IMF ponders tool to discourage reserves build-up

The International Monetary Fund is considering creating a new programme to discourage member countries from building up currency reserves, John Lipsky, the IMF’s first deputy managing director, said on Monday.

“We are exploring the possibility of improving our existing facilities or adding other insurance-like facilities that would give our members greater confidence that they don’t need to self insure by building up reserves,” Lipsky told reporters at a conference in Mexico.

Some economists see the massive accumulation of currency reserves by exporters like China as one of the causes of the global financial crisis.

The reserves were often reinvested in US dollar assets, which helped keep US interest rates low and, along with weak lending oversight, fuelled the housing bubble.

Earlier this month, the IMF called upon the Fund’s member nations to increase the amount of capital it can deploy in times of crisis by perhaps $1 trillion or more.

The IMF wants to dissuade countries like China from building big currency war chests by convincing them that the IMF could come to their aid in times of need.

In separate comments, Lipsky warned countries not to scale back stimulus measures used to fight the global recession, saying that could jeopardise a return to weak growth next year.

“This is no time to take risks with premature withdrawal of the stimulus,” said Lipsky. The IMF said earlier this month that the world economy had started to recover. It sees global growth of 3.1 per cent in 2010 after a 1.1 percent contraction this year.

Governments and central banks around the world have been pumping money into their economies all year to revive growth, though criticism of the stimulus measures in some countries has been growing.

In Britain, for example, the Conservative Party recently said that country’s central bank should stop injecting money into the economy soon.

Lipsky said countries should be careful about pulling back, though he did not specify between monetary and fiscal stimulus. Central bankers use monetary policy to make credit more available, while governments use fiscal policy to spend directly in the economy.

“Our forecasts of a return to even relatively sluggish output growth next year in the global economy are predicated on the implementation of the large scale stimulus measures....”