Even if the possibility of a widespread financial crisis like the one that battered Asia almost 10 years ago seems remote at this stage in the region’s history, there is little doubt among economists, analysts and bankers that Asia and the other emerging markets of the world will never stop needing a lender of last resort. Savita Iyer reports.
Asia is in a position of incredible financial strength, with the region's countries endowed with ample reserves, enough and more to meet their individual and combined needs should there be another crisis. Clearly the region has little or no need for the crucial role that the International Monetary Fund has always played, that as lender of last resort.
The role for the IMF of checking and monitoring exchange rate policies is for the region's bankers and debt issuers the one that the Fund needs to re-establish, after accusations of neglecting this function in past years.
Surveillance has been one of the Fund’s main mandates since its inception, but many feel the multilateral agency has fallen short of taking the kind of action needed to maintain exchange rate stability. These same observers fear that the global economy could be heading for major imbalances soon if China continues to maintain its currency at an artificially low level.
The IMF's status as a multilateral agency permits it the voice to at least steer the Chinese authorities to allowing the value of the renminbi to rise in line with the broader market. This, in turn, should help apply a balance in the global system and safeguard it, and especially Asian countries, from potential collapse.
“The IMF has been falling down on its job of policing the exchange rate policies of members, in particular those policies that adversely affect the functioning of the global economy and financial system by frustrating global adjustment,” said Ted Truman, a senior fellow at the Washington, DC-based Institute for International Economics (IIE). “The Fund has been assigned this role in Article IV of its Articles of Agreement, and certainly, the Fund is better placed to play this role than any individual country or group of countries such as the G-7.”
The pressure on the Fund to monitor exchange rate systems comes from many quarters, not least the G-7. The Fund has so far reacted by recognising the need for greater action, and is working on measures to improve its effectiveness in ensuring exchange rate stability.
While most are expecting formal statements on the subject to be made at the Annual Meetings in Singapore, the bigger question is whether the IMF will be able to wield authority over countries such as China and other Asian economies, at a time when it no longer carries the carrot of being a major lender.
A different influence
During the financial crisis of the late 1990s, when Asian countries leant most heavily on monetary assistance from the Fund, the conditions set were at often at the heart of the controversial role it played in rebuilding the financial infrastructure.
With Asia's main economies now in profit and so little IMF money outstanding, the agency cannot hope to use its influence if it comes at them in such an authoritarian manner. The dialog is now on a more equal footing, and the discussions of the IMF's role can only succeed if countries themselves are willing to work with the Fund, said Jonathan Anderson, Asia-Pacific Chief Economist at UBS in Hong Kong.
Asian nations might not need IMF loans right now, but even if their reserve levels might be more than robust to tide them over should they get into trouble, there is never any certainty with respect to the longer-term stability of emerging market nations, said Anderson.
There is little doubt that Asian nations will need the IMF funding again sometime over the next decade, he said, and as such the relationship between the Fund and emerging markets nations in Asia should be an ongoing one, whereby issues like exchange rate stability will lead to the promotion of both economic and financial stability in the long-term.
“The key is really whether Asian countries sponsor the initiative themselves,” said Anderson. “If so, then [IMF] recommendations could have more relevance.”
Anderson believes that Asian countries would be open to IMF recommendations on what strategy to adopt with their currencies. “There is only a residual of anti-IMF sentiment in the 1998 programme countries, namely Indonesia, South Korea and to some extent Thailand,” he said. “In the rest, there is not much feeling one way or the other.”
Global markets
If Asian countries are in the position of strength that they are in today, a large part of the credit should be given to the IMF. After all, said one banker, the agency’s ultimate goal remains that of bringing individual countries up to a level at which they can function as part of a smooth-running global financial system. But as things stand today, even the newfound wealth of Asian nations could rapidly become a dream of the past, if they do not work with the IMF to redress any global imbalance created by unbalanced exchange rate systems.
“The IMF these days is viewed as a benign institution by many emerging markets nations,” said the banker. “Its control and influence has diminished as individual central banks have become more efficient in managing their reserves, but even so, it does have an advisory role to play, and it must monitor and try and redress imbalances in the global system. Countries need to accept this and work with it.”
Indeed, emerging markets countries must give the IMF due respect as a monitor and surveyor of the global system, because it remains the only organisation capable of fulfilling this function. The prospect of an Asian financial union similar to the European Union, is still a long way off, said John Cairns, head of research for Asia at IDEAglobal in Singapore. Even with developments such as the Chiang Mai initiative, which calls for Asian countries to swap their reserves in times of crisis, countries would not be able to manage without the IMF.
“The IMF plays a large role in promoting global financial stability,” said Cairns. “The support it has given the Asian system is very good.”
The middle line
Overall, there are no major differences between what the Fund wants and what Asian authorities want, said Cairns, even in the case of China, where leaders agree that a revalued currency will ultimately help China achieve both internal and external balance, as well as contribute to the adjustment in global imbalances. But while the Fund is the right party to try and get China to revalue its currency faster than it has been, and also to act if such a situation were to present itself in the future, it can only hope to have success through analysis, dialog and recommendation, since the issue of conditionality is no longer relevant.
The IMF does not hold the same power over Asian nations as it did one decade ago, and it can only hope to achieve its goal of policing exchange rate stability if it engages in ongoing discussions with central bankers. “The IMF can only have an advisory capacity now, and its influence is limited over countries that do not need a lender of last resort,” said the banker.
The IMF is not in a position to issue directives to countries on what to do with their currencies in today’s world, agrees the IIE’s Turner. The Fund therefore needs to interact with countries whose policies adversely affect the functioning of the global economy via “sound analysis and friendly persuasion that its policy recommendations are in the interests of the country as well as the global system,” he said.
Without the crutch of conditionality and a lending role, the IMF has still fostered medium to long-term growth and stability. “I have proposed that we supplement our annual consultations with individual members with multilateral consultations, in which issues will be taken up comprehensively and collectively with some members and, where relevant, with entities formed by groups of members,” said Rodrigo de Rato, IMF managing director, in a speech given in Canberra, Australia in June. “These multilateral consultations will be something new for the Fund and for our members, and they will be an important vehicle for analysis and consensus-building.”
The Fund does have, in rare cases, the authority to determine that an individual country’s exchange rate policies are in violation of its obligations as a member of the institution. But its authority derives from the strength of its analysis, said Turner, and the way in which it puts forward its recommendations.
In a multilateral world, analysis, discussions and open dialog are the way to go, said Turner. But even if the Fund no longer has the same kind of hold it had over emerging markets nations as a lender, those authorities that ignore the Fund’s signals do so at their own peril, said Turner, and the effect would be global.