The Asian Monetary Fund: Just talk or potential reality?

In April 2023, Malaysia’s prime minister, Anwar Ibrahim, revived the idea of an Asian Monetary Fund (AMF). A proposal for this was first put forward in 1997 by Japan following the Asian financial crisis.¹

The AMF would have the primary objectives of promoting financial stability, providing emergency lending facilities, facilitating currency swap arrangements, and enhancing regional cooperation in monetary and financial matters. It would aim to address balance of payment difficulties, currency crises, and other financial challenges collectively faced by Asian economies. The proposal was unfortunately met with scepticism for fear of potentially fragmenting the global financial architecture and undermining the International Monetary Fund’s authority and effectiveness. However, there is still a need to address vulnerabilities in the region, especially when IMF solutions do not necessarily cater to the unique concerns and challenges of Asian countries.

The desire for greater regional financial autonomy, increased regional cooperation and a stronger financial safety net within Asia led to the 2010 Chiang Mai Initiative (CMIM). This involved the Association of East Asian Countries (ASEAN) plus China, South Korea and Japan, and the establishment of various bilateral currency swap agreements. Numerous members have since utilised the swap agreements when experiencing short-term liquidity difficulties – for example, Thailand and South Korea during the global financial crisis (GFC) in 2008-2009, and Indonesia, Philippines and Malaysia between 2013-2014, which helped stabilise financial volatility.

While these mechanisms contribute to regional financial cooperation and provide some level of support, they do have limitations in terms of coverage, surveillance and crisis management capabilities compared to what a fully fledged AMF could do. The CMIM, for example, doesn’t include Sri Lanka and Pakistan which often find struggle financially, despite the numerous IMF programs they have embraced.

In the current geopolitical environment, an AMF is seen as a way to rebalance the influence of global financial institutions and give Asian countries a stronger voice in decision-making processes, especially as education and governance has improved significantly since 1997. Some Asian countries perceive the IMF as being biased toward western interests, and during the Asian financial crisis felt their needs and concerns were not adequately taken into account. There is a feeling the IMF’s “one size fits all” approach may actually do more harm than good.

With China’s current might and ambitions to maximise its position in the global financial landscape, the AMF idea has unsurprisingly won the backing of President Xi Jin Ping. As it stands, China as the world’s largest bilateral lender disagrees with IMF stipulations. It has expressed that it seeks to provide debt relief to defaulting countries but also expects multilateral financial institutions to participate in these restructurings. Without their participation, China refuses to take a haircut in debt restructuring conversations alongside other private creditors. Instead, it offered Zambia a two-year moratorium on debt and interest repayments in January 2023, and maintains talks with Sri Lanka over the latter’s debt.

An AMF could also further help China with its RMB internationalisation ambitions, especially as other countries such as Russia, Brazil and the European Union are trying to shift away from a reliance on the US dollar.

For emerging market debt investors, the prospect of an AMF has meaningful implications. In the near term, while China plans a redesign of the financial architecture, it may be even more averse to taking a haircut in debt restructurings. Sovereign debt workouts risk becoming even more complex and drawn-out affairs than they are at present.

In the medium term, with a new AMF, Asian countries – especially those not involved in CMIM – can diversify their financial engagements and reduce their vulnerability to unwanted external pressures and biases. This can lead to sovereign ratings upgrades and improved resilience in the associated local currencies. So why not embrace an additional insurance option for a rainy day?