In countries that use a centralized banking system, the central bank sets the interests rates. Nearly every country in the world uses a centralized banking system, except North Korea and some of the various island countries. Real interest rates are adjusted to eliminate the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the investor or lender. In other words, it is the nominal interest rate minus the expected or actual inflation. Raising interest rates are done to combat rising inflation, and this reduces demand and the rate of economic growth. However, higher interest rates can have various negative economic effects like increasing the cost of borrowing, mortgage interest payments, an increase in government debt payments and increase in incentives to save money. It can also heighten the value of the country's currency and reduce consumer's confidence in the economy.
10. The Democratic Republic of the Congo
The Democratic Republic of the Congo (DR Congo) has been able to drastically lower its inflation rate in recent years as a result of their now cautious macroeconomic policies and increased export revenue. This increase in revenue is due to the country's vast mineral resources, which has caused the country's gross domestic product (GDP) to expand. However, interest rates still remain high as a measure to control inflation in the country.
Kyrgyzstan has had to raise its real interest rates as part of its fiscal consolidation efforts to try and combat its rising debt. Kyrgyzstan has recovered mildly as Russia's economy starts stabilizing and gold prices start to recover. The country has had to recently introduce value-added tax (VAT) exemptions and the economic has been contracting. This comes off of the country's largest gold mine having declining output and disputes on sharing gold profits between the government and mining operators.
Angola has had to raise its real interest rates to trigger a decrease in commodity prices which has put the countries oil-dependent economy under major strain. Oil accounts for around 95% of the country's exports and 75% of its fiscal revenues, so the slump in oil price as a commodity has caused massive cuts in government spending and tax revenues. This has also caused the country to quickly rack up big foreign debts as its tries to cover financial needs, another reason why interest rates have risen.
In Tajikistan inflation continues its slow yet steady rise, partly because the country's exchange rate is linked with the depreciation of the Russian economy and its currency, the rouble. Also, money payments from Russia have declined. This change has caused solvency problems in Tajikistan's banking sector. To try and counter this rising inflation, Tajikistan has set its interest rates to be high. It has also caused the country to negotiate with the International Monetary Fund (IMF) to secure a loan to revive the economy and to talk about joining the Eurasian Economic Union (EEU).
Oman is again another country whose rise in real interest rates is due to the decline in oil prices. Since Oman is another country who relies on much of its revenue to come from the oil industry, the drop in prices has caused the government's revenue to plunge recently. The lack of income for the government has caused the country's budget deficit to double. This change has caused Oman's leaders to seriously think about diversifying its economy, so the country is not so dependent on oil.
In Azerbaijan, interest rates are set high as an attempt to try and curb inflation and restore confidence in the national currency following the collapse of crude oil prices. Since Azerbaijan is a major oil exporting country, its economic problems are due to the ongoing low prices of oil. This fact has caused a depreciation of the country's currency and diminished the country's public revenues. Such changes had the effect of the government reducing its spending, especially in infrastructure with had severely hurt the construction sector of the country. The depreciation in currency has also caused the country to receive international financial support as it tries to wait for oil prices to climb.
In Brazil, high inflation rates are associated with rising unemployment levels and major political turmoil that has hit the country in recent years. Interests rates are set high in Brazil to try and attempt to reign in those inflation rates. Some signs of improvement have been seen and recently consumer confidence, and business confidence has somewhat risen due to the improved trade balance.
Qatar has had to raise its real interest rates for the same reasons as Angola, Oman, and Azerbaijan. Qatar is getting a large deficit but has been introducing measures to increase revenue. Since the country is hosting the 2022 FIFA World Cup, it is also helping keep the country's economy somewhat buoyant due to all the spending commitments that come with hosting the event. The government has also tried protecting its citizens from the negative effects of the economy by laying off expatriates so that locals can have job security.
Kuwait is once again another country on this list who has had to raise its real interest rates due to the decline in oil prices. The weakness in the oil sector has not been helped by the recent closure of an oilfield due to a disagreement with Saudi Arabia. The government's revenues have plunged due to the loss of revenue from oil, and the country is facing its first budget deficit in almost twenty years.
Inflation has been on the rise in Madagascar because of cuts in fuel subsidies. This factor has caused interest rates to be set high as an attempt to combat the countries rising inflation. In recent years this had not been helped as Madagascar has had little improvement in governance, energy shortages, delayed foreign funding and a worsening business climate. The tourism and mining sectors in the country have also not grown as expected, which has not helped to offset the cuts in fuel subsidies.
Highest Real Interest Rates In The World By Country
|Rank||Country||Real Interest Rate in 2015|