17 November 2014
IMF’s Role on Asian Crisis
In July of 1997 Thailand devalued the Baht and thus began the ‘Asian Crisis’ that would soon affect other Southeast Asian countries including the other two that were hit the hardest Indonesia and South Korea. Each country had no choice but to seek help from The International Monetary Fund (IMF). The IMF would have to pull through in aiding these countries out of this crisis, after carefully reviewing each country and see to what extent their financial problems had developed. As you can see below on Graph 1 each country’s exchange rate had depreciated tremendously during the crisis. With the demise of each ...view middle of the document...
About a month later ‘The Bank of Korea abandoned its effort to prop up the value of the won, and allowed it to fall below 1000 against the dollar, a record low’ (PBS). It was very clear that each country was failing to protect their currencies and their exchange rates. It was so bad in Indonesia that people started buying food, nearly clearing shelves at groceries stores, out of fear of a food shortage. Now was the time for the IMF to step in and help control the situation.
It wasn’t until the Baht devalued by 20, that Thailand had to reach out to the International Monetary Fund (IMF) for help. Unfortunately, by this time it was too late for the IMF to respond with low-cost options. In “In Defense of the IMF's Emergency Role in East Asia,” Hubert Neiss wrote ‘Important decisions in several complex and painful areas had to be made almost overnight and without full information’ (Neiss). As you can see in Chart 1 below, between May of 1997 and May of 1998 Thailand’s GDP growth rate had diminished completely and was actually a negative 3.1%. Neiss wrote that the countries, at the time, did not have the proper necessities to obtain an exchange rate policy. Some advocates wanted to do the exact opposite of an exchange rate policy and ‘Let the exchange rate fall freely while pursuing an expansionary monetary policy, in particular low interest rates’ (Neiss). This wouldn’t work because it could lead to hyperinflation which in return makes the value of the debt in each country would be unpayable. The International Monetary Fund started with Thailand in August of 1997.
In “Recovery from the Asian Crisis and the Role of the IMF,” the IMF staff wrote about how the IMF improved the Asian Crisis.
The IMF Staff Stated:
On August 20, 1997, the IMF's Executive Board approved financial support for Thailand of up to SDR 2.9 billion, or about US$4 billion, over a 34-month period. The total package of bilateral and multilateral assistance to Thailand came to US$17.2 billion. Thailand drew US$14.1 billion of that amount before announcing in September 1999 that it did not plan to draw on the remaining balances, in light of the improved economic situation (Box 1).
With the money they received from the IMF, Thailand used it for a change in fiscal policy to target fiscal deficit, ‘Much of the increased spending focused on boosting social safety net programs to ensure the protection of Thais affected by crisis’ (IMF Staff).
Thailand also suspended 58 bankrupt finance companies. Before the crisis broke out, a month earlier, each country announced full protection for depositors and creditors in order to keep the banks stabilized. The suspensions broke down into two phases. The first 16 companies that were suspended only covered the depositors and the next 42 companies covered both. Later only 2 of those 58 companies were able to avoid liquidation.
In the book “The Asian Financial Crisis: Causes, Cures, and Systemic Implications,”...