Transcript of a Press Briefing by David Hawley, Senior Advisor, External Relations Department, IMF

July 24, 2008

Washington, DC
Thursday, July 24, 2008
Webcast of the press briefing

MR. HAWLEY: Good morning, ladies and gentlemen. I'm David Hawley from the IMF's External Relations Department and welcome to another of our regular press briefings. Before going to questions, including from those of you joining online on the Media Briefing Center, let me give you a couple of housekeeping points.

The Global Financial Stability Report (GFSR) Update will be released next Monday—that's July 28th—at 11:00 a.m. Washington time (1500 GMT). The embargoed Update, which covers latest developments in financial and capital markets, will be available to the media around 7:00 a.m. on Monday morning through the online Media Briefing Center. At 9:00 a.m., Jaime Caruana, Director of the Monetary and Capital Markets Department, will hold a briefing here in this room. The briefing and the document itself will be under embargo until 11:00 a.m. If you have further questions on this, turn to Media Relations if you would.

We plan to open the web site for registration for the Annual Meetings. These take place in October, and the web site will open in early August. We will send you a media advisory on that too.

The Managing Director, Dominique Strauss-Kahn, will be traveling to Morocco and Mauritania next week. He will meet the authorities in both countries to discuss domestic, regional and global issues. In Nouakchott, Mauritania, he will participate in a meeting of African governors, i.e. finance ministers and central bank governors of the IMF and World Bank. That is going to focus on infrastructure needs in the region but will also look inevitably at the food and fuel price surge.

Finally, the Executive Board, which is responsible for decision-making of the Fund, takes its annual summer recess beginning August the 11th for 2 weeks. With that, I'm open for questions.

QUESTIONER: Do you have anything on the new Pakistani Prime Minister visiting Washington? Do you know if he is going to meet the Managing Director? Alternatively, another issue on that is the World Bank is in talks with them on a stabilization package, and is the IMF equally in talks with them on economic issues, and generally what is the outlook that the IMF has for Pakistan's economy?

MR. HAWLEY: Okay. I've got nothing on the Prime Minister's program. I'll ask, as that unfolds, Media Relations to get back to you on that one.

On your second question about Fund's views on Pakistan's economy, I'd offer a couple of thoughts. You asked about whether the discussion of a program. We have not received such a request. And, you asked about?

QUESTIONER: The economy is obviously going through lots of issues right now, which is why the World Bank is in discussions on a stabilization package, which tells me then the Fund would be involved or would have some sort of concerns.

MR. HAWLEY: One of the important issues in Pakistan is that net international reserves have declined by about 6.5 billion U.S. dollars since the end of June, 2007 to about 7.7 U.S. billion, and the Pakistan rupee has depreciated by 20 percent against the U.S. dollar over the same period.

Now a significant tightening of both fiscal and monetary policies to contain inflation and reduce the external current account deficit is needed in our view. In particular, fiscal consolidation should include the phasing out of energy subsidies, and moreover there is a need to stop central bank financing of the government which has been large since October, 2007. The Minister of Finance, I would note, has announced that, in principle, Saudi Arabia has agreed to provide an oil facility, deferring payment of part of Pakistan's oil import bill. But the terms, I understand, are still under discussion.

QUESTIONER: I just wondered, with the Global Financial Stability Report, can we expect a good deal of analysis about the Freddie and Fannie situation?

MR. HAWLEY: You have the opportunity when you meet Jaime Caruana next Monday to ask him at length on that issue. Let me, though, offer a couple of points.

As you may know, the U.S. Article IV discussion took place in the Executive Board yesterday, and in the context of that discussion the financial sector issues came up, and staff updated the Board on their understanding of these issues. The PIN and staff report on the Article IV should be available to you next week.

Specifically on Fannie and Freddie, we don't comment on individual financial institutions. However, for the past few months at the Fund, we have been saying that the U.S. housing sector has had a decisive influence on developments in the rest of the economy, and that is why we have been more pessimistic on the U.S. outlook than some others.

The announced measures on Fannie and Freddie are a go in the right direction and are consistent with approaches that the Fund has supported, and we agree that public sector intervention is warranted, accompanied by improved supervision.

I'll turn now to the Media Briefing Center, if I may. I have received a question from Nicaragua. The question is about Fund programs in Nicaragua in the early part of this decade and, in particular, he asks about the restructuring of CENIS bonds in 2003 and the latest sale of intervened banks, which took place in the context of a Fund-supported program for Nicaragua. He's asking us about the appropriateness of these operations and also the linkage between this intervention and Nicaragua's later qualification for HIPC debt relief.

I have to step back a bit to provide a little context. In Nicaragua in the early part of this decade, there was a deterioration in the financial conditions of several banks that endangered the stability of the financial sector and created serious risks to the economy. Addressing bank weakness promptly and in line with international practice was critical to minimize systemic risks and regain market confidence. There was a government program in this regard that was supported by the Fund in the context of IMF programs between 2000 and 2003. The key steps, I will remind you, of these programs included: ensuring that impaired assets were properly provisioned in line with local norms; recapitalizing the banks to strengthen their balance sheets; and auctioning assets and deposits of insolvent banks to other more adequately capitalized banks, in cases where existing shareholders were not able to recapitalize these institutions. This is the point of his question.

In this context, public bonds were issued to cover the differences between the assets and liabilities of the failed banks. The program provided for the plan to sell the assets received from intervened banks. The program called for this to be done through open selection of a company with international expertise in asset management.

This strategy—and this is picking up on the second part of the question—allowed Nicaragua to weather the banking turmoil, strengthen the financial system, maintain macro stability and improve balance sheets as well as to secure international financing including through the HIPC and MDRI debt relief initiative.

I have another question from the Media Briefing Center. The question is if we've got a date for the release of the China Article IV consultation.

What I can tell you is really the same as my response to this question last time, which is that the Article IV for 2007 is going to be folded into this year's review of China, and it will be discussed in the Executive Board probably in late August or early September.

QUESTIONER: A question about the so-called [inaudible] tax, the provision in several countries, including Italy, of taxing more bankers and oil producers. What's the IMF's position on this?

MR. HAWLEY: This is about windfall taxes, is that correct? I'll go on to another question, if I might, while I just look for that note.

QUESTIONER: I want to ask you just a little bit about coordination on monetary policy between the ECB, the U.S. and if I can call it the G-3 and China. Would the IMF have a role in any of that kind of coordination? Would it provide analysis? Is there any role that the IMF would have in that?

MR. HAWLEY: In coordinating?

QUESTIONER: On monetary policy, I mean discussions on coordinating. One of the things you've been seeing over the last few months is more discussions going on among those groups, especially the ECB and the U.S. and probably lesser to China. But it includes China, what they call the G-3. So I was wondering if there's any role that the Fund would have in that?

MR. HAWLEY: Let me answer that question in more general terms than you probably wish me to do so. The Fund provides a forum by virtue of its universal membership for policy coordination and does so explicitly in the context of its multilateral surveillance through the discussion of individual members' policies set in the context of their implications for other member countries and, through fora like the International Monetary and Financial Committee, bring together the membership to discuss questions of common concern.

I can now return the question about windfall taxes. Let me start with a general response on the issue, which is that in principle, windfall taxes are not a good idea. This is because investment may be deterred if investors feel that they will be surprised by new taxes in the event that their investment proves highly profitable.

However, having said that, in practice, countries which have established good relations with investors have been, in the past, able to introduce windfall taxes without apparently substantial long-term damages to their credibility. But this is an area where the devil is in the details, and we have not reviewed any specific detailed proposal.

What is important in broad terms is that any such tax should be as simple as possible, targeted on extraordinary returns and—to avoid retrospective taxation—focused on potential future earnings rather than seeking to claw back high earnings already made.

QUESTIONER: I'm just asking about Zimbabwe. There are discussions on a unity government. These proposals are now in agreement to start those talks. I was wondering if that changes anything on the horizon for the Fund's relations with Zimbabwe or not?

MR. HAWLEY: I haven't got anything fresh for you on Zimbabwe.

QUESTIONER: Could you just clarify? You said the Article IV report from the U.S. will be available next week. Is that just the staff summary or what exactly is it and in what part of the week?

MR. HAWLEY: The PIN and the staff report.

QUESTIONER: And would it be the first part of the week or later?

MR. HAWLEY: I don't have a date. We'll let you know as soon as possible.

Okay. Thank you very much.


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