Press Release: Statement by Horst Köhler, Managing Director of the International Monetary Fund, on the Work Program of the Executive Board, November 5, 2003
November 21, 20031. The September 2003 meetings of our membership in Dubai produced a clear and strong endorsement of the importance of multilateral cooperation, and established four priorities. The membership called upon:
• all countries to work together, against the background of the strengthening global economic recovery, to promote more balanced and durable growth, and an orderly resolution of imbalances;
• emerging market economies to seize the opportunity provided by the improved financial market environment to further enhance their growth prospects and reduce vulnerabilities;
• the Fund to further enhance its support of low-income countries' efforts to accelerate poverty reduction and achieve the Millennium Development Goals (MDGs), in close collaboration with the World Bank; and
• the international community to make substantive progress with multilateral trade liberalization in the Doha Round, after the disappointing outcome at Cancún.
2. The work program proposed below is aimed at outlining how the Fund can contribute to achieving tangible progress on these priorities in the coming 6-12 months. It is ambitious, but feasible, and will require continued efforts to streamline Board documentation and discussions. I am asking the Secretary to maintain the effort to ensure that we adhere to the minimum circulation periods, especially for policy papers, and to work to monitor and avoid undue bunching of the Board calendar.1
A. The Outlook for the Global Economy and Financial Markets
3. Our priorities with respect to the global economy and financial markets are to provide analysis and a multilateral context for discussion on how to lay the foundation for a more balanced recovery and further strengthen international financial stability. In keeping with the guidance from the IMFC, our focus should be on promoting structural reforms to raise growth potential, addressing medium-term fiscal sustainability issues, and pursuing exchange rate policies that contribute to an orderly unwinding of imbalances. We will also pay increased attention to remaining vulnerabilities in emerging markets, including large public sector debt burdens and balance sheet mismatches. The periodic reports on the World Economic Outlook (WEO), the sessions on World Economic and Market Developments (WEMD), the Global Financial Stability Report (GFSR), and the Financial Markets Update will remain our key vehicles for focusing the Fund's multilateral surveillance; these discussions will take place in accordance with the timing outlined in Charts 1 and 2. They will be complemented by an increased focus on these areas in Article IV country consultations. We will also explore ways to strengthen the links between multilateral and bilateral surveillance. In addition, a study is forthcoming shortly on the evolution and performance of exchange rate regimes for discussion in an informal Board seminar. It is intended to provide policymakers a comprehensive empirical overview of actual experience with the choice of regimes. Another informal seminar will discuss how a large macroeconomic model with strong microeconomic foundations recently built by the staff can be used to further expand and deepen our understanding of the consequences of policy issues across countries.
4. A key priority will be to intensify our focus on surveillance of capital markets, including by promoting reforms to strengthen market foundations in major financial centers. In the context of the GFSR, the staff will continue work to identify gaps and soft spots in financial markets, focusing on ways to prevent market volatility from turning to instability. This will include an assessment of the extent to which the transfer of risk away from transparent and well regulated sectors of the financial system is obscuring the true nature of financial vulnerabilities. In addition, the Fund will work closely with the Financial Stability Forum, as encouraged by the IMFC, to further strengthen assessments of systemic weaknesses in financial markets.
5. In accordance with the discussion at the IMFC in Dubai, President Wolfensohn and I are sending a letter to heads of state and trade and finance ministers stressing the importance of pressing forward with the Doha Round to make progress on multilateral trade liberalization. A staff paper for Board discussion on the Fund's initiative to provide members financial support in order to cushion possible temporary adverse effects from multilateral trade liberalization is under preparation.
B. Strengthening Fund Surveillance and Crisis Prevention
6. The policy priorities covered in the previous section will be a major focus of our surveillance activities. To this end, we will continue to give high priority to improving the quality, effectiveness, and persuasiveness of surveillance, while ensuring that enhancements are implemented consistently and evenhandedly across the membership. As we conduct our planned program of Article IV consultation discussions in the period leading up to the biennial review of surveillance next summer, the Executive Board will have opportunities to take note of our efforts to sharpen surveillance, especially in systemically and regionally important countries; to enhance its impact; and to bring fresh perspectives to our assessments when needed.
7. As part of our effort to further improve the quality of surveillance, the staff is preparing a guidance note on financial sector surveillance, which will be circulated to the Board for information. In addition, it is carrying forward its work on liquidity management, and is further examining policy issues relating to public debt burdens, including contingent liabilities and balance sheet risks. The Board will have an opportunity to examine these issues prior to the Spring meetings. A staff paper on public investment and fiscal policy, described in paragraph 20 below, is also of relevance for surveillance and will be discussed by the Board early next year. An informal seminar is planned on the topic of improving sovereign debt structures later in the Spring.
8. Helping members create an environment for sustainable flows of foreign direct investment (FDI) is a key aspect of Fund surveillance. A seminar planned for November 17 will focus on FDI trends and statistics, to be followed in early 2004 by a further paper discussing issues relating to the investment climate.
9. The staff is drafting a decision on Article VIII, Section 5 and a decision amending the Fund's transparency policy for Board consideration. The next review of data provision to the Fund will be held in early 2004.
10. A paper on key policy issues in the adoption of the euro in Central Europe will be considered in early 2004. The paper will focus on the readiness of the Central European countries for euro adoption, options for interim monetary policy frameworks, policy actions to smooth the transition to the single currency, and risks associated with credit booms and capital and exchange rate volatility ahead of euro adoption.
11. A paper on the Offshore Financial Centers (OFC) Assessment Program, which will cover the results of the assessments and the potential risks from OFC activity, is also slated for discussion. Following the Spring meetings, a seminar is planned on the implications of the New Basel Capital Accord for the Fund's work.
C. Strengthening the Framework for Crisis Resolution
12. Our main priorities in strengthening the framework for crisis resolution will be to continue to promote the voluntary adoption of collective action clauses (CACs) in international sovereign bonds and to consider issues of general relevance to the orderly resolution of financial crises. To that end, the Board will have a further opportunity to explore ways to strengthen the framework for sovereign restructurings at the forthcoming seminar on aggregation issues. A staff paper reviewing the experience with the exceptional access framework will be discussed in early 2004. The staff will continue to follow developments on a possible code of conduct taking place in the G20 and other fora. It will report on progress, including developments and issues in crisis resolution that have arisen recently, before the Spring meetings. The staff plans to produce short notes on legal developments regarding debt restructuring as warranted, with a view to keeping Executive Directors informed on a current basis.
13. Following the Spring meetings, the Board will consider a paper carrying forward the work on the return to capital markets by countries emerging from a financial crisis, highlighting the importance of a collaborative approach between countries and investors and the role of information dissemination. The Board will also consider a paper on financial sector issues in the design of sovereign debt restructuring.
D. Fund's Role in Low-Income Member Countries
14. We received strong support by the IMFC for the Fund's role in low-income countries, in close collaboration with the World Bank, to help achieve the high and sustained growth needed to reduce poverty and make decisive progress towards the MDGs. Our work ahead aims to enhance the Fund's contribution within the two-pillar approach of mutual responsibility agreed at Monterrey together with the country-driven PRSP process and the enhanced HIPC Initiative. Under this two-pillar approach, low-income countries will pursue the fight against poverty through sound economic policies and good governance, while the international community will match these efforts through the provision of better and stronger support. The Board discussion on the Fund's role in low-income countries last August laid out a work program focusing on four elements:
• adapting Fund instruments to respond better to the needs of low-income members, including helping them deal better with exogenous shocks, and defining the appropriate financial role of the Fund over the medium term, including the level and availability of its concessional resources;
• in collaboration with the World Bank, designing and implementing a framework for debt sustainability in low-income countries;
• enhancing Bank-Fund collaboration; and
• improving PRGF program design.
15. This work program will be taken up in a series of Board discussions, the first three of which will occur prior to the Spring meetings. The follow-up paper on the Fund's role in low-income countries over the medium term, scheduled for discussion at the end of January, will cover proposals for instruments and financing for low-income countries, including the modalities for exiting from PRGF-supported programs and the use and availability of PRGF resources. Drawing on that discussion, as well as that on the IEO's report on the Fund's experience with the PRSP/PRGF to be available at end-April, the staff expects to come back subsequently with additional specific proposals on the Fund's engagement with its low-income members for the Board's consideration.
16. The first global monitoring report on the MDGs will be prepared in conjunction with the World Bank for consideration prior to the Spring meetings. A Bank paper, to which the Fund staff will contribute, on mobilizing financing for the MDGs and covering mechanisms such as an international financing facility, will also be available for discussion by the Fund Board. An informal seminar to review the CIS-7 Initiative will be held prior to the Spring meeting of ministers of this region and other leaders. An IEO report on the Fund's experience with PRSPs and the PRGF is planned for discussion in April.
17. The Board's consideration of issues in program design in low-income countries, following the Spring meetings, will focus on how macroeconomic frameworks can support sustained growth and poverty reduction, and on the institutions necessary to create an environment in which the private sector can flourish. The role of the Fund's technical assistance in supporting the work on low-income countries will be addressed in the paper described in paragraph 25.
18. In the run up to the 2004 Annual Meetings, the Board will consider progress reports to the IMFC on the implementation of the enhanced HIPC Initiative and the PRSP approach, and an update on PRGF-HIPC financing. In addition, the Fund will contribute to a Bank paper on aid effectiveness and absorptive capacity and results-based measurement systems.
E. Fund Facilities, Instruments, Program Design, and Conditionality
19. As part of its ongoing work program, the Fund periodically undertakes reviews—extensively on a biennial cycle—of its lending facilities and the associated conditionality with the aim of enhancing the effectiveness of the Fund-supported programs and policies. Over the past several years, such reviews have resulted in significant policy innovations such as the new guidelines on conditionality. Efforts are now mainly directed towards implementation of the new policies as well as to reviewing and refining specific features of existing policies. In that context and in addition to the work on the PRGF mentioned above, we are also reviewing possible modifications to other facilities. The Board will need to complete its review of the CCL in November, and I think it would be useful if we had an informal discussion of the broad options prior to that. The review of the CFF is planned for early 2004. The staff paper on Bank/Fund collaboration mentioned in paragraph 14 will be discussed in early 2004.
20. The staff paper on public investment and fiscal policy referred to in paragraph 7 above will examine the treatment of public sector investment and public/private partnerships in fiscal policy assessment and program design and in fiscal reporting and accounting.
21. We will continue with our ongoing efforts to incorporate the IEO recommendations endorsed by the Board into the Fund's operations and to monitor their implementation. As agreed in the follow up to the IEO's report on prolonged use, the staff will prepare the first semi-annual report on the incidence of countries with extended periods of Fund arrangements by the end of 2003. Early in 2004, we will return to the Board with a staff paper following up on the IEO's report on fiscal adjustment. The IEO's report on the Fund's role in Argentina will be submitted to the Board by end-April. The recently circulated staff paper on the lessons of the crisis in Argentina, to be considered in November, is the product of internal review work previously undertaken by the staff.
22. In preparation for the next major biennial review of conditionality, in mid-2004, the Board will consider a series of papers on program design issues, including the overall setting for program design; issues in program design specific to low-income countries; and incorporating the lessons for program design from recent capital account crises, building on the conclusions of the IEO in this area. In mid-2004, the Board will discuss a paper reviewing the Fund's trade policy advice and conditionality in the context of Fund-supported programs, based on a paper examining programs in 34 countries and assessing the coverage and impact of trade conditionality during the 1990s.
F. Quotas, IMF finances, and the Fund's Cooperative Nature
23. Progress on the issues of quotas, representation, and voice will require broader consensus among the Fund's shareholders than currently exists. The IMFC is expected to review progress on these issues at the Spring meetings. The Development Committee communiqué requests a report from the two Boards "on all aspects of the voice issue" at the 2004 Annual Meetings, with a road map on procedures and next steps to be considered at its Spring meeting. In light of these requests, we need to consider how these issues can be taken further in the Fund Board.
24. In early 2004, the Board will discuss a paper on managing financial risk in the Fund and the level of precautionary balances. The annual review of the Fund's income position will be discussed prior to the Spring meetings. The next regular review of the Fund's strategy on overdue financial obligations will take place following the Spring meetings.
G. Other Policy and Administrative Topics
25. Strengthening institutions for effective economic management to help members successfully implement policies remains a key priority of the Fund's technical assistance (TA) program. The review of the Fund's TA program in early 2004 will focus on the forms of TA that the Fund is best placed to provide in support of particular country policy objectives, while also reviewing the cost/benefit implications of different TA delivery strategies, including regional approaches. It will also discuss the implications of the growing importance of external donor support in financing Fund TA. In August, the Board will discuss the IEO's report on the Fund's role in providing technical assistance.
26. The Budget Committee will have considered further budget reforms at a meeting in October. In early 2004, the committee will discuss the preparation of the FY 2005 Administrative and Capital Budgets and the medium-term estimates framework. The 2004 review of staff compensation and the discussion of the FY2005 Budget and Medium-Term Framework will take place in April.
27. A report on the 12-month pilot program of AML/CFT assessments and the delivery of AML/CFT technical assistance will be brought for Board discussion prior to the Spring meetings.
28. Following the donors conference in October in Madrid, the Fund will, subject to its policies, continue to work with the international community to support reconstruction, macroeconomic stability, and growth in Iraq. The Executive Board will be kept informed of developments and progress in this regard.
29. I will submit a report to the IMFC on the Fund's policy agenda prior to the ministerial meetings in April and October.
1 The key policy items for Board discussion are shown diagrammatically in Charts 1 and 2. Chart 1 focuses on the period to the Spring 2004 ministerial meetings. Chart 2 represents an initial outline of items that we can currently identify for Board consideration in the subsequent six months. The Secretary will be working with authoring departments on refining the priorities for policy items shown in Chart 2.