The global crisis in money market was largely because of the rising defaults on US sub prime mortgages. The world is experiencing a unique situation where “speculation” has become dominant rather than the productive economic enterprises.

For few weeks, the speculators thought, credit crunch was a temporary phenomenon. However, the continued credit drought has led to a global financial hemorrhage. Its impact is more severe than the East Asian Currency Crisis that began in July 1997. The economists compare present scenario with the depression of 1930s, warming the current crisis might prompt a global economic depression. IMF estimates the growth in the world economy to come down to 3% in 2009 from 5% last year. Analysts forecast worse economic conditions in most advanced economies. The World Bank president expects balance-of-payments problems in up to 30 developing countries.

The French bank Caisse d’Epargne lost $800 million in a trading incident. In the US, around 159,000 Americans lost their jobs in September. Lehman and Merrill, Fortis in Europe and Washington Mutual in the US, have disappeared as independent entities. World’s leading investment banks have collapsed. The world now needs a shared solution to the crisis. High financial temperature does not show any sign of cooling off. The British Prime Minister writes in The Washington Post that old post-war financial institutions are out of date. He suggests rebuilding for a new era in which there is a global, not national, competition and open, not closed, economies.

IMF expects long-lasting fallout from global financial crisis. As credit conditions will take a long time to normalise, its potential consequences should not be underestimated. Much was said about the development of corrective measures after the SEA crisis in 1997 to avoid future market turmoil. There was no development. Instead, speculative instruments were played in equity and foreign exchange markets. As a result, billions from the central bank reserves were transferred into the hands of speculators. Many thought IMF policy was to take over free market rather than preserve it.

IMF has always recommended policies that suit its conservative mission, not necessarily taking into account country-specific constraints and priorities. India and several other emerging economies were pressurised to go for Capital Account Convertibility (CAC). If India had gone towards that end in mid 1990s, the present growth would have been a distant dream. India has, however, completed its homework to move towards fuller convertibility.

The S S Tarapore committee constituted by the Reserve Bank of India in 1997 for preparing India for CAC had proposed three preconditions to be fulfilled by 1999-2000. These conditions include: the fiscal consolidation, a mandated inflation target and strengthening of the financial system. Although the home work is almost completed, India needs to seriously examine the likely impact from fuller CAC in the context of current global financial meltdown. India’s decision to go for fuller CAC has strong and positive correlation to Nepal’s future because of the latter’s increasing dependency on the former. Nepal’s deficit with India alone constitutes 64% of total deficits, indicating the volatility of Nepal’s economy with India’s policy choices.

To avoid the contagion from global financial tsunami, Nepal’s banks should take less risk than their peers abroad. The central bank should strengthen regulation and meticulous supervision. The enforcement of strict capital adequacy requirement should not be compromised. Although Nepal’s capital adequacy with the financial institutions at present exceeds the minimum required threshold, there has been erosion of capital of sick banks and financial institutions. Therefore, the exposure limits should be reviewed timely.

Access to international financial assistance may not be easy in the future. Development Assistance is bound to decrease. I suspect there would be less obligation to honour developed country’s commitment to rescue developing economies. Nepal is experiencing high budget deficit as a result of increased food and oil prices. The poor countries may therefore be a victim of developed counties’ mistakes. It is a pity that Western banks are bailing out bad investments by making uninformed borrowers the victim of IMF’s additional regulations.

There have been indications about the deterioration of global markets. The ongoing crisis is projected to reduce flow of funds by 25% in emerging markets. High oil and food price, use of food as an alternative to oil, inflation, credit crisis of development and commercial banks, unemployment and global recession have been visible. What did IMF do to safeguard global money markets? Nothing. Instead, the operation of markets became a mystery even to IMF. IMF should not focus on country-by-country policy. There is a need for powerful coordinated response through shared solution.

Pyakuryal is professor of Economics, TU