The underutilization of CMIM facilities during recent crises highlights the need to reevaluate the effectiveness of ASEAN+3 region’s financial safety net. Moving forward, a comprehensive lending framework is needed to adequately address the diverse and emerging challenges faced by the regional economies.

In a short span of time, the world has experienced a once-in-a-century pandemic, severe supply chain disruptions, energy and banking crises, a sharp escalation of interest rates and living costs, and two wars. Just like the acclaimed award-winning film, this confluence of crises – happening everywhere and all at once – has put immense pressure on businesses, institutions, and governments, testing their resilience and adaptability.

On top of these, the ASEAN+3 region faces a myriad of emerging challenges. It remains prone to natural disasters and climate change. Further geoeconomic shifts and ensuing supply chain fragmentation would hamper technological progress and lead to rising costs. Accelerating aging trends will add considerable challenges to fiscal sustainability, primarily due to the heightened demand for social welfare spending, escalating healthcare costs, and mounting pension liabilities.

In this increasingly complex and uncertain environment, ASEAN+3 economies can be confronted with a variety of challenging circumstances that require a wide range of crisis-fighting mechanisms, from crisis prevention to mitigation and resolution. This necessitates a suite of lending instruments that can be deployed in a flexible and nimble manner in response to a broad array of financing needs of members, enabled by a predictable, reliable and longer-term source of funding.

Even nations with robust policies and fundamentals are subjected to short-term liquidity or emergency shocks, which could spiral into deeper crises or broader economic disruptions if unaddressed. On the other hand, longer-term financing options may be needed in cases where economic vulnerabilities or longer-lasting shocks would require major policy adjustments and a prolonged period for these issues to be resolved meaningfully.

Currently, the Chiang Mai Initiative Multilateralisation (CMIM) toolkit consists of only two instruments for crisis prevention and resolution. The first is the Precautionary Line, accessible only by countries that meet certain qualification criteria. The Stability Facility (SF), which is the only crisis resolution instrument, is hindered by the short-term nature of CMIM’s funding structure and implicit requirement for a good track record in macroeconomic management.

This suggests that economies with weak fundamentals, even if committing to strong policies in the near future, are inherently unable to access the CMIM facilities, which was evident in the lack of utilization during crises periods.

A key initiative in the revamp of the ASEAN+3 regional financing arrangement (RFA) is the development of a comprehensive lending framework that caters to the diversity in the ASEAN+3 region and addresses the various potential and actual shocks and challenges. To achieve these objectives, the CMIM lending framework can be complemented with the following instruments.

First, establish a facility to meet actual and urgent financing needs. Urgent financial needs, including those caused by natural disasters and emergencies, should be provided promptly to avert significant economic damage to the recipient country. Although all member economies are eligible, they will need to demonstrate sufficient capacity and commitment to undertake and implement sound policies. ASEAN+3 members have recently agreed during its Finance and Central Bank Deputies’ Meeting on the establishment of the Rapid Financing Facility (RFF) under the CMIM, which is exactly designed to meet urgent financing needs.

Secondly, creating a Standing Liquidity Line (SLL) is crucial for crisis prevention. This instrument would serve as a precautionary instrument and liquidity backstop. In an increasingly integrated world, a short-term revolving facility for qualifying members is an indispensable tool in the crisis prevention toolkit, especially in dealing with abrupt and volatile capital flows. The SLL can be achieved by converting the existing CMIM Precautionary Line into a revolving liquidity line or by establishing a new instrument.

Thirdly, a Policy Adjustment Instrument (PAI) can be developed to support medium-term reforms. Given the longer-term nature of structural challenges looming around ASEAN+3, there is a need for an instrument that supports members’ medium-term reform agenda. This instrument can be used either for crisis management or for promoting economic transformation. The proposed PAI can be used for non-financing and financing situations.

The non-financing PAI, like the Policy Coordination Instrument (PCI) of the IMF, would enable a closer dialogue with members and the endorsement of policies by the RFA. It can also serve as a follow-up arrangement after a program, supported by the RFA or IMF, to signal the authorities’ commitment to continued reforms along the lines of previous programs, and help catalyze financing from other sources. It may also serve as a precursor of more complex program design and financing should the need arises.

On the other hand, the financing PAI would be more appropriate for members that might need financing support to adopt important reforms over the medium term. A three-year horizon of the financing PAI would be comparable to the duration of IMF’s Extended Fund Facility (EFF). The development of financing PAI should be preceded by reforms of the financial structure of the RFA to secure a more stable and reliable funding source.

Finally, a comprehensive guidance on program design and conditionality framework should also be developed in tandem with these new instruments. This would mitigate moral hazard by ensuring a clear and methodical approach in supporting members’ key reform initiatives while remaining flexible, cognizant of individual economy’s capacity constraints, and reflective of the economic diversity of the region. More efforts are needed to explore a pragmatic approach to improve accessibility to the RFA lending while maintaining sufficient safeguards of the financial resources.

In conclusion, the timely revamp of the ASEAN+3 RFA is key in promoting the region’s resilience and financial stability. The introduction of new lending instruments should be done gradually, in tandem with the financial structure reform. In the meantime, existing facilities shall be further enhanced based on a robust program design and conditionality framework. Ultimately, the integration of a veteran lending framework, a robust program design and conditionality framework, and a solid financial structure of the RFA will constitute the core of the crisis prevention and resolution mechanism in the ASEAN+3’s financial safety net.