International Monetary and Financial Committee Meeting
September 24, 2000
First of all, we welcome Horst Köhler at his first Annual Meetings as our Managing Director. In my view he has made an excellent start. Also on behalf of the countries of my constituency, I would like to express my view on the single most important issue that will be discussed today which is the Role of the IMF. With the new Managing Director settled in office and the world economy in a strong condition, now is an appropriate moment to address this issue. I think it is essential to have a clear understanding on the role of the Fund in order to secure substantial progress on other issues: the effectiveness of Fund conditionality and program design, surveillance (including codes, standards and transparency), private sector involvement and the role of the IMF in relation to its poorest members.
The role of the IMF
The stability of the world economy is an important international public good, which the IMF should help to provide. The Fund should safeguard the smooth functioning of the international financial system by helping to create a stable macro-economic environment. This should not only occur through Fund financial assistance, but, more importantly, by members pursuing appropriate policies. The IMF derives its legitimacy from its near universal membership, its co-operative character and its constituency structure through which an effective representation of its members is ensured. These characteristics should be cherished, as they have significantly contributed to the broad ownership of Fund policies and therewith to the success of the IMF. I feel that the IMF's effectiveness can be further enhanced by streamlining its activities. In this regard, the phrase "less is more" seems to apply. Specifically, the IMF should concentrate on the core activities related to its mandate, in which it has developed a comparative advantage. These activities consist of assessing the stability and sustainability of monetary, budgetary and exchange rate policies as well as management of the national balance sheet and financial sector stability. Other issues should preferably be dealt with by other, more specialised, institutions such as the World Bank or the WTO. Naturally, this delineation of activities requires adequate co-operation between the different institutions. Within its area of attention, the most important contribution the IMF can make to the international financial system is that of crisis prevention.
A particular feature in the discussion on the role of the IMF concerns the issue of IMF conditionality. The IMF has over-stretched its conditionality in recent years. I would therefore like to call upon the Fund to focus its conditionality on areas closely related to macro-economic and financial policies, in line with the Fund's core competencies. I welcome the views the Managing Director has expressed in this respect. This concerns not only the scope of IMF conditionality but also the need for equal treatment of member states.
Review of IMF facilities
Following the earlier streamlining of facilities, I welcome the compromise reached on developing ways to address unduly long and large use of Fund resources under stand-by and extended arrangements.
To start with, I feel that conditionality in IMF-programmes should be the main instrument to discourage long and large use of Fund resources. However, I agree with the general rule of introducing a time-based repurchase expectation that places the burden of proof on the member country. This allows countries with still weak balance of payments positions to request the traditional repurchase schedule. The Fund, on the other hand, should also retain its existing early repurchase policy for countries experiencing unexpected rapid improvements in their external positions. Those countries must repay the Fund in as timely a manner as possible. In addressing large use of Fund resources, I endorse the compromise proposal of a two-step escalator in the interest rate starting with 100 basis points at access beyond 200 percent quota. Nevertheless, I again feel that tight conditionality, also by requiring some degree of private sector involvement, remains the primary incentive to address large use.
With respect to the CCL, smoother activation procedures and lowering the rate of charge make it especially important to strictly maintain the eligibility criteria for pre-qualification to this facility, especially the criteria in the field of transparency and private sector involvement. I agree that countries' continued eligibility must be monitored with a high frequency. To facilitate this monitoring, importance should be attached to making the countries' policy intentions at the moment of qualification of the CCL as explicit as possible through the quantitative macro-economic framework. This will give the Board and the country concerned, in case of deteriorating policies, a point of reference in specifying the adjustments that are needed to remain eligible to the CCL.
In a similar vein, there is an urgent need to develop an exit strategy for countries that ultimately fail to sustain the sound policies on the basis of which they initially qualified for the CCL. I call upon the Fund to study this further. Possible solutions could include the granting of a limited breathing space at the first sign of possible slippages. During this breathing space the member would be expected to take remedial actions and at the same time start negotiations on a successor program (SBA or EFF). The aim of this programme would be for the country to work towards meeting the eligibility criteria for the CCL again as soon as possible.
Private Sector Involvement
Private sector involvement should be a key element in the international financial architecture for two basic reasons: 1) official resources are limited, and 2) anticipation of a bail out creates moral hazard. I feel it is important that the role of PSI in Fund programs is clarified soon. Certainly, since every crisis is different, the practical implementation of PSI will need to differ from case to case. However, in order to signal a clear commitment to the principle of PSI and to avoid unequal treatment of creditors, I urge making our framework for PSI further operational. In principle, in all cases where the private sector has a substantial exposure, it should be involved in the resolution of financial crises. In particular, there should be a strong presumption of PSI whenever a country's balance of payments difficulties stem from sudden unexpected outflows on the capital account. By implication, PSI should normally be part of a program when access is requested under the CCL or SRF facilities. Furthermore, from the viewpoint of equitable burden sharing, PSI would seem to be particularly justified in cases where the financing needs of a country are so large that the "exceptional circumstances clause" needs to be invoked. In addition, IMF policies should promote ex ante measures that facilitate PSI. In particular, I would welcome it if the provisions in the eligibility requirements for the CCL with regard to ex ante PSI-facilitating measures were fully adhered to.
Surveillance, Codes and Standards, Transparency
In order to be effective in safeguarding economic and financial stability, surveillance and the IMF's work on standards and codes should focus more on the core competencies of the Fund in the macro-economic field. The adherence by countries to internationally agreed-upon standards and codes reduces private sector uncertainty and fosters sound domestic policies. Furthermore, I feel that instruments like the pilot Financial Sector Assessment Program and macro prudential indicators are useful to identify vulnerabilities in financial sectors. As offshore financial centres may have an impact on international financial stability (especially when links exist with onshore centres), I also welcome the Fund initiative to develop voluntary assessments of these centres.
The IMF should focus on the dissemination and promotion of those existing standards and codes, which relate to its core competencies. By illustration, the recent completion of the supporting document to the Code of Good Practices on Transparency in Monetary and Financial Policies contributes to building the necessary institutional capacity in countries in order to enable them to implement this code. Furthermore, I feel that the value of Fund transparency initiatives is enhanced by discussing them with the private sector, although care should be taken to ensure that official sector initiatives do not reduce private market participants' incentives to carry out their own assessments.
Finally, the establishment of a more consistent and uniform publication policy for IMF documents will contribute to the transparency of the Fund itself. In this respect, I endorse the voluntarily publication of Article IV and Use of Fund Resources staff reports. It is imperative, however, that publication of these documents does not result in a toning down of the Fund's policy advice and that the Board remains fully informed at all times. In the broader context of IMF transparency, I also welcome the establishment of an independent Evaluation Office. The added value of this office lies in providing fresh and independent views on thematic issues associated with the operations of the Fund.
The World Economic Outlook
Growth prospects for the world economy have improved since our last meeting. For the first time in years, we have within reach the prospect of strong economic performance and improvement of living standards in almost all regions of the world. Whereas in the US economic growth is expected to remain brisk, the expansion in Europe has picked up speed and the Japanese economy is gradually recovering. Emerging markets in Asia and Latin America continue to recover strongly from the 1998 recession. Africa and the Middle East are recovering but are still vulnerable to commodity price cycles.
The transition countries in Eastern Europe are recovering strongly from the fall-out of the Russian crisis of 1998, with some countries like Ukraine and Moldova showing the first officially recorded economic growth since the start of transition. Also, in some Balkan countries like Bulgaria, macro-economic stabilisation and structural reform are producing results in the form of strong growth. As many of the transition countries are currently considering their exchange rate regime options, the Fund should provide support by further analysing the pros and cons involved.
Global savings and investment imbalances between the major areas continue to pose a threat to the global economic outlook. The US and Latin America continue to attract large amounts of net savings from Asia and, to a lesser extent, Europe. While this mostly reflects a market-based allocation of private capital in the context of different growth prospects, it also creates vulnerability to changing sentiments in financial markets. Therefore, a gradual policy-supported reduction of these imbalances remains key: in the US and Latin America through restrictive macro-economic policies; in the European continent through continued structural reform aimed at increasing potential economic growth; and in Japan through credible structural and macro-policies directed at restoring domestic demand. In the Asian emerging markets, the economic recovery needs to be supported by further financial and corporate sector reforms, which would also contribute to more sustainable current account positions for the region. A reduction of global current account imbalances is an essential condition for a smooth and gradual adjustment of exchange rates.
Global inflation remains relatively subdued, although inflation has risen slightly in the US and the European Union in the wake of the recent oil price increases. The scenario of continued high oil prices poses another threat to the world economy. Earlier episodes of high oil prices have taught us that the effects on oil-importing economies can be kept limited when monetary authorities react firmly to any underlying inflationary pressure and when market flexibility enables the private sector to adapt swiftly to changes in relative prices. In order to better adapt market supplies to the global economic situation, an increase in oil production is called for.
Structural reforms in Europe and Asia
Mr Chairman. If there is one thing we have learnt over the past decades, it is the importance of continuous adjustment to changes in the economic environment. In a globalised world with rapid technological and social developments, good functioning markets are indispensable to create robust economies that can withstand unexpected shocks. As the WEO notes for both Europe and Asia, the current cyclical upturn is conducive to accelerating the pace of structural reform. I know from experience that's sometimes easier said than done. Particularly in the present situation of oil price increases, complacency is dangerous. The present hike in the cost of living should not be passed on into higher wages.
Looking at structural reforms in Europe, I make a distinction between the EU on the one hand and the countries wishing to join on the other. Given the still high structural unemployment, the relatively underdeveloped services sector and the low labour participation rates, the need for enhanced structural reforms is widely acknowledged in the European Union. It is good news that in many areas reforms are being implemented (take for example the tax reforms in an increasing number of EU countries) and the positive effects are already visible (for instance in telecommunications). But Europe has to and will step up the pace. During the European summit in Lisbon, the EU has provided a new stimulus to this process by combining concrete goals and actions with specific time-tables and monitoring mechanisms. In the area of structural reforms in the financial sector a tight time-table is agreed to accelerate the completion of the internal market for financial services. After the progress made with fiscal consolidation in the European Union, it is now time to face the longer-term ageing challenge. For most countries, this implies a further reduction of government debt levels and reform of the pensions system. Timely adjustments now will reduce the cost of policy measures in the future.
Looking at the future member countries of the EU, I can only express my admiration for their reforms. These are the countries who have made the greatest reform efforts in the last decade! The WEO notes that financial markets in these countries start to look more and more similar to those in the EU. At the same time it observes imperfections such as ineffective systems of bank monitoring and supervision. Given the increasing capital flows the accession will imply, the importance of flexibility in the areas of monetary, exchange rate and budgetary policies and adequately supervised financial systems cannot be overemphasized. These countries have to keep up the pace of structural and institutional convergence, also after accession to the EU, in order to sustain their economic growth and close the gap with the present member states. At the same time, the dynamism in these countries will also provide a healthy stimulus for the present members to continue to revitalise themselves. The Fund could support these countries efforts by deepening the analyses of their exchange rate policy options.
Let me turn now to Asia. In Asia, the emerging market economies continue their strong rebound from the financial crisis. However, also in Asia the structural reform agenda still remains unfinished. Of particular concern is the continued weakness of domestic banking sectors. This is mainly due to a lack of progress in cleaning up balance sheets. Markets should be opened up to allow more competition, including foreign participation, and supervision practices should be brought in line with modern standards. I admit that since the Asian crisis, considerable efforts were made to improve the condition of the banking sector, but we are not out of the woods yet. The recent International Capital Markets Report shows that Asia is still very much behind Latin America and Central Europe when it comes to foreign participation in the domestic banking sector. Foreign direct investment in the banking sector is widely regarded as beneficial, as it encourages competition and the spread of knowledge and skills. The Fund's contribution to the Asian recovery will remain to be in the field of policy advice and technical assistance.
Mr. Chairman, I come to my conclusion: structural reform in Europe and Asia is an ongoing process. These reforms contribute to macro-economic stability and sustainable economic growth, both widely regarded the core tasks of the IMF. While the Fund has to keep up the pressure on member states to adapt and adjust institutions and to address long term issues like ageing, it is up to the member states to implement the right policy measures.
The IMF and its poorest members
Finally, I would like to touch upon the role of the Fund in its poorest members. The world-wide membership of the IMF, encompassing all geographic regions and countries in totally different stages of economic development, makes it self-evident for the Fund to make its expertise available to all. Especially the poorest members can greatly benefit from policy advice and financing from both the IMF and the World Bank, taking into account the different mandates of these organisations. I therefore welcome the views expressed by Horst Köhler and James Wolfensohn on enhanced co-operation between their organisations.
The IMF should focus its contribution in PRGF-countries towards achieving and sustaining macro-economic stability in order to create an environment conducive to economic growth and poverty reduction. In line with this, members that qualify for HIPC must have shown their ability to maintain macro-economic stability and their commitment to poverty reduction. Furthermore, PRGF countries need to reinforce their debt management policies. Reaching agreement on debt relief holds challenges for both developing and industrialised countries. Creditors and donors need to be sure that resources freed by debt relief will be allocated to the fight against poverty. At the same time, past experience shows that policies to reduce poverty cannot be effective unless there is strong ownership in recipient countries. The PRSP could be instrumental in avoiding the mistakes of the past, if all parties involved use it as the foundation for policy measures.
If HIPC countries carry out their policies designed to keep the economy stable and reduce the incidence of poverty, then donor countries will have to rigorously support this. Without such strong support, their strategies will not bear results. I also subscribe to the objective of the IMF and the World Bank to double the number of countries reaching their decision points before the end of the year. This makes it first of all inevitable that all bilateral donors of the HIPC Initiative make available their contributions to debt relief as soon as possible and that all international financial institutions live up to their commitments as well. Secondly, there may also be a need to increase contributions to enable countries to reach their completion points in 2001. Finally, I would like to call upon the Fund to carefully analyze the current worsening terms of trade as a result of recent oil price increases that threaten to evaporate the financial benefits of HIPC debt relief. The IMF should assure that these recent developments do not have any negative implications for poverty reduction and the progress in extending debt relief under the HIPC-initiative.
In addition to providing debt relief and official development assistance, the developed countries can and should do much more. Harmonising aid modalities and in particular untying aid can and will help to develop poor countries further. Besides this, opening up our markets to developing countries' exports is crucial to offer them the benefits of world trade growth and the scope for higher rates of income growth which this may be expected to bring.