ASEAN +3 Bolsters Financial Assistance in the Region
SINGAPORE – An expanded financial assistance pool among the 10 ASEAN nations, as well as China, Japan and South Korea was implemented last week, strengthening financial cooperation within the region.
The Chiang Mai Initiative evolved out of the 1997 Asian Financial Crisis as the member states endeavored to prevent a recurrence of the crisis by accruing large foreign currency reserves. It was officially established by the ASEAN +3 nations in 2000 and ‘multilaterized’ to become the Chiang Mai Initiative Multilaterization (CMIM) Agreement in 2009. The CMIM was implemented in March 2010 with an initial currency pool of US$120 billion.
The CMIM is a loosely-structured institution; rather than having a centralized fund, the currency pool is based on a series of promises to provide funds with all contributions remaining in the countries’ central banks until they are needed. ASEAN countries contribute 20 percent of the fund, with the remaining 80 percent being provided by China (32 percent), Japan (32 percent) and South Korea (16 percent).
The emergency currency pool offers troubled member states relief from short-term liquidity shortages as well as facilitating other international financial arrangements. CMIM also deters currency speculation by allowing member states to swap their currency for U.S. dollars from the pool on a short-term basis.
The amended CMIM went into effect last Thursday, doubling the size of the pool from US$120 billion to US$240 billion. As well as expanding the scheme, the amendment increases the portion of its borrowing quota that a country can access without being tied to an IMF program from 20 percent to 30 percent. A country’s borrowing quota is its contribution to the fund multiplied by its borrowing multiplier, which is set at 5 for Brunei Darussalam, Cambodia, Lao PDR, Myanmar and Vietnam, 2.5 for Hong Kong, Indonesia, Malaysia, Singapore and Thailand, 1 for South Korea and 0.5 for China and Japan.
New features include allowing countries to access a predetermined amount of money without having to have a request approved by other contributors, making it easier for a country to act quickly should a problem arise. A crisis prevention facility called the CMIM Precautionary Line has also been introduced, with the aim of providing short-term liquidity support in the event of an unexpected short-term liquidity problem.
“The amendments will effectively allow access of the ASEAN+3 member countries and Hong Kong to an enhanced CMIM package. These amendments are expected to fortify CMIM as the region’s financial safety net in the event of any potential or actual liquidity difficulty,” said the Bangko Sentral ng Pilipinas, the central bank of the Philippines.
Despite doubling in size, the currency pool on offer through the CMIM is very small in comparison with the sums provided by the IMF or the equivalent European fund. The latter created a US$950 billion bailout package in order to reassure financial markets in 2010, which represented approximately 8 percent of Eurozone GDP. In comparison, CMIM represents only 1.4 percent of ASEAN+3 GDP.
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