Time to create a new financial order: MR

By Uditha Jayasinghe

President Rajapaksa yesterday made a rallying call to all South Asian Central Banks and multilateral agencies to create a new global financial order that would prevent the recurring of a worldwide recession while providing equitable opportunities to emerging markets for development.

Delivering the inaugural address at the 49th South East Asian Central Bank Governors’ (SEACEN) Conference under the theme ‘Post-Global Financial Crisis: Issues and Challenges for Central Banks of Emerging Markets’ he emphasised that the concept of “too big to fail” applies to economies as well and larger countries such as the US must take decisions considering the implications for developing countries as well.

He insisted that the new financial order that is emerging fuelled by Asian growth phenomenon must dispense with double standards and give focus to developing nations. Recalling how the IMF and Central Banks were founded after the end of World War II he stated that in the context of their duty the service of these organisations were commendable. Yet he urged them to evolve to face the new challenges ahead.

“The blatant application of double standards; the obvious policy contradictions and inconsistencies; the stubbornness of large economies to face realities; the unfortunate attempts to politicise multi-lateral financial organisations; and the lethargy in handling urgently needed financial bailouts,” were all cited as reasons for the global financial crisis by him. He insisted that these oversights have to be addressed urgently for the sake of billions of people.  

“In order to be truly successful, we have to solve the economic problems of our people, who are our ultimate stakeholders. The people of our respective nations have entrusted their Governments with authority and resources to provide them with a safe economic environment where they can achieve their economic hopes and aspirations. When a country establishes a Central Bank, the people transfer a significant part of that duty and responsibility to you as well. Accordingly, as Governors, you are also responsible to the people of your respective countries.”

The president called on the monetary organisation leaders to pledge that they will do all they can to avert another financial crisis in the world.

IMF warns of challenges ahead

IMF Deputy Managing Director Naoyuki Shinohara delivering the keynote address at the inauguration of the 46th SEACEN (South East Asian Central Bank) Governors' Conference noted that going forward; greater exchange rate flexibility can offer an important buffer against risk. He pointed out that large capital inflows may undermine efforts to tighten the monetary stance. With global interest rates likely to remain low, countries with tightly managed exchange rates in effect import easy global monetary conditions, unless they tighten capital controls. 

“In Sri Lanka, for instance, instead of boosting domestic demand, a key priority will be restoring the country’s share of world exports, which has declined steadily over the past decade. Two important avenues to achieve this are increased regional integration — that is, reorienting exports from the US and Europe toward the fast-growing Asian economies — and enhancing export diversification and sophistication, to take advantage of new opportunities. The current strong recovery of the Sri Lankan economy makes the country well-placed to meet these challenges,” he said.  

Sri Lanka is one country that has faced a surge in capital flows, the IMF official emphasised adding that while the Central Bank has managed to create stability, intervention has led to excess rupee liquidity and attendant risks of a credit boom and high inflation. “The Central Bank, like many of its counterparts in the region, is grappling with how to manage these issues.”  

He continued with, “so far, most countries have relied on a combination of currency appreciation and reserve accumulation to accommodate capital inflows. Evidence suggests that reserve accumulation has absorbed a large fraction of the pressures from a return of capital flows, especially in the case of Asia but this masks significant variation of the response between countries. On the one hand, India has abstained from intervention since end-2009, allowing the exchange rate to take the brunt of the adjustment; on the other hand, intervention was rapid in other countries, not to mention Sri Lanka.”

However, he acknowledged that compared with other regions, Asian policymakers have been particularly effective at controlling money growth in response to reserve accumulation, as evidenced by the relatively low sensitivity of money supply growth to the build-up in Central Bank foreign assets.”