Statement On the Occasion of the General Assembly Meeting on Least Developed Countries

Rodrigo de Rato, Managing Director of the International Monetary Fund
at the United Nations General Assembly Meeting
New York, September 18, 2006

Submitted as a Written Statement to the UN General Assembly Meeting on Least Developed Countries

Mr. President,

Excellencies,

Distinguished Delegates,

Let me first express my sincere regrets at not being able to participate in this High-Level Meeting on Least Developed Countries in person. Unfortunately, this important event coincides with the IMF/World Bank Annual Meetings, which I am attending in Singapore. I am thus conveying this written statement to the Assembly in my absence. I hope it will enrich the discussion by explaining some aspects of the IMF's contribution to the global effort to improve the conditions of least developed countries.

Six years ago, we saw the Millennium Development Goals (MDGs) launched here. Now, with less than a decade to go before the agreed deadline for attaining these goals, many poor countries still face a dire situation, with some in real jeopardy of not meeting these goals. The issue at hand is more than just the achievement of a set of statistical targets, but the actual emergence of millions of people from chronic poverty, and tangible improvements in the living conditions for so many. For the least developed countries, in particular, the problems are of pressing urgency.

We have seen important progress in poverty reduction in recent years, but there remain important regional disparities. A number of nations in Asia and Latin America are now well positioned to meet the income poverty goal, and although there has been less progress in sub-Saharan Africa, macroeconomic outcomes have improved in many countries in the region. For example, growth in Africa over the last two years is the highest it has been in a decade. Excluding Zimbabwe, average inflation in the continent has dropped below 10 percent, the lowest rate in a quarter of a century. To a large extent, this is the result of efforts made by low-income countries themselves.

Least developed countries and their development partners have undertaken important actions over the last five years, within the framework of the Brussels Programme of Action for the Least Developed Countries for the Decade 2001-2010. But despite these gains, there is still much to be done. Sub-Saharan Africa presents the greatest challenge, for most sub-Saharan African countries are still far off track in terms of meeting any of the MDGs. It is incumbent on us to do much more in the limited time we have if these goals are to come to fruition. It is therefore critical that the international community maintain the same fervor with which it set these noble objectives in 2000, and keep the plight of low-income countries high on its agenda. As such, this meeting is most opportune.

In the roadmap for implementing the IMF's medium-term strategy that I set out earlier this year, we renew the IMF's commitment to support our low-income member countries in their development efforts, and make proposals for enhancing the effectiveness of our work. We intend to achieve this by focusing on what we do best, and on tasks where we can make the greatest contribution. The IMF will have a particularly important role in helping countries deal with issues of debt relief and debt management; and assisting them in managing effectively the increase in aid promised by the international community.

At both the G-8 Gleneagles Summit and the UN Millennium Review Summit last September, the international community renewed its pledge to help accelerate progress toward the MDGs. Collectively, it resolved to support a decisive reduction in debt owed by many low-income countries. It agreed to increase aid for many more. And it concluded that if the fruits of debt relief and higher aid were to be enjoyed by the people who needed them most, there would have to be better use of resources, and better governance.

There has already been marked progress in delivering debt relief, and the IMF has made an important contribution to this effort. To date, 29 countries have reached the decision point under the Highly Indebted Poor Countries (HIPC) Initiative and have begun receiving HIPC Initiative assistance, with US$41.7 billion in relief committed to them. Twenty of these HIPCs have also reached the completion point, and US$29.2 billion in relief has been delivered irrevocably to these countries. Moreover, following the Gleneagles and UN summits, the Fund has given 100 percent relief on debt owed by 22 poor countries in the context of the Multilateral Debt Relief Initiative (MDRI). Our debt relief began flowing this past January, and other international financial institutions have since followed. The dimensions of IMF relief vary, but combined with the expected debt relief from the International Development Association and the African Development Fund, total debt relief from the MDRI amounts to about US$50 billion.

These comprehensive debt relief initiatives have provided additional fiscal room to accelerate progress toward the MDGs. Yet our work is still not done. We must all be mindful of the need to prevent a future debt crisis. Countries that benefited from recent debt relief still run the risk of losing the hard-won gains of such debt relief if they were to replace the debt that has been removed with large amounts of new debt, possibly on less favorable terms.

There are already signs of new lenders—some private, some official—rushing in now that debt has been reduced. The primary responsibility for preventing excessive debt accumulation lies with the borrowing countries and with the lenders concerned, but the IMF can help both. Our responsibility is to help countries to understand the risks associated with a rapid build up of debt, especially if that debt is used to finance expenditures that are not growth-promoting. With this in mind, we have designed, together with the World Bank, a forward-looking debt sustainability framework specifically for low-income countries, which will help inform their decisions on new borrowing, based on medium-term debt management strategies aimed at avoiding unsustainable debt. We can also sound the alarm to creditors when debt or debt service levels are likely to become a problem. Some may not like this advice, but we will give it nonetheless, and they should listen to it.

Persuading countries to avoid unsustainable debt accumulation will require that we offer them alternative sources of finance. It is therefore important that the international community address the urgent needs of low-income countries by offering sufficient grants and highly concessional loans so they can finance development without relying on expensive debt. This is particularly important for the least developed countries, where the need for external assistance is greatest.

This leads to the second part of the Gleneagles compact: a significant increase in aid. The IMF has long been an advocate of higher and more effective aid. We also make the case for more aid to accelerate progress toward the MDGs in low-income countries that can absorb such aid effectively without endangering macroeconomic stability or debt sustainability. This requires careful planning and policymaking to identify and direct the poverty reduction programs to be funded by external aid; effective coordination of fiscal, monetary and exchange rate policies to manage the macroeconomic impact of higher aid inflows; and strengthened public financial management systems to ensure the transparency and effectiveness of spending programs.

If developing countries are to plan and implement effectively their poverty eradication programs, however, they must receive predictable support. We therefore also emphasize to donors the importance of providing early and predictable commitments of support over the longer term. Some donors are beginning to do this, but it is, unfortunately, still the exception, and not the norm. Donors must also help enhance the overall effectiveness of aid by delivering their assistance more efficiently—reducing transactions costs; aligning their support with national strategies for reaching the MDGs; and providing assistance in ways that improve transparency and strengthen country systems. This is the aim of the Paris Declaration on Aid Effectiveness and the Fund is firmly committed to supporting its full implementation.

The challenges of prudent and effective macroeconomic management can hardly be overemphasized. One of our core responsibilities at the Fund is to help countries with these challenges—especially to promote macroeconomic stability, which is the prerequisite for sustainable growth. Our main focus must continue to be on policies and institutions that are critical to economic and financial stability—particularly fiscal, monetary, and exchange rate policies. The Fund can help low-income countries to address the macroeconomic challenges inherent in the development process, including the possible impact of aid on the real exchange rate that may hamper competitiveness and long-term growth. We seek to identify policies that facilitate aid absorption, and that preserve macroeconomic stability, as well as debt and fiscal sustainability. Increasingly, in low-income countries as well as in other industrial countries, we also need to strengthen our work on financial markets.

The Fund is also strongly committed to making sure that countries have the fiscal space they need to expand essential social programs. IMF-supported programs have for many years focused on the need to maintain poverty-reducing spending, especially education and health spending, including in times of fiscal stringency. We consider national budgets as the prime vehicle for investing in human capital and, indeed, many Fund-supported programs include floors on poverty-related spending. When additional donor grants are made available for such spending, fiscal targets in IMF-supported programs will be adjusted to ensure such money can flow to the poverty reduction programs so long as the resources can be put to effective use while preserving the stability of the macroeconomic framework.

There are policy areas that may not be critical to macroeconomic stability but are critical to economic growth. In these areas, the IMF's role is less clear-cut, and will have to be worked out in a pragmatic, case by case way, reflecting our mandate and expertise.

I believe that the Fund's role is particularly important in two other areas: trade and financial sector development. Most of the discussion of trade policy in recent months has focused on the WTO negotiations on the Doha Round. This is appropriate: increased trade, bolstered by multilateral agreements, has been a cornerstone of growth in the global economy for many years, and is fundamental to the prospects of low-income countries. This makes the outcome of the recent Geneva deliberations especially disappointing. Hopefully, this is a pause in the negotiations, rather than a collapse. Negotiators must persevere and build on the gains that have already been made. Some measures are of particular interest to the poorest countries, such as the phasing out of export subsidies—including subsidies on cotton—and the provision of quota- and duty-free access for exports from the poorest countries to developed and large developing country markets. Beyond this, the donor community should also push forward vigorously with the delivery of Aid for Trade, which is crucial to the efforts of low-income countries, particularly the poorest among them, to position themselves to be able to reap the benefits of broader and more liberal trade.

The interruption of the Doha Round may well give an impetus to bilateral and regional trade arrangements. However, all countries—including low-income countries—should be cautious in pursuing such agreements. Multilateral trade reform remains the best way forward, and there are potential costs from bilateral agreements in trade diversion, confusion, and demands on limited institutional capacity.

We should also not forget the benefits that can flow from trade reform in developing countries themselves. Regardless of what happens in multilateral discussions, low-income countries can benefit from reforming their own trade regimes. Such reforms would not only benefit the economy as a whole; they could also contribute to poverty reduction.

Development of the financial sector has become critical in a world of globalized capital movements. I believe that the IMF has a key role to play and we need to strengthen our work in this area. A financial sector that is not sound presents profound risks to macroeconomic stability and seriously complicates macroeconomic management. Monetary policy can be used much more effectively if financial and capital markets function well. Broad, well-functioning financial systems are also crucial for the investment that will drive sustained economic growth. Financial sector development can also contribute to poverty reduction by making formal financial services accessible to the poor, at costs often much lower than in the informal sector, and fostering the development of the small-scale enterprises that are the backbone of so many developing economies. Yet, in many low-income countries, and particularly in the least developed countries, financial sectors are still underdeveloped.

In these areas, and in others, we share tasks and expertise with the World Bank, and are taking steps to ensure that our efforts remain well coordinated at both the global and country level. We also place a very high premium on working harmoniously with the broader donor community. Accelerating progress toward the MDGs will require that all parties be ready to work out cooperative arrangements to bring together a wide range of expertise and different forms of support. The relationship between donors and low-income countries has changed in recent years, with greater emphasis on country-led development strategies, and the IMF is adapting to reflect these changes. The Fund's role is not to coordinate donors, but we do need to work well with everyone if we are to maximize the effectiveness of our support to developing countries. Cooperative arrangements are particularly important in post-conflict environments. The IMF considers that the UN, and especially the newly established Peacebuilding Commission, has an important role to play in this context.

But the most important relationships that the Fund has are with our member countries. Our primary purpose is to serve these members. Our relationship with low-income countries has undergone some important changes in recent years, and the means that we use to support them are adapting to reflect these changes. Our support is now more flexible and more tailored to the needs of members. Since 1999, the IMF's support has been centered on Poverty Reduction Strategy Papers, which are genuinely country-led efforts. Whenever we provide financial support—through the Poverty Reduction and Growth Facility, Emergency Post-Conflict Assistance, or the Exogenous Shocks Facility, introduced in 2005—we strive to promote country ownership and to streamline conditionality. Where financial assistance from the Fund is not needed or wanted, we have the Policy Support Instrument, also introduced last year, which is working well in Nigeria and Uganda, and was introduced in Cape Verde last month. It is expected to be embraced by several other countries in the near future.

Capacity building through technical assistance and training targeted at key economic policies and institutions is an important complement to our policy advice and lending. We are currently reviewing our technical assistance to make it more demand driven. One aspect of this is to make technical assistance more regionally based. For example, we recently announced the establishment of a new Africa Regional Technical Assistance Center-AFRITAC—for central Africa, our third center in Africa and our sixth in the developing world.

There is another aspect of the Fund's relationship with low-income countries that has received considerable attention recently: the issue of voice and representation. The Fund is a financial institution, and it is reasonable that those countries that make a significant financial contribution should also have a significant influence over policies. But the Fund is also a global institution, and its legitimacy demands that all of the membership have fair representation and a voice that can be heard. At present, the relative quotas and voting shares of our members do not adequately reflect the increased economic weight of some of the largest emerging market countries, and we need to change this. But in doing so, we need to protect the voice and representation of low-income countries. To achieve this, we would like to see an increase in the number of "basic votes," which are the minimum and equal number of votes, unrelated to quota size, to which each member is entitled. Specific proposals on how to take these issues forward have been approved by our Board of Governors.

Last but not least is the issue of governance. This was a key element of the Monterrey Consensus and it is an area where the IMF has a well-defined and important role to play. When governance issues are macroeconomically relevant and may affect the success of a country's economic program, we address them in our policy discussions and, where appropriate, set terms in Fund-supported programs to address them. We also promote good governance through broader initiatives, for example, through assessments of countries' observance of standards and codes in the fiscal and financial sectors. We also support the Extractive Industries Transparency Initiative, and we give advice on transparent use of revenues from natural resources. Underlying this work is our belief that more public accountability and more transparency can raise the quality of public expenditure, minimize the scope for corrupt practices, and help reduce poverty.

In the last year, we have heard many strong words of support for low-income countries from the international community, and we have seen some of these words translated into actions. But this year we must translate more of these commitments into actions. This will require planning and great dedication. I have laid out for you today the IMF's strategy for low-income countries. As we proceed with implementing this strategy, focusing on our comparative advantage, we continue to welcome advice from others and remain open to new ideas. Progress will require a cooperative effort with the governments, civil society, and people of our low-income country member nations, as well as with the World Bank and the donor community.

I hope that these deliberations are fruitful and that we emerge with even more concrete ideas for making our collective effort to reduce poverty in low-income countries come to fruition.

Thank you.



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