IMF proposes emergency liquidity cushion for Asian economies

SINGAPORE: The International Monetary Fund (IMF) is proposing an emergency liquidity facility to help Asian and other emerging economies deal with any financial crises.

Takatoshi Kato, the IMF's deputy managing director, told a seminar in Singapore on Monday that despite the buoyant global economy, precautions must be taken against future instability.

IMF officials said the world had faced a slew of financial crises over the past 15 years, including the Asian financial crisis in 1997-1998.

"A key challenge for most emerging market countries these days is to continue to reduce domestic vulnerabilities, so as to make themselves more resilient to large and volatile capital flows and avoid future crises," Kato told the two-day seminar on "crisis prevention".

Many emerging markets, especially in Asia, have accumulated large reserves to guard against vulnerabilities but those reserves come at high cost, he said.

The IMF has been examining a lower-cost solution that provides a "high-access" line of credit to emerging market countries with strong macro-economic policies but which remain vulnerable to shocks, Kato said.

"This instrument would provide a liquidity cushion for our members and would be designed to help them avoid crises and respond to them if and when they do occur," he told policymakers and capital market representatives.

Kato said possible elements of a new instrument are expected to be elaborated on at the IMF/World Bank annual meetings in Singapore this September.

The IMF in May forecast a brisk 7.0 percent economic growth across Asia for 2006 but warned significant risks, including sharply higher oil prices, remain.

Mark Allen, director of the IMF's policy development and review department, told a news conference at the end of the seminar Tuesday that the design of the facility was still being worked out.

It aims to complement other regional facilities including the Chiang Mai Initiative, a swap arrangement that allows East Asian central banks to tap into each other's foreign exchange reserves during a financial crisis.

"It would be something that would provide quite substantial access," Allen said. A country could be allowed to borrow up to 300 percent of its special drawing rights under the IMF, according to initial plans.

Also under discussion will be the conditions under which a country could draw from the facility.

During the Asian crisis, the IMF came under heavy criticism for the conditions it attached to funds lent to affected countries.

Leslie Lipschitz, director of the IMF Institute, the fund's research arm, said one of the lessons learned from the Asian crisis is to disburse funds quickly and with conditions focused on solving a specific problem.

"It should not be a conditionality that's much more broad and we should not be trying to solve every problem in the world," he said.

Kato said any conditions under the plan "would need to be tailored to maintaining macroeconomic stability and reducing vulnerabilities, rather than tackling a broad swath of structural reforms."