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International Monetary Agreements Amendment Bill 1998
Bills Digest No. 165 1997-98
International Monetary Agreements Amendment Bill 1998
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
International Monetary Agreements Amendment Bill 1998
This Bill proposes to establish a legislative framework for Australia’s participation in specific types of International Monetary Fund (IMF) actions in countries facing particular economic crises. The Bill is especially significant in relation to Australia’s participation in the IMF packages to Thailand, Korea and Indonesia.
Australia’s current relationship with the IMF is governed by the International Monetary Agreements Act 1947 (the 1947 Act), which sets out Australia’s financial commitments to the IMF and the process through which those commitments will be met. This Bill proposes to amend the 1947 Act to provide a legislative basis for the provision of supplementary financial assistance as requested by the IMF in relation to specific loans packages. Currently, IMF requests for supplementary financial assistance are dealt with on an ad hoc , non-legislative basis. In his Second Reading Speech the Treasurer, the Hon. Mr Peter Costello MP, notes that this unstructured process is inappropriate and cumbersome when swift action is required.(1)
This financial assistance is in excess of the standard membership contribution provided by Australia to the IMF. Currently, Australia contributes to the IMF capital base, which provides two mechanisms for loaning funds to member countries facing emergencies - the ‘general arrangements to borrow’ and the ‘new arrangements to borrow’. Australia’s participation in the ‘new arrangements to borrow’ scheme was authorised by recent amendments enacted in the International Monetary Agreements Amendment Act 1997 .(2)
Currently, there is significant public debate concerning the operation of IMF loans and the conditions attached to those loans.(3) In order to place this Bill within the context of that debate, the Digest briefly outlines the general structure of the IMF, its action in response to the current Asian economic crisis and Australia’s participation in that action. The Concluding Comments outline some general concerns in relation to IMF action.
The International Monetary Fund (IMF), along with the International Bank for Reconstruction and Development (the World Bank) and the General Agreement on Trade and Tariffs (GATT), was established at the 1944 meetings at Bretton Woods between non-Communist allied countries. The aim of the meetings was to construct the institutional framework for a post-world war international economic system founded on free trade principles. Key aspects were to establish a system of fixed exchange rates, institute policies that would avoid ‘beggar-thy-neighbour’ protectionism and provide mechanisms to supply capital for post-war reconstruction.
The key role of the IMF was to provide balance of payment support for countries experiencing temporary balance of payments difficulties. In exchange, the IMF has traditionally required monetary and fiscal austerity designed to overcome balance of payment p roblems. The IMF also managed the fixed exchange rate system (which since the 1970s has been defunct) and maintains a supervisory role to support a co-ordinated approach to national and international economic policies.
In addition to purely country support, the IMF has become involved in international strategies and broader themes. For example, the 1970s oil crises meant not only expensive oil for the west, but also a sudden massive flow of funds to the Middle East countries in particular. To offset the outward flow of funds from the oil importing countries, the IMF became involved in ‘recycling’ the so-called ‘petro-dollars’ to mainly third world countries suffering as a result of massive increases in the value of their energy imports. The significant loans made during this era are partially responsible for the very significant foreign debt which has plagued many third world countries for the past two decades, and which the IMF has sought to remedy through structural adjustment programs.(4)
The IMF is ‘owned’ by its members, where control and voting power are directly related to the amount of money each member contributes. The quota is determined in accordance with each country’s national income, trade and other economic indicators. This system ensures that the priorities of wealthier countries (the top OECD countries known as the Group of 10) can heavily influence the direction of the Fund. The US is by far the largest quota holder, with 18 per cent of the total vote. As IMF decision-making generally operates according to the ‘eighty-five per cent’ rule, the 18 per cent vote gives the US an effective veto over key IMF decisions.(5) Loan requests go through a 24 strong Executive Board, with representatives from the US, UK, France, Germany, Japan, China, Russia and Saudi Arabia and with other countries represented by voting blocs. Under an agreement, the Executive Director is always a European national (currently Michael Camdessus of France), and the Executive Board is accountable to a Board of Governors, comprised of a representative of each member country.
Member countries are allowed to borrow up to 25 per cent of their quota without any conditions. Beyond this, drawing rights are subject to the imposition of conditions as part of the loan arrangement. Although these conditions can be flexible in accordance with a country’s particular situation, since the 1980s most conditions are modelled on variations of what the IMF terms ‘structural adjustment programs’ or austerity measures. The basic goal of structural adjustment programs is to increase revenue and reduce expenditure. The most frequently imposed elements of an adjustment program include:
- devaluation of the currency and ceilings on domestic credit and other monetary aggregates;
- privatisation of government enterprises such as electricity, water and transportation;
- reduction in other government expenditure, such as social spending on health, education, and social security systems and a concomitant pressure to privatise such systems; and
- elimination of price controls and other regulatory controls over trade and commerce and elimination of food and other consumption subsidies.
An important point to note is that although the IMF’s operation reflects Member country interests, key beneficiaries of IMF policies inclu de private financial institutions. Structural adjustment programs usually have the result of guaranteeing repayment of private bank debt by private and public debtors in a Member State. As a former senior official at the World Bank has stated:
The pressures on the IMF to continue to lend money are driven by the fact that the absence of lending could jeopardise institutions in the industrial countries. For the IMF, the need to protect Western banks is the driving force.(6)
Of course, while IMF programs inevitably ‘hurt’ the host country, the IMF may also play the convenient scapegoat when there is no alternative to unpopular austerity measures.
The Asian financial crisis started in Thailand in mid 1997, and quickly spread to other Asian countries, most noticeably the Philippines, Malaysia, Indonesia, and Korea. Ultimately the Asian financial crisis led to the largest one-day point loss on Wall Street on 27 October 1997. The IMF arranged for ‘rescue packages’ for the three countries facing what appeared the most severe crises - Thailand, Indonesia and Korea in that order.
From mid-1996 Thail and was experiencing a sharp downturn in exports and slowdown in growth, difficulties in the property markets, a sharp fall in the stock market and weakening of the fiscal position. That was followed by ‘a series of increasingly serious attacks on the baht.’(7)
On 20 August 1997, as part of an overall package of reform, the IMF approved stand-by credit for Thailand of up to $US3.9 billion, with $US1.6 billion available immediately and the rest subject to performance targets and program review.(8) The package of measures under the program included:
- a new exchange rate regime based on floating of the baht;
- fiscal policy designed to produce a surplus;
- ending the support for insolvent financial institutions;
- strengthened financial regulation and supervision;
- acc elerated privatisation; and
- increased emphasis on secondary education and training.
Following a review of the Thai program the IMF has relaxed some of the fiscal austerity implied in the original package, such as the easing of the target for the budget ba lance.(9)
In discussions leading up to the announcement Australia, along with Hong Kong, Malaysia and Singapore each pledged $US1 billion while Japan pledged $US4 billion. Indonesia and Korea pledged $US0.5 billion each while the World Bank and Asian Development Bank agreed to contribute $US1.5 and 1.2 billions respectively. The Australian pledge to Thailand involves a currency swap arrangement between the Reserve Bank of Australia and the Bank of Thailand.
Indonesia has been hardest hit by the A sian financial crisis with massive falls in the exchange rate, stock prices and massive falls in the people’s living standards. The IMF believed that Indonesia’s structural weaknesses made it especially vulnerable to adverse external developments. It cited domestic trade regulations, import monopolies, lack of transparency and data deficiencies in the business environment, a weak banking system ill-prepared to withstand the financial turmoil in SE Asia, and high levels of corporate overseas debt taken out after a history of stable exchange rates which proved unsustainable.(10)
On 5 November 1997 the IMF announced a package including stand-by credit of $US10.14 billion for Indonesia. The rest of the package includes:
- fiscal measures designed to maintain the s urplus;
- tight monetary policy;
- closing unviable banks;
- liberalising foreign trade and investment;
- dismantling domestic monopolies;
- private sector participation in infrastructure;
- expanding the privatisation program; and
- increasing the transparency of public sector activities to enhance the quality of governance.
In addition to the IMF credits, the World Bank has pledged $US4.5 billion and the Asian Development Bank $US3.5 billion. Indonesia’s own external assets, which are estimated at equivalent to 6 mon ths imports, are committed to the package. In addition, Australia, as well as China, Hong Kong, Japan, Malaysia, Singapore and the US have indicated they would be prepared to consider supplementary finance to support the program in the event the IMF credit arrangements proved insufficient. Australia’s commitment is up to $US 1 billion.
Recently the IMF and Indonesia have been at something of a stand off and the situation is fluid. Indonesia has been slow to introduce the reforms from the IMF package. For its part, the IMF has been delaying further payments under the program, although this impasse looks set to subside.(11)
Korea’s problems emerged early in 1997 as a number of highly leveraged conglomerates or chaebols became bankrupt as a result of over-investment in steel and cars, and weakened profitability with the cyclical downturn. The bankruptcies weakened the financial system with non-performing loans reaching 7.5 per cent of GDP. The decline in stock prices further reduced the value of bank equity. All of this led to a sharp fall in external finance.(12)
On 4 December 1997 the IMF announced a package including a $US21 billion stand-by credit for Korea. The package of measures agreed by Korea includes:
- tight monetary policy with high interest rates to stabilise markets;
- tight fiscal policy;
- strengthening t he financial system through a firm exit policy for failing companies, market and supervisory discipline and increased competition;
- further trade liberalisation;
- easing restrictions on foreign ownership; and
- making it easier to dismiss workers.
In addition to the IMF funding, the World Bank has indicated it will provide $US10 billion to support specific structural reform. The Asian Development Bank has promised another $US4 billion. As a second line of defence, Australia along with Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK and US have indicated they are prepared, in the event that there is a need for additional resources, to consider supplemental financing. This ‘second line of defence’ is expected to be in excess of $US20 billion,(13) and was activated over Christmas with the Treasurer, the Hon. Mr Peter Costello MP, announcing an early drawing of $US8 billion on the supplemental support arrangements. Australia’s share was expected to be $US330 million, which should be reflected in the 1998-99 budget papers.
The Australian pledge to Thailand involves a currency swap arrangement between the Reserve Bank of Australia and the Bank of Thailand.(14) This arrangemen t between the two central banks should have no impact on the Australian budget. The only exception would be in the unlikely event that the Bank of Thailand were to default on its agreement. In that case the Reserve Bank of Australia would carry a capital loss, which would be reflected in a lower annual dividend being paid to the Australian Government.
The Treasurer has announced that Australia’s $US1 billion assistance to Indonesia, in the event that it is required, would take the form of a loan to be repaid once the support program came to an end.(15) The effect of an actual draw down on the facility on the part of the Indonesian Government would be to increase the outlays side of the budget and as a result increase the so-called ‘headline deficit.’
While the arrangement with Korea is a currency swap, the swap is government to government rather than central bank to central bank.(16) Hence any actual draw down on that arrangement would be akin to the Indonesian arrangement with the draw down being reflected in the headline deficit.
Finally, it is interesting to note the recent debate surrounding the International Monetary Agreements Amendment Act 1997 ,(17) which similarly altered Australia’s financial relationship to the IMF by ensuring Australia could participate in the IMF’s ‘new arrangements to borrow’. The Greens Western Australia proposed amendments which would tie provision of Australian finances under the ‘new arrangements to borrow’ to international human rights treaties. These amendments were rejected by the Government and the Opposition, but accepted by the Democrats and Senator Harradine.
Proposed subsection 8C(1) specifies the circumstance in which the Treasurer may agree to provide assistance to support a Fund program. It provides that:
- if the IMF requests Australia provide assistance to another country in support of a Fund program and
- the Treasurer is satisfied that at least one other government or organisation has, or intends to provide, financial assistance in similar circumstances
the Treasurer may enter into a agreement to lend money to the recipient country or to enter into a currency swap with the recipient country. Proposed subsection 8C(3) provides that the Consolidated Revenue Fund will be appropriated for such purposes.
Proposed subsection 8C(2) provides that an agreement under proposed subsection 8C(1) must provide for Australia ‘to be able to’ require early repayment in the event of suspension, or premature termination, of the Fund program. The requirement of early repayment is discretionary.
Proposed subsection 8C(4) ensures that if any Australian agreement as described above needs to be finalised in relation to an IMF program for the Republic of Indonesia or the Republic of Korea prior to the Bill being enacted, then provided that those agreements reflect the conditions set out in proposed subsection 8C(1) and 8C(2), the Bill will retrospectively validate the drawing on Consolidated Revenue Fund for the purposes of that agreement.
Significant criticisms have been levelled a t the operation of the IMF from a wide range of sources, both in relation to the Asian crisis and more generally. A common thread in this criticism is that as IMF action is primarily directed at ensuring repayment of debt contracted to private banks, other social and political goals are often marginalised. The Minister for Foreign Affairs and Trade, the Hon. Alexander Downer MP, has raised concerns at the social and political impact of the IMF adjustment program in Indonesia.(18) In light of the Bill’s aim of enhancing Australia’s response to IMF requests, it is useful to briefly consider these concerns.
Two experts in international political economy, Professor Robert Wade and Frank Veneroso,(19) have argued that the Asian crisis is partly the result of excessive financial deregulation and a willingness of international financiers to lend significant amounts to private firms with no government regulation, resulting in a run on local currency and domestic assets when the economy showed strain. Wade and Veneroso argue that, as the IMF ‘rescue packages’ are premised on further financial sector deregulation and trade liberalisation in general, this strategy will serve to further entrench key conditions which led to the crisis. They note that:
deregulating the financial system to the point where short-term capital can enter and exit even more easily has made it all the more likely that such crises will recur.(20)
In attempting to answer why the IMF would adopt such an apparently risky strategy, Wade and Veneroso con sider who are the beneficiaries of the IMF adjustment programs. They note that ‘there is no doubt that western and Japanese corporations and the multilateral economic and financial institutions are the big winners.’ Contrary to the perception that the IMF simply donates funds to struggling countries, Wade and Veneroso suggest that the transfer of wealth is, in fact, ultimately from those countries to certain economic institutions in the North:
The combination of massive devaluations, IMF-pushed financial liberalisation, and IMF-facilitated recovery may even precipitate the biggest peacetime transfer of assets from domestic to foreign owners in the past fifty years anywhere in the world.(21)
The second key criticism of IMF structural adjustment programs is th eir effects on the structures, or possible structures, of popular sovereignty, substantive democracy and human rights. Anne Orford, an expert in international trade law at the Australian National University, has argued that the key aims of adjustment programs of curbing government expenditure on social services, labour market deregulation, privatisation of government services and full trade liberalisation have significantly constrained:
the ability of peoples or their representatives to make decisions about wage levels for workers, education policy, health policy, social security provision, provision of services.(22)
These areas, which are considered crucial to popular sovereignty, substantive democracy and civil and political rights ‘are now treated as legi timately within the province of economists in institutions such as the IMF and the World Bank.’(23) Similarly, Martin Feldstein, President of he National Bureau of Economic Research has criticised the political impact on democracy of adjustment policies, noting that:
a nation’s desperate need for short-term financial help does not give the IMF the moral right to substitute its technical judgements for the outcomes of the nation’s political system.(24)
In relation to economic and social human rights, many co mmentators have persistently pointed out that the priorities of adjustment programs have resulted in increasing income disparity and swelling poverty, social dislocation and human rights abuses.(25)
Stanley Fischer, the First Deputy Managing Director of the IMF, has recently responded that ‘the answer to the critics is that monetary policy has to be kept tight to restore confidence in the currency and that fiscal policy [in Asian countries] was tighte ned appropriately but not excessively.’ Mr Fischer continued:
The Fund’s macroeconomic advice in Asia is appropriate to the circumstances of individual countries; that the structural changes in these economies supported by the IMF programs are necessary for the sustainable return of growth; that IMF lending should be conditional on changes in policy and not too easily available.(26)
1. House of Representatives, Parliamentary Debates , 3 March 1998.
2. Assented 15/9/1997, Act No.127, 1997.
3. For example, see Jennifer Hewitt, ‘The Money Trap’, Sydney Morning Herald , 21 March 1998, 1s, 4s.
4. For a discussion of this process, see Susan George, A Fate Worse Than Debt , Penguin, London, 1988, 11-73.
5. Ibid., 55.
6. Jennifer Hewitt, op.cit., 4s.
7. ‘IMF approves Stand-by credit for Thailand’, IMF Press Release no. 97/37, 20 August 1997.
8. ‘IMF approves Stand-by credit for Thailand’, IMF Press Release no. 97/37, 20 August 1997.
9. ‘IMF Executive Board completes second review of Thailand’s economic program’, IMF News Brief , 4 March 1998.
10. ‘IMF approves stand-by credit for Indonesia’, IMF Press Release no. 97/50, 5 November 1997.
11. Greg Earl and Michael Dwyer, ‘Indonesia: hints of compromise’, Australian Financial Review , 23 March 1998, 1.
12. ‘IMF approves SRD 15.5 billion stand-by credit for Korea’, IMF Press Release no. 97/55, 4 December 1997.
13. ‘IMF approves SRD 15.5 billion stand-by credit for Korea’, IMF Press Release no. 97/55, 4 December 1997.
14. ‘IMF approves SRD 15.5 billion stand-by credit for Korea’, IMF Press Release no. 97/55, 4 December 1997.
15. ‘Australia’s contribution to IMF sponsored program for Indonesia’, Hon. P Costello, Treasurer, Press Release no 116, 1 November 1997.
16. ‘Australia’s contribution to IMF program for Korea’, Hon. P Costello, Treasurer, Press Release no 126, 4 December 1997.
17. Assented 15/9/1997, Act No.127, 1997.
18. Geoffrey Barker, ‘Secret Report Damns Indonesia’, Australian Financial Revie w, 20 March 1998, 1, 4.
19. Professor Robert Wade is professor of political science and political economy at Brown University. Frank Veneroso advises multilateral financial organisations and governments on financial issues. See Wade and Veneroso, ‘The Asian Crisis: The High Debt Model vs. The Wall Street-Treasury-IMF Complex’, New Left Review (forthcoming, March-April, 1998).
22. Anne Orford, ‘Locating the International: Military and Monetary Interventions After the Cold War’, (1997) 38(2) Harvard International Law Journal 443 at 465.
23. Ibid., 470.
24. Martin Feldstein, ‘Refocussing the IMF’, Foreign Affairs (forthcoming, March/April, 1998), 27.
25. For example, see Waldon Bello, Dark Victory: The United States, Structural Adjustment and Global Poverty , Pluto Press, London, 1990; Anne Orford, op.cit.; Vandana Shiva, Biopiracy: The Plunder of Nature and Knowledge, South End Press, Boston, 1997.
- Stanley Fischer, ‘The IMF and the Asian Crisis’, Unpublished speech, Los Angeles, March 20, 1998 (available at ).
Krysti Guest and David Richardson
Bills Digest Service
Information and Research Services
23 March 1998
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