Asia's long-term outlook favorable: IMF committee

Asia's long-term outlook favorable: IMF committee

HONG KONG (AFP): The long-term outlook for Asian countries, swept by currency turmoil, is favorable due to their solid economic fundamentals, the IMF policymaking body said yesterday.

The Interim Committee said in a statement after a meeting here that "the impact of recent financial market turmoil on some of the countries affected is expected to result in a slowdown of growth in the near-term."

But their economic fundamentals remained solid "and their longer-term outlook is favorable, provided the required adjustment policies are sustained," said the statement.

The committee said the disturbances Asian financial markets had underscored the need to ensure the internal consistency of economic policy, "strengthen financial systems, and avoid excessive external deficit and reliance on short-term foreign borrowing."

The Asian experience illustrated that rising capital flows may require some adaptions to exchange rate mechanisms to changing circumstances, the statement said.

"Regardless of a country's exchange rate arrangement, the maintenance of appropriate macroeconomic and structural policies consistent with the arrangement remains crucial."

Upheaval in Southeast Asian financial markets was triggered by the de facto devaluation of the Thai baht on July 2 which has shaved off more than a third of the currency's value.

With its economy in deep crisis and its finance sector burdened by billions of dollars in bad debt, Thailand went cap in had to the IMF and secured a US$17.2-billion credit line to put its house in order.

Free Flow

The committee also backed moves that would enable the Fund to promote the free flow of capital.

It called on the IMF executive board to complete work on amending articles governing the Fund's operation.

"The committee invites the executive board to complete its work on a proposed amendment to the Fund's articles that would make the liberalization of capital movements one of the purposes of the Fund," the committee said in the statement.

But apparently acknowledging fears in developing countries, it added that "safeguards and transitional arrangements are necessary for the success of this major endeavor."

Developing nations have expressed concern that their fragile economies could be overwhelmed and disrupted by a flood of foreign capital and have insisted on technical assistance to prepare their financial sectors.

The committee said that "provided it is introduced in an orderly manner and backed both by adequate national policies and a solid multilateral system for surveillance and financial support, the liberalization of capital flows is an essential element of an efficient international monetary system in this age of globalization."

In a separate communique the Interim Committee warned that the United States must "guard against the re-emergence of inflation."

It said Japan was challenged to "achieve the objective of domestic demand-led growth with a supportive stance of monetary policy" and urged European countries saddled with high unemployment to make "more determined efforts to increase efficiency and adaptability in labor and product markets."