International Monetary and Financial Committee
April 16 2000
|The International Monetary and Financial Committee member for the constituency consisting of Bangladesh, Bhutan, India, Sri Lanka.|
1. It is heartening that global economic and financial conditions have improved markedly in the course of 1999. Indeed, according to the World Economic Outlook, the prospects for 2000 look even more promising with world output growth now projected at 4 percent. The recovery in output is likely to be reflected in a sharp rebound in world trade volume to over 7 percent in 2000. The factors behind the upward revision in WEO predictions are well known: continuation of the strong forward momentum in the United States; the possibility of a robust recovery in Europe; strong turnaround in the emerging economies of Asia; and improved prospects for Brazil and Russia. However, it is noteworthy that non-oil commodity exporters would not be fully benefiting from this recovery since prices of their products are forecast to increase only modestly after two years of precipitous decline. Against the background of a doubling in oil prices since early 1999, this represents a major terms-of-trade shock for oil importing developing economies.
2. As against the upside potential, there are several disquieting factors that could adversely affect the global outlook. First, a sharp decline in global demand induced by a turnaround in equity markets could have adverse consequences for sustained growth. These include systemic repercussions on the international financial system and adverse effects on consumption and investment emanating from unfavourable developments in equity markets. Second, the unbalanced pattern of growth among the major industrial countries, especially the United States, Europe and Japan has resulted in current account imbalances and currency alignments that appear difficult to sustain. This underscores the importance of close macroeconomic policy co-ordination among the major industrial countries so that sharp, disruptive re-alignment of exchange rates are avoided. It has also to be recognised that a rise in real world interest rates could have adverse effect on the durability of the recovery. A strong and sustained growth is a sine qua non for poverty reduction to which all of us are committed. The flexibility afforded by relatively low rates of inflation should make this task of macroeconomic management easier for the leading industrial countries.
3. Notwithstanding these concerns, I am pleased to report that India posted a growth of about 6 per cent in 1999–2000, which was among the world's best and is likely to grow by over 7 per cent in 2000–2001. The performance of other countries in my constituency has also been quite impressive despite adverse external situation. It is noteworthy that strong growth in India was accompanied by remarkably subdued inflation and comfortable balance of payments. India's external reserves are presently at the highest level ever. At the same time, India has reduced its short-term debt sharply, which now constitutes a very small proportion of the country's external liabilities.
4. In the wake of the Asian crisis and the contagion that it spawned, the objective of strengthening the international financial and monetary system has assumed the centre stage. There is a lively debate on how to reform international financial institutions to face the challenges of crisis prevention and resolution in a world of increasingly integrated financial and exchange markets. The events of 1997 and 1998 have demonstrated that very few economies have been able to safeguard their economies from turmoil. Maintaining an orderly market-based international exchange and payments system is a global public good. This requires that there must be an international mechanism for meeting unexpected changes in resource requirements of different countries. Since the timing and quantum of such resource requirements are highly unpredictable, one possibility worth exploring, that we had put forth earlier, might be to amend the Articles to allow the Fund to issue SDRs to itself for use in lender-of-last-resort operations. SDRs created for this purpose would be extinguished on repurchase by the borrowing country, thereby ensuring that there would be no permanent increase in unconditional liquidity. A mechanism of this type will also considerably reduce the response time of the Fund during a crisis and instil confidence in the international financial system.
5. To my mind, an appropriate reform of the Fund is necessary so as to ensure its continued relevance. This calls for strengthening its role in three basic dimensions : first, as an international credit co-operative serving its near universal membership with impartial macroeconomic policy advice, technical assistance and temporary financing for balance of payments needs; secondly, as an overseer of the international monetary and financial system through effective bilateral and multilateral surveillance in order to prevent national and systemic crises and, thirdly, as an institution that supports the structural reforms, high quality growth and poverty alleviation in developing economies.
6. Any reform of the IMF must also recognise the continued need of member countries for funding support from the international community for meeting the adverse consequences of trade and other real shocks and for sustaining structural reforms. In this context, a suggestion emanating from certain quarters that the IMF should restrict its lending solely to pre-qualified countries and only in the form of short-term liquidity appears to us to be short-sighted. For instance, such a view does not take into account the possibility of contagion, systemic instability due to unexpected causes and the changes in the world economic conditions that adversely affect a particular group of countries. In addition, the very act of disclosure that a particular country ceases to satisfy the pre-conditions for availing liquidity support could ipso facto undermine the market confidence in that country. A more naunced system would therefore need to be worked out.
7. While "housecleaning" and "renovation" of Fund facilities are desirable, it is easy to exaggerate the complications arising out of the proliferation of facilities. Given the near universal membership of the Fund, the heterogeneity among members - especially in terms of their stages of economic development and the variety of shocks affecting them, having a multiplicity of schemes or windows has some logic. Therefore, due consideration needs to be given to the diverse requirements of the Fund membership. In the name of housekeeping we must not lock the doors themselves.
8. The optimal number, design and composition of the Fund's facilities should be governed by the following principles: First, each facility should be reviewed periodically in the light of its operational experience so as to assess its continued relevance. Overlapping schemes can be modified or combined. Second, the Fund may need to continue to add newer facilities to its armoury in the context of greater trade and financial integration. Third, any conditionality must be consistent with the underlying purpose of the scheme, and keeping in view the revolving nature of the Fund's resources and the liquidity available to the Fund. It is also important that the operationalization of each Fund facility is done in a transparent and non-discriminatory manner across the Fund membership.
9. These considerations lead us to conclude that increasing the rate of charge and shortening the final maturity of the credit tranches and the EFF is not desirable. There is a strong case for continuation of the EFF in view of the fact that structural reforms need longer period for formulation and implementation. We also do not favour shortening of the relevant grace period. On the other hand, we fully support the strengthening of the early repurchase policy through appropriate incentives. Given that crisis prevention by way of self-protection policies is a critical goal, it is noteworthy that no member country has availed of the Contingent Credit Lines created in May 1999. Modifications of this facility to impart greater flexibility would need to be seriously contemplated.
10. There is no doubt that there is an imperative need to strengthen the Fund's existing safeguards on the use of its resources. However, it is also the case that episodes of misreporting and misuse of resources have been few and far between. In the case of minor and occasional and inadvertent misreporting, waivers could be issued. However, in cases of serious and/or repeated misreporting, apart from "mandatory repurchase equivalent of purchases made on the basis of misreporting", there is certainly a case for stronger action including public disclosure of the findings of the IMF particularly relating to the major cases. In this context, I would also suggest that safeguard assessments should be carried out only in cases where there has been deliberate misreporting or misleading information.
11. To identify vulnerabilities and to ensure adequate lead-time for taking corrective action, there is now a general agreement that surveillance needs to be strengthened for systemically important countries, especially industrial countries. In this context, while we fully support many of the initiatives underway including developing the international standards and codes in the areas of direct operational concern to the Fund, I must also add, however, that the plethora of these codes, standards and principles are overwhelming and highly demanding of manpower and financial resources. Not only do these involve avoidable micromanagement but they also have a potential to become overly intrusive vis-à-vis national authorities. These developments bring to my mind, the worse features of the era of "command economy", which we all need to leave behind. We must guard against the trend of over-regulation under the rubric of centralised supervision. In my view, there is a distinct possibility that integrating the assessment of observance of standards and codes formally into the surveillance process could easily degenerate into categorising countries as "performers" and non-performers". Moreover we need to ensure that the observance of these standards and codes, many of which are at the experimental stage and voluntary in nature, do not prematurely become part of the conditionality for countries that approach the Fund for balance of payments support. It is also important that whatever codes are developed, they are applied equally to all member countries including industrial countries.
12. Progress has been made in involving the private sector in resolving financial crises. Involvement of the private sector is predicated on three principles that have been informed by recent crises. First, private sector lenders and borrowers have been heavily involved in recent crisis episodes. Second, the official sector has had to bear a disproportionate burden in resolving the crises. Third, the sums involved have been so large that the requirements have exceeded the availability of financing from official sources, and therefore the Fund could help to catalyse private sector participation. However, concrete operationalization of the role of creditor committees, standstill requirements, collective action clauses and a case-by-case approach need to ensure that obligations of the private sector of the industrial countries do not involve sacrifices by the developing country official creditors. The framework proposed by the G-7 Finance Ministers in their Report to the Koln Economic Summit prima facie suggests that the balance of initiative lies with the country concerned. Some re-balancing in this regard may be needed to accurately reflect the role of creditors, since there is evidence of imprudent lending in the run up to recent crises. There is a strong risk of moral hazard unless there is significant penalty for imprudent lending practices by private creditors.
13. The headway made so far on both the HIPC initiative and on Poverty Reduction and Growth Strategies is welcome. In addition, we welcome the progress in obtaining bilateral contributions and in completing nearly all the off-market gold transactions.
14. Before I conclude, let me welcome the formation of the Quota Formula Review Group (QFRG) to review the formulas used to calculate member's quotas in the Fund. The quota formulas have failed to adopt to the evolving global scenario, thereby calling their continued relevance into question. The formulas do not have any sound economic basis and are unduly cluttered and opaque. It is a matter of serious concern that relatively faster growth by developing economies during the 1980s and 1990s has not been reflected in commensurate increase in their quota shares. I am pleased that the task has been entrusted to eminent outside experts, who will be free to use economically rational measures which take into account difference in purchasing power while computing the relative GDP of different countries. I do hope that all efforts would be made to ensure that the quota share of developing countries is appropriately enhanced reflecting their improved economic strength.