Pakistan’s central bank governor has warned that emerging markets are vulnerable to a taper tantrum-style shock if advanced economies do not act sooner to manage rising global inflation.
The comments by Reza Baqir, a former senior IMF official, signal growing unease among developing-economy policymakers that central bankers in rich countries are not doing enough to rein in pandemic-era monetary stimulus and combat rising prices.
This will disproportionately hurt developing countries if foreign investors end up dumping emerging and frontier-market assets owing to unexpected interest-rate rises in advanced economies, Baqir said in an interview with the Financial Times.
“If there’s volatility in financial markets because there is a somewhat sudden realignment of expectations of interest-rate changes in advanced economies, that volatility will impact emerging markets with high debt and moderate or low levels of reserves more than otherwise,” he said.
Baqir’s comments came after the State Bank of Pakistan last week raised its own benchmark interest rate by 150 basis points, to 8.75 per cent, as the country battled rising inflation, a depreciating currency and a widening current account deficit.
“In Pakistan, we don’t have much presence of foreign investors in our local currency markets,” he said. “But we could have an impact on the credit, on our sovereign bonds, if fund managers pull out of emerging markets as an asset class.”
Central banks are under pressure to wind back stimulus programmes introduced at the height of the coronavirus pandemic, on concerns that easy money was fuelling sustained global inflation.
Policymakers and investors fear that inaction, followed by abrupt tightening, could spark a repeat of the 2013 taper tantrum when the US Federal Reserve’s signalling of stimulus withdrawal sparked an emerging market sell-off.
Gita Gopinath, the IMF’s chief economist, has warned that low and middle-income countries already weakened by the pandemic “cannot afford” a similar shock.
On Friday the Fed’s vice-chair Richard Clarida said the bank was open to faster tapering of its bond-buying stimulus programme, introduced in the darkest days of the pandemic, owing to the “upside risk” to inflation.
Baqir said: “Gradually, central banks around the world are moving towards a realisation 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 would like them to be, they don’t have the luxury of waiting as much as those central banks that issue hard currencies have.”
Some emerging market central banks have been more active on inflation than in advanced economies. Brazil, for example, last month raised interest rates by the most in almost 20 years — the sixth increase this year — owing to inflation concerns.
Pakistan was recently reclassified by index provider MSCI from an “emerging” to a “frontier” market, considered less developed or smaller. Concern about inflation prompted the central bank to bring forward its monetary policy meeting.
Inflation rose to 9.2 per cent in October, adding to pressure on prime minister Imran Khan’s government. Imports have also surged, with the current account deficit in the quarter that ended in September rising to $3.4bn, compared with $1.9bn in the entire previous financial year ending in July.
Investor unease about a deadlock with the IMF, which suspended a multiyear $6bn loan agreement, contributed to the fall of the Pakistani rupee to an all-time low of about Rs175 to the dollar this month.
The IMF announced on Monday that it had reached a “staff-level” agreement with Pakistan to resume the payouts, with the next $1bn tranche now pending approval from the IMF’s executive board.
Additional reporting by Farhan Bokhari in Islamabad