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.
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