Asia Needs Own Monetary Fund to Stem Crisis, ADB’s Kawai Says

Feb. 25 (Bloomberg) -- Asia needs its own monetary fund to protect the region’s economies from capital flight as the global financial crisis deepens, according to the head of the Asian Development Bank’s research arm.

The Feb. 22 decision of 13 Asian countries to pool $120 billion of foreign-exchange reserves to defend their currencies was an important step toward the creation of a fund, Masahiro Kawai, 61, dean of the Asian Development Bank Institute, said in an interview on Feb. 23.

An Asian version of the International Monetary Fund may help ensure central banks have enough to shield their currencies from speculative attacks such as those that depleted the reserves of Indonesia, Thailand and South Korea a decade ago. Many Asian currencies have tumbled in the past year as the global recession hammers their export-dependent economies.

“A storm has come, so it’s a good chance to further develop discussions,” Kawai, a former Japan Finance Ministry official and World Bank economist, said in his Tokyo office. “There’s no doubt that they’re heading in the direction of an Asian Monetary Fund.”

The $120 billion reserve pool agreed by Japan, China, South Korea and 10 Southeast Asian nations broadens an arrangement called the Chiang Mai Initiative, which previously only allowed bilateral currency swaps.

Under the program, the foreign reserves will be managed by each nation rather than put together in a fund. Kawai said one role for an Asian Monetary Fund might be to manage the reserves, making it “easier to carry out the Chiang Mai initiative.”

IMF Loans

A decade ago, Indonesia, Thailand and South Korea were forced to turn to the IMF for more than $100 billion of loans after they spent much of their foreign reserves attempting to prop up their currencies. In return, the governments had to cut spending, raise interest rates and sell state-owned companies.

It may be more palatable for governments in the region to ask for loans from an Asian Monetary Fund, particularly given the demands placed on them by the IMF in the past, Kawai said.

“It’s probably politically difficult to go to the IMF, because of their experience a decade ago,” he said.

Creation of an Asian Monetary Fund was first proposed by Japan in 1997 in the wake of the crisis. Eisuke Sakakibara, Japan’s top currency official at the time, said the U.S. opposed the idea because it threatened the country’s influence in the region. The U.S. has the most voting rights at the Washington-based IMF.

Persuading China, which didn’t embrace Japan’s proposal 11 years ago, may be key to its revival, Sakakibara said.

“If China fully agrees with the idea, we can say it’s none of the U.S.’s business even if it opposes it,” he said. “We could virtually make it a fund by expanding the current Chiang Mai Initiative.”

China, Japan, South Korea and the 10 members of the Association of Southeast Asian Nations have amassed more than $3.6 trillion of foreign-exchange reserves, about half of the global total.