Argentina and the IMF
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STANLEY FISCHER, FIRST DEPUTY MANAGING DIRECTOR,
THOMAS C. DAWSON, DIRECTOR, EXTERNAL RELATIONS DEPARTMENT,
INTERNATIONAL MONETARY FUND
Wednesday, January 6, 2000
[Transcript prepared from a tape recording]MR. DAWSON: Today is another regular in our regular program of briefings. As the first briefing of the new year, we thought it would be useful and appropriate for Mr. Fischer to take the floor.
As always, when you have questions, please identify yourself by name and affiliation. Also, I would make reference to a couple of events that you I think need to be aware of. On January 18th and 19th in Libreville, Gabon, the Gabonese government is hosting a summit of heads of state of Africa to discuss growth and poverty reduction and the agenda for Africa.
The IMF Managing Director, Michel Camdessus, will participate in this summit, along with Mr. Fischer and Deputy Managing Director Eduardo Aninat.
Now, I'd like to turn the floor over to, Mr. Fischer.
MR. FISCHER: Thank you. And thanks very much for coming to this first regular press briefing of the new millennium. We're talking about millennia, but for us the last two years seem roughly like a millennium, and that period, thankfully, is over. At Christmas time this year, I was thinking back two years we were trying to get in place the Korean bailing-in package. Christmas one year ago we were thinking about whether Brazil would be able to deal with its problems and whether the global financial crisis that everybody feared was going to happen, and this Christmas we thought about how nice the fireworks would be on New Year's Day, and that difference is really quite something.
So I thought I'd take the opportunity to look back a little bit and also look forward. This will be very brief because you're not really very interested in this stuff and would like to ask tough questions, but let me look back a little bit.
We're in a situation where prospects for most of the emerging market countries look good. The Asian recovery now looks spectacular in most countries, especially, of course, Korea. But even in Indonesia, where it took longest to achieve macroeconomic stabilization, the outlook is much brighter. Nothing is firm in any country, but it's much brighter, and especially in the aftermath of democratic elections.
And then if you look at Latin America, I think the Brazilian turnaround, relative to what was expected at the start of the program is extraordinarily impressive and what is, to me, even more impressive is that this is a country where the environment for policymakers is not easy. Just when they think they've got the fiscal program in place, something happens every time. And yet each time they've come back, typically within a period of days, with some way of overcoming the latest obstacle. And as a result, they've succeeded in overperforming fiscally in 1999.
And obviously the new monetary policy framework, which they have put in place, is operating very well. And that change in the very, in the largest economy, by far, in Latin America is really a critical change.
And looking at another economy which occupies a similar position in its region, in Russia, the situation, the economic situation is also much better, as a result largely of the rise in the price of oil, the devaluation and the fact that previously scheduled debt payments are not being made as debt is rescheduled. But the fact in Russia is that they did pursue monetary policies that kept inflation under control and that the fiscal outlook has improved.
Perhaps ironically, part of the reason the fiscal outlook has improved is that one of the measures that was important in the 1998 July package, which was designed to move revenues from the regions to the Central Government, is actually working now. It's working too late for August 1998, but it is taking effect, and that's part of the reason for the better performance in Russia.
Well, you wouldn't expect me to only be happy. In every one of these countries, nobody can afford to be complacent, and there is a lot to be done in Asia, in Latin America and, of course, in Russia. We also will probably need to see capital flows revive—not on the scale of April, May, June 1997. They're about a third of that now. They should be going back towards, but not necessarily all of the way up to those levels, and that will take a sustained policy performance in these countries and also maintenance of stable conditions in the world economy, and that is determined largely by the industrialized countries.
I don't want to go into these prospects for the industrialized countries, but there is an important structural factor, and that is that the trade liberalization process, which is critical, especially to the poorest countries, needs to be revived.
Now, if we look back, what made the difference from a year ago? First of all, the industrialized countries' Central Banks, led by the Fed; the fact that the Fed moved very quickly—it was in the interests of the United States, but it was also in the interest of the world economy—was critical to turning a very bleak situation of October around, and then the other Central Banks in Europe followed suit. That was important, and without the prosperous industrialized countries, the developing countries would have done badly. But we must give credit to policy makers in developing countries. Many of them operate in extremely difficult circumstances, and they have stood their ground. It is amazing that almost nobody closed up their economy during this crisis. They stayed the course, and they have seen the rewards of recovery. Of course, when I say "they stayed the course," in many cases they changed ministers.
MR. FISCHER: But governments stayed the course and pursued a particular set of policies, and it looks to be paying off.
And, of course, our role came in for a huge amount of examination, not least by ourselves. And we have diagnosed some mistakes, I think, particularly early in the Asian crisis, when we did not appreciate its scale, in advising fiscal tightening when, given the lack of demand from any other source as the crisis worsened, when it was necessary, in fact, to have fiscal easing. But it took just a few months to correct that. And I think the basic approach of the IMF to defend currencies and not to defend them at the initial level necessarily, but to not let them go wherever, in order to keep inflation under control, to make sure that budgets do not get wildly out of control and, for the first time, to put structural elements of banking sector and corporate debt restructuring reforms, at the center, was correct. And those results of those approaches are speaking for themselves now in Asia and Latin America.
Now, there are lots of other lessons being drawn about avoiding vulnerable exchange rate regimes and about not opening the capital accounts at the short end first, opening them in an orderly way, embracing greater transparency, all of those things are known. I think these two years also underline the relevance of the Fund, but in a way that may not be obvious from the fact that we've been dealing with a crisis.
Let me emphasize something slightly different than the way we operated in the crisis. We do another thing that is really very important, and we see that, say, in our recent programs for Turkey and Colombia. Those are Fund business as usual. What we are really doing is providing modest financial support and a framework, an organizing framework in which countries commit themselves and get international backing that is politically important and important for the markets for a program that they know is good for them and that we know is good for them, but that is very difficult to undertake without the international backing.
The plain fact is that the Fund is one of the most important ways, possibly the most important way, that the international community promotes good macro policies around the world. We support governments that try to do the right things, often in the context of an IMF program, with not massive financial support, say, as in the case of Turkey now, that helps provide a signal to investors that countries are adopting policies that deserve their support.
And this notion of providing a framework, a signal, a framework for policy makers, reinforcing those in the country who want to pursue good policies, happens through the way we do programs in normal times, through surveillance, and through technical assistance and, of course, it also happens in a crisis. But as we reexamine the role of the Fund, we must not underestimate what is our bread and butter. Crisis lending is a critical part of what we do. It is far from being the only thing we do, and it is far from being the main thing that we do. And as we consider the reform of the IMF in the years ahead, we must remember the plain fact that the IMF is there to promote good policies and has done it and should be able to continue doing that in the new millennium.
So let me take questions, and thank you for listening.
A QUESTIONER: The Finance Minister from Argentina announced yesterday that he's going to meet with you on Sunday, and he also anticipated he's going to ask for a waiver of the targets of the last few years of '99, and renegotiate the targets for 2000 and also have some money more just in case on the contingency plans. I would like to know what are your comments on what he's coming to ask for.
MR. FISCHER: Well, Mr. Machinea will be arriving I think on Saturday, and we'll meet on Sunday. And he and his team will also be talking to our staff on Saturday, I believe, after they arrive.
What we're trying to do is to set the basic parameters for how we proceed with the new Argentine government. And as you imply, the government, the budget for 1999 ran over the amounts agreed in the program so something has to be done about that. But what we really want to do with this government, and the reason Mr. Machinea
is coming is to review with him what is the best way for the IMF to help Argentina, to help the new government, which has a particular set of policies it wants to implement, particularly to restore fully macroeconomic stability and confidence. What is the best way we can help them? And whether to continue the current arrangement, whether to turn it into some other kind of arrangement, whether to reinforce it with something, all of those things are on the table.
We don't want to start with saying it must be this way. The question is what will help Argentina the most and that the IMF can do, and that's what we'd like to explore, without going into all of the details. What we want to do is set a broad framework and then let the staff continue the negotiations within that framework.
A QUESTIONER: I'm with Turkish Daily News.
Just recently, you signed an agreement with Turkey, on December 22nd. You also mentioned about that. Two days ago the Turkish Prime Minister indicated that inflation, within the first months of the year, may not be as low as they hoped.
Are you concerned that that 25-percent inflation target, pulling the inflation down to 25 percent, may not be achievable this year? And how would you interpret the Prime Minister's statements two weeks after you sign all of those wonderful targets for the next three years?
MR. FISCHER: I don't actually know what the Prime Minister said, so I'm not able to interpret his statements. But if I were to guess, the inflation rate for December came in a bit higher than expected, and that is partly because of energy prices, petroleum prices, and partly because there was an accelerated rate of devaluation in November and December done, in part, to make sure that the program started with an appropriately valued exchange rate.
It's very early on January 6th to be announcing what the inflation rate is going to be for the next 12 months in a framework in which the aim is to reduce it from 65 or 70 percent to 25 percent on a 12-month basis. And I would say that the design of the Turkish program, where the exchange rate was designed to help bring interest rates down and make the whole budget situation more tolerable, is working pretty well at the moment. So that promises well for helping to fix the fiscal situation, which is, of course, part of the underlying difficulty in Turkey.
So I don't think at this stage we can say very much, other than that things look good at the beginning so far.
A QUESTIONER: I'm with Kyodo News.
MR. FISCHER: No, the Japanese recovery is not spectacular. There's been a stabilization, and there was probably growth in 1999. There is a fiscal policy in place which should promote growth. Monetary policy should continue to be very expansionary, but no one is looking to a spectacular recovery in Japan.
On your second—if policies continue supportive, we should see growth. On your second question, I don't know what the outcome of the process now underway, if it is underway.
MR. FISCHER: —for selecting a new Managing Director will be.
A QUESTIONER: Going back to the first question, I understand that one possibility that the Argentinean government is considering is trying to avoid this process of waiver and going directly to a new program. I understand that IMF's position on that is that, if you go to a new program, the credit that will be allocated to Argentina will be zero from the beginning.
So one of the problems, I mean, if the IMF has decided to give a program with an up-front credit important enough to Argentina to go with that. So I would like to know if it's possible to do that, if it's possible for Argentina to have a new program and to have a credit line of $2- or $3 billion from the very beginning allocated. Because I understand that's a problem.
And two other things is, in terms of the structure of reforms, are you going to insist on labor reform, on labor measures, or is it the priority to look for the provincial finances and to include that in the targets of the program?
MR. FISCHER: On the first question, you know Argentina has accumulated rights under the current arrangement, which they have chosen to make precautionary. They have a right to draw a certain amount and are concerned about the possibility of losing that, or they would lose that if we moved to a new arrangement. But, of course, in any arrangement, by law, when the Board votes on it, the country gets the right to a payment. It has to be, otherwise we don't do it. And you gave me numbers, $2- to $3 billion. I don't actually know what the numbers would be, but obviously there would be some size first tranche that would offset the impact of the loss of the accumulated rights under the current precautionary arrangement.
On what structural measures will be in it, I just take note of the fact that the Argentine government on Christmas Eve sent its own labor measures to the Congress, and we'd have to look closely at that and see. The provincial government finances is a critical issue. There was a significant overrun last year. This issue has come up in many countries and ways are found of dealing with it, and I assume the government of Argentina, too, will find ways of ensuring that the whole public sector, including the provinces, keeps fiscal discipline.
A QUESTIONER: Just to clarify on Argentina, are you saying that there will not be any decision on any waiver request at this meeting this weekend?
On Russia, you say the country is doing better. One can't help getting the impression that the IMF has got two rules, one for Russia and one for the rest of the world. When Indonesia, when there was fighting in East Timor, the IMF said very clearly we can't possibly lend while this is going on. When there is fighting in Chechnya, the IMF is saying, ah, but they haven't met the conditions. Would you, could you, comment on that, and could you comment on Mr. Putin's initial policy proposals which include lower interest rates, 100-percent import earnings, export earnings, currency exchange, compulsory exchange of export earnings 100 percent, and proposals to cut export taxes.
MR. FISCHER: On Argentina—I didn't actually say either way on what will happen this weekend. I don't know where we'll end up. We're not not trying, in meetings with Mr. Machinea and his colleagues, to negotiate a program. We're trying to decide on the framework in which we'll proceed and so I just am not sure how that will end up.
On different rules for different countries, the Timor versus the Chechnya thing, remember that we always said on Indonesia that there are two things, of which one was Bank Bali, which was a technical issue right through that. The East Timor issue was related to the fact that promises had been made to the international community and the international plebiscite had been held, et cetera, that the international community, and in these issues we are guided by our Board, the international community interpreted in one particular way.
The Chechnya case is obviously more complicated for our membership. There's great distaste for the way the war is being fought. There is the fact that Chechnya is part of Russia. So it's a more complicated situation, and we haven't had to face that particular choice yet, and there is a lot of technical stuff that needs to be done.
On Mr. Putin's policy proposals, unfortunately, I, again, seem to spend my time not reading Prime Minister's policy proposals. I haven't seen all of his. I have seen that Mr. Gerashchenko was in favor of 100-percent surrender requirements on export earnings. We have to recognize that capital flight is a huge issue in Russia, and we've supported a variety of measures to try to reduce capital flight. But the 100-percent surrender requirement is not one. We've gone along with the 75-percent surrender requirement, not very enthusiastically, but we've gone along with it, and we have a variety of other measures to try to monitor much more closely what happens to export earnings. Because the surrender requirement is sort of okay, but is a mechanical way of seeming to make this thing work.
But the problem is that people have to declare that, and it would be a lot more useful to actually know where exports are going and what the actual true value of the export earnings is and what the true cost of imports is than to go in this direction.
As to lower interest rates, inflation is coming down. I didn't see what Mr. Putin said, but it should not be ruled out that with inflation declining and if fiscal discipline is maintained that interest rates will come down.
A QUESTIONER: I'd like to ask you something about the U.S. economy. Now, the Fed has already indicated that it's going to probably raise interest rates. If, after the next raise of interest rates, the U.S. economy does not respond and continues with this amazing rate of growth, what should the Fed do, continue to raise interest rates? Is there an optimum sustainable rate, economic growth rate, for the United States?
MR. FISCHER: Economic growth per se, higher economic growth, is not a reason to be worried. It's a reason for happiness. The question is what is happening on the things that you don't like, which is primarily inflation and current account deficit in this case, particularly inflation.
And if interest rates are raised, and growth continues, and there's no signs of inflation, and the current account is not worsening, it's not a signal that you have to raise rates, if your models of inflation tell you that it's going to stay low. So I'm sure the judgment on the interest rates will be based not on the growth rate, but on the prospects for inflation, primarily, and as long as they look good. And the inflation outlook is not bad, but it's not as good as it was, say, two years ago. If there is any worsening in the inflation outlook, then the Fed would continue the process. But it's not going to do it because of growth. It's going to welcome growth, as it should.
A QUESTIONER: But do you think there is now a reason, on the inflation front or the external account, to justify a rate increase?
MR. FISCHER: There's a long joke I'll tell you one day about asking people about interest rates, but—
MR. FISCHER: The end of the joke is—it has to do with IQs, and the questions you ask people. It's a joke that starts with Einstein going to Heaven, and he's introduced to a variety of people, and the third one he meets, he says, "What's your IQ?"
And the guy says, "75."
He says, "Good. Tell me what'll happen to interest rates."
A QUESTIONER: Is it still your expectation that Mr. Camdessus will depart the IMF in February? And if so, have you discussed with any of the shareholders the possibility that you might step in pro tem, as interim Managing Director?
And just on your remarks that you've just made, do I infer from them that you are not particularly enthusiastic about the idea of a slimmed-down IMF focused mainly on financial emergencies?
MR. FISCHER: On Mr. Camdessus, yes, I believe he's leaving on February the 16th, as he said he would. And there's no reason to think he's changing his plans, at least none that I know about.
We haven't discussed what would happen if a successor hadn't been named. I notice that, as deadlines get closer, they usually promote action. So I expect that a successor will have been named by the time he leaves.
On whether the Fund should be slimmed down or not, that's not really the intent behind my comments was. It was just to remind possibly the public, that we do a great deal of other things than crisis lending—crisis in the sense of the threat of a world crisis. And we spend a lot of time helping individual countries in their own crises.
There's a fine line between focused and slimmed down. And a focused IMF, deciding what it's priorities are, is something we should all welcome. I don't necessarily interpret that as meaning a very small—a very much smaller IMF. This is a small institution with a staff of under 3,000, and there are regional Feds which are larger than the IMF. So I don't think the institution is necessarily too large.
But every institution, it's a healthy move for it to reexamine what it's doing from time to time, particularly after it's come through a period as turbulent as this. So I think the reflections from the U.S., from our other members, are well in order. And if the world situation stays reasonably quiet, I expect we'll be doing a lot of examination of what we should be doing.
A QUESTIONER: (Blair Pethel of Bridge News)
What impact is that going to have on the global economy as a whole and particularly on the recovery in the emerging markets, as they depend a lot on demand from these industrial countries for exports?
MR. FISCHER: That's a very complex question. The evidence is that industrialized country interest rates have a very important effect on capital flows to emerging market countries. And the question about the monetary policy tightening is whether it's going to succeed in maintaining noninflationary growth while raising interest rates or whether possibly somewhere—it's not something in sight now—there's an overtightening.
As long as there's not an overtightening, I think the impacts will not be bad, but good for the developing countries. Because what they need primarily is a stable and growing world economy. And if monetary policy works as successfully in the United States as it has in the past decade, this is all encouraging.
But then there's the question of the interest rate effect, which has a separate impact on flows to developing countries. It will raise the cost of capital for the emerging markets, but it would happen at a time when the spreads for emerging markets are somewhere up around 800 basis points. They're coming down, but they are massive, relative to what they used to be.
So, if the emerging market countries maintain their strong policies, as most of them have, then I don't think the interest rate increases will set them back for very long. On the day that U.S. interest rates would go up, I'd expect that you'd see a negative impact on some emerging markets for a day or two. But there's so much room in the spreads for them to adjust, as policies are maintained, that we're in a situation in which, provided the industrialized countries continue to grow, I think the emerging markets can continue to get increasing shares of capital flows.
A QUESTIONER: On Mexico, can you say how concerned are you about the prospects of the fiscal situation with the workout of the bad bank debt, which has not yet been dealt with. And also could you say, on the U.S. economy, how concerned are you, how much of a threat to the global economy is a possible stock market correction?
MR. FISCHER: We are in the election year now and Mexican fiscal policy running up to this election year has been remarkably strong. And their ability to maintain fiscal discipline, as the price of oil fell just over a year ago, when they repeatedly took action to maintain the budget deficit at I think around 1.25/1.5 percent, was extremely impressive, and they didn't ease up when oil prices went up. So they've demonstrated a pretty formidable commitment to not making the mistakes of previous election years.
The costs, the financial costs of bank restructuring, which, as you say, are ongoing, will be factored into our calculations of the fiscal position. And I don't think the increased amounts that are going to be recognized in years ahead are going to fundamentally threaten the fiscal situation. It's not something to be happy about, but it's not something that they are not aware of and not dealing with.
On the U.S. stock market correction, it's roughly the same answers I gave Blair Pethel. The market has gone up very, very fast. If it were to correct, it should have a short-run negative impact. The question is whether the industrialized countries stay on a course for growth. If they do, I don't expect a stock market correction would have a major impact. And so given the policy capacity of the United States to prevent any negative effect turning into a recession, I think a stock market correction would not set back the emerging market countries for any period of time.
A QUESTIONER: I wonder if you could tell us whether you are satisfied with the way the Bank of Indonesia has been moving ahead in the recent weeks and whether you are confident in how the power structure has been established in the administration, the new Wahid administration.
MR. FISCHER: In Bank Indonesia, the audit has been undertaken, and we are discussing with them the follow-up actions that need to be taken, and I understand rumors that some names have been submitted to the Congress for, possibly, a change in leadership. But whatever it is, there is a follow-up process. So that is the important element. They did the audit, they are drawing their conclusions, and they will discuss the conclusions with us.
The new economic leadership team is establishing itself. Remember, we are dealing with a group of people who have been out of power for 30 or 40 years, possibly forever, and they are coming into a very difficult policy situation. So, inevitably, it will take them a while to shake down. But we're very impressed with the cooperation we've had working closely, as we did in the previous administration, with the Economic Coordinating Minister, in particular. But we also have discussions from time to time with the President.
And I think the determination to improve the macroeconomy and to deal with some of the other negative aspects that remain, the corruption fallout and then particularly to get the banking system restructured and done are impressive. But it will take a while, as it does in the case of every new government, for the government to get fully on top of every element of economic policy.
A QUESTIONER: I was wondering if you're concerned at all about the speculation that the government might put some of its economic reforms on hold until it gets the situation in Chechnya under control. And I was wondering what your assessment is of the new Russian President's background, in terms of his predisposition to back economic reform.
MR. FISCHER: We have a variety of economic reforms, which have still not been done, as part of our program, and we have not yet resumed discussions with them following the Christmas and New Year's break. So we haven't heard. We don't know whether they plan to put things on hold. I hope not, and we have no indication that they do. But every country's preelection period is a complicated one for economic policy.
I don't know what Acting President Putin's basic attitudes to economic reform are, but he was associated in Leningrad with a reformist administration, and some of the people who are known as economic reformers, and some of them who have played an important role in economic reforms, believe he is an economic reformer. So we'll just have to see how that goes as we begin negotiations with this government.
A QUESTIONER: Mr. Fischer, of those five bench marks that as of December 7th had not been met on Russia, have they ticked off any more of them, and when do you think they might get this installment?
MR. FISCHER: I had thought it was four, but you may well be right.
I don't know whether any of those have been done, and it's really up to the Russians as to how rapidly they implement them. The cash collection rates by the utilities are an important element in that. And we had, for the previous tranche, we had the rates as of end September, and presumably we should soon be getting the rates as of end December, and that would be one of the most important indicators of whether there's been progress.
A QUESTIONER: What about Ivory Coast, where the new government yesterday said it would suspend his debt repayment?
MR. FISCHER: We've been in touch with the government. We've also looked at some private-sector reports on what we believe is going on. What we've heard at this moment from ministers is that the cash situation is extremely tight, which we knew, but that they have not made a decision to suspend payments, and they will do everything they can to meet payments.
They may want to take advantage, at least according to private-sector interpretation we've seen of the situation, of a grace period that they have for making these payments in order to get the use of the cash for a little longer. But I don't believe, at this moment, that there's an Ivory Coast decision not to make their debt payments. Of course, the consequences of doing that are very, very severe.
A QUESTIONER: Do you have anything on IMF relations with Romania, particularly with the second tranche that the Rumanian government is waiting for and also if you think that the last crisis, political crisis, from Romania that happened at the end of the last year could influence your talks with the new Rumanian government?
MR. FISCHER: The new Prime Minister is, of course, someone with whom we've dealt over many years already, the former Central Bank Governor, whose technical expertise is highly appreciated. If anything, I could imagine that it would make negotiations at the technical level proceed more smoothly. But the problems are not only technical, there are also some political issues on the fiscal side, in particular.
We will be looking forward to sending a team to Romania I think in the next week or two to pick up the negotiations and to try and look ahead basically for the rest of this year, which would take us just a little past the elections. We'll have to see what the Rumanian government can commit itself to in this year.
You know that your country last year significantly stabilized the external situation. You brought an external deficit of about $3 billion down to $1.3 billion. Your reserves went up, despite making a variety of debt payments. Unfortunately, inflation stayed quite high, and there was a sharp decline in income. But many positive elements were there.
IMF EXTERNAL RELATIONS DEPARTMENT