IMF warned on economic vulnerability last year

IMF warned on economic vulnerability last year

WASHINGTON (Agencies): The International Monetary Fund had warned the government in Jakarta as early as July, 1996 about Indonesia's vulnerability to economic crisis, a report said here.

The IMF annual report released on Tuesday said it also had warned Indonesia about "important policy challenges" that it faced.

But the IMF also praised "the authorities' flexibility in adapting the policy mix to meet changing circumstances."

The report said the flexibility had been "an important component of policies to discourage short-term capital inflows."

But even Indonesia could not stop attacks on its currency during the regional crisis and it had to float the rupiah on Aug. 14.

IMF directors have insisted the Indonesian authorities should "address weaknesses in the banking sector, and in particular to act decisively to resolve the problem of insolvent banks and recover non-performing loans."

They said this was "critical to reduce the vulnerability of the economy to shocks."

But again it took time for the message to get through.

Last week, the Indonesian government announced a monetary stabilization and economic reform program. This includes putting the financial system in order and retrenchment in the public sector's investment spending.

The report showed IMF also had sounded an advanced alarm about Thailand and Malaysia's vulnerability to an economic crisis as early as June and August last year.

The report supported claims by IMF Managing Director Michel Camdessus that the Southeast Asian nations, particularly Thailand, were warned virtually a year before the Thai baht crisis erupted in July.

The alarm was raised during regular consultations on the countries' economies, and the annual report, which came just before the IMF and World Bank annual meetings in Hong Kong, also gave details on the cause of the Asian currency crisis.

"The recent increase in the current account deficit had increased Thailand's vulnerability to economic shocks and adverse shifts in market sentiment," IMF directors warned in July 1996.

The deficit at that time was close to eight percent of gross domestic product.

IMF First Deputy Managing Director Stanley Fischer told a news conference here marking Tuesday's release of the annual report that the fund, aware of its responsibilities to the governments who pay its bills, was unlikely to go public with this sort of warning.

"The early warning system worked fine. This was a case where the authorities were made aware quite early of the concerns of the fund," Fischer said, noting it was up to a country to decide whether to act on IMF recommendations.

Confidentiality

He added: "We have a lot of inside information which we get because a country trusts us. If we become the loud voice of a rating agency we will not get that information and our role as an adviser will change.

"We have to find a balance between keeping governments as informed as possible, but not revealing information that countries do not want to reveal, in order to enable us to continue operations," Fischer added.

Early IMF warnings about Thai problems were made public for the first time in the annual report, which said a document released in June 1996 highlighted problems caused by an inflexible currency policy and a wide current account gap.

"The level of short-term capital inflows and short-term debt were somewhat high," they diplomatically added.

The IMF urged "caution in the use of foreign savings" and "early action to reduce the current account deficit."

IMF board members added that measures taken to control "large and volatile capital inflows," were "not an effective substitute for more fundamental policies over the medium term."

"The stability of the baht had served the Thai economy well in the past, but directors recommended a greater degree of exchange rate flexibility to improve monetary autonomy and reduce the incentive for short-term capital inflows."

The report set out the scenario for the crisis.

Confidence was undermined by the sudden realization of the extent of trade and financial imbalances after 10 years of substantial growth. A liquidity crisis was caused by the brutal withdrawal of 'floating' capital.

In August 1996, the IMF board also foresaw Malaysia's problems, which Prime Minister Mahathir Mohamad has at time blamed on international speculators. He has since agreed to take tough action.

"The size of the deficit and the increased reliance on debt- creating flows gave rise to risks," IMF directors decided last year, according to the report.

They said the Malaysian authorities should "take early action to attenuate overheating and to place the (current account) deficit on a clear downward path."

However it took until this month for the Malaysian prime minister to postpone, in some cases indefinitely, mammoth infrastructure projects because of growing monetary panic that battered the ringgit.

Talks -- Page 10