By Arun Kumar, IANS
Washington : Indian Finance Minister P. Chidambaram Saturday sought periodic realignment of nations’ votes in the International Monetary Fund (IMF) to reflect their changing economic weight.
Addressing the International Monetary and Financial Committee as the two-day IMF-World Bank Spring Meetings began, he also called for policy action by national authorities and international bodies to restore the confidence in US financial markets so as not to let the credit squeeze deteriorate into a credit crunch.
“This calls for quick recognition of losses, recapitalisation of solvent institutions and strengthening of regulation and supervision,” he said addressing the committee on behalf of India, Bangladesh, Bhutan, and Sri Lanka.
Taking note of the efforts of US authorities to redress the situation, Chidambaram said other national authorities also need to review the adequacy of their regulation and supervision of financial markets and institutions.
A degree of credibility in the IMF’s governance has been undoubtedly restored in the recent exercise in realigning quotas and votes, he said describing it as a “definitive step” towards a simple, transparent quota formula as identified at their meeting in Singapore.
But “India views the current round of quota and voice reform as only the first step in a process that needs to be carried forward,” he said.
“We would welcome a periodic realignment of quota shares as the global economy gets restructured over time,” said Chidambaram asking the Governors to endorse a programme of reviews not linked to concerns of liquidity alone, as is the current practice.
Noting that in globalised financial markets, systemic risk to the financial sector could emanate from advanced financial markets as demonstrated by recent events, Chidambaram suggested that the Fund give greater focus to the financial sector in its bilateral surveillance of advanced economies.
The Fund should expedite the discussions on the design of a new crisis prevention instrument that could be made available to emerging market economies that seek such support.
Noting that they were meeting in the midst of a financial crisis in global economy, he said it was all the more disturbing since the problems have emanated from one of the most advanced financial markets in the world.
Moreover, it has also affected other advanced financial markets, particularly in Europe. The emerging market economies seemed to have been less affected by the initial impact of the turbulence. Since, the crisis is still unfolding, there are considerable uncertainties as to how the situation would evolve, Chidambaram said.
The immediate fallout of the financial crisis is reflected in a reversal of the robust trend of global growth during 2008. So far, the spillover to emerging markets and developing countries seems relatively contained mainly because of their limited direct exposure to sub-prime related securities.
However, notwithstanding the increase in trade volume within emerging markets, the spillover effects could soon be evident as the US and Europe continue to remain the main destinations for the final products from emerging markets.
“We have already seen increased volatility in equity markets in emerging economies. While debt flows to emerging markets continue, borrowing costs have gone up,” Chidambaram said. Simultaneously some emerging markets are experiencing a liquidity spillover with substantial injection of liquidity by central banks in advanced economies.
This has exerted upward pressure on exchange rates in these countries and has also given rise to excess domestic liquidity that engenders inflationary expectations, he said.
“Another worrisome development is the emergence of global inflationary pressures. While growth expectations have dampened, inflationary expectations have not.”
The deflationary impact of globalisation seems to have run out with increasing wage and inflationary pressures. There is growing apprehension that financial stability concerns are distracting central banks in advanced economies from emerging inflation risks, he said.
The confluence of these developments has implications for long-term inflationary expectations. Policy makers and central banks will, therefore, have to carefully balance growth and financial stability considerations with the potential risks to price stability.
Amidst the turmoil, attention could easily get diverted from the continuing global imbalances. While the US current account deficit is projected to moderate, current account surpluses are getting concentrated in a few countries, further accentuating global imbalances, Chidambaram said.
“Already we have seen sharp movements in exchange rates of major currencies. This has implications for the orderly management of exchange rates by emerging market and developing countries which could have adverse consequences for growth and stability.”
Turning to India, Chidambaram said GDP growth driven by domestic demand remains robust thus far, though it moderated somewhat to 8.4 percent in the third quarter of 2007-08.
While inflationary expectations remain contained, headline inflation rose above the projected tolerance level of five percent recently reflecting higher food, fuel and other commodity prices, particularly metals.
The overall external trade and current account situation is evolving as per expectations. However, strong capital inflows and their volatility continue to pose significant challenges generally stable, though equity markets have exhibited greater volatility mirroring global trends.
Revenue collection remains buoyant and fiscal marksmanship has improved. Fiscal targets set in the fiscal responsibility legislation are being met.
Chidambaram said India remained committed to economic reforms and conduct of macroeconomic policy to enable continuation of the growth momentum with stability.