Pakistan’s central bank governor has warned emerging markets are vulnerable to a tantrum-style shock if advanced economies do not act sooner to drive rising global inflation.
The remarks by Reza Baqir, a former senior IMF official, point to growing unrest among policymakers in developing economies that central bankers in rich countries are not doing enough to curb monetary stimulus from the pandemic era and rising prices.
It will hurt developing countries excessively if foreign investors eventually dump emerging and frontier market assets due to unexpected interest rate hikes in advanced economies, Baqir said in an interview with the Financial Times.
“If there is volatility in financial markets because there is a somewhat sudden realignment of expectations of interest rate changes in advanced economies, that volatility will affect emerging markets with high debt and moderate or low levels of reserves more than otherwise,” he said.
Baqir’s remarks came after the State Bank of Pakistan last week raised its own benchmark interest rate by 150 basis points to 8.75 percent as the country struggled with rising inflation, a depreciation of currency and a growing current account deficit.
“In Pakistan, we do not have much presence of foreign investors in our local foreign exchange markets,” he said. “But we can have an impact on credit, on our sovereign effects, if fund managers withdraw from emerging markets as an asset class.”
Central banks are under pressure to withdraw stimulus programs set at the height of the coronavirus pandemic, for concern that easy money is being raised sustained global inflation.
Policymakers and investors fear that lack of action, followed by sudden sharpening, could trigger a repeat of the 2013 tantrum when the U.S. Federal Reserve’s stimulus withdrawal signal triggered a sell-off in emerging markets.
Gita Gopinath, the IMF’s chief economist, warned that low- and middle-income countries already weakened by the pandemic can ‘not afford’ a similar shock.
The Fed’s Vice President Richard Clarida said on Friday that the bank was open to taper faster of its bond-buying stimulus program, which was introduced in the darkest days of the pandemic, due to the “upward risk” for inflation.
Baqir said: “Gradually, central banks around the world are moving towards a realization that there is a justifiable reason to be proactive about moderating monetary stimulus.”
He added: “For emerging markets with high debt, with reserve levels not where they want it to be, they do not have the luxury of waiting as long as those central banks issuing hard currencies.”
Some central banks in emerging markets were more active on inflation than in advanced economies. Brazil, for example, had interest rates last month with the most in almost 20 years – the sixth increase this year – due to concerns about inflation.
Pakistan was recently reclassified by the index provider MSCI from an “emerging” to a “border market”, which is considered less developed or smaller. Concerns about inflation have prompted the central bank to bring forward its monetary policy meeting.
Inflation rose to 9.2 percent in October, contributing to pressure on Prime Minister Imran Khan’s government. Imports also rose, with the current account deficit in the quarter ending in September rising to $ 3.4 billion from $ 1.9 billion in the entire previous fiscal year ending in July.
Investor’s unrest over a deadlock with the IMF, which suspended a $ 6 billion multi-year loan deal, contributed to the decline of the Pakistani rupee to an overall low of around Rs175 against the dollar this month.
The IMF announced on Monday that it had reached a “staff-level” agreement with Pakistan to resume payments, with the next tranche of $ 1 billion now awaiting approval from the IMF’s executive council.
Additional Reporting by Farhan Bokhari in Islamabad