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Continuing
Global Financial
Crisis
IMF Must Refocus
Action Policies
In April 2008, Finance
Minister P. Chidambaram
led an Indian delegation
to meetings with
the International
Monetary Fund (IMF)
and the World Bank
meetings in Washington.
In his address to
the International
Monetary and Financial
Committee, Chidambaram
talked about the
continuing financial
crisis in the United
States and Europe,
which has led to
a reversal of the
global growth rate
in 2008. The spillover
will certainly affect
the emerging markets,
he said. Chidambaram
further pointed
out that the rising
fuel prices are
adding to inflationary
pressures The sharp
fluctuations in
exchange rates are
threatening to hit
the stability of
emerging markets
and developing nations,
he said. In order
to tackle the global
financial crisis,
international agencies
such as the Fund,
should refocus its
action policies,
Chidambaram said.
Following is the
text of Chidambaram's
speech.
The Global Economy
and Financial Markets
We are meeting in
Washington at a
time when the global
economy is in the
midst of a financial
crisis. We had drawn
attention to the
risks in the financial
sector earlier,
but the intensity
of this crisis was
unanticipated and
is disturbing, particularly
since the problems
have emanated from
one of the most
advanced financial
markets in the world.
Moreover, it has
also affected other
advanced financial
markets, particularly
in Europe. The emerging
market economies
seemed to have been
less affected by
the initial impact
of the turbulence.
Since, the crisis
is still unfolding,
there are considerable
uncertainties as
to how the situation
would evolve. It
is therefore important
for multilateral
institutions including
the Fund to continuously
and closely assess
the situation, and
policy makers will
need to exercise
constant vigilance.
The immediate fallout
of the financial
crisis is reflected
in a reversal of
the robust trend
of global growth
during 2008. So
far, the spillover
to emerging markets
and developing countries
seems relatively
contained mainly
because of their
limited direct exposure
to subprime related
securities. Buoyant
domestic demand
has sustained the
growth momentum
in many emerging
markets and developing
countries.
Notwithstanding
the increase in
trade volume within
emerging markets,
the spillover effects
could soon be evident
as the US and Europe
continue to remain
the main destinations
for the final products
from emerging markets.
There exist a number
of imponderables
at the moment. If
apprehensions about
the US recession
turn out to be correct
and the growth in
euro area slows
more than currently
anticipated, domestic
demand alone may
prove inadequate
to sustain growth
in the emerging
markets.
We have already
seen increased volatility
in equity markets
in emerging economies.
While debt flows
to emerging markets
continue, borrowing
costs have gone
up. Simultaneously
some emerging markets
are experiencing
a liquidity spillover
with substantial
injection of liquidity
by central banks
in advanced economies.
This has exerted
upward pressure
on exchange rates
in these countries
and has also given
rise to excess domestic
liquidity that engenders
inflationary expectations.
Inflationary Pressures
Another worrisome
development is the
emergence of global
inflationary pressures.
While growth expectations
have dampened, inflationary
expectations have
not. The deflationary
impact of globalization
seems to have run
out with increasing
wage and inflationary
pressures. There
is growing apprehension
that financial stability
concerns are distracting
central banks in
advanced economies
from emerging inflation
risks. Strong inflationary
pressures are also
evident from the
supply side. Rising
food prices are
an increasing concern
not only in developing
countries but also
in developed economies.
This rise has been
exacerbated by the
increasing diversion
of foodgrains and
other crops towards
bio-fuels. Fuel
prices continue
to remain high and
volatile. The confluence
of these developments
has implications
for long term inflationary
expectations. Policy
makers and central
banks will, therefore,
have to carefully
balance growth and
financial stability
considerations with
the potential risks
to price stability.
Amidst the turmoil,
attention could
easily get diverted
from the continuing
global imbalances.
While the US currentaccount
deficit is projected
to moderate, current
account surpluses
are getting concentrated
in a few countries,
further accentuating
global imbalances.
Sharp Fluctuations
in Exchange Rates
Already we have
seen sharp movements
in exchange rates
of major currencies.
This has implications
for the orderly
management of exchange
rates by emerging
market and developing
countries which
could have adverse
consequences for
growth and stability.
The current global
scenario calls for
policy action both
by national authorities
and international
bodies like the
Fund. It is important
to restore the confidence
in US financial
markets so as not
to let the credit
squeeze deteriorate
into a credit crunch.
This calls for quick
recognition of losses,
recapitalization
of solvent institutions
and strengthening
of regulation and
supervision. We
have taken note
of the efforts of
the US authorities
to redress the situation.
Other national authorities
may also need to
review the adequacy
of their regulation
and supervision
of financial markets
and institutions,
focusing on ways
to mitigate possible
risks arising out
of operations of
entities that dominate
cross-border flows
and increase the
transparency in
their operations.
The Fund, entrusted
with the task of
maintaining global
financial stability,
should work closely
with other international
bodies to address
these challenges.
Quotas and Voice
A degree of credibility
in the IMF's governance
has been undoubtedly
restored in the
recent exercise
in realigning quotas
and votes. In Singapore,
we identified the
need to arrive at
a simple, transparent
quota formula that
adequately captures
the changing economic
weight of countries
in the world today.
I believe that the
current formula
is a definitive
step in that direction.
While we may still
have issues on how
“openness”
or “variability”
should be measured,
there is no gainsaying
the fact that the
current construction
is a marked improvement
over the previous
five formulae which
were opaque and
complex.
The second round
ad hoc increase
in quotas is also
a move in the right
direction. While
there can be arguments
both for and against
the adequacy of
the rebalancing,
it can be nobody's
case that the marginal
rebalancing achieved
is either perverse
or in the wrong
direction.
That said, I need
to reiterate that
India views the
current round of
quota and voice
reform as only the
first step in a
process that needs
to be carried forward.
We would welcome
a periodic realignment
of quota shares
as the global economy
gets re-structured
over time. We would
welcome fellow Governors
endorsing a programme
of reviews not linked
to concerns of liquidity
alone, as is the
current practice.
New Income Model
and Medium-term
Budget
We welcome the significant
forward movement
on implementing
the New Income Model
recommended by the
Crockett Committee,
particularly the
sale of the post-Second
Amendment Gold and
the creation of
an endowment. I
expect that this
proposal will be
endorsed by the
national authorities
across the membership
of the Fund expeditiously
and a significant
source of steady
income would be
available without
further delay.
In implementing
the expanded investment
authority, the Fund
should establish
sound policies and
transparent procedures
and avoid any perception
of a potential conflict
of interest. This
is important given
the Fund's unique
position in the
financial world
as a confidential
advisor to member
countries with considerable
access to privileged
information.
We welcome the resumption
of reimbursement
of administrative
expenditure related
to the Poverty Reduction
and Growth Facility
(PRGF). We hope
that the donor countries
will honour their
commitment and bear
the cost of administration.
We are apprehensive
that the failure
to secure adequate
support for the
investment of quota
resources will adversely
affect the sustainability
of the model. We
would urge member-countries
whose support is
crucial for implementing
this key element
to be open to a
review of this issue
in the next two
or three years.
The crisis in resources
was an opportunity
to refocus and reprioritize
the activities of
the Fund. I expect
that the substantial
expenditure reductions
that have been proposed
are in line with
the broad strategic
direction outlined
in the Managing
Director's statement
on the medium-term
budget and the Fund's
capacity to deliver
on its core mandate
and to tackle any
future crises is
not compromised.
The Fund should
also now be able
to shift its attention
away from internal
process issues to
addressing the issues
affecting the global
economy.
Surveillance
I welcome the emphasis
on multilateral
perspective in bilateral
surveillance and
the efforts at improving
the analysis of
linkages between
the real economy
and the financial
sector. Recent events
demonstrate that
in globalised financial
markets, systemic
risk to the financial
sector could emanate
from advanced financial
markets. Hence,
I suggest that the
Fund gives greater
focus to the financial
sector in its bilateral
surveillance of
advanced economies.
The Fund should
also develop a common
understanding of
operational issues
in implementing
the 2007 Surveillance
Decision in an even-handed
manner.
Crisis Prevention
Keeping in view
that the current
financial turmoil
has emanated from
advanced markets,
I welcome the extension
of vulnerability
exercise to include
advanced economies.
The Fund should
expedite the discussions
on the design of
a new crisis prevention
instrument that
could be made available
to emerging market
economies that seek
such support.
Role in Low Income
Countries
The clear recognition
that the Fund is
not a development
agency is overdue.
In working with
low income countries,
the Fund needs to
focus on its core
competencies and
recognize that it
does not have a
lead role and it
has to co-ordinate
its efforts with
other international
agencies that focus
on low income countries.
Developments in
the Constituency
Let me now turn
briefly to some
key aspects of developments
in my constituency.
In India, GDP growth
driven by domestic
demand remains robust
thus far, though
it moderated somewhat
to 8.4 percent in
the third quarter
of 2007-08. While
inflationary expectations
remain contained,
headline inflation
rose above the projected
tolerance level
of 5.0 percent recently
reflecting higher
food, fuel and other
commodity prices,
particularly metals.
The overall external
trade and current
account situation
is evolving as per
expectations. However,
strong capital inflows
and their volatility
continue to pose
significant challenges
to macroeconomic
management. Financial
market conditions
are generally stable,
though equity markets
have exhibited greater
volatility mirroring
global trends. Revenue
collection remains
buoyant and fiscal
marksmanship has
improved. Fiscal
targets set in the
fiscal responsibility
legislation are
being met. We remain
committed to economic
reforms and conduct
of macroeconomic
policy to enable
continuation of
the growth momentum
with stability.
The Bangladesh economy
performed well during
2006-07 with GDP
growth of over 6.0
percent, moderate
inflation and balance
of payments surplus.
The economy, however,
suffered a major
setback from natural
disasters of flood
and cyclone in the
later part of 2007.
Consequently, the
overall adverse
effect on GDP is
likely to be 0.7
percent in 2007-08
with direct budgetary
cost of relief in
the order of 0.6
percent of GDP.
The most significant
adverse impact would
be on the balance
of payments which
were already under
pressure from high
world oil and food
prices as well as
a slowdown in garment
exports. The authorities
appreciate the understanding
shown by the international
community and would
like to thank the
Fund for extending
Emergency Assistance
of about US$217.7
million. In implementing
the relief and recovery
program, the authorities
remain committed
to improving the
fiscal position,
allowing monetary
policy to maintain
reasonable price
stability, and making
progress towards
MDG targets.
Sri Lanka's economy
continues to maintain
its growth momentum,
and real GDP growth
is projected at
7.0 percent in 2008.
Manifesting the
benefits from high
economic growth,
the unemployment
rate in 2007 dropped
to a record low
of 6.0 per cent.
Fiscal deficit and
public debt to GDP
ratio continue to
improve and export
growth remains robust.
Overall surplus
of the balance of
payments and foreign
reserves improved
further. However,
inflationary pressures
have emanated from
high and rising
oil and commodity
prices. The tight
monetary policy
measures are expected
to bring inflation
down to near single
digit level by end
2008. A noteworthy
development in 2007
was the establishment
of the Inter Regulatory
Institutions Council
with the mandate
for monitoring and
co-coordinating
the work of multiple
regulators, specially
with regard to supervision
of financial conglomerates.
Further, Basel II
was implemented
in January 2008.
Bhutan has undergone
a historic political
transformation to
a parliamentary
democracy with elections
having been held
for the first time
in March 2008. This
wisely-managed transition
has been completely
peaceful and orderly.
With the coming
on-stream of Tala
hydro-electric project,
Bhutan's real GDP
growth during 2007
peaked at 18 per
cent. Growth is
now expected to
return to the recent
trend level. The
current account
of the balance of
payments is in surplus
and foreign exchange
reserves remain
comfortable. |
