Challenges and Opportunities for the IMFAddress by Mr. Agustín Carstens, Deputy Managing Director
International Monetary Fund
At the 2006 Annual Meeting of the Bretton Woods Committee
May 23, 2006
As prepared for delivery
1. Good afternoon. I would like to thank the Bretton Woods Committee for the kind invitation to be a principal speaker today.
2. The IMF continues to enjoy excellent cooperation with the Bretton Woods Committee. As a bipartisan body of distinguished US citizens, the Committee has remained steadfast in its mission to increase understanding of the vital role the international financial institutions play in promoting growth and stability for the U.S. and for the global economy.
3. I am pleased to share our priorities for the IMF and what we see as its major challenges and opportunities. As you may know, we presented a report on our medium-term strategy to the International Monetary and Financial Committee (IMFC). at our spring meetings in Washington just this past March, and the IMFC enthusiastically endorsed it, opening the way for implementation. I would like to concentrate my remarks in highlighting the most relevant aspects of the agreed path forward.
4. Our new surveillance framework encompasses several key elements. The first is a new focus onmultilateral issues, including global financial issues. In this new approach, the Fund will engage in multilateral consultations. As a universal institution, we are better placed than any other forum to be a catalyst for multilateral debate and action. Already, through global surveillance instruments like our World Economic Outlook and Global Financial Stability Report, we are able to present in-depth analysis of global imbalances, and increasingly discuss the implications of spillovers in bilateral consultations with our members. The main rationale for focus on multilateral consultations is now to catalyze action.
5. Initiating these multilateral consultations will allow us to take up issues comprehensively and collectively with several members at once and where relevant, with entities formed by groups of members. These consultations will be an important vehicle for building a common vision for action on issues like global imbalances, something that would lessen risks for countries all over the world.
6. We shall also pay close attention to enhancing the effectiveness of individual country surveillance. Here we aim to promote greater awareness of regional contexts and cross-country experiences. We envisage a major push to integrate financial sector analysis with the macroeconomic analysis that has traditionally been the focus of our surveillance. This will require some organizational changes within the Fund, but also the active participation of our members in this endeavor.
7. We plan to put particular emphasis on exchange rate policies. A challenge for Fund surveillance from financial globalization is the potential for larger and longer-lasting departures from equilibrium exchange rates, which in turn risk crises and disruption when reversals occur. While judgments about equilibrium values are intellectually difficult and politically and market sensitive, the thinking of policy-makers must be informed by an analysis based on a consistent multilateral framework. Our internal work on estimating equilibrium exchange rates for industrial countries will be expanded to cover all major emerging-market currencies. The analysis should also become a point of reference for Article IV surveillance discussions with members.
8. In sum, our surveillance is adapting to new realities in the world. It will be a more action-oriented, and it will include strengthened analysis and monitoring of the exchange rate policies, risks and spillovers in our member countries. As a whole, our focus will be sharper and our outreach enhanced.
Supporting emerging markets
9. Emerging market countries have become major players in the world economy. They are in increasingly good shape. They have sound macroeconomic policies in place, more resilient financial systems, in managing their debt many countries have already prefunded their 2006 operations, and more and more countries are receiving investment grade ratings. Clearly, therefore, with the world changing by the day, the Fund's instruments also need to change to stay in step.
10. Today's benign situation in global financial markets should not lull us into thinking that the risk of financial crises is over. The IMF's capacity to lend substantial amounts under appropriate safeguards is central to its ability to help emerging market members deal with the risks associated with large and volatile capital flows. But a central lesson from the past decade is that it is far preferable to prevent a crisis from developing in the first place than to try to cure it after the fact. Therefore, the Fund needs a financial instrument to help prevent crises. We are discussing with our membership a new contingent financing instrument for countries that have strong macroeconomic policies, sustainable debt, and transparent reporting, but which remain vulnerable to shocks. Such an instrument would also provide a framework to support and reinforce good economic policies, and, thus, help to further lower vulnerabilities. It would tackle the problems that have made previous approaches unattractive to emerging markets countries by providing for automatic drawings for programs that are on track, and providing more finance up front.
11. Some emerging market countries have regional arrangements for pooling their reserves. Some groups, for example in Asia under the Chiang Mai Initiative, have already set up funds for contingent financing. These arrangements are useful, and we are considering how we can play a greater role in supporting them.
12. We will also focus our attention on debt restructuring and lending into arrears. Recent experience has raised some practical questions, which we are looking at. For example, there is the question of whether the Fund should express views on the macroeconomic parameters that determine settlements. There is the question of what constitutes a good faith effort to resolve sovereign arrears. Fund lending during a debt restructuring should depend on an agreed medium term fiscal envelope and macroeconomic framework, since disputes over the range of reasonable offers hampers debt restructuring programs.
Low-income country engagement
13. We realize that we have an equally critical role to play in low-income countries, and intend to be more effective in our engagement in these countries.
14. The U.N. Millennium Development Goals are receiving much attention in low-income countries, with both the Fund and the World Bank called on to monitor and report on progress. One of our challenges is to marshal the expected rise in aid flows and debt relief, to ensure that these increased aid flows are absorbed effectively and in a manner consistent with macroeconomic stability.
15. We also want to make sure that increased aid helps achieve higher growth and propels countries towards attainment of the MDGs. Helping countries do so requires a deeper but more focused engagement by the Fund, including new understandings with the World Bank and other agencies on an appropriate division of labor.
16. Debt sustainability is also key. Recent debt relief by the international financial institutions, including through the Multilateral Debt Relief Initiative (MDRI), has had a positive impact. We are refining the joint IMF-World Bank debt sustainability framework with the aim of helping countries to implement sound medium-term debt strategies and strong public expenditure management and tax systems.
17. The IMFC has urged all creditors to work with the Fund and the World Bank to adhere to responsible lending. It is absolutely important that low-income countries not spiral into a new cycle of over indebtedness. It is also critical for the effectiveness of our work in low-income countries that our policy advice, support for capacity building, and financial assistance are closely aligned with the countries' evolving needs and poverty reduction strategies.
Quota and Voice
18. As a cooperative institution, the effectiveness and credibility of the Fund must be safeguarded, and its governance enhanced. As such, it is important for all our members to have fair voice and representation in the organization. We are examining how an ad hoc quota increase would improve the distribution of quotas to reflect important changes in the weight of countries in the world economy. A lot of work will go on in this area in the coming months, and we hope to take concrete proposals for fundamental reforms to the IMFC for agreement at our September Annual Meetings in Singapore. Early progress will require a two-stage approach. Such a strategy could involve ad hoc quota increases for the most underrepresented members in the near term, followed by further steps at a later stage. Agreement on an increase in basic votes will be key for strengthening the voice of the smallest members.
19. Finally, let me say a few words about our internal financing. The recent drop in credit, and the associated drop in income, has raised the issue of the long-term sustainability of the Fund's finances. Our overall financial position remains strong from the perspective of our balance sheet, which has continued to strengthen over the recent past. However, income risk has now emerged as an important issue.
20. It is no longer tenable to finance the Fund's surveillance role at the center of the international financial system, and its capacity building activities from margins on adjustment lending alone. We produce very valuable public goods—like the prevention of financial crises—that need to be financed, irrespective of our lending activities. What we must do is find the right formula. At the same time, of course, we need to remain efficient, and we are re-examining opportunities for further cost-savings in the delivery of our services.
21. To conclude, let me say that the IMF emerged from the recent Spring Meetings with a strong and renewed mandate to address the world's financial imbalances and to help our membership adapt to the new realities being shaped by globalization. Our 184 shareholders have enjoined us to proceed with reform measures that will make our 61-year-old organization better able to prevent and resolve crises. We intend to pursue these reforms wholeheartedly, making the IMF more fit for purpose in this 21st century global economy.
22. Thank you.