Toward a Liquidity Management Strategy for Emerging Market Economies

The increasing frequency, damage, and contagion effects of recent financial and balance-of-payment crises have highlighted the role of developing countries in the current debate on the new international financial architecture. The challenge for emerging markets is to better manage capital market disruptions in an environment where external assistance, such as IMF lending, is likely to decrease. Based on the experiences of the last decade, this paper suggests that a country's risk management strategy should focus on three main areas: the financial system, public debt management and the corporate sector. With the recognition of the combined effects of these three areas in affecting a country's liquidity risk, this paper discusses how systematic policies can be devised and implemented to encourage sustainable international capital flows and reduce unnecessary volatility. The paper discusses selective issues within these areas, which have not been adequately emphasized or have remained controversial. In particular, the discussion on the financial system focuses on the issues of transparency, liquidity requirements, and the resolution of problem banks. In term of debt management, this paper emphasizes the stock rather than flow conceptualization, and the issues of maturity and credibility. Some implications for exchange rate policy and the role of the IMF are drawn.