New IMF reform tackles currency manipulation

The International Monetary Fund has launched a new surveillance system on exchange-rate policies aimed at preventing a country from jeopardizing the health of the global economy.

The IMF said the major reform updates a 30-year-old program and targets currency manipulation that could destabilize trade and private capital flows.

However, IMF officials sidestepped questions about China, criticized for keeping its yuan currency undervalued in order to gain a competitive edge in exports.

The new legal framework for monitoring a country’s program does not target any specific country, but provides a level playing field for all its 185 members by being clearer and broader in scope, IMF officials insisted.

“It reaffirms that surveillance should be focused on our core mandate, namely promoting countries’ external stability,” IMF managing director Rodrigo Rato said Monday, according to the prepared text of a speech he delivered in Montreal, Canada.

“And it gives clear guidance to our members on how they should run their exchange-rate policies, on what is acceptable to the international community, and what is not.”

Perhaps the most delicate issue of exchange-rate policy revolves around the claim of some US lawmakers that China is keeping its yuan currency undervalued to gain an unfair competitive edge.

The US trade gap with China ballooned to 232.5 billion dollars in 2006.

Last week the US Treasury declined to label China a currency manipulator, saying that although its tightly controlled exchange rates have spawned a host of economic problems, it was unable to determine that Beijing intentionally left the yuan undervalued. US Treasury Secretary Henry Paulson welcomed the IMF reform Monday.

“The revised decision sends a strong message that the IMF will put exchange-rate surveillance back at the core of its duties and rigorously implement its rules on exchange rate surveillance going forward,” Paulson said.

The new policy was adopted Friday by the 24-member executive board with “very broad support, including from industrial countries, from emerging economies and from developing countries,” Rato said.

Details of the procedures for enacting the reform will be published by Thursday, a senior IMF official, speaking on condition of anonymity, said in a teleconference with journalists.

The IMF set out four guiding principles to be used on a bilateral basis to determine whether a country’s behavior is acceptable.

The first three were clarifications of existing principles, and a fourth one was added that reflects how the economic landscape has changed since the 1977 initial framework was established.

“A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members,” it reads. The former program looked only at how exchange-rate policies affect the current account, which measures trade and financial transfers, another senior Fund official explained.

The reform also includes the capital account, which measures the net flow of capital, the official said in the teleconference.

The IMF also set out seven “indicators” that could lead to an IMF review of foreign-exchange policies and the opening of bilateral discussions on the subject with a member country, ranging from market intervention to policies that promote large and prolonged trade deficits or surpluses.

Rato cited the US trade imbalance as a leading risk to the global economy. “The imbalances between the United States and the rest of the world are not sustainable over the long term,” he warned.

“If investors become suddenly unwilling to hold US financial assets at prevailing exchange rates and interest rates, this could lead to an abrupt change, and could cause global financial market disruptions as well as an economic downturn.” afp

source:www.dailytimes.com.pk