Download Improving Macroeconomic Management

Economic Review
39
particular, the assessment of sustainable and manageable levels of short-term debt;
risks associated with sterilization operations needed to neutralize the effects of
capital inflows on the monetary base; financial institutions and corporate sector
credit exposure of short-term foreign borrowing and its servicing; and risks of
misalignment of exchange rate systems with capital flows. As the capital inflows
put pressure on exchange rates to appreciate in real terms, export growth would be
affected. This experience reconfirmed that pace and sequencing of capital account
liberalization is critical. While early liberalization of long-term inflows and other
trade flows is key, the short-term capital inflow liberalization needs to be
sequenced with sound macroeconomic fundamentals and prudential regulatory
safeguards in the financial sector. (http://www.adb.org/Documents/Speeches
/1999/ms1999033.asp).
So, a big challenge is to design and establish a framework for international
financial markets that will put the enormous potential of private investment capital
to use while, at the same time, limiting the inherent risks. Today, private
investment capital is indispensable, both in terms of volume and sophistication, for
promoting development and growth and for creating jobs. To avoid the devastating
impact that financial and currency crises would have on the affected economies and
on the people, the need to reform and strengthen the international financial
architecture, especially through increased transparency of economic and financial
data among the countries, is quite high (http://www.imf.org/external/np/speeches/
2002/062102.htm). The crisis prevention initiatives to address the vulnerabilities
linked to volatile private capital flows, weaknesses in banking and corporate
sectors, and contagion revealed by the financial crises are the enhanced
surveillance of capital markets and assessments of external vulnerability,
implementing standards and codes, pursuing financial sector assessment program,
and improving transparency (http://www.imf.org/external/ np/speeches/2002/
052602.htm).
STRENGTHENING MACROECONOMIC POLICIES
There is no doubt that high priority should be given to consolidating
macroeconomic stability
and strengthening competitiveness through
implementation of sound fiscal, monetary, and exchange rate policies. On fiscal
policy, there will be a need to enhance tax efficiency and improve collection
through various measures, including reorienting the tax system from foreign trade
taxes toward broad-based domestic consumption taxes, curbing tax exemptions,
and revamping revenue administration. Strengthening expenditure management
systems and strictly limiting the overall government borrowing from the banking
system is essential. Concurrently, monetary policy should seek to regulate the
growth of the money supply to keep price uncertainty in check. Reliance on
indirect monetary instruments and ensuring that interest rates are freely determined
by market forces are important as is the increased exchange rate flexibility.
Sustaining competitive real exchange rates to facilitate the integration into the