November 2001 IMFC Statements
IMFC Ottawa Meeting
Republic of Azerbaijan and the IMF
Switzerland and the IMF
Kyrgyz Republic and the IMF
Republic of Poland and the IMF
Republic of Tajikistan and the IMF
Turkmenistan and the IMF
Republic of Uzbekistan and the IMF
Statement by Mr. Jean-Pierre Roth|
Chairman of the Swiss National Bank
Governor of the IMF for Switzerland
Ottawa, November 17, 2001
I welcome the Managing Director's initiative to enable this discussion of the current challenges facing the international community at this extraordinary International Monetary and Financial Committee (IMFC) meeting in Ottawa. I would also like to take this opportunity to thank the Canadian authorities for providing the venue for this meeting.
Challenges Posed by the Global Economic Downturn
Hopes that the slowdown in global output would be short lived were crushed by recent developments. An unexpectedly strong deceleration of world economic activity has taken place over the past six months. Furthermore, uncertainty has increased significantly in the wake of the tragic events of September 11.
The magnitude of the downward revision of global growth forecasts for this year and next since our last meeting is a source of concern. While the slowdown of the US economy was anticipated, the decline in growth in the other major economic regions caught most economic forecasters by surprise. This is particularly true for the European countries. With the rebalancing of growth patterns among advanced countries not materializing and with many emerging economies suffering from weak demand for their exports, sources of near-term growth are difficult to identify.
Although investor confidence in a swift recovery by mid-2002 gives reasons for optimism, achieving the recovery hinges crucially on the timely adoption of appropriate policies. In other words, there should neither be benign neglect, nor frenzied and shortsighted measures that could endanger medium-term macroeconomic stability.
In this regard, the easing of monetary policy in advanced economies following the September 11 terrorist attacks was appropriate. Central banks should continue to follow macroeconomic developments closely and stand ready to adjust their policy stance if necessary. In assessing the scope for further monetary steps, it will be important to adequately weigh inflationary as well as deflationary risks.
As regards fiscal policy, the progress in consolidating general government finances over the past years has provided many countries with enough room for automatic stabilizers to operate fully. However, the scope for discretionary measures is limited. The long and uncertain time lags associated with fiscal stimuli makes these a largely ineffective policy measure under current circumstances. With a view to the medium term, it is crucial not to undermine the hard-won credibility achieved in many countries regarding their efforts to reduce fiscal deficits.
Of course, the sharper and longer-lasting global downturn poses a serious problem for most developing and emerging market economies. This is especially true in light of the simultaneous weakening of all advanced economies. Exports, an important engine of growth in most developing countries, will decline sharply and significant terms-of-trade losses will be experienced because of falling non-oil commodity prices. It is encouraging to see that, overall, those emerging market economies having undertaken broad-based reforms appear to be more resilient in the current downturn. By moving away from unsustainable exchange-rate regimes, strengthening domestic financial systems and implementing a wide range of structural reforms, they now stand on a sounder basis to face the difficult challenges ahead. Fortunately, we increasingly observe that international investors take into account the important reform efforts made by many countries and, unlike in the past, better differentiate between emerging market economies when making investment decisions. Emerging market economies that are highly dependent on external financing are clearly the most vulnerable at a time when overall private capital flows are diminishing. The vulnerability in Argentina and Turkey remains a source of great concern.
While it is relatively difficult to assess the economic impact of the September 11 terrorist attacks on the global economy, Central Asia stands out as being particularly affected. Several Central-Asian countries—among them some in our constituency—are directly affected by their proximity to Afghanistan. The war in Afghanistan has amplified regional vulnerabilities, and it is exerting a negative impact on economies already struggling with a difficult transition process. Security concerns are taking a toll on consumption and investment decisions while intra-regional trade flows were disrupted even further. The rising risks associated with a strong increase in the number of refugees and displaced persons could pose a serious threat for financial and social stability.
Tajikistan and the Kyrgyz Republic are particularly hard hit, given the fragile state of their economies, their low income and heavy debt burden. As regards Uzbekistan and Turkmenistan, the war in the neighboring country has made the authorities' challenges to reform the economy even more difficult. I very much welcome the Management's intention to prepare a new joint initiative—together with the World Bank and the European Bank for Reconstruction and Development—to promote economic growth prospects in low-income CIS countries, including Azerbaijan.
The authorities of these countries must remain committed to reform, while the Fund should step up its assistance by providing additional financial support within the framework of strong programs of macroeconomic stabilization and structural adjustment.
Role of the IMF
In collaboration with other international institutions, the IMF can and must play an important role in coordinating the efforts directed at mitigating the negative impact of the deterioration of the economic outlook. I welcome the initiative of the heads of the major international financial institutions to coordinate their efforts in responding to members' needs in these difficult circumstances. With the IMF's global membership, its focus on economic surveillance, and its capacity to provide financial assistance to members with balance-of-payments problems, the IMF has the necessary instruments to respond effectively to the challenges of the current situation.
The IMF must use its surveillance mandate to provide members with advice on how they can adapt their macroeconomic and financial policies to the changing environment. The increased focus of IMF surveillance on domestic financial systems and vulnerability indicators should prove to be very important at this juncture.
The Fund is equipped with a wide range of facilities to assist members facing balance-of-payments problems. Depending on the exact nature of these problems, the assistance can be tailored to provide ample financial support, even though the resources of the Fund are limited. The current liquidity position is sufficient to support members wishing to implement strong economic adjustment programs. Given the diminished willingness of international capital markets to finance emerging market countries, the Fund has an important catalytic role to play. In the case of capital account crises, which by nature necessitate large amounts of financing, the Fund should seek fair burden sharing between official and private lenders. The Managing Director's report to the IMFC on Private Sector Involvement is encouraging in this respect as it points to the necessity of adequately engaging the private sector in the resolution of crises.
Assistance to low-income countries
As regards low-income countries, the Fund currently extends its concessional Poverty Reduction and Growth Facility (PRGF) to 39 countries. To ensure that the efforts of these members to effectively reduce poverty levels are not undermined by weakening exports and falling commodity prices, the Fund should stand ready to reassess their financing needs. These are not primarily due to the current global economic slowdown, but to difficult structural problems that can only be addressed with a long-term strategy. An important ingredient of structural reforms in PRGF countries should be export diversification, in order to reduce their vulnerability to commodity price movements. In this sense, I consider improved market access for developing countries an important issue for a possible new round of multilateral trade liberalization. Independently of a new round, and in addition to the preferences already granted to the least developed countries, Switzerland will implement a zero tariffs/no quotas scheme for all agricultural products of these countries shortly. A reassessment of the amounts of debt relief at the completion points might also be necessary for some of the countries benefiting from the debt reduction under the Heavily Indebted Poor Countries (HIPC) initiative. Indeed, the modalities of the initiative provide for the possibility of additional relief at the completion point in the case of adverse exogenous developments. There is much merit in this provision. It should, however, be used carefully, and on a case-by-case basis.
Combating Money Laundering and the Financing of Terrorism
The fight against money laundering and the financing of terrorism is a particularly important challenge both for financial intermediaries and for our governments. No efforts should be spared in combating such abuses of the international financial system that constitute a serious threat to its integrity and have negative repercussions on financial stability. To make this fight efficient, I consider a strict application of know-your-customer rules and procedures by all financial intermediaries to be a key instrument. Close cooperation and exchange of information between national authorities is also an essential requirement for achieving results.
All international financial institutions are being called upon to work towards a strengthening of their instruments to prevent financial abuse. Given the Fund's mandate and its expertise in financial sector issues, a strong argument can be made that the Fund play an enhanced role in the fight against money laundering and the financing of terrorism. In close cooperation with the Financial Action Task Force on Money Laundering (FATF), the IMF could play an important role in assessing the compliance of its member countries with internationally recognized anti-money-laundering standards and standards devised to combat the financing of terrorism. For these assessments to be effective, the Fund will have to draw both on its own expertise in the fields covered by its mandate, and, for the remaining standards, on the expertise of other bodies, like the FATF. This means that an efficient division of labor between IMF and FATF should be devised. This is especially true as resources and know-how in this field are in particularly short supply and duplication of work should be avoided.
I welcome steps directed at including anti-money laundering issues in the IMF's surveillance activity. An evaluation of the implementation of anti-money laundering standards is also warranted in the Financial Sector Assessment Program (FSAP) and in Offshore Financial Center (OFC) assessments. The main standard setters will have a key role to play in adapting, interpreting, and assessing compliance with the standards. To this end, the development of a comprehensive Report on Standards and Codes (ROSC) module is highly desirable. As its recommendations have emerged as the recognized international standard in this area, the FATF should have the lead in strengthening the tools against money laundering and the financing of terrorism.