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The International Monetary Fund

The activities of the International Monetary Fund, IMF, in 1997 were concerned with the unrest on the foreign-exchange and capital markets in Southeast Asia, cf. p. 46ff.

In an attempt to curb the crisis the IMF within a short period granted three exceptionally large loans to Thailand, Indonesia and South Korea and extended and increased an existing loan to the Philippines. These loans were granted against the background of major economic and political stabilization programmes to redress imbalances and ensure sustainable economic development. The large IMF loans were an element of more extensive international financial assistance packages which in 1997 amounted to a total of USD 108 billion, of which USD 35 billion from the IMF, cf. Box 5.

In February 1998 there were indications of a degree of stabilization in the region. As was the case when the IMF granted a loan to Mexico in 1994-95, cf. Chart 32, after an IMF assistance package had been agreed and approved by the IMF's Executive Board the decline in the Korean exchange rate dampened to some extent, while the development in exchange rates in Indonesia and Thailand was still affected by political uncertainty. However, it should be taken into account that the Asian currencies had not fallen as much as the Mexican peso prior to the IMF agreement.

Restructuring the financial sector has been one of the principal elements of the countries' economic and political programmes in conjunction with

Box 5: The large IMF loans and the financial crisis packages 1995-97

the IMF. Many banks have been closed and compliance with BIS standards concerning the capital adequacy of financial institutions is now required. In the case of Korea special requirements have been added with regard to legislation on central-bank independence, financial supervision, accounting and auditing. In Thailand, Indonesia and Korea financing institutions have been set up for containment of the non-performing loans of financial institutions. The financing is provided via government budgets and by government borrowing on the international capital markets. In Indonesia and Korea government-owned banks will be privatized.

The IMF programmes have also been introduced to ensure that official interest rates are raised, that the authorities intervene as little as possible in the foreign-exchange markets (a flexible exchange-rate policy) and that existing restrictions on inward capital flows are relaxed. The purpose is to restore favourable conditions for inward capital flows to these countries. Moreover, fiscal-policy tightenings are required as a consequence of the effects on the budgets of the crisis-stricken countries of the economic downturn and the costs of restructuring the financial sector. In addition, trade liberalization measures play an important role in Indonesia.

The substantial loans to Thailand, Indonesia and Korea have burdened the IMF's liquidity. The situation is expected to be brought back to normal on the completion of the augmentation of the IMF's capital base, the quotas, adopted in September 1997. In addition, the IMF's access to borrowing will be increased by the New Arrangements to Borrow, NAB, which are described in the 1996 Annual Report, p. 80. Denmark has ratified the quota increase and NAB, although the entry into force of the latter awaits ratification by several large members. The USA has ratified neither the quota increase nor NAB.

Denmark has not granted direct loans to any of the countries of Southeast Asia affected by the crisis, and has only provided credit indirectly via the ordinary financing of the IMF's activities. Denmark's reserve position with the IMF has thus increased from kr. 3,601 million at the end of 1996 to kr. 4,311 million at the end of 1997. In January 1998 the IMF drew another large amount, so that the reserve position at the close of the month was kr. 6,697 million.

In connection with the IMF's annual meeting in Hong Kong in September 1997 approval in principle of a quota increase by 45 per cent was achieved. The distribution of the quota increase among the individual countries varies according to the development in each country's relative significance to the international economy. For Denmark the proposal

Box 6: The IMF's capital base

entails a quota increase from SDR 1,070 million to SDR 1,643 million (kr. 15,136 million). The proposal was approved by the IMF's Board of Governors on January 30, 1998. Box 6 presents the IMF's capital base.

In addition, approval was gained to initiate procedures to amend the IMF's Articles of Agreement to provide for a special one-off allocation of SDR. The primary purpose of this one-off allocation is to ensure that all members, new and old, are allocated the same quantity of SDR in relation to their quotas. So far, a country's SDR allocation has depended on how long the country has been an IMF member and whether the country has participated in all allocations. The SDR system was established in 1970 and the most recent allocation took place in 1979-81. It has been decided in principle that all countries shall be allocated SDR equivalent to 29.32 per cent of their quotas. This will lead to a doubling of the existing amount to SDR 42.8 billion (kr. 394.3 billion).

In February 1997 a special fund was established under the auspices of the IMF to finance the IMF's participation in the debt initiative for the most debt-ridden developing countries, the HIPC initiative. This fund has been established as a special facility under the auspices of the IMF's Enhanced Structural Adjustment Facility, ESAF, which grants loans on favourable terms to poor developing countries. Under the debt initiative the creditors of a number of especially poor and debt-ridden developing countries may grant debt alleviation according to guidelines agreed in advance so as to reduce the countries' debt burden to a sustainable level. A further condition for inclusion in this initiative is that the country has complied with the conditions of an economic and political stabilization programme for an extended period. So far, three countries have been declared eligible for support under the initiative. In February 1997 it was decided to transfer SDR 180 million and in November 1997 a further SDR 70 million to the special fund in order to finance the IMF's share of the debt-alleviation expenditure. So far these transfers have been made from the reserves of ESAF, which are kept separate from the IMF's general reserves.

The Nationalbank's Participation in Technical Assistance Programmes

After the collapse of the Soviet Union the new republics have established their own central banks and have therefore required technical assistance. This has been organized by international organizations, first and foremost the IMF.

The Nationalbank has participated in this cooperation and in 1997 provided technical assistance to the central banks of Russia and the Baltic states. The technical assistance was provided within the areas of payment and settlement of securities transactions, use of repo agreements in monetary-policy management and planning of exchange-rate policy. The Nationalbank provided technical assistance to the Baltic states on govern- ment-debt management.