WASHINGTON: IMF chief Dominique Strauss-Kahn on Thursday suggested the currencies of China and other emerging economies should be added to its reserve asset to promote stability in the global monetary system.
Strauss-Kahn, the managing director of the 187-nation International Monetary Fund, said an expanded role for the IMF's special currency could help to bolster the monetary system in the face of damaging volatility.
Noting the only way the world survived the 2008 financial crisis was through extraordinary international policy cooperation, he warned: "Global imbalances are back."
Issues that were worrisome before the crisis -- large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves -- were "on the front burner once again," the managing director said at an IMF panel discussion on international monetary reform.
If the problems were left unresolved, they "could even sow the seeds of the next crisis," he warned.
Such reform would help address the root of those global imbalances and bolster the system's ability to prevent future crises.
"When we worry about the deficiencies of the international monetary system, we are mostly worrying about volatility: a sense that money sometimes flows around the globe in too volatile a fashion, and that countries need a more stable, more predictable external environment in order to prosper," the former French Socialist finance minister said.
Strauss-Kahn recalled that the IMF has been working to limit that volatility through several approaches: by strengthening coordination of economic and monetary policy, stepping up surveillance of capital flows and improving its financial safety net for member nations in need.
Under a mandate from the Group of 20 developed and emerging economies, representing about 90 percent of global output, the IMF has launched a mutual assessment process that takes into account the global effect of country-level policies.
France, which holds the rotating G20 presidency this year, has put currency reform at the top of its agenda. Strauss-Kahn's remarks were his clearest yet showing an alignment with the remedies proposed by French President Nicolas Sarkozy.
As part of a reform toolkit, Strauss-Kahn suggested the fund's international reserve asset, known as the Special Drawing Rights (SDR), could be used to smooth volatility.
"Over time, there may also be a role for the SDR to contribute to a more stable international monetary system," he said.
A key move would be expanding the SDR basket, which currently includes four major currencies: the dollar, euro, yen and pound.
"Adding emerging market currencies -- such as the renminbi -- could help the process of internationalization of these currencies, which would benefit the system as a whole," he said, referring to the official name of the Chinese yuan.
The IMF chief laid out a series of proposals made in an IMF report published Thursday to enhance and expand the role of SDRs, which were created in 1969 to serve as an international reserve asset alongside gold and the dollar. But they have never been a major player in the global system.
The IMF separately reported Thursday on a January 28 meeting of the IMF executive board, composed of 24 countries and groups of countries.
"Many remained unconvinced at this stage that there is a key role for the SDR in the process" of monetary reform, it said.
However, the idea of expanding the SDR basket attracted strong support.
"Many urged staff to assess promptly the potential for expanding the basket to include currencies of large emerging market economies in line with their growing role in global trade and finance."
But "a number" of directors cautioned that including currencies that are not fully convertible -- such as the dollar-pegged yuan -- could reduce the attractiveness of the SDR.
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