The IMF and Asian Monetary Fund Development – G20 Official Communique

Economics, Premium POM

By JC Collins

On August 25, 2015 I published a post titled Meet the Asian Monetary Fund, in which the following was stated:

“In May of 2013 the Fed began to openly talk about tapering QE and this led to more uncertainty and revealed broader fears associated with the normalization of monetary policy.  It became increasingly apparent that the region (Asia) would need to implement the required new initiatives before the Fed began to normalize the monetary policies and begin to increase interest rates, as this would lead to a massive capital outflow from the region.”

“The idea of a region specific Asian Monetary Fund (AMF) was first suggested by Japan in September, 2007, and was supported by all members of the ASEAN+3.  The idea was to pool foreign exchange reserves which would meet the demands of the Chiang Mai Initiative, which would later be called the Chiang Mai Initiative Multilateralization (CMIM).”

The CMIM has since developed as a broader regional support mechanism and as explained in the 2015 post, has a segment which is directly linked to the IMF:

“The CMIM also contains a portion which is linked to the IMF.  This fact is the undeniable reality of the direct connection and multilateral planning which exists between international institutions like the IMF, and the Asian institutions which are being developed.”

“The IMF delinked portion does need to be expanded and increased so CMIM members can use the emergency lending component without going to the IMF, as that proved challenging and non-effective in the crisis of 1997 – 1998.”

“Currently the delinked portion is set at 30%, but will be increased to 40% to accommodate the volatility which will come with the Fed rate increase…”

With this in mind let’s consider the relevant parts of the official G20 Hangzhou Summit Communique. The full section is quoted in full below with the main focus on the content in bold:

“We endorse the G20 Agenda Towards A More Stable and Resilient International Financial Architecture. We will continue to improve the analysis and monitoring of capital flows and management of risks stemming from excessive capital flow volatility. We look forward to the IMF’s review of country experiences and emerging issues in handling capital flows by year-end. We note the ongoing work on the review of the OECD Code of Liberalization of Capital Movements. We support work to further strengthen the Global Financial Safety Net (GFSN), with a strong, quota-based and adequately resourced IMF at its center, equipped with a more effective toolkit, and with more effective cooperation between the IMF and regional financing arrangements (RFAs), respecting their mandates. In this respect, we welcome the upcoming CMIM-IMF joint test run. We support maintaining access to bilateral and multilateral borrowing agreements between members and the IMF, in line with the objective of preserving the IMF’s current lending capacity, and call for broad participation of the IMF membership, including through new agreements. We welcome the entry into effect of the 2010 IMF quota and governance reform and are working towards the completion of the 15th General Review of Quotas, including a new quota formula, by the 2017 Annual Meetings. We reaffirm that any realignment under the 15th review in quota shares is expected to result in increased shares for dynamic economies in line with their relative positions in the world economy, and hence likely in the share of emerging market and developing countries as a whole. We are committed to protecting the voice and representation of the poorest members. We support the World Bank Group to implement its shareholding review according to the agreed roadmap, timeframe and principles, with the objective of achieving equitable voting power over time. We underline the importance of promoting sound and sustainable financing practices and will continue to improve debt restructuring processes. We support the continued effort to incorporate the enhanced contractual clauses into sovereign bonds. We support the Paris Club’s discussion of a range of sovereign debt issues, and the ongoing work of the Paris Club, as the principal international forum for restructuring official bilateral debt, towards the broader inclusion of emerging creditors. We welcome the admission of the Republic of Korea and the decision of Brazil to join the Paris Club. We welcome China’s continued regular participation in Paris Club meetings and intention to play a more constructive role, including further discussions on potential membership. Following the IMF’s decision, we welcome the inclusion of the RMB into the Special Drawing Right (SDR) currency basket on October 1st. We support the ongoing examination of the broader use of the SDR, such as broader reporting in the SDR and the issuance of SDR-denominated bonds, as a way to enhance resilience. In this context, we take note of the recent issuance of SDR bonds by the World Bank in China’s interbank market. We welcome further work by the international organizations to support the development of local currency bond markets, including intensifying efforts to support low-income countries.”

The totality of that quote from the G20 Communique fully supports the thesis which has been presented here on POM for almost three years now.  The fact that the IMF and CMIM will be running a joint test is confirmation of the development of an Asian Monetary Fund.  This fund, as I have stated in previous posts, will be subservient to the larger mandates of the International Monetary Fund.  – JC