Transcript of a Press Briefing by Masood Ahmed, Director, External Relations Department, IMF

Washington, D.C.
Thursday, March 6, 2008
Webcast of the press briefing

MR. AHMED: Good morning to you. I am Masood Ahmed and this is our regular press briefing. I would like to welcome also the people who are logged in through the Media Briefing Center and encourage them to send in their questions early.

Before I take your questions, let me give you some information on some public engagements and travel by management. First, the Managing Director will speak on March 17 at a joint OECD/IMF conference in Paris on structural reform in Europe. This event is open to the press. So if you are interested, please contact the OECD. He will then travel to London on the 18th of meetings with the authorities.

Mr. Lipsky, the First Deputy Managing Director, will speak tomorrow, March 7, at an International Symposium at the Banque de France in Paris on globalization, inflation, and monetary policy. And again this event is open to the press, but I can refer you to the Banque de France for further details. On March 12, Mr. Lipsky will be giving a speech at the Peterson Institute here in Washington which is entitled "Navigating the Financial Storm: Tail Risks, Policy Challenges, and the Role of the IMF." You can get more details on this speech from Media Relations and I encourage you to find out more about this event.

Also tomorrow Mr. Portugal, the Deputy Managing Director, will deliver a keynote address at the 2008 Spring Membership Meeting of the Institute of International Finance in Rio de Janeiro. His speech will review the effect of the recent financial market turmoil on Latin America and possible implications for the region's economic prospects.

And let me also just remind you that for the Spring Meetings as I mentioned at the last press briefing, registration is now open online on our website until April 10 and we will focus on the issue of the Spring Meetings agenda at our next briefing on March 20.

Let me now take your questions.

QUESTIONER: Good morning. I just noticed that there is going to be a Board meeting next week on the quota and voice formula. I was wondering what it is going to be about precisely and what is to be expected.

MR. AHMED: As you know, we have been working toward the objective of having for the Spring Meeting of the IMFC a proposal from the Managing Director on the realignment of quotas and including the broader agenda on increasing basic votes. As you know, this is part of moving toward the timetable that was agreed in Singapore.

So the Board meeting next week is the opportunity for us to get guidance from the Board on the broad elements of that proposal which we are now putting together and we expect that if the Board supports and endorses the broad elements, then between next week's meeting and the Spring Meetings we will take it further and try and fine-tune and define the elements that would then go to the IMFC.

QUESTIONER: Turkish inflation has practically exceeded its safety limits.

Would there be any additional measure or any talks between the IMF and Turkish government regarding any methods, any new additional steps that can be taken?

MR. AHMED: I don't have a specific response on steps that could be taken to deal with an increase in inflation that you are referring to. I think our view on the overall priorities for macro policy in Turkey remain that starting from the fact that we have had strong performance in recent years.

The priorities now are to consolidate that success by reestablishing fiscal discipline and continuing with prudent monetary policy to bring inflation back down to the 4-percent target over time. At the same time we also think that we do need to support the Turkish authorities' efforts to revitalize structural reforms to raise growth durably to the rates seen in other emerging markets.

QUESTIONER: Just to follow-up, do you see any delay or any problem with the reform process in Turkey, some of the laws on social security reforms and things like that?

MR. AHMED: Let me give you one general point on the reform process and then a specific point about the IMF's support for that reform process. On the overall point, I think our sense is that the government's commitment to sustain good policies is unchanged. We think that the adoption of a tight budget and lifting of a 5-year freeze on end-user electricity tariffs are from this perspective very encouraging and strengthen the sense that the government will soon deliver on the other outstanding items in their reform agenda.

That said, there are some outstanding items on the reform agenda, and, as I said, while there has been progress in a number of areas that would enable us to pave the way for the completion of the seventh review of the program that the Fund is supporting, passage of the social security law has taken longer than initially envisaged by the authorities and we do look now to progress being made in this key area so that we can complete the pending seventh review.

QUESTIONER: Masood, do you have anything for us on oil hitting a record high today of US$106, but has come a bit down to $105. Do you think that that is where it could stay for a long time? And at this level do you see an impact for growth?

MR. AHMED: On oil, can I just put it first a little bit in perspective? As we have said before, looking at the level of oil prices which now is at as you say a historical high, looking at oil prices and their increase, we have to try and identify what is driving it. And to the extent that that is being driven by an increase in demand, then that is a different policy message than if it is driven by a perception of a supply shortage or constraints on the supply side.

Our sense has been that this time around over the last year or so the increase in oil price has been largely a function of the increase in demand, and for that reason the line that we have taken, which I think is still valid today for us, is that if we do anticipate as we do a slowing down in the world economy over the coming year, then that should have an impact in terms of moderating the demand for oil and therefore on the price for oil.

As for the increase in the last couple of weeks, the last if you like $15 to $20 or so, there it is not so clear how much of this has been driven by an increase in demand or whether it is the result of either some speculation or of the weakening of the dollar. In that sense, this particular last increase is not exactly consistent if you like with the model we have been looking at.

As to where oil prices will go in the longer term, I think what we have said is that oil market supply conditions are quite tight, it is a tight market, there is not a huge amount of spare capacity. At the same time, if there is a moderation in demand, then that should have an impact on prices over the next year.

QUESTIONER: You touched on the dollar and I would like to touch on the euro which are two connected items, of course. It has been the IMF's view if I am not mistaken over this past year that the dollar was overappreciated and the euro was reflecting fundamentals. At this point the euro is at its maximum and I wanted to know if the IMF is changing its view on the euro and on the European Central Bank's actions. Thanks.

MR. AHMED: First of all, I should talk about the euro and then I will talk about the actions of the central bank. On the euro, our view now is that after the appreciation of the euro, it is now on the strong side in relationship to its medium-term fundamentals. As you noted, a few months ago our line was that the euro was broadly in line with its medium-term fundamentals, now we have taken the view that with the appreciation of the euro, and I do want to stress this is in relation to its broad trading partners, that is, if you look at the real effect of exchange rates, the euro is now on the strong side.

If you look at the broader framework of exchange rates, we also think that in looking at the other major currencies that the lack of adjustment in the currencies of several economies with inflexible exchange rate regimes and large current account surpluses has not been supportive of global adjustment, and we think that while China's currency has appreciated somewhat in real effective terms since the summer, it remains substantially undervalued. As we have said before, we do think that faster appreciation of the renminbi in nominal effective terms would help to keep domestic inflation pressures in check in China.

The other question you asked about was the ECB. We think that the risks to inflation in the euro area are on the upside in the near term but should subside as downside risks to growth come to the fore. Therefore, our view is that the ECB has appropriately kept interest rates on hold but should stand ready to respond flexibly if downside risks to growth moderate the risk of inflation.

Before I come to you, I see there is a question on the Media Briefing Center: China's Sovereign Wealth Fund has said it is unfair that the funds are being asked to develop a code of best practices. Has the CIC communicated this to the IMF? And is the IMF finding resistance to its efforts to develop a code?

I mentioned at my last press briefing that, first, in terms of the work that we are doing on helping to develop a set of best practices among the Sovereign Wealth Funds, we think that this work is useful and it would be useful both substantively and because it will address some of the questions and perceptions that are being raised about Sovereign Wealth Funds. So we think it is an important public good to help develop this.

We do think it is important to do this work with the broad participation and consultation of Sovereign Wealth Funds because ultimately this is something that is useful for them, and we have been embarked on that process now since November. As I mentioned at my last press briefing, we had a roundtable discussion here which brought together representatives from Ministries of Finance and Sovereign Wealth Funds from nearly 30 countries. We have a follow-up dialogue with them including a survey of their current good practices. We will have a discussion on the IMF this month which will be an initial paper that will set out a sort of work program on taking this forward. Our objective remains to work toward preparing a set of best practices for managing Sovereign Wealth Funds which we can then bring to our Board and more broadly disseminate before the Annual Meetings in October.

We have not had resistance to this effort. Indeed, as I say, we are doing this very much as part of a broad collaborative exercise. As to your specific point on this, we certainly have not received any communication that suggests that this would be unfair to do so.

QUESTIONER: Mr. Ahmed, has Kosovo applied for membership? To the best of your knowledge, have they made any moves to apply for membership?

MR. AHMED: No. We are following developments very closely and if we were to receive an application for membership, we will address it in accordance with our standard procedures, but as of now they have not applied for membership. Do you have a follow-up?

QUESTIONER: Not really a follow-up, a different subject.

MR. AHMED: Sure.

QUESTIONER: This Tajikistan paper yesterday, in view of that experience, an unpleasant experience I'm sure, are you thinking about maybe checking back on other countries, or do you have any reason to believe that you may have been misled by others other than Tajikistan?

MR. AHMED: First of all, just to say that on Tajikistan, it was a difficult decision for the Board because on the one hand there has been a serious incidence of misreporting or relevant economic data by the Tajik authorities. At the same time, the Board was very conscious of the fact that the country is going through a very difficult economic circumstance. As a result of that, as you know, the Board decided that while the resources that had been provided to Tajikistan from the IMF needed to be repaid, that it would use its discretion and extend the repayment period beyond the normal 30-day repayment expectation to one where these resources would be paid over a 6-month period beginning in September 2008. So that is the sort of balance they struck in that case.

The more general point you said, we have an ongoing process of due diligence with all of our members and we do not see any reason to assume that because of this particular instance the work that we do with other members is any different.

QUESTIONER: Masood, you spoke that now you believe that the euro is on the strong side in relation to medium-term fundamentals. What then do you see the dollar at? Do you think the dollar has depreciated enough to now say that is enough or do continue to believe that it still needs to come down?

MR. AHMED: I think our view on the dollar has not changed insofar as the line that we have taken is that the depreciation of the dollar again in terms of its multilateral real effective exchange rate has brought it much closer to its fundamentals but it remains within that framework still on the strong side.

I have a question here on the Media Briefing Center: How much of the recent rise in oil prices does the IMF attribute to the weak U.S. dollar and how does it see dollars levels now in terms of medium-term fundamentals?

I am going to say that I think I answered both your questions in separate ways so I do not really have anything more to add to what I have just said on those two issues.

QUESTIONER: Coming back to the euro, the concern in Europe is the fact that not only is Europe being dragged down by the slowdown in the U.S. economy, but now also by the strength of the euro. Do you think that that is a real concern?

MR. AHMED: I have already given you view on the monetary stance of the Euro Area which we think is appropriate. Let's broaden that out and look at the outlook for Europe. As you know, the economy slowed in the last quarter of 2007 to 0.4 percent from 0.8 percent in the third quarter, so there is clearly a slowing going on. Real GDP growth is also projected to decline from around 2 1/2 percent in 2007, to 1 1/2 percent in 2008. In our view what is driving this is higher commodity prices, rising risk premiums, and slowing world growth. But we also think that the risks to this outlook are actually broadly balanced. Over the short term the impact of financial market turmoil remains uncertain, and over the medium term, external downside risks dominate, including global imbalances and uncertainty in oil markets.

Now on the question of whether the strong euro is part of the issue, as I have said, we do now think that the euro has been appreciating in real effective terms and at present appears to be on the strong side relative to its medium-term fundamentals. I cannot give you now what is the contribution of that if you like to the broader outlook, but really that is one of the elements that I mention.

QUESTIONER: Just a quick clarification. You said earlier that the risk of inflation in the Euro area is now on the upside but should subside. Is that correct?

MR. AHMED: Yes. What I said is that as I have mentioned before, even amid slowing growth, headline inflation has surprised on the upside. As you know, it clocked in at 3.2 percent in January. Nevertheless, we do think that headline inflation in the Euro area is projected to move in line with the ECB's target over the medium run with roughly balanced risk. And it is for that reason that I had said that we support the ECB's stance of keeping interest rates on hold and think that they should stand ready to respond flexibly if the downside risks to growth and inflation intensify.

QUESTIONER: This is something completely different, Masood. It is about Iraq. The IMF has not got a mission that goes to Iraq or has somebody in Iraq. I was recently at a Treasury briefing and they are talking about the fact that the security situation has improved so much that this was an opportunity now to get the things done that they have not been able to do on the economic side. Has the Fund considered sending somebody permanently back into Iraq?

MR. AHMED: As far as I am aware there is no proposal under consideration to change the way in which we are operating in Iraq. If it turns out that there is more information on that, I will come back to you, but our current view is that we are not at this point revisiting the way in which we are operating there.

QUESTIONER: May I have one on Kenya, please? The Kenyan parties have an agreement. Does that mean now that the IMF can move on discussions on a new program with them?

MR. AHMED: I think what I can say to you at this stage is that we obviously welcome the power-sharing agreement. As you know, we have been concerned about the fact the political difficulties in Kenya were causing concern not only for economic and social conditions in Kenya but also for neighboring countries. So clearly the fact that there is now a power-sharing agreement is something that we welcome and we urge all the parties to continue to work to implement expeditiously the agreement.

That gives us a framework. The issues facing Kenya remain challenging in terms of now coming forward with safeguarding macroeconomic stability and reinvigorating growth which clearly would then require also support from private investment. At this stage I think we are now beginning a conversation around that, but it is too early for me to take a view or to give you a view on whether and how that conversation would go forward and what timetable there will be in terms of any program.

If there are no further questions?

QUESTIONER: A completely different topic, just bureaucratic or administrative. As for the Spring Meetings, you do not have any details to give us today of appointments, press conferences, whatever?

MR. AHMED: I do not have details today, but will certainly have the material posted on our website soon. I think we may even have some material on our website already with some of the details of the key events and we can walk through that agenda at our next press briefing. Thank you very much. See you in 2 weeks' time.



IMF EXTERNAL RELATIONS DEPARTMENT

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