Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

The Imf And Low-Income Asia: Making a Difference

International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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Information about Asia and the Pacific Asia y el Pacífico
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The Asia and Pacific region is the most economically dynamic and diverse in the world. It is an important driving force of growth in the global economy, featuring 4 of the world’s 12 largest economies—Japan, China, India, and Korea—as well as several of the fastest-growing ones. Nevertheless, the Asia and Pacific region remains home to some of the poorest countries as well. And the region’s low-income countries still need help adjusting to the new demands of globalization:

Across the region, the IMF is working closely with governments of Asia’s low-income countries, a group comprising 17 countries, with an overall population in excess of 350 million, including a large number of people living in poverty—that is, on less than two dollars a day. It is a group that is itself diverse, including countries in transition to a market-based system (like Vietnam, Cambodia, and Mongolia), Pacific economies (like Papua New Guinea) disadvantaged by a limited market size, and countries vulnerable to natural disasters and other external shocks (like Bangladesh).

Although each country faces its own challenges, there are certain common features in their reform strategies: pursuing stable policies; strengthening institutional and human resource capacity; and fostering a business-friendly environment that can help attract foreign direct investment, create jobs, and reduce poverty. In all these areas, the IMF has been working with low-income countries, tapping into its ability to provide policy advice, technical assistance, and financial support. The five country snapshots that follow show the IMF in action.

Liberalizing trade: Vietnam

Vietnam has opened its economy as a way to achieve sustained, rapid growth and higher living standards. Since 1986, the country has made great strides in liberalizing its trade system. “Dismantling trade barriers has been a cornerstone of its doi moi—or renovation—policies, and the IMF has supported this strategy,” says Lazaros Molho, the IMF’s mission chief for Vietnam.

Between 1993 and 2004, Vietnam’s trade openness—as measured by the sum of exports and imports relative to GDP—more than doubled, and its share of world exports more than tripled. Propelled by its dynamic export sector and increasing foreign direct investment, Vietnam markedly improved its growth performance (with GDP growth averaging more than 7½ percent a year over 1993-2005) and sharply reduced poverty (from 58 percent in 1993 to less than 20 percent in 2004). In both regional and global terms, “this is an impressive performance,” says Molho.

Since 1993, Vietnam’s IMF-supported reform programs have all contained some components of trade liberalization, including simplifying import-licensing procedures, phasing out quotas, and liberalizing trading rights. Notable among Vietnam’s most recent efforts was the 2001-05 trade policy road map, which called for tariff reduction, the removal of quantitative restrictions, and other measures aimed at laying the basis for accession to the World Trade Organization (WTO). A bilateral trade agreement with the United States in 2001 gave further impetus to Vietnam’s efforts to liberalize its trade and investment regimes while also providing a useful framework for WTO accession. Regional commitments under the Association of Southeast Asian Nations Free Trade Area have also served as important anchors for liberalization and have contributed to a rapid increase in Vietnam’s trade flows over the past decade.

There is still considerable room, however, for Vietnam to dismantle its remaining nontariff barriers; further reduce the average level of its tariff rates, which remain among the highest in Asia; and continue to open up its trade and investment regimes. The ongoing WTO accession negotiations provide an important venue for the pursuit of progressive international integration. WTO accession will not only create more trade opportunities, it will also spur improvements in the legal and business environment, and should thus continue to improve Vietnam’s attractiveness as a destination for foreign direct investment.

The IMF supports the country’s efforts to join the WTO, and it provides complementary advice and technical assistance to help Vietnam develop a more open and efficient exchange system. In this latter connection, Vietnam took an important step in October 2005, when it removed remaining restrictions on its current international payments. Looking ahead, the IMF will continue to provide Vietnam with policy advice on macroeconomic management and related structural reforms in the context of its surveillance operations, and it will remain available to provide technical assistance to help the authorities develop a more efficient, market-oriented foreign exchange market.

Adjusting to shocks: Bangladesh

With the expiration of quotas under the WTO’s Multifiber Agreement at the end of 2004, a number of low-income countries in Asia, including Bangladesh, feared that intensifying competition, especially from China, would jeopardize textile and clothing markets that they had come to rely on for foreign exchange revenue and employment.

In recognition of these risks, the IMF introduced the Trade Integration Mechanism (TIM) in April 2004 (see page 19) to help member countries meet temporary shortfalls in their balance of payments. Two months later, the IMF lent Bangladesh—a major exporter of ready-made garments—$78 million in financial support under the TIM to help the country cope with anticipated balance of payments pressures.

“The good news,” says Thomas Rumbaugh, IMF mission chief for Bangladesh, is that the country “has weathered the storm and is competing effectively in the sector.” Exports of ready-made garments have held up better than had been expected and have also benefited from the reintroduction of “safeguard” quotas on China’s textile and clothing exports.

However, significant challenges lie ahead, and prospects for its ready-made garment exports will depend on Bangladesh’s ability to address infrastructure bottlenecks, cumbersome customs administration, still-onerous regulatory requirements, and governance and security concerns.

Greater exchange rate flexibility is another reason Bangladesh has proved resilient. By providing more effective price signaling, greater flexibility “not only helps allocate an economy’s resources to their most productive use,” explains Olin Liu, a member of the IMF’s mission team; “it also improves the economy’s ability to weather external shocks arising from a rapidly changing global environment, when coupled with prudent macroeconomic policies.”

IMF policy advice and technical assistance helped prepare Bangladesh for the transition to a flexible exchange rate system. With IMF technical assistance, the central bank strengthened its capacity to support a flexible exchange rate and developed a more market-based monetary framework to control inflation. The authorities floated the taka at the end of May 2003 by withdrawing the official band for buying and selling rates against the dollar. “Since then, the system has been working relatively well,” says Rumbaugh. “A commitment to the market-based exchange rate will continue to underpin the economy’s ability to adjust to changes in the external environment.” This will be important to support continued strong performance in exports and remittances—key ingredients in the government’s growth and poverty reduction strategy. To that end, the IMF will continue to provide technical assistance and policy advice.

Improving bank supervision: Papua New Guinea

When the IMF opened its office in Port Moresby in September 2000, Papua New Guinea’s economy had been through a difficult period, in part because of governance issues, and economic activity and business confidence were deteriorating sharply. The government—committed to major economic and political reform with the objective of improving prospects for faster growth and poverty alleviation—set out to tackle a number of problems with the IMF’s assistance. Among the government’s chief priorities was developing a well-functioning financial system that could help bolster macroeconomic and financial stability and attract larger and more stable international capital flows.

To strengthen on-site bank supervision and develop effective regulatory and supervisory practices, the IMF provided Papua New Guinea’s central bank with considerable technical assistance. It helped the authorities craft important legislation—the new Central Banking Act 2000, the Banks and Financial Institutions Act 2000, and the Superannuation and Life Insurance Acts 2000—early in the reform process. These laws, in turn, greatly enhanced the central bank’s capacity to implement a number of IMF recommendations—notably, setting limits on lending to single borrowers; establishing more stringent internal audit and reporting requirements; adopting higher minimum capital requirements and a capital adequacy rule that conforms to Basel standards; and using an internationally recognized framework to assess a bank’s capital adequacy, asset quality, management, earnings, and liquidity.

The central bank, following best international practice, introduced stringent supervision of banks, finance, companies, and other financial institutions. “This has led to prudent management of depositors’ funds, members’ contributions to superannuation funds, and premiums on life insurance policies held with these financial institutions,” explains Ebrima Faal, the IMF’s Resident Representative in Papua New Guinea. A greater focus on good governance and on assessing the qualifications of those who serve as directors and managers of these financial institutions is also important, he adds.

So far, the reforms have succeeded. Central bank staff members who trained with technical assistance experts now conduct their own on-site inspections. And a number of indicators suggest a more financially sound banking system. Nonperforming loans as a percent of total loans, for example, dropped from 7.3 percent in 2002 to 3.6 percent in 2005. Return on assets— negative in 2002—topped 4.0 percent in 2005.

“A key challenge now,” says Faal, “is to ensure that the central bank’s supervisory capacity can be sustained and serve as the basis for ongoing prudential regulation and supervision.” The IMF’s ongoing technical assistance is focusing on these areas.

Strengthening public finances: Cambodia

One of the government’s main challenges since the country emerged in 1991 from devastating civil conflict and international isolation has been to raise public revenues to meet expenditure requirements for reconstruction and basic public services and to enhance public financial management to use those resources effectively. IMF technical assistance, coupled with financial support and policy advice, has been instrumental in helping the government step up to that challenge.

When the country’s rehabilitation process began, public revenues were less than 5 percent of GDP, public spending was more than double the state’s receipts, and the current balance of the government’s budget was in deficit. The government embarked on a fiscal reform process in 1992. Only in 1999, however, with the introduction of a 10 percent value-added tax, did a simplified tax structure and widened coverage allow the government to boost revenue to 10 percent of GDP

That effort was strengthened when the government launched a number of reforms in 2001 to improve tax and customs administration with the help of technical assistance under the Technical Cooperation Action Program (TCAP). The TCAP— designed jointly by the Cambodian authorities, the IMF, and other donors—sought to bolster the operational capacity of key institutions to mobilize more revenue, and to improve expenditure execution and cash management. Improvements in customs administration helped increase revenue to more than 11 percent of GDP in 2001-02. Nevertheless, the revenue-to-GDP ratio is very low by international standards, and is still insufficient to finance Cambodia’s critical infrastructure, rural development, and social spending needs. A key challenge is to raise government revenue further. The IMF continues to provide advice on policies and the macroeconomic framework for increasing revenues, as well as technical assistance to strengthen tax and customs administration.

On the other side, the government’s public expenditure policy has also improved during the past few years. Spending has been restructured toward priority areas, such as agriculture, rural development, health care, and education, although education and health care expenditures still lag behind the average of countries at a similar stage of development. However, despite progress to date, Cambodia still faces the daunting challenge of transforming its public financial management system into one that is capable of adequate service delivery. The country continues to receive extensive assistance from the IMF, together with the World Bank, to support the government’s priority program of addressing the weaknesses.

Cambodia’s recent improvements in overall macroeconomic performance, poverty reduction, and public expenditure management—from a very low starting point—helped pave the way for 100 percent cancellation, in January 2006, of its obligations to the IMF under the Multilateral Debt Relief Initiative (MDRI) (see page 29). As John Nelmes, the IMF’s Resident Representative in Cambodia explains, the country’s reforms “will help ensure that money made available under the MDRI will be used effectively.” The government intends to spend the debt-service savings—about $82 million over a number of years—to finance rural irrigation infrastructure, which should raise agricultural productivity and directly improve the livelihoods of the poor.

Planning for the future: Mongolia

Policymakers in Mongolia have faced a multitude of challenges since the early 1990s, when the country embarked on its transition to a market economy. In addition to establishing laws and building institutions conducive to private sector development, the authorities have had to address major weaknesses in the banking system and contend with large external shocks, including extended droughts, a series of extremely harsh winters, and volatility in the prices of Mongolia’s main export commodities (copper, gold, and cashmere).

Throughout this period, the IMF has supported the authorities’ reform efforts with loans from its concessional facilities and with extensive technical assistance in such areas as financial sector restructuring, banking supervision, tax policy and administration, and statistics. The government’s reforms were broadly successful in reducing inflation from very high rates, strengthening budget revenue, and restoring confidence in the financial system. Nevertheless, economic growth generally remained lackluster during the decade through 2001, budget deficits remained fairly large, and there was a continued buildup in public debt.

The period since 2001 has witnessed a marked improvement in economic performance, as the benefits of the reforms of the 1990s began to take hold, weather conditions improved, and the prices of Mongolia’s main export commodities moved sharply higher. Real GDP growth has averaged about 6½ percent a year since 2002, more than double the average growth rate of the preceding eight years. With buoyant economic activity and record-high export prices, the budget and balance of payments have strengthened significantly. Budget revenues have increased by an impressive 13 percentage points of GDP compared with the mid-1990s, and the budget deficit, which had averaged about 9½ percent of GDP in the second half of the 1990s, recorded its first-ever surplus (a substantial 3 percent of GDP) in 2005. The external current account has also been in surplus since 2004, and international reserves have been substantially rebuilt.

Despite these important achievements, major challenges remain to be addressed if Mongolia is to reduce its vulnerability to external shocks and make lasting inroads in reducing poverty, warns Roger Kronenberg, Advisor in the IMF’s Asia and Pacific Department and Mission Chief for Mongolia. To plan for the longer term, policymakers need to help insulate the economy from revenue shocks that arise from volatile resource prices. “Despite the current favorable conditions, it doesn’t take very sweeping assumptions to see that debt sustainability could still be an issue. Policies, therefore, need to be firmly grounded in a credible medium-term budget framework for the success of such a strategy,” says Kronenberg.

The IMF staff is recommending that Mongolia save most of the windfall from exceptionally high commodity prices, remain alert to the risks of renewed inflationary pressures from rapid credit growth, and refrain from foreign borrowing on expensive commercial terms. The IMF is also encouraging Mongolia to improve the transparency of the central bank and other public sector institutions and to move ahead with civil service reforms. Kronenberg notes that discussions with the Mongolian government on a possible new program supported by the IMF’s Poverty Reduction and Growth Facility were initiated earlier this year and are expected to continue in the fall, when the authorities start drawing up the 2007 budget.

Different strategies, same objective

The different challenges faced by these countries and the various strategies they are pursuing indicate that there is more than one path to sustainable growth and poverty reduction. With this in mind, the IMF has also followed a flexible approach in supporting their efforts. Policy advice takes place through regular country health checks, known as surveillance. Financial assistance is provided through a range of different instruments. And technical assistance supports the development of macroeconomic institutions in key areas, which vary with country circumstances and include the establishment of a foreign exchange market, a framework for monetary policy, bank regulations and supervision, anti-money laundering, tax policy and administration, public financial management, external debt management, and economic statistics. All of these countries have made some strides toward poverty reduction and are making progress toward other key Millennium Development Goals (see page 29), such as reducing child mortality and combating HIV/AIDS and other diseases. Much more remains to be done, however, and the IMF stands ready to continue to assist in this effort.

Christine Ehrdhim-zadeh

IMF External Relations Department

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