For more information, see South Africa and the IMF
Minister of Finance
to the Interim Committee Meeting
September 26, 1999
Global economic developments and outlook
I join other Ministers in expressing our relief that the worse of the financial crisis that has plagued the international community for the past year and a half, seems to be behind us. The recovery in the global economy has been led by continued robust growth in the US economy as well as an improvement in economic activity in the euro area and in most of the crisis-hit Asian economies and most recently Brazil seems to be gaining momentum.
Notwithstanding the improvement in the state of the global economy, there are downside risks surrounding the current projections. The most significant perhaps may be the build-up of systemic risks from potentially sharp corrections in the US equity markets, and in particular the impact of asset prices on growth and stability. It is therefore imperative that an appropriate policy mix be pursued with regard to monetary policy to ensure a soft landing of the US economy in order to minimise its potential impact on the rest of the world. With regard to Japan there is the still the continued fragility of the recovery in private demand and the authorities should also continue to build on the important financial sector reforms already initiated. As for the euro area stronger progress is needed in structural reforms aimed at addressing the rigidities in the labour and product markets.
Africa presents a mixed picture. Growth is projected at 2.75 percent in 1999, lower than earlier expected, reflecting the persistent weakness of non-oil commodity prices. Once again, we see the importance of diversification in order to put our economies on a higher growth path. Furthermore, the continued increase in the incidence of HIV/AIDS on the African continent and the persistence of military conflicts in some countries constitutes a serious impediment to growth and development. It is, however, important to note that many African countries are in the process of implementing wide ranging political, social and economic reforms designed for growth and sustainable development. The ultimate goal is to overcome the scourge of poverty and to do this we have to ensure much higher growth rates than even the 5 percent projected by the Fund for Africa in 2000.
Globalisation presents many challenges as well as many opportunities. Our continent must ensure that it can address the challenges and grasp the opportunities so that we may indeed realise the hope and the aspirations of all of our peoples. We have to do this if the next century is indeed to be the African century.
In order to ensure that the African continent will not be marginalised in the global economic system it would be critical that our countries find ways to become better integrated into the global economy to enable our economies to take advantage, among others, of capital flows for investment purposes. This is one of the areas where international financial standards and transparency regarding foreign investment can be expected to play an important role. It has also become clear that our countries need to find ways to strengthen regional integration, not only as a means of promoting trade but also of mobilising capital for development. In this connection, Governors should be aware that we have already begun to draw the attention of the Fund to the importance of helping our countries to develop capital markets in a regional context, including the integration of banking systems, among others, in order to benefit from economies of scale.HIPC Initiative
The Koln Summit has resulted in important modifications to the HIPC framework, providing for deeper and possibly front-loaded debt relief. As I stressed in my last statement to this Committee, we need bold, urgent and decisive measures to give the developing countries a fresh start in the new millennium. The post-Koln framework starts down this road, but falls short of the objective. Three issues need to be addressed, if "HIPC 1999" is to proceed on a solid foundation:
First, the length of track record must be shortened from six to three years--six years, by all reasonable standards is far too long. "HIPC 1999" will not do the job if the track record remains at six years. Secondly, the revenue-to-GDP threshold under the fiscal window remains too high at 15 percent. Let me highlight this concern in the context of four of our countries: for Sierra Leone, the ratio currently stands at 7 percent and Tanzania is 3 percent. Meanwhile, the export-to-GDP ratio for Burundi stands at 8 percent, that for Tanzania is 15 percent, Sierra Leone 19 percent and Ethiopia 16 percent; against the required threshold of 30 percent. It will take too long for these countries to qualify under this framework. The thresholds need to be lowered. Thirdly, the proposal for floating completion points seems useful. But let me share with you an important concern of many of the countries I represent here: that the floating completion point process could be used to tag on a whole new basket of conditionalities for debt relief; and in the process to stretch out the delivery of relief, for much longer than is necessary, warranted or deserved by these countries. We will need to monitor this issue closely.
I welcome the linkage between debt relief and poverty reduction. It is something we have called for since the ESAF came into being in 1987 and we have called for this also since the 1996 HIPC Initiative. Nevertheless, there are hazards, which we pointed out in the recent Deputies meeting and which I reiterate here. In addition to the social dimension, we must not add another layer of conditionalities to the macroeconomic, structural, fiscal, balance of payments, and monetary policy conditionalities already confronted by our countries. More work is needed on making this linkage effective. We should bear in mind that in the first instance, it is economic growth and development that brings about durable reduction in poverty. It would therefore be imperative that ESAF programs should be redesigned to focus on achieving faster and sustainable growth at an early stage while taking into account the costs of social and sectoral programs aimed at poverty reduction and preserving macroeconomic stability. I would, therefore, expect that some of the resources released through debt relief be used for, amongst others, promoting investment and development, infrastructure development, assisting in the liberalization of trade and exchange regimes, domestic debt reduction, etc.
In addition, making this linkage between poverty reduction and debt relief will have direct and substantial resource implications for the HIPC countries. They will have to find capacity to develop and monitor social indicators; to implement poverty reduction strategies; to prepare poverty reduction strategy papers; to shift to multiyear budgeting and to establish medium term expenditure frameworks which explicitly bring on to the budget both aid and debt relief. All this will take time. It will take scarce human resource capacity; it will take money which the recipient countries don't have. If we do not build these considerations into the debt relief package we will not establish a successful new initiative. And equally, if we impose all of the requirements as preconditions for debt relief, rather than consequences of such relief, we will be imposing another layer of conditionalities alone, not designing a structure which leads to deeper, faster and broader debt relief. This may limit the access of poor countries to the HIPC initiative.Strengthening the international monetary system
I see the thrust of the IMF's role in two major directions; first to ensure the smooth functioning of the international financial system and avoid financial crises, and second, assist low-income countries in fighting poverty and in integrating into the world economy. In this regard, I welcome the many initiatives that are underway.
Regarding the involvement of the private sector in forestalling and resolving crises, we welcome the continued attention being given to this critical issue and encourage the Executive Board to continue its efforts to finalize a workable solution. We support the view that prevention of financial crises should be the primary focus through mainly the pursuit of sustainable macroeconomic policies and forging transparency of the policy framework so as to enhance the ability of the private sector to make sound investment decisions. We can also support the ex ante measures that have already been discussed by the Board. In particular, we join other members in encouraging the advanced economies to include sharing and collective representation clauses in their own bond issues to pave the way for emerging market economies.
With regard to a mechanism for securing private sector involvement in the event of a crisis, it will in our view be important to establish as soon as possible a broad framework within which private sector involvement will be expected. This will go a long way in reducing market uncertainty, and assist the efforts of members who may find themselves in crisis situations. In this context, however, we must stress three elements, namely such efforts should not lead to an increase in the cost of borrowing for emerging market economies, the medium-term viability of the balance of payments should not be placed at risk, and there should be no discrimination between classes of creditors.
We maintain that no single exchange rate regime is appropriate for all countries for all circumstances. While we would consider some exchange rate stability as generally appropriate, the choice of an exchange rate regime depends on a number of country specific circumstances, including the country's inflation history, size and structure of the economy particularly the existence of institutions and markets that are able to handle exchange rate fluctuations, political commitment and the credibility of macroeconomic policies. Fund advice in this area should take these factors into account and we would in general discourage the Fund from prescribing exchange rate regimes to members. It is important to note that under the Fund's Articles of Agreement, members are free to choose their exchange rate regimes and we would want to maintain this status quo.
In the aftermath of the recent financial crisis in East Asia it has become evident that the pace of liberalisation needs to be well synchronised with the level of economic development and the strengthening of the financial, banking and corporate sectors. It would therefore be imperative that developing and emerging markets endeavour to implement measures that would be geared towards the strengthening of financial and corporate sectors as a prerequisite for the full liberalisation of capital movements, especially short-term flows. We, therefore, welcome the Fund's continued analysis of capital account liberalisation issues aimed at providing guidance to the membership of appropriate sequencing and pacing of liberalisation on a case by case basis. We furthermore support the Fund's emphasis on the close interrelation between capital account opening and financial sector reforms.
On institutional reforms, we go along with the change in name of the Interim Committee and support its enhanced role. Let me underscore that in a globalizing environment an effective institution is one that relies on balanced representation and maximum contribution from its members.Y2K contingency planning
Many countries in our region have formed task forces for contingency planning related to the Y2K problem. The South African Government is also providing assistance to SADC member states who are grappling with varying stages of the Y2K exercise. This is of particular importance in light of the increasing interdependence amongst these countries in areas such as electricity provision, financial services and the customs union. In South Africa, preparations for Y2K compliance are well advanced at central government level, public utilities, the financial sector and the private sector and no major disruptions are expected.
We welcome the fact that the IMF is acting in a pro-active manner by assuring members of its financial support in the event of Y2K-related balance of payments difficulties and we support the broad outline of the proposed Y2K facility, as discussed by the Executive Board.Strengthening fund surveillance and programs
The measures taken to improve transparency in the Fund's own operations have been useful, particularly the release of important policy documents. We urge the Fund to continue striking a balance between members' concern for confidentiality and internal ownership in economic management and the growing demand by outsiders for more transparency within the Fund.
External evaluations have also become a useful oversight instrument on Fund policies and a way of enhancing transparency and the effectiveness of Fund policies. The Fund Executive Board should ensure that useful recommendations from these evaluations are implemented promptly, and I refer to the recommendations made by external evaluators of ESAF which still need some follow-up. I am also tempted to suggest that the HIPC Initiative has proved a great challenge for the international community as a whole and we stand to benefit from an external evaluation of this facility. I would think such an exercise would receive widespread support and the relatively short experience with the few cases that have benefited so far can help us shape the future course of this facility. Finally on this matter, in any external evaluation, we would encourage maximum participation by the intelligentsia from those countries impacted by the policies under review and I urge the Fund Executive Board to keep this in mind.
The enforcement of international standards and codes of good practices is very useful, particularly in an increasingly globalizing environment. However, let me caution the following: economic, political and social integration in Africa is gaining steam. Work is at an advanced stage at the regional level. As we have learnt from the European integration, such initiatives need time, resources and management expertise. Africa should be assisted to integrate itself as well as into the global system. In particular, the IMF should step up its technical assistance to regional groupings. The formulation and enforcement of standards should take into account regional initiatives. For example, the SADC has formulated its timetable for the liberalization of trade, exchange systems and capital movement, financial integration and institutional reform. These timetables do not represent big bangs but are what is feasible given the current circumstances. I would therefore urge the Fund to ensure that its programs in our member countries are consistent with these SADC protocols particularly on liberalization of trade and choice of exchange regimes. This is important if mismatches in reform programs are to be avoided.
Finally, a word on South Africa. South Africa's macroeconomic performance since 1994 has been encouraging. The economy quickly rebounded after the recession in the early 1990s, and growth has averaged just below 3 percent since 1994. This improved growth was based on a turnaround in investment and the strength of consumption spending, both of which were driven by the upturn in consumer confidence after the democratic transition. Investment has grown appreciably when compared to the pre-1994 period. Capital account liberalisation combined with growing international confidence in the Government's policies contributed to a large increase in foreign investment. Inflation has declined continuously as a result of a concerted anti-inflationary stance of the central bank and the consumer price index (CPI) is at its lowest level in 30 years. Improvements in fiscal policy are reflected by a significant reduction in the budget deficit, from above 9 percent in 1993 to 2.7 percent in 1998. This in turn has contributed to lower inflation and created conditions for a sustainable decline in real long-term interest rates. The redistributional aspects of the budget have been considerably enhanced and the tax system has been reformed in favour of low-income earners. On the expenditure side, a significant reprioritisation of the budget has taken place. Over 60 percent of expenditure now goes to social services and to meet the needs of the poor.
These achievements are underpinned by a number of structural reforms which include a three year rolling budget, or Medium Term Expenditure Framework; the appointment of primary dealers for government debt and the introduction of weekly auctions for government bonds; and major improvements in revenue collection which has improved compliance and tax yield. The latter has allowed us to reduce corporate tax rates to 30 percent and significant reductions in tax rates for lower and middle income earners.