Malaysia resurfacing the Asian Monetary Fund: Will the idea take off this time?

On an official visit to China towards the end of March 2023, Malaysia's prime minister, Anwar Ibrahim, conveyed his intention of reviving the idea of an Asian Monetary Fund (AMF) at the Boao Forum for Asia Annual Conference in Hainan. Reports have indicated that President Xi Jinping welcomes the idea and both countries are now looking at ways to trade using the ringgit and the renminbi.

It was the second time Anwar broached the subject. The first time was during his keynote address at "The Future of ASEAN" lecture organised by the Malaysian-Thai Chamber of Commerce in Bangkok in February.

The idea of an AMF was first proposed by Japan in 1997 at the height of the Asian Financial Crisis (AFC). It, unfortunately, did not see the light of day amidst strong US objections and eventually fizzled out. Will it succeed this time around? While it is still too early to tell, the idea is likely to gain traction considering the current geopolitical realities and global economic/monetary conditions.

The geopolitical realities of today are arguably different compared to the 1990s. Back then, the US successfully challenged Japan's proposal to deny the consensus needed in forming the AMF. As Phillip Y. Lipscy wrote: "Without Chinese support and in the face of grave US opposition, the AMF proposal was effectively dead." The US had viewed the proposal as a challenge to its hegemonic power in Asia, while China was sceptical of Japan's intentions.

A lot has changed since then. Firstly, China's economy has strengthened tremendously. In 1997, China's GDP stood at US$961 billion. This figure rose to US$17.8 trillion in 2022, and is second only to the US. Its Belt and Road Initiative (BRI) and the Asian Infrastructure Investment Bank (AIIB) initiative have gained international support, enabling Beijing to expand its economic clout and political influence, particularly across the global south. Small powers like Malaysia cannot afford to take sides. China is important to Malaysia's economic growth because it remains the latter's biggest trading partner.

Secondly, it is telling that Anwar chose China over Japan in announcing his proposed resurrection of the AMF. While Beijing's decision to maintain its currency value during the AFC helped in stabilising the situation, it was Japan that contributed most significantly to the International Monetary Fund (IMF) and provided US$2 billion bilateral aid under the New Miyazawa Initiative to Malaysia, which had decided against borrowing from the IMF.

Granted, Anwar's proposal includes Japan and South Korea. It should never be interpreted as a weakening of Malaysia-Japan relations despite the fact that Anwar has yet to visit Japan in his official capacity as prime minister. His decision does, however, underscore the pragmatic acknowledgement of how indispensable China is to the realisation of regional ideas like the AMF and getting China onboard is crucial if the AMF is to succeed. This pragmatism ought to be understood within the broader context of Malaysia's foreign policy under Anwar Ibrahim where collaboration takes precedence over competition.

Thirdly, American hegemony has been on a gradual decline. Multiple events from the global financial crisis of 2007-2009 that exposed the vulnerabilities of the US's financial system, and the US's retreat from global leadership under the Trump administration, to the poor international management of the Covid-19 pandemic, the abrupt withdrawal of US troops from Afghanistan, and the protracted Russian-Ukraine war, demonstrated the weakening of the existing liberal order and the fragility of international partnerships.

Such events are seized by China to develop closer relationships with countries in the global south. China's vaccine diplomacy, for example, boosted its image, particularly among poorer countries that had difficulties accessing Western-made vaccines during the Covid-19 pandemic. This in turn serves as a springboard to more substantial forms of bilateral and regional cooperation.

Many countries in the African continent, South Asia, Southeast Asia and even the Pacific islands have established close economic relations with China. The more the US chooses to confront and decouple its economy from China as it desperately tries to sustain its supremacy, the more adverse effect it will have on developing countries that have come to view China as integral to their economic well-being. It is thus instructive that Anwar is willing to soften his stance on the South China Sea issue during his China trip, albeit with criticism from political opponents and analysts at home.

An AMF provides an additional option for developing countries to access temporary financing during an economic or financial crisis. It could reduce the over-dependence on the greenback in international transactions and so minimise the risks associated with a strong US dollar. Logically, an appreciation in the greenback would generate higher repayment for USD-denominated foreign debts, which in turn increases fiscal burden and reduces available funds for the domestic economy.

A strong US currency further discourages developing countries from importing high-technological goods and services necessary for industrial upgrades. This is undeniably counterproductive if the Asian region is to become a major economic powerhouse. The time could be ripe to institute a regional mechanism that would empower financial independence.

The proposed AMF need not start from scratch. The bilateral currency swap networks under the Chiang Mai Initiative (CMI) and the subsequent reserve pooling arrangement under the Chiang Mai Initiative Multilateralisation (CMIM) for the ASEAN Plus Three countries will provide the building block for the development of a full-fledged AMF.

This makes the AMF more likely today than when it was first mooted 26 years ago. Although the CMIM scheme has been strengthened over time, it is still linked to the IMF and hence the US dollar, which means that an IMF programme must be imposed if the currency swap exceeds 40% of the maximum arrangement amount. The proposed AMF would fully delink from the IMF and make it more attractive to smaller countries requiring a temporary liquidity solution.

The attractiveness is not only on the swap amount but also in the area of policy advice and capacity development. If structured responsibly, the AMF can offer regionally-focused technical expertise and monetary assistance programmes that are more sensitive and attuned to the local demands and economic peculiarities of member states.

The formation of an AMF is not without concerns. Firstly, will developing countries turn to AMF as a cheap source of funds to circumvent IMF's strict lending conditions? Accountability, transparency and the imposition of obligatory conditions are as important for the AMF as it is for the IMF. Without responsibilities, moral hazards can occur in managing a country's economy that would either worsen or contribute to subsequent crises. Moreover, frequent lending will cause the AMF to become unsustainable considering that the main funders are limited to China and Japan, if the latter joins.

Secondly, is Beijing capable of supporting the liquidity of its currency in international markets? The high degree of government intervention in the Chinese economy, hidden municipal debts, and a growing aging society at a time when its economy has yet to mature do not foster market confidence in the renminbi's long-term resilience. In other words, the success of the AMF will notably depend on the performance of China's currency.

Thirdly, will the AMF end up serving China's economic interests in the same way the IMF has been accused of doing for the US? A plausible scenario is an AMF that becomes a platform for Beijing to internationalise the renminbi by increasing its use in international transactions.

Beijing hopes that as the liquidity of its currency improves, its economy further strengthens, and the renminbi emerges as an alternative global currency. The latter is China's long-term goal and the US-led international sanctions on Russia are contributing to that effect. India, China and Russia have already begun trading oil in their local currencies. To further reduce dependency on the greenback, a new report has indicated that the BRICS countries are working to create a new medium for payments. Realistically, these developments will not lead to an immediate abandonment of the greenback. The dollar will continue to dominate in global trade and financial transactions at least in the short to medium term.

In sum, Anwar's push for reawakening the AMF is not to disengage from the current international financial architecture but to reduce its dependency. Malaysia's proposal reflects a general awareness of the changing geopolitical order where Asian countries are demanding a bigger voice in rulemaking. Just as the AIIB is able to coexist with other international institutions, the AMF should be viewed positively as the world moves toward greater multilateral governance.

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