IMF defends Asia deals, WB denies rift

IMF defends Asia deals, WB denies rift

WASHINGTON (Reuters): The International Monetary Fund defended its reform recipes for Asia on Thursday while the World Bank, whose officials have questioned IMF-mandated high interest rates, said it never intended to criticize the fund.

"There has never been any doubt on our part that the International Monetary Fund has carried out this most difficult task (of restoring Asian growth) with strength and judgment," World Bank President James Wolfensohn said in a statement.

The World Bank's chief economist Joseph Stiglitz on Wednesday lashed out at the high interest rates prescribed by the fund for Asia's troubled economies, describing them as pain for pain's sake.

"One should not have excessively contractionary monetary and fiscal policies," Stiglitz told reporters.

"I'm very much of the view that pain for its own sake is not a virtue, and that pain (of very high interest rates) doesn't restore confidence in the economy."

His comments were echoed by international financier George Soros, who said on Thursday that the IMF was "part of the problem" in the world financial system.

"The present mode of functioning of the International Monetary Fund is far from satisfactory. They are, in fact, part of the problem," Soros told a meeting launching his latest book. He also criticized the fund's interest rate policies.

IMF programs "impose punitively high interest rates in order to stabilize the currency and reestablish the ability of the debtor country to service its debts," said Soros.

The World Bank report said tough initial policy prescriptions had failed to lift Asia's crashing currencies or restore investor confidence. It warned of a substantial risk of global recession and said some countries might need to impose limited controls on capital flows.

The IMF has been urging countries to keep interest rates high as part of a string of multibillion dollar rescue deals for Asia's one-time tiger economies last year.

Fund officials said high rates were essential to defend fragile currencies, and they urged countries to rein in spending to curb current account deficits and make money available for much-needed financial sector reforms.

But they have amended their policies considerably since the start of the crisis and now allow countries to run budget deficits and spend their way out of recession.

Shailendra Anjaria, director of external affairs at the IMF, said IMF reform policies were appropriate, and he told the World Bank to stick to its mandate of development and structural reforms.

"What is clear is that the World Bank has a mandate in the structural area and in the development area, and the IMF has its mandate in the area of macroeconomic policies. I think if we respect each other's mandates, we can work well together," he said.

Anjaria said the countries hit by the turbulence had no alternatives to high interest rates.

"The idea that the policy mix was fundamentally incorrect is just wrong," he said. "We would say there is no alternative but to maintain high interest rates for a short period in the aftermath of an exchange rate crisis which comes in wake of the exhaustion of international reserves."

The IMF and the World Bank were both set up in 1944 as part of efforts to rebuild the war-torn world economic system.

Their roles are separate -- the fund looks at economic policies and the bank at structural issues like bank reform -- but Asia's rapidly unfolding crisis increased the overlap as the IMF took on increased responsibility for bank sector reform and other structural change.