IMF admits misgauging Asian crisis

By Reiner S.

SINGAPORE (JP): The International Monetary Fund, although admitting it underestimated the severity of the Asian economic crisis, is standing behind its much-criticized high interest rate and banking closure prescriptions as the right remedies.

"The program projections badly misgauged the severity of the downturn," the IMF said in a 147-page internal assessment of its bailout programs for Indonesia, Thailand and South Korea. It is the first time it has released such a comprehensive review.

The fund acknowledged its projections were more optimistic than the market consensus, reflecting pressures to agree with those of national authorities and the effort "to avoid damaging confidence through gloomy forecasts".

In the document released on Tuesday, the IMF contended the crisis and its severe ramifications took everybody by surprise "... as very few foresaw the severity of the downturn -- neither the authorities, the private sector nor academic observers".

The Asian economic crisis started in the middle of 1997, set off by the sharp devaluation of the Thai baht and the contagion effect on the currencies of South Korea and Indonesia.

The countries successively free-floated their embattled currencies and quickly sought help from the IMF. In exchange for its provision of multibillion dollar bailout schemes, it recommended a tight monetary policy, stringent fiscal policy and structural and banking reforms.

Critics charge the IMF's requirement of the swift implementation of tough measures, particularly the tight monetary policy and bank closures, exacerbated the recessions in the three countries.

In Indonesia, the rupiah plunged to more than Rp 16,000 to the U.S. dollar, a drop of more than 80 percent from the precrisis level, amid massive private capital outflow and hyperinflation.

The IMF maintained the tight monetary policy was designed to avoid an "inflation-depreciation spiral", but cited initial hesitancy of governments to follow through with programs.

"During 1997, the authorities in all three program countries showed some reluctance to tighten monetary policies, both before and after exchange rate pegs were abandoned. This initial vacillation made the task of stabilizing more difficult later on."

IMF policy development and review department director Jack Boorman said on Tuesday that ultimately the programs proved effective.

"That works, those currencies were stabilized, they've now appreciated substantially, and in the wake of that appreciation, interest rates have been able to come back down rather dramatically," Boorman said in a teleconference with reporters in Singapore and Hong Kong.

"The conclusion perhaps we intend to draw from that experience is that the stabilization and reversal of the currency depreciation could have occurred earlier and perhaps with less pain if interest rates have been used more aggressively. We have no apologies for the monetary policy advice that we have provided them."

A major point of issue in Indonesia's case was the fund's recommendation to close down 16 insolvent banks in November 1997.

Critics say it was overly severe, undermining confidence in the banking sector and leading to massive runs on several major institutions. The government was forced to announce a deposit guarantee scheme to prevent the banking sector's collapse.

"This is the most difficult aspect of this experience that we have had. It is the most difficult question to address," Boorman said.

"But it was no secret that there were some severe weaknesses in the Indonesian banking system ... A signal has to be given that the authorities will come to grip with these problems.

In addressing the same issue, the IMF report said: "Delays in closures may only have made their costs larger. One factor accelerating bank runs was the initial treatment of deposit guarantees, which were very limited in amount, inadequately publicized and covered only those institutions already closed down. In contrast, the experience with financial restructuring in Korea and Thailand was much more favorable."

The report, covering the period through October 1998, said there were signs the recession was bottoming out and financial market conditions stabilizing.

It noted particular factors affecting Indonesia's recovery.

"Korea and Thailand have, on the whole, been rather successful in implementing the programs as agreed, whereas in Indonesia, in part due to the severity of the underlying political crisis, the program has repeatedly veered off course and required substantial modification," it said.

"In Korea and Thailand, the challenge is to persevere with their adjustment, and get through the difficult phase where measures have begun to bite but their credibility has not yet been established, into the phase where they can start to reap the benefits."

It noted Indonesia's difficult road ahead but was buoyed by recent developments.

"Indonesia, in contrast, still faces a more difficult task, due to the need to repair repeated policy slippages and arrest a slide into an increasingly difficult social situation; its progress in this direction in the past few months has, however, been encouraging."

It cautioned that both domestic and external factors could still jeopardize the programs in the three countries..

The regional market shivered last week on developments in Brazil with the devaluation of the real. The country is seeking more help from the IMF, which announced it would provide the same high interest rates and stringent fiscal policy prescriptions.