WSJ. IMF Says Resources Are Low As Needs Rise in Global Crisis
September 13, 1998
Dow Jones Newswires
WASHINGTON -- The International Monetary Fund's resources are
running perilously low just when global needs for financial assistance from
the agency are rising, the first deputy managing director of the Fund said.
"The situation in the global economy unfortunately and very regrettably is
becoming very difficult," Stanley Fischer said upon the release of the
organization's annual report for fiscal 1998. "Fund resources are limited"
but demands on the Fund's resources continue, he said.
The IMF faced "major challenges" including the Asian financial crisis that
led to a record level of funding activity during the fiscal year ended April
30, Mr. Fischer said.
In particular, the IMF cobbled together assistance packages for Thailand,
South Korea and Indonesia, after they were hit by sharp depreciations of
their currencies and crippling contractions in economic growth that left
them unable to meet debt obligations.
Members drew $25.6 billion from the IMF's general resources account
during fiscal 1998, nearly four times the amount in the previous year, the
report said.
In a period running from late April through August, the Fund disbursed
$11 billion, Mr. Fischer said. It committed $43 billion in fiscal 1998 and
an additional $10 billion since the end of that year, he added.
"Those are very large sums relative to the lending base of the IMF," he
said.
Total IMF credit outstanding rose to a record $75.4 billion at the end of
fiscal 1998, net of repayments of previous drawings, it said. That amount
was significantly higher than the $55.3 billion outstanding at the end of the
previous year, according to the report.
"As a result of the large new demands on the IMF's resources in
1997/98," its stock of uncommitted usable resources fell to $30.1 billion at
the end of fiscal 1998 from $58.9 billion at the end of the previous year, it
said.
That $30.1 billion has now dropped to about $28 billion, Mr. Fischer said.
Russian Bailout
Resources that can still be committed fell further since April mainly from a
bailout for Russia. Since the Fund prepared rescues for key Asian
countries last fiscal year, it has also had to deal with financial chaos in
Russia, for which it negotiated a $22.6 billion emergency loan package in
July. While only a portion of that money has so far actually been
disbursed, roughly half that amount was pledged by the IMF, with other
multilateral and bilateral sources making up the remainder.
Meanwhile, the Fund's liquidity -- the ratio of net uncommitted usable
resources to liquid liabilities -- fell to 45% in fiscal year 1998, and
dropped further to 36% currently, from 121% in the previous year, Mr.
Fischer said. While on average that ratio has been about 70%, a
"reasonable" floor for it would be 25%-30%, in order that countries that
have contributed resources into the Fund, which acts as a kind of global
credit union, may withdraw them if they please, he said.
That ratio translates into necessary reserves of about $19 billion-$23
billion, which means that the Fund now has only about $5 billion to $9
billion available from the $28 billion in its general coffers for lending in case
a country needs an emergency assistance package, he said.
The depletion of the Fund's general capital, its main source of credit for
countries in need of temporary help to bring their finances back in line at
times of crisis, is especially problematic, because IMF officials, economists
and investors alike fear the turmoil that began in Asia and spread to Russia
may infect more countries.
"The Fund's role in Latin America is also at issue," Mr. Fischer reiterated
upon the release of the annual report.
Even as IMF officials praise Latin American countries for their pursuit of
economic strategies involving privatization and strict fiscal discipline
condoned by the IMF, and try to convince international market
participants that the Latin American countries can bypass the storm in
other emerging markets, they worry.
Latin American Worries
Indeed, IMF Managing Director Michel Camdessus was so concerned
about contagion in Latin America that he called an emergency meeting of
finance and central bank officials from the region in Washington at the end
of August, just a month before the officials are due in Washington anyway
for the IMF/World Bank annual meetings. His goal was to create a
coordinated plan among those countries to cope with potential contagion
and to attempt to impress upon the investment community that all emerging
markets aren't alike, and therefore wouldn't necessarily be hit by the same
kind of financial turmoil.
Meanwhile, Mr. Fischer said he's "sure" the issue of contagion will capture
the attention of the IMF board and staff in the coming year. After a first
round of crisis in Asia, contagion concerns will "only be reinforced by the
second round" in Russia, he said.
As he spoke, Brazil seemed the most likely Latin American candidate next
to teeter off the edge. With the country's stock market gyrating, Brazilian
officials hiked interest rates this past week to defend the quickly
depreciating real.
Mr. Fischer said the IMF would stand ready to support Brazil, if the
"major steps" Brazil has take to bring down its massive public debt, defend
the stability of the real and keep inflation down, don't work.
He also noted IMF officials have discussed the "willingness" of board
members to support Latin America in general, if necessary -- and if
requested to do so.
But given the agency's cash-strapped state, it would likely need to find a
creative way to fund such assistance. Selling a portion of its gold reserves
would be neither expedient nor wise, while it would put IMF shareholders
at risk, Mr. Fischer said.
Tapping capital markets for additional resources would be unlikely
because it would break too sharply with the system used or the past 50
years, he suggested.
Instead, the IMF would likely turn to special rarely-used credit lines to fill
in its financial gaps. It could dig into a facility called the General
Arrangements to Borrow, which is separate from the Fund's regular
capital, to assist countries in Latin America, if push came to shove, he said.
Right now, the GAB has about $15 billion available, Mr. Fischer said. The
governments or central banks of 11 industrialized countries created the
special credit line in 1962 to assist in correcting systemic financial
problems. While it hadn't been tapped in about 20 years, the IMF used it
this summer for assistance to Russia, bringing its resources down from
roughly $23 billion.
While the IMF has known its dwindling capital has been an issue for some
time, and has planned for a 45% capital increase since the beginning of
1998, the agency hasn't been able to pump it up in large part due to U.S.
political considerations.
Given that the U.S. holds about 18% of the votes on the IMF board, and
a capital increase requires the approval of 85% of the Fund, any new
money is effectively blocked until the U.S. accedes.
Mr. Fischer said the Fund could potentially allow reserves to drop below
the previously accepted minimum levels, but only temporarily and if there
were "good prospects" for additional resources to be available soon.
He declined to define those prospects further, and it isn't clear when or if
the views of the U.S. Senate, which has approved the Clinton
administration's full request for $18 billion more funding for the IMF, will
prevail in the House.
House members concerned about squandering taxpayers" dollars on
fruitless projects have stalled approval of the funding. It would include
about $3.5 billion for a new credit facility called the New Arrangements to
Borrow and a $14.5 billion chunk for the general capital hike.
Many critics complain the IMF's loans don't actually bail out crisis-ridden
countries, and, falling further into turmoil, they end up wasting their
precious aid.
Russia is a case in point, around which the Congressional debate of late
has largely revolved. After Russia received its special emergency package
in July, the political and economic chaos there only intensified. Some key
House leaders pointed to a newspaper interview in a Russian economic
daily, in which Anatoly Chubais, Russia's previous IMF liaison, reportedly
said Russia had to deceive the IMF in order to get its emergency aid in
July.
Nevertheless, while Mr. Fischer admitted the discussion over the IMF is a
"wholly legitimate debate," he called on the Congress to approve the
infusion. The IMF should be able to help countries, particularly ones in
Latin America, that are willing to help themselves by implementing the right
policies, he argued.
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