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Opinion
May 12, 2017 www.intellinews.com I Page 22
adequate guarantees – that help minimise costs to the public sector.
Third, liquidation of bad assets and openness to private investment in the sector should be pur- sued transparently, with the goal of promoting competition.
Finally, regulators must continue to strengthen lending practices, develop and implement crisis management frameworks, and fully enforce pru- dential regulations.
Financial sector repairs will complement the region’s ongoing fiscal, monetary, and structural reforms in various ways. Fiscal consolidation is needed to address the wider fiscal deficits and higher debt generated by the earlier (and appro- priate) increases in public spending to support growth. But this should strike a balance between supporting economic activity in the short term and ensuring sustainability in the long term, while prioritising productive investments and protecting the poor. A strong financial sector will help this process by not only reducing potential
fiscal pressures, but also supporting a success- ful debt-management strategy.
On monetary policy, further improvements to exist- ing frameworks are needed to fully reap the ben- efits of increased exchange rate flexibility. These should focus on fostering policy credibility, which requires developing clear communication practices and ensuring central bank independence. In this context, a solid and reliable financial sector will contribute to the de-dollarisation process, which is necessary for the effectiveness of monetary policy. On the structural front, weaker financial sectors that are incapable of supporting the real economy jeopardise the completion of reforms that promote the much-needed economic transformation away from commodities and remittances.
The countries of the region should take decisive action to fix their banks. A healthy financial sector will help unleash the region’s economic potential and raise living standards.
Juha Kähkönen is deputy director, IMF Middle East and Central Asia Department.