Yilmaz Akyüz :
(From previous issue)
Emerging economies are widely commended for large amounts of international reserves they have accumulated in the new millennium. However, in the large majority of cases these came from capital inflows rather than current account surpluses. Cumulatively, all G20 emerging economies except China and Russia have registered current account deficits since the beginning of the millennium, at a total amount of some $2 trillion while their external labilities have increased by over $4 trillion.
Reserves accumulated is less than a quarter of the increase in total liabilities while the rest of capital inflows (new liabilities) has been used for financing current account deficits or private acquisition of assets abroad – assets that would not necessarily return at times of interruption and reversal of non-resident capital inflows.
As of end 2016, on average, the reserves of deficit G20 emerging economies were less than one-third of their total non-FDI external liabilities including debt issued internationally and non-resident holdings in local deposits, bonds and equities. In many cases these holdings plus short-term forex debt reach or exceed international reserves. In most cases reserves would be totally inadequate to provide a reliable buffer against a generalized exit of non-residents and a widespread capital flight by residents.
Given the dismal record of the IMF in crisis intervention and management, many emerging economies are loath to go back to the IMF in the event of a severe currency and liquidity crisis, except those such as Argentina whose neo-liberal policies are strongly supported by the IMF. In any case at some $800 billion, the lending capacity of the IMF would be too small to take on the task. The level of liquidity that may be needed by many emerging economies in the event of capital reversals exceed by a large margin what the IMF could provide under exceptional financing.
Most emerging economies would also be highly reluctant to resort to unilateral debt standstills and exchange controls in view of their exposure to creditor litigation and chronic dependence on international lenders and investors. On the other hand, not much relief could be expected from South-South multilateral arrangements for liquidity provision, notably the Chiang-Mai Initiative Multilateralization (CMIM) of East Asian countries and the Contingent Reserve Arrangement (CRA) of BRICS.
These are not only small in size but also have design problems. The CMIM has never been called upon, even during the global crisis. It does not include a common fund but a series of promises to provide liquidity, with each country reserving the right not to contribute to the specific request by a member. Its size is $240 billion and access beyond 30 per cent of quotas is tied to an IMF program.
The CRA is also designed to complement rather than substitute the existing IMF facilities. Its size is even smaller, $100 billion, and access beyond 30 per cent is also tied to the conclusion of an IMF programme. Thus, these regional arrangements do not provide escape from IMF conditionality and surveillance.
That leaves bilateral swaps among central banks and bilateral lending by governments of reserve-currency countries, notably the US, and surplus emerging economies with ample international reserves such as China. A very large part of bilateral swaps established by the US Federal Reserve is with other advanced economies.
Those with emerging economies (Brazil and Mexico) are too small to provide much relief. In the words of the former chair of the US Federal Reserve, Janet Yellen, expanding the swap lines to serve as a safety net for countries encountering balance of payments pressures is not within the Fed’s mandate and therefore is a complete non-starter. China has swaps with over 30 countries. But these are mostly with advanced economies and designed to support trade and investment and to promote the international use of renminbi rather than boost reserves.
(Yilmaz Akyüz is chief economist, South Centre, Geneva and former Director of the Division on Globalization and Development Strategies, UNCTAD, Geneva).
(From previous issue)
Emerging economies are widely commended for large amounts of international reserves they have accumulated in the new millennium. However, in the large majority of cases these came from capital inflows rather than current account surpluses. Cumulatively, all G20 emerging economies except China and Russia have registered current account deficits since the beginning of the millennium, at a total amount of some $2 trillion while their external labilities have increased by over $4 trillion.
Reserves accumulated is less than a quarter of the increase in total liabilities while the rest of capital inflows (new liabilities) has been used for financing current account deficits or private acquisition of assets abroad – assets that would not necessarily return at times of interruption and reversal of non-resident capital inflows.
As of end 2016, on average, the reserves of deficit G20 emerging economies were less than one-third of their total non-FDI external liabilities including debt issued internationally and non-resident holdings in local deposits, bonds and equities. In many cases these holdings plus short-term forex debt reach or exceed international reserves. In most cases reserves would be totally inadequate to provide a reliable buffer against a generalized exit of non-residents and a widespread capital flight by residents.
Given the dismal record of the IMF in crisis intervention and management, many emerging economies are loath to go back to the IMF in the event of a severe currency and liquidity crisis, except those such as Argentina whose neo-liberal policies are strongly supported by the IMF. In any case at some $800 billion, the lending capacity of the IMF would be too small to take on the task. The level of liquidity that may be needed by many emerging economies in the event of capital reversals exceed by a large margin what the IMF could provide under exceptional financing.
Most emerging economies would also be highly reluctant to resort to unilateral debt standstills and exchange controls in view of their exposure to creditor litigation and chronic dependence on international lenders and investors. On the other hand, not much relief could be expected from South-South multilateral arrangements for liquidity provision, notably the Chiang-Mai Initiative Multilateralization (CMIM) of East Asian countries and the Contingent Reserve Arrangement (CRA) of BRICS.
These are not only small in size but also have design problems. The CMIM has never been called upon, even during the global crisis. It does not include a common fund but a series of promises to provide liquidity, with each country reserving the right not to contribute to the specific request by a member. Its size is $240 billion and access beyond 30 per cent of quotas is tied to an IMF program.
The CRA is also designed to complement rather than substitute the existing IMF facilities. Its size is even smaller, $100 billion, and access beyond 30 per cent is also tied to the conclusion of an IMF programme. Thus, these regional arrangements do not provide escape from IMF conditionality and surveillance.
That leaves bilateral swaps among central banks and bilateral lending by governments of reserve-currency countries, notably the US, and surplus emerging economies with ample international reserves such as China. A very large part of bilateral swaps established by the US Federal Reserve is with other advanced economies.
Those with emerging economies (Brazil and Mexico) are too small to provide much relief. In the words of the former chair of the US Federal Reserve, Janet Yellen, expanding the swap lines to serve as a safety net for countries encountering balance of payments pressures is not within the Fed’s mandate and therefore is a complete non-starter. China has swaps with over 30 countries. But these are mostly with advanced economies and designed to support trade and investment and to promote the international use of renminbi rather than boost reserves.
(Yilmaz Akyüz is chief economist, South Centre, Geneva and former Director of the Division on Globalization and Development Strategies, UNCTAD, Geneva).
