The International Monetary Fund (IMF) warned emerging economies on Monday to brace themselves for potentially difficult times as the US Federal Reserve prepares to raise interest rates and global economic growth slows due to the Omicron variant of Covid-19.

The International Monetary Fund, which is set to release updated economic forecasts on January 25, stated that for the time being, global economic recovery from the pandemic will continue this year and next.

The IMF economists Stephan Danninger, Kenneth Kang, and Helene Poirson wrote in a blog post that "risks to growth remain elevated by the stubbornly resurgent pandemic."

Since mid-December, the highly contagious Omicron strain has spread like wildfire around the world, causing a record number of new Covid cases in the latest wave of the global health crisis.

Omicron, which appears to cause less severe disease than previous coronavirus strains, is causing countries to reinstitute health measures that impede economic growth.

"Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence," the economists said, as these countries are also confronting elevated inflation and substantially higher public debt. 

Higher interest rates

The Fed has indicated that it will raise key interest rates sooner and more aggressively than previously planned in order to combat rampant inflation in the United States, which is affecting US households and consumption – the engine of economic growth in the country.

Higher interest rates increase the cost of financing for some emerging economies with dollar-denominated debt.

These countries are already lagging in the global economic recovery, making them less able to absorb additional spending.

"While dollar borrowing costs remain low for many, concerns about domestic inflation and stable foreign funding led several emerging markets last year, including Brazil, Russia, and South Africa, to start raising interest rates," the IMF said.

According to the blog, faster Fed rate hikes could jolt financial markets and lead to tighter financial conditions on a global scale.

The risk is there will be a slowing of demand and trade in the US, as well as capital flight and a depreciation of the dollar in markets of emerging countries.

The IMF advised developing countries to "tailor their response based on their circumstances and vulnerabilities."

In addition, central banks that raise interest rates to combat inflation should engage in "clear and consistent communication" so that people understand the importance of price stability, according to the international lender.