Asian Financial Crisis Propels IMF Activity to New Levels in 1997/98
- International Monetary Fund
- Published Date:
- September 1998
The Asian financial crisis that broke out in July 1997 in Thailand, and its subsequent global reverberations, dominated the IMF’s work in 1997/98, absorbing an unprecedented amount of time of the Executive Board, management, and staff. The crisis—whose global consequences continued after the end of the financial year—also prompted a record level of IMF lending in 1997/98, adding immediacy to the need to strengthen the financial resources of the institution to enable it to continue playing a fully effective role in the globalized world economy. The crisis also led to the creation of a new lending facility (the Supplemental Reserve Facility); stepped-up work on strengthening the conduct of IMF surveillance; and, more generally, led to the elaboration of a framework for strengthening the architecture of the international monetary system. Separately, the Executive Board undertook an extensive review—drawing on both internal and external assessments—of the IMF’s concessional lending facility for low-income countries (the Enhanced Structural Adjustment Facility) and continued its work aimed at ensuring the uninterrupted availability of financial resources for the ESAF. Together with the World Bank and other creditors, the IMF made important headway in implementing the initiative to reduce the external debt burden of a number of heavily indebted poor countries (the HIPC Initiative).
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The Asian financial crisis had a major impact on the scale of IMF financial assistance in 1997/98. During the year, member countries drew SDR 19.0 billion ($25.6 billion)1 from the IMF’s General Resources Account in the credit tranches—nearly four times the level of the previous year. The IMF approved nine new Stand-By Arrangements, with total commitments of SDR 27.3 billion, and four new Extended Arrangements, with total commitments of SDR 2.8 billion. The largest Stand-By Arrangements were for Korea (which also made use of the new Supplemental Reserve Facility), Indonesia, and Thailand; the largest Extended Arrangement was for Argentina. In addition, the IMF approved eight new ESAF Arrangements with commitments totaling SDR 1.7 billion. As of April 30, 1998, 14 Stand-By Arrangements, 13 Extended Arrangements, and 33 ESAF Arrangements were in effect with member countries. Net of repayments of previous drawings, total IMF credit outstanding rose to a record SDR 56 billion ($75.4 billion) as of April 30, 1998, compared with SDR 40.5 billion ($55.3 billion)2 a year earlier.
In December 1997, the Executive Board established the Supplemental Reserve Facility to provide additional financial assistance to members facing exceptional balance of payments difficulties attributable to a large short-term financing need resulting from a sudden and disruptive loss of market confidence.
As a result of the large new demands on the IMF’s resources in 1997/98, its net uncommitted usable resources (adjusted to meet the requirement to maintain adequate working balances of currencies) declined to SDR 22.6 billion at the end of April I99S from SDR 43.5 billion a year earlier. Over the same period, the IMF’s liquid liabilities rose sharply—reflecting an increase in members’ reserve tranche positions—and its liquidity ratio fell to 44.8 percent as of April 30, 1998, from 120.5 percent a year earlier.
In January 1998, the IMF’s Board of Governors adopted the Executive Board’s recommendation that total IMF quotas be increased by 45 percent (to SDR 212 billion from SDR 146 billion) under the Eleventh General Review of Quotas. The increase will take effect after members having not less than 85 percent of total quotas as of December 28, 1997, have consented to their quota increases.
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The IMF’s work on surveillance issues intensified following the outbreak and spread of the financial crisis to other Asian economies and the subsequent pressures on other emerging market economies. Surveillance was also intensified in recognition that promoting good governance, making budgets more transparent, improving data collection and disclosure, and strengthening financial sectors are increasingly important if countries are to establish and maintain private sector confidence and lay the groundwork for sustained growth.
In a preliminary review in March 1998 of the implications for IMF surveillance of the Asian financial crisis, the Executive Board drew five lessons:
- effective surveillance depends critically on the timely availability of accurate information;
- the focus of surveillance has to extend even further beyond short-term macroeconomic issues, yet remain appropriately selective;
- surveillance at the country level should pay more explicit attention to policy interdependence and the risks of contagion;
- the crucial role of credibility in restoring market confidence underscores the importance of transparency; and
- effective surveillance depends fundamentally on the willingness of members to take the IMF’s advice.
In July 1997, the Executive Board adopted guidelines clarifying the IMF’s role in governance issues. The guidelines call for a more comprehensive treatment, in the context of both bilateral consultations with members under Article IV and IMF-supported programs, of governance issues within the IMF’s purview and expertise; for evenhanded treatment of member countries; and for enhanced collaboration with other institutions—notably the World Bank—to make better use of complementary areas of expertise. The guidelines identify two areas in which the IMF can make a particular contribution: improving the management of public resources and supporting the development and maintenance of a transparent and stable regulatory environment conducive to efficient private sector activities.
Similarly, in an effort to enhance the accountability and credibility of members’ fiscal policies, the Interim Committee, at its April 1998 meeting, adopted a Code of Good Practices on Fiscal Transparency: Declaration on Principles.
In December 1997, the Executive Board reviewed members’ progress in providing data to the IMF for surveillance and saw scope for improvement. Recent experience also suggested the need to complement traditional “core” indicators with data on reserve-related liabilities, central bank derivative transactions, private sector external debt, and prudential banking system indicators.
To guide members in disseminating data to the public, the Executive Board endorsed a two-tier approach: the Special Data Dissemination Standard, established in March 1996 for countries that have or might seek access to international financial markets, and a less ambitious General Data Dissemination System, approved in December 1997, for all member countries.
The importance of strengthening members’ financial sectors was a recurring theme of Board discussions in 1997/98—including the importance of enhancing IMF and World Bank collaboration so that emerging financial sector problems are promptly identified, each institution takes the lead in its own areas of responsibility, and the IMF’s macroeconomic analysis and the Bank’s sectoral policy recommendations are fully coordinated.
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To enhance the transparency of its surveillance, the IMF in May 1997 introduced Press/Public Information Notices—following the conclusion of Article IV consultations. PINs summarize the Executive Board’s assessment of member countries’ economic policies and prospects. Of the 136 Article IV consultations in 1997/98, 77 resulted in the issuance of PINs. PINs appear on the IMF’s website, http://www.imf.org, and are published three times a year as IMF Economic Reviews.
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At the Annual Meetings in Hong Kong SAR in September 1997, the Interim Committee issued a Statement on the Liberalization of Capital Movements Under an Amendment of the IMF’s Articles of Agreement. The statement invited the Executive Board to complete its work on a proposed amendment to make the liberalization of capital movements one of the purposes of the IMF and extend, as needed, the IMF’s jurisdiction in this area. In 1997/98, the Board considered various aspects of such an amendment and, to help inform its work, sponsored a high-level seminar in March 1998 to elicit views from a wide range of private and official observers outside the IMF. At its April 1998 meeting, the Interim Committee noted the progress made thus far and the provisional agreement reached by the Executive Board on that part of the amendment dealing with the IMF’s purposes. The Committee asked the Board to pursue with determination its work on other aspects, including policy issues, with the aim of submitting an appropriate amendment of the Articles for the Committee’s consideration as soon as possible.
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Since the Mexican financial crisis of 1994–95, the IMF has taken a number of steps to enhance the functioning of the international monetary system. The heightened challenges posed by the ongoing globalization of financial markets—as exemplified by the Asian financial crisis—highlighted the need for further efforts in this direction. In its continuing discussions of additional initiatives to strengthen the architecture of the international monetary system, the Executive Board in 1997/98 identified the following imperatives:
- improving international and domestic financial systems;
- strengthening IMF surveillance further;
- promoting the wider availability and greater transparency of information regarding economic data and policies;
- reinforcing the central role of the IMF in crisis management; and
- introducing more effective procedures for involving the private sector in forestalling or resolving financial crises.
The Interim Committee, at its April 1998 meeting, endorsed these objectives and asked the Executive Board to report on its work in these areas at the Committee’s next meeting in October 1998.
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Since the mid-1980s, the IMF has provided concessional financing through the Enhanced Structural Adjustment Facility (ESAF) and its predecessor, the Structural Adjustment Facility (SAF), to respond to the balance of payments difficulties confronting many of the world’s poorest developing countries. As of April 30, 1998, SDR 6.4 billion ($8.6 billion) had been disbursed under 71 ESAF Arrangements to 48 countries, and SDR 1.8 billion ($2.4 billion) disbursed under SAF arrangements. For the continuation of the ESAF—and to finance the IMF’s contribution to the HIPC Initiative—the Executive Board took steps in 1997/98 to mobilize financing from bilateral contributions and from the IMF’s own resources. In April 1998, Uganda became the first country to reach its completion point under the HIPC Initiative. Uganda will receive from its creditors the equivalent of about S350 million in net present value terms, which is estimated to reduce its nominal debt service by nearly $650 million; the IMF’s assistance will reduce the present value of its claims on Uganda by about $70 million. Five additional countries (Bolivia, Burkina Faso, Côte d’Ivoire, Guyana, and Mozambique) also became eligible for assistance that would reduce their nominal debt service by about $5 billion.
Two in-depth evaluations of the ESAF were undertaken in 1997/98 (both of which have been published): an internal review by IMF staff of the record of 10 years of ESAF-supported programs, and an evaluation under the guidance of the Executive Board by outside experts—the first of its kind—of certain aspects of ESAF-supported programs. Both assessments confirmed the value of the ESAF in assisting low-income countries, while identifying areas for improvement and further consideration.
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Member countries’ demand for IMF technical assistance and training remained strong in 1997/98. Assistance provided by IMF staff and external advisors averaged about 300 person-years and accounted for about 17 percent of total IMF administrative expenses.
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In December 1997, the IMF opened a Regional Office for Asia and the Pacific in Tokyo.
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In December 1997, the Republic of Palau became the IMF’s 182nd member.