Press Conference by Michel Camdessus, Managing Director
September 26, 1996
September 26, 1996
Meeting Hall A
MR. ANJARIA: Good morning, ladies and gentlemen. I would like to welcome you to the opening press conference of the Managing Director of the International Monetary Fund, Mr. Michel Camdessus. Seated to his right is Mr. Stanley Fischer, the First Deputy Managing Director.
Before we open the floor for questions, I would like to request Mr. Camdessus to make some opening remarks about the coming meetings.
MR. CAMDESSUS: Good morning. As on previous occasions, let me tell you what we have on the menu of the Interim Committee for next Sunday which, as you know, determines more or less the focus of the agenda of the Annual Meetings as well.
I must say that we are working now in a satisfactory global environment. You heard, at yesterday's press conference of Mr. Mussa, the global figures for growth and inflation in particular. These suggest that we are now a little bit above the trends in terms of growth for the last 20 or so years, and there are enough positive underlying factors in the world economy for us to believe that the medium-term perspectives are also good.
So, this is the environment. What will we do? First, Ministers and Governors will take stock of the situation and adapt their global strategy to it as needed. You know the motto of the IMF: there is no room for complacency, particularly when the situation looks good. Thus, we expect Ministers to reread the Declaration they adopted in Madrid in October 1994 and to add to it a few qualifications to continue with this strategy--which is a successful one--in an even more focused, more determined way.
This is more or less the business of the morning of next Sunday, and Ministers will probably devote part of their lunch also to discussing the global policy strategy. Then, Ministers will turn to what has kept the Fund particularly busy during the last six months or so, namely, the way in which we should reinforce the institution to make it even more fit to meet the challenges and opportunities of globalization. Here, you will find the menu familiar--strengthening surveillance; strengthening our financial instruments; and considering decisions on a number of important and difficult issues, such as the modalities for a continuation of ESAF (Enhanced Structural Adjustment Facility) and our contribution to the solution of the problem of the highly indebted poor countries, the state of preparation for our next quota increase, which now starts to become an urgent matter, endorsement of the proposal for the New Arrangements to Borrow, and endorsement of the recent Executive Board decision on the modalities for achieving greater equity in cumulative SDR allocations.
This is more or less the menu, and now I would like to answer your questions.
QUESTION: Mr. Camdessus, the IMF Annual Report seems to give India's economy a passing grade, referring to a robust economic expansion and a solid external position. But the World Economic Outlook has a more somber prediction that excessive fiscal deficits and supply-side bottlenecks will slow the rapid pace of economic expansion and that inflation will increase in the remaining part of the year. I know you like to encourage countries and not criticize them, but could you tell us realistically how India is doing?
MR. CAMDESSUS: Broadly speaking, India is doing well. India has, indeed, solved a number of major problems during the last few years, particularly its external financial vulnerability, and it has reduced inflation successfully, although not as yet definitively.
As you know, though, the pace of fiscal consolidation has been only gradual and has been concentrated on the central government side. Now if you take together the deficit of the central government, the state governments, and public enterprises, then you discover that the overall public sector deficit of India is still over 9 percent of GDP, and this, indeed, is not sustainable. It jeopardizes the investment needed for sustained high growth. Indeed, if you allow it to continue, you can see the risks of external vulnerability reappearing.
So, we believe that this is a time of opportunity for India, with a new government and a favorable external environment, to decisively address the problem of its public finances. In conversations with the Indian authorities, we have indicated that they do not need to do anything dramatic, but that, over let us say five years, they could reduce by half this public sector deficit. Then, India would be in a much more favorable position for economic progress, provided, simultaneously, that it continued to develop its efforts on the structural side. Here, several things come naturally to mind, particularly the need to reduce and eliminate quantitative restrictions on imports of consumption goods, continue with financial reform, continue the reform of public enterprises, and open much more broadly the big domain of public infrastructure to the private sector. I am confident that these things can be done, and the IMF will continue its close dialogue with the Indian authorities to assist them in this effort, which can have a very, very significant impact.
QUESTION: Mr. Camdessus, how do you see the Brazilian economic situation now, and what is now the agenda of the IMF with Brazil?
MR. CAMDESSUS: First, I see a good situation in Brazil, with the long-lasting, positive impact of the Real Plan. As regards relations with the IMF, these are of a permanent and friendly dialogue. The Real Plan, of course, cannot deliver more than it has and more than it was designed for, and we believe that now there is a lot to do in the reform of social security, the public administration and the tax system, and in deepening the privatization effort to improve the fiscal position, which, over the medium term, will be critical for the lasting success of this program. The authorities are doing a lot in this direction. We have seen that the privatization program, in particular, continues to be implemented. The recent sale of the electricity distribution system of Rio de Janeiro was quite an important step. More is certainly in the pipeline, and I hope that the government and the congress will be able to continue in this direction.
QUESTION: I have a two-part question, Mr. Camdessus. The first is, could you just take us through the IMF's resources and tell us in dollar terms what the total existing IMF resources are. Then, it would be helpful if you would remind us how much, in dollar terms, the SDR allocation will amount to, what is the proposal for quotas, and what is the NAB (New Arrangements to Borrow), so that we can have a kind of understanding of how much money is being proposed for strengthening resources.
The second part of the question concerns gold. You have expressed confidence that gold will be sold, as has Mr. Rubin. We all know that the Germans and the Italians and the Swiss are opposed to it. I think everybody knows that a diplomatic compromise has been agreed upon in the Executive Board, and that gold, as a word, is not being mentioned. Can you tell us when--this year, or next year, or after the German elections in 1998 perhaps, or after the European currency is in place--you will explicitly make a decision on the sale of gold for the HIPC (highly indebted poor countries) initiative?
MR. CAMDESSUS: Our capital base is a little over SDR 140 billion. You multiply that by approximately 1.45 to get the figure in dollars. We consider that we must increase this base pretty soon because, as you know, we live in reality on short-term reports from all the central banks of the world.
There is a "must" in the management of the IMF, which is to keep permanently a sufficient degree of liquidity so that all our central banks do not have any doubt about the liquidity of their claims on us. This is why, since the origin of the Fund, we have felt that our own liquidity ratio needs to be kept very high, and that when it approaches 70-80 percent, we are crossing a kind of red line. And the fact is that, next year, we will cross the 70 percent line, which means--as it has always meant in the past--that the membership must proceed with an increase of quotas.
The size of the increase of quotas is debatable, of course. But you will remember the discussions of last year, particularly after the Mexican crisis, when it appeared crystal clear that it is in the interest of the system to have a very solid financial base that would allow this institution to take prompt and decisive moves when needed--hopefully not frequently. It was against that background, and having in mind both that we must consider what the situation will be during the first years of the next century--because a quota increase must cover at least five years and, often in fact, more--and the growing size of the world economy, that I was of the view that doubling the quotas would be the best thing to do.
If one wanted only to maintain the size of the Fund relative to the world economy since quotas were last adjusted, now one should increase quotas by at least two thirds. The Executive Board is discussing this issue, and I see a very broad majority of the Board considering a substantial quota increase. "Substantial" means for me at least something between 50 and 100 percent. This will be a matter for discussion, I believe, during the first part of next year.
I remind you in passing that this institution is increasing its activities strongly, as the world is now in the formidable and positive process of adapting to the new, globalized economy--a process that entails suffering, pain, and effort and that, for many countries, requires international support.
To give you an idea of the efforts taking place in the world and of the participation of the Fund in them, on September 20, 60 countries had arrangements with us--some large, such as Russia and Mexico, and some smaller, such as Yemen, Moldova, Mali, Zambia, Uganda. If you also take the countries which are in negotiation with us with the view of getting a program, obtaining Fund support for their programs, then the total rises to 84 countries--out of a membership of 181.
This is not a shrinking Fund, as you see. When I arrived here there were about 25 countries with Fund-supported programs. A broader perception has since developed that adjustment and structural reform can open new opportunities for prosperity. Countries know that our support has helped many of them to a better situation, and we have more and more clients applying for it. We must be ready to help them.
A last figure. Total Fund disbursements, which in 1989 amounted to SDR 2.6 billion, have since gone up progressively, and for the financial year ended April 30, 1996, amounted to SDR 12.3 billion.
I have mentioned the need for an increase in quotas to strengthen our financial base. I put emphasis on that because this is a quota-based institution. It must live within its own resources to be credible. Nevertheless, for emergencies, it is important to have the additional possibility of drawing on some credit lines. This is what we call the GAB-NAB, which are now being doubled. I am extremely grateful to the governments, the old GAB members and now the new, and those who are joining them, for doubling these credit lines, bringing them to around $55 billion.
Now the SDR. This is an old story, one of my favorites. You remember the difficulties we had in Madrid. We decided subsequently that the problem of equity in our membership was so important and is so important that we could not be discouraged by these difficulties and had to find a solution--putting aside, let us say, the solution we had on the table in Madrid. I welcomed last April--you took that with a degree of skepticism, I remember--the request, not the suggestion, of the Interim Committee to the Executive Board to find a solution to this problem by the time of the next Interim Committee meeting. The Executive Board has worked hard, with an extremely good spirit of compromise. Management put on the table a new scheme to tackle the issue, taking advantage of the fact that we would have to go to parliaments for the quota increase in the next two years or so. What has been decided is to propose a special amendment of our Articles to provide all our members with the same ratio of allocated SDRs to quotas and to make every effort to get such an amendment adopted by member countries within two years, or earlier if we conclude the Eleventh General Review of Quotas earlier.
The amount of the allocation and the precise language of the Articles are still to be completely agreed. However, the Executive Board agreed that the amendment would broadly reflect my suggestions, and this could involve an amount of about SDR 26 billion. This would provide a modest, but meaningful, SDR allocation to each of the Fund's members and would represent significant progress toward equity because it would equalize the ratio for all. Indeed, this would be a new demonstration of the spirit of consensus which prevails in our ranks.
You mentioned gold, also; you have not left much to your colleagues, as a matter of fact! Let me tell you, first, that as regards the problem of financing the continuation of ESAF and our own participation in the initiative for the highly indebted poor countries, there is a done deal. The negotiation has been completed in the Executive Board in a remarkable spirit of compromise.
I must say that I am extremely heartened by several things: first, by the very positive reaction of the membership to my proposals; second, by the unanimous support of the membership--I emphasize unanimous--to make ESAF the centerpiece of our response to the problems of the poorest countries, including the most indebted ones; third, by the fact that we have a full understanding of how to proceed; and, finally, by the fact that many members have already pledged to secure the generous bilateral contributions which are needed in a spirit of fair burden sharing for this initiative to work. So, we can now indicate to the membership that, as far as the IMF is concerned, we are ready to start implementing the initiative for the highly indebted poor countries, and this will be my message to the Development Committee.
Now, how do you do that, how much is it, where will the money come from, and which kind of money will it be? Very simply, I will tell you the amounts and how I see the next steps. First, we are not talking about enormous amounts of money, as a matter of fact. What we are talking about is financing an interim ESAF between the year 2000, more or less, and 2004. After that, according to our calculations, the accumulated reserve in the old ESAF, plus the interim one we are putting in place now, will allow ESAF to continue in perpetuity, disbursing about $1.2 billion a year to the poorest countries on the basis of the revolving fund which will have been created this way. If you note the catalyzing factor of ESAF resources, it means that, for the continuity of time, the IMF will be able, without having to go back to its contributors, to finance the poorest countries, the most distressed ones, the post-conflict countries with its well known efficiency.
Now, the problem is how to finance the interim period between the year 2000 and the year 2004. For the ordinary activities of ESAF, an amount of SDR 1.7 billion is required to subsidize the interest rate during this period on an as-needed basis. To this must be added our contribution to the HIPC initiative of SDR 800 million, also on an as-needed basis, for a total of about SDR 2.5 billion on an as-needed basis. At a time when all bilateral donors say that they are under severe budgetary constraints, and when the probability of finding that amount through added contributions to those provided to us under ESAF No. 1 and under ESAF No. 2 was extremely low, I had proposed using the profits of a very limited part, 5 percent, of our gold reserves to fulfill the financing package. You know that the views of the membership have been extremely diverse on that. You had those telling us, you must do that exclusively with bilateral contributions, and you had those telling us, you must do that only with IMF resources and, in particular, with reserves accumulated here or there--gold included--and a variety of positions in between.
Things were discussed in Lyons, you remember, and there we had a kind of breakthrough which was not exclusively semantic, contrary to what was said, namely that, if needed, the IMF should optimize the management of its reserves. But the interpretation of this beautiful language was left to us. We have discussed the matter very seriously, and now I can record the arrangement in the following way: a done deal.
I repeat: all chairs of our Executive Board are fully committed to securing the financing of the interim ESAF so as to make possible the continuation of ESAF and our participation in the HIPC initiative. Full commitment of all. Second, we are invited to secure the bilateral contributions which are part of the deal, and we have started this work with great success so far. It is not yet concluded, but the responses of the membership are extremely encouraging, not only in the amounts but in the great number of countries accepting to participate. You will be surprised to see in their ranks countries in transition and developing countries, including among the poorest in the world and those who have benefited from ESAF in the past. This gives you a very strong idea of what this new partnership is that we are talking about from time to time.
We are by no means sure, of course, that these bilateral contributions will suffice. Therefore, all Directors agreed that if the need arises, and in light of the amounts which will have been pledged, we must be prepared to optimize the use of our reserves to secure the full financing. It is not necessary to make this decision now, because the money we have in our coffers, plus the contributions which are arriving, cover well our current needs for ESAF. However, we had to ensure that the understanding exists on the crucial, but contingent, element of this package, the optimization of our reserves. Here, I observed that all Directors recognized that, if the need were to appear, a decision will have to be taken. In view of the dynamic which has developed and which is developing in support of this package, I understand that there is the needed majority of members of the Board who consider that such optimization of reserves would entail sales of an amount of gold up to 5 million ounces. I note, nevertheless, that a few of our colleagues still object to this.
This being said, I must make clear two or three things. First, any amount within this ceiling would be decided only after all efforts have been made to secure the maximum bilateral contributions, it being also understood that we are talking here only about the use of the interest income on the investment of profits generated by gold sales. The effective decision--and here I answer your question--on sales of a given amount of gold would be taken by the Board only when this need appears. Of course, it is extremely difficult to say when, because it depends on the flow of bilateral contributions and it depends on the rapidity with which countries come to our window. But, after hearing the views of the Executive Board, I am confident that any decision on optimizing our reserves management, if you like to put it that way, would be taken with the desirable broad consensus.
After hearing the views of Directors, and in view of the unanimous commitment I have mentioned, I note that the Executive Board is of the view that the necessary support now exists to proceed with a continuation of ESAF and our participation in the HIPC initiative.
This will seem to you a little bit complicated. But I must tell you that this heavy language reflects a strong consensus, a strong wish to go ahead together with one of the most promising initiatives this institution, together with the World Bank, has ever taken.
QUESTION: Mr. Camdessus, today and tomorrow Argentina is expected to be paralyzed by the general strike called by the unions in protest against economic policy in general, and against labor market reform in particular. This week a senior official of the IMF said that in Argentina it is the moment to fight against vested interests and the Government apparently has decided to do so. I would like you to specify if the labor market laws and labor practices are part of those vested interests that need to be fought. Also, would you include corruption, which, in Argentina, according to public opinion, is supposed to be very high, as part of the problem to be fought in this so-called second generation of reforms?
MR. CAMDESSUS: Well, I think this high-ranking official of the Fund was well inspired in telling you that. Argentina is living its sixth year of a new era for its economy, no doubt the most successful of, let us say, the last 60 years. Argentina has made formidable progress toward the in-depth modernization of its economic structures, of its economy in general; it has got rid of inflation and it has availed itself of a currency which is as good as the dollar. Now, thanks to all of that, the basic economic parameters of Argentina are basically strong, and Argentina is truly on its way to entering the new century on a very, very solid basis.
Now, like all countries in the world, Argentina must add to its important macroeconomic changes and to the important structural changes it has implemented so far, a few missing elements of decisive importance. We salute the courage of the Government in doing so, particularly in trying to streamline labor market regulations, in trying to consolidate the financial institutions of the country, and all of that in a package which has been designed with the cooperation of this institution.
Speaking in Argentina last May, I mentioned corruption as one of the problems which was a serious one for Argentina, as it is for so many countries in the world. I do not know if I used this term, but Argentina now is playing in the world's first-class league of strong economies, and you cannot stay there and persevere and prosper if you do not get rid of this corruption factor and if you do not permanently improve your governance. The Argentine authorities are extremely mindful of that, and they are trying to act in this direction.
Indeed, in this process of structural change, you must also be prepared to face vested interests, as I have said many, many times, in other parts of the world. Among the difficult problems you must tackle is the necessity of convincing labor unions that, in order to reduce unemployment, which is still above 17 percent in Argentina, you must accept to reduce the privileges of those who have a job to be able to create jobs for those who have no jobs. Here, of course, you have a difficult balancing act, not only for the government but also the labor unions, which is to find the best way of balancing the needed protection of those who have a job and the needed support for those who do not. This is an extremely difficult task, not only in Argentina, but in my own country and in many others. This requires leadership, not only from government but also from labor unions. I have no doubt that the labor unions in Argentina--I know their leaders pretty well--will be mindful of that and are mindful of that even if, of course, they are in a fight and are trying to do their job.
QUESTION [as interpreted]: The Bank of Montreal here in Washington said that to maintain stability and growth, Mexico needs to devalue the peso again. I would like to have your opinion on that.
MR. CAMDESSUS [as interpreted]: The Fund does not say this.
QUESTION [as interpreted]: We are talking about economic growth of 3.6 percent of GDP in Mexico this year, and the problem is that at the same time unemployment is increasing in Mexico and many of the resources given by the World Bank and other institutions, such as the IDB (Inter-American Development Bank), have been directed to urban centers, forgetting the indigenous areas, which have led to armed movements in Guerrero and Oaxaca. What is the Fund intending to do to help Mexico in this area and to resolve the problem of corruption in the way resources are distributed?
MR. CAMDESSUS [as interpreted]: What I have just said to your colleague applies also to Mexico, especially the fight against corruption. It is difficult, naturally, but essential not only to strengthen the economy, but also to make progress in democracy, and the Government is convinced of this. Let me just say that we are satisfied with the progress of the Mexican economy over the past 15 months and with the success of Mexico's courageous efforts not just to fight against a crisis which might have been of systemic proportions, but also to put Mexico on a sustainable growth path which would really enable it to improve the condition of its poorest citizens, not just in the mega cities, but also in the more remote regions where the indigenous populations have suffered for many years from unjust conditions.
Mexico's program is functioning well. I need not mention the successes in purely financial terms--you are all aware of those, and they have been ratified by the markets, of course. But we could also speak in real economic terms, particularly in terms of growth. The economy is reviving, and I think we could discuss for how long and how much, but we are above 3 percent growth and we are looking forward to more next year.
The International Monetary Fund continues to support Mexico, and we are working with the authorities on the program which will be a framework for Mexican growth in the coming years. But the IMF cannot do more than play its role. In particular, it is not up to us to say where, in micro terms, our financing should be applied or, in particular, what the priorities should be in terms of economic development. That is up to our friends in the World Bank and the IDB; they do this very well. I know my friend, Jim Wolfensohn, has been visiting your regions where there are indigenous populations, and that he wishes to increase the decentralization of Bank activities in Mexico and establish a regional decision area.
QUESTION: I would like to bring your attention to the European situation which was dealt with quite fully in the World Economic Outlook. In particular, there appears to be a paradox in Europe where the pursuit of fiscal reform, though widely acknowledged to be entirely necessary, also seems to be associated with slow growth and problems in dealing with unemployment, and so on and so forth. The time frame which has been set for the establishment of a single currency seems to be driving many European governments into difficult choices over fiscal policy. Could you give us your view on the desirability of sticking to a rigid timetable, or whether you think there is scope for more flexibility, and what you would recommend in the event that, as the report mentions, the pursuit of fiscal goals becomes procyclical? The report suggests that, if it does, then perhaps it should be abandoned or slowed.
MR. CAMDESSUS: This is indeed at the center of the debate in Europe about Maastricht and the Maastricht timetable and in view of the disappointing performance of the European economies in 1995 and the beginning of 1996. But I must tell you a few simple things.
First, we are of the view here that the Maastricht timetable is feasible. The success that the European countries have had in reducing inflation, in most cases already to very low levels, is indeed extraordinarily encouraging. Under our current expectations for economic growth, most European countries should be able to satisfy the Maastricht treaty requirements for the general government deficit. I add that, of course, while these are the requirements of Maastricht, their importance is much more than that of simply meeting a given treaty. These are a kind of "must" for the majority of European countries if they want to grow in a sustainable way. Government spending in many countries reached such levels that it was stifling activity and reducing to almost nil the prospect of continued growth.
So, this had to be done, and indeed was perceived as the priority among the priorities by the markets. I admire the courage of the European countries which are persevering with this budgetary effort at a time of economic slowdown. This is remarkable; it does not have that many precedents. But the markets are reacting very positively to it. Take France, for instance. Short-term interest rates went down by 4 points over one year. This is the recognition by the markets that this strategy is the needed one by the countries.
When you talk about flexibility with the criteria, the calendars, or whatever, you should have in mind what would be the interpretation of the markets of such flexibility, and whether this flexibility would entail more dangerous consequences for these economies than sticking to the Maastricht criteria. Our views here are that, in the present circumstances, what is being done is correct; that with the prospects now for an economic recovery in Europe, the effort not only is feasible but can bring a good number of countries to readiness to join the first group of countries creating the Euro. We are encouraged by the fact that this strategy is being supported by the markets.
Then you will tell me: but let us imagine that, once again, you are disappointed with the economic response and that the economy performs below reasonable current expectations. Well, then, indeed, the authorities will have to sit together once again and analyze what kind of action will be needed. I think that the important thing at this very moment is that the markets continue to see that they are working together, taking decisions in common in the most harmonious way. I am confident that on January 1, 1999, you will have the new Euro system starting. Thank you.