Annual Meetings 2003
2003 Annual Meetings: News Releases, Speeches, Committee Papers, Documents and Background Information
Statements Given on the Occasion of the IMFC Meeting
September 21, 2003
Documents Related to the September 21, 2003 IMFC 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
Global economic prospects look brighter than when we last met at the spring meeting of the International Monetary and Financial Committee. We are encouraged by the positive signs of stronger growth in the U.S. and Japan, and some improvement in consumer indicators in select European countries. Major risks remain, however. Continued vigilance is needed to sustain more robust growth over the coming year, with the emphasis on sound economic policies and further structural reforms. Challenges remain on the global economic front, and continued efforts are required to improve the International Monetary Fund's (IMF's) ability to help countries prevent and resolve financial crises and withstand potential shocks. And further progress toward poverty reduction in low-income countries will require a sustained period of more rapid economic growth in the developing world.
The Global Economy: Outlook, Risks and Policy Responses
The global outlook is clearly more favourable than it was the last time we met. All the risks have certainly not disappeared. But instead of forecasting a strengthening of growth, as we have been doing for over a year, now we are seeing it, particularly in the U.S. Accommodative monetary policy and expansionary fiscal policy have contributed to continuing high rates of household spending. At the same time, continuing high rates of productivity growth are contributing to an improved outlook for investment.
In Canada, output, employment and domestic demand grew strongly right through the first quarter of this year. More recently we have been hit with a series of shocks, such as the severe acute respiratory syndrome outbreak, the discovery of an isolated case of mad cow disease and the appreciation of the Canadian dollar, which caused the economy to stall in the second quarter.
But the negative impacts of these shocks are expected to be short-lived. Canada's strong fundamentals, coupled with a strengthening U.S. recovery, are expected to support growth in the second half of 2003. We agree with the forecasts of both the IMF and Organisation for Economic Co-operation and Development that see Canada near the top of the G-7 in growth in 2003 and 2004.
Growth in most of Asia is also strong. Indeed, Japan probably provided the largest growth surprise in the first half of this year as expansionary monetary policy measures appear to be having an effect. Deflation, however, remains entrenched, which means the Bank of Japan should intensify its expansionary efforts.
There are areas of the world where the outlook is still lacklustre. Growth in much of Europe continues to languish. But even here there are signs of consumer indicators turning up recently. Moreover, some governments have taken steps to deal with some of the structural rigidities that have hobbled growth in recent years. In our view, further monetary easing should be considered to reinforce growth prospects.
Turning to Ireland, the delayed European recovery and recent euro appreciation are posing significant challenges to its very open economy. Growth in the 1 to 2 per cent range seems likely this year—far below potential, and too little to prevent an increase in unemployment. Policy continues to focus on securing the basis for sustained future expansion. Inflation and cost growth have eased significantly, helped by the recent social partnership agreement. Public investment in key infrastructure—and in research, education and training—remain core budget priorities. Despite full play of the automatic stabilizers, a quite modest fiscal deficit is likely, keeping an already low debt ratio broadly unchanged. And structural reform continues, geared to enhance the competitiveness of the economy.
The economic performance of the majority of Caribbean countries which I represent has been subdued, reflecting the interdependence of today's economies. The recent global slowdown and geopolitical uncertainties have severely constrained the expansion of the region's key sector—tourism—and have thus held back overall economic growth. However, efforts in the Caribbean to intensify economic reforms and increase international competitiveness, together with recent positive developments in the international economy, should improve the prospects for growth in the Caribbean.
Growth in some of the key emerging market countries has been uneven. But a number of governments have made courageous structural reforms to address impediments to growth in their economies. These measures have been recognized by financial markets and have contributed to the generally favourable financing environment for emerging market debt.
All in all, therefore, the outlook in the near term is more reassuring than it was six months ago.
The challenge now is to take advantage of the present more favourable circumstances to make the structural changes necessary to underpin solid medium-term growth.
Fiscal policy needs to be put on a sustainable medium-term track. This is especially true for some industrial countries that are or will shortly be feeling pressures from aging populations. It is also true for emerging market economies which, because of the need to borrow to cover fiscal deficits, remain vulnerable to shifts in financial market sentiment.
Financial systems have to be strengthened. This is an urgent issue for emerging market economies that are coming to play an increasingly important role in international financial markets. We have seen over the past couple of years, however, that industrial countries too have regulatory gaps and vulnerabilities.
External payment imbalances pose a risk of exchange rate instability and increased trade tensions. These imbalances have to be addressed.
We can do this two ways. We can do it cooperatively and constructively, with effective structural reforms, sound monetary and fiscal policies that are aimed at promoting sustained growth, open trading regimes and flexible exchange rate adjustment. Generally speaking, this is the route we have taken since the Second World War, and that has led to the greatest advances in human welfare in history. Or we can try to foist the blame and burden of adjustment on other countries. This is the route so many countries chose in the 1930s, with disastrous results.
Enhancing Crisis Prevention and Resolution
IMF Surveillance and Crisis Prevention
The Fund's surveillance role is critical in identifying emerging problems and policy imbalances before they become crises. Preventing crises is always the preferred course of action; after all, the easiest crisis to resolve is the one that doesn't happen. Effective Fund surveillance helps countries establish strong policy frameworks that provide the basis for sustained growth. It is equally important to ensure that incentives are properly aligned so that investors evaluate and correctly price the risks involved in foreign lending.
The Fund has made further progress in making surveillance more effective, including through the strengthened framework for debt sustainability assessments and other tools aimed at ensuring financial and balance sheet fragilities receive adequate attention. In addition, the Fund's assessments of country situations have become more frank—but still more candour is needed. Without a frank portrayal of opportunities and risks, policy prescriptions will not be meaningful.
We are also encouraged by the Fund's more holistic approach to surveillance of putting an increased emphasis on sound institutions and the rule of law, and more closely examining political economy issues and ownership of programs. The Fund could do even more to help build ownership by publishing more of its documents; this would facilitate a meaningful dialogue with interested parties and lead to better policy design and enhanced public support for reforms. Moreover, program ownership could be strengthened if Fund documents included scenarios that clearly spell out the costs of policy inaction. The public needs to be assured that often difficult reforms are indeed necessary and have significant medium-term benefits.
Finally, it must be remembered that it is the country itself that must take primary responsibility for crisis prevention. Sound macroeconomic fundamentals that can deal with economic and financial shocks must be the first line of defence.
Progress on Crisis Resolution Initiatives
It is clear that financial crises will continue to occur despite our improved efforts at prevention. Good progress has been made in improving the crisis resolution framework over recent years, including setting out the criteria and procedures for exceptional access lending and the widespread adoption of collective action clauses in international sovereign bond contracts. Work is also underway to develop a code of conduct to guide debtor-creditor relations. If a code is developed that has widespread support, it could be a useful addition to the overall crisis prevention and resolution framework.
But the framework should be regarded as a work in progress. More can be done on issues related to debt restructurings, such as inter-creditor equity and aggregation issues. IMF financial assistance programs must include the necessary reforms to put economies onto sustainable growth tracks, so that they no longer need to rely on official financing.
Raising Growth Rates in Low-Income Countries
While low-income countries may face their own unique set of challenges, they too must implement the necessary reforms to put themselves on a more sustainable growth path. There is no substitute for sound economic policies in promoting growth and poverty reduction. At the same time, it is becoming increasingly clear that this is not enough to yield satisfactory long-term results. If governance is lacking, if property rights are unprotected, if legal contracts cannot be relied upon, the chances of improving the economic well-being of people in the poorest countries are slim.
Today we are looking at ways in which the Fund can do more to support these efforts. We can all agree that our long-term goal is to help low-income countries grow more quickly, and reduce poverty to the point where they are relying predominantly on private sources of financing. The Fund can help facilitate this objective through more intensified support in its traditional areas of macroeconomic competence. This must continue to be at the core of its activities. But we also see room for the Fund to work more in conjunction with other development partners in areas such as institution building and in encouraging greater developing country ownership of programs.
Some evolution may also be required in the Fund's instruments available to low-income countries, especially to help countries coming out of post-conflict situations but not ready to enter into a full program relationship, and for countries making the transition to an emerging market economy.
The Fund can also make an important contribution to vulnerable low-income countries by providing advice on how to prepare for and respond to exogenous shocks. Specific procedures are needed to ensure that there is a more systematic focus in Fund documents on responding to shocks.
This does not mean that the Fund can or should micromanage all aspects of the development agenda. What we need is a more comprehensive approach, with the Fund as one key partner. Unless the international community, including bilateral and multilateral donors, works together better to help build capacity in developing countries to achieve growth and poverty reduction, our longer-term targets will not be met.
Finally, let me just take a moment to say how much we appreciate the difficult work the staff of the Fund and the Bank are doing in many of the poorest and conflict-ridden countries. The recent tragedy in Baghdad, where a number of Fund staff were injured, and where several United Nations and World Bank staff were killed, brought home to us all how difficult things are on the front line in a number of these countries. Our thoughts go out to the families and colleagues of these people.