ANKARA: World financial leaders will agree to calibrate and communicate monetary policy carefully to avoid triggering capital flight, but will not call an expected US rate rise a risk to growth, a draft communique showed on Friday.

Many emerging market economies are concerned that when the US Federal Reserve raises borrowing costs, investors will withdraw from other markets and buy dollar assets, weakening other currencies and creating turbulence as capital flees.

Officials from emerging markets wanted the communique from finance ministers and central bank governors of the Group of 20 biggest economies, meeting in Turkey, to say that a US rate rise now would be a risk to growth.

But the draft avoids such wording.

“We note that in line with the improving economic outlook, monetary policy tightening is more likely in some advanced economies,” the draft communique, seen by Reuters, said.

“We will carefully calibrate and clearly communicate our actions to minimize negative spillovers, mitigate uncertainty and promote transparency,” said the draft, which may yet change before it is finally agreed on Saturday.

An earlier version of the text said policy tightening in developed economies “may remain one of the main sources of uncertainty in financial markets”.

“In one of the wild formulations it said that this was the biggest threat to the world economy. This was killed immediately and forever,” a Russian source said earlier.

The text welcomed strengthening activity in some economies but said that global growth fell short of expectations, although it expressed confidence a recovery would gain speed.

It also indirectly addressed Chinese moves that weakened its yuan currency in August, in a sign these were not seen as a competitive devaluation to prop up Chinese exports.

“We reiterate our commitment to move toward more market determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments,” it said. “We will refrain from competitive devaluations and resist all forms of protectionism.”

Slower growth in China and rising market volatility have boosted the risks to the global economy, the International Monetary Fund warned ahead of the G20 meeting, citing a mix of potential dangers such as depreciating emerging market currencies and tumbling commodity prices.

But the G20 had been seen as unlikely to come up with any concrete new measures to address the spillover from instability in the world’s second-largest economy, or to call directly on Beijing to address structural issues such as rising bad debts.—Reuters

Published in Dawn, September 5th, 2015

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