The Chiang Mai Initiative Multilateralisation (CMIM) swap arrangement provides short-term lending to ASEAN+3 members in case of financial crisis, while imposing minimal upfront financial burden to the lenders. However, it is subject to substantial limitations in terms of certainty of financing, size of firepower and the capacity to meet the diverse financing needs of its members. Introducing a paid-in capital scheme to the Regional Financing Arrangement (RFA) will tackle these shortcomings in a large extent.
Being one of the largest RFAs in the world, the CMIM, with a lending capacity of $240 billion, has undergone continued improvements over the past decade. That said, it has never been tapped.
Thanks to the economic resilience of ASEAN+3 members, there has been little need for substantial external financing. However, at times when certain members were subject to precarious financial conditions or potential shocks, they looked to other sources of financial support. This led to discussions and requests for reviewing the functionality of the CMIM and finding any ensuing solution. To this end, reforms are deemed necessary to enhance the current framework and reinforce the RFA’s central role in serving as a financial safety net for the region.
Introducing a more robust financial structure is a key consideration in the fundamental upgrade of the ASEAN+3 RFA. Under the CMIM’s multilateral swap arrangement, members commit to providing liquidity in reserve currencies in exchange for the local currency of borrowing countries. This arrangement poses advantages and disadvantages at the same time. The disadvantages become clear when compared to other RFAs that mostly operate on a firm paid-in capital structure and directly manage large amounts of assets.
First, the complexity of multilateral swap transactions can give rise to errors and delays. Multiple transactions are needed to activate the CMIM. Drawing a single facility requires transactions from all CMIM member central banks and an intermediary agency, involving the interchange of more than 200 SWIFT messages. An unexpected withdrawal by any member from the swaps will invalidate all the planned transactions, adding concerns and uncertainty when members try to activate the CMIM financing.
Second, the size of CMIM’s financing capacity is limited by its financial structure, with all of its financing coming from the ASEAN+3 members’ committed contributions. The CMIM’s lending capacity cannot be augmented by borrowings from the market or any other potential sources, including its member countries. In contrast, other RFAs with paid-in capital, such as the European Stability Mechanism (ESM), have secured additional financial resources by bond issuance. In the case of the International Monetary Fund (IMF), bilateral borrowing from some member countries is an important complement to its lending capacity.
Lastly, the CMIM could hardly be used to finance medium to long-term loans. Its funds are legally sourced from creditors’ foreign exchange reserves and governed by their regulations on reserve management, which usually allow short-term lending only. On the contrary, multilateral institutions with equity capital, such as the ESM and the IMF, are not bound by national regulations and can freely arrange medium- to long-term facilities to address the structural weakness of member economies.
Finding a solution
Among various options, an enhanced RFA based on paid-in capital structure will essentially overcome the deficiencies associated with the CMIM swap arrangement. Experiences can be drawn from other international financial institutions which independently manage a pool of liquid assets. Such financial structure will substantially reduce uncertainties arising from complex transactions or unexpected events of bilateral creditors.
The ESM and the IMF enjoy the flexibility to augment their lending resources through borrowings from the capital market (ESM) or the membership (IMF). From the point of view of a member country, once it subscribes to paid-in capital, their funding contribution to the RFA would no longer be subject to local regulations guiding foreign exchange reserves management. The paid-in capital structure will also enable the RFA to unleash more potential by lending in a broader array of purposes and maturities.
Paid-in capital schemes, however, come with a price. Foreign exchange payments to RFAs’ capital in most cases cannot be unconditionally withdrawn by members, thus rendering a deduction in the member’s foreign exchange reserves if the funds are originated from the central bank. In a swap arrangement, the financial burden on creditors would be incurred only when there is actual lending.
To alleviate any financial burden, ASEAN+3 members may consider a gradual reform of the RFA’s financial structure and introduce a new paid-in capital scheme on a limited scale initially.
The size of the paid-in capital could increase. A gradual transition will allow the enhanced RFA to adapt to changes in its operations and governance brought about by the new financial structure.
Today’s increasingly complex and uncertain external environment calls for decisive actions to reform the ASEAN+3 RFA. While the CMIM provides a crucial financing buffer to the region with minimal upfront cost from its members, its nature as a swap arrangement has limited its usefulness as a regional financial safety net. A paid-in capital scheme would entail a compelling and important upgrade of the regional RFA, offering higher predictability, reliability, and responsiveness.