Interim Committee Meeting
Sunday, September 26, 1999
|The Interim Committee member for the constituency consisting of Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Socialist People's Libyan Arab Jamahiriya, Maldives, Oman, Qatar, Syrian Arab Republic, United Arab Emirates and Republic of Yemen.|
World Economic Outlook and Policy Requirements for a Sustained and Better Balanced Global Economic Recovery
The clouds that permeated the global financial scene this time last year have today cleared in many respects. Following the significant slowdown in global output growth in 1998, it is gratifying that the world economy has picked up moderately in 1999, in large measure as a result of continued rapid growth in the U.S. economy as well as a strengthening recovery in the euro area and in most of the crisis-hit Asian economies. A major challenge to the sustainability of the global recovery underway lies in the expected global adjustment among the major industrial countries, spearheaded by an expected slowdown in the U.S. economy, which if excessively steep, could have serious worldwide economic and financial ramifications. The hope is that the U.S. economy would experience a soft landing that would be compensated for by a strong pickup in other major economies, particularly in the euro area and hopefully Japan. Needless to say, the role of economic policies in the major industrial countries will be crucial in the sustainability of the global growth momentum in the period ahead
In the United States, while economic performance continues to be very impressive, the economy is at a stage that calls for a delicately balanced monetary policy that would ensure a "soft landing" of the economy in an environment of exceptionally high asset prices but generally low inflation. In Japan, we welcome the emerging pickup in economic activity and are hopeful that policy makers will persevere in their supportive expansionary policies until a strong private demand momentum firmly takes hold. The authorities should also continue to build on the important financial sector reforms already initiated. As for the euro area, it is gratifying that the outlook over the short term has improved since our last meeting. However, stronger progress is needed in structural reforms aimed at dealing with the interrelated problems of structural fiscal imbalances and high structural unemployment. This will require a marked decline in the role of government entailing a reduction of high tax burdens and the containment of subsidies, as well as pension, welfare and labor reforms.
Developments in the rest of the global economy are also generally encouraging , although the economic situations of a number of economies in Latin America remain delicate. Emerging market and developing countries, generally, need to persevere in the implementation of sound macroeconomic policies and should accelerate the implementation of much needed structural reforms to strengthen their institutional capabilities and improve the environment for private sector investment.
In the Middle East, the rise in oil prices has improved budgetary and balance of payments prospects for 1999 for the major oil exporting countries. Depressed oil prices over the past year triggered an intensification of structural reform efforts aimed at the diversification of economies away from oil and at strengthening structural fiscal positions, thereby promoting long-term growth prospects. Other countries in the Middle East are also implementing ambitious economic reform programs aimed at reducing the role of government and increasing the role of market forces in economic management. Significant progress is being made in fiscal consolidation, including through the implementation of important fiscal structural reforms. Price liberalization, deregulation, and privatization of public enterprises, banks and utilities is also contributing to a much improved environment for private domestic and foreign investment. These reforms have been accompanied by historically low inflationary pressures. Tariff reductions are also being introduced under the Pan-Arab Free Trade Agreement, and a number of trade agreements have been concluded with the European Union.
In Africa, while a number of countries, including some HIPC-eligible countries, have been performing rather well on account of the pursuit of appropriate macroeconomic policies and favorable weather conditions, we are concerned with the slow rate of growth in a number of African economies. In too many African countries high debt levels are still constraining economic growth and an improvement of living standards. An early conclusion of the pending financing issues of the enhanced HIPC initiative is imperative to assist these countries in implementing comprehensive reform programs that would help place their economies on the path of sustainable growth.
Progress in Strengthening the International Monetary System
Measures to strengthen the international monetary system must aim primarily at building a system that would reduce the incidence of crises and contain the spread of adverse spillover effects when they do occur. In our view, this involves efforts on five broad fronts:
1) Strengthening Fund surveillance, particularly of the economies of systemically important countries. Increased attention needs to be accorded to the international ramifications of economic policies of major industrial countries as well as those of emerging markets. The rapid pace of globalization has enhanced the repercussions of national economic policies of the major industrial countries on the functioning of the global monetary and financial system generally and on other economies, particularly of developing countries. The Fund should also pay increased attention to assessments of external vulnerability in member countries and take increased account of those factors in its multilateral surveillance.
2) Strengthening the supervisory framework over the international monetary and financial system through more effective regulation and disclosure requirements in both creditor and debtor countries and the design of incentives to improve private sector risk management to stem the growth of highly speculative financial activities and capital flows. In this connection, we welcome the ongoing review of the Basel Capital Accord, and view with particular importance consideration of proposals that seek to eliminate the present regulatory bias in favor of short-term interbank credit lines.
3) Strengthening the financial and corporate sectors of national economies, particularly in emerging and developing countries, to enhance their resilience to financial shocks and sudden shifts in market sentiment. Recent financial crises have demonstrated the dangers of excessive financial and corporate leverage levels generally, and of large short- term foreign liabilities in particular.
4) Exercising caution in capital account liberalization in developing countries so that the pace of liberalization is well synchronized with their stage of economic development and the strengthening of their financial, banking and corporate sectors. Recent crises have drawn increased attention in developing and emerging market economies to the importance of strengthening financial and corporate sectors as a prerequisite for the full liberalization of capital movements, especially short-term flows. We, therefore, welcome the Fund's continued analysis of capital account liberalization issues aimed at providing guidance to the membership on the appropriate sequencing and pacing of liberalization on a case by case basis and support the Fund's emphasis on the close interrelation between capital account opening and financial sector reforms. At the same time, we welcome the increased attention being given to the improvement of prudential regulations and disclosure requirements in advanced financial markets aimed at reducing the large speculative short-term cross-border flows which have a destabilizing impact on both creditor and debtor economies.
5) Strengthening private sector involvement in crisis prevention and resolution. The industrial countries, through coordinated action, are best positioned to provide the needed momentum for the implementation of a number of ex-ante mechanisms that could potentially be useful in the resolution of crises, including in particular the modification of international bond contracts. We welcome steps in this direction. As for attempts by the Fund at devising a rules-based framework for private sector participation in the resolution of a crisis once it erupts, the cases confronted so far demonstrate the need to proceed on a case by case basis until sufficient experience is accumulated to allow the formulation of appropriate rules. At the same time, it is important that the Fund continue to be guided by the principle of uniformity of treatment across the membership as it tackles the issue in the context of Fund-supported programs. It may also be useful for the international community to begin consideration of a standstill mechanism, with adequate safeguards, for truly exceptional circumstances in order to allow an orderly and comprehensive debt resolution when other efforts prove unsuccessful.
While we support the ongoing study and analysis of the role of exchange rate regimes in strengthening the international monetary system, we would underscore that there is no one appropriate exchange rate regime that is suitable for all countries or even for the same country over time. In our view, the choice of regime rests with the member country. However, it must be recognized that in increasingly globalized financial markets characterized by excessive capital flows this choice assumes added importance. The Fund should provide guidance to member countries on the required supporting macroeconomic policies for the different options. In this connection, we note that there have been calls to limit the choice of exchange rate regimes of countries whose economies are increasingly integrated in the global financial system to either a hard peg (such as a currency board arrangement) or a freely floating rate. We would note here that a large number of developing countries do not yet have the institutional financial structure necessary to adopt either of these regimes, and their exchange rate regimes are therefore likely to lie somewhere between those two extremes. In our view, for countries at this stage, the Fund should focus on strengthening their financial and banking sectors to create the conditions that would be necessary for a more flexible exchange rate, should that be deemed desirable.
Reform efforts aimed at strengthening the Interim Committee should now focus on the implementation of the recommendations of the Executive Board aimed at enhancing the quality of the Committee's meetings. To this end we strongly support strengthening the focus of the Committee's agenda by limiting it to a few items that require Ministerial attention. This would also facilitate the Board's central task of preparing issues to be discussed by the Committee. We also caution against the establishment of working groups outside the context of the Executive Board in view of their potential to erode the role of the Executive Board as defined in the Articles of Agreement. As the Interim Committee has noted on previous occasions, it is important to maintain the central role of the Board in conducting the business of the institution. Any erosion of the Executive Board's responsibility and authority would reduce members' confidence in their ability to effectively exercise their voice in the governance of the institution.
Reforming ESAF and Securing IMF Financing for the ESAF and the HIPC Initiative
We are fully supportive of the international community's renewed emphasis on the goal of global poverty reduction. We welcome, in particular, the recent proposals to enhance the ESAF/HIPC framework aimed at providing faster, deeper and broader debt relief and at strengthening the link between debt relief and poverty reduction . We would stress, however, that, for these enhancements to be effectively implemented, the leadership role in and the primary responsibility for the formulation of social sector policies should remain firmly with the World Bank which has the mandate and expertise to deal with these issues. This will also allow the Fund to better focus on its core activities. The Fund should rely on the World Bank in the design and monitoring of the social content and poverty reduction measures of ESAF programs, and should in no way attempt to duplicate the interdisciplinary character of the World Bank. The Fund's mandate and expertise require it to focus on its primary role of fostering the economic conditions that would assure macrostability and the attainment of high sustainable growth levels. Close and effective collaboration between the World Bank and the Fund will therefore be of the essence.
Securing the financing of the enhanced ESAF/HIPC framework remains a key challenge. We are hopeful that a financing package can be agreed to during this year's meetings, so that implementation of this worthy initiative can proceed in a timely manner. We support the Fund's participation in the financing efforts through the one time off-market sale of up to 14 million ounces of its gold. Members of our constituency who are in a position to do so have also announced their readiness to participate in the financing.
Y2K Contingency Planning
We welcome the setting up of a new temporary short-term IMF facility for Y2K-related balance of payments difficulties. While we hope it will prove unnecessary, it is important to provide assurance that all qualified Fund members who find themselves facing such difficulties will have access to Fund resources expeditiously and at a reasonable cost.
Standards and Transparency Initiatives
The Fund and the membership are to be commended for the important progress that has been made in the development of standards in the Fund's core areas, namely in the fiscal, monetary and financial, and data dissemination areas. The potential role of standards in international surveillance is still evolving, and the Fund must tread carefully in view of the complexity of issues involved and the potentially large resource costs it would entail. We have a number of specific concerns: First, the Fund should limit its involvement to core areas within its mandate and competence. Second, Fund involvement in the preparation of assessment reports and the exercise of pressure for their publication, which should remain voluntary, could conflict with the Fund's role as confidential advisor to national authorities. Third, it must be understood that the adoption and implementation of standards by countries is voluntary and will necessarily depend on each country's circumstances. Fourth, and most importantly, the Fund should stand ready to provide countries with technical assistance to help them in this endeavour.