MercoPress. South Atlantic News Agency

IMF calls on Asian countries to appreciate their currencies

IMF Fund Managing Director Dominique Strauss-Khan warned that world recovery remains “fragile”

International Monetary Fund Managing Director Dominique Strauss-Khan urged Asian nations to let their currencies appreciate as part of the region’s contribution to a more balanced global recovery.

Asia is leading the world out of the worst economic crisis in six decades and should play a “leadership role” in policy makers’ effort to achieve a new global growth model, Strauss- Kahn said in a speech on Friday at the Monetary Authority of Singapore.

“Based on our analysis, many Asian currencies are still undervalued related to those of their major trading partners, while the Euro is somewhat overvalued on this basis,” Strauss- Kahn said. “The region should not resist a gradual appreciation of its exchange rates, which I consider an important prerequisite for long-term rebalancing.”

Growth in Asia will accelerate to 5.75% next year, almost twice the pace of global economic expansion, the IMF estimates. Still, with China’s fixed-rate policy, the Yuan has followed the dollar’s 14% decline in the past year against the currencies of six major trading partners, prompting central banks in India, South Korea, Thailand and Taiwan to accelerate dollar purchases to curb currency appreciation.

Policy makers are seeking to ensure the return to economic growth is more balanced. Emerging Asian economies need to boost domestic demand, while the region’s nations would benefit from increased intra-regional trade that could reduce their dependence on other parts of the world, Strauss-Kahn said.

He welcomed China’s commitment to boosting private spending and said that improving social policies such as pensions and healthcare, developing financial markets, providing savings vehicles and making insurance products more widely available would help reach that goal.

Still, as long as Asian currencies remain undervalued, the “necessary recalibration of Asia’s growth model” will be delayed, he said.

The IMF chief also said that the global recovery remains fragile, urging leaders to keep supportive measures in place while they plan exit strategies. He doesn’t expect the economy to experience a double-dip recession.

In some emerging economies “including a few in Asia,” the withdrawal of support should happen “sooner rather than later,” he said.

Asia is facing “policy challenges” as its faster expansion attracts investors, boosting capital flows. While a good thing, this can “raise risks of rapid and potentially destabilizing movements of currencies and asset prices” Strauss-Kahn said.

Controls on capital inflows, while they can reduce volatility, “tend to lose effectiveness over time,” he said.

With the IMF planning to reform quotas to give the region more clout, “now is the time for Asia to use its stronger voice to contribute to global efforts to reshape the economic and financial landscape,” Strauss-Kahn said.

While the region’s financial systems “proved resilient” during the current financial crisis, countries should not let down their guard, he said.

Strauss-Kahn expressed concern that policy makers elsewhere may miss their window of opportunity to overhaul financial regulation as financial markets recover.

“Memories of the crisis have already begun to fade -- raising the risk that the political momentum needed to push through significant reforms will dissipate,” he said. “Markets already seem to be sensing this, and a worrying return to ‘business as usual’ may already be taking place.”

Strauss-Kahn also reiterated a proposal he unveiled to the lender’s 186 members last month that would have the IMF turn into an insurance fund that they can draw on in difficult times. Such a plan would expand the fund’s role beyond giving loans to distressed economies and, according to Strauss-Kahn, would require an increase in resources.

The idea, aimed at curbing the accumulation of foreign reserves in countries such as emerging Asia, also depends on getting rid of “the stigma associated with the IMF in some parts of the world, while dealing with the moral hazard problem,” he said.