The Latin American Reserve Fund (FLAR) was initially created as a mechanism for the five Andean nations – Bolivia, Colombia, Ecuador, Peru and Venezuela. Two years ago they were joined by Costa Rica and Uruguay. While similar in philosophy to the Chiang Mai Initiative in Asia, FLAR still needs to gain traction among Latin American nations. Members, however, believe the region’s new liquidity, coupled with responses to world economic crisis, could be the push FLAR needs to transform into a regional body.
"FLAR is similar to Chiang Mai, but we only have seven countries. It would be an important mechanism if there were more countries and more reserves. It could become an important lender if capital were increased," Peruvian Central Bank Governor Julio Velarde told Emerging Markets.
The fund has $2.34 billion in subscribed capital and five lines of credit that can be accessed by members, including balance of payments, central bank external debt restructuring and liquidity.
It has extended loans for $9.75 billion in its history, most coming at times of crisis. Of the total amount, $8.8 billion have gone for balance of payment and liquidity lines.
There have been four credit lines in the past decade, with one for Bolivia, one for Costa Rica and two for Ecuador. Ecuador has turned to the FLAR more than the other members, with $3.5 billion in total credits.
Ana Maria Carrasquilla, FLAR president, said the institution was actively lobbying other countries in Central and South America to join. "We have a solid history of success, which is generating interest in other countries that are looking for ways to maximize reserves," she said.
Pedro Delgado, Ecuador’s Central Bank governor, said FLAR member countries were looking "strengthen the institution as a regional mechanism. The region has a great deal of liquidity that could be used for regional development".
Delgado said resistance to joining could come from the history of failure of regional initiatives in the past 50 years. "In Latin America we have a history of creating institutions but never consolidating them so that they work. FLAR has a different record, which I think will help convince others to join," he said.
Velarde said an important change that could help is a softening of the position of the IMF and the US Treasury, which were strongly opposed to reserve pooling, such as Chiang Mai. "The IMF has recognized that these initiatives are not a threat."
But the IMF’s Western Hemisphere Director Nicolas Eyzaguirre that pooling foreign currency reserves might offer only a limited insurance against systemic shocks.
"But if the shocks are not correlated in the region, that would be helpful. If there are correlated, it would not make much difference." he told Emerging Markets