This was the backdrop of the spring meetings of IMF and World Bank (April 15/16) where Finance Ministers and Central Bank Governors also had to take note of the impact of possible prolonged disruption of industrial production in disaster-struck Japan, due to power shortages, on other economies, particularly Asian, and the economic and social consequences of the upheaval in Middle East and North Africa

In a sense, the global economy is in total disarray, leaving the financial leaders, who all voiced their respective concerns, to fall back upon IMF to come up with solutions to resolve “new vulnerabilities” and provide a consolidated multilateral surveillance report for the annual meetings in September. IMF’s past shortcomings notwithstanding, there is now growing acceptance of its new directions to strengthen its relevance and legitimacy in a changing world.

The Ministerial communiqué called for credible actions in advanced economies toward timely fiscal consolidation, applicable greatly to USA where the President and the Republican majority in Congress are locked in battle over ways to achieve savings of the order of four to five trillion dollars over a decade and ensure sustainable fiscal consolidation for coming years. Republicans are bent on sweeping cuts in spending including health care, putting in jeopardy President Obama’s prized reform.

A significant development outside the Fund-Bank meetings was the agreement among G-20 Finance Ministers on “indicative guidelines” by which to measure how nations pose risks to global economy. Lack of such an accord had bedeviled a successful outcome at the G-20 Seoul Summit in November last. China had stoutly opposed its exchange rate policy being included in guidelines while USA held that its currency (renminbi) was under-valued giving China unfair competitive advantage, which also affected emerging economies.

Meeting in Washington on April 15 with French Finance Minister Christine Lagarde in the chair, the Ministers struck a compromise by which nations would be evaluated on the basis of their government debt, private savings and debt levels, trade balances and investment flows. These specifically exclude exchange rate and current account balance, deferring to China’s reservations. But current account balances can be measured on the basis of trade and budget deficits and private debt flows. France is holding the Presidency of G-20 this year.

Ms. Lagarde, announcing the accord, said officials would be working between now and October on the guidelines to determine which countries are broadly out of balance in relation to these criteria with the rest of the world. This exercise would be limited to six “systemically important” countries which include USA, China, Japan, Germany, France, Britain and India. This would also be input for IMF in preparing its Mutual Assessment Process report, mandated by G-20 Summit, on countries following up on the commitment to strong, sustained and rebalanced growth. IMF will also provide “spillover” reports assessing the impact of policies of systemically important economies on one another. This will be a major subject at the next G-20 Summit in Cannes (France).

Emerging economies like China and India (represented by Dr Subbarao, Governor of Reserve Bank of India) have argued that for sustainable and balanced growth of the world economy, advanced nations, which issue reserve currencies, have greater responsibility in fiscal consolidation and monetary management as otherwise developing economies would continue to experience volatile capital flows and other exogenous shocks and would be required to make painful adjustments.

IMF has already embarked on a comprehensive study of capital flows and their impact and, according to Fund officials, it has a pragmatic approach to capital controls which are left to country-specific circumstance. Dr Subbarao said countries facing volatile capital flows must have flexibility and discretion to adopt macro-economic and capital account management policies they consider appropriate to mitigate risks.

The advanced economies have not made the expected progress in strengthening the financial system with prudential regulations and supervision and co-operatively addressing the risks posed by globally systemic financial institutions (“too big to fail”) essential for financial stability. The sovereign debt crisis in some of the EU countries has thrown up vulnerabilities which, according to IMF, need a comprehensive euro-zone of assistance to besieged economies like Greece, Portugal and Ireland where debts would have to be re-written coupled with enhanced capital requirements for the banking system.

Elevated inflation and overheating pressures in emerging economies need to be tackled by tightening of macro-economic policy stance in Asia, according to IMF officials. Output gaps in many of these economies are closing resulting in over-heating, both in goods and asset markets. Headline CPI inflation, mainly food, has now spilled over into core inflation and inflation expectations (as household surveys in India on outlook for 2011 show). Rise in food and fuel prices could affect growth and inflation outlook, particularly hitting low-income households and the poor, IMF says and urges targeted protection for these groups.

According to Dr. Anoop Singh, Director of IMF Asia and Pacific Department, emerging Asia would grow close to 8 per cent this year with growth in China and India at 9.5 per cent and “around 8 per cent” respectively. He expects capital flows will continue for the next two years at moderate pace and does not rule out volatility from tensions in mature markets and withdrawal of monetary accommodation already beginning in advanced economies. However, he noted, countries like India are taking macro-prudential measures which would help to avert risks from volatility. The capital flows have now shifted more into portfolio flows and there is room to act in monetary, exchange rate and fiscal policies both to tackle overheating and to address surge in capital flows.

IMF officials say RBI remains vigilant and would take necessary action with regard to inflation, a short-term challenge while medium-term issues for India are structural like development of infrastructure, which would provide appropriate environment for sustained high growth, increased agricultural productivity, improved quality of human capital and foreign direct investments. India is already trying to build up different structures to ensure that infrastructure investment goes up. In this sense, capital flows would not be a problem for India as in some countries since these flows could be supportive of greater infrastructure spending.

Inflation has become top priority in China with CPI peaking at 5.4 per cent in March, 32-month high, while the economy maintained fast growth at 9.7per cent in the first quarter of 2011. The central bank is set to continue policy tightening and has now raised the reserve ratio to 20.5 per cent. The benchmarket interest rates have also been revised four times since October last. IMF says China needs tot bring down its credit growth though the authorities have acted with successive rate increases and taken measures directed at property market. (IPA Service)