Tuesday, September 1, 2009

Something is wrong with global stimulus package

The IMF has issued SDRs of a meager $31 billion in the last 60 odd years of its existence. The voluntary arrangement with central banks of 13 member countries was adequate for this small issue. These are mostly developed countries. Their economies were doing well in the past. The British people, for example, obtained various indirect benefits through their government’s control of the IMF in lieu of the cost borne by them in buying the SDRs. The IMF, under pressure from Britain, would impose conditions on Bangladesh to open its economy to foreign investment. The benefits from such opening of Bangladesh’s economy for British companies would compensate for the loss of income from purchase of SDRs. But it will be difficult for the developed countries to buy SDRs of ten times the amount when their own economies are facing huge recession. For example, the United States has made a stimulus package of more than $ one trillion to increase purchasing power of its citizens. They have been given tax refunds. It will be difficult for the United States to buy SDRs tendered by Bangladesh in this situation. The purchasing power of the American people will decline if the Federal Reserve Bank buys these SDRs. I reckon that in times to come a crisis will arise. There will be no buyers for the SDRs. Developed countries will close their doors just as the turtle withdraws its limbs in a storm. It seems the developed countries are aware of this impending crisis. Their strategy is to push China, India and oil exporting Arab countries to buy these SDRs. The Guardian reports British Prime Minister Gordon Brown saying that China and oil-producing countries in the Gulf should "pump hundreds of billions of dollars into the International Monetary Fund to prevent the global financial ‘contagion’ from destroying vulnerable economies." A Blog on IMF says that India and China should buy the SDRs. The developed countries expect China, India and oil exporting Arab countries to buy the SDRs. If they are successful in their design, the cost of the IMF’s stimulus package will be borne by the people of these countries. Say, Bangladesh deposits SDRs of $ one billion with Reserve Bank of India and obtains rupees of this amount. Bangladesh buys cars, cement, steel and cotton of this amount in Kolkata markets and ships them to Dhaka. These goods will now be consumed by people of Bangladesh instead of people of India. We will additionally face inflation due to the infusion of $ one billion that was provided initially by RBI to Bangladesh. In this way the we will bear the cost of the stimulus package. The benefits of the stimulus package will be reaped by countries that sell their SDRs and costs will be borne by countries that buy the SDRs. The developed countries have tacitly already expressed their inability to buy the SDRs. They would rather sell their SDR allocations to India and take cotton and steel from here to their homes. Therefore, the SDRs become like Bonds issued by a bankrupt company. The developed countries who control the IMF are themselves unwilling to buy the bonds issued by IMF. There is every possibility that China, India and oil exporting Arab countries will see through this game plan and refuse to buy the SDRs. This will create a huge crisis in the world economy akin to the Reserve Bank of India becoming insolvent. The entire global financial structure may collapse.

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