According to a high-level steering committee of senior financiers formed by the Institute of International Finance (IIF), the IMF has greatly improved its transparency during the past year, both in its operations and in its discussions of systemic issues. This increased transparency can significantly contribute to cooperation between the public and private sectors in addressing future financial crisis. The Steering Committee on Emerging Markets was established in the summer of 1998 to recommend ways to strengthen the architecture of the international financial system. The committee held meetings with top Group of Seven and other officials and issued reports on their findings. (See IMF Survey, April 5, page 110, for a summary of two of the reports: Report of the Working Group on Transparency in Emerging Markets Finance and Report of the Task Force on Risk Assessment.) The IIF’s Summary Report on the Work of the IIF Steering Committee on Emerging Markets Finance is now available and highlights the issues likely to feature in discussions leading up to this year’s Annual Meetings of the IMF and the World Bank.
The report enumerates major challenges facing participants in the global system of emerging market finance:
• For market participants, including commercial banks, securities firms, asset management and insurance firms, and hedge funds: improve risk monitoring and management, support increased transparency, and work cooperatively to resolve crises voluntarily.
• For governments, central banks, and regulators of emerging market economies: maintain sound domestic policies, accelerate financial sector reform, meet international standards on issues from data disclosure to governance, and manage relations with private investors and lenders.
• For the IMF, the World Bank, and other international organizations: build on improvements in transparency and lending facilities, catalyze sustainable private financing on a voluntary basis as needed, and cooperate with emerging market governments and market participants to support strong adjustment programs.
• For the Group of Seven and other industrial countries: pursue noninflationary growth without creating unsustainable external imbalances, provide leadership in lowering barriers to trade and finance, and support cooperative approaches to preventing and resolving crises.
The report forcefully argues for a stronger and earlier two-way relationship between the official community and the private financial community to reinforce the global framework for sustainable and productive private capital flows to emerging markets. One vehicle for achieving this, the report notes, is the IMF’s new Contingent Credit Lines, viewed as a “potentially important vehicle” for ensuring finance in advance of need for countries meeting global standards for access to capital markets. Questions regarding the vehicle’s use will need to be addressed, the report states, and some authorities may wish to explore market-based contingent financing arrangements with private lenders.
Unsustainable short-term debt has been an important factor in the recent crises, and policies that create a bias in favor of short-term financing need to be corrected, the report states. Transparency in this area needs to be enhanced, and the report recommends closer surveillance by the IMF, the World Bank, the Organization for Economic Cooperation and Development, and other official bodies.
A lack of information was a factor in the crises of the 1990s, and the steering committee recommends further work in the areas of data standards and IMF transparency. The committee welcomes recent revisions in the IMF’s Special Data Dissemination Standard while recommending that more needs to be done to strengthen it further. Along with the IMF’s increased transparency, surveillance results in IMF Article IV staff reports provide important guides for private investors and lenders, particularly in situations where spreads may not fully reflect underlying risks. Therefore, the report recommends that market participants closely follow the IMF’s 18-month pilot program for voluntary release of staff reports. (See page 247.)
Despite efforts to prevent crises, the report notes, they are likely to occur from time to time. Official support is one of the crucial elements for the constructive involvement of the private sector in future crises. While countries can recover from a crisis without support from the IMF and other official sources, deeper and longer recessions may well be the result. Official support can speed up the adjustment process in several ways, according to the report. IMF conditionality can lend credibility to reforms adopted in crisis countries. Balance of payments financing can lessen pressure on countries to impose capital controls or accumulate payments arrears that could postpone access to markets. These steps can help catalyze new flows of private capital to support a country’s recovery. As a complement to these efforts, the IMF has created two facilities—the Supplementary Reserve Facility and the Contingent Credit Lines—to provide short-term financing to deal with or forestall liquidity crises.
Efforts by the public and private sectors to find ways to prevent and resolve financial crises in emerging markets have provided a better understanding of the linkages in the international financial system. The report urges the private financial community to focus on several measures to implement improvements independently and in conjunction with other participants in the international financial arena.
• In their internal risk-management activities, financial firms should give high priority to using better risk-measurement techniques and improving internal controls.
• In their relations with emerging market authorities, financial firms should encourage investors to be proactive, promote high standards of transparency, and pursue other means to enhance differentiation among economies with varying prospects.
• In their relations with the IMF and other international organizations, financial firms should take advantage of opportunities to explain their concerns about the policies and performance of countries, as well as monitor the surveillance activities of these agencies more closely and help identify programs that could be effective in catalyzing sustainable private financing.
The full text of the Summary Report on the Work of the IIF Steering Committee on Emerging Markets Finance is available on the IIF’s website: http://www.imf.com.
Photo Credits: Denio Zara, Padraic Hughes, and Michael Spilarto for the IMF, pages 241, 243–5, and 256; Gero Breloer for AFP, page 251; and the American College, page 253.