For more information, see Portugal and the IMF
Minister of Finance of Portugal
in his capacity as
Chairman of the Council of EU Economic and Finance Ministers
to the IMFC Spring Meeting 2000
April 16, 2000
1- The Minister of Finance of Portugal, Mr. Joaquim PINA MOURA, submits this statement in his capacity as Chairman of the Council of the EU economic and finance ministers. It focuses on the reform of the international financial architecture, the debt initiative for heavily indebted poor countries, and economic developments in different regions of the world.
2- We would like first of all to pay tribute and express our deep gratitude to Michel CAMDESSUS for the excellent work he accomplished over the last 13 years as Managing Director of the Fund and assure his successor, Horst KOEHLER of our full support in his challenging tasks.
The role of the IMF
3- The IMF is the key institution to promote international monetary co-operation and financial stability. Due to its world-wide membership and the effective representation of member countries through constituencies, the IMF has the legitimacy to fulfil this role. The EU and its Member States welcome the transformation of the Interim Committee into the permanent International Monetary and Financial Committee and the continued preparation of its ministerial meetings at deputy level.
4- We are committed to a universal IMF which is a partner of all its member countries, whether they are poor, middle-income or more developed; and which offers appropriate advice -- and, where appropriate, financing -- from its unique perspective.
5- The EU and its Member States consider that the IMF’s function of preserving international monetary and financial stability should be pursued through:
6- While the World Bank remains is the central institution responsible for poverty reduction, macro-economic stability -- a central goal of the IMF, which is not to be replicated by the World Bank -- is a key tool for the achievement of poverty reduction and growth. Hence it is essential that the IMF through its new Poverty Reduction and Growth Facility ensures that a macro-economic framework compatible with the delivery of poverty reduction is put in place.. Close co-ordination between the Bretton Woods institutions is indispensable in preventing duplication of work and inefficient policies. In this respect we welcome the newly introduced Poverty Reduction Strategy Papers that can play a useful role in the co-ordination between both institutions . They should focus the action of both institutions on a country-based approach and ensure that they both follow the same agenda geared to growth and poverty reduction, while at the same time strengthening ownership within the developing countries concerned.
Review of the Fund’s facilities
7- The EU and its Member States welcome the ongoing review of IMF facilities with a view to possible streamlining and simplification. This should ensure that the Fund’s catalytic role-- as stated above—is strengthened..role -- as stated above-- is strengthened. The reform of these facilities must respect the following principles :principles.
Crisis prevention and resolution, and private sector involvement
8- More attention needs to be devoted to crisis prevention. This requires reforms of domestic financial systems, appropriate sequencing of capital account liberalisation, transparency in policy making and sound liability management. The surveillance activities of the Fund are key to crisis prevention. In particular, the EU and its Member States strongly support ongoing efforts to develop a comprehensive framework of economic and financial codes and standards, to be accepted and implemented by countries which participate in the international financial system. The priority must now be to promote ownership of the various codes across a broader range of countries and to encourage their wider implementation. We strongly support efforts to put in place a framework for monitoring compliance with codes and standards, with the IMF assuming a leading and co-ordinating role by virtue of its Article IV surveillance process, and involving the World Bank and the other standard-setting bodies in their own areas of expertise.
9- Stronger involvement of the private sector in the prevention and resolution of financial crises is crucial to avoid moral hazard and other distortions in the functioning of international financial markets, and to facilitate more orderly adjustment in case of crises. First of all, debtor countries and private creditors should seek in normal times to establish strong and continuous relations, including better channels of communication. Instruments to foster this aim include collective action clauses, contingent credit lines, debt-service insurance and call options on interbank credit lines. Incentives need to be designed to encourage emerging market countries to appropriately involve ex-ante the private sector. This could be achieved inter alia by increasingly linking access to IMF financing to the adoption of such mechanisms. Private sector involvement should be a standard element in crisis resolution arrangements. Industrial countries can play a facilitating role for private sector involvement, in particular by seeking to identify and remove all regulatory and legal obstacles to the use of collective action clauses by all borrowers that raise capital in their markets.
10- Involvement of the private sector in crisis resolution should respect the three following principles: i) focus on the short-term resolution and the medium term sustainability of a country's financing position; ii) comparability of treatment between and within a country’s bilateral official and private creditors; iii) and clear allocation of responsibilities between the various players involved in the resolution of crisis, in particular the IFIs, the debtor country and its private creditors. These principles should be applied equally to countries in a similar position. To implement these general principles, clear and systematic instruments and procedures should be identified. The preferred creditor status of IFIs should not be called into question. Furthermore, the IMF should not be directly involved in bilateral negotiations between the debtor and its creditor.
11- The IMF should concentrate on agreeing with the recipient country an adjustment programme, which indicates the relative contributions of official finance, private sector finance and in particular domestic economic adjustment, to fill the financing gap over the short and medium-term. The IMF should take into account , inter alia, the quality of a country‘s policies and the nature and source of the balance of payments need, and its own regular access limits. The debtor country itself should be responsible for negotiating with all creditors, with a view to implementing the principle of comparability of treatment among and within classes of creditors. The Paris Club, if involved, should state the degree of comparability desired and achieved between its agreement and those reached with other creditors. Finally, the IMF, before disbursing its share of the financing, should review and assess the country’s efforts to secure the contributions from private creditors required to ensure medium term sustainability, consistent with these principles. IMF use-of-Fund resources papers should contain a section explaining the extent and the modalities of the involvement of the private sector. Countries should be made aware of the consequences of failing to secure the needed contribution from private creditors, as required in the medium term financing plan. These could include a revision of the programme to require additional domestic structural adjustment and/or the reduction of official financing. Conversely, the IMF could decide to lend into arrears if the country has suspended payments while seeking to work co-operatively and in good faith with creditors and meeting other program requirements.
Exchange rate regimes
12- The choice of an appropriate exchange rate regime is important for emerging economies to achieve sustainable economic development. Since economic circumstances, financial and trading links, the sequencing of capital market account liberalisation and the stage of development are different, the appropriate exchange rate regime is not the same for each country. In order to be successful, any exchange rate regime has to be backed by sustainable, consistent and credible economic policies, including solid financial systems and prudent debt management.
13- The relative merits of different options across the full spectrum of exchange rate regimes, ranging from freely floating exchange rates on the one hand to currency board regimes and dollarisation or eventual ‘euroisation’ on the other, need to be addressed in the analysis. In some situations, corner solutions are preferable. In other situations, although requirements for sustaining pegs have become very demanding, such intermediate solutions might remain a relevant option, notably for small open economies with a dominant trading partner that maintains price stability and less developed countries experiencing high inflation. In such cases, anchoring the currency provides a simple and credible rule for monetary policy. This requires the subordination of monetary policy to this goal. In addition, other macroeconomic policies should be consistent with it, mainly with a view to curbing inflationary pressures.
14- In certain circumstances, stability of markets and exchange rates can also be enhanced by arrangements between countries. This could be the case when countries have strong trading relationships and experience economic convergence. Such arrangements should in any case fall within the existing monetary framework.
15- The IMF should play an important role in advising and supporting countries in this area. It should in particular reinforce its assessment of the compatibility of the exchange rate policy with a view to their long term macro-economic and financial strategy. IMF financial support of untenable exchange rate pegs must be avoided.
Economic development and the HIPC-initiative
16- Industrialized countries are committed to assisting emerging market countries in reforming and restructuring their economies. EU Member States welcome in this respect the replacement of the Enhanced Structural Adjustment Facility by the new Poverty Reduction and Growth Facility, which aims to make poverty reduction efforts among low-income members a more explicit element of a renewed growth-oriented economic strategy. This constitutes an essential element to guarantee the ownership by the countries themselves of their development strategy. The EU participates in several ways in this work, for instance through PHARE, TACIS and macro-financial assistance for the European transition economies.
17- The EU and its Member States attach great importance to the HIPC-Initiative as a means for finding a lasting solution to the debt problems of the poorest countries pursuing sound economic policies. We welcome the fact that up to five countries will have reached their decision point under the enhanced HIPC initiative by the Spring meetings, but we are ddisappointed that more countries will not benefit from debt relief as originally envisaged in the IMF’s December announcement. We therefore urge the IMF and World Bank to take all necessary efforts through instituting the appropriate arrangements to speed up implementation to ensure that three quarters of the eligible countries have reached their decision point under the Initiative by the end of 2000.
18- The EU has contributed significantly to the financing of the initiative: as a creditor, by providing the required debt relief assistance against Community claims up to € 320 million; as a donor by providing additional assistance through structural adjustment support up to € 250 million to countries having reached the decision point; as a major development stakeholder, by providing a Community contribution to the HIPC Trust Fund of up to € 680 million. The EU encourages all IFIs, as well as other multilateral creditors, while guaranteeing their financial integrity, to remain actively engaged in the Initiative and to maximise the use of their own resources in meeting their costs. The EU highlights the importance of a fair burden sharing of the financing of the Initiative. It urges all countries and institutions that have committed to the HIPC Initiative to deliver their agreed share of contributions as soon as possible. This applies to both the funding of the HIPC Trust Funds and the delivery of bilateral debt relief.
Preventing abuse of the Global Financial System
19- The EU and its Member States consider it essential, in order to safeguard the global financial system, to take appropriate measures to enhance poor regulatory standards, reduce harmful tax competition and to fight financial crime. Regarding the latter, we are in the process of strengthening our own legislation on money laundering. We strongly support the work under way in the Financial Action Task Force to complete the identification of non-co-operative countries and territories, and the work under way in the Financial Stability Forum and the OECD’s Forum on Harmful Tax Practices in offshore centres and tax havens.
20- We welcome the initiatives taken by the World Bank and IMF to help emerging countries adopt national instruments to fight corruption and money laundering. We urge the IFIs to take appropriate action to ensure the sound and transparent use of their financial support, for instance through external audits.
World economic outlook
21- The upturn of global economic growth since the middle of last year has been confirmed since our last meeting in September. It has contributed to a progressively more balanced performance between the main economic areas. However, important risks still exist and have to be managed carefully.
22- The economic performance of the United States, with prolonged strong growth, falling unemployment and low inflation, has been remarkable. The combination of flexibility in labour, financial and product markets, technological achievements and budgetary and monetary discipline have created a favourable climate for consumers and investors, so that investment, in particular in information technology, has remained strong throughout the upswing, and contributed to a significant increase in the production potential of the US economy. However, some imbalances remain and are growing even stronger. A sudden correction of these rising imbalances would have an important impact on the stability of world markets. The recent monetary tightening is clear evidence of a serious effort to restrain the pace of domestic demand growth. Future policy measures should help fostering domestic savings. Such measures should also include persisting in budgetary discipline.
23- While economic recovery in Japan remains hesitant, policy action should aim to reinforce the confidence of consumers, investors and enterprises. The EU welcomes the efforts already made to restore dynamism in the Japanese economy and urges the authorities to continue to implement decisive structural reforms, including full implementation of financial sector rehabilitation plans and the deregulation and liberalisation of still largely protected economic sectors.
24- The Russian economy shows some signs of recovery. However, the prospects remain uncertain and the current positive indicators may be the result of transitory and external factors such as the competitiveness gains from the 1998 devaluation and the increase of oil prices. We urge Russia to implement urgently the macro-economic measures and structural reforms as decided in the programmes agreed upon with the IMF so as to correct the structural deficiencies of the economy and to put recovery on a sounder footing. In that respect, special focus must be laid on the continuation of fiscal consolidation, structural and institutional reform including the real restructuring of unviable firms, the building of a viable banking system, the fight against crime, corruption and money laundering. These measures are essential to restore credibility and confidence within and outside the country. The election of new representatives at the Duma in December 1999 and the appointment of a new government after the presidential elections offer a window of opportunity for the Russian authorities to make further progress with the necessary reforms.
25- Notwithstanding certain differences, the emerging market countries’ economic outlook has improved significantly due to better economic policies and an increasingly favourable international environment. In most countries, further work is needed on continuous sound macroeconomic policies and the deepening of structural reform, including reform of the financial and corporate sectors. The EU and its Member States, in co-operation with the IFI’s and other international bodies, stand ready to continue to provide emerging market economies with technical assistance in these areas, in the framework of existing financial instruments and co-operation procedures. In this context, we welcome the success of the last EU-Latin America Summit, the forthcoming Euro-Mediterranean Conference and the fruitful co-operation developed within the ASEM framework.
26- We also welcome the improved economic prospects for several African economies. However, many of them are still coping with significant impediments to growth. Conflicts in some of them are very detrimental to regional growth. More than others, African countries face the challenges of globalisation. The EU and its Member States will continue to provide technical as well as financial assistance to these countries, inter alia through the Lomé Convention in order to foster their economic development.
27- Even though the immediate crisis in South Eastern Europe has been resolved, the international community has to continue to focus on bringing peace, stability and prosperity to the region. The EU and its Member States are the largest donors to the region and will fully support development in the region within the realm of the Stability Pact for South Eastern Europe and other multilateral structures. The donors’ conference (which was held on 29-30 March) was an important step in this direction for providing stability and reconstruction in the region. Moreover, the EU and its Member States actively pursue the process of integrating the South Eastern Europe countries fully in the global economy and bringing them closer to EU structures. However, the main challenges lie with the countries of the region themselves. International assistance cannot pave the way for sustainable economic development without the countries’ continued commitment to economic reforms, institution building and increased co-operation within the region.
EU economic prospect and policies
28- Recent data suggests that the projected recovery in the European Union is not only on track but is even better than expected. Continued price stability, steady gains in employment, continued budgetary consolidation and the strengthening of structural reform are fostering confidence and growth.
29- Sustained non-inflationary growth and higher employment continue to be the EU major economic objectives. For the past decade, on the road to economic and monetary union, many efforts have been directed towards the promotion of macro-economic stability and the removal of structural rigidities. Much has been already addressed : public deficits decreased sharply, economic co-ordination within the EU has greatly improved, the euro has been successfully introduced,introduced; the single market is largely complete, and the process of liberalisation in important economic sectors is continuing.
30- Nevertheless, in order to exploit the full potential of the single market and of the euro, structural reform has moved to top of the EU policy agenda, as confirmed by the comprehensive range of measures contained in the Lisbon strategy. The focus of these measures is to continue to raise the productive potential of Member State economies so as to ensure higher rates of sustainable economic growth and employment creation in the medium term. The Lisbon European Council has taken stock of the efforts already pursued by the Member States and defined the medium-term strategy for structural reform of the European Union. The erm sustainability of public finances, so to encourage, where appropriate, corrective measures on pension systems and on pre-funding pension and health care expenditures.Member State economies so as to ensure higher rates of sustainable economic growth and employment creation in the medium term. The Lisbon European Council has taken stock of the efforts already pursued by the Member States and defined the medium-term strategy for structural reform of the European Union. The extend and precision of the measures proposed as well as the clearly defined timetable for delivering on the commitments made indicate the depth of commitment to implement this strategy and to achieve a structural transformation of the EU economy in the coming years. For example, fully integrated and liberalised telecommunications markets are to be completed by the end of 2001 and the plan to create an integrated EU financial market is to be implemented by 2005.
31- The EU welcomes Greece’s recent request to become a member of the euro-area. This request will be reviewed during the Portuguese Presidency, in accordance with the provisions of the EU Treaty.