IMF Support Has Been Integral Element in Helping Countries Weather Impact of Asian Crisis

• Author: Lynn Aylward
• Position: IMF External Relations Department
• Pages: 280-281

Page 280

The financial crisis that erupted in Asia in mid-1997 led to sharp declines in the currencies, stock markets, and other asset prices of a number of Asian countries; threatened their financial systems; and disrupted their real economies. The crisis also put pressure on exchange rates in emerging markets outside Asia and is expected to reduce the world growth rate in 1998 by more than 1 percent.

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The crisis was unexpected in that it unfolded against the backdrop of several decades of outstanding economic performance in Asia. Moreover, the difficulties that the East Asian countries face are not primarily the result of macroeconomic imbalances. Rather, they stem from weaknesses in financial systems and, to a lesser extent, in governance. A combination of inadequate financial sector supervision, poor assessment and management of financial risk, and maintenance of relatively fixed exchange rates led banks and corporations to borrow large amounts of international capital, much of it short-term, denominated in foreign currency, and unhedged. As time went on, this inflow of foreign capital tended to be used to finance poorer-quality investments.

Response to the Crisis

Since the IMF is charged with safeguarding the stability of the international monetary system, its central role in resolving the Asian financial crisis is clear and has been reaffirmed by the international community. The IMF's priority has also been evident: to restore confidence to the economies affected by the crisis.

In pursuit of this immediate goal of restoring confidence in the region, the IMF responded quickly by:

- helping the three countries most affected by the crisis-Indonesia, Korea, and Thailand-arrange economic reform programs that could restore confidence and be supported by the IMF;

- approving some $35 billion of IMF financial support during 1997 for reform programs in Indonesia, Korea, and Thailand, and spearheading the mobilization of some $77 billion of additional financing from multilateral and bilateral sources in support of these reform programs. On July 15, 1998, the assistance committed for Indonesia was augmented by an additional $1.3 billion from the IMF and an estimated $5 billion from multilateral and bilateral sources (see IMF Survey, July 20, page 229), while international donors pledged additional...