IFIs must correct global imbalances: Manmohan

PM calls for coordinated action to prevent sudden downturn in economies.

Prime Minister Manmohan Singh today said international financial institutions (IFIs) needed to play a proactive role in correcting global payment imbalances.

He also called for a coordinated action, both from countries with current account surpluses and those with current account deficits, for prevention of a sudden downturn in economies.

"The process of correcting imbalances can be disruptive if it is sudden and unexpected," Singh cautioned during his address to the board of governors of the ADB. He said the role of the IFIs was even more relevant in this context.

Saying that the current global imbalance was reflected in huge disparities in the current account positions of different countries, he added that while mismatches in current account positions were to be expected to some extent and even desirable, large disparities raised concerns about unsustainability and hard landings.

Singh said in 2005, the current account deficit of the US stood at $805 billion, which was as much as 6.4 per cent of its GDP. In the same year, its current account surplus was $163.9 billion, that of China was $158.6 billion and that of the Middle-East $196 billion.

Referring to the rise in oil prices, the prime minister said, "It is incumbent on all major IFIs to pool in their collective wisdom, expertise and experience to devise credible strategies to enable the world economy to cope with the increased unpredictability and volatility of energy prices and their impact on processes of economic growth."

Stating that an important lesson India needed to learn from the Asian financial crisis of 1997 was the need for effective, quick and credible response from the IFIs.

Post-crisis analysis revealed that it was very important for the IFIs to inject sufficiently large funding to economies in crisis to provide an assurance of stability. It had also demonstrated that financial crises could be contagious and that foreign exchange markets were prone to a bandwagon effect.

"This means that the IFIs need to be ahead of the curve, identify potential victims and go to their support in good times so as to contain crisis. This also means that the size of the funding can be quite large," the prime minister said.