The agreement reached at the 12th Asean+3 finance ministers meeting in Bali on May 3, 2009 on the main components of the Chiang Mai Initiative Multilateralisation (CMIM) is a landmark in Asian economic cooperation. This will provide the 14 economies covered by the agreement, funds totaling $120 billion, to meet short-term liquidity difficulties by providing access to regional funds and supplement the existing international financial arrangements.
This follows the agreement reached on the contribution of individual members, the borrowing accessibility available to each and the surveillance mechanism to monitor and analyse the participating countries and support the CMIM decision making in close cooperation with the ADB. But operationalising the agreement will have to wait till the end of the year when the legal documents and the implementation plan would be drawn up.
The only major drawback is that South Asia, especially India, has been kept out of the whole process. However, if some detect a Chinese conspiracy to keep out India, it would not be fully off the mark as decision making mechanism of the CMIM requires full consensus of all nations on fundamental issues like contributions, borrowing limits, memberships and terms of lending. However, the Chinese influence on lending issues is limited as the rules of decision making ensure that decision of lending issues are decided by majority. With Japan and South Korea accounting for close to half the contributions, it would be difficult for any single nation to push through individual agendas.
The borrowing limits under the agreement are based on individual multipliers worked out for each country. Countries which benefit the most from the arrangement include Brunei, Cambodia, Laos, Myanmar and Vietnam who can borrow up to five times their contribution. Next on the list are Hong Kong, China, Indonesia, Malaysia, Philippines, Singapore and Thailand who can avail up to 2.5 times their contribution. Major contributions like China and Japan, who have paid up $38.4 billion each, can borrow only about half their contribution while Korea, the third largest contributor with funds of $19.2 billion, can borrow an equal amount.
The CMIM is a major development over the previous agreement which only allowed for currency swaps between the central banks of the partner countries to ensure adequate funds to guard against speculative attacks that happened during the Asian financial crisis more than a decade ago and countries like Thailand, Indonesia and Korea had to depend on loans of more than $100 billion from the IMF, which came with stringent conditions which critics blamed for further intensifying the problems of the region.
The general feeling in the region was that the existing international framework made it impossible to react quickly to any financial crisis and that there was a need to provide a regional financial agreement to build an additional support mechanism in the regions. It was with these aims in mind that the Asean came to launch the Chiang Mai Initiative in May 2008 with the aim of enhancing the bilateral swap network between North East and South East Asian nations to ensure short term liquidity. In fact the effort was so successful that the network of bilateral swaps arrangement under the Chiang Mai Initiative (CMI) grew to $58 billion by early 2009.
The swap agreements provided countries like Indonesia, Malaysia, Philippines, Thailand and South Korea the potential to mobilised finds that were multiplies more than their quotas allocated by the IMF. And the swaps were even better as they provided not just short term liquidity but also medium-term funds as these three month swaps could be renewed as much as seven times without going through the stringent IMF conditions.
The growing success of the bilateral swap agreements pushed the Asean plus three finance ministers to launch the Post-Chiang Mai Initiative (P-CMI) or CMI Multilaterlisation in May 2007. Under this the countries were expected to move from the swap arrangements to self managed reserve pooling arrangement under a single pooling agreement to meet the earlier objective of ensuring adequate liquidity in times of crisis.
In May 2008 the finance ministers meeting of the Asean plus three countries decided that funds were to be supplied to the requesting country in the form of a swap transaction of US dollars and the local currency. Other key points agreed upon included than on the size of the fund at $80 billion and the need for working out provisions relating to contribution, borrowings, surveillance and activation of the scheme. Later the Asean initiative received a further boost from the Japan, China, Korea Trilateral summit in December 2008, which decided expedite the CMIM initiative and strengthen the regional surveillance mechanism for monitoring the local economies.
The change over from a network of bilateral swap arrangements (BSA) to a collectively managed regional fund comes close to the Japanese proposal to create an Asian Monetary Fund in 2007. And the CMIM can even radically alter the global financial architecture as it lays out new paths to integrate financial regionalism and global financial institutions like the IMF in a similar way as the regional trade agreements flourish in tandem with multilateral trade institutions like the WTO.
And regional agreements like the CMI have taken pains to ensure that they remain under the IMF framework. For instance as the potential large creditors under the arrangement were keen on laying down conditions to ensure efficient use of funds they have opted to ensure that 90% of the funds under the BSA were allocated only after the borrower agreed to an IMF programme so that the funds allocated without conditions were just 10% of the total swap agreement.
?p.raghavan@expressindia.com