1998 IMF Survey Supplement on the Fund / September 1998
IMF Acts in Changing Economic Environment
To Strengthen Global Monetary System
The widespread crisis has dominated the work of the IMF over the past year, prompting IMF lending to reach record levels and placing considerable strain on its financial resources. This has added urgency to the need to strengthen the institution’s resources through a quota increase and other measures, so that it can continue to play its full role in the world economy.
Developments in the World Economy
The Asian financial crisis contributed to a slowdown of global growth in late 1997 and 1998. For 1997 as a whole, world output growth continued at about 4 percent, as slower growth in Africa, Asia, and the Middle East was offset by faster expansion in most industrial countries (other than Japan), the developing countries of the Western Hemisphere, and several countries in transition. With the recession in Asia deepening and broadening in 1998—even while there was significant progress with macroeconomic stabilization in the original crisis countries—the risk of setbacks with renewed contagion effects in other emerging market countries increased.
In August, following an intensification of financial pressures in the preceding weeks, the Russian authorities announced a number of emergency measures, including a de facto devaluation of the ruble and a unilateral restructuring of ruble debt. These actions contributed to the most severe wave of international financial instability in recent months, including a marked increase in the cost of funds to emerging market economies generally and steep declines in equity markets worldwide. Even with growth in most industrial countries except Japan remaining robust, it now seems that global growth in 1998 will be little more than 2 percent.
Once the Asian crisis began, a redirection of financial flows toward mature markets, together with prospects for lower inflation, contributed to strong declines in medium- and long-term interest rates in the industrial countries in late 1997 and early 1998. This easing of financial conditions, particularly in North America and Europe, supported the growth of domestic demand. Helped by weak primary commodity prices, including those for oil, consumer price inflation in 1997 declined further in each of the main country groups. In 1998, commodity prices have continued to fall, in part as a result of reduced demand in the crisis countries, which has led to sizable losses of export earnings for commodity-exporting countries.
The impact of the Asian crisis on the advanced economies has varied. While the dampening effects of the crisis have helped contain inflationary pressures in some countries that faced the risk of overheating, they have had a large adverse impact on Japan, where economic activity and confidence were already weak. Downside risks continue to threaten many countries, including Japan, where policy uncertainties remain. The advanced economies of North America and Europe have been less affected by the turmoil in Asia; the robust growth of the U.S. economy and the strengthening expansion of domestic demand in much of western Europe have provided support for global growth in the face of the crisis. In Europe, while the budgetary consolidation and inflation convergence of recent years have laid a firm foundation for European Monetary Union at the beginning of 1999 and have underpinned growth, the members of the euro area will face a number of challenges, including the need to promote greater labor market flexibility.
Financial markets in a large number of developing countries have suffered the effects of the crisis, which have aggravated other problems that limit growth, such as loss of competitiveness, lower commodity prices, and domestic and external imbalances. While the economic slowdown in 1997 was significant in Asia, it was even more marked in Africa, partly owing to a number of temporary factors. In the developing countries of the Western Hemisphere, in contrast, growth in 1997 was actually stronger than in the previous two years, but it weakened in 1998. For the developing countries of the Middle East and Europe, the direct spillovers from the Asian crisis have been generally limited, although the effects through financial and commodity (including oil) markets have been significant in many cases.
Russia and the other transition countries as a whole recorded positive growth in 1997 for the first time in eight years. However, the situation has changed markedly in 1998, as negative spillovers from the Asian crisis became more apparent in financial markets, especially in Russia, Ukraine, and, among the Baltic countries, in Estonia. In Russia, the ruble came under attack on numerous occasions in late 1997 and 1998. Despite an external current account close to balance, pressures arose from a persistently weak fiscal position resulting from poor revenue collection; concerns about how the external position might evolve, if the fiscal imbalance was not dealt with; and the decline in oil prices. Following the August measures, the ruble depreciated steeply through early September amid political uncertainty. A number of transition economies in central Europe, including the Czech Republic, Hungary, and Poland, weathered the crisis reasonably well.
The IMF in 1997/98
The crisis and its subsequent reverberations dominated the IMF’s work in 1997/98. While seeking to limit the risk of moral hazard, the IMF provided unprecedented assistance to contain the damaging consequences of the crisis. Lending reached a record level, as members drew more than $25 billion in IMF credit, bringing total credit outstanding to more than $75 billion. At the end of 1997/98, 60 Stand-By, Extended, and Enhanced Structural Adjustment Facility (ESAF) Arrangements were in effect with member contries. The pressing needs of member countries led, in December 1997, to the creation of the Supplemental Reserve Facility, which is designed to provide financial assistance to member countries with exceptional balance of payments difficulties due to large short-term financing requirements.
Strengthening the International Monetary System
Analysis of the lessons learned from the crisis and the IMF’s experience with member countries have led the IMF to suggest a number of approaches for strengthening the international monetary system that would improve the ability of countries to realize the full potential of globalization while containing its risks. More broadly, the IMF’s experience with its member countries has shown that although macroeconomic stability, establishment of the basic institutional framework for a market economy, openness to the world economy, and market-friendly structural policies are essential for strong growth, deeper and broader-based reforms are often necessary to achieve high-quality growth that is sustainable and more equitably shared. These second generation reforms address a number of problems highlighted by recent crises. They include measures to address corruption and to encourage improved private and public sector governance, greater transparency of government budgets, and more efficient and robust financial sectors.
Governance and Transparency
The Executive Board has adopted guidelines to clarify the IMF’s role in governance issues. These call for a more comprehensive treatment of such issues, in the context of both Article IV consultations and IMF-supported programs; evenhanded treatment of member countries; and enhanced collaboration with other institutions, including, notably, the World Bank. In order to enhance the accountability and credibility of members’ fiscal policies, the Interim Committee of the Board of Governors, at its April 1998 meeting, adopted a Code of Good Practices on Fiscal Transparency: Declaration on Principles (see box below).
To guide members in disseminating data to the public, the Executive Board endorsed a two-tier approach: the Special Data Dissemination Standard, established in March 1996 for countries that have or might seek access to international financial markets, and a less comprehensive General Data Dissemination System, approved in December 1997, for all member countries.
To enhance the transparency of its surveillance, the IMF in May 1997 initiated Press Information Notices (subsequently renamed Public Information Notices) following the conclusion of Article IV consultations. PINs summarize the Executive Board’s assessment of member countries’ economic policies and prospects. Of the 134 Article IV consultations in 1997/98, 77 were summarized in PINs. PINs appear on the IMF’s web site (www.imf.org) and are published three times a year as IMF Economic Reviews.
Expanding IMF Resources
While strengthened IMF surveillance, encompassing greater transparency, is intended to forestall major disruptions in the world economy or lessen their severity, it is unlikely that it will ever be possible to prevent all crises. This underscores the importance of the adequacy of the IMF’s resources to help countries deal with crises when they occur. In 1997/98, the Executive Board agreed that IMF quotas should be increased by 45 percent, and this increase will take effect after members having not less than 85 percent of total quotas as of December 23, 1997, have consented to their quota increases. The Executive Board also agreed to renew the General Arrangements to Borrow for another five years from December 26, 1998, to December 25, 2003. Also awaiting the formal approval of the membership are the New Arrangements to Borrow, which were approved by the Executive Board in early 1997. An agreement was also reached in the Board to amend the Articles of Agreement to allow for a special one-time allocation of SDRs to equalize members’ ratios of cumulative allocations to their Ninth Review quotas at approximately 29.32 percent. This amendment also has yet to be formally approved by member countries.
Capital Account Convertibility
At the Annual Meetings in Hong Kong SAR in September 1997, the Interim Committee issued a Statement on the Liberalization of Capital Movements Under an Amendment of the IMF’s Articles of Agreement. The statement invited the Executive Board to complete its work on a proposed amendment to make the liberalization of capital movements one of the purposes of the IMF and to extend, as needed, the IMF’s jurisdiction in this area. In 1997/98, the Board considered various aspects of such an amendment and, to help inform its work, sponsored a high-level seminar in March 1998 to elicit views from a wide range of private and official observers outside the IMF. Following the seminar, the Board has continued its work on this matter and will report on progress to the Interim Committee at its October 1998 meeting.
Assistance to Low-Income Countries
The Executive Board undertook an extensive review drawing on both internal and external assessments of the IMF’s concessional lending facility for low-income countries, the ESAF, and continued its work aimed at ensuring the uninterrupted availability of resources for the ESAF. The Board also reviewed the lessons to date of experience with the ESAF. In addition, the IMF, together with the World Bank and other creditors, made important headway in implementing the initiative to reduce the external debt burden of a number of heavily indebted poor countries, to which about $8 billion had been pledged by bilateral, commercial, and multilateral creditors.