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