IMF to launch new lending instrument

The International Monetary Fund (IMF) is developing a new lending instrument specifically for emerging markets that have strong fundamentals but remain vulnerable to shocks.

Faced with criticisms about its increasing irrelevance, the IMF said it is considering a host of changes that would make the Fund more responsive to the need of its members, particularly the most vulnerable ones.

IMF managing director Rodrigo Rato said the new instrument under consideration would have to allow more automatic drawdowns for programs that were on track as well as provide more funds up front.

"The first line of defense against crises must be a sound macroeconomic framework, including appropriate monetary and fiscal policies," he said.

Thus far, Rato said Asian countries have made progress in making policy frameworks more flexible but they have to make fuller use of flexible exchange rate arrangements while strengthening the financial sector and enhancing good corporate governance.

Most of these economies, according to Rato, have also built up their cushion of foreign exchange reserves either nationally or through regional arrangements like the Chang Mai Initiative or through their access to institutions like the IMF.

"But there are actions that the Fund can take," Rato said. "I want to make sure that when financial markets worsen which they eventually will, the services we offer to our members including in Asia, are sufficiently useful, he added."

Rato said his proposal was to develop a new instrument designed to help members avoid crises and to respond to crises when they do occur.

Aside from allowing more automatic drawdowns and providing more funds up front, Rato said conditions would also be narrowly focused on policies to maintain macroeconomic stability and reduce vulnerabilities.

The IMF has been increasingly edgy over the global current account imbalances, particularly the imbalance between the US and the rest of the world that officials warned were not sustainable.

The IMF said the problem was global but had the potential to affect Asian countries profoundly.

According to the IMF, either a global downturn or financial market disruptions could affect Asian emerging markets "very seriously".

The IMF said the most obvious signs of payments imbalances was the large deficit in the current account of the balance of payment of the US which meant that the US had to depend on foreign savings to the extent of almost 6.5 percent of its gross domestic product (GDP) in 2006.

In contrast, certain other countries have large surpluses, including oil exporting countries, Japan and some of the major Asian emerging countries, especially China.