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Argentina and the IMF

Brazil and the IMF

Malaysia and the IMF

Russian Federation and the IMF

United States and the IMF

IMF Borrowing Arrangements: GAB and NAB -- A Factsheet

IMF Quotas -- A Factsheet

IMF Surveillance -- A Factsheet

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INTERNATIONAL MONETARY FUND
PRESS BRIEFING ON
1998 ANNUAL REPORT
BY
STANLEY FISCHER
FIRST DEPUTY MANAGING DIRECTOR

September 11, 1998, 3:00 p.m.
Meeting Hall B
IMF Headquarters
Washington DC

MR. ANJARIA: Good afternoon, ladies and gentlemen. Thank you for coming. I'd like to welcome you to the press conference of the First Deputy Managing Director, Mr. Stanley Fischer, on the IMF's 1998 Annual Report.

I should note that with this press briefing, we begin a series of press events which will be of interest to you in connection with the upcoming Annual Meetings. We expect to schedule a briefing on international capital markets on the basis of the 1998 report on international capital markets on September 21, and we expect to schedule the press conference of the Economic Counselor of the IMF, Mr. Michael Mussa, on the World Economic Outlook on September 30.

I'd like to introduce today's panel. Mr. Fischer, on my right, you know. To his right, Mr. David Cheney, chief of the External Relations Department’s Editorial Division; to his right, Mr. Michael Kuhn, Senior Advisor in the Treasurer's Department and, to his right, Mr. Graham Hacche, Assistant Director in the Research Department.

I'd like to ask Mr. Fischer if you would like to make a few opening remarks, and then, we will move on to your questions. Thank you.

IMF First Deputy Managing Director Stanley
Fischer
MR. FISCHER: Thanks, Shail, and thank you very much for coming. This Annual Report comes out just before the Annual Meetings, and this is the start of a cycle of briefings and press conferences that go through the Annual Meetings. We're looking at an Annual Report that is physically better than ever, marred only by pictures of the management of the Fund. A new innovation, trying to put a human face on the IMF, and it describes a financial year, that year ending April 30, that has been truly momentous for the IMF and that has confronted us and the entire global system with major challenges. In the period that this report covers, the Asian crisis and some of its reverberations around the global system dominated our work and led to a record level of Fund lending.

In the past financial year, member countries borrowed US$26 billion from the Fund, nearly four times as much as in the previous year, and from the end of April through the end of August, we've disbursed a further US$11 billion. Now, that's the amount drawn. The amount that we committed in financial year 1997/98 was US$43 billion. Some of the money that we have committed has not been drawn, and there has been an additional US$10 billion committed since the end of the financial year. Those are very large sums relative to the base, the lending base, of the IMF.

As a result of these activities, our stock of net uncommitted usable resources, adjusted because we need to maintain working balances, fell to US$30 billion at the end of the financial year from about US$59 billion a year earlier, and that US$30 billion has now become about US$28 billion. The Fund's liquidity ratio, one of the arcane elements of Fund practice--it's the ratio of our net uncommitted usable resources to our liquid liabilities--was at 45 percent at the end of the fiscal year and is now about 36 percent, compared with 121 percent at the end of the fiscal year 1996-97.

On average, that ratio has been 70 percent. Now, the question arises what do you need this liquidity for, and the answer is that, as has been said often, the Fund is a Bank, and the Bank is a Fund. The IMF is a bank. It operates by countries making deposits in it, and we then lend out their deposits, the currencies they give us. But they have the right to draw those currencies, just as in a bank, and we need to keep liquid assets in case they want to draw. That's why we need a liquidity ratio. That's why we regard 30 percent as a ratio below which we should not fall.

We think of 30, possibly 25 to 30--around US$19 billion to US$23 billion--as a reasonable reserve ratio or liquid assets ratio, to maintain. That would mean that we now have US$5 billion to US$9 billion available for lending. We could imagine going below the 30 percent liquidity ratio on a very temporary basis and doing some additional lending but only if we knew that additional resources would be available soon.

All these data underscore the need to strengthen our financial resources, both through the approval of the quota increase and the approval of the NAB, measures which we hope and expect will become effective soon, because as you can see today, the demands on the Fund's resources are not declining right now, and I see Mr. Sotero over there or anybody from Latin America knows that the Fund's role in Latin America is also at issue.

This Annual Report is slimmer than previous ones. It's partly because it's printed on beautiful paper, but even more importantly because we have left out the summaries of the Article IV consultations with selected member countries because we publish those more rapidly on the IMF Website. And you also probably know that we publish them now in hard copy in a publication called IMF Economic Reviews three times a year. Three times a year, we collect all of the Press/Public Information Notices (PINs) issued in the previous four months and put them together in these economic reviews. So, if you want to access in hard copy PINs, they are here in the back of the room.

l-r, IMF First Deputy Managing Director
Stanley Fischer and External Relations Department Director Shailendra Anjaira
We did that for an obvious reason. Putting them into the Annual Report leads to the effect that sometimes, as last year, the report on a discussion for the year ending April is 16 months out of date by the time it comes out, and that has led to misunderstandings in the past.

Now, the report, as you can imagine, given that it ends in April, is dominated by the Asian financial crisis, and it provides a broad description of our response to that crisis and includes a chronology of the developments which we updated through July to supplement the summaries of the Board's discussions. The report, as you know, is a special breed of Fund publication. It is a publication of the Executive Board, which is the Fund's decision making body. It is the group to which we are responsible. It is not a staff publication.

It is the occasion for the Board to convey to the world a record of its work and its views, and you may want to know how a 24-member Board does that, and the answer is that it's a very painstaking process. They get a draft outline from the staff; they discuss the draft outline; they tell us what they would like; the staff then writes something. We then go through the staff's draft report on a page-by-page basis with 24 people making drafting suggestions. At the end of it, if we are still alive and awake, we come out with a report that traditionally takes 8 to 10 hours for Board discussion and sometimes runs over into the next day. The report is approved page-by-page and reflects what the Board says, and you will notice this year that we are continuing the Fund's steady trend of increasing transparency, of reporting more and more about Board deliberations and our operations.

The report has four sections: an overview; a summary of Board discussions other than of individual countries. The PINs are of individual countries, but, of course, the Board discussed the WEO; it discussed the international capital markets; it discussed other non-individual country issues like EMU and systemic questions about the way the system is operating.

The third section describes what we did in the financial year: surveillance, financial support for members, the ESAF, the HIPC initiative, capital account liberalization, and we end with a description of our staffing organization and budgets.

Now, the Board has so far drawn some tentative conclusions from the Asian crisis. We will come back to them. Again, there is an emphasis on the importance of timely and accurate information. This sounds trite, but information on reserves, information on off-balance sheet transactions of central banks, of the banking systems, getting that on a timely basis, providing it on a timely basis, is a recurrent lesson, one on which we hope to do better and better--but in which you find in every crisis that what you have is the information you needed for the last crisis, and in every crisis, there is some piece of information that is new, that you have to go out and get.

We see the Board and the Fund broadening its reviews of individual economies, particularly in considering financial sector issues. The issue of contagion, of interdependence, has, of course, come to the fore. It was doing that on the basis of the Asian contagion. It will, no doubt, do that far more forcefully, even, on the basis of the Russian contagion, I am sure an issue that will capture the attention of the Board and the staff in the coming year.

Transparency is an issue. The Board is moving steadily to become more transparent, steadily supporting those moves; grappling with the complications of how you remain transparent and get full information on very sensitive issues. That debate is taking place. And finally, the recognition that for Fund surveillance to be effective, member countries have to take the Fund's advice seriously and to implement it when we have made a convincing case for the measures we recommend, and I think we usually do.

These are obvious lessons. They are early lessons. But I am sure we will continue to draw the lessons, in part, as we consider--as each country's program continues--what the lessons are that we are learning from those programs.

Now, you know also that the Asian crisis--and again, it will be only reinforced by the second round or by the crisis that started with the Russian devaluation--these crises have focused attention on ways of strengthening the architecture of the international system. This architecture issue will feature very prominently in the Annual Meetings. There will be a series of reports, reports by the staff. There are a variety of Gs that are producing reports: the G-10; probably G-22, and I'm sure a few other Gs will have reports on these issues.

They will point in roughly the same direction, I am sure: that we need to help members strengthen their financial systems; that we need to improve, strengthen surveillance; that we need to provide better information on what countries are doing; that we need to grapple with the issue of combining the Fund's role in crisis management with the recognition of the moral hazard issues that are created by Fund and other official sector financing; and that we continue to grapple with the extraordinarily difficult role of the private sector's role in dealing with resolving financial crises.

There is a tension between the desire to involve the private sector financially in the resolution of crises and the fear that if that becomes the norm in every case that as a crisis approaches, you only encourage the volatility of capital movements. That's an extraordinarily difficult trade-off to handle. The international community, I think, is approaching this issue, bearing in mind these complexities. I hope that in the next few months, we will see constructive suggestions coming out for how to balance these two desirable features of crisis resolution, involving the private sector but not increasing the volatility of capital flows; rather, reducing it.

Now, we focus on Asia, but you should know that the great majority of programs are outside Asia, including programs with low-income members. You know that the Board undertook a review, and it had both an internal and an external assessment of ESAF, our concessional lending to our poorest member countries who constitute the bulk of the programs we have.

We also have placed a summary of a staff paper on the lessons that we think we learned from these reviews, the internal and the external. We have posted a summary of the paper on our Website, along with an electronic mailbox asking people to comment so that we can get feedback from practitioners and others who are interested in the operation of the ESAF and the operation of the Fund in low-income countries.

And we have also during this year, together with the World Bank and other lenders, under the HIPC Initiative, begun the process of providing debt relief to six heavily-indebted, low-income countries.

On surveillance, we have clarified our role on governance issues. We have provided clear guidance to members on increasing the transparency of fiscal policy making. We are doing further work on principles of monetary policymaking, and we have focused a great deal of effort on helping members strengthen their financial systems.

We have continued our discussion of a possible amendment to the Articles of Agreement that would make the orderly liberalization of capital flows one of the purposes of the Fund and possibly extend Fund jurisdiction in this area. This is an important and complex matter. It is a controversial one at this time, and several issues have to be resolved. There is a basic debate over whether the freer flow of capital is a good idea. Another question for those of you who attended our conference on this issue was whether legal jurisdiction for the Fund is feasible and necessary. Other questions were how, if this is done, we can assure that banking and supervisory standards and the quality of banking systems are sufficiently improved, and that other preconditions are met so that a country is in a position to open its capital account.

It's not clear where the Board is going on this issue because of the controversies aroused by the current crisis. I think I am supposed to represent the Board, but perhaps, representing management, let me say that I believe that the current crises reveal more than ever how important it is to accomplish capital account liberalization properly and that that, to me, is the justification for an amendment of the Articles of Agreement. We would not have recommended to countries to do what some of the countries now in crisis did, which is to open up their capital accounts at the short end while keeping them closed at the long end. It's the other way if you are going to go gradually. I think we need to develop an understanding and increase our understanding of how to liberalize capital accounts and that that is the way that we think of the amendment, not as a helter-skelter move to capital account liberalization but as a way of bringing order to this process.

I hope, as you go through this report, as you visit our Website, and as you attend the increasingly frequent briefings by Fund staff, that you will realize that the Fund is moving, to be sure gradually--as befits an organization with 182 members, not all of whom have the same views--but is moving steadily in the direction of greater transparency; greater clarity about what it's doing. It is something that the management is enthusiastically supporting, and, I believe increasingly, our members do too, and I hope you find this report informative. If it isn't; if there are ways that you think it could be improved, let us know, and next year, it could be even better.

Thank you.

MR. ANJARIA: Thank you very much. Mr. Zwätz could you wait for the microphone, please?

QUESTION: Yes; thank you. Mr. Fischer, can you tell us something on the IMF's view on the ratification process on the quota increase and the NAB and the U.S. Congress?

MR. FISCHER: The debate over the role of the IMF and the way it is fulfilling its task is a wholly legitimate debate. We need to be held accountable, we need our mission to be understood--all these things are understandable. This is part of the process in any democratic country.

There is a view that accountability is somehow lacking, but actually, as you know, most of you are familiar with this organization. We have a Board of Directors which has to vote in favor of everything that we actually do. So, the accountability is to governments.

But the broader debate that takes place at the time of a quota increase is an entirely healthy development, an entirely healthy feature of the process. At the same time, the situation in the global economy, unfortunately and very regrettably, is becoming extremely difficult. And the Fund's resources now available are limited, possibly limited in ways that are unhelpful to increasing confidence in the international system, and this is a time when uncertainty about the international system prevails.

So, we very much hope that the Congress will move rapidly to support the quota increase and the NAB. There are countries out there who need assistance. The system needs a functioning IMF, able to provide assistance not indiscriminately but to member countries which are doing the right thing and which, for reasons not under their control, are facing grave difficulties. That is why we believe it's important that the quota increase proceed as rapidly as possible.

QUESTION: My name is Martin Burkhard. I am with the Danish newspaper Information. Pleased to be here.

In light of what you said about free capital movements in that debate, do I take it, then, that you don't agree at all, or you consider rather far-fetched, the views of Jeffrey Sachs on limiting the inflow of capital into borrowing nations, and do you have the same feelings about Mr. Krugman's views on currency boards?

MR. FISCHER: Let me address the issues without addressing the people. I think the Fund has in the past years recognized on the question of controls on capital inflows, that for countries whose financial systems are not adequately developed or whose macroeconomic policies are not yet strong enough that controls on capital inflows may well be warranted, provided they are market-based as, say, the Chilean controls are, and we are on record in a variety of places as seeing those controls as potentially helpful.

We are also on record on liberalization of capital controls as saying they should only take place when the preconditions for those--for the lifting of those controls--have been met. The preconditions are essentially the same as those that would be needed to remove or reduce inflow controls.

So, we are not advocates of rapid, indiscriminate capital liberalization. We believe that in the long run, countries should liberalize their capital accounts. We believe they will all want to. We are very influenced by the fact that the industrial countries all have open capital accounts and do not control their capital accounts. We believe that that is where countries will end up.

The process of getting there may be slow, and we would advocate, as I said a bit earlier, that a liberalization process starts at the long end. There are very little disadvantages to foreign direct investment or to long-term lending and gradual moves toward the short end. That's the general advice we have given.

We also recognize that controls tend to break down, and they are not a long-term solution to most of these problems.

On the Malaysian experiment, I think that the reimposition of controls--the attempt that seems to be being made to cut the country off, cut the domestic financial system off from the international system--is not one that will do very much for Malaysia in the long-run. The imposition of controls may, in the short-run, succeed if you have the apparatus to surprise people and catch them, so to speak, but I don't believe they are helpful over any sustained period.

QUESTION: Christie Bahrenberg, Dow Jones.

My question is really related to the first question, but more specifically, you said that US$19 billion to US$23 billion is a reasonable level of reserves, and then, you also said that you could imagine going below that temporarily but only if you knew there were additional resources available soon. I wondered if you could define that further. How do you define sooner? How do you know if additional resources are coming? Does that really mean you are waiting for the Congress to do something? Or is there some other indication?

MR. FISCHER: We don't--we would be very uncomfortable. Our shareholders are much more important here, because it's the liquidity of their claims that's at stake; it's their feeling that what they have in the IMF constitutes usable reserves; that's really the issue.

So, we are considering what they have told us in the past, and they have said they don't want these ratios to go down. They count these as reserves, and they want to know that if they need the money, they can get it. So, we would need to have some indication that the quota resources are on their way, or it's very likely they're coming.

I speak for, and in some sense, I'm prejudging what the membership would say; it's their decision. But that's what I guess they will say. If there is a good prospect that this will be reconstituted very soon, we could go down for awhile, but you don't feel comfortable running a bank and saying, well, we're going to run at a very low level of liquidity.

QUESTION: What's a good prospect?

MR. FISCHER: I can't define that for you. We'll have to make that decision at the time if we are put into that situation.

QUESTION: You were talking about how much money you had left and usable resources of US$5 billion to US$9 billion with that reserve discussion you just had. Can you comment on Brazil? There's discussion, talk out of Brazil that the IMF and the U.S. are trying to put together a financial package to aid them. Is that true? And what's your assessment of the situation there?

MR. FISCHER: I'm struck by the fact that we are supposed to be talking about the period through April 1998, but let me try and address that.

Obviously, with a country of such major importance being under attack, we are talking to the Brazilian policy makers about what they can do to deal with the situation. They have been, for many years, in close discussion with us. We have very good working relations with the Brazilians. It's not unusual for us to speak to them. But, of course, we have been doing it much more frequently lately and following very closely the various measures they have taken.

We are seeing a situation which, in some respects, reminds one of October 1997. There are some initial hesitations about raising interest rates; there are some initial hesitations about responding, creating fears in the market that Brazil might not really defend its major achievement, which is the stability of the currency and the stability of inflation. Then, at the beginning of this week, there was clarity that the interest rate was, in fact, being raised to 30 percent and then, last night, clarity that they will again undoubtedly defend the real when they raise the interest rate to 50 percent.

At the same time, they have put in place a strong cut in fiscal spending in 1998. It's at an annual rate of 1.5 percentage points of GDP, and they have said that they will be announcing shortly a medium-term program supported by appropriate fiscal reforms that will stabilize public debt in relation to GDP within the next 3 years. These are major moves by Brazil to defend itself. They should remove the doubts that have existed about Brazil's determination to defend the stability of the economy. We discussed these measures with them. We stay in daily touch with them, and if it were to become necessary, then, and if Brazil were to need it, the IMF would, as it does for any member that requests it, stand ready to provide financial assistance.

QUESTION: Have they yet?

MR. FISCHER: No.

QUESTION: Harry Dunphy from AP.

I'd like to go back to the question of Congress and available reserves. In some of the sessions in Congress, there have been statements that, in fact, far more money is available than the US$5 billion to US$9 billion that you have mentioned, because the IMF could borrow money on the open market or use its gold reserves. I realize that that is a decision for the Board members to make, but does management have a view?

MR. FISCHER: The ability of the Fund to operate in crises--we are supposed to operate in cases where markets are disturbed, and we are supposed to be able to move very quickly and very decisively. That seems to me the right way for the Fund to move. Our gold reserves are there for a particular purpose. It is the nature of the way the Fund operates that it makes loans to countries in crisis. It is the nature of the way the Fund operates that it makes loans to countries when the private sector is trying to pull out; that is to say, it is the nature of the way the Fund operates that it is making loans to countries that face difficulties.

Now, in our long history, we have had very few cases of long-term default or long-term arrears. There are some. We found ways of gradually bringing them back in the international system. We have been a very sound institution. But we are not going to operate in a way that puts our shareholders' resources at risk, and we need to hold those gold reserves as the ultimate assurance to our members of the validity, value of their claims on this institution.

Now, there are all sorts of technical reasons why we couldn't get hold of the gold, and Mr. Kuhn, the Deputy Treasurer, could explain them to you. Michael, correct me if I'm wrong, but I believe if we sell gold, the proceeds go back to the members anyway; don't they?

MR. KUHN: Not necessarily.

MR. FISCHER: Not necessarily; okay, I'm wrong. But there are technical reasons why this would take a very long time, and in any case, there is a prudential reason why it is extremely unwise.

QUESTION: Mr. Fischer, there have been a couple of think tank reports in recent days suggesting that the world might be much better off if the IMF was done away with altogether, and I believe some of the Senators who voted against extra funding for the IMF are influenced by some of these reports.

Now, in view of that, are you planning to initiate any activity to counter these arguments?

MR. FISCHER: You know, we spend a lot of time, Mr. Anjaria and his department is here to help make the case for the IMF. The Managing Director does it; I try to do it in speeches, and staff tries to do it. There is no question that the Fund's public image is not as good as it should be, or as good as the objective circumstances indicate.

Part of the reason we don't mount the public relations defense we should is that people here tend to be very busy, and we should probably devote more time to this activity. But we will not, possibly unfortunately, be mounting a major extra campaign. We will continue doing our regular work. We will continue to do what is our duty to help member countries, and we rely also on our member countries to make the case for the Fund.

You know, the quota increase is not a whim of the management of the Fund. It's a decision of 182 member governments that this institution needs more resources. They're the ones who wanted to fund us; they're the ones who voted for that; they're the ones who make the decision. There is a request by the U.S. Treasury before Congress for resources to fund the IMF, and I may say we are extremely grateful for the way the Treasury has made this case. It is a role they have taken on themselves with great effectiveness to make the case for the IMF.

I am sure we should be doing better, and I am sure we will try to do better in meeting the concerns of our critics. I find very little validity in the views of those who think that the world would be better off without this institution. It's very hard to deal with them, as some come from one side of the political compass and some from the other side. We can have a lengthier debate on that after this event.

QUESTION: Yes, Dr. Fischer, Daniel Moss from Bloomberg. Just following this line of argument a little bit further, most pollsters rate it unlikely that there will be a change in the balance of power in either house of the U.S. Congress this November. It's possible we could be having this same discussion in 12 months' time.

Under such circumstances, would you consider going to the capital markets? I know it's probably not a preferred option, but there may be no change in the balance of power in the U.S. Congress after November. Is it completely inconceivable that you would go to the capital markets?

MR. FISCHER: You know, there are decisions of enormous importance being made now about the role the United States plans to take in a global economic system that it created in 1945 together with the other members of the Bretton Woods conference. It is a system that has delivered unprecedented growth. It has delivered an extraordinary economic performance, unprecedented in history. It has operated by and large in the way the creators of this system envisioned it would. It has created a volume of global trade that could not have been believed, although it was hoped for 53 years ago.

It is not a small decision to decide to abandon that system, and I think we should not, at this stage, be crossing hypothetical bridges as to how the world would look if the United States Congress decides not to support the IMF. It would not be a small thing. It's not a matter of where do you get the money next. It would be a big change in the system, a system that has served the world well and that could continue to serve the world well. This is a very, very important issue for the operation of the world economy.

So, I don't want to go into what will you do if this, that, and the other. I think this is a serious debate, how the countries that take the responsibility for running the international system react. I think that great debate has to be settled first.

QUESTION: Can you elaborate a bit more on the long-term effect of the currency controls imposed by the Malaysian Government? You said that it is not helpful in the long run. What kind of damage to the economy would the Malaysian measures have on the economy in the long-run?

MR. FISCHER: Malaysia has done extremely well by integrating into the world economy. It has benefitted enormously from foreign investment. It has benefitted from access to international capital markets. It has benefitted from an extraordinary growth in the volume of trade. It's putting in place controls which will certainly limit access to the global economy. It will certainly reduce the willingness of foreign investors to invest in Malaysia. It will reduce the opportunities of Malaysian citizens to interact with the world economy.

In the short run, you're living off the capital of the benefits of the openness of the past few decades, but that openness is what has now been decided to be closed, and as the closing gathers strength, and as the connections wither, the economy will turn in on itself and will lose the opportunities that history shows outward-oriented economic development has produced.

Maybe this is all temporary. We don't know. I suppose if it's only there for a short while, and they are only temporary measures, the effects won't be long-lasting. But if the intention is to move toward a closed, controlled system, all the evidence is that over long periods, that doesn't work.

QUESTION: Jose Carillo with Universal of Mexico. My question is very simple: in view of what is going on actually in the financial world, do you consider that it would be necessary or interesting, at least, to have a new conference of Bretton Woods?

MR. FISCHER: What is going on now, the work on the architecture of the system is, in essence, an incremental approach to doing what you want. My guess is that it would be very hard. You've got existing institutions in place. You're not in a world war after a Great Depression which has totally destroyed the fabric of the world economy, which was the situation at Bretton Woods.

The world economy had been simply destroyed. We're in a functioning institutional framework. Redesigning institutions from the ground up doesn't make a lot of sense. But the ongoing reexamination of the international architecture, the issues that are coming up in that connection, that, I believe, is part of what you want.

I think the system could be operating much better, but basically, the system is a reasonable one, one that needs improvement. I don't think it needs to be redesigned from the ground up.

QUESTION: I've got a question about the Congress, funding.

Barbara Edsel, Futures World News.

Basically, I would like your opinion. If the U.S. Congress, in the final analysis, does not agree to approve additional funds for the IMF, does that put the whole dues increase in jeopardy? Is there any other option if the Congress does not agree to pass the funding?

MR. FISCHER: The decision on the quota increase requires 85 percent support, and that would require the U.S. to accede. So, we couldn't do it without the United States.

MR. ANJARIA: Thank you very much.

I would like to remind you that the Annual Report section of the press briefing is now over, and we would like to move to a few current questions that you have.

QUESTION: South China Morning Post. What are your views on the recent moves by the Hong Kong Monetary Authority to intervene in the market there?

MR. FISCHER: The monetary authority discussed the changes they were considering with us, and they said, in their public announcement, that they regarded two conditions or two preconditions as absolutely paramount in their thinking. One was the maintenance of the currency link, the 7.8 or 7.7 link pegged to the dollar, and the second was no controls, which, in any case, they pointed out, were inconsistent with the basic law, to use exchange controls of any sort. They said that was what motivated these changes, and there was a driving consideration in this case. They made it clear to us during the discussions we had with them of the changes they wanted to implement.

In that light, the changes they had made were described to us and are, in fact, changes designed to make the currency board operate more transparently and more smoothly.

In essence, as I understand it, what they have done is to broaden the monetary base or the base that's eligible. I think of it as broadening the monetary base so that the extreme fluctuations in interest rates that were taking place on the basis of relatively small movements in the reserves of banks before that will be dampened.

But the rules are now very clear. They have also produced a transparent mechanism as to how interest rates for discounting are going to be set. It's a very simple one. And the system is technically well-designed and is an improvement over the preceding system.

We had a concern when the changes were being discussed that the changes could be misinterpreted. We thought that what was being proposed was extremely sensible from a technical viewpoint. The question was might the markets say, oh, they're changing the rules in an undesirable direction? I think they have done an excellent job of explaining why they changed the rules and how the system will operate, and so, that concern has been vastly reduced by the way they went about the explanation of what they were doing.

QUESTION: I have two questions following up on what my colleague asked about Brazil and Latin America.

First, from sources in other multilateral organizations, I hear that after what happened yesterday, there is a recognition that something has to be done from this end here, and in that line, today, we heard that there are active consultations between members of the G-7 countries and multilateral organizations with a view of creating some contingency mechanism to help central banks of Latin America, if needed.

Could you comment on that? Secondly, on Brazil specifically, given the structure of our public debt right now and the maturity profile of it, how long do you think that Brazil can keep interest rates at 49 percent a year without launching a major attack on the fiscal side?

MR. FISCHER: On the first question, we have been discussing inside the Fund and with our Board the willingness of the IMF to provide assistance to Latin American countries if required, if requested. We have not received requests. The Managing Director, after consultation with the Board, has prepared a statement that should arrive here shortly. It will be brought as a News Brief, and when it arrives, it will be distributed for immediate release.

It will say that the IMF stands ready to help countries willing to pursue the appropriate policies. It would also say that the Latin American countries have undertaken important measures to defend themselves and that they deserve support.

I'm not aware of discussions on the specific mechanism that you described. I am aware of discussions with our Board of the role of the IMF, which would be willing to do what it has to do and would seek to find the resources for that.

There is no question that the high interest rates are a problem, a fiscal problem, for Brazil. If they continue very long, it would mean further fiscal tightening would be necessary, and it would mean that your Government, which has in the past demonstrated its willingness to defend its currency through fiscal and monetary policy, would have to take those actions. But, you know, this market situation is truly extraordinary and it should not be expected that this extremely adverse market situation will continue on and on and on.

We believe it is an overreaction to the Russian events; that the situation in Latin America is very difficult; that the attitude of Latin American countries to debt servicing--an issue that has come up as a result of the Russian case--is clearly being demonstrated to be very difficult; and that Latin American countries understand from the experience of the 1980s that preservation of relations with their creditors and debt servicing is crucial. They said so last week at the meeting of Latin American finance ministers and central bank governors--of Western Hemisphere finance ministers and central bank governors--that was held here.

QUESTION: Besides the commitment, the strong commitment by the governments of Latin America to defend their economies against these overreacting movements by the Russian crisis, the situations have been worse since the meeting a week ago.

So, my question is how this organization can send a message to the Latin American people that the recipes of IMF are really going to work to defend not just the monetary policies but to get the people more benefits economically.

MR. FISCHER: You know, the policies supported by the IMF are the policies supported by your governments with great success, and we're not, in Latin America, in a situation in which the IMF is prescribing a set of policies that governments disagree with. Your governments are doing in the 1990s, and started in the 1980s, things very differently than they had before, and in many countries--including Argentina, Chile, Brazil, and Mexico, the largest four countries--the signs of the payoffs of these programs are there.

Occasionally, regrettably, the international capital markets turn negative. As was expressed by the Argentinean finance minister in our meeting last week, these are difficult times, but what is critical is what happens after these times, because this will end, and the question will then be which of us is able to receive the benefits of international capital flows. I'm sure he had in mind that in 1995, Argentina was severely tested; that it defended the currency, and that in 1996, 1997 and 1998, it has seen growth at an extraordinary rate as a result of the increased confidence in Argentina.

So, this is a very testing time. It is not a time whose presence any of us welcomes. It is unfortunate that contagion is taking place, but the countries that act to defend themselves will be the countries that come out stronger when this period ends, and it will end and more normal capital flows resume.

QUESTION: Mr. Sitov here. Who is going to the London meeting on Russia, please, for the IMF?

MR. FISCHER: Mr. Odling-Smee.

QUESTION: And a second question on Russia. In view of some things that the press has told us about Mr. Primakov's views on macroeconomic policies and especially in view of the first appointments that were made in Moscow of Mr. Maslyukov, the former Gosplan chief and especially of Mr. Gerashchenko, the former central banker, do you see a threat of Russia completely repudiating the policies that it was pursuing in tandem with the IMF?

MR. FISCHER: It's very early days yet. I think Russia has changed a great deal in the past 6 or 7 years. The views of many in the country have changed. It's noteworthy that in other countries, when political changes like this have taken place--and there have been political changes in other countries in which a group of reformers were replaced by people who had been prominent in the old system or by a Communist party or by something like that--that typically, the reforms resumed after a short while.

But it's very premature to say anything. We have to see what the policies of the new government will be. We will have to see how Mr. Maslyukov and his team decide to operate the economy. We'll have to see what the central bank does. We will judge on the basis of policies. It doesn't matter what the past of the policy makers is; it matters what the policies are, and we will wait; we will see.

QUESTION: A followup. Is your Moscow office kept abreast of the plans of the new administration?

MR. FISCHER: The Moscow office has been kept fully abreast of developments, but since, when I last spoke to them this morning, it was not yet confirmed who the central bank governor was but only expected, we don't have the latest views of the economic team, but I'm sure that in a day or two, we will.

QUESTION: Yes, Mr. Moss here. I just wanted to clarify your answer to the gentleman in the front row before. When you are saying that countries in Latin America which have pursued the correct policies will be assisted if necessary, did I hear you say at the end of your response that you would find the resources to do so? Is that correct?

MR. FISCHER: As we contemplate the situation in Latin America now, we will do what we can with the resources we have, and recalling that the General Arrangements to Borrow is for systemic problems, and that there is US$15 billion in that fund and that certainly, the Latin American crisis or the region as a whole has systemic implications. It is something we would certainly take up with our shareholders, that possibly access to GAB funding should be provided to help with this situation.

QUESTION: Given the obvious impact that President Clinton's difficulties are having on U.S. financial markets, do you have any information on what impact, if any, it's having on international capital flows? And do you have any opinion on whether his problems will exacerbate international crises?

MR. FISCHER: I don't have any--I certainly don't have any information, and I don't think my opinions on this one would help very much in either direction. We'll just, as on most issues, have to wait and see how things turn out.

[Edited transcript]


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