Statement by Mr. Hans Eichel
German Minister of Finance
to the International Monetary And Financial Committee Meeting
Prague, September 24, 2000
List of IMFC
First of all, Mr. Chairman, I want to warmly welcome Mr. Köhler as the new Managing Director in our midst.
Global Economic Prospects and Policy Challenges
1. According to IMF-projections prospects for a strong and more balanced growth of the world economy are good as economic fundamentals have generally strengthened. The US economy will provide important stimulus again this year but is expected to slow down to a more sustainable level of growth in 2001. Growth in the euro area is robust, and prospects are good. In Japan there are signs of a recovery.
2. However, there are risks to this favourable outlook. The decisions by OPEC this year to increase oil production are welcome but prices are still very high. It remains essential that supplies are better adapted to demand to avoid a negative impact on global activity and inflation. While the performance of the US economy has been impressive over the last years potential risks have emerged, in particular a record deficit on current account, low household savings, and a high level of stock prices. Caution in monetary policy is essential and fiscal policy should avoid any moves that could further stimulate domestic demand.
3. Prospects for a recovery in Japan seem to be improving. However, given its fragile nature it is essential that macroeconomic policies remain supportive until recovery is firmly on track. As public finances have rapidly deteriorated in recent years and given the financial burden that will arise from the ageing population a strategy for consolidation over the medium-term should be developed. While progress has been made in restructuring the corporate and financial sectors, determined efforts in these areas, as well as labour market reforms, are needed to ensure a lasting recovery. To strengthen growth further deregulation and a further opening up of the economy remain important.
4. As recent data suggest growth is accelerating in the euro area. Headline inflation has picked up due to high oil prices and the depreciation of the euro but core inflation is still very low. While considerable progress has already been made in reducing budget deficits, fiscal consolidation will be continued and the implementation of structural reforms speeded up.
5. In Germany growth is strong at about 3% this year - thus slightly above current IMF-projections. A comprehensive tax reform package has been approved by parliament with net tax relief rising gradually to roughly 2% of GDP in 2005. The tax reform will strengthen domestic demand but it has also important supply side elements that will make investments more attractive. For example, from 2001 onwards corporate tax which is currently 40% on retention and 30% on distribution will be reduced to a uniform rate of 25% - one of the lowest rates among OECD countries. As a result of the tax reform the general government deficit will temporarily rise from 1% of GDP this year to 1 ½% in 2001 but will be back to 1% in 2002. According to our medium-term projections a balanced general government budget will be reached in 2004. The revenues from the sale of mobile telecommunication licences will be completely used for reduction of government debt.
6. In emerging market economies macroeconomic stabilisation has made progress and growth prospects are generally good. Capital inflows have recovered to an encouraging extent and differentiation in spreads seems to be increasing. However, there remain important risks and uncertainties.
7. Faster than expected recovery in Asia has led to strong current account positions which help to reduce vulnerabilities. However, confidence has not yet been fully restored and several currencies have come under some pressure in spring of this year. Progress in restoring fragile banking systems and in restructuring the corporate sector is uneven and further efforts are still very much needed to secure a lasting recovery.
8. We welcome the progress made in major Latin American economies in fiscal consolidation and in containing inflation. Still, current account positions are weak in a number of countries despite healthy growth in exports. The substantial need for external finance remains a major source of vulnerability, especially if US monetary policy should need to be tightened more aggressively. Further progress in fiscal consolidation is important and structural reforms in corporate and financial sector, including the development of local debt markets, remain essential.
9. In the transition countries of central and eastern Europe growth is strengthening, partly reflecting oil price-driven growth in Russia and in other countries of the Commonwealth of Independent States. Particularly in countries with the prospect of EU membership it remains important to ensure fiscal and monetary discipline and to deepen structural reforms to strengthen competitiveness. In this regard substantial current account deficits in a number of accession countries are a cause for concern.
10. Growth of the Russian economy is expected to be very strong this year and next with a comfortable balance of payments situation and substantial accumulation of foreign reserves. The economic programme of the Government of the Russian Federation aiming at creating a legislative framework to improve the investment climate, structural reform and financial stability is welcome. The recently approved tax reform and plans for a balanced budget in 2001 are encouraging signs of progress in implementing this programme. Swift and consistent implementation of the programme in areas such as securing property rights, enforcing the rule of law, improving corporate governance and creating an efficient financial sector is essential to keep the momentum and to unlock Russia`s economic potential growth.
Future Role of the IMF
11. Both the IMF and the World Bank continue to have central roles in a world economy that is being increasingly shaped by market economy principles. Macroeconomic stability, open markets, and the stability of the international financial system are major public goods. They make a crucial contribution to global growth and prosperity. And economic growth is in itself a basic prerequisite for successfully reducing poverty in poorer member countries. A number of preconditions have to be fulfilled so that the IMF and the World Bank can perform their tasks efficiently. I would like to highlight three of them.
- The first precondition is that there should be a clear division of labour between the IMF and the World Bank on the basis of their core mandates. The IMF is a monetary institution. The IMF's core tasks are surveillance and policy advice. The ultimate goal is crisis prevention and financial stability, both, in the national and the international context. The Fund's surveillance and its policy advice function are to be supplemented by the provision of liquidity assistance to be used as a catalyst in solving balance of payments problems, if a member has insufficient access to private capital markets. The World Bank as a development institution has the task to support less developed members by funding development projects. The World Bank has therefore a primary responsibility for poverty reduction. The Bank should play here a catalytic role, and attract private investors, but not substituting them. The two institutions should not compete with each other. Rather, their co-operation must be further improved in order to avoid unproductive overlapping, duplication of work and inconsistencies. In this context, I very much welcome the joint Statement by Horst Köhler and James Wolfensohn on an enhanced partnership for sustainable growth and poverty reduction.
- The second precondition is a strengthening of the catalytic nature of IMF financing. There is hardly a justification for IMF financing if a country has access to private capital markets on sustainable terms, because this would mean a rather questionable displacement of private creditors by public ones. The IMF cannot and should not adopt the function of lender of last resort. Large-scale financing packages lead to a sub-optimal allocation of resources and should not be used to finance unsustainable exchange rate levels. Moreover, they can create unsustainable financial burdens. Even in a financial crisis the IMF should provide only limited financial assistance in order to ensure private sector involvement in crisis management. Crisis prevention is primarily the responsibility of individual countries. As a matter of fact, crises stem from deficiencies in national economic policies. Thus, the IMF's function as a provider of policy advice to its members is essential.
- The third precondition is an adequate conditionality. Conditionality in IMF programmes should be directed to addressing balance of payments problems and to restoring a sustainable macroeconomic situation. The design of a detailed structural should be left to the World Bank. Finally, IMF-supported programmes must be designed in partnership with the countries concerned so as to ensure that countries are able to identify themselves with these programmes and are prepared - if necessary - to accept painful adjustments.
Review of Fund Facilities
12. Streamlining and adapting IMF facilities to reflect better the realities of global capital markets are core elements in strengthening the international financial architecture and reforming the IMF. We welcome the agreement recently reached by the IMF Board on further measures to reform IMF facilities. The introduction of time-based repurchase expectations into Stand-By Arrangements (SBAs) and the Extended Fund Facility (EFF) will certainly contribute to avoiding unduly long use of Fund resources. Furthermore, the adoption of a level-based surcharge will help to avoid the use of excessively high amounts of Fund resources provided under those two facilities.
13. However, we might need to come back to these issues in light of the experience with these policies to consider as to whether these measures are sufficient to strengthen the catalytic nature of IMF financing.
Surveillance, Stability and Transparency in the Financial Sector
14. We welcome the progress achieved in strengthening IMF surveillance through, inter alia, greater transparency of Fund's activities and members' policies, and the progress under way in implementing core standards and codes for financial system stability. While the IMF has to maintain a sound balance between an adequate confidentiality in its dialogue with members and appropriate transparency vis-à-vis the public, it would appear that the more systematic release of Article IV reports and other country related IMF documents will make a significant contribution towards improving financial markets' risk assessments.
15. Financial Sector Assessment Programs (FSAPs) should become an important cornerstone of surveillance. They should be continued on a broader country base while ensuring that they are firmly integrated into the Article IV-process. Not less important are the envisaged IMF assessments of "Offshore Financial Centers". However, also in this context the Fund should respect its mandate, expertise and resources. We share the view that the publication of Reports on the Observance of Standards and Codes (ROSCs) can significantly improve the efficiency of private capital markets through higher quality risk assessments.
16. In order to play a more effective role in preventing crises and promoting domestic and international financial stability the Fund has to further strengthen its surveillance, inter alia, with regard to its ability to identify sources of external and financial sector vulnerabilities at an early stage. The assessment of the appropriateness of a country's exchange rate system is of particular importance. In this context, Fund's advice on exchange rate policy issues should not be reduced to flexible or fixed regimes. In our view, not only the two extreme positions are realistic. Nevertheless, countries must always ensure that their policies are consistent with the chosen regime. Increased attention should also be given to capital account issues, including capital account liberalisation. Desirable efforts by members to liberalise their capital accounts should be assisted and supported by the Fund. In that respect, due regard must be given to a liberalisation that is properly sequenced. Soundness and stability should have priority.
Private Sector Involvement
17. We welcome the progress achieved in developing a framework for private sector involvement in preventing and resolving financial crises. Recently private creditors have been more involved in the financing of IMF-led programs. However, important aspects of the approach, agreed by the IMFC in April of this year, to private sector involvement still need to be refined, and we look forward to further progress at the IMF in making operational this approach in the design of IMF programs so as to provide greater clarity to countries and market participants. We should establish a strong presumption that private sector involvement would be a standard element in crisis resolution arrangements. Concrete steps should be taken, inter alia, to ensure the implementation in IMF programs of all the agreed principles and tools, in particular through the systematic inclusion in these programs of an analysis specifying the extent of private sector involvement. Ensuring an efficient coordination with the Paris Club is also of utmost importance in this regard.
Independent Evaluation Office
18. We welcome the agreement recently reached on the Terms of Reference of the Independent Evaluation Office (EVO) within the IMF as an important complement of already existing internal and external evaluation mechanisms. We hope that the EVO and the other evaluation mechanisms will contribute to further improve the work of the Fund, to further strengthen its external credibility and to facilitate the control of Fund activities by the Executive Board. It is essential that the EVO can operate independently. Concerning the selection of topics, the EVO should focus on fundamental policy issues and should coordinate its activities with other evaluation projects in the Fund. We expect a strict adherence to these Terms of Reference. The EVO should soon begin its work. This requires a quick solution of the still open organisational and personnel issues, starting with an early appointment of the director.
HIPC Initiative/PRSP Process and the Poverty Reduction and Growth Facility
19. We note with satisfaction the progress in the implementation of the Enhanced HIPC-Initiative, launched last year in Cologne in order to bring faster, broader and deeper debt relief for the poorest countries. Until now, 10 countries have reached their decision point. Their debt relief will amount to more than US$ 16 billion. Until the end of 2000, as many countries as possible should be declared eligible for the Enhanced HIPC-Initiative. Integrating debt relief in strategies for poverty reduction is of central importance for the Government of the Federal Republic of Germany. Poverty reduction and debt relief demand macroeconomic stability and economic growth as well as good governance to be successful and sustainable. Significant progress has been made with respect to the financing of the bilateral and multilateral shares. Open questions have to be settled. We call upon bilateral and multilateral donors to meet their financial commitments.
IMF EXTERNAL RELATIONS DEPARTMENT