Manmohan Singh: Financial crisis far from over

OPINION

As far as the immediate priority is concerned, I recognise that a number of important steps have already been taken by countries to inject liquidity into the financial system, recapitalise banks and other systemically important institutions. Some countries have also introduced a number of innovative, even unorthodox, measures to restore confidence so that the financial system could start functioning again. These measures have had some effect, but the crisis is far from over. Credit channels remain clogged and the signs of distress in the real economy suggest that additional measures are needed.

An obvious issue is to consider whether the emergence of recessionary trends calls for some fiscal stimulus. A co-ordinated fiscal stimulus by countries that are in a position to do so would help to mitigate the severity and duration of the recession. It would also send a strong signal to investors around the world. Resorting to fiscal stimulus may be viewed as risky in some situations, but if we are indeed on the brink of the worst downturn since the Great Depression, the risk may be worth taking. We should therefore take all possible measures at the national level to complement any co-ordinated international stimulus.

The international community needs to consider special initiatives to counter the shrinkage of capital flows to developing countries that is almost certain to occur over the next two years. The initiative by the IMF to establish a new liquidity facility is a welcome step. However, we must also consider whether the IMF is adequately funded for the task it will face in managing this global crisis. Looking ahead, we must plan for possible additional demands on the IMF if the global recession is pronounced. This suggests that we must activate a process for replenishing IMF resources.

An alternative to the IMF as a source of liquidity is the establishment of short-term swap arrangements. The existence of such arrangements will reduce the burden on the IMF and will add to confidence in the system. Countries in a position to do so should consider the scope for expanding such arrangements.

Depressed conditions in the global economy are likely to produce a downturn in private investment in developing countries, which will worsen recessionary trends. It is necessary to take steps to counter this development. Expanding investment in infrastructure by the public sector and also the private sector, where possible, is an ideal countercyclical device. It has the immediate effect of stimulating demand and the longer-term effect of laying the conditions for an early return to faster growth. Investment in infrastructure is today perhaps the best signal for reviving private investment, including FDI, tomorrow. This requires new and innovative ways of solving the financing problems that will restrain infrastructure investment. The World Bank, regional development banks and national governments need to consider measures such as providing additional credit for infrastructure projects, promoting new instruments for infrastructure financing and providing capital and liquidity support to banking institutions to lend to infrastructure projects that are underway. The World Bank/IFC and the regional development banks should aim at giving an additional $50 billion per year in support of infrastructure development in the public and private sectors. This window can be wound down once normalcy returns to global capital flows.

Industrialised countries can also help in reviving trade flows in developing countries by expanding the scale of export credit finance available to these countries. We know there is a temporary market failure in this area with elevated risk perceptions, which discourage private flows. There is a need to intervene to overcome market failure. A collapse of trade is the last thing that one wants in the current crisis, with all its implications for growth and employment.

(Excerpts from Prime Minister Manmohan Singh’s speech at the G-20 summit in Washington on November 15)