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IMF says better policies, deeper markets aid emerging economies

IMF says better policies, deeper markets aid emerging economies

Better policies deeper markets aid emerging economies, according to a new IMF study published as part of its World Economic Outlook. The report shows that emerging markets are now more resilient to global shocks thanks to credible inflation targeting, stronger fiscal guardrails, flexible exchange rate regimes, and independent central banks.

Since the aftermath of the 2008 global financial crisis, these policy improvements have helped emerging economies grow more steadily and dampened inflation spikes during turbulent periods. The IMF quantifies that such reforms have added around 0.5 percentage point to growth and reduced inflation by about 0.6 percentage points during recent crises like the COVID-19 pandemic and the Russia-Ukraine war.

In addition to policy upgrades, deeper domestic capital markets have played a central role. Liquidity in local bond and equity markets has improved, enabling countries to absorb shocks more effectively. But the IMF warns that over-reliance on local banks to absorb domestic debt could backfire in stress periods if debt issuance is opaque or not broadly distributed among investors.

The study also highlights that not all emerging or frontier markets benefit equally. Countries like Mexico and South Africa are better positioned to attract investment, while smaller, riskier economies still struggle to deepen markets or maintain stable institutions. The Fund urges these frontier economies to transparently manage debt issuance and diversify their investor base.

Going forward, the IMF recommends continued policy vigilance: maintain strong institutions, improve debt management frameworks, upgrade legal and regulatory systems, and invest in deepening financial markets. Combined, these steps will help emerging economies withstand external shocks, ensure macroeconomic stability, and support sustainable development over the long term.

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