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IMF to Emerging Asia Markets: Tighten Policies
Source: gmanews.tv
Source Date: Thursday, October 21, 2010
Created: Oct 24, 2010

Multilateral lender International Monetary Fund (IMF) on Thursday said emerging Asia economies should tighten monetary and fiscal policies in place as capital continues to flood the region and inflation starts pressuring commodities prices and the purchasing power of currencies.

Strong economic growth in the region is leading to new policy challenges as inflation pressures continue to build and prices in some property markets continue to grow at double-digit rates, the fund said in its regional economic outlook for Asia and Pacific.

Plus, strong capital flows are adding further to domestic price pressure, it said in the report "Consolidating the Recovery and Building Sustainable Growth."

"A faster withdrawal of the fiscal stimulus put in place during the global financial crisis would also help guard against the risks of overheating," the Fund said.

There is room to return to a more stimulating policy stance should a worsening of global economic conditions negatively affect Asia, it said.

The Bangko Sentral ng Pilipinas (BSP) has kept a relaxed policy stance by keeping its key rates at record lows as inflation was benign, but has withdrawn almost all liquidity-enhancing measures introduced at the height of the global financial crisis in November 2008.

As economies buckled from the global financial melt down the BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009 bringing the overnight borrowing rate to 4 percent and the overnight lending rate to 6 percent.

The IMF said central banks in the region including the BSP would face a difficult challenge in managing capital inflows that pose potential risks to financial stability.

"Macro-prudential measures have appropriately been taken in many regional economies to minimize risks, but more action may be needed," the IMF added.

Ensuring access
A broad range of reforms are needed to support domestic consumption and investment, including strengthening social safety nets, ensuring access to credit, easing restrictions in service sectors, and improving infrastructure, Anoop Singh, IMF director for Asia and Pacific department, said.

He added that exchange rate appreciation is an important part of rebalancing.

“It is only natural that as Asian economies grow stronger so too will their currencies. This is very much a sign of Asia’s success," he said.

Asia remains firmly in the lead of the global economic recovery and the time has come for countries in the region to normalize monetary and fiscal policy stances, Singh said.

“We welcome the steps so far taken by policymakers to control inflation risks and limit the build-up of financial sector vulnerabilities, but more now needs to be done given the continued strong growth in the region," he said.

The IMF said in the 101-page outlook that it has upgraded the gross domestic product (GDP) growth forecast in Asia to 8 percent from 7 percent this year before easing to a more sustainable pace of 6.8 percent next year.

Economies across the region are expanding strongly led by China with a projected GDP growth of 10.5 percent this year and 9.6 percent next year, followed by India with 9.7 percent this year and 8.4 percent next year, the IMF said.

The GDP outlook for Association of Southeast Asian Nations (ASEAN) Plus 5 that includes the Philippines, Thailand, Vietnam, Malaysia, and Indonesia would hit 6.6 percent this year and 5.4 percent next year, according to the report.

Surprising turnaround
IMF upgraded its Philippine economic forecast to 7 percent from 6 percent this year after the country posted a surprising turnaround in the first half. That was the second time the IMF upgraded the Philippine growth forecast, originally expecting domestic output to grow by 3.6 percent for 2010.

"In the Philippines, above-trend growth in 2010 reflects a recovery in exports, strong consumption supported by robust remittance inflows, and a pickup in investment," IMF said in the report.

Thailand is expected to lead the region 7.5 percent, followed by Philippines (7 percent), Malaysia (6.7 percent), Vietnam (6.5 percent), and Indonesia (6 percent).

Philippine economic managers in the Cabinet-level Development Budget Coordination Committee (DBCC) upgraded their growth target to 5 percent to 6.0 percent from 2.6 percent to 3.6 percent as the GDP grew stronger-than-expected at 7.9 percent in the first half from 1.2 percent a year earlier.

The IMF kept its 2011 outlook of the Philippines at 4.5 percent, the second slowest GDP growth and slightly better than Thailand’s 4 percent.

It expects Vietnam to lead the region next year with 6.8 percent followed by Indonesia (6.2 percent) and Malaysia (5.3 percent).

"In 2011, as the recovery matures, growth is expected to return to trend," the multilateral lender added.

The DBCC, however, expects the domestic output to grow between 7 percent and 8 percent next year.
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