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
Republic of Armenia and the IMF
Bulgaria and the IMF
Bosnia and Herzegovina and the IMF
Cyprus and the IMF
Georgia and the IMF
Republic of Croatia and the IMF
Israel and the IMF
Republic of Moldova and the IMF
former Yugoslav Republic of Macedonia and the IMF
Kingdom of the Netherlands-Netherlands and the IMF
Romania and the IMF
Ukraine and the IMF
Statement by Gerrit Zalm, Minister of Finance of the Netherlands,
International Monetary and Financial Committee (IMFC)
Dubai, September 21, 2003
Exactly five years ago, Russia defaulted on its debt and, in the process, sent shock waves through global financial markets. Since then, a number of other emerging markets have been experiencing longer periods of macroeconomic stress. The Fund had come to the rescue many times. In doing so, it has learned important lessons. A few of them may be worth mentioning in light of the agenda of the IMFC-meeting, and will be elaborated upon in this intervention.i
First, the Fund now rightly takes a more nuanced viewpoint with regard to fixed exchange rates regimes as well as to capital account liberalization. Neither should be pursued in their own right, but require sound accompanying macroeconomic and structural policies. Today, this lesson seems to be particularly relevant with regard to the perceived undervaluation of China's currency (see section 1). Second, the recent financial crises show the risks of balance sheet problems spilling over from one sector into other sectors of the economy. This has urged the Fund to broaden and deepen surveillance and to develop a balance sheet approach (section 2). Third, the decisions regarding debt default and devaluation were taken largely in absence of generally recognized rules of behavior in a crisis situation. Meanwhile, some redesign of the international financial architecture has taken place, notably in terms of the inclusion of collective action clauses in bond contracts and the development of codes of conduct (section 3). Fourth, the build-up of the especially the Russian crisis is often referred to as one of the most vivid examples of moral hazard, with private creditors confident that there was little likelihood of default, because they were counting on money from official creditors and international financial institutions. This is a strong argument not to overestimate the financial role of the Fund (section 4). Albeit for somewhat other reasons, this is also one of the key messages with regard to the role of the Fund in low income countries: the Fund's involvement should not be equated with its credit (section 5). In brief, since the Russian crisis considerable progress has been made, though more remains to be done to foster global financial and monetary stability.
1 Taking up domestic challenges to adjust global imbalances
Since our April meeting, uncertainties in the world economy seem to have diminished and leading indicators have improved. Yet, the latest World Economic Outlook indicates that the turnaround of the world economy remains fragile. While every single country has to do its own specific homework, imbalances are a global phenomenon. My constituency believes that addressing domestic challenges is not just in countries' own interests, but also helps to adjust global imbalances.
For now, reduced uncertainties have not yet led to strongly improved growth prospects. Expected growth in the US has only recently been adjusted upwards, while prospects for the euro area remain dim. Japan is doing reasonably well considering the scale of its problems. The slow and moderate recovery reflects the existence of fundamental imbalances within countries that grow deeper than the short-term outlook suggests. In the United States, household debt is historically high and the still rising budget deficit is of growing concern. Keeping government finances sustainable within a credible medium-term framework will help ensure growth both in the short and the long run. With respect to Japan, deflation is at the core of its larger economic troubles. Fundamental issues such as excess capacity in the corporate sector and the fragile financial system remain to be tackled. At the same time, several countries in Europe should step up their growth potential by keeping up the momentum of structural reforms towards more flexible product and labour markets. Moreover, Europe has to increase productivity by sticking to the timetable of the 2010 Lisbon Agenda. It not only concerns raising labour participation and the number of working hours, but is also about stimulating innovation and fostering entrepreneurship.
More specifically, one of the major imbalances in Europe is of a different nature, that is between generations. Europe will be hit harder by population ageing than any other region (baring Japan). Public expenditure on health care and pensions in most EU-member states will double to 6% GDP up to 2040. Complacency in the sphere of ageing in Europe would result in an unduly high burden for future generations. An ambitious strategy is needed to put us on the right track: reforming pension systems, increasing labour market participation, increasing productivity and reducing public debt. With respect to the former, the German and French first initiatives are welcomed. Speeding up the Lisbon process is needed to boost employment. Regarding the third pillar, the budgetary and the debt targets of the Stability and Growth Pact should be considered only as a minimum for meeting the budgetary challenges of ageing.
As in previous meetings, my constituency considers the current account imbalances in the world economy—basically reflected in the large US current account deficit—as the single most important global imbalance. The global economy is therefore still highly vulnerable to a sudden correction. Although the US external deficit largely mirrors the US budget deficit, US efforts in reducing its government deficit and strengthening national savings alone would not bring about a sufficient adjustment. As with most international economic problems, policy efforts are needed on a global scale. All world players need to play their part in adjusting the world's largest imbalance with exchange rates being allowed to work as adjustment mechanisms.
In this light, recent discussions appear to focus on the exchange rate of the Chinese renmimbi, where China has become one of the foremost financiers of the US external deficit. One idea is that a one-off revaluation of the Chinese currency, with possibly more exchange rate flexibility in the longer run, would help to share the burden of reducing the US current account deficit more equally, while reducing excess liquidity growth and inflationary pressures in Chinese asset markets. My constituency invites the Fund to undertake a study of the consequences of a possible change in the current exchange rate policies of some Asian countries. Generally, it should be acknowledged that an exchange rate regime change is no silver bullet to global imbalances and that, for example, further opening up the world economy to trade would also have a crucial role to play. And as mentioned before, all regions involved (Europe, Japan, US) must deliver their share to the adjustment of global imbalances by solving domestic problems.
In Latin America, the situation has recently improved somewhat, especially with the strong recovery in Brazil. At the same time, the situation in Argentina remains uncertain and in Venezuela the economic malaise continues, which has repercussions for the neighbouring countries. It is noteworthy that the WEO projects around 5 percent growth in 2004 for nearly all my constituency countries. As noted in the WEO, the CIS-countries as well as the countries in southern and south-eastern Europe have continued to weather the growth slowdown in advanced countries and the ensuing uneven recovery considerably better than expected. After a very deep recession, GDP growth in Israel is also expected to turn positive in 2003 and strengthen in 2004.
Last but not least, my constituency supports the continuing involvement of the IMF and World Bank in the reconstruction efforts in Iraq. It wishes to underscore the importance of a close cooperation with the UN, given the latter's extensive experience in post-conflict assistance. Due to the absence of an internationally recognized government, the fragility of the political situation as well as existing arrears, Fund and Bank involvement are currently limited to macro-economic advice and technical assistance, which seem mostly needed at this stage.
2 Crisis prevention: strengthening the signaling role of the Fund
The effectiveness of IMF surveillance in terms of promoting sound policies and institutions and a smooth functioning of international markets depends on a chain of factors, namely its scope, quality, follow-up and transparency. With regard to the latter, my constituency welcomes the Board decision to move towards presumed publication of Article IV reports, which should also include debt sustainability assessments. All my constituency countries publish Article IV reports as well as program documents, and we encourage other members to follow suit. Transparency allows a proper assessment by markets and fosters the credibility of the Fund. This is especially true for large access cases, where accountability, also to the international community, is paramount. In addition, my constituency would like to share the following suggestions.
First, my constituency encourages the Fund to elaborate on the balance sheet approach and to pilot the approach for a number of countries in the context of Article IV consultations. In line with recent recommendations by the Independent Evaluation Office, there is clearly a need to analyze the consequences of potential shocks to stocks of assets and liabilities of the government, financial sector and corporate sector. In fact, it is surprising that it has taken so long to come to realize this. The balance sheet approach will contribute to an improved detection of potential vulnerabilities in member countries, related to currency, maturity and capital structure mismatches. It would complement the traditional flow-analyses of fiscal and current account positions and could build upon on-going work with regard to data provision and dissemination, financial sector surveillance, standards and codes and debt sustainability assessments.
Second, my constituency subscribes to Fund initiatives to enhance a fresh perspective in surveillance, especially regarding program countries. Thus, consultation cycles should allow for missions to take place when most valuable, while surveillance and program missions could have somewhat different staff compositions provided there are continuity and coordination safeguards and without unduly increasing the burden on the national authorities. Moreover, it should become standard practice that alternative scenarios and policy responses are discussed with national authorities and reflected upon in the Article IV reports. These practical measures are already part of the conclusions of the 2002 biennial surveillance review. However, we oppose an institutional separation of surveillance and program activities, which would entail high efficiency losses and might lead to inconsistent advice.
Third, and even more importantly, my constituency encourages the Fund to explore ways to promote that policy advice is taken into account by national authorities, notably in a non-program setting. For example, Public Information Notes could indicate when countries deviate systematically from IMF advice, while taking into account the possibility that earlier Fund advice was flawed. To give surveillance even more bite, the extent to which countries have not followed up on earlier Fund advice, if appropriate, should be factored into program decisions. Countries that have neglected sound policy advice and consequently run into balance of payment problems should have an especially convincing program. Such a practice will also foster the accountability of the IMF in delivering clear and high quality advice.
Finally, my constituency acknowledges the important signaling function of the Fund with regard to economic developments and member countries' policies. Signaling towards financial markets (in case of industrialized economies and emerging markets) and donors (in case of low income countries) is an important aspect of Fund involvement. While surveillance is often considered as having a relatively light signal, IMF credit provides for a very strong signal, but with the obvious disadvantage that it adds to the debt burden of countries. We believe precautionary arrangements to be a useful mix, implying upper level conditionality and strong Fund involvement, but not necessarily with financing. Precautionary arrangements are a much better instrument to provide insurance against large capital outflows than the Contingent Credit Line, which we expect to expire before the end of 2003. At the same time, we are not in favor of ex ante exceptional access under precautionary arrangements, as this would lead to an unwarranted level of moral hazard and potential Fund exposure.
3 Crisis resolution: working towards a transparent, orderly and timely process
Given the persistent difficulties in emerging markets—in particular in the current case of Argentina—discussions on ways to promote an orderly and timely crisis resolution remain highly relevant. The discussion now focuses on the strengthened framework for access to IMF resources, the inclusion of Collective Action Clauses (CACs) in new sovereign bonds and the work of official and private sectors on a voluntary Code of (Good) Conduct.
On the first issue, my constituency continues to stress the importance of ex ante clarity on limits of Fund financing, being essential to reduce uncertainty and moral hazard, and to promote private sector involvement and equal treatment of members. As such, we reiterate our support for the renewed criteria and procedures of the framework for exceptional access, and emphasize the importance of its strict and consistent implementation. The further improvements in the methodology and use of debt sustainability analyses are welcome, as these would help to determine if and to what the private sector should contribute to the bridging of the (potential) financing gap of countries in distress.
Second, we welcome the early success of international sovereign issuance with CACs under US law. Already, South Africa, Korea, Uruguay, Brazil and Italy, among others, have followed Mexico´s lead of using CACs in US-issued bonds. This may well be a sign of a more permanent shift in market practices. In this respect, it is also worth noting that half of my constituency countries which issue foreign bonds (as well as the UK and other countries that have been issuing under non-US jurisdictions) have been including CACs for quite some time. With a broader application of CACs, it appears particularly important to retain some measure of homogeneity. As such, we value the Fund´s initiative to encourage and monitor the use of CACs in its surveillance on the basis of the G10 model.
Third, my constituency supports the elaboration of the Codes of Conduct, while encouraging the final creation of one single Code. Good faith between debtor countries and creditors is central to the resolution of financial crises, and within that, to an effective and efficient role for the Fund. Indeed, the Fund should be involved in this process, given its role in crisis resolution, for example with regard to lending into arrears—but also in crisis prevention, through surveillance (e.g. role of data dissemination, debt sustainability analyses). A similar consideration applies to the G10, as a forum of creditor countries. Concerning the operational side of the Code, the establishment of creditor groups on a national level for a semi-permanent dialogue with the national authorities would appear to be particularly instrumental. In addition, the Fund could monitor the implementation of the Code through Article IV consultations, for example by paying attention to minimum information disclosure. This will enhance transparency, and promote inter-creditor equity.
Fourth, following up on the conclusions of the Spring meeting, we invite the Fund to further explore issues related to a statutory approach, such as the aggregation of claims and the treatment of total debt stock.
4 IMF quotas and representation
My constituency does not see a need for a general quota increase at this point in time. Since the conclusion of the Twelfth General Review of Quotas last January, the one-year forward capacity to make financial commitments (FCC) has increased by 15 percent to SDR 63 billion. This confirms the view that the Fund is well-equipped to address possible financing requests in the foreseeable future. This is the more so, as SDR 34 billion can be raised additionally, if necessary, through the GAB of the G10 as well as the NAB. Under the current circumstances, such an increase would, moreover, run counter to the objective of increasing private sector involvement in crisis resolution and might fuel moral hazard. Although the Fund's financial role is crucial in tackling crises, it should not be overestimated.
My constituency believes that individual quotas should adequately represent member countries' share in the international financial system. In this respect, the current system of quota formulae works reasonably well. To facilitate an increase in the voting power of developing countries, we propose a gradual rise in the number of basic votes—doubling the number as a start — to the original relative levels at the time the Fund was founded. In addition, my constituency welcomes the recent measures to increase staff in two of the ED-offices.
Finally, my constituency wishes to point to the advantages of multi-country constituencies consisting of both debtor and creditor countries. My constituency, like others, is a good example of promoting the interests of both groups of countries. On the one hand all these countries profit from a substantial share of voting rights, whereas on the other, transfers of knowledge and expertise within the constituency can support capacity building in the countries themselves. Finally, multi-country constituencies express the quintessentially multilateral nature of the organization. Having a bridging function, they can enhance the consensus building in the Executive Board and thus enhance ownership of Fund decisions and policies by all members.
5 The role of the IMF in low income countries
My constituency encourages the IMF to continue the valuable discussion on the fundamental role the Fund has to play in low-income countries and consult with officials of low-income countries, multilateral development banks, bilateral donors, and civil society organizations. We wish to underline three key issues.
First, my constituency agrees with the growing recognition that the Fund's engagement with low-income countries will often be long-term, given the deep-seated problems that cause macroeconomic instability. The Fund's policies (surveillance, program lending and technical assistance) should therefore be aligned to the long term development objectives of low income countries, which are formulated in the Poverty Reduction Strategy Papers. These PRSPs may have a limited time span but they are the country specific road maps to reach the Millennium Development Goals. This recognition calls for intelligent measures, including alternative scenario analyses, for example in public finance management, that both serve stabilization and sustained growth. It also requires that IMF relations with the low-income countries should complement the work of other development partners. Better coordination would also ensure that the Fund remains within its mandate and core areas of competence. To this end, it would be helpful if the various international stakeholders in the PRSP-process agree on an explicit division of responsibilities on the country level.
Second, my constituency wishes to emphasize that the recognition of a long term relationship should not be confused with IMF financing being provided over longer periods. The crucial issue is to tailor the mix of IMF policies to a country's political and economic realities. Although its financing role may often remain indispensable, the Fund should attempt to focus on its advisory role, also in terms of technical assistance for capacity building and institutional strengthening, and on its signaling function towards other development partners. Certifying the soundness of macroeconomic policies often crowds in other, more concessional, financing. However, there remains a risk that countries that wish to receive the Fund's advice and monitoring for signaling purposes feel obliged to also take the Fund's credit, which adds to their already high repayment obligations. We therefore encourage donors to accept more informal ways of monitoring and suggest promoting the use of low access or precautionary PRGF-arrangements. We urge staff to further assess the possible use of these arrangements.
Third, my constituency expects that if the balance between knowledge and finance will generally be more heavily weighted towards the former, it could partly prevent countries becoming unnecessarily long users of Fund credit. This risk could be further mitigated if the Fund would, at some point in its relation with a country, step back and review the on-going country program and reassess its future involvement. These assessments can analyze whether sufficient progress is being made to warrant a longer term program relationship with the Fund, and whether the IMF staff's strategy is appropriate. It is vital that this process does not result in an ex ante stigmatization of longer term IMF involvement, as such involvement can be entirely appropriate. In these situations, financing is usually less important than the expertise and discipline provided by a program, which is why precautionary programs might be appropriate.
Finally, we look forward to a number of upcoming studies: the status report on the AFRITAC initiative and the assessment of the pricing of TA of the Fund relative to other sources of TA. Generally, my constituency countries greatly value the technical assistance given by the IFIs, being essential to continue improving economic policies and strengthening public institutions, for example in public finance management, banking supervision, financial sector development.
Other areas of concern
_ Recent events have shown that the fight against money-laundering and against the financing of terrorism remains highly important. We support the IMF and the World Bank in contributing to this fight through their surveillance activities, notably the ROSC-process and technical assistance, in collaboration with FATF and FATF-style regional bodies. The relevant ROSC-module will be part of the FSAP-exercise in which the Netherlands is pleased to participate. We look forward to the evaluation of the pilot project on the ROSC-module.
_ Trade liberalization is crucial for stability and sustained growth. Trade liberalization is also an important element of crisis prevention and crisis resolution. Rhetoric in the Doha trade round has therefore to be met by action. Consistent with its mandate, we endorse the Fund's intention to assess in its Article IV reports the extent to which countries observe the conditions for open trade regimes.
i These lessons partly build on the ex post assessments in: Peter Kenen and Alexander Swoboda, Reforming the International Monetary and Financial System, IMF, 2000.