IMF's misdeeds unforgiven and unforgotten in Asia (Feature)

By Peter Janssen and dpa correspondents Apr 20, 2010, 6:08 GMT

Bangkok - The Internal Monetary Fund (IMF) may be enjoying increased popularity as a financial saviour in Eastern Europe and, perhaps, even Greece, but in Asia the institution remains a pariah.

The IMF was the key player in handling the Asian financial crisis that started in Bangkok in July 1997. That downturn quickly threw the region into a deep recession, wiping out foreign exchange reserves, depreciating currencies and causing a wave of bankruptcies and a slowdown in economic and social development.

Back then, the IMF was a tough taskmaster, and set strict conditions for its bail-out funds to hard-hit countries such as Indonesia, the Philippines, South Korea and Thailand.

In stark contrast to the fiscal stimulus programmes and government bail-outs of banks and corporations after the recent subprime crisis, which started in the USA, the IMF forced Asian governments to swallow bitter medicine in the 1997/98 crisis.

Loan conditions included tight fiscal and monetary policies, structural reforms and requirements that governments honour guarantees to creditors (mostly foreign).

When the recessions deepened and poverty increased, the IMF was forced to admit that it had proffered poor advice. A bitter aftertaste remains for those countries that were forced to take it.

'If the government took Thailand into another IMF program I think there would be mobs in the streets,' said Chalongphob Sussangkarn, a former Thai finance minister who is currently chief economist at the Thailand Development Research Institute (TDRI), a think tank.

During the Asian crisis, many governments wanted to bail out their banks and industrial giants, but were prevented from doing so by the IMF and its chief lenders, who were fond of citing 'moral hazard.'

'But if you look at what's happening in the current crisis, there was huge moral hazard created by bailing out all these financial institutions, so the IMF has completely changed in terms of the lending conditions they say must be imposed,' Chalongphob said.

Partly in response to their past mistakes in Asia, the IMF has created a new 'flexible credit line,' designed to provide bail-out funds with no conditions to countries with 'good track records.'

Of course, countries with good track records are unlikely to need bail-outs.

The IMF's poor track record in Asia has not stopped Eastern European governments from appealing to the IMF, although its role has not been without controversy.

The IMF extended 1.7 billion euros (2.3 billion dollars) to Latvia to help it overcome the steepest economic recession in the Europe. Because of the hard-hitting structural reforms introduced as conditions of the loan, the fund has been accused by some opposition groups of worsening the economic crisis.

The IMF claims it has done a lot more good than harm.

'What the fund has done in this part of the world is move very rapidly and be instrumental in preventing contagion from one country to another,' said the IMF's senior regional representative for Central and Eastern Europe, Mark Allen.

'We really deserve some credit for having prevented knock-on effects to other parts of the region,' he said.

In 2008, the IMF approved a 16.8-billion-dollar package to be loaned to the Ukraine in four instalments, in an effort to stave off a wide-reaching Ukrainian financial industry collapse and prevent a domino effect across Central and Eastern Europe.

The cash injection prevented a massive failure of Ukraine's creaky banking industry. But, in December, the fund announced it was 'withholding' the last 3.5-billion-dollar outlay because of Kiev's unwillingness to implement energy industry and government budgeting reforms that were part of the loan conditions.

Viktor Yanukovych, Ukraine's newly elected President, called the IMF loan programme to the former Soviet republic 'harmful,' and 'fiscally irresponsible.'

Meanwhile, in Europe, work could not go ahead on a bail-out plan for Greece until the IMF was included as a creditor, helping provide some political cover for all parties involved.

In Asia, which has weathered the current crisis better than most regions, the IMF is trying to 're-link' to governments in the region via the newly set up Chiang Mai Initiative Multilateralization Fund (CMIF), which has drawn contributions of 120 billion dollars from member states including China, Japan, South Korea and South-east Asia.

Should the CMIF be called on to bail-out one of the more precarious Asian economies this year, that might open an opportunity for the IMF to make a credible comeback to the region.

'If the CMIF could find a way to link a program to the IMF's flexible credit line with no conditionality that would be one way to get the IMF back into the Asian picture,' Chalongphob said.