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Minister of Finance for Germany
International Monetary and Financial Committee
of the IMF Board of Governors
Sunday, April 16, 2000
Achieving Better Balanced and More Sustainable Growth in Advanced Economies
1. It is encouraging to note that the state and the prospects of world economic development have continued to improve since our last meeting.
2. But economic policy faces worldwide challenges. The most recent decision by OPEC and by other countries to step up oil production appears to have lessened one of the major risk factors. But other risks remain. The rapid expansion of the U.S. economy is accompanied by growing internal and external imbalances. The large and still rising deficit on current account and the high level of consumption, funded increasingly by indebtedness of private households, are not sustainable in the long run. Stock market valuations are very high and volatility has increased in recent months. To reduce these imbalances, the United States should not only maintain its current cautious monetary policy stance but also its fiscal policy approach aimed at achieving a budget surplus. Measures to encourage private savings are also important to improve the prospect of a "soft landing" for the US economy.
3. Latest economic indicators seem to show improved prospects for an economic recovery in Japan. But if the indications of an economic upturn are not confirmed by actual improvements in the near future, interest policy should be as supportive as possible of domestic demands, if necessary. Additional fiscal measures to stimulate the economy will also have to remain an option despite the limited scope now available for fiscal policy action. As before, resolute structural reforms must be undertaken as an essential prerequisite for sustained growth. Such reforms must include putting into full effect the plans to rehabilitate the financial sector and deregulating and liberalizing those sectors that are still largely shielded from foreign competition. This would also play an important part in helping to eliminate the imbalances in international trade.
4. Growth prospects of the euro area are good, growth above potential has not yet been fully utilized. To exploit this potential, the European Council in Lisbon recently agreed on a number of structural measures. The Member States are determined to implement this reform agenda speedily and consistently. In Germany, this process has already made tangible progress in particular regarding the liberalization of the telecommunication and energy sectors. Also, and even more important, capital and financial markets are undergoing fundamental changes catalysed by the introduction of the Euro at the beginning of 1999. Since summer 1999 the German economy is on a clear upward trend. This trend is underpinned by fiscal policy and in particular by tax policy. The tax reform measures will afford relief of about DM 75 billion to private households and corporations as against 1998. Notwithstanding this tax relief, the German government's fiscal policy approach complies in full with the requirements of the European Stability and Growth Pact. Recent moderate wage settlements for 2000 and 2001 which will exert a favorable effect on growth and employment and also on the price climate.
Developments and Prospects for Emerging Market Economies
5. It is encouraging to note that the world economic upturn is also embracing the emerging markets, generating in some instances vigorous growth rates. But in the emerging market economies of southeast Asia the vigorous growth and in some instances very high current account surpluses should not be seen as an encouragement to relax in the efforts to deal with unsettled structural problems in the banking and corporate sectors. In view of the high cost of rehabilitating the banking system, the consolidation of public finances will be of particular significance. This will of course remove short-term, positive fiscal impulses, but against the backdrop of a drastic decline in investment ratios in a number of countries fiscal consolidation is needed to prevent the creation of a structural debt problem and the accompanying negative impact on private investment.
6. It appears that the economic situation in Latin America is continuing to improve. But the high current account deficits give cause for concern, especially as the region has benefited more than others from rising commodity prices. The marked need for external finance remains a source of vulnerability which may well become more acute in the event of a global rise in interest rates. It is important for the budget consolidation course adopted by many countries to be consistently followed if investor confidence in the region is to be permanently strengthened. Additionally, where appropriate, structural reform in the banking and corporate sectors should be intensified, among others, to help these countries to compete more effectively at the international level.
7. In the transition economies of central and eastern Europe, many of which are engaged in negotiating accession to the European Union, the rate of economic growth will more than double this year. Economic recovery in the euro area, the main market for these countries, has played an important part in this respect. I share the view of the IMF that in view of the good growth prospects budget consolidation should be stepped up and further structural reforms should be undertaken to strengthen the financial and corporate sectors.
8. The past year has seen a marked improvement in Russia's economic data. This trend may well be largely attributable to positive external factors of a temporary nature, such as the rise in oil prices. But it affords the Russian administration scope for resolute action on structural reforms. Only by broadening the scope for market forces to take effect can sustained growth be achieved and effective measures be adopted to counter the ever-present threat of capital flight.
Alleviating Poverty and Encouraging Sustained Development
9. We support the process of alleviating poverty, in particular its close link with the debt reduction initiative agreed in Cologne. The World Bank and the IMF have made substantial efforts to push ahead with implementing the relevant decisions of the 1999 Annual Meetings.
10. The debt relief resulting from the HIPC initiative must be embedded in a comprehensive strategy to combat poverty, with responsibility for working out the strategy resting with the respective developing country. Additionally, policy measures must be adopted to combat poverty, for instance in the areas of health care and education. A stable political and macroeconomic framework, good and transparent governance and budget management as well as social stability, encouraging private investment and economic activity and thus paving the way for sustained economic growth, are essential pre-conditions for combating poverty.
11. We call upon all those engaged in the development process, especially the World Bank and the IMF, the governments and the civil society, to continue with their efforts towards this end. It is important in this process for the developing countries to create the institutional infrastructure ensuring effective coordination of all activities.
Review of Fund Facilities
12. Initial steps to streamline the IMF facilities have already been taken. We welcome the decisions of the IMF Executive Board to abolish four facilities which are no longer needed. In our view, the discussion on the IMF facilities needs to take account of the overall issue of the IMF's future role. Defining that role should in particular take the following basic principles into consideration:
13. We therefore think the Fund's lending policy should be designed to satisfy the following key principles:
14. The IMF should also be prepared to lend to countries with balance-of-payments needs triggered by structural problems. However, such lending should be limited to a time horizon in keeping with the monetary character of the IMF, and prolonged use of Fund resources should be avoided.
15. Precautionary facilities should be designed carefully, to ensure that no wrong signals are sent to markets: A precautionary facility should not undermine the basic market principle that debtors and creditors are ultimately responsible for their decisions. Therefore a firm link should be established between lending under the Contingent Credit Line (CCL) and private sector involvement. We think more precise and binding rules would be helpful in that respect. Furthermore, we would not advocate to weaken the conditions for CCL eligibility and use. Lower charges for the CCL would only be acceptable for a short lending period and in combination with higher charges for longer use or more stringent eligibility criteria in order not to impair the current overall conditionality of that facility.
Safeguarding Fund Resources
16. Almost all program countries fulfil their obligations under Fund supported arrangements, and cases of misreporting of information and misuses of Fund resources have been rare. However, we take every case of misreporting and misuse very seriously since they can severely impair the Fund's relations to its member countries and may have a damaging impact on the Fund's public appearance.
18. Against this background we welcome the Fund's decision to implement safeguard assessments for all program countries on an experimental basis which are intended to avoid ex ante the emergence of those problems. Furthermore, we support recent agreements on strengthening the legal framework with regard to misreporting to the Fund.
Review of Surveillance; Links between Surveillance and Standards/Codes
19. Surveillance continues to be the key to crises prevention. We therefore welcome the progress being achieved in strengthening the Fund's surveillance, especially with respect to a deeper analysis of exchange rate policies, financial sector stability, capital account issues, and the vulnerability to financial crises. In our view, it is also important that surveillance covers structural issues if the case can be made that they have a significant impact on macroeconomic and financial stability.
20. We welcome the ongoing initiatives in such important areas as the development and implementation of standards and codes, financial sector assessment programs, and financial sector stability assessments, as well as debt and reserve management practices. A decision on the extent to which these initiatives can be integrated into the Fund's regular surveillance activities should be taken in due time. All member countries should be encouraged to adopt relevant codes and standards. We therefore support the provision of technical assistance for that purpose.
Private Sector Involvement
21. Involving the private sector in the resolution of financial crises is a necessary element in preventing future crises by reducing "moral hazard". Private sector involvement would help to put international capital flows to emerging market economies on a more solid basis, which is also in the interest of the emerging market countries. Market discipline will only work if creditors bear the consequences of the risks that they take. This principle, which is uncontroversial at the national level, must also be applied at the international level, as demanded by the Economic Summit in Cologne in June last year.
22. Private sector involvement in the resolution of financial crises must become the rule, not the exception. It is necessary that the international community convey this message to market participants. Work toward an operational framework for the implementation of private sector involvement has started and progress has been made. But this work is still unfinished. As regards the application of private sector involvement to different cases, the operational framework should include the following key elements:
Progress on the HIPC Initiative and Poverty Reduction and Growth Strategies
23. The Cologne debt initiative, initiated by Germany at the 1999 Cologne summit, is making headway. The international community is undertaking great efforts to move the initiative forward. We welcome that most beneficiaries themselves contribute by compiling debt reduction strategies on their own with a view to securing sensible use for the funds freed up from debt service. Only five countries (Bolivia, Mauritania, Uganda, Tanzania and, most recently, Mozambique) have reached their decision points to date. The German government promotes that as many countries as possible will embark on the HIPC process by the end of the year.
24. While we must accelerate the HIPC process in whichever reasonable way we can, we must also look to the initiative's quality that alone will ensure its long-term success. We therefore strongly endorse the concept of the participatory PRSPs (Poverty Reduction Strategy Papers) adopted at the Cologne summit1. We need to do all we can to encourage HIPC countries to devise their own anti-poverty strategies, and bringing completion points forward for HIPC countries with successful policies in that field will provide a major incentive for them to combat poverty on their own initiative.
25. It is obvious that the HIPC initiative's success hinges on securing its timely financing over its duration - which is still not finalised in important areas. The Pay-As-You-Go scheme, as opposed to providing full up-front financing, helps to alleviate the strain on contributors' resources. Funds made available or pledged at this time (US$ 3.012) are sufficient to get HIPC under way, but worrying financing gaps will open in 2006 at the latest. We are particularly facing major stumbling blocks as regards the IDB's and AfDB's contributions. As for the IDB, of US$1.1 billion pledged only US$400 million are in place, AFDB has just US$320 million financed of its total US$2.3 billion share. Intensive work will need to be done to resolve this expeditiously. Likewise, the US contribution to the HIPC Trust Fund must be secured promptly to ensure the HIPC initiative's timely progress.
26. Germany is making a sizeable contribution to the HIPC initiative's financing:
The resources available at this time should be used as effectively as possible, including flexible sequencing of individual contributions over time, as long as equal burden sharing remains guaranteed.