Press Conference by Mr. Michel Camdessus, Managing Director of the Intenational Monetary Fund
January 16, 1998
MANAGING DIRECTOR OF THE
INTERNATIONAL MONETARY FUND
January 16, 1998
I. OVERVIEW OF COUNTRIES IN THE REGION
I am pleased to announce that the government of Indonesia and the International Monetary Fund have reached agreement on a much strengthened and reinforced economic program. It aims to restore confidence in the currency and in the economy by demonstrating that the Indonesian government recognizes the problems confronting the country and is prepared to take the necessary measures to overcome them, even if they are difficult and painful.
Let me summarize briefly the program that we have just agreed.
- The program is designed to avoid a decline in output, while containing inflation to 20 percent this year, with the aim of bringing it back to single digits next year.
- The budget. The 1998/99 budget will be revised, to accord with the newly agreed macroeconomic framework, while still adhering to Indonesia's long-standing balanced-budget principle. This would imply that the budget would record a small deficit, of about 1 percent of GDP--a level that strikes an appropriate balance between the need to avoid an undue fiscal deterioration and the need to avoid a fiscal contraction that would further depress economic activity.
- Fiscal transparency. Accounts of the Restoration and Investment Funds will be brought into the budget in 1998/99.
- Public sector projects. Under current economic conditions, public spending must be limited only to those items of vital importance to the country. Twelve infrastructure projects will be canceled. Budgetary and extra-budgetary support and credit privileges granted to IPTN's airplane projects will be discontinued, effective immediately. In addition, all special tax, customs, and credit privileges for the National Car project will be revoked, effective immediately.
- Monetary policy. Bank Indonesia will be given full autonomy to conduct monetary policy and begin immediately to unilaterally decide interest rates on its SBI certificates. As the program measures take hold and confidence returns, market interest rates should gradually begin to fall.
- Bank and corporate sector restructuring. It is vitally important to restore the banking system to financial health and to alleviate the difficulties of the corporate sector. Specific plans to assist the banking system are now being formulated.
- Structural reforms. The program envisages that virtually all of the restrictions that have been put in place over time will soon be swept away. For example:
- From February 1, BULOG's monopoly over the import and distribution of sugar, as well as its monopoly over the distribution of wheat flour, will be eliminated.
- Domestic trade in all agricultural products will be fully deregulated. The Clove Marketing Board will be eliminated by June 1998.
- All restrictive marketing arrangements will be abolished. Specifically, the cement, paper, and plywood cartels will be dissolved.
- With respect to foreign investment, all formal and informal barriers to investment in palm oil plantation will be removed, while all restrictions on investment in wholesale and retail trade will be lifted.
- Measures are also being taken to alleviate the suffering caused by the current severe drought.
This revitalized program is bold and far-reaching, addressing all of the critical problem areas of the economy and deserving the full support of the international community. It provides for strengthened measures targeted to alleviating the plight of the most vulnerable people in the country.
Korea's adjustment program had a difficult start when markets realized the full seriousness of the foreign exchange situation. Through prompt implementation and acceleration of the program, however, confidence has gradually improved, the official international community came in with additional support, and creditor banks have started negotiations to achieve a restructuring of Korea's debt. All this is a significant change, but difficulties still lie ahead. The government has started a social dialogue with unions and employers, and its success is crucial for ensuring that the overall program can be implemented with social stability.
Significant progress has been made in the rehabilitation of Thailand's financial sector and the external situation has improved. The government, in acting with determination to implement the program, deserves our full support.
Some have asked if the Thai program will be "renegotiated" or "augmented." The authorities have not requested a renegotiation of the program, nor an increase in the financing of the program, which has been sufficient up to now. However, there will be a further program review in February 1998, during which--among other things--the fiscal position will be reassessed. This is not a renegotiation, but an adaptation of the program to evolving circumstances.
While they have weathered the earlier storm, vigilance during the period ahead--which is also a pre-election period--is necessary. In particular, the Philippine authorities need to keep fiscal policy on track and to maintain the required degree of monetary tightness.
While affected by the turmoil in the region, Singapore has managed the situation well, owing to sound macroeconomic policies and a strong financial position of its financial institutions, as well as increased transparency.
China has been a stable part of the region, and a moderate slowdown in growth is welcome. The government can now--in a preemptive fashion--deal with structural issues of banks and state enterprises. China continues to enjoy a strong balance of payments, and its authorities rightly intend to maintain the present value of the renmenbi.
Like other countries, Malaysia has experienced serious pressures in financial and exchange markets, reflecting contagion effects from other countries in the region and--despite in many ways strong economic fundamentals--concerns about its own macroeconomic vulnerabilities. Over the past several months, the authorities have taken important preemptive measures to address the situation, particularly on the fiscal side, notably in last month's economic package, which I applaud. However, given the continued volatile market situation, I believe that there is a need to strengthen policies further--particularly on the monetary side--to achieve a better policy mix, underpin the restoration of market confidence, and thereby ensure a rapid return to exchange rate stability and sustainable growth. Malaysia does not necessarily need an IMF-supported program to achieve this. Our efforts, rather, are directed at providing whatever advice and technical assistance we can to support the Malaysian authorities in putting together their own comprehensive economic program, including measures in such areas as financial sector reform and structural policies. To this end, an IMF team has started the annual Article IV consultation, and will discuss formulation of a comprehensive package.
(1) temporary tightening of monetary policy to help stop the slide in exchange rates;The goal is to let these economies emerge more strongly to resume rapid development.
(2) taking immediate action to correct obvious weaknesses in the banking system--a major element in these crises; and
(3) implementing with determination structural reforms to remove long-standing impediments to growth--rigidities, monopolies, and governance issues.
The intermediate goal is to shorten the adjustment period and mitigate its effects through:
(1) provision of finance--our own, and arranging financing packages;
(2) budgetary flexibility to minimize output loss;
(3) alleviating the impact of credit tightness on exporters and small/medium enterprises; and
(4) alleviating the social costs of adjustment.
- First, correcting accumulated structural weaknesses and the resulting foreign exchange problem inevitably involves a temporary slowdown in economic activity and unavoidable social hardships. IMF programs are designed to shorten the period of adjustment and minimize the loss in output.
- I frequently emphasize that, while the burden of adjustment is inevitable, a lopsided distribution is not. I have, therefore, been encouraging a social dialogue between employers, employees, and the government to advance necessary changes-- including retrenchment of surplus labor--while, at the same time, ensuring both an alleviation, and an equitable sharing of, the pain. The possible ways to achieve this include:
- For displaced workers: severance payments, unemployment insurance, continuation of health insurance, retraining for new jobs, and improved labor exchanges.
- For the poorest sections of the society: targeted programs to ensure minimum standards of nutrition, health, and shelter.
- At the same time, IMF-supported programs provide for needed flexibility in the budget to support economic activity and finance unemployment and poverty alleviation schemes.
- Flexibility with respect to overall fiscal targets. While there is a need in most IMF-supported programs to strengthen public finances, targets can be relaxed to avoid "fiscal overkill" if there is a serious weakening of the economy.
- Flexibility with respect to the composition of expenditure. IMF-supported programs encourage curtailment of unproductive expenditures and low priority investments to make room for investment in human capital--education and health--and for social expenditures.
- Flexibility with respect to subsidies on essential products. While subsidies are an inefficient way to protect the poor, many IMF-supported programs provide for a careful phasing out rather than immediate abolition so as to avoid disruptions and hardships.
- Structural measures to eliminate monopolies and cartels (which benefit the few at the expense of the many), increase competition, reduce tariffs, improve corporate governance, and promote transparency.
- This underscores that the IMF is indeed sensitive to social concerns. IMF-supported programs try to integrate socially-oriented measures with macroeconomic and structural adjustments that are essential to reestablish sustained growth. And sustained growth is the most powerful means of bringing unemployment down and reducing and eventually eradicating poverty.
Finally, let me briefly comment on some specific questions and points of concern widely discussed in recent weeks:
1. Is the Hong Kong peg safe?
Hong Kong, China, is prepared to make full use of interest rate policy. Hong Kong's banks are in a strong position, and Hong Kong's reserves are high. I am confident, therefore, that the peg can and will be sustained.
2. Is China going to devalue?
China is in a sound macroeconomic position, its balance of payments is strong, and its reserves are high. The impact of the crisis on China's balance of payments will need to be monitored carefully, but the authorities have clearly--and in my view rightly--concluded that a devaluation of the renmenbi would not be appropriate at present.
3. Proposals for "currency board-like" arrangements?
Future exchange rate arrangemets in the region are a very important issue, and I welcome the constructive debate now taking place. We in the IMF have an open mind on such proposals, and we are studying them carefully. In the meantnime, no time should be lost in acting to restore confidence so currencies can be stabilized.