November 2001 IMFC Statements
IMFC Ottawa Meeting
Antigua and Barbuda and the IMF
The Bahamas and the IMF
Belize and the IMF
Barbados and the IMF
Canada and the IMF
Dominica and the IMF
Grenada and the IMF
Ireland and the IMF
Jamaica and the IMF
St. Kitts and Nevis and the IMF
St. Lucia and the IMF
St. Vincent and the Grenadines and the IMF
Statement by the Honourable Paul Martin Minister
of Finance of Canada, to the International Monetary and Finance Committee|
November 17, 2001
Our meeting here today has added significance as a result of the horrific events of September 11th. The terrorist attacks have raised concerns about the ability of governments to perform one of their primary functions--protect the security of their citizens. The sense of personal insecurity bred by terrorism has implications for our economic security, as confidence effects pose a significant short-term risk to a global economy that was slowing even before the events of September 11th.
But we are far from helpless. The fact that the International Monetary and Financial Committee (IMFC) and the Development Committee (DC) are meeting here in Ottawa this weekend demonstrates the international community's determination to safeguard global economic security.
To be sure, the terrorist attacks have presented us with a new set of challenges. The immediate challenge is the need to deal with the economic fallout of the attacks and to choke off terrorist financing. On both of these fronts, the response of national authorities and international bodies has been swift and appropriate.
There is also a danger that, in instinctively protecting ourselves, we become less open--psychologically and economically. To do so would be to hold ourselves hostage to fear. Indeed, we cannot allow borders to become barriers to the open markets and trade that are the foundation of economic and technological progress. More importantly, it would deny the promise of prosperity that the global economy offers to the millions around the world who live in poverty--to those who seek only the opportunity of advancement for themselves and their children.
As a result, we must work together to help ensure that the security measures needed to protect our citizens are implemented in a way that facilitates rather than hinders legitimate international trade. This is entirely consistent with our ultimate objective: to build global economic arrangements that deliver economic prosperity and security to all of our citizens. And, in addressing the challenges associated with the events of September 11th, we cannot afford to lose sight of this goal.
Safeguarding Security: Combating the Financing of Terrorism
As representatives of sovereign governments, one of our fundamental functions is to protect our citizens. As finance ministers and central bank governors, an immediate priority in meeting this overarching objective is to combat terrorist financing. To achieve this goal we must engage all members of the international community, and work together in a broad range of fora.
The IMF, reflecting its near-universal membership and the threat that terrorist financing and money laundering pose to countries' domestic financial sectors and to the integrity of the international financial system as a whole, has an important role to play in this battle. In particular, IMF staff should work with appropriate international experts, such as the Financial Action Task Force (FATF), to ensure that the Fund's financial sector assessment efforts and policy advice contribute, where appropriate, to global efforts to combat money laundering and terrorist financing.
We therefore welcome the IMF staff recommendations that the Fund, among other things, apply its expanded anti-money laundering methodology to all Financial Sector Assessment Programs (FSAPs) and offshore financial centre (OFC) assessments, accelerate its OFC assessments, and work closely with the FATF in finalizing an anti-money laundering Report on the Observance of Standards and Codes (ROSC) as soon as possible.
We also have to recognize that, in order to participate effectively in the broad-based international effort to fight these financial abuses, smaller countries with limited resources and administrative capacities will need technical assistance. The IMF and other relevant international bodies have a key role to play in these capacity building efforts, as do bilateral donors. And, in this regard, Canada stands ready to do its part.
Safeguarding Economic Security
The heinous acts of September 11th were attacks against physical structures and the people who worked in them. But they were intended to shatter the sense of personal security of the American people; they were planned and executed to break the confidence of consumers and businesses and thereby undermine their sense of economic security.
In this respect, the economic outlook for the U.S., which was uncertain before the recent tragic events, has now become even more so as business and consumer confidence have deteriorated in the wake of the attacks.
And, as prospects in the U.S. have clouded, the outlook for the rest of the world has also become more uncertain. Economic growth has slowed significantly in the euro area. The Japanese economy is in recession. A weaker U.S. economy and higher investor risk aversion have made financial market conditions more difficult for emerging market economies. Economies with large external financing needs, such as those in the Latin American region, will be the most affected. The global environment has also made it even more difficult for Turkey and Argentina to proceed with their economic adjustment programs.
Fortunately, the policy response has been swift and sound. In the U.S., the Federal Reserve Board has demonstrated its readiness to ease interest rates and add liquidity to the financial system as necessary.
Elsewhere, the European Central Bank has reduced its key interest rates by 125 basis points since August 30; and, given the expected decline in inflation in early 2002, there may well be room for further cuts in the near term. There is also scope for the core economies in the euro area to allow their automatic fiscal stabilisers to help moderate the downturn, although their near-term fiscal targets will quite likely be missed.
In Japan, the authorities have taken some steps to ease monetary policy and move ahead on writing down the non-performing loans in the financial system. Nonetheless, additional, more aggressive actions may well be required to offset the deflationary pressures in the Japanese economy.
Economic Performance and Prospects in the Constituency
On balance, then, appropriate policy responses have been taken, with central banks in several industrial and emerging market economies reducing interest rates, and governments in economies with relatively strong fiscal positions allowing their automatic fiscal stabilizers to work. Despite this timely response, however, the near-term prospects for the global economy remain very uncertain, affecting all members of our constituency.
With over 40 per cent of Canadian GDP generated by exports, it is clear that Canada cannot escape the effects of the global economic slowdown. The pace of economic activity in Canada slowed significantly from late last year through the first half of this year. In the second quarter of this year, GDP growth was less than ½ per cent.
Consumer spending slowed significantly in the second quarter, reflecting a slower pace of income growth. Although investment in machinery and equipment recovered somewhat in the second quarter, it remained 2 percent below its level of a year earlier. The weakening in economic activity has been reflected in a higher unemployment rate.
The September 11th terrorist attacks have exacerbated the slowdown that was underway in Canada by disrupting production and reducing consumer and business confidence.
Fortunately, Canada is in the best position in decades to cope with a slowdown of this type. In the early 1980s and early 1990s Canada was severely affected by global economic deteriorations. In those earlier periods, we paid a high price for not having our economic house in order. This time, our stronger fundamentals have provided us with more fiscal and monetary policy flexibility.
This flexibility has enabled the federal government to introduce $17 billion in tax cuts this year alone. These tax cuts, which will rise to almost $20 billion next year, are supporting the Canadian economy, and will continue to do so in the months ahead. In addition, Canada's low inflation environment and fiscal credibility have enabled the Bank of Canada to reduce the overnight rate eight times this year for a total of 300 basis points.
These policy measures will increasingly help to support consumer spending and business investment in Canada in the coming months.
The Irish economy has continued to perform remarkably well, although it was experiencing a slowdown even before the events of September 11th impacted on global economic growth prospects. Growth in 2001 is expected to be about 6 per cent, compared with more than 10 per cent in 2000, and the prospect is for a further easing in 2002. While the slowdown has been driven mainly by international trends, and by the information, communications and technology sector in particular, the economy had grown above trend for several years and had been experiencing capacity constraints, with unemployment falling to less than 4 per cent.
The slowing economy has impacted on revenue but a substantial fiscal surplus is still foreseen for the year.
While inflation remains above the average of other Euro area countries, it has been on a declining trend and there is little evidence that prices and wages are overshooting sustainable trends. The economy remains highly competitive and is well positioned to avail of a renewed upturn in the world economy in the course of 2002.
The Caribbean Countries
In the Caribbean, after several years of fairly robust growth and significant declines in unemployment, the global economic slowdown weakened economies dependent on tourism. Greater erosion is expected in the wake of September 11th. In the smaller islands, real growth was sluggish and fiscal problems became acute in some cases. This reflected a contraction in tourism revenue, erosion of preferential markets and the impact of a series of devastating hurricanes. Efforts to diversify into the provision of international financial services continued, but this sector weakened during 2001.
However, there were some important successes. In Jamaica, where growth resumed in 2000 after several years of negative growth, continued fiscal consolidation resulted in a remarkable primary surplus of 13% of GDP.
Ongoing efforts continued to strengthen financial sector regulation and supervision and upgrade anti-money laundering legislation. The FATF removed The Bahamas from its list of Non-Cooperative Countries and Territories and also welcomed progress made by two other Caribbean islands to address deficiencies.
The Caribbean Regional Technical Assistance Centre (CARTAC), located in Barbados, became operational in September. Canada is the largest single donor to this important body. It is designed to strengthen the region's technical capability in financial sector regulation and supervision, tax administration and other areas. We welcome the Fund's role in assisting the region to strengthen its capacity.
Safeguarding Economic Security: The Role of the IMF
It is clear, therefore, that while the terrorist attacks may have been directed at the U.S., the economic fallout from September 11th has affected all countries--rich and poor, advanced and emerging.
Through its surveillance activities and existing lending facilities, the IMF is well positioned to help members cope with a highly uncertain short-term economic outlook. And, in this respect, we welcome the Managing Director's October 5th statement that "the IMF is prepared to play its role of providing advice and additional financial support, where necessary, to those members that have (or adopt) suitable policies, as part of a joint international effort to strengthen confidence in the global economy".
The Fund also has a key role to play, over the longer term, in helping countries respond to the challenges of global integration. In keeping with the Fund's primary function--the promotion of international financial stability--action is required on a number of fronts. On the financial crisis prevention front, the IMF has strengthened surveillance, promoted transparency, and encouraged the development and implementation of internationally accepted codes and standards.
Obviously, this preventative work should continue. In tandem with these efforts, we also need to make further progress in ensuring that our crisis management framework is consistent with the over-arching objective of promoting efficient international capital markets.
To achieve this, the official sector needs to provide a greater degree of predictability to shape private and public expectations of how financial crises will be handled in the future. This is essential to ensure that private investment decisions are based on an undistorted assessment of risk and return.
With its emphasis on the limited nature of Fund resources, the IMF's current crisis management framework has helped to provide some clarity; however, further refinements are required. In particular, while rightly stressing the desirability of voluntary approaches to crisis resolution, it does not elaborate on how the official sector will deal with cases where a voluntary solution is either not forthcoming or not sustainable.
Canada has long felt that this is a key gap in the framework and others seem to be coming around to this point of view. For example, in his farewell address, former First Deputy Managing Director Stanley Fischer noted: "we need to develop a better framework to enable countries to reschedule debts".
While there is never an ideal time to work on sensitive issues such as this, the IMF, in cooperation with relevant public and private sector partners, needs to look more fundamentally at how debt restructurings can be facilitated in the most transparent and least disruptive fashion. In this respect, we continue to regard temporary payments suspensions - debt standstills - as an essential element of the crisis resolution toolkit, and encourage the staff to move forward on analysing and addressing the operational issues associated with their use.
We believe that such a framework is essential if the Fund is to help countries strike the right balance between financing and adjustment so they do not have to undertake actions that are, in the words of the Articles of Agreement, "destructive of national or international prosperity".
Today, I have elaborated on the role that the IMF must play in meeting the challenges associated with the events of September 11th. Obviously, other institutions have a role to play as well. Tomorrow, in the Development Committee, we will focus on the world's poorest countries and the role of the World Bank.
And, we should all be very pleased with the successful conclusion of the WTO meeting and the launch of the "Doha Development Agenda". We are hopeful that these negotiations will substantially reduce trade barriers and, in particular, result in the elimination of agricultural export subsidies. We are also hopeful that the negotiations will address the very real needs and concerns of developing countries, particularly the poorest, about participating in the global economy.
In each of these institutions, we must continue to work together to ensure that the Bretton Woods promise of economic prosperity and security is kept.
The tragic events of September 11th have added to the list of challenges associated with globalization. Nonetheless, through appropriate domestic policy measures and international cooperation, we can put in place global arrangements that provide economic prosperity and security.
Of course, progress in addressing the short- and long-term challenges of global integration will not be enough to placate anti-globalization angst. We have to communicate the benefits of open borders to people in a way that is personally meaningful to them. We have to show that their lives have been enriched by globalization--in the jobs available to them, the goods and services they can buy, and their ability to enjoy the rich and diverse offerings of other countries and cultures right in their own backyard.
Quite simply, at a time when many are questioning the merits of open borders, it is incumbent upon us, through meetings such as the IMFC and the DC, to clearly articulate what global economic integration has achieved, as well as our shared commitment to make it work better and for the benefit of all.