Statement by Mr. Kaspar Villiger
Minister of Finance of Switzerland
September 26, 1999
|The Interim Committee member for the constituency consisting of Azerbaijan, Kyrgyz Republic, Poland, Switzerland, Tajikistan, Turkmenistan and Uzbekistan.|
Developments in the World Economy
I am pleased to note that the global economic situation has continued to improve since our last meeting. A large part of the positive developments can be attributed to skillful economic management in member countries and to the determined pursuit of structural reforms in many countries that were recently affected by financial crises. Furthermore, I am convinced that our efforts in strengthening the international monetary and financial system are beginning to bear fruit. While progress has been slower than expected on some of the issues under discussion, the International Monetary Fund has sent some clear signals to all participants of the globalized financial markets. First, it has stressed the importance of sustainable domestic economic and financial policies for crisis prevention. The strengthening of IMF surveillance and the definition of international standards and best practices in different policy areas have been crucial in this respect. Second, the IMF has effectively communicated to private market participants that they are expected to share the burden of financial crises. While the strategy of private sector involvement is not yet in place, the message is clear: private creditors should no longer be bailed out by official resources. I urge the IMF to continue its work on the broad range of issues regarding the strengthening of the international monetary and financial system. We must not allow current positive developments to slow down the existing reform momentum.
Diminished Downside Risks
Growth performance in the United States has remained robust since our last discussion and inflationary pressures are still absent. This is a welcome development, given the uncertainties that surrounded the growth outlook of Europe and Asia until recently. Prudent policies and a series of favorable circumstances contributed to the impressive performance of the U.S. economy over the last years. However, many of these circumstances are changing. Commodity prices are showing an upward trend, and with the economic situation in other regions steadily improving, the risk of inflationary pressures is rising. In view of these changes, I welcome the monetary tightening by the Federal Reserve, which should diminish the risk of a "hard landing" of the U.S. economy. I particularly welcome the fact that the interest rate increases did not cause any market overreactions.
In Japan, the risks associated with a persistent economic stagnation and rapidly mounting fiscal deficits have diminished in view of the unexpected strong output performance in the first half of this year. Indications of improving corporate and consumer sentiments and the expected positive impact of the strong growth performance in Asia on industrial production will hopefully put the Japanese economy back on a sustained growth path. However, growth is likely to remain modest in the short and medium term given the negative impact on aggregate demand of the ongoing corporate and banking restructuring.
In Europe, growth prospects have strengthened significantly. Therefore, the danger of a sustained downturn of economic activity in the region has subsided. This provides a further welcome reduction in the existing growth imbalances between the major industrial economies. However, growth rates within the EU still show important differences. If these divergences were to persist, the formulation of a common monetary policy by the European Central Bank would face significant challenges. In my view, the strengthening of the global outlook and a pick-up in intra-European trade should allow growth rates to converge. A more challenging task will be to raise the level of potential output growth in this region which, in turn, will lead to increased job creation. In this context, efforts must continue to tackle the well-known structural rigidities, particularly in the labor markets. Moreover, the further reduction of structural budget deficits must remain a priority for most European countries.
In Asia, the surprisingly fast economic rebound of most crisis-hit economies is providing a solid and welcome contribution to global growth. More importantly, the strong growth performance will hopefully allow a rapid easing of the severe economic constraints imposed by the financial crisis on large parts of the population. I commend the authorities for their perseverance in implementing ambitious reform programs. I urge them not to relinquish their efforts in view of the significant improvement of macroeconomic indicators. On the contrary, some positive developments could even be cause for renewed concerns. For example, the rapid reduction of yield spreads for some sovereign bonds below their levels in early 1998 could indicate the risk of a new boom-and-bust cycle. While there has certainly been significant progress in strengthening the financial sector, the agenda is far from being completed.
The differences in growth performance among major industrial countries remain a cause of concern. This particularly given the apparent difficulties in explaining certain phenomena, such as the growth performance in the United States, and the crucial importance of shifts in investor sentiment. Although some recent developments have attenuated my concerns, the risk of abrupt exchange rate adjustments cannot be ignored. A large depreciation of the U.S. dollar against the yen and the euro, and the accompanying correction in asset prices could cause strong reactions in consumer spending in the United States. This could further reduce export prospects for the euro area and for Japan, thereby endangering the recent strengthening of global growth. The speed of the exchange rate adjustments will also be crucial for the outlook for the next years. If the adjustments are controlled and gradual, the risk of a new global slowdown will be limited.
Notwithstanding the surprisingly rapid improvement in Brazil, I am concerned about the potential problems in Latin America. The countries in this region have had to cope with the shocks emanating from the Russian and Brazilian crises with less favorable macroeconomic fundamentals than their Asian counterparts. This has severely constrained their capacity in following countercyclical policies. More importantly, political uncertainty stemming from upcoming elections appears to be a major obstacle in the implementation of the necessary policy measures. It is interesting to see how, contrary to Asia, the bond yield spreads have never reverted to pre-crisis levels and have shown a marked upward trend over the last months. The recent reemergence of financial market pressures in Argentina and Brazil has underscored the fragility of investor confidence.
Russia constitutes another significant risk. I am concerned by the continuing political uncertainty, which has further eroded the confidence of private and official creditors. This could further intensify capital flight and accelerate the decline in foreign direct investment. The recent allegations of widespread corruption and misappropriation of public funds is certainly not helpful. In addition, the misreporting of financial statistics is clearly unacceptable. In order to retain the credibility of the Fund, it is essential that all members comply with the rules it sets. I am, however, confident that the current investigations by the Russian and other authorities will provide the necessary clarifications in the near future. The Russian crisis has unfortunately also increased the uncertainties in several countries of the FSU and has caused major setbacks in the reform efforts of these countries.
Y2K problems are an additional source of uncertainty. While most countries have undertaken the necessary steps to avoid major disruptions in trade and financial flows, doubts about possible repercussions remain. Therefore, I welcome the establishment of the new Y2K facility. The IMF should stand ready to assist members if the Y2K problem were to cause significant balance of payments problems. It is important, however, that this assistance is well targeted. This will be difficult, given the inherent problem of determining the origins of specific balance of payments problems.
Strengthening the International Monetary and Financial System
As I noted at the outset, I think the efforts to strengthen the international monetary and financial system are already showing some positive effects. Unfortunately, progress in many areas has not been as rapid as we had hoped. This stems from the complexity and sensitivity of the issues and the uncertainties as regards the possible medium-term impact of the changes under discussion. I sincerely hope that the relative calm in financial markets will not diminish our efforts in adapting the current system in order to make it more resilient to financial crises.
Transparency and International Standards
Significant progress has been achieved in the areas of promoting greater transparency of members' policies and IMF advice as well as establishing international standards and best practices. I commend the IMF for its efforts in these areas and hope that other international institutions will contribute in a similar fashion in their respective areas of competence. I remain convinced that countries can only benefit from making public as much information as possible on the current economic and financial situation. The strong interest in adhering to the Special Data Dissemination Standard (SDDS), the broad use of publishing the Executive Board assessments of Article IV consultations and program documentation, and the participation of nearly 50 countries in the pilot project for releasing the full Article IV consultation report shows that this conviction is shared by many.
The IMF has reached an important milestone in its work on standards. All international standards pertaining to the core areas of the IMF's activities are now defined. The SDDS is well established and already in the process of being strengthened. I am happy to note that Switzerland is already disseminating data on international reserves according to the enhanced template. As regards the Codes of Good Practices on Fiscal Transparency and on Transparency in Monetary and Financial Policies, they are now finalized and countries should be encouraged to use them as benchmarks.
Following the establishment of the various standards and ensuring their disclosure, we must now tackle the quality issue. The effectiveness of international standards will depend on the quality and timeliness of the information released. The IMF with its universal membership and well-established surveillance process is a logical choice to perform a monitoring function. While I agree that the IMF should move into the monitoring area, I strongly believe that it should do so only in its core areas. The IMF should encourage the relevant organizations to cover the other areas in which standards are being established. I support the ongoing efforts of producing Transparency Reports to disseminate the progress in compliance with the various standards. Although this exercise has proved to be quite resource intensive for the IMF and will touch upon sensitive issues, it will provide the members and the public with a comprehensive overview.
Private Sector Involvement
Overall, little progress has been made on this important issue. The main reason for this is the fact that we are now moving beyond the simple statement of principles. While there is broad agreement on the necessity to involve the private sector in forestalling and resolving financial crises, there is little consensus on the specific measures. Since many of the measures aim at changing the existing relationship between creditors and debtors, private creditors have been strongly opposed, indicating that "involuntary approaches" would reduce future private capital flows. This has weakened the support from many IMF members for an effective private sector involvement strategy. In my view, we must redouble our efforts to convince all parties involved that measures to ensure private sector involvement is in our mutual interest, since it will contribute to avoiding future financial crises as experienced in the recent past.
The first cases of private sector involvement have underscored some of the specific issues that must be followed upon. We should try to dissipate as rapidly as possible the existing uncertainty of private market participants vis-à-vis the IMF's strategy. This means giving more precise indications as to how the general principles will be put into action.
As regards ex-ante measures to enable an orderly resolution of payment problems, I look forward to progress in the areas of collective action provisions in international sovereign bonds, establishment of a more systematic dialog between debtors and creditors, and the possibility of putting in place private contingent credit lines.
I welcome the steps that have been taken to strengthen the Interim Committee. A pragmatic approach has allowed us to maintain the current structure, while increasing the efficiency of our discussions. I support the proposal to give the Committee a permanent status and a new name. The International Monetary and Financial Committee should be the principal forum to provide political guidance for decisions on global monetary and financial issues. Therefore, I very much regret that the possibility to establish working groups of this committee did not find support. I do not favor initiatives to establish new informal groupings outside the Bretton Woods framework to enable the dialogue between systemically important countries. This dialog should and can take place within the existing framework.
Given the increased need for better collaboration between the IMF and the World Bank, I support the idea of joint sessions with the Development Committee on an exceptional basis.
HIPC Initiative and ESAF
We have strongly supported the joint IMF-World Bank initiative to allow highly indebted poor countries a permanent exit from their unsustainable debt situations. The initial experience under the initiative has demonstrated the need to deepen and broaden the available debt relief. I therefore welcome and support the concrete proposals that have been made to enhance the current HIPC framework, such as the reduction of the sustainability target for the NPV debt-to-export ratio to a uniform 150 percent.
I also welcome the proposal to provide earlier debt relief to good performers. This will allow more resources to be freed for social expenditures. However, to ensure effective use of these resources, early assistance from multilateral institutions must be conditional on a satisfactory performance under the programs supported by the IMF and the World Bank. In addition, it has to take the country's absorption capacities into account.
I welcome the suggestions to strengthen the link between debt relief and poverty alleviation. However, the effectiveness of this link crucially depends on an overall program of sustainable development, effective institutions, and sound fiscal management. Without clear sector strategies incorporated in a consistent development framework and a fiscal system that can generate enough public resources and efficiently channel them into poverty reduction programs, debt relief would be ineffective. Therefore, debt relief should be contingent on three core conditions:
- (i) A sound tax system, able to generate sufficient revenue, so as to avoid excessive future
reliance on debt financing
(ii) A transparent and accountable public expenditure system, able to channel resources effectively toward priority sectors and
(iii) Sufficient debt management and analysis capacities.
Unfortunately, the enthusiasm of many countries when proposing enhancements of our framework to help the poorest members was not maintained when the discussion focused on ensuring the adequate financing. The enhancements have lead almost to a doubling of the total financing costs for the IMF. At the same time, pledges for bilateral contributions have remained insufficient. Clearly, my support of the proposed changes to the HIPC framework is conditional on securing the necessary financing. Our constituency has done its part and has pledged bilateral contributions in excess of its quota share. I urge particularly those countries that have strongly supported the enhancement of the HIPC-Initiative, to now provide the appropriate financing.
We are still confronted with a considerable gap. In this context, I welcome the efforts that have been made to secure the Fund's contribution to financing the Initiative. Of course, I would have preferred relying more extensively on voluntary bilateral contributions. The fact that more than half of the current financing package stems from the IMF's own resources shifts the burden onto the membership as a whole, including debtor countries.