By Anna Yukhananov and Alonso Soto
WASHINGTON Oct 12 Global finance chiefs on
Saturday told the IMF to stand ready to aid emerging market
economies that could be destabilized by a sudden flight of
capital when the U.S. Federal Reserve and other central banks
back away from ultra-loose monetary policies.
The International Monetary Fund's governing panel, after a
semi-annual meeting, acknowledged the risks posed by a
transition toward more normal policies in advanced economies,
and it urged nations not to delay preparations.
"The key task is to focus on the transition, prepare
ourselves well for this eventual normalization," the committee's
chairman, Singaporean Finance Minister Tharman Shanmugaratnam,
told reporters. "It's not imminent, but it will happen."
A wave of selling spread quickly through world financial
markets this year after the Fed, responding to signs of stronger
U.S. growth, said it could start winding down its economic
stimulus program by year end.
The pain was felt most severely in developing countries as a
gusher of cheap dollars that had poured into their economies
dried up, sparking a sharp slide in stock prices and currencies
and pushing up local interest rates.
Low interest rates in developed economies, engineered by
their central banks in recent years, had spurred investors to
hunt for higher-yielding assets, many of which were found in
When the U.S. central bank does move to reduce stimulus, the
repercussions "may be even more significant," said Zeti Akhtar
Aziz, chief of Malaysia's central bank. Aziz said the IMF's
"policy toolkit" needed to expand to help cope with the fallout.
The U.S. central bank has held interest rates near zero
since 2008 and has tripled its balance sheet to roughly $3.7
trillion. Over the last year, it has been pumping $85 billion
into the U.S. financial system each month through bond
The IMF panel, which represents the Fund's 188 member
nations, said these ultra-accommodative policies have supported
world growth and remained appropriate for now.
Worries about the strength of the U.S. economy prompted the
Fed to refrain from winding down its stimulus last month. But
few doubt it will wait very long.
The panel urged developed market central banks to try to
limit the damage to emerging markets when the time comes to move
toward tighter policy, saying the shift should be "well-timed,
carefully calibrated and clearly communicated."
The Fed faced criticism from officials in developing nations
and from market participants for abruptly suggesting in June
that it could soon move to scale back its stimulus. It surprised
onlookers again last month when it opted to hold fire.
"Global financial stability is a shared responsibility,"
said Ewald Nowotny, a member of the European Central Bank's
Governing Council. "The Fed should therefore clearly communicate
the path of its intended policy actions to minimize negative
spillovers" on developing economies.
Russian Finance Minister Anton Siluanov said policymakers
should prepare for another round of "considerable turbulence in
financial markets" once a move toward tighter policy begins.
"The assumption that the asset price correction that began
this summer has already been largely completed does not seem to
be plausible to us," he said, referring to the sell off in
To protect themselves, finance leaders urged developing
nations to act now to reform their economies and reduce
vulnerability to unpredictable capital flows.
That's especially critical for countries where budget
deficits make them dependent on unstable foreign capital flows.
"Fiscal consolidation remains a high priority in countries
with large fiscal imbalances, while others should rebuild
buffers, unless growth deteriorates significantly," the panel
said in a closing statement.
While emerging markets' pace of growth has slowed of late,
the IMF governing committee said it still expects expansion in
these countries to account for "the bulk of global growth."
Advanced economies, including the United States and Japan,
need to commit to medium-term deficit reduction plans while
supporting near-term growth and job creation, it said.
The finance chiefs also called for completing IMF reforms to
give emerging markets a greater say at the global lender.
Three years ago, the IMF's board agreed on changes that
would cut Europe's representation, but they have been held up
because the U.S. Congress has yet to sign off on them, and
prospects for action before year-end are slim. Without
ratification by the United States, the fund's biggest and most
powerful member, the reforms cannot move forward.
"The governance reforms have entered a stage of complete
paralysis and this has further eroded the fund's legitimacy and
credibility," said Brazil's central bank chief, Alexandre
"Emerging market countries have honored their part of this
political agreement," he added. "It is time for the United
States and Europe to deliver theirs."