The Impact of Rising Global Interest Rates on the Economies of Developing Countries

Rising global interest rates have a significant impact on the economies of developing countries. When central banks in developed countries, such as the Federal Reserve in the United States, increase interest rates, global capital flows can experience a shift. Investors tend to seek higher returns, which in turn can lead to a shift in investment from developing to developed countries. One of the direct effects of rising interest rates is an increase in borrowing costs. Developing countries often rely on foreign loans to finance infrastructure projects and economic development. Rising global interest rates make this financing more expensive, making it difficult for many countries to meet their needs. This could result in a slowdown in economic growth, as delayed projects can limit job creation and income. An increase in interest rates also has the potential to worsen the currency exchange rates of developing countries. When investors withdraw their capital, pressure on the local currency may increase, causing depreciation. This depreciation increases the cost of imports, which often leads to inflation. For example, countries that import raw materials for their industry will experience rising costs, increasing the price of goods and affecting people’s purchasing power. Furthermore, rising inflation can exacerbate economic uncertainty. When inflation affects purchasing power, people tend to reduce spending. This impacts domestic demand, which is the main driver of economic growth in many developing countries. With reduced demand, many companies could face falling profits and even workforce reductions. Higher interest rates could also make it difficult for developing countries to maintain growth-supportive monetary policies. In an effort to control inflation, central banks in developing countries may be forced to raise their own interest rates. This creates a vicious circle where further growth is sacrificed to satisfy price stability. Not only that, sector competitiveness in developing countries could be threatened. Rising global interest rates often worsen their access to capital. Companies that are unable to obtain affordable financing face difficulties in investing in technology, innovation, and expansion. As a result, this may harm their competitiveness in the global market. Impacting foreign direct investment (FDI), an increase in global interest rates could result in a reduction in investment flows to developing countries. In the midst of rising interest rates, investors tend to prefer to place their investments in countries that offer higher returns and lower risks. This reduces the potential for private sector growth and infrastructure development in developing countries. Rising global interest rates could also exacerbate social inequality. Low-income people are more vulnerable to increases in prices of basic goods and difficulties in obtaining loans. This creates social and political tensions, which could risk stabilizing economic conditions. Overall, the impact of rising global interest rates on developing country economies is hard to ignore. This increase could slow growth, increase inflation, and increase economic uncertainty. Developing countries need to develop mitigation strategies to deal with the implementation of higher global interest rates, while maintaining domestic economic stability to ensure sustainable growth in the future.