Assessment of Programs IMF Releases Internal Review of Its Response To Crisis in Three Affected Asian Countries

• Pages: 17-20

Page 17

The IMF has released its first internal review of its policy approach to the crisis that erupted in Asia's financial markets in 1997. Covering the period through October 1998, the review focuses primarily on events in Indonesia, Korea, and Thailand- the three countries most severely affected by the crisis. IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment, by the IMF's Policy Development and Review Department, looks at the causes of the crisis, the IMF's response in terms of policy advice and financial support for the three countries, and the reaction to the programs. The released report also includes the Chairman's December 1998 summingup of the IMF Executive Board's discussion of the review. It was the subject of press conferences on January 19, conducted by Jack Boorman, Director of the Policy Development and Review Department (see page 20). The review notes that the Asian crisis differs from previous crises in a number of key respects and may indicate fault lines in an increasingly integrated global economic and financial system.Unlike so many other cases in which IMF assistance is requested, the Asian crisis did not result mainly from the monetization of fiscal imbalances. It was rooted, instead, in financial sector fragilities, stemming in part from weaknesses in governance in the corporate, financial, and government sectors. These weaknesses, given the increasing rapidity with which international capital movements can change course, made these economies increasingly vulnerable to changes in market sentiment, a deteriorating external situation, and contagion. The IMF's support to all three countries was organized under the Emergency Financing Mechanism. This mechanism, with a dramatically shortened period of negotiation, review, and IMF Executive Board approval, permitted the programs to be put in place very quickly in responsePage 18 to immediate and overwhelming market pressures. At the same time, it necessitated exceptionally quick analysis and negotiation, and decision making, at times, had to be based on unusually incomplete information.

Initial Attempts to Restore Confidence

The design of the policy responses in the context of IMF-supported programs was dictated by the distinctive features of the crisis, the report notes.The strategy chosen, given the nature and scale of the crisis, combined macroeconomic and structural policy measures, along with an unprecedented commitment of financial resources to break a self-reinforcing cycle of capital outflows, exchange rate depreciation, and financial sector weakness.

Another key element of the IMF-supported programs was the decision to permit exchange rates to continue to float-part of the initial response of the authorities in all three countries to the pressures...