Nearly ten years on from the Asian financial crisis and the IMF has yet to find a workable solution to the need for a precautionary financing arrangement that helps middle-income countries prevent financial crisis. The IMF’s inability to articulate a plan to mitigate global economic risks will force countries to continue searching for ways to self-insure.
The Reserve Augmentation Line (RAL), targeted at helping middle-income countries avoid a sudden financial crisis, was proposed to replace the failed Contingent Credit Line (CCL) (see Update 13), which operated for four years without ever being used. However it may be heading towards the same mistake by failing to guarantee sufficiently large levels of financing on an automatic basis without conditionality.
The staff paper on the RAL proposed a facility that required pre-qualification and semi-annual reviews, and which granted automatic access to funds equivalent to 300 per cent of a country’s quota at interest rates 3 to 5 per cent above the basic rate of charge. It also proposed a global cap on use of the facility at about $75 billion “to ensure that sufficient resources remain available to be provided under” other Fund lending programmes. The proposal was generated after a summer of seminars and dialogue with member states, including a high-level two-day workshop in Singapore in July that was attended by the Fund’s deputy managing director Takatoshi Kato, and a discussion with policy makers in Korea in August.
For fighting contagion, the envisaged sums are too small.
Contention has arisen over the need for requirements for qualification and reviews. Only countries with favourable macroeconomic balances will be accepted into the RAL, but they are the least likely to need it. The proposal might also put the Fund in a difficult position of sparking a crisis by rejecting an applicant or refusing completion of a review. Fund management sought to assuage concerns that applications for the RAL would send a negative signal: “The analytical work finds no evidence that the market stigmatises members for adopting precautionary programmes”.
The executive board discussed the proposal, a key plank of the managing director’s strategic review, in August , but insiders indicated that the major shareholders in Europe and North America disagreed on the fundamental design questions. On the crucial issues of conditionality and automatic access, the EDs failed to support the proposal, saying only that it was “a good starting point for further consideration of a liquidity instrument.” As a follow-up two further seminars were held in December, one in Chile and one in Italy, in order to try to generate some consensus on the thorny questions.
Heribert Dieter, a researcher at the think tank German Institute for International and Security Affairs also questioned whether the RAL could actually handle a major financial crisis, saying it “The RAL proposal does not address one of the most pressing questions for the Fund: Is it able to provide last-resort lending in the event of a financial crisis? I don’t think it does: The RAL does not provide sufficient liquidity for that. For fighting contagion and/or speculative attacks, the envisaged sums are too small.”
Whether any replacement for the CCL will be approved is still up in the air. The board will consider a new proposal in advance of the spring meeting of the IMF’s board of governors, but the US has traditionally opposed automatic access financing. However, Dieter continued: “Whether the US or the EU will find the RAL proposal acceptable is no longer the important question. For the future of the Fund, the issue these days is whether Asia and Latin America endorse new concepts. Without support from these two regions, any new instrument will be as useless as the CCL has been.”
Managing global risk
Economists are concerned about a potential crisis from a disorderly unwinding of global imbalances. The IMF mooted a role for itself in tackling such risks, and in May 2006 trumpeted its new multilateral consultations of ‘systemically important’ member states (See Update 51). Many observers saw this as the US using the IMF to force the Chinese to revalue their exchange rates.
However, the June launch of the first consultations produced no concrete outcome after months of talks. In January, IMF management stated that the consultations had now moved to discussing policy options but refused to state whether they would endorse specific policy recommendations. The change in Fund priorities may reflect a cooling of US interest, as US Treasury’s public affairs officer Brookly Mclaughlin now states: “The multilateral consultations are not intended to produce new policy commitments or joint coordinated policy responses.”
With the US averse to making any commitments, and the Chinese resisting revaluations, it is not surprising that the Fund is seeking to downplay the importance of the consultations. Without any IMF-fostered accord on exchange revaluation amongst big economies or an effective contingency financing arrangement, countries will continue to look for self-protection and regional mechanisms to mitigate risk.
Capital controls in vogue again
On top of the accumulation of reserves across Asia (see Update 53), Thai economic planners sought more control over their macroeconomic situation through the adoption of controls on capital inflows in late December. As opposed to 1997 when the Thai currency, the baht, was facing speculation for depreciation, in 2006 there was significant upward pressure on the baht. To control the appreciation economic policymakers in Bangkok announced ‘Chilean style’ controls on inflows of capital.
This ran foul of market sentiment, as the Thai stock market crashed on the day following the announcement, forcing the government to backtrack and remove the controls on foreign investment in the stock market. Though analysts disparaged the Thai government’s inability to stay the course, the IMF seemed unconcerned, even welcoming the indecisiveness: “the measures were too strong and far-reaching, and the partial roll-back of the new controls today is welcome.” Given that an IMF statement admitted “Thailand’s underlying economic fundamentals remain solid, and we believe that growth will remain resilient in the face of the financial market turbulence this week”, it is unclear what motivated the Fund to praise the government’s indecisiveness.
Despite the admission by Fund’s chief economist Ken Rogoff that capital controls can be useful (see Update 39), managing director Rodrigo de Rato indicated support for using interest rates and sterilisation to manage the currency appreciation: “We believe that the worries of the government regarding the strength of the currency should be addressed not so much through controls but through more normal monetary options that are in the hands of the government and the central bank”.
The IMF also recently chided Namibia over a proposal to introduce capital controls to prevent capital flight to South African financial centres. Summarising the board discussion on the topic: “To strengthen foreign reserves and help keep domestic savings in the country in the long term, Directors recommended developing domestic investment opportunities and market-based strategies – such as asset securitisation and open market purchases of foreign exchange”.
In fact Chanida Chanyapate and Jacques-chai Chomthongdi of Focus on the Global South, a Bangkok-based NGO, indicated that the Thai central bank plainly wanted controls on stock investors to encourage speculators to exit the market. They continued: “One thing is clear from this debacle. With the expansion of capital markets, such as the bond and futures markets, after the 1997 crisis as part of the financial sector reform prescribed by the IMF and the World Bank, fund managers have increased their influence on the Thai economy to the point where what fund managers want trumps what the [Bank of Thailand] wants.”