Communiqué of the Interim Committee of the Board of Governors of the International Monetary Fund, IMF
April 16, 1998April 16, 1998
1. The Interim Committee held its fiftieth meeting in Washington, D.C. on April 16, 1998 under the Chairmanship of Mr. Philippe Maystadt, Deputy Prime Minister and Minister of Finance and Foreign Trade of Belgium.
The World Economic Outlook, including the Causes and Effects of the Asian Crisis
2. The Committee agreed that, while the countries at the center of the crisis will suffer significantly from the recent financial turmoil in Asia, the global outlook for world economic growth can be regarded as cautiously optimistic. This assessment reflects the continued strong performance expected in most industrial countries, sustained corrective policies in emerging market countries that helped avert a wider crisis, and progress in much of the developing world and among the transition countries in improving medium-term fundamentals.
Notwithstanding these positive aspects, there are downside risks, calling for resolute action in a number of areas to support global noninflationary economic growth.
- Among the countries at the center of the crisis, determined implementation of agreed policy programs is essential to restore confidence and sustainable growth. This includes maintenance of appropriately firm monetary policies to underpin the recovery in exchange rates, fiscal discipline, and the implementation, without delay, of structural reforms, especially in the financial sector, which are essential to strengthen medium-term prospects. It is equally important for all countries to keep markets open.
- In Japan, both fiscal and structural measures, including comprehensive regulatory and financial sector reforms, are needed to secure an early and lasting recovery. The Committee welcomed the recent announcement of the economic policy package, as well as steps taken earlier to strengthen the financial system. It will be important now to implement effective fiscal measures and appropriate structural reforms promptly. Decisive and rapid action in the financial sector is important to restore public confidence. Any support to the banking system should be accompanied by appropriate action on closure or consolidation, and undertaken as part of a coherent medium-term policy framework. Such actions are particularly crucial at the current conjuncture, given the importance of the Japanese economy for the region and for the world.
- In those industrial countries operating near capacity, including the United States and the United Kingdom, the authorities need to remain vigilant as always to inflation risks. In the United States, prospective fiscal surpluses should help to address the issue of the low national savings rate.
- In continental Europe, the Committee welcomed the economic convergence of the countries aspiring to initial participation in EMU and looked forward to the historic decisions to be taken shortly. Further progress with fiscal consolidation is desirable in a number of countries, especially to provide for the needed scope for policy flexibility within the Stability and Growth Pact, and there continues to be a strong need for progress in implementing structural reforms, especially in labor markets, to help reduce unemployment and contribute in this regard to the success of EMU. Moreover, it will be important for balanced world growth that growth in continental Europe be led increasingly by domestic demand. The Committee requested the Executive Board to examine further the implications of EMU for Fund operations and for the conduct of Fund surveillance, and to report its findings in time for the next meeting of the Committee.
- For developing countries, the focus should remain on sound macroeconomic policies, open markets, and structural reforms - particularly building soundly managed and supervised market-oriented financial sectors. While those emerging market economies not at the center of the crisis have generally weathered the crisis well thus far, it remains prudent for them to continue to strengthen policies, particularly by containing external balances, avoiding overheating, strengthening the financial system, and enhancing data provision. In Africa, strong structural adjustment policies and continued support from the international community are needed to sustain the progress made by several countries in raising living standards. Although a number of developing countries would benefit, the recent sharp declines in oil and other commodity prices pose considerable challenges for a number of other developing countries, and could temporarily affect growth and investment and slow progress in reducing poverty, especially in some African countries.
- For the transition countries, the move to positive growth with lower inflation in 1997 represents an important achievement, but many countries still need to reduce fiscal deficits by strengthening revenue collection and improving the efficiency of social security and welfare systems and of governmental services more generally.
Strengthening the Architecture of the International Monetary System—Prevention, Management, and Resolution of Crises
3. The Committee discussed emerging lessons from the Asian crisis and steps required for strengthening the architecture of the international monetary system. Such a strengthening was regarded as needed, particularly in light of globalization, which has brought clear benefits, but at the same time has posed challenges. It has reinforced the importance of sound macroeconomic policies and strong financial systems to guard against vulnerability to shifts in market sentiment and to contagion effects from policy weaknesses in other countries. The Committee considered that action to help prevent financial crises, and resolve them when they occur, should center on the following pillars.
a. Strengthened international and domestic financial systems
- Sound and stable macroeconomic policies are critical to financial stability.
- Action is also needed to strengthen domestic financial systems, by developing supervisory and regulatory frameworks consistent with internationally accepted practices and strengthened standards for bank and non-bank financial entities. Work in this area is already in progress in various for a, notably the Basle Committee’s Core Principles for strengthening banking regulation and supervision. The Committee noted that such work should be further advanced in the appropriate fora to cover other important areas, which could include accounting, auditing, disclosure, asset valuation, bankruptcy, and corporate governance. The Committee called on the Fund to work with other concerned institutions and organizations responsible for the development of standards and guidelines in these areas, and in the context of its surveillance activities, to consider how best the Fund could assist in the dissemination of such standards to the membership and to encourage members to adopt them. The Committee welcomes ongoing efforts to facilitate the exchange of information and greater coordination among financial supervisors, to help strengthen domestic financial systems.
b. Strengthened Fund surveillance and recommendations
- The Committee agreed that the Fund should intensify its surveillance of financial sector issues and capital flows, give particular attention to policy interdependence and risks of contagion, and ensure that it is fully aware of market views and perspectives.
- The Committee noted that the Fund’s enhanced surveillance should include a focus on the risks posed by potentially abrupt reversals of capital flows,particularly those of a short-term nature. It requested the Executive Board to examine ways to strengthen the monitoring of capital flows.
- The Committee encouraged further efforts by the Fund and the Bank to find the most effective way—possibly through new forms of joint collaboration, and drawing on relevant outside expertise—to offer their members the best possible advice on strengthening the financial sector.
- It emphasized the need for the Fund’s views to be communicated effectively to members and to be brought to bear in members’ policy deliberations. In this context, it requested the Executive Board to develop a ‘tiered response’, whereby countries that are believed to be seriously off course in their policies are given increasingly strong warnings.
c. Greater availability and transparency of information regarding economic data and policies
- Noting that the effectiveness of surveillance depended critically on the timely availability of accurate information, the Committee underscored members’ obligation to provide timely and accurate data to the Fund. If persistent deficiencies in disclosing relevant data to the Fund seriously impede surveillance, conclusion of Article IV consultations should be delayed.
- The Committee welcomed the progress made on implementation of the Special and General Data Dissemination Initiatives. It requested the Fund to expedite its efforts to broaden and strengthen the Special Data Dissemination Standard (SDDS) to cover additional financial data, including net reserves (reserve-related liabilities, central bank derivative transactions and positions); debt, particularly short-term debt; and indicators of the stability of the financial sector. The Committee recognized the importance of encouraging more members to subscribe to the SDDS and of supporting efforts by members to improve compilation and provision of data with technical assistance from the Fund and other agencies. The Committee also emphasized the importance of subscribers being in full observance of the standard by the end of the transition period in December 1998. Consideration should be given to increase its usefulness, accessibility to the public and market participants, and publication of compliance.
- It further requested the Fund to continue its efforts to increase dissemination of information on its policy recommendations and encouraged member countries to increase the transparency of their policies.
- The Committee encouraged more members to release Press Information Notices on the conclusions of Article IV consultations, and it welcomed the upcoming review as a good occasion to take stock of the experience.
d. Central role of the Fund in crisis management
- The Committee welcomed the timely response to the crisis by the international community, including from the Fund. It welcomed the establishment of the Supplemental Reserve Facility and the use of emergency procedures in the Fund’s rapid response in support of the countries in crisis.
- The Fund’s role in responding to members experiencing a large financing need should remain central, in particular because of the Fund’s role, through its conditionality, in supporting the necessary reforms. The Fund cannot be expected to be able to finance whatever large balance of payments deficit. Its role is essential to catalyze other sources of financing, and, when needed, to coordinate support from other sources.
- The Committee noted the sharp weakening of the Fund’s liquidity position and stressed the need to ensure that the Fund has adequate resources. It called for the rapid implementation of the increase in quotas approved by the Board of Governors in January 1998 and of the New Arrangements to Borrow.
e. More effective procedures to involve the private sector in forestalling or resolving financial crises
- The Committee observed that, while many in the private sector had incurred substantial losses in the recent crises, it was important that all creditors, including short-term creditors, more fully bear the consequences of their actions.
- It noted that, in the first instance, measures to discourage excessive reliance on short-term financing and strengthen countries’ capacity to withstand sudden shifts in market sentiment are essential preventive elements.
- The Committee agreed that, when warranted by crisis situations, ways needed to be found to involve private creditors at an early stage, in order to achieve equitable burden sharing vis-à-vis the official sector and to limit moral hazard. While noting the difficult issues involved, the Committee requested the Executive Board to intensify its consideration of possible steps to strengthen private sector involvement.
- Efforts should also be devoted to strengthening incentives for creditors and investors to better use information to analyze risks appropriately and avoid excessive risk-taking.
- The Committee suggested that different mechanisms for meeting this objective could be considered:
- closer contacts with creditors for explaining Fund arrangements and catalyzing private sector financing;
- studying further the possibility of introducing provisions in bond contracts for bondholders to be represented, in case of nonpayment, in negotiations on bond contract restructuring;
- extending the Fund’s policy of providing financing to members in arrears on their debt payments to some private creditors under appropriate safeguards;
- encouraging the adoption of strong bankruptcy systems for the operation of both domestic and international capital markets;
- advising members to exercise caution with respect to public guarantees to reduce the risk of a private debt problem turning into a sovereign debt problem.
The Committee requested the Executive Board to report on all aspects of its work in these areas at the next meeting of the Committee.
Liberalization of Capital Movements Under an Amendment of the Articles
4. The financial crisis in Asia has given heightened attention to the role of capital flows in economic development. The effects of the crisis have not negated the contribution that capital movements have made to economic progress in the Asian countries before the crisis erupted. Rather, the crisis has underscored the importance of orderly and properly sequenced liberalization of capital movements, the need for appropriate macroeconomic and exchange rate policies, the critical role of sound financial sectors, and effective prudential and supervisory systems. The Committee reaffirmed its view, expressed in the Hong Kong Communiqué last September, that it is now time to add a new chapter to the Bretton Woods Agreement by making the liberalization of capital movements one of the purposes of the Fund and extending, as needed, the Fund’s jurisdiction for this purpose. The Committee noted the progress made thus far and the provisional agreement reached by the Executive Board on that part of the amendment dealing with the Fund’s purposes. It requested the Executive Board to pursue with determination its work on other aspects, including policyissues, with the aim of submitting an appropriate amendment of the Articles for the Committee’s consideration as soon as possible.
Code of Good Practices on Fiscal Transparency—Declaration on Principles
5. The Committee adopted the attached "Code of Good Practices on Fiscal Transparency—Declaration on Principles" 1 to serve as a guide for members to increase fiscal transparency, and thereby enhance the accountability and credibility of fiscal policy as a key feature of good governance. The Committee encouraged member countries to adhere to the principles and implement the practices of the Code, recognizing that implementation will be affected by diversity in fiscal institutions, legal systems, and implementation capacity. The Committee requested the IMF to monitor progress in implementing the Code in the context of its surveillance. The Committee also encouraged the Executive Board to examine the desirability of developing a code of good practices with respect to financial and monetary policies, in cooperation with the appropriate institutions.
ESAF and HIPC Initiatives—Implementation, Financing, and Evaluation
6. The Committee welcomed the progress made to date in the implementation of the HIPC Initiative, including (i) the release by the Executive Boards of the Fund and the Bank of assistance for Uganda when it reached its completion point in early April; (ii) the decisions, in principle, to provide assistance to Bolivia, Burkina Faso, Côte d’Ivoire, Guyana, and Mozambique; and (iii) the preliminary discussions on Guinea-Bissau and Mali. The Committee encouraged countries that could qualify for assistance under the Initiative to take expeditiously the necessary adjustment measures to qualify for this special assistance.
The Committee noted the need to reactivate the efforts by the Fund to secure the full financing of the ESAF and the HIPC initiative. In view of the present and expected future commitments under the HIPC Initiative and the significant costs resulting from the delay in mobilizing the necessary financial resources, the Committee urged all members to move quickly to complete the financing of these initiatives as soon as possible. The Committee requested that the Executive Board report back to the Interim Committee on this issue at its next meeting.
The Committee expressed its appreciation for the work of the external evaluators of the ESAF. Their report, which complemented the earlier internal evaluation of the ESAF, reaffirmed the view that the ESAF is a valuable instrument to assist low-income countries. The Committee noted that, together, the internal and external evaluations provided important lessons and a useful basis for public debate. The Committee welcomed the intention of theExecutive Board to draw operational conclusions from the issues raised by the evaluations so as to strengthen the ability of the Fund to foster sustained growth and external viability in poor countries.
The next meeting of the Interim Committee will be held in Washington, D.C. on October 4, 1998.
CODE OF GOOD PRACTICES ON FISCAL TRANSPARENCY—DECLARATION ON PRINCIPLES
The Interim Committee stressed the importance of good governance when it adopted the Partnership for Sustainable Global Growth in September 1996, and again at its September 1997 meeting in Hong Kong SAR. Fiscal transparency would make a major contribution to the cause of good governance. It should lead to better-informed public debate about the design and results of fiscal policy, make governments more accountable for the implementation of fiscal policy, and thereby strengthen credibility and public understanding of macroeconomic policies and choices. In a globalized environment, fiscal transparency is of considerable importance to achieving macroeconomic stability and high-quality growth. However, it is only one aspect of good fiscal management, and attention has to be paid also to increasing the efficiency of government activity and establishing sound public finances.
Because of its fiscal management expertise and universal membership, the IMF is well placed to take the lead in promoting greater fiscal transparency. The Interim Committee is therefore seeking to encourage IMF member countries to implement the following Code of Good Practices on Fiscal Transparency. The Code is based around the following key objectives: roles and responsibilities in government should be clear; information on government activities should be provided to the public; budget preparation, execution, and reporting should be undertaken in an open manner; and fiscal information should be subjected to independent assurances of integrity. The Code sets out what governments should do to meet these objectives in terms of principles and practices. These principles and practices are distilled from the IMF’s knowledge of fiscal management practices in member countries. The Code will facilitate surveillance of economic policies by country authorities, financial markets, and international institutions.
Guidelines to the implementation of the Code are to be provided in a supporting manual, which is currently being developed. The Code acknowledges diversity across countries in fiscal management systems and in cultural, constitutional, and legal environments, as well as differences across countries in the technical and administrative capacity to improve transparency. While there is scope in all countries for improvement with respect to some aspects of fiscal transparency covered in the Code, diversity and differences across countries inevitably imply that many countries may not be able to move quickly to implement the Code. Moreover, it is recognized that there may be a need for technical assistance if existing fiscal management practices are to be changed, and the IMF must be prepared to provide technical assistance, in cooperation with other international organizations, to those countries that request it in connection with improving fiscal transparency. Modifications to the Code should be considered periodically, in light of the experience with its implementation.
I. Clarity of Roles And Responsibilities
1.1 The government sector should be clearly distinguished from the rest of the economy, and policy and management roles within government should be well defined.
1.1.1 The boundary between the government sector and the rest of the economy should be clearly defined and widely understood. The government sector should correspond to the general government, which comprises the central government and lower levels of government, including extrabudgetary operations.
1.1.2 Government involvement in the rest of the economy (e.g., through regulation and equity ownership) should be conducted in an open and public manner on the basis of clear rules and procedures, which are applied in a nondiscriminatory manner.
1.1.3 The allocation of responsibilities between different levels of government, and between the executive branch, the legislative branch, and the judiciary, should be clearly defined.
1.1.4 Clear mechanisms for the coordination and management of budgetary and extrabudgetary activities should be established, and well-defined arrangements vis-à-vis other government entities (e.g., the central bank, and state-controlled financial and nonfinancial enterprises) should be specified.
1.2 There should be a clear legal and administrative framework for fiscal management.
1.2.1 Fiscal management should be governed by comprehensive laws and administrative rules applying to budgetary and extrabudgetary activities. Any commitment or expenditure of government funds should have a legal authority.
1.2.2 Taxes, duties, fees, and charges should have an explicit legal basis. Tax laws and regulations should be easily accessible and understandable, and clear criteria should guide any administrative discretion in their application.
1.2.3 Ethical standards of behavior for public servants should be clear and well-publicized.
II. Public Availability of Information
2.1 The public should be provided with full information on the past, current, and projected fiscal activity of government.
2.1.1 The annual budget should cover all central government operations in detail and should also provide information on central government extrabudgetary operations. In addition, sufficient information should be provided on the revenue and expenditure of lower levels of government to allow a consolidated financial position for the general government to be presented.
2.1.2 Information comparable to that in the annual budget should be provided for the outturns of the two preceding fiscal years, together with forecasts of key budget aggregates for the two years following the budget.
2.1.3 Statements should be published with the annual budget giving a description of the nature and fiscal significance of contingent liabilities, tax expenditures, and quasi-fiscal activities.
2.1.4 The central government should regularly publish information on the level and composition of its debt and financial assets.
2.2 A public commitment should be made to the timely publication of fiscal information.
2.2.1 Specific commitments should be made to the publication of fiscal information (e.g., in a budget law).
2.2.2 Advance release date calendars for fiscal reporting to the public should be announced.
III. Open Budget Preparation, Execution, and Reporting
3.1 Budget documentation should specify fiscal policy objectives, the macroeconomic framework, the policy basis for the budget, and identifiable major fiscal risks.
3.1.1 A statement of fiscal policy objectives and an assessment of sustainable fiscal policy should provide the framework for the annual budget.
3.1.2 Any fiscal rules that have been adopted (e.g., a balanced budget requirement and
borrowing limits for lower levels of governments) should be clearly specified.
3.1.3 The annual budget should be presented within a comprehensive and consistent quantitative macroeconomic framework, and the economic assumptions and key parameters (e.g., effective tax rates) underlying budget estimates should be provided.
3.1.4 Existing commitments should be distinguished from new policies included in the annual budget.
3.1.5 Major risks to the annual budget should be identified and quantified where possible, including variations in economic assumptions and the uncertain costs of specific expenditure commitments (e.g., financial restructuring).
3.2 Budget estimates should be classified and presented in a way that facilitates policy analysis and promotes accountability.
3.2.1 Government transactions should be on a gross basis, distinguishing revenue, expenditure and financing, and classifying expenditures on an economic and functional basis. In addition, expenditure should be classified by administrative category. Data on extrabudgetary operations should be similarly classified. Budget data should be presented in a way that allows international comparisons.
3.2.2 A statement of objectives to be achieved by major budget programs (e.g., improvement in relevant social indicators) should be provided.
3.2.3 The overall balance of the general government should be a standard summary indicator of the government’s financial position. It should be supplemented by other fiscal indicators (e.g., operational balance, structural balance and primary balance) when economic circumstances make it inappropriate to base judgements about fiscal policy stance on the overall deficit alone.
3.2.4 The annual budget and final accounts should include a statement of the accounting basis (i.e., cash or accrual) and standards used in the preparation and presentation of budget data.
3.3 Procedures for the execution and monitoring of approved expenditures should be clearly specified.
3.3.1 A comprehensive, integrated accounting system should be established. It should provide a reliable basis for assessing payments arrears.
3.3.2 Procedures for procurement and employment should be standardized and accessible to all interested parties.
3.3.3 Budget execution should be internally audited, and audit procedures should be open to review.
3.4 Fiscal reporting should be timely, comprehensive, reliable, and identify deviations from the budget.
3.4.1 During the year, there should be regular, timely reporting of budget and extrabudgetary outturns, which should be compared with original estimates. In the absence of detailed information on lower levels of government, available indicators of their financial position (e.g., bank borrowing and bond issues) should be provided.
3.4.2 Timely, comprehensive, audited final accounts of budget operations, together with full information on extrabudgetary accounts, should be presented to the legislature.
3.4.3 Results achieved relative to the objectives of major budget programs should be reported to the legislature.
IV. Independent Assurances of Integrity
4.1 The integrity of fiscal information should be subject to public and independent scrutiny.
4.1.1 A national audit body, or equivalent organization, should be appointed by the legislature, with the responsibility to provide timely reports to the legislature and public on the financial integrity of government accounts.
4.1.2 Macroeconomic forecasts (including underlying assumptions) should be available for scrutiny by independent experts.
4.1.3 The integrity of fiscal statistics should be enhanced by providing the national statistics office with institutional independence.
INTERIM COMMITTEE ATTENDANCE
April 16, 1998
Philippe Maystadt, Deputy Prime Minister, Minister of Finance and Minister of External Trade of Belgium
Members or Alternates
Ibrahim A. Al-Assaf, Minister of Finance and National Economy, Saudi Arabia
Gordon Brown, Chancellor of the Exchequer, United Kingdom
Chaiyawat Wibulswasdi, Governor, Bank of Thailand
Cassim Chilumpha, Minister of Finance, Malawi
Carlo Azeglio Ciampi, Minister of the Treasury, Italy
Peter Costello, Treasurer, Australia
Liu Mingkang, Deputy Governor, People’s Bank of China (Alternate for Dai Xianglong, Governor, People's Bank of China)
Marcel Doupamby Matoka, Minister of Finance, Economy, Budget, and Equity Financing, in charge of Privatization, Gabon
Sergei Dubinin, Chairman, Central Bank of the Russian Federation
Roque B. Fernández, Minister of Economy and Public Works and Services, Argentina
José Angel Gurria, Secretary of Finance and Public Credit, Mexico
Marianne Jelved, Minister of Economic Affairs, Denmark
Abdelouahab Keramane, Governor, Banque d'Algérie
Sultan Bin Nasser Al-Suwaidi, Governor, United Arab Emirates Central Bank (Alternate for Mohammed K. Khirbash, Minister of State for Finance and Industry, United Arab Emirates)
Pedro Sampaio Malan, Minister of Finance, Brazil
Paul Martin, Minister of Finance, Canada
Wolfgang Ruttenstorfer, Deputy Minister of Finance, Austria (Alternate for Philippe Maystadt, Deputy Prime Minister, Minister of Finance and Minister of External Trade, Belgium)
Shozaburo Nakamura, State Secretary for Finance, Ministry of Finance, Japan
Robert E. Rubin, Secretary of the Treasury, United States
Yashwant Sinha, Minister of Finance, India
Dominique Strauss-Kahn, Minister of Economy, Finance and Industry, France
Kaspar Villiger, Minister of Finance, Switzerland
Theo Waigel, Federal Minister of Finance, Germany
A.H.E.M. Wellink, President, De Nederlandsche Bank (Alternate for Gerrit Zalm, Minister of Finance, Netherlands)
Yilmar Akyuz, Chief, Macro-Economics and Development
Policies Branch, UNCTAD
Anwar Ibrahim, Chairman, Joint Development Committee
Andrew D. Crockett, General Manager, BIS
Yves-Thibault de Silguy, Commissioner for Economic, Monetary and Financial Affairs, CEC
Donald J. Johnston, Secretary-General, OECD
Ian Kinniburgh, Director, Development Policy Analysis Division, Department of Economic and Social Affairs, UN
Renato Ruggiero, Director-General, WTO
James D. Wolfensohn, President, World Bank