Reforming global monetary system essential - UNCTAD report

The balance between private activity and state involvement in the financial sector need to be revised fundamentally for the stability and reliability of the financial system said, the Trade and Development Report 2009 of the United Nations Conference on Trade and Development (UNCTAD).

The report covers the global economic crisis and climate change issues. It stresses that a large segment of the financial sector cannot be left to function like giant casinos without harming the real sector of the economy. Pointing out the involvement of the governments and the central banks to rescue mismanaged banks and financial institutions the report said that the huge profits and income earned from financial activities of some market participants and managers over the past few years is disproportional to the macroeconomic and social usefulness of the financial sector.

The report stresses the need for financial support to low income countries to face the crisis. Debt servicing and debt sustainability of the countries which heavily depend on commercial loans as well as low income developing countries including heavily indebted poor countries have become problematic. Despite debt relief provided to them their external debt situation remain highly vulnerable to shocks. The report suggests a temporary debt moratorium on official debt repayment for low income countries.

Compared to the size of the stimulus packages for the developed countries, the total amount of such a temporary debt moratorium would be modest, amounting to around US$ 26 billion for 49 low income countries for 2009 and 2010, the report said.

Warning on a sharp increase of inflation as a result of large injection of money by central banks and sharply rising budget deficits in many countries, the report said that the deflation is the real danger at the moment. Wage deflation is the imminent and most dangerous threat in many countries today, because governments will find it much more difficult to stabilise a tumbling economy when there is a large scale fall in wages and consumption.

However, deflation will not cure itself.The most important task is to break the spiral of falling wages, prices and demand as early as possible, review the financial sector ability to provide credit for productive investment to stimulate real economic growth.

Governments and central banks need to take rapid and strong proactive measures to boost demand and avert the risk of deflation, the report said.

According to the report the scope for expansionary policies to counter the impacts of the crisis on domestic demand and employment in developing countries has been severely constrained by the conditionality attached to IMF lending. From the outbreak of the crisis to May 2009 IMF has extended its lending for 50 countries.

The report predict the global recovery in 2010 but said it is unlikely the global GDP growth exceed 1.6%. In 2009 global GDP is expected to fall by 2.5%. Report said that the reform of the international monitory and financial system is imperative and the dollar based reserve system is increasingly challenged.