The Evolving Role of the IMF And its Dialogue With Parliamentarians, Remarks by Graham Hacche, Deputy Director, External Relations Department, IMF

May 19, 2006

Graham Hacche
Deputy Director, External Relations Department, IMF
Remarks at Seminar for Parliamentarians of the Kyrgyz Republic
Organized by the IMF and the National Bank of the Kyrgyz Republic
Bishkek, May 19-20, 2006

Mr. President, Mr. Prime Minister, Mr. Governor, Honorable Members of the Zhogorku Kenesh of the Kyrgyz Republic, ladies and gentlemen, it is a great pleasure and honor for me, on behalf of the IMF, to welcome you to this seminar that we have organized jointly with the National Bank.

The Kyrgyz Republic has been a member of the IMF for 14 years. What does your membership in the IMF mean? Perhaps the IMF is best known as a source of loans of foreign exchange, and of debt relief under the HIPC program (which we operate with the World Bank), to which policy conditions are attached. And since 1993, your country has borrowed several times from the IMF. The loans have been drawn to support your balance of payments, to promote policies of macroeconomic stabilization and structural reforms, to assist your transition to a market economy, and to foster sustainable economic growth and poverty reduction. And now the HIPC is a subject of active debate here.

Mr. Hacche Mr. Hacche

But the IMF is not only, or even mainly, about financial assistance and the conditions attached to it. The IMF is an international organization in which countries come together—almost all countries in the world—to cooperate for the common good: to inform each other of their economic situations and policies, to discuss their economic situations and policies, and to help each other find economic policy solutions that bring long-term benefits not only to the country concerned but globally. Membership in the IMF, like membership in any club, involves both rights and obligations. You can take advantage not only of the IMF's financial assistance, but also of its policy advice and technical expertise, based on its research and the collective experience of its membership. You participate in IMF decision-making and the IMF's policy advice to other countries, through your Executive Director, Mr. Thomas Moser, who is elected by a constituency of countries including the Kyrgyz Republic, and your Governor of the IMF, the Chairman of your National Bank, Mr. Alapaev. But you also have obligations—to provide the Fund with the information it needs to analyze your economy, and to observe certain rules designed to ensure that countries do not adopt policies damaging to the exchange rate system or to other countries. Such rights and obligations are in the nature of international cooperation.

It is important to recall that the IMF was born out of some painful lessons. The pain was the catastrophe of the 1930s "Great Depression" in the world economy. One lesson from that experience was that national economic problems can quickly become international economic problems. Another was that if a country tries to solve its problems in a defensive way—by restricting imports, for example, or artificially manipulating its exchange rate to gain a short-term improvement in its international competitiveness—not only will other countries suffer, but the country taking the action itself will suffer, especially in the longer term, even though some particular groups and sectors may benefit in the short term. In the 1930s, the results of defensive protectionist policies adopted by several countries, including in retaliation to the actions of others, included dramatic declines in international trade, output, and employment that historians view as having contributed to the Second World War. The IMF was born, along with the World Bank, at the end of that war, to help ensure that that history would not be repeated. And thankfully it has not been repeated. The period since 1945 has been one of unprecedented growth in living standards globally. And the IMF is proud to have contributed to that.

The purposes of the IMF are the same today as when the organization was established more than 60 years ago—to provide an institution for international cooperation on international monetary problems; to facilitate the growth of international trade, and thus to promote high employment, economic growth, and poverty reduction; to promote exchange rate stability and an open system of international payments; and to lend countries foreign exchange, when needed, on a temporary basis and under adequate safeguards to help them correct balance of payments problems without resorting to measures destructive of national or international prosperity.

But while the IMF's purposes have not changed since 1944, its role and operations have changed substantially, to meet the shifting needs of its expanding membership in an evolving world economy. The IMF began with 29 member countries; now it has 184, almost covering the globe. Many of them, including the Kyrgyz Republic, suffer from extreme poverty, and the Fund has been working increasingly hard in recent decades to help low-income countries reduce poverty, including through the provision of concessional financinglow-interest loans with long maturities, and debt relief—to support good policies. Since 1994, all this country's loans from the IMF have been on these concessional terms—since 1999 under the new Poverty Reduction and Growth Facility (the PRGF). The introduction of the PRGF, and the Fund's increased attention to poverty reduction, is an example of how the IMF has evolved.

The conditionality attached to the IMF's loans has also evolved. But you may ask: why are policy conditions attached to Fund loans at all? The reasons are simple. One purpose of conditionality is to ensure that the loans the Fund provides are used to help address the country's underlying problems, by supporting appropriate policies. Without appropriate policies, there will be no progress in addressing the country's problems, and the country, by borrowing, will just be burdened with more debt. The other main purpose of conditionality is to ensure that the IMF is repaid, so that other countries in need can borrow from it. In recent years, the Fund's conditionality has evolved mainly in two ways. More emphasis is being given to country ownership of policies: we have learned that the broader the support you have for policy programs in the country, the more effectively they are likely to be implemented and the more successful they are likely to be. And in low-income countries like the Kyrgyz Republic, the Poverty Reduction Strategy's consultation process provides a means of building such ownership. Yesterday, we had an interesting meeting with a number of the organizations of civil society that are clearly actively involved in this process in this country. Second, in recent years, there have been increased efforts to streamline conditionality, so that it can focus effectively on the policies essential to attain macroeconomic objectives.

But as I said at the beginning, the IMF is not just about loans. Membership in the IMF also means access to technical assistance and training in areas of the Fund's responsibility and expertise, and indeed, the President's speech referred to the technical assistance provided by the IMF to the Kyrgyz Republic. The Fund's technical assistance and training aim to help countries build the institutions and the capacity they need for effective policy-making and sound governance—essential ingredients in any recipe for strong economic performance and healthy economic growth.

Both Fund lending, and Fund technical assistance and training, are provided to countries on the basis of need. But the Fund's third main function applies to all countries. This is the IMF's surveillance over economic policies. You know about the Article IV consultations that the Fund regularly holds with this country. The Fund conducts these consultations on economic policies with all countries, from the largest to the smallest, including countries that do not use either Fund financing or technical assistance. For the Kyrgyz Republic, they involve IMF staff discussions here in Bishkek with your officials, which help our staff and management assess your economic situation, your economic policies, and the policy changes that would benefit your country. Each consultation ends with a discussion in our Executive Board, in Washington, where all our member countries are represented. IMF surveillance thus involves the scrutiny of every country's economic situation and policies by the global community, and provides an opportunity for every country to benefit from the experience and knowledge of other countries and the lessons that they have learned from experience in economic policy-making. The Fund is the only global forum where consultations of this kind on economic policies take place. And this surveillance is at the heart of the IMF's role as the center of global monetary cooperation.

Through its surveillance of developments and policies at the country level, and also at the regional and global levels, the IMF seeks to promote economic and financial stability, and sustainable economic growth. This includes the prevention of financial crises. In fact a great deal of work has been done at the Fund over the past decade to strengthen its crisis-prevention work for a world of rapidly increasing capital flows. This work has been based partly on the lessons learned from the crises of the mid-to late 1990s in the emerging market countries of Latin America and east Asia.

In 2006 the IMF is continuing to evolve, and continuing to work to help member countries more effectively to meet the economic challenges they face, including the challenges arising from globalization. About 18 months ago, in late 2004, the year that marked the IMF's 60th Anniversary, it embarked on a broad strategic review of its operations. Last September, after a year of discussions, within the IMF and also with member governments and outside experts, the Fund's Managing Director presented a report outlining proposals for a medium-term strategy (MTS) for the IMF to the International Monetary and Financial Committee (IMFC)—the advisory committee of the Fund's Board of Governors—which endorsed the report. Last month, the Managing Director presented a second report to the IMFC, on the implementation of the strategy. This was endorsed by the IMFC, and implementation has begun.

Let me mention a few key elements of this strategy. First, it involves efforts to make IMF surveillance more effective—efforts that include sharper focus on key macroeconomic and financial issues, including exchange rates and the effects of country's economic policies on other countries. A new instrument for this purpose is "multilateral consultations", which will now allow the Fund to take up issues like global payments imbalances—currently a significant risk to global growth—with the several key countries most involved simultaneously. Second, in low-income countries, the Fund is aiming to focus its work more sharply on issues critical to macroeconomic performance, including institutions relevant to financial stability and growth. This will require greater clarity on the division of labor between the Fund and other international organizations like the World Bank. The Fund will also be making strong efforts to help countries benefiting form debt relief avoid a repeated accumulation of excessive debt. And it will help countries ensure that their macroeconomic policies are consistent with increased aid flows. Third, in technical assistance and training, a key aim is to better align capacity-building efforts with the needs of member countries and the priorities identified in IMF surveillance. Fourth, the distribution of voting power in the IMF among its member countries is being reviewed, with the aim of establishing a distribution that better reflects the weight and role of countries in the world economy.

There is much more to the medium-term strategy than this, but these elements may indicate how the Fund is continuing to evolve.

Finally, let me turn to a very basic question: why are we, from the IMF, here today talking to parliamentarians in Bishkek? Why does the IMF want to talk to parliamentarians and listen to parliamentarians? This seminar is part of a process that began about a decade ago and that has accelerated in the past few years. This process is a change in the IMF's attitude to transparency and outreach.

The IMF used to be, only 10 years or so ago, like many financial institutions, a secretive organization. We tried to keep our work out of the public eye, often with great success. And, frankly, most of our member governments liked it that way. It meant that when they received advice they did not like, they could more easily ignore it. We dealt largely with government officials with expertise in our areas of responsibility, for the most part central bankers and finance ministers. The Fund had no tradition of broader public engagement.

All that has changed. Why? One of the reasons is the spread of financial markets and the realization that timely and accurate information is important for markets to work effectively, and to help avoid crises. The emerging market crises of the mid- to late 1990s happened partly because markets that had been deprived of information suddenly became aware of important facts. Markets need information to work well. Transparency can also provide markets with information about policy intentions and actions, and reinforce the drive to make policies credible and sustainable. In fact, research at the IMF shows that greater transparency lowers the cost at which countries can borrow in international markets. Transparency about policies can also help build public support for them, which can improve their sustainability and effectiveness.

A large majority of the IMF's member governments are persuaded that transparency about economic data and economic policies is desirable. One important illustration of the IMF's increased transparency that has been supported by our member countries is the amount of material we now publish. A decade or so ago, we published little of our work; now there is hardly anything we do not publish. An example is our Article IV reports, which give the results of the IMF's surveillance consultations with member countries. Two years ago, the IMF began to implement a policy whereby publication of these reports, though still subject to the consent of the member country, is presumed. Article IV reports are now published for about 75 percent of member countries, including the Kyrgyz Republic.

So the IMF has become more open. But why is the IMF interested in dialogue with parliamentarians? The answer is linked to the Fund's increased transparency, and represents another shift in the way we do business. This is partly a matter of our accountability. We at the IMF think about our accountability in a broader way today than we did a decade ago. We are still accountable, first and foremost, to our member governments—to our Governors, like Mr. Alapaev. But we now engage in dialogue with, and reach out to, parliamentarians, labor unions, civil society organizations, religious groups, and other groups because we recognize a need for broader accountability. We take the view that both the IMF and our member governments will be more effective if the policies we promote command broad support in society: this relates to the point about country ownership of policies to which I referred earlier. And parliamentarians are especially important, of course, because they—you—are representatives of the people, because you are consulted by the government on economic policies; and because, as members of legislatures, you influence legislation. Parliamentarians play a critical role in approving and monitoring national budgets, and formulating and approving legislation on economic reforms. You also play a major part in ensuring that the voices of the people are heard in major policy debates, and in helping forge consensus on issues. You can help the IMF by building public understanding of economic reforms and IMF-supported policy programs. And our listening to your concerns can improve our understanding of the political and social context in which economic decisions are taken in your countries.

In recent years, therefore, the IMF has substantially broadened its dialogue with parliamentarians. This has been encouraged by our Executive Board, and our management, who have acknowledged the special importance of IMF communication with parliamentarians. As part of this expanded outreach, we are working with inter-parliamentary bodies, and at the regional and country levels. The Fund has been working closely, in particular, with the Parliamentary Network on the World Bank (PNoWB). We have also participated in meetings of the Inter-Parliamentary Union (IPU) and the Global Organization of Parliamentarians against Corruption (GOPAC).

At the regional and country levels, IMF staff have organized seminars for parliamentarians in several countries in Africa (Cameroon, Ghana, Kenya, Zambia, the Maghreb region), the Balkans, central America, and Asia (Indonesia; Laos & Vietnam; South Asian parliamentarians). The Fund has also been holding seminars for parliamentarians from the transition economies since 1995, usually at the Joint Vienna Institute. Indeed, I had the pleasure of meeting a number of parliamentarians from this country there only a few weeks ago, and our meeting today is an example of how we try to sustain the dialogue. And our Managing Director and Deputy Managing Directors, when visiting member countries, usually aim to meet with parliamentarians.

Of course, the IMF has to be mindful of its accountability to member countries' authorities—the executive branch of government—as it tries to expand its dialogue with parliaments. We also need to be alert to the specific circumstances of each country, especially the nature of the political system and relations between the executive and the parliament, such as constitutional provisions, political history and structure, political process, and the prevailing political climate. Also, we have to avoid being drawn into domestic politics.

In 2003, our Executive Board set up a working group to examine how the Fund could enhance its dialogue with national legislators. The report of that Working Group was published in January 2004. It stressed that the IMF should listen to legislators particularly in order "to improve the Fund's understanding of the political and social context in which economic policy decisions are taken". It recommends that "Building on the dialogue between the Fund and legislators thus far, outreach should be expanded to help build understanding of, and support for, the work of the Fund". This seminar is part of that expanded outreach. I hope that it will help us to learn more about your views on the kind of information on the IMF that you, as parliamentarians, would find useful and the kinds of information that you, as parliamentarians, would like to share with the IMF. And I hope that you will find this seminar useful and interesting.


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