IMF warned on economic vulnerability last year<\/p>\n
WASHINGTON (Agencies): The International Monetary Fund had
\nwarned the government in Jakarta as early as July, 1996 about
\nIndonesia's vulnerability to economic crisis, a report said here.<\/p>\n
The IMF annual report released on Tuesday said it also had
\nwarned Indonesia about \"important policy challenges\" that it
\nfaced.<\/p>\n
But the IMF also praised \"the authorities' flexibility in
\nadapting the policy mix to meet changing circumstances.\"<\/p>\n
The report said the flexibility had been \"an important
\ncomponent of policies to discourage short-term capital inflows.\"<\/p>\n
But even Indonesia could not stop attacks on its currency
\nduring the regional crisis and it had to float the rupiah on Aug.
\n14.<\/p>\n
IMF directors have insisted the Indonesian authorities should
\n\"address weaknesses in the banking sector, and in particular to
\nact decisively to resolve the problem of insolvent banks and
\nrecover non-performing loans.\"<\/p>\n
They said this was \"critical to reduce the vulnerability of
\nthe economy to shocks.\"<\/p>\n
But again it took time for the message to get through.<\/p>\n
Last week, the Indonesian government announced a monetary
\nstabilization and economic reform program. This includes putting
\nthe financial system in order and retrenchment in the public
\nsector's investment spending.<\/p>\n
The report showed IMF also had sounded an advanced alarm about
\nThailand and Malaysia's vulnerability to an economic crisis as
\nearly as June and August last year.<\/p>\n
The report supported claims by IMF Managing Director Michel
\nCamdessus that the Southeast Asian nations, particularly
\nThailand, were warned virtually a year before the Thai baht
\ncrisis erupted in July.<\/p>\n
The alarm was raised during regular consultations on the
\ncountries' economies, and the annual report, which came just
\nbefore the IMF and World Bank annual meetings in Hong Kong, also
\ngave details on the cause of the Asian currency crisis.<\/p>\n
\"The recent increase in the current account deficit had
\nincreased Thailand's vulnerability to economic shocks and adverse
\nshifts in market sentiment,\" IMF directors warned in July 1996.<\/p>\n
The deficit at that time was close to eight percent of gross
\ndomestic product.<\/p>\n
IMF First Deputy Managing Director Stanley Fischer told a news
\nconference here marking Tuesday's release of the annual report
\nthat the fund, aware of its responsibilities to the governments
\nwho pay its bills, was unlikely to go public with this sort of
\nwarning.<\/p>\n
\"The early warning system worked fine. This was a case where
\nthe authorities were made aware quite early of the concerns of
\nthe fund,\" Fischer said, noting it was up to a country to decide
\nwhether to act on IMF recommendations.<\/p>\n
Confidentiality<\/p>\n
He added: \"We have a lot of inside information which we get
\nbecause a country trusts us. If we become the loud voice of a
\nrating agency we will not get that information and our role as an
\nadviser will change.<\/p>\n
\"We have to find a balance between keeping governments as
\ninformed as possible, but not revealing information that
\ncountries do not want to reveal, in order to enable us to
\ncontinue operations,\" Fischer added.<\/p>\n
Early IMF warnings about Thai problems were made public for
\nthe first time in the annual report, which said a document
\nreleased in June 1996 highlighted problems caused by an
\ninflexible currency policy and a wide current account gap.<\/p>\n
\"The level of short-term capital inflows and short-term debt
\nwere somewhat high,\" they diplomatically added.<\/p>\n
The IMF urged \"caution in the use of foreign savings\" and
\n\"early action to reduce the current account deficit.\"<\/p>\n
IMF board members added that measures taken to control \"large
\nand volatile capital inflows,\" were \"not an effective substitute
\nfor more fundamental policies over the medium term.\"<\/p>\n
\"The stability of the baht had served the Thai economy well in
\nthe past, but directors recommended a greater degree of exchange
\nrate flexibility to improve monetary autonomy and reduce the
\nincentive for short-term capital inflows.\"<\/p>\n
The report set out the scenario for the crisis.<\/p>\n
Confidence was undermined by the sudden realization of the
\nextent of trade and financial imbalances after 10 years of
\nsubstantial growth. A liquidity crisis was caused by the brutal
\nwithdrawal of 'floating' capital.<\/p>\n
In August 1996, the IMF board also foresaw Malaysia's
\nproblems, which Prime Minister Mahathir Mohamad has at time
\nblamed on international speculators. He has since agreed to take
\ntough action.<\/p>\n
\"The size of the deficit and the increased reliance on debt-
\ncreating flows gave rise to risks,\" IMF directors decided last
\nyear, according to the report.<\/p>\n
They said the Malaysian authorities should \"take early action
\nto attenuate overheating and to place the (current account)
\ndeficit on a clear downward path.\"<\/p>\n
However it took until this month for the Malaysian prime
\nminister to postpone, in some cases indefinitely, mammoth
\ninfrastructure projects because of growing monetary panic that
\nbattered the ringgit.<\/p>\n
Talks -- Page 10<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/imf-warned-on-economic-vulnerability-last-year-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }