Spring Meetings

Prepared by the Secretary’s Department

Contributor: Inderjit Sian

The seminar explored the adequacy and need for further reforms of the international monetary system (IMS); the implication of the Renminbi (RMB) being included in the SDR basket; the cooperation between the IMF and Regional Financial Arrangements (e.g., Chiang Mai Initiative Multilateralization); and the appropriateness of the IMF’s toolkit in helping members better manage volatility and safeguard financial stability.

Key Points:

 - IMS adequacy: On the question of gaps within the IMS, Eichengreen noted that the current system has problems with adjustment, confidence and liquidity, pointing to weak adjustment of trade flows to exchange rate movements; asymmetric adjustments of capital flows; and the shortage of international liquidity, particularly, in safe assets. Warjiyo considered the gaps to be in the lack of coordination of monetary policies, inability to deal with volatile capital flows, and gaps in safety nets in EMs. Pointing to the fact that the IMS was designed 60 years ago, Sheng noted that the old IMS design does not address issues of growth and income inequalities that have surfaced recently, nor does it take account of the development of cyber-economies and climate change issues. He pointed out that financial regulations have imposed large fines and transactional costs to global flows, which have resulted in a much more complex IMS.

 - Spillovers: Subbarao pointed to there being no global safeguard mechanism to manage cross-border spillover effects. He noted that while the Fund has attempted to address these concerns through the integrated surveillance decision and spillover reports, he remained unconvinced that the Fund has any impact on brokering or mediating international cooperation where there are spillovers. As such, he felt there is a need for an international body to monitor and manage the impact of spillovers from domestic policies. In response, Eichengreen noted that central banks’ mandates are usually only concerned with domestic conditions and potential spillbacks, and was skeptical that any meaningful cooperation can be reached on monetary policy.  Subbarao pointed out that policymakers have acknowledged the international impact of domestic policies in different international fora, that said, there is no mechanism to deal with the impasse that central banks will only consider domestic conditions and raised the question whether there is a need for an international code of conduct.  Noting the significant impact of the Federal Reserve’s actions on the rest of the world, Sakakibara, felt that the Fed should be more careful in its actions.

 - Role of the RMB and SDR: On the inclusion of the RMB in the SDR basket, Sheng noted it as being both a symbolic and substantive event given China is now a large trading partner for a number of countries; has more trading partners than the US; and the RMB is used more than some other reserve currencies in trade payments. Sakakibara, however, felt that while the inclusion of the RMB was important, it is unlikely to have a substantive impact on capital flows. Eichengreen considered that China still needs to develop its domestic financial markets to make progress on the use of the RMB.  Subbarao noted it was not clear how the SDR could transform from limited use to being used in trade as a medium of exchange or a store of wealth; and opined it would not be any more useful than it has been in the last 60 years.  Eichengreen thought that SDR bonds should be issued if governments are serious about its use. Sheng considered that multilateral development banks could issue SDR bonds, so that exchange rate liabilities are spread out, while Sakakibara did not share the view that the SDR’s role should be enhanced. 

 - Global Financial Safety Net (GFSN): Eichengreen noted that while the headline figures suggest that the GFSN is adequate, the fact was that Asian economies do not draw on Fund facilities nor from regional financing arrangements. He also noted that it was not clear whether the Fed would continue to extend swap arrangements or even extend them to Asian economies. Sakakibara noted that Asian economies are reluctant to draw on IMF financing given the handling of the Asian crisis. He felt there is probably a need for a special fund with a focus on Asia; he thought that the Chiang Mai Initiative could probably take on that role. Warjiyo also felt there is a need for a IMF swap-like facility for well-functioning economies as the SBA and FCL are lending facilities which carry a stigma. Subbarao concurred that the stigma for accessing financing from the Fund remains, and countries are likely to exhaust all other options first before turning to the Fund for assistance.

Quotes:

“There are three important features of a well-functioning monetary system: adjustment, liquidity and confidence. There are gaps in the current system along all three dimensions” Barry Eichengreen, Professor, UC Berkeley

“The basic problem is that the IMF provides only short-term liquidity. What is lacking at the moment is a long-term view [to] solve…structural issues. […] We need to rethink the international financial architecture in that context.” Andrew Sheng, Distinguished Fellow, Fung Global Institute, Hong Kong

“To the extent that inclusion in the SDR is international recognition of your currency, strength of your economy, the openness of your economy, and inspires confidence of other countries, the Indian rupee would love to be included in the SDR.” Duvvuri Subbarao, Governor of Reserve Bank of India (2008-2013), Distinguished Visiting Faculty, National University of Singapore

“What we need with the GFSN is something more on normal liquidity…something like the central bank doing normal repos or swap lines” Perry Warjiyo, Deputy Governor, Bank Indonesia