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India presses for new world financial body

C K Arora in Washington

India has called for establishing a new facility, ''international lender-of-last-resort,'' independent of the International Monetary Fund and financed by additional resources, to provide a lasting solution to any financial crisis in future.

The Reserve Bank of India governor Bimal Jalan, who made the proposal at a spring annual meeting of the interim committee, the policy-making body of the IMF, said the eligibility criteria should be flexible.

''The facility would need to be designed carefully not only to balance its credibility but also to ensure that it does not contribute to moral hazard,'' he added.

He felt that ''performance criteria, thought to be appropriate prior to a crisis, cannot continue to be the basis of performance requirements, if a crisis does occur.''

One way out of this would be the release of a first tranche of loan with little or no conditionality and simultaneous determination of conditionality for the rest of the package, he added.

''Also, departure from pre-qualification criteria would require withdrawl of the safety net, which itself could precipitate loss of confidence,'' he added.

Jalan, who is leading the Indian delegation in the absence of Finance Minister Yashwant Sinha (who stayed back due to the fall of the Vajpayee ministry), gave the background of the east Asian crisis and the resultant economic slowdown. He said, ''I am pleased to report that countries in my constituency (south Asia) recorded growth rates in the neighbourhood of five per cent.

''India posted a growth rate of nearly six per cent, which was one of the highest in the world,'' Jalan remarked with a sense of genuine satisfaction in the atmosphere of gloom and doom.

He also emphasised the need for a ''cooperative international effort'' to review existing prudential standards, including in the leading industrial countries. ''In particular, we need to urgently re-examine norms that could have incidental effect of encouraging short-term flows to developing countries by ascribing lower-risk weights to short-tenor inter-bank loans, which encourages potential volatility to these countries,'' he added.

The RBI chief favoured the establishment of a ''broader mechanism'' to regulate volatile private capital flows, which, in large part, emanate from the inadequately regulated international operations of hedge funds and institutions operating from offshore banking centres.

''Since these types of institutions are able to leverage almost without limit at present, it is imperative that strict guidelines are evolved as a matter of urgency,'' he added.

Jalan supported the need for observing ''certain minimum universally accepted standards'' in areas relevant to the maintenance of stability in the international monetary system, including increased transparency in formulation and implementation of monetary and financial policies and improvements in dissemination of relevant data.

Earlier, finance ministers of the Group of 24 developing nations (G-24), who met on the eve of the interim committee session, asked the IMF for a constant review of its crisis management policies, particularly the belt-tightening measures, which have harmed their economies instead of helping them to grow.

The ministers criticised the high interest rates and tight fiscal measures in early policy prescriptions from the IMF as it sought to ease financial crises in Asia and beyond.

It welcomed the establishment of a kind of IMF contingency loan that countries could receive before financial disaster strikes.

It hailed a ''change of heart'' from the World Bank and the IMF and said that their initial policies to deal with a financial meltdown had actually made matters worse.

Group chairman G L Peiris, who is finance minister of Sri Lanka, told a press conference that the measures taken to deal with the Asian financial crisis -- which started in Thailand in July 1997 before spreading through the region and beyond -- did not take into the account the specific situation that obtained in each country.

He said the IMF and the World Bank reacted initially to this crisis by endeavouring to increase interest rates to very high levels. ''We believe, however, there is no universal panacea and that contextual factors are of the greatest importance,'' he added.

The group expressed concern about the pressure in some industrialised countries for resorting to protectionism through various devices.

UNI

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