International Monetary and Financial Committee Meeting
The second meeting of the IMFC once again takes place against the backdrop of strong global economic performance. The growth projections for this year have been corrected upwards even further and we have to go all the way back to the late eighties to find comparable growth rates for the world economy. I am very encouraged by this development. Looking back at where we were only a few years ago, it is clear that we must be doing many things right. I sincerely hope that this strong global environment will provide further stimulus to those countries that are still lagging behind.
Strong economic fundamentals in nearly all the regions of the world and relatively calm financial markets provide an excellent background for us to continue our efforts to strengthen the resilience of the international monetary and financial system. While the criticisms to the International Monetary Fund (IMF) of the past years following the financial crises have certainly abated, the debate on the new role of our institution continues in various national and international fora. Expectations are high and it is important that we do not relinquish our efforts to make progress in the several areas of our ambitious agenda to strengthen the international system.
I welcome the dedication and the determination the Managing Director has shown in tackling the challenges the IMF faces in these important areas.
2. Global Economic Developments
We have good reasons to be optimistic regarding the global economic outlook. However, this optimism is based on a crucial assumption, namely that the large existing economic and financial imbalances are reduced in an orderly fashion. Unfortunately, I do not see any significant developments in the past six months that have contributed towards a reduction of the imbalances. The risks associated with an abrupt correction, therefore, remain undiminished.
The U.S. economy continues to display an exceptional economic performance. The significant upward correction of growth projections is certainly good news for global growth. However, the continuing strength of aggregate demand tends to exacerbate existing imbalances. In my view, the risks of an upward shift of inflation and a hard landing scenario have increased for several reasons. First, a large share of the growth rate of potential output over the last years can be attributed to employment growth. Given that employment growth has slowed down significantly, it is not clear if labor productivity can increase sufficiently to ensure that the upward shift of the potential output growth remains sustainable. Second, the upward pressure on prices of commodities and investment goods is increasing with world demand gaining momentum. Obviously, recent developments in oil prices provide a good example. Such developments can lead to a rapid shift of market participant's inflationary expectations. Third, the continuing appreciation of the U.S. dollar, particularly vis-à-vis the Euro, are difficult to explain by economic fundamentals. These developments have increased the possibility of a sharp adjustment in the value of the dollar. A persistent and growing current account imbalance, if coupled with a downward revision of the productivity outlook in the U.S., could prompt a significant depreciation of this currency.
I think U.S. policy makers are aware of the risks associated with a hard landing of the U.S. economy. The challenge remains to correctly assess the impact of the significant changes that have taken place in the real economy stemming from the expanding role of the "new economy".
Economic developments in Japan remain a cause of concern. Hopes that the recovery of the Japanese economy had finally found a solid basis have gone unfulfilled several times in the recent past. Indicators of persistent weakness of household income and weak bank lending to the private sector underscore the remaining fragilities. Furthermore, predicting a sustained pick up of internal demand is complicated by the fact that the recent recovery appears to be concentrated on a few sectors. It also remains unclear how long the downward pressure on internal demand stemming from the still high costs of structural reforms and corporate restructuring will persist.
The unexpected persistence of weak economic growth has further exacerbated the difficult choices faced by the Japanese authorities in terms of continuing their policy of accommodative and supporting economic policies. Considering the weakness of internal demand and persistent deflationary pressures, the authorities should maintain an accommodative monetary policy stance. Hopefully, the signal sent by the authorities in their recent decision to move away from their zero interest rate policy will not be misinterpreted by markets. As regards fiscal policy, the concerns I voiced at our last meeting remain more valid than before. In my view, the fiscal position has deteriorated to a point at which further support through fiscal impulses should be avoided.
As regards Europe, I am encouraged by the further strengthening of growth prospects since our last meeting. It is especially welcome that this has contributed to reduce the traditionally high unemployment rates further. However, policy makers for the Euro zone continue to face significant challenges stemming from the persisting differences in cyclical positions of the member countries. The current monetary stance is clearly too expansive for many of the high-growth countries. It is crucial for these countries to adopt an adequately tight fiscal policy stance to compensate for the demand impact of monetary policy. For the Euro area as a whole, the aim to accelerate fiscal and structural reform remains important. I welcome the recent income tax reform in Germany, which sends a clear signal of the authorities determination to reduce the existing high tax burden. This step will hopefully initiate similar moves in other European countries.
The continuing depreciation of the Euro poses an important policy challenge for the ECB. The depreciation, together with the strong rise in oil prices, has put significant upward pressure on consumer prices. In my view, recent developments are difficult to explain when looking at the economic fundamentals. While policy decisions should be guided by the potential threat to long-term price stability, care should be given not to choke off the recent economic recovery.
The crisis-hit countries in Asia have staged a remarkable and rapid comeback. Strong policies and a growing global demand have allowed growth rates to reestablish themselves at pre-crisis levels only two years after the financial crisis. At present, the main focus in these countries must remain to complete the ambitious structural reforms. This is especially true for Indonesia, which may face major difficulties should it be unable to go ahead with corporate debt restructuring, banking system reform and other structural adjustments. In Korea, the focus clearly should lie in the area of corporate restructuring. As soon as output gaps will start to shrink, authorities will have to start with medium-term fiscal consolidation. This will permit to gradually reduce the significant public debt that was built up during the crisis years. This in turn will allow monetary policy to remain relatively accommodative, and thereby maintain a favorable environment for a determined restructuring of the financial and corporate sectors.
Economic developments continue to remain mixed in Latin America. While countries with sound underlying macroeconomic policies and flexible exchange rates such as Brazil and Mexico continue to exhibit comparatively rapid growth, others are struggling with economic and political uncertainties. Given the close linkages of economic activity in Latin America with developments in the U.S. and its strong dependence on external financing, the outlook is highly dependent on U.S. dollar interest rates. This is particularly true for Argentina, given its currency board arrangement. For most Latin American countries fiscal consolidation and the strengthening of the domestic financial systems remain the top priority. Stability-oriented policies will also help further encourage FDI flows, thereby reducing the reliance on volatile short-term capital flows.
Regarding Africa, I am concerned by the developments that seem to be leading toward a generally more pessimistic attitude toward this continent. On the one hand, the substantial fall in the terms of trade of the non-oil producing countries has put several economies that were in the early stages of their reforms under severe pressure. Export prices of non-fuel commodities and other primary goods remain depressed, while oil import prices have risen and show no sign of abating. This has led to an erosion of the often narrow export basis and to further pressures on the precarious public household positions. On the other hand, several countries have lost the benefits of past reforms following natural disasters (floods, draught), armed conflicts, and political unrest. While many of these factors are exogenous, policy slippages have also contributed to weak performance in many countries. This is unfortunate, since the economic indicators show that countries, which moved forward with macroeconomic and structural reforms, are being rewarded with strong or improving growth prospects.
I am also worried by the alarming dimensions of the human and economic consequences of the HIV/AIDS pandemic. This phenomenon will have a significant impact on the macroeconomic framework in countries in which infection rates are threatening to wipe out a large part of the productive workforce. The governments and societies concerned as well as the international community will need to act forcefully. The Fund can play an important role in bringing the macroeconomic implications of this phenomenon to public awareness.
As regards transition countries, I very much welcome the focus given to the issues regarding the transition process. The difficulties associated with this process are highlighted by the fact that only this year, 10 years into the process, the phenomenon of negative output growth has (with one exception) been banished. While the relatively strong average growth rate in transition countries is encouraging, it hides the wide range of problems existing in the very diverse economies comprised under this heading. I am particularly concerned by the trends in external indebtedness in several transition countries, particularly in the Transcaucasian and Central Asia regions. These countries have depended largely on external financing and some of them are now starting to face unsustainably high debt service ratios. Although the Fund has been active in most countries, performance under the programs has been uneven and at present the situation regarding on-track programs looks quite bleak. Looking forward, I think it is essential to analyze how Fund programs can be more effective in these countries.
3. Review of the IMF's Core Facilities
An important element of adapting the way the IMF does business to the significant changes that have taken place in the international financial system was the introduction of new facilities. The financial crises of the nineties underscored the necessity to find innovative ways to provide those members with financial assistance that had access to private capital markets. The IMF reacted by creating the Supplemental Reserve Facility (SRF) and the Contingent Credit Lines (CCL). While introducing new facilities was surely an important step, the extremely complex and in some respects intransparent framework of facilities was in dire need of a thorough review.
I welcome the decisions taken by the Executive Board following their in-depth review. In my view, the importance of these decisions is twofold. First, they will contribute to improve the revolving nature of IMF resources. This is crucial, given the possibly large future demands and the well-known difficulties in augmenting quotas. By refocusing the scope of the Extended Fund Facility (EFF) on its original purpose, namely to assist members with long-term balance of payments difficulties and deep-rooted structural problems, the use of long-term IMF financing should be reduced. I particularly welcome the introduction of early repurchase expectations into stand-by arrangements and EFFs. This should contribute significantly to an overall shortening of repayment schedules, while guaranteeing to those members whose external positions have not improved sufficiently the original maturities. Furthermore, the introduction of a graduation of charges based on access levels sends a signal that large access to IMF resources should be avoided.
Second, the changes of the modalities of the CCL aim to make this "second generation" facility more useful as an instrument of crisis prevention. The new pricing structure, which lowers charges compared to the SRF, ensures greater consistency between the different facilities. Furthermore, the introduction of some degree of automaticity for drawing down IMF resources sends a clearer signal to markets that resources will actually be available should they be needed. However, to adequately safeguard IMF resources and to credibly signal sound economic policies among CCL users, we must stand very firm on the eligibility criteria we had set out for potential CCL users. Furthermore, effective monitoring must ensure that the eligibility remains intact over the whole period of the program. I encourage the Executive Board to develop clear rules and procedures to ensure effective monitoring.
4. Enhancing IMF Surveillance and Transparency
Progress in enhancing IMF surveillance continues at an impressive pace. The strong push to increase the quality of economic and financial data and the significant work that has gone into promoting best practices in the main areas of economic policy are starting to pay off. Members participating under the various programs have achieved significant progress in identifying data and policy weaknesses. I also welcome the continuing effort to further strengthen IMF surveillance in the area of financial sector issues. The Financial Sector Assessment Program is proving to be an effective, albeit resource intensive, instrument to gain in-depth insight of a member's financial sector as a whole. Given the complex interrelationship between the different components of a financial system, such assessments provide valuable information of possible vulnerabilities. I particularly welcome the strong cooperation between the IMF, the World Bank, and national agencies under this program. I consider emerging and transition countries to be the primary targets for FSAPs. However, given the specific risks stemming from major financial centers, I expect all of them to eventually undergo such an assessment.
In terms of increasing transparency, I think it is fair to say that we have again made huge strides since our last meeting. The success of the pilot project for the voluntary release of staff reports in the context of Article IV and combined Article IV/use of Fund resources (UFR) has been very encouraging. Notwithstanding the strong concerns that were voiced by many at the outset, a third of the membership participated. This underscores the value members attribute to publishing reliable and high quality information regarding their economic policies. The very positive outcome of the evaluation of the pilot project, which showed that overall publication had not led to a loss of candor and had not posed problems in terms of confidentiality, was very encouraging.
I welcome the IMF's move to a general policy of voluntary publication of staff reports as well as other country papers. I am confident that most members will take this opportunity to complement their own ongoing efforts to increase transparency. Publishing economic policy discussions with IMF and reliable economic data will contribute importantly to reduce existing uncertainties surrounding country assessments. However, to achieve this the IMF must remain vigilant to maintain the quality and candor of the documents and avoid a tendency to negotiate its content with the authorities.
Another important step was the establishment of an independent Evaluation Office. The IMF had long resisted the use of external evaluations and relied on internal mechanisms for quality assurance. In an environment in which accountability and transparency were becoming increasingly important this was clearly not acceptable anymore. The experience in the past years with ad hoc external evaluations has shown the important insights that such exercises can bring. This is particularly true in times such as now, when changes in the global environment are demanding adaptations in all areas of the IMF's work. A permanent evaluation unit that is fully independent is an essential addition to the IMF's existing evaluation framework.
5. Private Sector Involvement
I continue to believe that ensuring adequate and equitable participation of the private sector in prevention and resolution of financial crises is a cornerstone of our endeavor to strengthen the international financial system. This is a difficult and complex issue, which explains to a large degree why progress has been slower than in other areas. Based on the various cases in the past years, in which private sector involvement has been achieved in one way or another, market participants have clearly realized that the IMF is unwilling to bail out private creditors. While this principle has been understood, and also accepted, by many market participants, they have underscored the large degree of uncertainty that continues to exist regarding the official sector's strategy on private sector involvement.
If we want the private sector to be on board, we must be able to provide them with a framework that is sufficiently operational to be fully understood. I realize that we have to strike a difficult balance in order to achieve the necessary clarity, while allowing the framework to be flexible enough to deal with the multitude of different crisis scenarios we could be faced with. I welcome the further steps that have been taken to build on the principles laid out in the report by G-7 Finance Ministers last year. I think some progress has been made in better defining the circumstances in which the use of IMF resources would be conditional to private sector involvement. At the least, we must make it clear there should be a presumption of concerted private sector involvement if: (i) an early restoration of market access on realistic terms is not considered to be forthcoming; (ii) the debt burden is unsustainable or (iii) access to Fund resources exceeds a certain level. I also welcome that a preliminary discussion of issues associated with the possible consequences of standstills in the context of crisis resolution has taken place. Some of the instruments to achieve standstills may have drastic consequences and must, therefore, be considered only as a last resort measure. However, in some circumstances a standstill could provide the debtor with sufficient breathing space to allow for a more orderly debt restructuring process. Given the complex issues involved in the use and implementation of standstills, I urge the IMF to study this matter further.
I also welcome the Managing Director's initiative to establish a Capital Markets Consultative Group. This group should allow a deepening of the dialog between the official sector and private market participants and help ensure that there is full understanding of our strategy in the are of private sector involvement. In this context, I think it could also be helpful if authorities in all countries with important financial sectors deepen their own dialogs with representatives of financial institutions.
6. The HIPC Initiative and the Poverty Reduction and Growth Facility (PRGF)
I welcome the joint statement issued by the Managing Director of the IMF and the President of the World Bank on the vision of an enhanced partnership of the institutions to achieve the aim of effectively reducing poverty. Stronger cooperation means recognizing the comparative advantages of each institution and defining the responsibilities accordingly when assisting our low-income members. I strongly support the guiding principles mentioned in the statement, particularly those referring to the importance of country ownership and the link between support and performance.
On the enhanced HIPC Initiative, I welcome the significant progress that has been achieved in its implementation. I think that we have found a good balance between speeding up the process and ensuring an effective use of debt service savings in the fight against poverty. However, the future cases might prove to be more difficult to deal with, since these will be countries with more mixed economic performances. In theses cases it will be crucial to put sufficient weight on strong and credible commitments to follow sound economic policies, to implement measures to fight poverty and to improve governance. We must be aware that lowering the standards by making too many compromises with regard to governance problems and macroeconomic preconditions would risk undermining our original intention, namely to ensure that a country exits permanently from a situation of unsustainable debt. Additionally, we would run the risk of treating early participants who have delivered a strong and long-track record worse - in retrospect - than later participants. One of the most important preconditions, in my view, is the existence of a continuous track record under a PRGF arrangement leading up to the decision point.
Regarding the floating completion points, I am encouraged by their apparent ability to shorten the interim period to less than three years. However, in terms of conditionality, I believe that we should not overload the reform agenda and identify just a few, crucial areas. I am satisfied by the Board's decision to extend the sunset date for potential HIPC countries that have not yet embarked on IDA- and IMF-supported programs. I urge these countries to do so expeditiously and to thus begin establishing their eligibility for debt relief within the HIPC framework.
Finally, I am concerned by the serious risk that the IMF will not be able to finance its participation in the HIPC-Initiative maybe as soon as late 2000. This would be the case if the remaining 5/14 of the profits from the gold sales cannot be released soon. I urge all donors to take the necessary steps to fulfill their pledges in a timely manner.