IMF urges key emerging economies to allow currency appreciation

Category: International Finance Sub-category: International Finance
Document type: news


The International Monetary Fund, in a surveillance note to the G20 economies, has urged key emerging economies running trade surpluses to allow their currencies to appreciate to help rebalance the global demand. The note further reinstated that trade balances would continue to widen and would not correct themselves in the absence of specific policies to smoothen out the distortions creating large surpluses in some countries and big deficits in others. Widening trade imbalances would be threatening to the growth prospects of both emerging and advanced economies.

The IMF stated that the Chinese yuan continues to remain substantially undervalued, while the US dollar is on the "strong side". However, in Japan, the euro zone, and Britain, exchange rates were broadly in alignment with the economic fundamentals.

At the meeting of G20 ministers in Gyeongju, South Korea, ahead of the G20 leaders' summit in Seoul on Nov. 11-12, the G20 finance ministers had agreed to shun competitive currency devaluations but had not been able to reach a conclusion and fell short of setting targets to reduce trade imbalances.

On being accused by the US that China has been keeping the yuan artificially weak to promote its exports, Beijing warned that a rapid shift in the country's exchange rates may lead to a disastrous social turmoil in China.

Central banks across the nations have stepped up currency interventions, fueling talk of trade wars. Brazil and Thailand have responded by introducing controls on the inflows of capital.

The IMF said that in order to rein in debt, credible medium-term fiscal consolidation plans needed to be prepared by the advanced economies based on conservative growth projections. To serve the purpose, the advanced economies should initiate spending cuts in 2011. The IMF further added that an accommodative monetary policy was appropriate in the advanced economies, and careful vigilance is to be exercised to check negative spillovers to the other economies, particularly emerging economies.