Bandid Nijathaworn: Some thoughts on IMF reform on crisis prevention and
crisis resolution
Speech by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, presented to the G-20
Workshop on Reform of Bretton Woods Institutions, Tokyo, 28 February 2006.
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Thank you Chairman,
First, let me thank the Ministry of Finance of Japan for inviting me to this workshop on the reform of
the Bretton Woods Institutions. This workshop is another reminder that the work on IMF reform is still
ongoing.
Next year will be a full ten years since the height of the Asian financial crisis. Over the past decade,
many important ideas on the reform of the IMF have been advanced, but still there is no consensus on
how the reform should move forward.
I see today's workshop as another opportunity to contribute to this ongoing debate. And whatever the
outcome may be, the reform will certainly mark a critical turning point for the global economy, as the
Bretton Woods Institutions attempt to adapt their roles and responsibilities to the forces of
globalization.
Today, I have been asked to speak on IMF crisis prevention and crisis resolution.
Given the limitation of time, and the fact that the recommendations on these two issues have been
many and are well-known, I thought the best way for me to add value to today's discussion is to share
with you our thoughts on the subject, as well as to make three specific points.
The first point is how the Fund can improve its surveillance by focusing on how best to reduce the
likelihood of crises in emerging markets, in particular, how to help emerging markets better cope with
the challenge of the next crisis.
The second is our view that the Fund's surveillance and its works on crisis resolution should recognize
the usefulness of national and regional self-insurance efforts that are being pursued by a growing
number of countries.
And the third is our suggestion that the Fund's works on crisis prevention and crisis resolution can
benefit from a clear separation of these two functions in terms of duties, responsibilities, and
decisionmaking, so as to achieve greater effectiveness and accountability.
To begin, the consensus seems to be that the Fund has not been doing a good-enough job on crisis
prevention and crisis resolution. This is evidenced by a string of financial crises in emerging markets
that had happened, which does not reflect well on the Fund's surveillance mechanism. In addition,
dissatisfactions were expressed in the Fund's perceived lack of consistency and coherence in its
approach to crisis resolution, in the shortcomings of its program design and conditionality, and most
importantly, in the way political pressure from the major economies were allowed to influence the
program content and decisions.
In the Thai case, our own experience with IMF involvement was not dissimilar. Dissatisfactions were
recorded in the program design that exacerbated the liquidity problem into a near-systemic problem, in
the overly tight stabilization policies based on too optimistic assumptions that led to serious economic
dislocations, and also in the Fund's approach to financial sector restructuring and privatization which
were flawed and alleged to benefit foreign interest.
Of course, different problems of different economies require different solutions, and it may not be fair
to compare one program directly with another. But, for the most part, criticism of the Fund on crisis
prevention and crisis resolution centers mainly on four issues: (1) the quality and the effectiveness of
its surveillance mechanism in preventing the crisis; (2) the independence of its assessments and
decisions on program design; (3) the conditionality that it imposes; and (4) the lack of a clear and
predictable process in crisis resolution.
As I noted earlier, many good solutions have been put forward. The Fund has also responded
positively to the criticisms by implementing many new and important initiatives. Importantly, its work on
crisis-prevention has become more pro-active. The Article IV process has been strengthened with
increased focus on debt sustainability. The Fund's works on standards and codes, FSAP, and the
inclusion of collective action clauses in bond contracts, are all important innovations and provide the
global economy with new benchmarks.
So far, I would say that improvements in Fund surveillance, its policy advice, as well as the
transparency it encourages have led to sound policies, better institutions, and overall greater flexibility
in emerging markets. A big pay-off was evident last year when the improved economic resilience
enabled emerging markets to cope better with the impact of the high oil price. But, definitely, more can
be done.
And the first point I want to make is that IMF surveillance would be most useful for emerging markets
if it strengthens its focus on helping members to better prepare for coping with the challenge of the
next crisis.
My view is that, with the improvements in economic fundamentals and policies that we are now seeing
within emerging markets, there is now less likelihood than before that the next crisis, if it were to occur,
will originate from imbalances within emerging market economies.
On the contrary, imbalances now seem to be more of a challenge for the major economies with the
financing now becoming a major component of the global capital flows. An unwinding of the
imbalances could lead to economic slowdown and sudden changes in the financial conditions of the
major economies, which, as the past episode of capital account crises shows, can create difficulties for
emerging markets in terms of growth implications, abrupt reversals of capital flows and sudden stops.
It is in this context that Fund surveillance could help members to be more informed of the implications
of such risks, and to assist members, through Fund policy advice, on how best to prepare.
In this respect, I have a view that the Fund could do more in three areas.
First, it should step up its surveillance of the major economies by providing frank and independent
assessments. Also, the briefings, papers, and analyses that the Fund prepares on G7 economies and
meetings could be shared more widely with other Fund members.
Second, in the area of financial markets surveillance, a few things could also be done. The Fund could
produce and circulate monthly report on global financial markets to members focusing on the key
financial flows to keep members informed of what the Fund sees as the current trends and risks in
financial markets. Important in this context is the monitoring of activities or position-takings of large
institutional players and hedge funds. Also, it would be useful for members if the Fund could develop
its own in-house view of a benchmark risk scenario which then can be used, or shared with members,
in stress-testing the vulnerabilities of economies to capital flow reversals.
And third, in addition to the debt sustainability framework, the central focus of the Fund's surveillance
in emerging markets should be the analyses of capital flows and capital account sustainability. In fact,
a definitive framework for analyzing capital account sustainability would be most helpful for emerging
market members in their own assessments of their vulnerabilities to capital flow reversals. I think this
capital account sustainability framework is important, given the Fund's mandate on the balance of
payments and the recent episode of capital account crises in emerging markets.
The second point I want to raise is that the Fund should look more positively at the progressing
efforts by members to increase their own immunity against the risks of financial crisis and contagion by
engaging in various self-insurance activities.
These activities include (1) strengthening domestic policies, institutions, and data transparency which
have led to greater flexibilities in dealing with shocks, (2) improving external positions by running
current account surpluses, reducing external debt, and holding larger international reserves, (3) being
more careful with capital account liberalization with greater willingness to use prudential and capital
account measures to check excesses and to deter speculative short-term capital flows; and (4)
engaging in regional cooperative efforts, such as the Chiang Mai Initiative in East Asia, to undertake
collective regional surveillance and set up liquidity facilities that can be drawn in the case of
emergency.
To me, these developments reflect the genuine desire by regional policymakers to work together
towards a common goal of reducing the likelihood of the next crisis. The Fund can look more positively
at these developments as they contribute to raising global capabilities in preventing and dealing with
financial crises. In particular, regional arrangements, such as the Chiang Mai Initiative, if correctly
designed and disciplined, can be an important supplement to the existing IMF facilities.
For those of you not familiar with East Asia, the Chiang Mai Initiative, or CMI, was set up in the
aftermath of the Asian financial crisis in the year 2000 as a regional arrangement of the ten ASEAN
member countries plus Japan, China and Korea. The Initiative comprises a process of economic and
financial surveillance at governmental level and a voluntary financing arrangement in terms of a
network of bilateral swaps, which now amounts to US $ 55.5 billion. Twenty percent of the agreed
bilateral swaps can be drawn to meet emergency liquidity needs unrelated to an IMF program. The
CMI is now under review, with a view of making it more useful and more relevant to the needs of the
region in the longer-term.
I see regional arrangements, such as CMI, as an important regional financial architecture that
complements and supports the Fund's works on crisis prevention and resolution.
First, in addition to IMF surveillance, the surveillance undertaken under CMI provides a new dimension
of peer review that draws on regional knowledge and expertise in the surveillance process.
Second, the drawdown of the bilateral swaps under the first tranche provides an important liquidity
support facility. This is a feature which is now missing in all of the Fund's current lending facilities, and
Third, since the remaining drawdown of the swaps is linked to a formal package of assistance that
requires exceptional financing, Governments in the region, in a way, have pre-committed substantial
amount of fund to be made available to support crisis resolution. In this regard, the IMF will only stand
to benefit because part of the financing requirement will have already been shouldered by
Governments in the region, thereby equipping the Fund with greater financial leverage to deal with
other issues elsewhere.
Let me now turn to other aspects of self-protection against future crises. On self protection through
reserves accumulation, I think it is only proper that differentiation is made of the reasons for reserve
buildup on a country-by-country basis. This is to say that one needs to assess whether the buildup is
excessive with respect to that country's overall level of exposure to the global financial markets, to its
structure of exports and imports, and to the country's overall level of external liabilities.
On self-protection through the use of capital account measures, I welcome the fact that the Fund's
thinking on this subject has become more liberal. On occasions, it is appropriate to use capital account
measures for crisis prevention. And on capital account liberalization, I agree with my ASEAN
colleagues that it would be more useful for the Fund to concentrate on managing the process of
capital account liberalization of its members instead of discussing whether to make capital account
liberalization an explicit purpose or mandate of the Fund.
Finally, the third point I want to make today is that I see strong merits in separating lending and
surveillance. At present, crisis resolution is done as an extension of surveillance by the area
departments using the approach they see fit. Separating these two functions in terms of duties,
responsibilities, and decision-making would provide clear accountability within the IMF on role and
responsibilities over these two issues.
Moreover, since crisis prevention and crisis resolution require different sets of skills and expertise,
separating the two would allow the Fund to pool resources and the special skills on a Fund-wide basis,
thereby strengthening the overall institution's capabilities to deal with crisis resolution.
Finally, with the work on crisis resolution becoming more centralized, the Fund's program design could
be more uniformly structured to reflect a common set of guiding principles in relation to absolute limits
of access to IMF financing, the use of standstills on debt repayment, the role of the Fund in debt
restructuring, and the extent of the involvement of the private sector.
We have given some thoughts to this issue, and to execute the idea, one solution would be for the
Fund to set up a new department that will handle only crisis cases involving exceptional financings.
This new department will take over the responsibilities of crisis management and resolution from the
area departments and will have the responsibility for designing the rescue package and acting as
coordinator between creditor Governments contributing to the rescue package, other creditors in the
private sector, IMF management, and the country concerned, to push through the rescue program. In
this model, a separate Resolution Board will also be set up to approve, monitor, and supervise the
implementation of the rescue package, of which membership will come directly from representatives of
Governments contributing to the rescue package, key IMF members, and IMF management. The IMF
Executive Board will vote to provide IMF's contributions to the package but would have no other
involvement. This is to separate the decisions on surveillance and lending.
This simple model of separation illustrates three benefits that can add to the current process. First,
there will be clearer accountability within the Fund in terms of duties, responsibilities, and
decisionmaking for its works on surveillance and crisis resolution. Second, there are benefits of resource
pooling which will allow the Fund to handle crisis cases with all available resources and with the
program design structured under a common set of guiding principles. And the third, the program
design will have greater likelihood to be adopted since it has utilized the best expertise available and
has the highest degree of perceived legitimacy, since the governance of the Resolution Board better
reflects the interest of all stakeholders, be they borrowers, creditors and private markets.
The challenge to IMF reform on crisis prevention and crisis resolution has many dimensions, and
recommendations that have been made to address this challenge are wide-ranging. Given the limited
time that we have, I hope my contributions today have been useful.
In closing, I would like to stress that the IMF has responded well to the needs for reform with new
important initiatives and measures that are now showing positive results. I am confident that, going
forward, the IMF will be able to come up with a credible reform agenda that will lead to greater
improvements in our capabilities to maintain the stable economic and financial environment which is
essential for the well-being of the global economy.
Thank you.