Sanjaya Panth is the senior resident representative of the International Monetary Fund (IMF) in India. Just prior to taking up his current position at New Delhi a few weeks ago, Panth was a division chief in the IMF’s western hemisphere department, which includes the United States.
In the course of over a decade at the Fund, he has spent long stints in Russia and the former Soviet Union, Egypt and Indonesia. Prior to joining the Fund, he taught economics at Columbia University. He has a PhD in economics from the University of Pennsylvania. Our correspondents Siddharth Zarabi and John Samuel Raja D met up with him last week to discuss the current global financial turmoil and what it meant for countries like India. Excerpts:
Will the impact of current financial crisis be different on developed and developing economies?
The fundamental way it affects countries is the same because there is no decoupling between the performance of the two. But there are differences in their starting situations, so the outcome will also be a little different. Growth in developing economies has slowed but not so much as in advanced countries.
On the other hand, inflation remains more of a problem in emerging market countries. In general, the direction (referring to slowdown in growth) will be the same but the magnitude is vastly different. Developing countries are still expected to drive the growth in the global economy.
In what ways can the current crisis affect the developing economies?
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There are two ways by which the current crisis can affect: trade and capital accounts. Emerging economies will increasingly find it difficult to access finance with general shortage of credit.
Also, there is a general re-pricing of risk in the wake of what happened, so the cost of borrowing will remain high even after liquidity in the market eases. We have seen this repricing of risk also for the corporate debt market in the advanced economies.
On the trade side, economies that depend on exports will be most impacted. This is especially true for commodity exporters as commodity prices have already softened in the last few months.
On the positive side, this will, however, help reduce inflation. But, it is still a wait and watch situation as to how these developments would impact the developing world, where inflation remains a problem.
How are things likely to move up in the future?
First, growth for the world as a whole will be a lot lower. Second, it will be a slow recovery and it will take a long time. In all of these, there are unknown variables, such as how the US government bailout package will actually affect home prices.
For India, the impact on the real economy and financing impact will be lower than for countries that rely more on exports for their growth or have larger financing needs. India is also in a good situation because it has built up reserves.
Everywhere, minimising the impact of the financial crisis will depend on how much room countries have to undertake countercyclical measures, both fiscal (government expenditure going up or taxes coming down) and monetary steps.
For both of these, however, it depends on how heated the economy is as any mis-step would increase the inflation expectations in the economy, which would be bad. Also, the long-term fiscal position may be weak so there may be such limits too to fiscal counter cyclical policies.
How different is the current crisis from the past ones? Is the uncertainty much more severe?
I have seen much more uncertainty in past crises but they were localised uncertainties. What is different in the current crisis is the reach, which is global, because it is happening in the US, which is the financial centre.
This financial crisis will lead to a slowdown for the whole world. When the dotcom boom and burst happened it was one part of the real sector only, but now it’s in the financial sector and therefore could affect the whole real sector.
Also, owing to financial innovation (referring to use of complex derivatives and excess borrowing to finance the same), the financial sector impact on the real sector will be different than past banking or financial problems in the US.
What is your view on the $700 billion rescue package? Is capital not a much bigger problem for affected banks?
The $700 billion bailout package may not be the real cost as the government could profit from it when it sells the assets back. On the other hand, it could also be a loss. Yes, lack of availability of capital for the banks is a valid point.
The capital need, however, not have to come entirely from the state and can be private too. The bailout that will be given to banks for their bad assets could also end up be being higher than actual value of these assets, so this could indirectly also help shore up capital, but that is not the best way to provide capital – a direct way is much better.
Nevertheless, this package is a systemic response to the crisis, which was sorely needed and so it is an important step to help bring back trust.
What will work for India in these circumstances?
Things have got bad in the external environment but looking forward real fundamentals for India have not changed. Emerging markets growth will be much higher than developed markets and India will remain among the faster growing countries even among emerging markets.
Three things that are positive for India- strong domestic market demand, decline in commodity prices and a profitable corporate sector. These will better help the real sector to withstand the shock.
What is the role of IMF in the current crisis? You were proactive in what countries should do when the South -East Asian crisis happened?
In this crisis too, we have been proactive in our analysis and our message. Many months ago, the IMF was one of the first to come out with a large number, one trillion dollars, about the losses from the sub-prime crisis. People argued at that time that we were being too pessimistic!
The original purpose for setting up the IMF was to have coordination between countries on policy matters. And now we continue to provide a forum for all countries to discuss what the US is doing and what coordinated actions are required in other countries to minimise the crisis.
The key difference this time from the emerging market crises in the past is that nobody is yet asking the Fund for money. Countries have built-up resilience and have learnt from the past mistakes. It is a good thing that countries do not need to borrow from the Fund.