Give IMF a $500-billion boost to help developing world: Manmohan

Prime minister Manmohan Singh has called for $500 billion fresh funds for the International Monetary Fund (IMF) to help developing countries cope with the worst financial crisis in six decades even as he warned rich nations against protectionism.

Speaking at a dinner hosted by British prime minister Gordon Brown for G20 leaders on Wednesday, Manmohan said an issue of vital concern to developing countries is the rise of protectionist sentiment in the industrialised world.

"This phenomenon is not surprising, given the downturn in economic activity and the rise of unemployment. However, it will be a test of leadership whether we persuade the public that we must not repeat past mistakes," he added.

Manmohan Singh, who is in London to participate in the G-20 summit today, will also hold talks with US president Barack Obama later.

"We must declare our resolve to increase the resources available with the IMF substantially, buy around $500 billion over the next two years," he said, adding:"We should agree on a fresh allocation of SDRs (special drawing rights) of around $250 billion."

This, he said, will provide developing countries with about $80 billion of usable resources at a time when liquidity was exceptionally tight.

''In Washington DC we pledged to take action to revive the world economy and also to bring about basic reform of the financial sector to reduce the likelihood of similar severe crises in future and to build institutions that can intervene more effectively if we do. We have made considerable progress in several areas, but I believe much more needs to be done,'' he said.

The world is looking to us to show that we can act cooperatively in a manner commensurate with the scale of the crisis. As we deal with the immediate problems, we must also be careful not to sacrifice the gains of openness of trade, direct investment and immigration. It will be a test of the leadership of the G-20 whether we can craft a strategy that meets all these objectives.

There can be no doubt that restoration of the banking system in the industrialised countries to full functionality is precondition for successful revival of the global economy. This is primarily a task for the Governments of the individual countries concerned. It is a task that will require commitment of resources on an unprecedented scale, he said.

''The IMF has estimated that the write down of toxic assets needed may be as high as $2.8 trillion in the US and $1.4 trillion in Europe and Japan. Many Governments, most recently the United States, have made large commitments of resources to deal with the problem of tainted assets and also to recapitalise the banking system. More may well be needed,'' he pointed out.

A rescue effort on this scale will place a huge burden on tax payers and this has given rise to considerable public anger, which is entirely understandable. However, it has to be explained to tax payers, and also their elected representatives, that anger at the irresponsible, and even morally reprehensible behaviour on the part of managements of financial institutions, should not come in the way of efforts to resurrect the system.

He said contra-cyclical policies will not have their full expansionary effect if credit does not flow to where it should. We have to explain to the public that reviving the banks is important not for the banks, as is sometimes perceived by the public, but for the economy, for employment, and for global prosperity generally.

It is ultimately a political problem that has to be handled by each national government, he added.

''Active contra-cyclical policy must be a priority item on our agenda and global markets are looking to see if we are united on this issue. We have seen a massive contraction in consumer demand in industrialised countries arising from the wealth effect of the decline in house prices and in stock market values,'' he said, adding, ''This is compounded by uncertainty about future employment prospects.''

While excess capacities are normally offset by expansion in surplus countries, this has not happened and many countries, including developing countries, are burdened with excess capacity now, he pointed out. ''We are now seeing a contraction that has overshot and contra-cyclical stimulus is, therefore, necessary in all countries,'' he added.

Manmohan Singh also suggested several other steps and urged the G20 leaders to demonstrate their willingness to help.

These include:

• Increasing the capital of Asian Development Bank by 20 per cent;
• Concrete steps to revive trade finance, and expansion of lending by export credit agencies;
• Stronger regulation and improved supervision of global financial system;
• Bring tax havens and non-cooperating jurisdictions under closer scrutiny;

Manmohan Singh said the Indian economy was expected to have expanded by 7 per cent in 2008-09, as opposed to 9 per cent in the previous fiscal, even as the country's fiscal deficit shot up due to the fiscal measures taken by the government.

"While India will be able to manage, many other developing countries may not be in the same position and this is where the international community can help, he said, while appealing for free flow of private capital.

He said the developments since November when the G20 leaders met last have shown that the downturn was much deeper and that the prospect of recovery had receded to 2010 at best.