Statement by Dr. D. Subbarao, Alternate Governor at IMFC, Washington D.C. - ఆర్బిఐ - Reserve Bank of India
Statement by Dr. D. Subbarao, Alternate Governor at IMFC, Washington D.C.
Statement by Dr. D. Subbarao, Alternate Governor at IMFC, Washington D.C.* 1. The IMFC meets today in extraordinarily complex and challenging times. The financial crisis became full-blown in the second half of 2008, and has morphed through negative feedback to real activity, plunging the global economy into the deepest recession since World War II. What started off as a sub-prime crisis in the US housing mortgage sector has turned successively into a global banking crisis, global financial crisis and now a global economic crisis spreading from the littoral Atlantic regions across the world to Europe, Asia-Pacific, Latin America, and most unfortunately, to Africa. The crisis now threatens the recent gains in human livelihood and well-being. It also challenges many of our fundamental beliefs about economic resilience and financial market stability. 2. The most frequently asked question today is whether the worst is behind us. While there are incipient signs of business confidence and consumer spending trying to gain toehold, rising unemployment, high inventories and financial stress weigh heavily on overall demand conditions. In financial markets, although spreads have narrowed from September 2008 levels, they remain elevated while bank credit has declined and other markets remain impaired. The estimates of the expected write-downs by banks on global exposures are rising rapidly. For all financial institutions taken together, the expected write-downs over 2007-10 is estimated at $ 2.8 trillion on US-based assets and $ 1.4 trillion in Europe and Japan. The retrenchment from emerging markets is outpacing the overall de-leveraging that is underway, raising serious concerns about refinancing and even default risks. * Statement by Dr. D. Subbarao, Governor, Reserve Bank of India on behalf of Mr. Palaniappan Chidambaram, Member, IMFC (representing the Constituency consisting of Bangladesh,Bhutan,India and Sri Lanka), Leader of the Indian Delegation to the International Monetary and Financial Committee, Washington D.C., April 25, 2009. 3. Global economic activity is expected to contract by an annualised 6 percent in the first quarter of 2009 – the same as in the fourth quarter of 2008. Policy making around the world is in clearly uncharted territory. Governments and central banks across countries have responded to the crisis through big, aggressive and unconventional measures. Emboldened by falling inflation, monetary authorities in advanced countries have cut policy rates to unprecedented lows and when credit markets failed to thaw, central bank balance sheets have been expanded alongside funding and guarantees to financial intermediaries. Fiscal stimuli have been employed in conjunction, with large discretionary impulses boosting automatic stabilisers. Even with current levels of policy intensity the trough of the global recession is not seen until the end of 2009 and could get pushed out further if the policy responses fail to gain traction. 4. While the recession has intensified in the advanced economies, emerging economies have been dented by the collapse in external demand and commodity prices, the tightening constraints on access to external financing and the retrenchment of capital flows. Emerging and developing economies could experience capital outflows of the order of 1 percent of GDP in 2009 with growth expected to slump to 1.5 percent. Their prospects could indeed worsen if external financing constraints tighten further, trade and financial protectionism escalates and stress in domestic financial systems heightens and spreads. 5. Inflation is subsiding across the world with cooling demand and weakening commodity prices; however, this has not translated into gains in purchasing power in the face of high job losses and eroded profit margins for firms. In many emerging economies, this has resulted in overvaluation of currencies, partly reflecting the appreciation in the key reserve currencies. As international reserves have been drawn down to stabilise foreign exchange markets, the cushion against the global crisis has been eroded further. 6. Current estimates of write-downs on toxic assets suffered by banks globally are highly contingent on the hope that the global economic situation does not worsen further. Of the write-downs of $ 3 trillion only a third has been capitalised. Uncertainty about potential losses has kept spreads in financial markets elevated with the securities market still impaired and the credit market yet to thaw. In this context the key challenge is to impart credibility to a restructuring strategy comprising, loss recognition; realistic valuation; cleansing balance sheets; and recapitalisation and distress resolution. These issues need to be speedily addressed so that economic recovery takes root in the mature economies and capital flows to emerging and developing economies are revived. The Role and Response of the Fund 8. Core to the very existence of the IMF is its surveillance role - monitoring global, regional and national economies to assess whether countries’ policies are consistent not only with their own interest but also with the interest of the international community. The on-going crisis has highlighted the relevance and importance of strengthening and appropriately focusing Fund’s surveillance. I reiterate the need for greater focus on systemically important countries - the more systemically important the country the greater should be the rigour of surveillance. In parallel, the gap between multilateral and bilateral surveillance should be bridged. The IMF’s surveillance should not add to the obligations of developing countries. 9. While the Fund’s traditional emphasis has been on exchange rates, the crisis has pushed macro-financial sector issues onto centre-stage in IMF surveillance. A key aspect is the integration of macroeconomic and financial sector surveillance. The Financial Sector Assessment Programme (FSAP) should be made more focused and forward-looking so that it could be integrated more effectively into bilateral surveillance. National authorities are closer to the terrain realities of their financial sectors and self-assessment of regulatory frameworks based on internationally agreed methodologies should be a priority. As we have learnt, prescription of standards for the financial sector in itself cannot prevent crises. There is a need for on-going review of the standards by international bodies and greater national commitment for implementation. National authorities should also commit to assist each other in enhancing their capacity to strengthen regulatory frameworks and the IMF has a crucial role to play in this coordination. 12. These reforms could enable the Fund to re-emerge as the financier of choice not only for balance of payments needs and programmes designed for macroeconomic stability and structural adjustment, but for insurance in these uncertain times. Many member countries who were far removed from the epicentre and had no role or responsibility in the making of the crisis have nevertheless been adversely affected by it. The Fund would have to assist them and ensure that the fallout of the crisis in emerging markets and developing countries is contained. We expect that these facilities will be implemented in an appropriately flexible manner. The Fund should work closely with its membership to ensure that support is provided in a timely manner to prevent crises at an early stage. In this context, the initial response to the FCL is heartening. 13. We also welcome the initiative of the Fund to reform the financing instruments for low income countries (LICs) to better reflect their diverse needs and circumstances and heightened exposure to global volatility. Appropriate precautionary arrangements with higher access levels and ex-ante conditionality for strong performers amongst low income countries also warrant consideration. We call for an early completion of this exercise. The doubling of access limits for concessional lending, including the rapid access component of the Exogenous Shocks Facility (ESF), is a good interim measure. 14. We also support the initiatives that are underway to bridge the gaps in trade financing and restore normalcy to markets for trade finance flows and rollovers. We urge the IMF to collaborate with other international financial institutions (IFIs) and bilateral agencies to support a truly multilateral effort. The unimpeded flow of trade financing to low income countries for imports of essential items such as food, fertilizer, fuel and capital goods should also be ensured. 15. In response to the increasing demand for Fund financing to manage the crisis the London Summit of G20 Leaders rightly focused on measures to enhance the resources available with the Fund. These decisions should be speedily implemented. 16. The Fund is a quota based organisation and quotas have to be the primary mechanism through which the resource needs of the Fund are ultimately met. This calls for two tasks on the way forward. The first task is to ensure that the April 2008 package of quota and voice reform is ratified at the earliest. The second task is advancing the completion of the 14th General Review of Quotas from January 2013 to January 2011. This quota review should, at the minimum, aim at doubling the quota resources. A time-sliced work plan should be laid down, commencing at the earliest so that the quota review can be completed in the targeted year and a half time frame. 17. Since the process of increasing and allocating quotas could take some time, the Fund is working on securing alternate resources, including borrowing. We support these efforts but these should be seen as bridging mechanisms until the quota review is complete. 18. We appreciate the bilateral commitments made so for. We believe that the Fund’s borrowings should adhere to certain key principles, consistent with the London Summit decisions. First, the Fund’s borrowings should not be seen as a substitute for a substantial quota increase. Second, an appropriate mix should be maintained between the quota resources and borrowings of the Fund. Third, Fund borrowings should be based broadly on present quota shares, preferably within a multilateral framework like a modified NAB. Fourth, to provide greater flexibility for member countries to contribute to the Fund’s resources, various modalities should be explored, including note purchase mechanisms. Fifth, resources lent to the Fund should be treated as part of the country’s international reserves. 19. An early decision on these modalities would enable a quicker mobilisation of the targeted resources from a wider group of members. On our part, India is prepared to take on its share of responsibility to augment the Fund’s resources. We would be able to commit on the extent of participation once the modalities are evolved in keeping the principles enunciated. 20. We call for an early and front-loaded allocation of SDRs worth $250 billion which would amount to about three-quarters of the present quota size of the Fund. This would provide developing countries with additional liquidity of about $100 billion, of which $ 19 billion will go to low income countries. There is a need to widen and deepen the market for SDRs through an expansion of the voluntary agreements. An SDR allocation is a reversible measure and the allocation could be re-considered when the global economic situation shows significant improvement. 23. The initiative towards internal governance reform within the Fund is also relevant, although it should follow the quota and voice reform. We now have the Independent Evaluation Office (IEO) report on Corporate Governance, the report of the Trevor Manuel Committee, and the inputs from civil society. We expect that these inputs would be thoroughly analysed and discussed in the Executive Board and appropriate recommendations for action would be made so that the IMFC could become a more effective forum and the Fund is also strengthened. 24. We call for the introduction of an open, merit-based process, irrespective of nationality and geographical preferences, for the selection of the senior management of the Fund. The next Managing Director of the IMF should be selected in this manner. Developments in the Constituency |