said that the rapid speed at which foreign shocks affect domestic financial conditions may also make it difficult to react in a timely and effective manner.
It added that country characteristics are likely to influence how sensitive domestic financial conditions are to global financial shocks. “Key characteristics considered include financial linkages with the United States, financial openness and development, institutional quality and the exchange rate regime”.
“The expectation is that financial conditions of countries that are more financially open and that feature stronger financial linkages with the United States should be more sensitive to global financial conditions. Conversely, countries with strong institutional and policy frameworks as well as deep financial markets should display less sensitivity”, says the report
Zimbabwe uses the greenback for both transacting and trading purposes and has already been incurring the challenge of uncompetitive exports due to the strengthening US dollar against the currencies of trading partners such as South Africa.
The report recommends that governments can promote domestic financial deepening to enhance resilience to global financial shocks.
“In particular, developing a local investor base that encompasses both bank and non-bank financial intermediaries, as well as fostering greater equity and bond market depth and liquidity, can help dampen the impact of external financial shocks”
“Macro-prudential measures can be used to limit risks from a further build-up of vulnerabilities that increase domestic financial conditions’ sensitivity to external financial shocks”, the report says.