After the 1997-98 Asian financial crisis, countries in the region expended great effort to establish new financial safety nets. The Chiang Mai initiative is one such safeguard.
However, and by popular assessment, the scheme has numerous limitations and is perhaps unusable.
The first step in the development of Asian financial defences took place in August 1977 when the monetary authorities of the original five Association of Southeast Asian Nations countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand) established reciprocal currency arrangements. The Asean Swap Arrangement was created with an initial maximum of $100m, rising to $200 million in 1978. Such sums proved inadequate when the 1997-98 crisis struck.
The CMI was subsequently created in 2000 by expanding the bilateral swaps of the ASA both in size and membership. It included all Asean members, as well as China, Japan and South Korea. The initiative was intended to supplement the existing facilities of the International Monetary Fund, whose draconian bail-out conditions in 1997 continue to provoke bitter resentment.
However, when short-term capital quickly exited emerging economies after the 2008 financial crisis, members requiring liquidity did not use the CMI. South Korea and Singapore borrowed from the Federal Reserve, and Indonesia secured finance through a World Bank-led consortium.
In response, the CMI was ‘multilateralised’ in 2009. The CMIM, as it became known, is a self-managed reserve pooling arrangement governed by a single contract. Asean countries contribute 20%, and the remainder comes from China (32%), Japan (32%) and South Korea (16%). The CMIM came into effect in March 2010 with $120bn, and doubled in size in 2012. A country can draw up to 30% of its quota without being subject to IMF conditionality. To draw its full quota, the remaining amount to be disbursed must be tied to an IMF programme.
Although the CMIM is a common liquidity pool, there is no common or centralised fund; the contributions remain in the central banks of member countries. In the event of a balance of payments or liquidity crisis, a member can swap its local currency for dollars from this pool. Each country’s borrowing quota is based on its contribution multiplied by its respective borrowing multiplier. The borrowing multiplier is set at five for Brunei, Cambodia, Lao, Myanmar and Vietnam. For Hong Kong, Indonesia, Malaysia, Singapore and Thailand, it is 2.5. South Korea’s borrowing multiplier is one, and for Japan and China it is 0.5.
Despite the manifold changes to the CMIM, some question whether it is or can become an effective regional financial safety net, even as a ‘supplement’ to the IMF.
Although the scheme has increased substantially, the amounts involved remain relatively low. The sums available to large Asean countries are much lower than Indonesia and Thailand required from the IMF in 1997-98. Moreover, the amounts available in the absence of a Fund programme are trivial.
The key to making the CMIM practicable, and dropping IMF conditionality, would be strengthening Asia’s financial surveillance systems. The Asean+3 Macroeconomic and Research Office, established in 2011, is intended to perform this function.
The goal for East Asia should be to continue developing the CMIM so it becomes a reliable complement to the IMF and provide meaningful supplementary finance. This should include increasing the size of the CMIM, perhaps through the participation of other countries like Australia, India and New Zealand as associate members.
Improving AMRO’s ability to provide regional surveillance and burying the stigma still attached to the IMF 20 years after the Asian financial crisis ought to be prioritised as well.
While effective, Asian countries inclination towards accumulating enormous foreign reserves to protect against volatility is an expensive policy. The increasing popularity of and reliance on bilateral swap agreements, too, leaves countries at the whim of their swap partners. A strengthened CMIM would be a much more advantageous and prudent safeguard for the region.
John West is Executive Director of the Asian Century Institute and a Member of the OMFIF Advisers Network.