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Crisis Prevention and the IMF, Remarks by Mr. Takatoshi Kato, Deputy Managing Director, IMF
July 10, 2006
1. Good morning, ladies and gentlemen. I would like to begin by thanking the Monetary Authority of Singapore for their invaluable help in organizing this event. In the run-up to the IMF/World Bank Annual Meetings in Singapore this September, gatherings like this enable us to deepen our dialogue on various issues of interest to the region. In particular, we value greatly the opportunity to listen to the views of distinguished policymakers and economists like yourselves from a broad cross-section of emerging market economies. My colleagues and I look forward to learning from your insights based on concrete experiences over the next two days.
2. The last few years have certainly seen a very strong global economy. Prudent domestic economic policies, as well as a benign external environment, have enabled emerging markets to achieve impressive economic records. These developments have also allowed countries to strengthen their external positions and reduce vulnerabilities; indeed, many of those with borrowing from the IMF have been able to reduce–or even completely eliminate–their obligations earlier than expected. Despite monetary tightening by many leading central banks in recent months, growth this year and next is expected to stay quite robust.
3. However, current calm seas should not lead us to lower our guard against possible storms. The recent modest increase in financial market turbulence is a reminder that capital markets are not immune to shifts in investor sentiments. A key challenge for most emerging market countries these days is to continue to reduce domestic vulnerabilities, so as to make themselves more resilient to large and volatile capital flows and avoid future crises. While globalization has brought immense benefits across the globe, integration of financial markets has also brought new risks.
4. As an institution, the IMF recognizes these developments, and understands the need to change and renew itself to face emerging challenges. The Medium-Term Strategy that was endorsed at our Spring Meetings in Washington is a step in this direction. While the strategy is a multi-faceted attempt to assist IMF's members take full advantage of globalization and face the challenges it presents, I would like to talk briefly about the topic of this seminar, crisis prevention in emerging markets, focusing especially on the role of the Fund.
5. One of the consequences of the favorable economic climate has been a rapid rise in official reserves. Many emerging markets, especially those in Asia, have accumulated large precautionary reserves. The rationale for such reserves is clear–to reduce vulnerabilities faced by a country in the context of large and volatile capital flows–but they also come at a high financial and opportunity cost. There has been increasing realization that there ought to be a way to attain this goal at a lower cost.
6. Is there any way the IMF as an institution can help in this process? The Fund realizes that sharp withdrawals of capital can have adverse effects on emerging markets, and understands that it needs to have the capacity to lend in substantial amounts, under appropriate safeguards, to help its members mitigate the risks associated with large and volatile capital flows. Several members–including those from emerging markets–have asked the Fund to create such a financial instrument that meets their need for predictability and flexibility.
7. In response to such requests, we have proposed to our Executive Board a new instrument that provides a high-access line of credit to emerging markets that have strong macroeconomic policies but which remain vulnerable to shocks. This instrument would provide a liquidity cushion for our members and would be designed to help them avoid crises and respond to them if and when they do occur.
8. To be more attractive to emerging market countries than previous approaches, this new instrument must provide for more automatic drawings for countries with sound economic policies and proven track records. It must also provide more financing up front. Any conditionality under it would need to be tailored to maintaining macroeconomic stability and reducing vulnerabilities, rather than tackling a broad swath of structural reforms.
9. Recent analytical work at the Fund on precautionary arrangements and crisis prevention, discussed at the Executive Board in May, has also underscored the relevance of such an arrangement. The analysis–some of which will be discussed at the seminar and which we expect to publish soon–suggests that beyond a country's own policies, there is a role for Fund financing in reducing the likelihood of a crisis. The analytical work also finds no evidence that the market stigmatizes members for adopting precautionary programs. Indeed, the evidence suggests that spreads might even have widened if the members had not requested precautionary arrangements, suggesting that Fund-supported programs can help mitigate the adverse effects of uncertainty on spreads.
10. Staff believe that there are several clear advantages to introducing such a high-access financing arrangement for emerging market countries. First, this arrangement would provide a more assured access as an added level of protection against crises. Second, the presence of such financing would also allow emerging market countries to hold less in the way of low-yielding precautionary reserves where this is the primary motivation for reserve accumulation.
11. Staff at IMF is currently working on a proposal for such an arrangement., further inviting comments from our member countries. Initial discussions in our Executive Board on this will begin over the next month or so, and we expect to elaborate on possible elements of a new instrument by our annual meetings right here in September. In that context, we are looking forward to a constructive dialogue over the next two days.
12. I invite you to an exchange of ideas on these issues. We have here current and former senior policymakers from emerging market countries, their insights, in some cases, forged in the flames of past crises. We also have representatives from the capital markets to provide their valuable perspectives. There are several members of the IMF staff who were involved in designing Fund-supported programs for emerging markets all over the world. And, most important, we have you, the practitioners, who can inform us all with your specific experiences. We look forward to that exchange. With that, let me once again welcome you all to the seminar and look forward to a constructive exchange of views.
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