DUBAI, 24 September 2003 — The International Monetary Fund (IMF) here yesterday backed a call by the Group of Seven (G-7) industrialized states for more flexibility in exchange rates, at the start of the IMF’s annual meeting with the World Bank.
And the World Bank supported the demand of poor nations for lower agriculture subsidies in rich countries to improve their international trade and reduce poverty. “Allowing greater exchange rate flexibility would be helpful both domestically and globally,” IMF Managing Director Horst Koehler said in his opening speech at the meeting in the Gulf emirate of Dubai, attended by 16,000 delegates and journalists from 184 countries.
He said one of the key steps needed to deal with risks from current account imbalances and high public debt involves “allowing more flexible exchange rates where appropriate”.
The finance ministers and central bank chiefs of the G-7 issued Saturday a veiled call for Asian countries, and notably China, to allow their currencies to rise in order to check the widening gap in the US current account deficit.
The G-7 — Britain, Canada, France, Germany, Italy, Japan and the United States — after a meeting here also urged the IMF to exercise “effective and persuasive surveillance” of the currency situation.
But Chinese Finance Minister Jin Renqing toed the line of preserving the stability of China’s yuan. “We take note of the concern about the renminbi (yuan) exchange rate,” Jin said in his speech. But the yuan’s stability “is conducive to stable economic and financial development not only in China but in the region and the world,” he added.
American manufacturers say that the yuan - which has been pegged to the dollar at around 8.3 for the past nine years - is undervalued by 15 percent and is unfairly eating away at US exports.
European policy makers are also worried that the euro could undergo a damaging surge when the US current account deficit causes the dollar to fall, if the Asian countries do not let their currencies appreciate.
The IMF itself expressed concern last week that the US economy faces risks from a mushrooming budget deficit and a massive current account deficit.
In his speech to the Dubai meeting, US Treasury Secretary John Snow said the world’s biggest economy had plans to slash its budget deficit by half over the next five years. “That will bring it back well below two percent of GDP.”
Snow said Monday there has been no change in the US strong dollar policy and declined to comment on the plunge of the dollar. But a number of analysts have said the G-7 statement implicitly endorsed a further decline in the greenback.
The dollar continued to plunge yesterday, touching a fresh three-year low against the yen while the euro hit the 1.15-dollar mark for the first time since July on the impact of the G-7 statement.
Thai Prime Minister Thaksin Shinawatra yesterday brushed off the potential impact of Thailand’s surging currency on its exports and vowed not to intervene in the market as long as the baht remained stable.
On international trade talks, World Bank President James Wolfensohn voiced understanding for the stand of developing nations on agriculture and called for a “new balance” between rich and poor.
In his speech, Wolfensohn said the collapse of trade talks in Cancun, Mexico, in mid-September, reflected the “forces causing imbalance” between the world’s rich and poor. “The recent impasse in Cancun is a case in point.