[Pradumna B. Rana] Asian Monetary Fund so near yet so far

Asia has not forgotten the “Asian Monetary Fund” (AMF). In fact, the case for the AMF has been much strengthened by the difficulty in reforming the governance of the International Monetary Fund (IMF).

On May 4, the Association of Southeast Asian Nations and its three Northeast Asian partners China, Japan and South Korea met in Hanoi, Vietnam, and took an important step toward establishing the AMF. The ASEAN+3 finance ministers met with Wei Benhua, newly appointed director of the ASEAN+3 Macroeconomic Research Office (Amro), which will be based in Singapore. They instructed their deputies to review Amro’s organizational capacity and hoped that it would be operational soon. The setting up of Amro is a critical step toward the establishment of AMF.

The other critical step in establishing the AMF was the Chiang Mai initiative (CMI) and its successor, the Chiang Mai initiative multilateralization (CMIM), which came into effect in March 2010. After the Asian financial crisis of 1997-98, ASEAN+3 countries launched the CMI, comprising a network of bilateral swaps among each other, as part of their regional self-help mechanism. These swaps were “multilateralized” ― that is, they could be withdrawn simultaneously with one agreement. This formed the CMIM, comprising the $120-billion crisis fund.

China and Japan agreed to contribute 32 percent each of the amount, South Korea 16 percent, with the ASEAN countries providing the remaining 20 percent. Within ASEAN, Indonesia, Malaysia, Thailand and Singapore agreed to contribute $4.77 billion each, and the Philippines $2.64 billion. In times of crisis, these five ASEAN member countries can withdraw 2.5 times their contribution.

But during the global economic crisis of 2008-09 when a number of countries in the region faced a liquidity shortage, the CMI swaps could not be used because of the absence of a surveillance unit to conduct due diligence. Understandably, countries in the region were not willing to lend to each other under the CMI or CMIM without it.

So South Korea and Singapore had to rely on national reserves or trigger their swap agreements with non-regional and regional countries outside of the CMI. South Korea triggered its swap agreement with the United States and China, and Singapore with the U.S. and Japan. A fully operational Amro will fill this important void.

In Hanoi, the ministers welcomed the establishment of the Amro which, as a surveillance unit of CMIM, will play an important role in monitoring and analyzing regional economies. It will contribute to early detection of risks, swift implementation of remedial actions, and effective decision-making of the CMIM. The ministers instructed their deputies to launch a study to strengthen the legal status of the Amro to constitute an international organization with an international legal personality.

As is well known, the original proposal to establish the AMF was made at the height of the Asian financial crisis in 1997-98. It was quickly shot down by the IMF and the U.S. Treasury. But the difficulty in reforming the IMF’s governance ― its charter, quotas and voting rights ― to give greater weight to large emerging markets such as China and India, has led to the evolution of a more flexible decentralized global monetary architecture.

Under the decentralized architecture, the IMF as the “senior” global organization would be linked to monetary funds in various regions of the world in a complementary manner. The Arab Monetary Fund and the Latin American Reserve Fund have already been established, and the probability of a “European Monetary Fund” is high. The case for the AMF has, therefore, been strengthened.

At the G20 summit in Pittsburgh in 2009, leaders pledged to increase the quota of large emerging markets by 5 percent ― it was increased to 6 percent in Seoul a year later. But even the more modest pledge made in 2006 when the IMF’s annual meeting was held in Singapore is yet to be implemented, for the required support of 85 percent of IMF members has not been obtained.

On behalf of ASEAN+3 Research Group, I led a team of researchers from Nanyang Technological University, Singapore, to conduct a survey of ASEAN+3 opinion leaders (comprising government officials, academics and bankers) recently. The findings are illustrative. Nearly two-thirds of the respondents said the decision to set up Amro was significant and that it would enhance the use of CMIM. A similar percentage said the CMIM and Amro should be merged in the future to set up the AMF. They also said the AMF should complement the IMF and not try to supplant it.

But one should not expect the AMF to be established any time soon. The Amro has been established but it is not yet operational, and its legal status is yet to be determined. Hence, the task of building an effective independent surveillance unit with a fully operational early warning system against crises and competent enough to complement the IMF will take time.

In the survey, about half of the ASEAN+3 opinion leaders said the AMF could be established sometime between 2016 and 2020, and one-third felt that that could happen only after 2020. Only 10 percent said it could be set up in the next five years.

The establishment of the Amro now and the CMIM last year might have accelerated the journey toward the AMF, but reaching it will still take time.

By Pradumna B. Rana

Pradumna B. Rana is an associate professor at the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore, and a former senior director at the Asian Development Bank’s Office of Regional Economic Integration. ― Ed.

(China Daily/ Asia News Network)