IMF and High Interest Rates

IMF and high interest rates[edit]
The conventional high-interest-rate economic wisdom is normally employed by monetary authorities

to attain the chain objectives of tightened money supply, discouraged currency speculation,
stabilized exchange rate, curbed currency depreciation, and ultimately contained inflation.
In the Asian meltdown, highest IMF officials rationalized their prescribed high interest rates as
follows:
From then IMF First Deputy managing director, Stanley Fischer in 1998:[30]
When their governments "approached the IMF, the reserves of Thailand and South Korea were
perilously low, and the Indonesian Rupiah was excessively depreciated. Thus, the first order of
business was... to restore confidence in the currency. To achieve this, countries have to make it
more attractive to hold domestic currency, which in turn, requires increasing interest rates
temporarily, even if higher interest costs complicate the situation of weak banks and corporations...
Why not operate with lower interest rates and a greater devaluation? This is a relevant tradeoff, but
there can be no question that the degree of devaluation in the Asian countries is excessive, both
from the viewpoint of the individual countries, and from the viewpoint of the international system.
Looking first to the individual country, companies with substantial foreign currency debts, as so many
companies in these countries have, stood to suffer far more from… currency (depreciation) than
from a temporary rise in domestic interest rates…. Thus, on macroeconomics… monetary policy has
to be kept tight to restore confidence in the currency....
From the then IMF managing director Michel Camdessus:[31]
To reverse (currency depreciation), countries have to make it more attractive to hold domestic
currency, and that means temporarily raising interest rates, even if this (hurts) weak banks and
corporations.
Countries affected[edit]
Thailand[edit]
Further information: Economy of Thailand
From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the highest
economic growth rate of any country at the time. Inflation was kept reasonably low within a range of
3.4–5.7%.[32] The baht was pegged at 25 to the U.S. dollar.
On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30 June
1997, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht. However,
Thailand lacked the foreign reserves to support the USD–Baht currency peg, and the Thai
government was eventually forced to float the Baht, on 2 July 1997, allowing the value of the Baht to
be set by the currency market. This caused a chain reaction of events, eventually culminating into a
region-wide crisis.[33]
Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and
construction that resulted in huge numbers of workers returning to their villages in the countryside
and 600,000 foreign workers being sent back to their home countries. [34] The baht devalued swiftly
and lost more than half of its value. The baht reached its lowest point of 56 units to the U.S. dollar in
January 1998. The Thai stock market dropped 75%. Finance One, the largest Thai finance company
until then, collapsed.[35]
On 11 August 1997, the IMF unveiled a rescue package for Thailand with more than $17 billion,
subject to conditions such as passing laws relating to bankruptcy (reorganizing and restructuring)
procedures and establishing strong regulation frameworks for banks and other financial institutions.
The IMF approved on 20 August 1997, another bailout package of $2.9 billion.
Right after the 1997 Asian financial crisis income in the northeast, the poorest part of the country,
rose by 46 percent from 1998 to 2006.[36] Nationwide poverty fell from 21.3 to 11.3 percent.
[37]
Thailand's Gini coefficient, a measure of income inequality, fell from .525 in 2000 to .499 in 2004
(it had risen from 1996 to 2000) versus 1997 Asian financial crisis.[38]
By 2001, Thailand's economy had recovered. The increasing tax revenues allowed the country to
balance its budget and repay its debts to the IMF in 2003, four years ahead of schedule. The Thai
baht continued to appreciate to 29 Baht to the U.S. dollar in October 2010.
Indonesia[edit]
See also: Fall of Suharto, May 1998 riots of Indonesia, and Economy of Indonesia
Fall of Suharto: President Suharto resigns, 21 May 1998.

In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation, a trade
surplus of more than $900 million, huge foreign exchange reserves of more than $20 billion, and a
good banking sector. But a large number of Indonesian corporations had been borrowing in U.S.
dollars. During the preceding years, as the rupiah had strengthened respective to the dollar, this
practice had worked well for these corporations; their effective levels of debt and financing costs had
decreased as the local currency's value rose.
In July 1997, when Thailand floated the baht, Indonesia's monetary authorities widened the
rupiah currency trading band from 8% to 12%. The rupiah suddenly came under severe attack in
August. On 14 August 1997, the managed floating exchange regime was replaced by a free-floating
exchange rate arrangement. The rupiah dropped further. The IMF came forward with a rescue
package of $23 billion, but the rupiah was sinking further amid fears over corporate debts, massive
selling of rupiah, and strong demand for dollars. The rupiah and the Jakarta Stock
Exchange touched a historic low in September. Moody's eventually downgraded Indonesia's long-
term debt to "junk bond".[39]
Although the rupiah crisis began in July and August 1997, it intensified in November when the
effects of that summer devaluation showed up on corporate balance sheets. Companies that had
borrowed in dollars had to face the higher costs imposed upon them by the rupiah's decline, and
many reacted by buying dollars through selling rupiah, undermining the value of the latter further.
Before the crisis, the exchange rate between the rupiah and the dollar was roughly 2,600 rupiah to 1
U.S. dollar.[40] The rate plunged to over 11,000 rupiah to 1 U.S. dollar on 9 January 1998, with spot
rates over 14,000 during 23–26 January and trading again over 14,000 for about six weeks during
June–July 1998. On 31 December 1998, the rate was almost exactly 8,000 to 1 U.S. dollar.
[41]
Indonesia lost 13.5% of its GDP that year.

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IMF and high interest rates[edit]

The conventional high-interest-rate economic wisdom is normally employed by monetary authorities

Fall of Suharto: President Suharto resigns, 21 May 1998.

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