International Monetary Fund
INTERNATIONAL MONETARY FUND SEMINAR ON CAPITAL ACCOUNT LIBERALIZATION
PRESS CONFERENCE
March 10, 1998, 4.00 p.m.
IMF Meeting Hall
Washington DC
MR. ANJARIA: Good afternoon, ladies and gentlemen. We would like to welcome you to a press briefing by Mr. Stanley Fischer, First Deputy Managing Director of the International Monetary Fund, and Mr. Jack Boorman, Director of the Policy Development and Review Department of the IMF.
As you will recall, last September, the IMF Ministerial-Level Interim Committee agreed that it was time to add a new chapter to the Bretton Woods Agreement, an amendment to the IMF’s Articles to make the liberalization of capital movements one of the purposes of the Fund, and to give the IMF jurisdiction on capital movements.
Most of you have been following the discussions today and yesterday on closed-circuit television, and you will have seen that the discussions which involved a wide range of participants have made important contributions to drafting that chapter.
I am particularly pleased that the media have been able to follow these discussions. If experience from our earlier conferences is a guide, your reporting of the seminar will form a major part of the public debate of this important and complex issue that we expect to undertake in the next few months.
I have one further housekeeping announcement. This press briefing is on the record, and we would like to embargo the contents until 15 minutes after the close of the press conference.
Policy Development and Review Department Director Jack Boorman and First Deputy Managing Director Stanley Fischer Mr. Fischer, would you like to make some introductory comments?
MR. FISCHER: Mr. Anjaria says that you heard the summing up of the conference, and I couldn’t reproduce it anyway, so we had better stick with what that was.
Just a word on the purpose of this seminar. It was to have an opportunity for the Fund Executive Directors in particular, but also the staff, to hear the views of people outside the Fund from both the official sector and the private sector on the possible capital account amendment, and I think we got a lot of useful information on that.
We are also hoping to have some seminars in other countries and continents, explaining what this is about and seeking the participation of people in those countries in those seminars as well, as part of the effort to involve a broader range of people and organizations in this discussion.
I think we should just go straight to questions if we could.
QUESTION: One point which I felt was not discussed at length was that some people pointed out that both India and China escaped being drawn into the storm in Asia because of the fact that they had not liberalized, and the only counter-arguments given were the examples of two very, very small countries. One was Singapore, with a population of 3 million, and the other was Hong Kong, with a population of 6 million.
I was wondering whether you could elaborate on that, whether the examples of China and India show that it is better to go slowly and not rush headlong into the process.
First Deputy Managing Director Stanley Fischer and External Relations Department Director Shailendra J. Anjaria MR. FISCHER: There was actually a third example given in Asia, of Taiwan—although, by the standards of India and China, I guess everything else is small. Argentina was another country that was discussed that has a very open capital account.
I don’t doubt that with a country with the state of development of the financial system of China that a rush to liberalization would be a mistake. In the case of India, a report has been produced proposing a phased liberalization of the capital account, and nothing that we’ve seen or heard recently has persuaded us in the Fund that that should be reversed or put on hold in any way. Of course, we go to the preconditions, which include the strengthening of the financial system in India, and that is something which that commission recognized and of course is a conclusion of this seminar.
The interaction between the two is very complex. I suspect that if India decides to open the capital account, there would be a lot more urgency in fixing the financial system than there has been so far.
QUESTION: Mr. Fernandez of Argentina described the Argentine experience with the currency board and the conditions that preceded it, none of which sounded like Indonesia to me. Can you foresee a way of resuming payments to Indonesia if Indonesia adopts a currency board in the next six months?
MR. FISCHER: Six months is a long way off, and the answer is I could conceive within six months the issues that we described as preconditions for the successful introduction of the currency board could well be taken care of, which is to make progress with the bank restructuring agency and getting the banking restructuring process underway. And there could be, not in six months, but in a matter of weeks if current uncertainties were resolved, serious progress on the corporate debt problem. So within six months, yes. Let me clarify that. You asked me a specific question, and I don’t want to say that it will take six months. It is a matter of the preconditions being met. If decisions were made to move ahead rapidly to deal with those things, it could be done well short of six months.
QUESTION: Mr. Fischer, there were pros and cons for the amendment, and I wonder whether you could address again the rationale which you as a representative of the management of the Fund would give for pushing for the amendment.
MR. FISCHER: I thought they were very well-stated by David Peretz. To use a word which is too common, if we have an international architecture, institutions are designed to do various things; there should be clarity on what they are doing; and it should be agreed that they are doing what is their business. There is a case for the Fund to get involved in this. It is a central issue in the management of the international economy. It is central to the Fund’s lending operations what capital account transactions take place and under what conditions they take place. So it is very naturally something in which the Fund should be concerned, and it is something that, as was said, we have pushed in the context of programs. But using conditionality is inherently asymmetric, and I don’t think that is the right approach. I think this is something that, if we are going to do it—and I believe we should do it, and I believe the international community wants us to do it—then we should be given that authority as part of the legal structure of this organization.
And you know, looking at the Articles of Agreement of the Fund, it always astonishes me how closely we stick to the Articles. If you look at the Purposes, those really are the purposes that we still pursue 50 years later. And I think that if we are going to change them, it would be better to do it formally.
QUESTION: I wonder if we could just return for a minute to Indonesia and if you could talk about what has gone wrong with that program, if in hindsight you think you should have done something differently, and then, looking ahead, if you see any room for some flexibility and keeping in mind some of the humanitarian issues that are coming to the forefront now.
MR. FISCHER: Let me leave aside the first issue. I think we are at a time when the essential need is to deal with the second issue, the fact that there are major humanitarian problems that could be arising there. Looking back as to what went wrong is not going to be helpful in dealing with that. We will have lots of time for looking at that. Needless to say, we have views, but those shouldn’t be on the record.
There is obviously room for flexibility. In a way, we have demonstrated it in both Korea and in Thailand. That is, the circumstances have changed, and we always change the programs in accordance with the changes in circumstances. So it would be obvious that fiscal parameters would be reset, and the monetary policy parameters would be reset. That flexibility is just inherent in every IMF program. That is why there is a review process. That is why we don’t make an agreement and then pursue it rigorously for the next 3 years without ever looking at whether it needs to be adjusted.
There is then another element, which is how to deal with the fact that the exchange rate is way off the place it was expected to be. If the review is successfully completed, and there is agreement on the overall framework, including the structural measures that would be necessary to help stabilize this situation, one could see the exchange rate strengthening and appreciating. But in any case, if the disorganization that has come about in the last few months, particularly in the food and distribution area, were to continue, the Fund would show the flexibility that it has shown there. In the January reformulation, for instance, there was a removal of many subsidies, but subsidies on cooking oil and palm oil were not removed; they were provided for. And similarly, for things which are essential for the poor, I am sure the Fund would show considerable flexibility in a renegotiation of this program.
So I expect there is room for flexibility, and we are deeply mindful, as the Managing Director said in his lunchtime comments yesterday, of the potentially tragic consequences of events now taking place in Indonesia.
QUESTION: Do you think that President Suharto understands that you are flexible?
MR. FISCHER: I am pretty sure that that message has gotten to him through many channels, yes.
QUESTION: Do you feel that the Asian crisis set you back in the cause of promoting capital account liberalization? Did you detect in the speech or the interventions of some of the representatives, especially from developing countries a sort of stiffened resistance to capital account liberalization, or at least to more introduction of quote-unquote temporary controls?
MR. BOORMAN: I think people are still drawing their conclusions. No one at this stage in the game is ready, I think, to make definitive conclusions about what the lessons from the Asian crisis were, or what the causes were, regarding the extent to which capital liberalization, or perhaps flawed capital liberalization, was behind part of the problems there.
To the extent there were few in the course of the two days’ discussion that seemed to hint or imply that capital account liberalization might have been part of this process that led to the problems these countries confront, I heard many more, I thought, say that they were concluding that this argued even more for having Fund jurisdiction, for having an amendment, and generally going beyond the narrow technical issue of having the Fund give more and greater attention to this.
The whole issue of whether or not liberalization was done properly, was sequenced properly, whether certain preconditions were met, I think is the issue that one needs to wrestle with. So I don’t see it as negatively concluding about the general process of moving toward more open systems, but rather a question of how is the best way to do that.
QUESTION: Back on Indonesia briefly and the specific issue of the next tranche, the Fund is being portrayed now as having held off or postponed the release of that money, which is causing some tensions or perceived tensions between the Fund and Indonesia. Could you explain what it is that the Fund is looking for before those funds will be released?
MR. FISCHER: Well, each review is in essence a renegotiation of the program—Mr. Boorman will check me if I’m wrong on this—each review comes with a Letter of Intent which lays out what the government intends to do, and that includes the monetary and fiscal frameworks. We need to negotiate those with the new cabinet, or with whomever is there, to make sure we get back on track, and we need to agree on the structural measures that will be implemented. So that’s what is there. I think that part of what happened was that during the period in which we would normally have been negotiating the monetary framework, the currency board proposal was occupying a great deal of attention, and that held up these negotiations to some extent.
QUESTION: The Managing Director expressed some concern yesterday, or seemed to be expressing some concern yesterday, about the contagion problem from Indonesia possibly spreading to neighboring countries. Is the Fund taking any measures or consultations with neighboring countries to protect them against the possible contagion effect?
MR. FISCHER: I think that in the context of the completion of the Thailand review, the Managing Director’s press statement at the end of the Board meeting made clear that in the event that Thailand, which has been pursuing its program very closely and resolutely, needed further resources, they could be made available. The statement is:
“The IMF will continue to monitor the situation closely to ensure that the program remains properly funded at all times, including, if necessary, by the provision of additional financing.” That statement stands, and in the event that, for whatever reason, Thailand needed more resources to maintain its program and its stability, I think the Board indicated last week that it would be willing to do that. We do discuss these issues with other countries, and I think what I said about Thailand stands.
Korea, as you know, is making progress with its banking sector, bank debt rollover. It undertook a road show last week, and I think somewhat later this month, that financing should be clear. We will continue to follow that situation very closely as well.
QUESTION: Two quick questions. First, you mentioned the currency board. Are you confident that that has been shelved for now? And two, given that you described each review as a sort of renegotiation, do you think the Fund will have to require some sort of prior actions from Indonesia to restart the program, given the problems that we have seen?
MR. FISCHER: The signals on the currency board are very hard to interpret, and we don’t know whether it has been removed from consideration or not. There are days on which it seems to have been removed and days on which it seems not to have been removed.
I guess I’ll defer to Mr. Boorman on the second question.
MR. BOORMAN: Well, in this case, too, there are a host of measures since the renegotiation of the program in the middle of January that were expected to be taken. In most of those instances, if they are still appropriate, one would expect to see them taken. Whether you consider that to be a prior action or not, I am not exactly sure. It’s an action that was expected to have been taken out of the last discussions.
QUESTION: That would have to happen before you resume disbursing?
MR. FISCHER: Yes.
MR. BOORMAN: If those actions are still viewed as appropriate to the circumstances.
QUESTION: What is your reaction to the statement of Indonesian Government that the agreement that you signed with President Suharto is against the Constitution?
MR. FISCHER: It is very hard for us to comment on that. We generally leave the interpretation of domestic legal matters like that to the country concerned. I am told also that that is not a statement made by the Government, but in any case, it is not really for us to decide that particular question. We don’t have the ability to parse on what is and isn’t consistent with the laws of Indonesia.
QUESTION: At what stage is the Executive Board at in terms of formulating the [capital account] amendment? Is there a draft available? Will it be made public, and will it be ready by mid-April?
MR. FISCHER: It is unlikely in current circumstances to be ready by mid-April. There have been a number of smaller papers discussed looking at particular aspects of the amendment, and I think the way we’re dealing with it is taking issues one at a time. Among those that have been discussed is the treatment of inward investment, how that would be treated if there were an amendment. But the overall amendment has not yet been formulated, and given the current schedule and the fact that the Board and the staff have been rather busy lately, unexpectedly busy, on Asia, we are probably falling a little bit behind the schedule.
QUESTION: Mr. Fischer, could you please clarify your answer to the first question that was asked, when you were asked about the currency board and whether in six months, you could see them having those conditions, and you said you could see it in six months. Were you saying that they could still go ahead with the currency board if they meet those conditions?
MR. FISCHER: We haven’t changed our view that if preconditions were met, a currency board could work in Indonesia. And we set out those preconditions in a letter that was unfortunately leaked, which emphasized particularly the banking sector restructuring and dealing with the corporate debt. Those are both problems that would not be solved but which could be well on the way to being solved within a period of months, not as long as six months.
So if the decisions were made, then you could begin to see those problems being dealt with, and you could begin to see the preconditions being put in place. We don’t know whether that’s what the Indonesian Government wants to do. These are problems that have got to be dealt with, so they should get on with these whether or not the ultimate end will be a currency board. These are critical problems right now.
QUESTION: Back to the seminar, the purpose of it, in terms of why now this seminar. My impression talking to the representatives from the developing countries here was that there is a tremendous amount of reluctance; there is a lot of sympathy for capital controls. I am just wondering if in the process of deciding to hold this conference, was the Fund picking up those kinds of messages or feedback; did you feel a need to get this on the table, or was there pressure from member countries to push ahead with this agenda?
MR. FISCHER: Well, the Interim Committee asked us in Hong Kong to work on the amendment and to come back to them by April. So the need to get going on this thing was handed to us, and that was a requirement. And then, some Executive Directors did indeed say that they were uncomfortable with the analysis of some of the issues, and they wanted to listen to a broader range of opinion, and that is I think what we assembled.
One of the things that possibly I should have emphasized in the summing up is the way that the staff and the management look at this is not consistent with the concern that we are going to ram this down people’s throats in the next six months. We really do see the analogies to what we have now in the current account, namely, a status like Article XIV status in which your existing controls are accepted, and then another status like Article VIII in which you declare yourself ready to accept the obligations of capital account liberalization; and we would not be pressing every mission to say get rid of this right now, and if you don’t do it by the next six months, we will report you to higher authority.
We see a process getting under way of systematizing—and that’s really important—what is done about the capital account and how it is controlled and what controls are acceptable and how you liberalize it. It has been chaotic so far in many countries.
QUESTION: Were you afraid that there would be a backlash after the Asian crisis against some sort of liberalization or, like I said, sympathy for controls? Was there a desire to resist or counter that backlash?
MR. FISCHER: The short part of the answer is yes, I did suspect that there would be a backlash, but that wasn’t part of the motivation for this seminar.
MR. BOORMAN: That came up not in the context of learning from the Asian crisis. The idea of inviting a broader group of people in to hear views from the private sector, from some academics and so forth, is something that has been on the table for some time.
But on the issue of the Asian crisis, here again I don’t detect that it is necessarily a conclusion to halt liberalization or reverse. I think what people are asking themselves are the tough questions about how you do it productively because, as you heard in the seminar, acceptance of the proposition that this is a good thing to do is virtually universal.
[IMF Edited transcript]