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Reforming The Architecture of the
International Monetary System:
Managing The Impossible Trinity
Rakesh Mohan
Michael Debabrata Patra
Muneesh Kapur
Conference of the The BRICS & Asia, Currency Internationalization,
and International Monetary Reform
Hong Kong
10-11 December 2012
1
Presentation Outline
IMS – Performance Evaluation
IMS Early Warning: Review and Reform
Managing Capital Flows: Country-centric or
Multilateral
 Issues in reserve management



 Stylized facts
 Dominant Reserve Currency – Risks to IMS; Demand-Supply
Dynamics

Currency Internationalization: the Way Forward?
 Costs and Benefits

IMS and Central Banks
 Central Bank Mandate(s) – Rethink?

Key Takeaways
2
What is the IMS?

Set of official arrangements comprising:
◦
◦
◦
◦



exchange arrangements and exchange rates
international payments and transfers relating
international capital movements; and
international reserves
What it is not
Mission creep
Shifting channels of contagion- This time will
be different
3
IMS Performance – Evaluation

Increasing incidence of crises
Period
Gold Standard (1870-1913)
Inter-War Period (1925-1939)
Bretton Woods (1948-1972)
a.1948-1958
b.1959-1972
Post Bretton Woods (19732010)
a.1973-1989
b.1990-2010
Banking Crisis Currency Crisis External Default
1.3
0.6
0.9
2.1
1.7
1.5
0.1
1.7
0.7
0.0
1.4
0.3
0.1
1.9
1.1
2.6
3.7
1.3
2.2
3.0
5.4
2.4
1.8
0.8
Source: Bush, Farrant and Wright (2011) [Table A, p,7].
4
IMS Performance Evaluation:
Higher Exchange Rate Volatility
Variability in Major Exchange Rates
(coefficient of variation in percent)
Period
Yen/
Pound /
1970-79
US Dollar
16.47
US Dollar
13.91
1980-89
26.05
1990-99
Swiss Franc/
US Dollar
Euro/
30.62
US Dollar
21.91
13.46
18.90
21.69
13.55
6.91
8.46
15.07
2000-09
8.63
14.72
17.90
18.32
2000-12
12.96
24.49
27.92
18.18
Note: Data for Euro/US Dollar prior to 1999 pertain to Deutsche Mark/US Dollar.
Source: International Financial Statistics, IMF.
5
IMS Performance Evaluation:
Exchange and Payment Arrangements


Intermediate Solutions – managed floats; soft pegs
Current restrictions ebbing; capital restrictions well in evidence
Exchange Arrangements : Current and Capital Transactions
1970
1980 1990 2000
No. of Countries
37
54
72
152
Article VIII Status (no restrictions on
payments/transfers for current international
transactions
Article XIV Status (Transitional restrictions)
Bilateral Payments Agreements
Controls on Payments for Invisible
Transactions and Current Transfers
Repatriation/Surrender Requirements for
Exports and/or Invisibles
Controls on Capital Transactions
Total number of countries covered
Source: AREAER (various issues), IMF.
2010
171
80
60
80
86
42
73
83
47
87
34
60
98
19
67
95
100
114
124
107
89
99
119
110
141
123
155
182
186
186
190
6
IMS Performance : Evaluation
High flux in Capital Flows
9
Debt flows-Short term
8
Debt flows-Long term
Portfolio equity flows
2008
crisis
FDI flows
6
Total capital
5
US easy
monetary
policy
Recycling
petro dollars
4
Greenspan
put
Asian
crisis
3
Debt
crisis
2
1
0
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
-1
1970
Per cent to GDP
7
7
High Flux for AEs too
Capital Inflows and Outflows: Advanced, Emerging and Developing Economies
2003
2881
2004
4838
2005
6137
2006
7461
2007
10293
2008
279
(US $ billion)
2009 2010
213 3723
62
2676
142
31
4528
279
61
5634
442
-2
6667
796
97
9104
1093
85
-623
817
88
-196
321
145
2841
737
24
11
34
75
14
-16
20
32
63
112
16
36
137
20
77
113
17
78
234
72
102
236
35
117
250
119
164
358
39
162
173
88
286
154
23
94
125
2
62
46
15
71
294
-36
125
149
32
174
3458
55
3168
235
5299
29
4847
423
6703
60
5992
651
8160
29
7222
909
11231
103
9384
1744
1061
74
4
984
1102
84
277
741
4555
134
3132
1289
15 Dev. Asia
86
159
265
324
471
16 Central and eastern Europe
54
93
125
195
298
17 CIS
41
61
85
126
286
18 Mid. East and north Africa
36
54
73
150
346
19 Sub-Saharan Africa
9
15
17
7
65
20 Western Hemisphere
8
41
86
106
278
21 Net (11-1)
577
462
566
699
938
Note: Both inflows and outflows are exclusive of movements in foreign exchange reserves.
256
264
167
90
42
164
782
344
78
43
61
56
159
889
640
75
101
89
58
325
832
1
Total Assets (Outflows) (2+3+4)
2 International Organizations
3 AEs
4 EDEs (5 to 10)
5
6
7
8
9
10
Dev. Asia
Central and eastern Europe
CIS
Mid. East and north Africa
Sub-Saharan Africa
Western Hemisphere
11
12
13
14
Total Liabilities (Inflows) (12 to 14)
International Organizations
AEs
EDEs (15 to 21)
8
Reserve Accumulation by EMEs and AEs
12.0
Stock of International Reserves
10.0
US$ trillion
8.0
EDEs
6.0
AEs
4.0
2.0
0.0
Mar-2000
Other, 1.5
Jun-2012
Composition in Percent (March 2000)
Composition in Percent (June 2012)
Other, 5.3
Euro, 17.5
Euro, 25.1
Swiss Franc,
0.3
Yen, 6.3
Swiss Franc,
0.1
Yen, 3.8
Pound, 2.9
US Dollar,
71.5
Pound, 3.8
US Dollar,
61.9
9
AEs share in global reserves are coming down
IMS: International Reserves@
(US $ billion)
End of
1970
1980
1990
2000
2011
World
AEs
EMDCs
Sub-Saharan Africa
Developing Asia
Emerging Europe
Middle East& North Africa
Western Hemisphere
97.6
72.6
20.6
3.0
3.5
0.6
4.7
5.5
461.2
273.6
162.2
14.8
27.7
5.4
74.0
40.3
990.0
628.7
201.5
13.3
68.1
19.3
51.7
49.0
2070.3
1325.8
739.4
36.1
324.5
104.1
117.5
157.2
10705.1
3744.9
6954.6
178.1
4058.0
870.6
1108.1
740.1
100.1
1089.0
1373.5
2314.3
12186.3
Memo:
World Reserves with Gold at Market Prices
@: comprising foreign exchange, reserve position in the IMF, SDR holdings and gold valued at SDR 35 per ounce.
Source: International Financial Statistics, IMF.
10
IMF Surveillance –Review and Reform

Gaps in Surveillance – Response
◦ Enhancing integration of multilateral macro-financial analysis: WEO &
GFSR
◦ introduction of Early Warning Exercise, Fiscal Monitor, Spillover Report,
Pilot External Sector Report, and the G-20 Mutual Assessment Process
◦ Improvements in bilateral surveillance – multi-country perspective:
timeliness and readability
◦ The Financial Sector Stability Assessment (FSSA, a major component of
FSAP) made mandatory for 25 key countries

An Alternative approach: an India example
◦ Ensured compatibility with best practices and enhanced the skill-sets
within the financial sector, leading to significant capacity building
◦ 4 independent advisory panels
◦ Reports peer reviewed

Integrated Surveillance Decision
◦
◦
◦
◦
Why not amend Articles?
More multilateral less bilateral
Dealing with spillovers – dialogue; encouragement?
Flawed governance, flawed surveillance
11
Managing Capital Flows
•
•
•
•
Five challenges for collective action
Empirical evidence on beneficial effects of CAL weak
Danger of one-size-fits-all approach
Capital account management does not mean less
openness – fully open capital account may not be
desirable
• Policies needed to counter externalities associated with
cross-border flows
• Even-handed treatment?
• Advisory role for the IMF is the best option for now
◦
◦
◦
◦
Analysis of push and pull factors
Cross fertilisation of country experiences
Improve mapping
Capital controls legitimate part of policy toolkit
12
Issues in Reserve Management

Massive Reserve Accumulation

Reserve Accumulation vis-à-vis Other Metrics
Months of Imports
Percent of GDP
Percent of Gross capital Formation
Percent of Short-term Debt
Table : Reserves in Relation to Selected Metrics
1990
2000
Global
4.4
5.2
5.2 @
6.9
2010
2011
13.5
17.1
13.2
17.0
75.2
n.a
n.a.
n.a
16.3
28.7
15.7
26.9
47.1
229.5
89.1
556.5
82.0
n.a.
High Income Countries
4.2
4.8
5.0 @
5.9
10.2
11.6
10.6
12.0
62.8
n.a.
n.a
n.a.
Months of Imports
Percent of GDP
23.4 @
30.9
n.a.
n.a.
Low and Middle Income Countries
5.6
6.2
6.6 @
11.3
Percent of Gross capital Formation
Percent of Short-term Debt
25.7 @
107.5 @
Months of Imports
Percent of GDP
Percent of Gross capital Formation
Percent of Short-term Debt
Note: @: Data pertain to 1992;
22.9 @
n.a.
n.a. = not available
26.9
n.a.
13

Dominance of US Dollar in International Reserve
Currency
US Dollar in International Finance
Foreign exchange transactions
86
International reserves
64
Debt securities
46
Share of banknotes held overseas
65
Cross-border bank deposits
59
Cross-border bank loans
Source: IMF (2010b).
52
0
50
100
Percent to World Total
14
Demand for Reserve Assets continues to rise…
Net Foreign Assets: Requirements of Major EMEs
US $ billion
2011
Country
2017
Actual
Scenario A
Scenario B
Scenario C
Brazil
349
883
591
470
Hong Kong
280
479
329
305
China
3776
9510
6483
5129
India
286
665
460
373
Korea
309
500
330
319
Russia
491
1456
755
623
Saudi Arabia
547
1393
592
569
6036
14886
9540
7788
Total
Source: Authors’ Calculations (see text for methodology) based on IFS, IMF data.

Demand likely to outstrip supply of reserve currencies
15
Underlying Risks

Threats to IMS Stability
◦ US debt sustainability and Triffin dilemma
◦ Underpricing all Risks
◦ Risks from policies towards domestic
orientation in the US

Ability of US Dollar to meet future
reserve currency demand?
16
Trends and composition of GDP
Sectoral Contribution to GDP growth
12
8
6
4
2
0
Agriculture

Industry
Services
Jun-12
Feb-12
Oct-11
Jun-11
Feb-11
Oct-10
Jun-10
Feb-10
Oct-09
Jun-09
Feb-09
Oct-08
Jun-08
Feb-08
Oct-07
Jun-07
Feb-07
Oct-06
Jun-06
Feb-06
Oct-05
-2
Jun-05
Weighted contribution in %
10
GDP
Growth has moderated over last six quarters
◦ Sluggish industry growth
◦ Services has also shown moderation in last 3 quarters
17
Inflation Persistence
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
Aug/07
Oct/07
Dec/07
Feb/08
Apr/08
Jun/08
Aug/08
Oct/08
Dec/08
Feb/09
Apr/09
Jun/09
Aug/09
Oct/09
Dec/09
Feb/10
Apr/10
Jun/10
Aug/10
Oct/10
Dec/10
Feb/11
Apr/11
Jun/11
Aug/11
Oct/11
Dec/11
Feb/12
Apr/12
Jun/12
Aug/12
Oct/12
per cent
WPI YoY Inflation

February 2010 to November 2011 – Highly elevated inflation

February 2012 to October 2012 - Sticky Inflation
◦ Average Inflation 9.6 per cent
◦ Average Inflation around 7.6 per cent
18

2010-11
2008-09
2006-07
2004-05
2002-03
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
1978-79
1976-77
1974-75
1972-73
1970-71
Rupees per US Dollar
Movement of Indian rupee vis-à-vis US dollar
60
50
40
30
20
10
0
Market-determined-movements two ways
19
Financial openness of India increasing
90
80
60
50
40
30
20
10
Intenational Assets
International Liabilities
Source: Lane and Milessi-Feretti Database
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0
1970
(as % of GDP)
70
Total Assets + Liabilities
20
India’s Currency Invoicing
Currency-wise Pattern of Invoicing of India’s Mercandise Trade
(Per cent)
1990-91
Currency
Pound Sterling
US Dollar
Japenese Yen
Euro
1999-2000
2005-06
2008-09
Export
Import
Export
Import
Export
Import
Export
Import
4.5
3.1
3.9
1.7
2.9
2.0
2.8
0.9
57.2
59.7
87.0
85.8
87.4
78.2
84.1
86.3
0.1
4.4
0.3
3.8
0.5
4.2
0.5
2.3
3.0
3.3
7.7
12.5
10.9
9.5
-
-
Indian Rupee
27.7
7.7
0.3
0.0
-
-
-
-
Others
10.5
25.1
5.5
5.4
1.6
3.2
1.8
1.0

US Dollar is also the major currency for invoicing software exports
with 76% share, followed by Pound Sterling (10%) and Euro (7%) in
2009-10.
21
16
Share in World GDP- PPP based
14
12
Per cent
10
8
6
4
2
0
1980

1990
2000
2011
EMEs account for 49% of global GDP in 2011; India: 5.6 %
22
Currency Internationalization
Growing scope for EME Currency Internationalization…
Brazil
China
Hong
Kong
India
Indonesia
Korea
Mexico
Russia
Singapore
South
Africa
Turkey
Selected Macro and Financial indicators of Select Currencies with Internationalization Potential
Macroeconomic Indicators
GDP share
3.6
Economic growth
4.2
Inflation
4.9
10.9
9.5
2.6
0.4
4.4
3.4
2.8
8.1
5.2
1.3
6.7
4.8
3.2
4.2
3.3
1.7
3.6
3.1
1.7
4.3
7.2
0.4
4.4
2.5
0.6
4.2
5.0
1.2
4.2
5.2
Sovereign ratings
BBB-
AA-
AAA
BBB-
BB+
A
BBB
BBB
AAA
BBB+
BBB-
Capital account openness
Total trade
0.4
1.3
1.1
0.9
0.4
3.1
1.1
1.8
Floating
2.5
2.7
Currency
board
-1.1
2.3
Exchange rate flexibility
Financial Indicators
Financial depth
Intl. debt securities
FX market turnover
FX bid-ask spreads
-1.1
11.0
Crawllike
1.6
0.1
0.3
8.6
7.2
0.1
0.4
1.7
1.6
0.2
1.2
1.2
1.1
0.0
0.5
6.7
0.3
0.0
…
…
1.2
…
0.8
11.6
0.5
0.1
0.6
7.2
Indicator
0.2
2.3
Other
Floating Floating Floating Floating managed
0.8
0.1
0.5
7.9
2.5
-1.1
0.1
2.6
0.5
1.0
Other
managed Floating Floating
0.5
0.1
0.7
6.7
0.5
0.1
0.4
31.2
0.4
0.1
0.4
23.6
23
EMEs’ share in global trade is rising but…
Exports of Goods, Services and Financial Flows: Share of Top 20 Countries(%)
Exports of goods and
Exports of goods and services and
Country
services
financial flows
2001-2005
2006-2010
2001-2005
2006-2010
Euro area
24.1
23.6
25.3
24.6
US
China
UK
Japan
Canada
Korea
Singapore
Russia
Switzerland
Mexico
India
Sweden
Saudi Arabia
Australia
Malaysia
UAE
Norway
Brazil
Thailand
Total
Source: IMF (2011c).
18.5
8.8
9.1
8.3
4.7
3.2
2.9
2.3
2.8
2.5
1.3
2.0
1.5
1.4
1.6
1.0
1.4
1.2
1.3
100.0
16.8
12.0
7.7
6.9
3.7
3.4
3.2
3.2
2.7
2.0
2.0
2.0
1.9
1.7
1.5
1.5
1.5
1.4
1.4
100.0
22.4
7.5
12.7
7.2
3.8
2.5
2.3
1.9
2.4
2.0
1.1
1.7
1.1
1.6
1.2
n.a.
1.3
1.1
1.0
100.0
19.1
10.4
11.7
6.0
3.3
2.7
2.6
2.8
2.8
1.7
1.8
1.9
1.5
1.9
1.2
n.a.
1.5
1.5
1.1
100.0
24
…..Share of EME currencies in Fx turnover still
negligible...
Global Foreign Exchange Market Average Daily Turnover: Currency-wise
(Per cent)
Currency
Share in Global Turnover
2001
2004
2007
2010
US dollar
44.9
44
44.9
42.4
Euro
19
18.7
19
19.5
Japanese yen
11.8
10.4
11.8
9.5
Pound sterling
6.5
8.2
6.5
6.4
Australian dollar
2.2
3
2.2
3.8
Swiss franc
3
3
3
3.2
Canadian dollar
2.2
2.1
2.2
2.6
Hong Kong dollar
1.1
0.9
1.1
1.2
Swedish krona
1.2
1.1
1.2
1.1
New Zealand dollar
0.3
0.5
0.3
0.8
Korean won
0.4
0.6
0.4
0.8
Singapore dollar
0.5
0.5
0.5
0.7
Indian rupee
0.1
0.2
0.1
0.5
Russain rouble
0.2
0.3
0.2
0.5
Chinese renminbi
0
0
0
0.4
South African rand
0.5
0.4
0.5
0.4
Brazilian real
0.2
0.1
0.2
0.3
Others
5.9
6
5.9
5.9
Memo:
Global turnover
(all currencies, US$ bn)
1239
1934
3324
3981
25
Source: BIS
…US Dollar and Euro continue to dominate
in Global Fx Derivatives Market…
Global Forex Derivatives Market Turnover(Share in %)
US dollar
Euro
Japanese yen
Pound sterling
Australian dollar
Swiss franc
Canadian dollar
Hong Kong dollar
Swedish krona
New Zealand dollar
Korean won
Singapore dollar
Indian rupee
Russain rouble
Chinese renminbi
South African rand
Brazilian real
Others
26
…Rising presence of some EMEs..
International Bond Issuance in Emerging Market Currencies
Currency
Hong Kong dollar
Brazilian real
South African rand
Singapore dollar
Chinese renminbi
Russian rouble
Korean won
Indian rupee
Total
Source: IMF (2011e).
(Per cent)
Share in Total EM Issuance in 2010
18.0
10.9
10.8
10.2
5.8
4.5
0.5
0.4
61.1
27
Prerequisites…

Acceptability is key, comprising
◦ Deep and liquid financial and foreign exchange
markets
◦ Full currency convertibility and an open
capital account
◦ Wide use in international transactions
◦ Macroeconomic and Political stability
28
Cost and Benefits of Currency Internationalization
Reduces transaction costs
 Reduces exchange rate risks


Access to international debt securities markets –domestic
deepening

Complicates monetary management
Can hurt export competitiveness
Could make exchange rate more volatile
Exorbitant privilege or exorbitant risk
Systematic consequences




Rush into currency internationalisation – repent at length
29
Key Takeaways

Enlightened IMS Governance is key
◦ More representative legitimate and effective IMF
◦ Regional arrangement and national reserves integral part of global safety net

Domestic stability, external stability and global stability – new impossible
trinity
◦ Dealing with spillovers critical




Managing Capital Flows – One size fits all or customised to country
context?
Central banks mandate in reformed IMS – financial stability; self FSAP
Future demand-supply mismatches in reserve currencies –recipe for
future shocks?
Currency internationalisation
◦ EMEs in a still nascent continuum
◦ Managed internationalisation is flawed and dangerous
◦ Economic size, financial depth, openness, credibility, usability, - set a high bar
Blending fundamentals with country experience will balance desirable
with feasible
30
Thank You!
31