September 29, 1996 Press Conference by Interim Committee Chairman and IMF Managing Director
September 29, 1996Joint Press Conference
by Philippe Maystadt, Chairman Interim Committee
and Michel Camdessus, Managing Director, International Monetary Fund
September 29, 1996
IMF Meeting Hall
MR. ANJARIA: Good evening, ladies and gentlemen. I would like to welcome you to this evening's press conference by the Chairman of the Interim Committee, Mr. Philippe Maystadt, Deputy Prime Minister and Minister of Finance and of Foreign Trade of Belgium, and Mr. Michel Camdessus, Managing Director of the International Monetary Fund.
I would like to ask the Chairman of the Interim Committee and the Managing Director if they would like to make some opening comments.
CHAIRMAN MAYSTADT: Ladies and gentlemen, the Interim Committee has just had a productive meeting, thanks to the good preparatory work of the Executive Board and, of course, the Managing Director, so my role as Chairman has been made easier.
The Committee has been able to take three important steps.
• First, we have updated the Madrid Declaration. In fact, we adopted a new Declaration on Partnership for Sustainable Global Growth. Just a few comments on this new Declaration. The strategy set out in the Madrid Declaration--which emphasized, as you remember, sound macroeconomic policies and structural reforms--remains valid. Nevertheless, all Committee members saw a need to broaden this strategy in several critical areas to take into account the new challenges that have been emerging, as well as the lessons from the review of member countries' economic policies. I would like to mention some of these new elements.
• The new Declaration stresses the importance of the complementarities between macroeconomic policies and structural reforms. These policies and these reforms are mutually reinforcing.
• The new Declaration reiterates, of course, the need for fiscal discipline, but it also draws attention to the quality and the composition of the fiscal adjustment, and also to the need for greater transparency in government finances--in particular, the reduction of off-budget transactions.
• The new Declaration also emphasizes the need to promote good governance in all its aspects, including by ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling corruption.
• The new Declaration also pays attention to the soundness of banking systems and to the need for more action to prevent money laundering.
We agreed that the realization of this common strategy will help to avoid significant exchange rate misalignments and to provide a foundation for reasonable exchange rate stability.
We think that this Declaration can serve as a guide. That is why we have decided that it would be useful for a copy of the Declaration be sent not only to the 24 members of the Interim Committee, but to the finance ministers of each of the Fund's member countries.
Second, we have endorsed the approach that has been agreed by the Board to resolve the so-called SDR equity issue: an amendment to the Fund's Articles providing for a one-time allocation of SDRs. This agreement has been made possible because the group of developing countries, in a true spirit of compromise, have accepted the proposal for this equity amendment. Personally, I welcome this gesture, and I would hope that all industrial countries will in turn show flexibility about the amount of this special allocation.
Third, we reached an agreement on the initiative to assist the heavily indebted poor countries (HIPCs). I am very much encouraged by the full support expressed by all Committee members for the implementation of this initiative. When, in October 1995--less than a year ago--the Interim Committee encouraged the Fund and the World Bank to continue their work on ways to address the problem of the burden of multilateral debt, few observers would have thought that a credible strategy could have been devised and endorsed by the international financial community as early as today. Even fewer observers would have found it likely that the IMF could be a key partner in this strategy. Today, I am delighted that we have reached an agreement on a set of proposals to help the poorest countries to achieve an exit from unsustainable debt. I am also pleased that the Committee endorsed the Fund's participation in this initiative through the ESAF (Enhanced Structural Adjustment Facility), with grants or loans on longer maturities.
For the Fund to move forward to bring help to eligible countries, it was crucial that understandings exist on the commitment to secure the needed financing. I can assure you that the unanimous commitment is there. Many of my colleagues have expressed today the firm intention to make bilateral contributions, and I must tell you that more of my colleagues than I expected made such a commitment. I am confident that those countries that have not yet committed to do so will ultimately be prepared to contribute as well.
It is also understood that, if the need arises, the Fund should be prepared to optimize the use of its reserves. But I am sure that the Managing Director will be able to tell you more about this. As you know, he was the main architect of this breakthrough, and I am very grateful to him. Now we have a clear approach and can launch the HIPC initiative, and I really hope that, before the end of this year, action will be taken, and one or two countries might already be helped in the framework of this new initiative.
THE MANAGING DIRECTOR: One word on the new Declaration. When I was joining this press conference, somebody suggested to me that this would be just another declaration, after so many. I would like to call your attention to what makes the Declaration that our Chairman has just commented on unique. It is not something that happens simply because when ministers gather, they make a declaration. No. It is the distillation by the Interim Committee--the group of the most qualified and responsible policymakers in financial matters--of the results of the Fund's exercise of surveillance, day after day, with all of its 181 member countries. On average, every day, we have Fund missions in 30 countries in the world analyzing what is going on and how governments react to the realities. From the consideration by the Executive Board of the resulting surveillance reports, a few basic elements appear and are analyzed. What you have here is a strategy that is rooted in, based on, this work with each of our members. It is quite impressive to see that, when we have such a diversified membership, one can come up with these eleven new commandments--if I may call them that--for the good governance of the economy of the world. And, please, read this document this way--not as something coming down from the heavens, nor coming down from the minds of the key policymakers of the world, but as something coming up from the grass roots of the economic realities of each of our member countries.
QUESTION: Could I ask, first, whether you are now confident that the G-7 will be prepared to move beyond its proposal for an SDR 16 billion allocation and toward the SDR 26 billion that you, Mr. Camdessus, have proposed? And second, could I ask how many countries at the Committee pledged to hand over their money in SCA-2 (the Fund's second Special Contingent Account) to help finance the ESAF and HIPC initiatives?
THE MANAGING DIRECTOR: On the amount of the one-time SDR allocation to solve the problem of equity, no precise decision has been taken today. The decision that has been taken is to endorse the proposal of the Executive Board. What is the proposal of the Executive Board? It is to make a one-time SDR allocation through a change of the Fund's Articles of Agreement--which will be brought to parliaments, together with the quota increase--providing for an SDR allocation to equalize for all members the ratio of the SDRs allocated to them to their quotas. It has been said that this agreement will be finalized in a language and for an amount broadly in line with the proposals of the Managing Director. My proposal is to provide for a ratio of 33 percent, which translates into SDR 26.6 billion.
What will be the final amount? Possibly it will be exactly this amount, possibly a little bit less, possibly a little bit more. But there is a very clear trade-off between the agreement of many countries to go through changing the Articles and the amount I have proposed. So I am confident that the final amount will certainly be above the SDR 16 billion you are mentioning. Possibly it will be SDR 26.6. I would see that as perfectly reasonable. Possibly a little bit less or a little bit more--but in a close range around this figure.
On the SCA-2, I must tell you that many countries have pledged to leave with the Fund the resources they would receive if the SCA-2 were liquidated. Many--I could say, almost all--have said, "okay, we leave that with the Fund." A number of them have said that not only are they prepared to leave that with the Fund; they are also willing to make an outright grant of it. Others have said that they will make a very long-term deposit with no interest rate or a very low interest rate. The final modalities have not been settled, but these SCA-2 resources will be a very significant part of what to expect as bilateral contributions to the overall funding mix.
QUESTION: Mr. Camdessus, I understand that, on the issue of IMF gold sales, the result of this meeting is basically, that the issue has been postponed. From a German perspective, it looks like we have to face the battle about the IMF gold either in a year, half a year, maybe in two years. What would you think will be the factor that would make maybe a situation where we get voted down, with a French Managing Director arranging the vote, with American help, where the Americans are really the main cause for the whole disaster because they are not contributing to IDA (the International Development Association)? We ask, what do we do with IDA? And then we have, of course, this typical German problem of understanding why the IMF should get so much involved in a development issue. Do you not think that if the Germans are voted down, that this could have major repercussions on other areas where we should cooperate with the Fund, like other bilateral contributions and so forth? I have not mentioned the situation that in a few years we are without a Bundesbank. We will have a European central bank--where maybe we get voted down by a French majority on major issues, to the heart of our stability concern, particularly with Mr. Maystadt as head of the Interim Committee... (inaudible)
CHAIRMAN MAYSTADT: It is completely untrue. The Central Bank of Belgium has sold gold because it had a far bigger proportion of gold in its reserves than the average. But this was not used to cover the deficit. This is completely untrue. That would be monetary financing, and it is prohibited by the Maastricht Treaty.
THE MANAGING DIRECTOR: I refer to what you call sales of gold and what here we call optimization of the management of IMF reserves. I must tell you that the decision that has been taken has, of course, nothing to do with the nationality of the Managing Director of the Fund, but reflects an extraordinary spirit of compromise in the Executive Board of this institution, to which your countrymen have admirably contributed. We have not postponed anything here. When I addressed the press corps a few days ago to explain what we would be deciding during these Annual Meetings, I said that the financing of the continuation of ESAF and of the HIPC initiative was a done deal, and I confirm that to you.
What we have done is the following. First, we decided that we would try to collect as much as possible in bilateral contributions. The SCA-2 is one of the key elements of that. In addition, all Directors considered that they must be prepared, if needed, to optimize the use of the reserves of the IMF. Directors were unanimous in considering that this decision would be premature today. But they were also unanimous in considering that there had to be a clear understanding now of what optimizing the use of our reserves would mean if and when this was needed. And, in view of the dynamic of the negotiation that has developed, I was able to note in my official conclusions that there was the needed majority of members of the Board who consider that such optimization would entail sales of an amount of gold up to 5 million ounces. At the same time, and after listening carefully to my colleagues of the Board, I was also able to express my confidence--and I reiterate it today--that any decision on optimization of our reserves would be taken with a desirable Board consensus, which means that we will not be in the business of outvoting one group or the other. We are confident that the decision will be made in this spirit of compromise, a compromise to which, once again, Germany has admirably contributed.
Now, you quote me the problem of IDA and of its financing. It is certainly an important problem, but I suggest that you keep this question for Mr. Wolfensohn tomorrow, when we will meet again at the end of the Development Committee.
Last, you are telling me, okay, once again the IMF is financing developing countries; so, it is in the development business. What we are doing is not at all development financing. What we are doing for developing countries is the job for which we have been created--the job which is so well described in the first Article of our Articles of Agreement, namely, to provide our members with the necessary resources to be able to face their temporary payments crises or their deeply rooted structural problems without resorting to measures destructive of national or international prosperity in the context of strong, solid, credible adjustment and reform programs. Nothing more. Nothing less.
CHAIRMAN MAYSTADT: May I draw your attention to the sentence in the communiqué, which is quite explicit that the Committee endorsed the conclusions by the Executive Board on financing the continuation of ESAF and the Fund's participation in the HIPC initiative. This clearly means that the Committee, by endorsing the conclusions of the Board, agreed that if the need arises, we must be prepared to optimize the use of the Fund's reserves. It was very clear for all members of the Committee, and it was accepted by all members of the Committee. That is the reason why I said that there is a unanimous commitment to securing the financing of the HIPC initiative.
QUESTION: Two questions, the first of which is addressed to Mr. Camdessus. This Declaration--these eleven commandments, as you have referred to them--should we see this as an explicit recognition that coordination of exchange rates in its narrower sense is obsolete, has failed in effect?
The second question relates to the developing countries. You refer to good governance. How will you accommodate the unhappiness of the G-24 at the inclusion of that reference? And are you confident that it will be possible to put in place quickly new institutional arrangements for representing the new countries that are contributing to the General Arrangements to Borrow?
THE MANAGING DIRECTOR: We are not renouncing our job in overseeing the international monetary system and paying particular attention to developments in exchange markets. What you have in this document is the strong and clear definition of the way in which the Interim Committee sees developments in exchange markets and the maintenance of currencies in the proper alignment. It sees exchange rate stability and the avoidance of significant misalignments among currencies as the natural consequence of the implementation of sound macroeconomic policies and efforts at avoiding large imbalances. This is applicable to the whole membership.
Then you have, of course, the special responsibilities of the countries with reserve currencies, or countries whose currencies are traded more frequently in the markets. This is more particularly the responsibility, of course, of the Group of Seven. We work with them. We monitor their efforts. When needed, we encourage them not only to coordinate their action but, when needed, to undertake coordinated intervention to consolidate stability. But what is important is that--for the first time since a long time now--in September 1996 the Interim Committee considers that there are not at this stage significant misalignments among currencies, and that the problem is now not so much to bring the currencies into a better constellation, but to preserve the good constellation we have through appropriate macroeconomic policies.
Then you have two other points. On good governance, our Chairman will tell you that the developing countries have not objected at all to this point here. On promotion of good governance in all its aspects--including, of course, the rule of law, improving the efficiency and accountability of the public sector, tackling corruption--all of these are essential elements of a framework within which economies can prosper. On that, there is a consensus of the membership.
Last, you will soon have disclosure of the agreements that are being finalized now for the creation of the New Arrangements to Borrow (NAB). You will have in this context the appropriate structures for countries participating in the NAB and the General Arrangements to Borrow to coordinate their efforts. I am certain that this will be finalized promptly. And, you will find there all that is, I think, appropriate for allowing these countries to participate not only in the financing of the Fund, but also to have a commensurate share of the responsibility for decisions. The details will not be settled at this meeting. There are still a few things to finalize.
QUESTION: My question goes to Mr. Camdessus. It is stated in the communiqué that you want to achieve an exit from unsustainable debt for the HIPC countries. Now, it is not stated here, but I think we all know that one benchmark for sustainable debt is, among others, up to 25 percent debt service. Now, I am sorry that I bother you again with the German example, but I think Germany would not have been able to recover after the second World War if in the London debt settlement agreement a benchmark of 25 percent debt service would have been imposed. In fact, it was agreed, or it was arranged, that only 5 percent debt service would be the maximum to be fulfilled by Germany then. I think it was a major factor for German recovery. Now, my question to you is, in view of such examples, how can you possibly, and by economic theory and practice, say that with a 25 percent debt-service ratio, the HIPC countries will really recover?
THE MANAGING DIRECTOR: Well, you put your question in a very interesting way. I would start by telling you that I beg to disagree with your reference to the case of Germany after the War. You tell me that the recovery of Germany was a mix of certain attitudes of its creditors on the debt issue. It was also the result of the generosity of America under the Marshall Plan, something you are suggesting also to have, I presume, for the highly indebted poor countries, and I join you on that. It was also the result of remarkable efforts by Germany to tackle its own problem and to rebuild its economy. I think we must start with that. In this HIPC initiative, you have first the invitation to all these countries to build a solid track record of effort--to tackle by themselves their problems--and it is in view of these efforts that the creditors and the multilateral institutions will provide their contribution.
On the ratio of 25 percent, there are a lot of theoretical discussions. But I must tell you that it is conventional wisdom, and in particular among the members of the Paris Club, that the ratio of 20 percent signals a situation in which, let us say, a yellow light flashes. Here, you have 25 percent, but you have also the other 200 to 250 percent debt to exports benchmark. These are benchmarks that have been established with a very serious reflection based on the experience of countries we see as being in a sustainable debt situation. I do believe that the approach is valid, and that a country that performs well for a few years, that then continues maintaining good policies, and that benefits from this effort of the creditors and the special contribution of the World Bank, the IMF and the regional multilateral development banks will be truly in a situation of sustainability. You could tell me that it would be nicer if the debt service ratio benchmark were 15 percent or 5 percent, but I can tell you that this has been established in a very objective way and that, provided that all the other elements are there, then the country will certainly be in a sustainable situation.
QUESTION: We have seen the calculations of the World Bank on the HIPC initiative--that 80 percent nominal debt relief by the Paris Club results in only somewhere between 17 and 20 percent effective relief because big chunks of the bilateral debt of the Paris Club are left out. Post cut-off date debt, official development assistance debt is not dealt with in a responsible way by various countries (Japan, the United States). What are you going to do about that problem, and do you not exaggerate a little bit with your assessment that the 80 percent relief linked to the HIPC initiative and the effort of the multilaterals will really provide an exit for the most indebted developing countries?
THE MANAGING DIRECTOR: I will answer you with a degree of prudence, because this issue will be discussed tomorrow at the Development Committee. But, I can tell you that my colleague, Mr. Wolfensohn, and myself have been suggesting that, for eligible countries, the Paris Club be prepared to reduce debt to them by 90 percent. This might suggest that we should normally be disappointed by 80 percent. But let me tell you that, with such a level of contribution, a large number of the cases that we have analyzed in a particularly detailed way can still be settled in a satisfactory manner. If the contribution of the other creditors were a little bit below expectation, we will have to see case-by-case if, in view of the actual situation of the countries, we can nevertheless get sustainability through other compensatory measures. We see a great probability for that. If this turns out not to be possible, we have agreed that we would sit together once again and try to find a solution, a cooperative solution, that would simultaneously meet the objective of putting the debt situation of the indebted countries on a solidly sustainable footing and of preserving the preferred creditor status of the institutions.
Allow me to tell you that I do welcome the good news that has recently come from the Paris Club. A few months ago, you would have heard that it was impossible to go beyond Naples terms of 67 percent debt reduction. Now they are prepared to go up to 80 percent. This is good news, and an extremely good basis for getting this new initiative started immediately after the deliberations of the Development Committee.
QUESTION: May I follow up on that? Because you do not answer my question in the way I expected. I mentioned two issues that prevent the Paris Club's 80 percent from resulting in real debt relief. It remains a nominal 80 percent, resulting in less than 20 percent overall debt reduction because of the debt that is not covered.
THE MANAGING DIRECTOR: When we, the World Bank and IMF, speak about 80 percent or 90 percent debt reduction, we speak in the traditional language of the Paris Club, knowing pretty well the rules they have for the cut-off date, for the treatment of some forms of credit and not the others. We use this language, and our calculations have been made having in mind the practices of the Paris Club.