Summary of WP/92/82

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Summary of WP/92/82

“Issues in Managing and Sequencing Financial Sector Reforms: Lessons from Experiences in Five Developing Countries” by Amer Bisat. R. Barry Johnston, and V. Sundararajan

This paper reviews the experiences of five developing countries in reforming their financial systems, illustrating the benefits and risks and examining the factors that contribute to successful financial liberalization. Although financial reform generally led to significant financial deepening, several countries also experienced some loss of monetary control. Inappropriately sequenced reforms, combined with inadequate prudential supervision and unstable macroeconomic conditions resulted, in some cases, in financial crisis.

Liberalizing interest rates and removing direct credit controls can improve financial sector competition and efficiency in the allocation of financial resources. However, to avoid loss of control, financial sector reform needs to be supported by active monetary policy and flexible and effective monetary control procedures. In some cases, financial sector reform was accompanied by an initial, more rapid growth of credit, which needed to be constrained by high positive real interest rates, with possible adverse effects on the real sector (through appreciation of the real exchange rate and the revaluation of assets). To minimize these effects, the sequencing of reforms should be consistent with a broader program of macroeconomic adjustment. In addition, the pace of the liberalization of interest rates and credit should take account of the solvency of financial and nonfinancial firms and their ability to respond to the new financial environment. In certain cases, countries may benefit from liberalizing interest rates and credit more gradually while pushing ahead with industrial sector restructuring and the recapitalization of banks.

A minimal system of prudential regulation must be in place if financial sector reform is to succeed. Too rapid liberalization can strain banks’ credit approval process and may not give them time to develop sound banking techniques and supervisory procedures.

Working Paper Summaries (WP/92/49 - WP/92/112)
Author: International Monetary Fund