World Bank warns emerging economies to 'fasten seatbelts'

Washington, Jun 10: The World Bank warned emerging economies around the world today of a rocky road ahead as the US moves toward tightening monetary policy and the dollar strengthens. But the development lender's chief economist also urged the US Federal Reserve to put off any rate hikes to next year, to give more breathing room to the slow-growing global economy.

In an update of the prospects for world growth, the World Bank trimmed its forecast for 2015 to 2.8 per cent, compared to the 3.0 per cent expansion predicted in January. That downgrade was due mainly to the US contraction in the first quarter, the slow turnarounds in Europe and Japan, and China's deceleration.

But, it has increased the challenges for emerging and poor economies, many hit by low commodity prices and capital outflows. These challenges could become tougher as the US economy rebounds and the Fed mulls raising interest rates, according to the World Bank report.

As that happens, there will be more volatility in global markets and weaker economies will suffer, the report said. Those economies will pay more to borrow and incoming investment will be harder to attract, effectively adding more downward pressure on currencies that have already fallen significantly against the dollar over the past year.

"We are advising nations, especially emerging economies to fasten seat belts" said Kaushik Basu, the World Bank economist. Basu took the view of his counterparts at the International Monetary Fund that the US and global economy would be better off if the Fed holds its benchmark federal funds rate at the zero level until early next year.

"If I were advising the US Fed, I would recommend that this happens next year instead of late this year," he said.

AFP