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Minister for the Russian Federation
International Monetary and Financial Committee
of the IMF Board of Governors
Sunday, April 16, 2000
1. World Economic Outlook
Over the past year the global economic outlook has improved substantially. Since our last meeting, the world growth projection for 2000 was revised upward from 3.6 to 4.2 percent. Above all, we would like to note that the resumption of economic growth in the countries hardest hit by the crisis was more rapid than previously expected. This is particularly true for Asian countries, Brazil, and Russia. The continuing strength of the U.S. economy, as well as more favorable prospects for growth in a number of major European countries, have also contributed to the improvement in the global picture.
Despite the general improvement in the situation, however, the latest edition of the World Economic Outlook notes the uncertainties and risks that remain, and we are in complete agreement on this score. The longstanding divergence in growth rates among the leading industrial countries has already resulted in serious current account imbalances, which could ultimately lead to significant adjustments in exchange rates among the main currencies (most important, a decline in the exchange rate of the U.S. dollar). Furthermore, in the event of a sharp correction, the high level of stock market valuations in industrial countries could lead to significant financial disruptions, especially in the United States.
At the same time, the risks associated with an increase in world oil prices seem to be somewhat exaggerated. In real terms, oil prices are at a relatively lower level than historical peaks, especially after the recent stabilization. As a result of technological changes and progress in energy saving, oil prices play now a much smaller role in the world economy than they did in the 1970s. Furthermore, for a number of industrial countries with an "overheated" economy, higher oil prices could even turn out to be useful in terms of correcting domestic demand.
1.2. Prospects for Economic Growth in the Industrial Countries
Robust economic growth is continuing in the United States against a backdrop of practically nonexistent inflation, record-low unemployment, and a budget surplus. At the same time, as the latest World Economic Outlook correctly points out, the substantial current account deficit and the negative rate of private sector and household savings make it unlikely that such high growth rates can be sustained in the future. The vulnerability of the U.S. economy is also related to the clearly overvalued prices in the stock market, which are contributing substantially to the "overheating" in the real sector. In this environment, choosing the correct monetary policy, and interest rate policy in particular, becomes a challenge. We concur with the thesis contained in the World Economic Outlook that in the future monetary policy in the United States will have to become tighter. At the same time, at present it is difficult to say whether this will be enough to avoid a "hard landing."
We welcome the signs of accelerated economic growth that are evident in a number of countries in Western Europe. At the same time, the cyclical recovery in the major countries of the euro area does not yet quite appear sustainable. Furthermore, significant cyclical discrepancies still exist among countries in the European Monetary Union, which complicates the pursuit of a uniform monetary policy within the framework of the EMU. We agree with the position outlined in the World Economic Outlook that over the short term, monetary policy in the euro area should be based on the need to reinforce the economic upswing that has been observed. At the same time, it makes sense to address the obvious "overheating" in a number of smaller European countries using more ambitious programs of fiscal consolidation.
The substantial weakening of the euro with respect to the U.S. dollar is contributing to an increase in the existing trade imbalance among the main groups of industrial countries, and it also threatens a sharp correction in exchange rates among the main currencies in the future. We agree that the current weakness of the euro reflects to a great extent difference in the stages of the economic cycle in the United States and Europe. At the same time, it could also reflect insufficient confidence on the part of financial markets in the sustained noninflationary growth in Europe in connection with the presence of profound structural problems.
The economic situation in Japan continues to be complicated-the return to visible economic growth that was anticipated in 1999 did not occur, and the forecast for 2000 was revised downward in the latest World Economic Outlook. Under these conditions, efforts to stimulate the economy need to be continued. The selection of an economic policy in Japan is complicated by the fact that opportunities for monetary and fiscal stimulation of the economy are already nearly exhausted. Moreover, the friction between short-term and long-term fiscal policy objectives is even greater in Japan than in Western Europe. But, considering the urgent need for rapid economic recovery, we believe that continued fiscal stimulus is justified and perhaps additional measures to increase liquidity as well.
1.3. Development Prospects for Emerging Market Countries
In countries of the Asian region we are seeing a substantial improvement in the economic situation, which is manifesting itself in a return to economic growth-primarily owing to robust growth in exports-and an influx of private foreign capital. Korea, Malaysia, and Thailand are in the forefront here, and in the period following the financial crisis these countries pursued the most rigorous and consistent adjustment policies. At the same time, countries in this region have not yet completed the difficult and painful structural reforms, particularly in the banking and corporate sectors. We agree with the opinion expressed in the World Economic Outlook that progress in this area is crucial to ensuring sustained economic growth in the future.
The output decline in a number of Latin American countries last year can be explained to a great extent by the impact of the financial crisis in Brazil. At the same time, the recession in Brazil itself turned out to be milder than previously expected. The pursuit of sound macroeconomic policies and energetic structural reforms in the country allowed for a restoration of investor confidence and a significant improvement in growth prospects. A resumption of economic growth is anticipated throughout the region as a whole this year. While taking a positive view of this trend, we share the concern expressed in the World Economic Outlook regarding the region's high external financing requirements that are associated with substantial current account deficits. In an environment of financial markets that remain skittish and the possibility of future interest rate increases in the United States, Latin American economies could become even more vulnerable. It seems that a policy aimed at further budget deficit reductions may be the best way to reduce the risks in these countries.
As far as Russia is concerned, the country's economic situation in the wake of the crisis has improved much more rapidly than anticipated, including by the IMF. In 1999 economic growth was 3.2 percent, inflation over the year fell to 36.5 percent, and the current account surplus rose to $20 billion. For the first time throughout the entire reform period, there was an increase in investment in the economy. The Central Bank's foreign exchange reserves grew against the backdrop of a strengthening of the real exchange rate of the rouble.
We managed to achieve appreciable progress in the fiscal sphere, which over recent years has continued to be the weakest point in Russian economic policy. As collection of taxes and customs duties improved substantially, federal budget revenues in 1999 were approximately 13.5 percent of GDP, compared with 12.1 percent in the previous year. Moreover, all federal budget revenues are being collected in cash, since we have put an end to the practice of so-called mutual offsets. The federal budget primary surplus was 2 percent of GDP in 1999, as originally planned.
The positive economic trends have continued in early 2000 as well. In the first quarter GDP growth continued, the federal budget primary surplus rose to 3.5 percent of GDP, and in the year to March inflation fell to 22.3 percent. The Central Bank's gold and foreign exchange reserves grew at a significantly faster pace, and over the first three months of 2000 they increased by $3.1 billion.
The stabilization and subsequent improvement of the economic situation in Russia occurred as a result of responsible policies of the Russian government and the Central Bank. The economic recovery was also helped by growth in demand for domestic products owing to import substitution -in 1999 imports of goods dropped by nearly one third. By floating the exchange rate, the Central Bank allowed the exchange rate of the rouble to properly reflect macroeconomic fundamentals, thus helping to improve the overall balance of payments. The resumption of growth was also propped up by higher prices for key Russia's export commodities, including crude oil.
In order to achieve sustainable growth, however, a number of structural reforms need to be carried out in the economy. We must complete as quickly as possible the restructuring of the banking system, which was hit hard by the financial crisis. Strengthening payment discipline continues to be an important objective, along with preventing mutual nonpayments among enterprises and reducing the degree of barterization of the economy. Implementation of tax reform is an ongoing objective, which should serve as a basis for improving the investment climate in the country. A comprehensive program of structural reforms is currently being devised, and the new Russian government will have the implementation of this program high on its list of priorities.
2. Reforming the IMF's Role in the Global Economy
2.1. Review of Fund Facilities
The "housecleaning" conducted by the Fund with respect to its financing facilities is very timely. We believe that the establishment and application of the SRF has been appropriate and successful. The recent decision by the Executive Board to eliminate four outdated facilities from the Fund's arsenal is another welcome step, which we readily support. At the same time, we find that the EFF meets the needs of a number of Fund members with especially severe balance of payments problems requiring fairly long periods of time to resolve. This Fund facility should be retained in its current form, although it might be used more selectively.
Not all of the IMF's decisions with regard to Fund facilities have been equally effective. The lack of interest in the CCL is a graphic illustration to the point. Since the adoption of this facility we have been skeptical of its design and continue to believe that the CCL should be radically modified to strengthen its preventive role. During such an exercise special attention should be paid to the controversial role of the activation review, to the lengthening of the maturity under the CCL, and to a closer link between the CCL and a full-fledged program addressing users' vulnerability to financial crises.
We share the concern about moral hazard inherent in large financing packages. From this perspective the higher rates of charge used under the SRF and CCL are certainly justified. It would be a mistake, however, to extend that same logic to the IMF's traditional instruments. Rates of charge are not the main factor determining a country's desire to avail itself of the Fund's assistance. Immeasurably more important are access to the IMF's expertise and the confidence of investors in an economic policy approved by the Fund. Therefore, countries are willing to undertake certain political and economic risks related to acceptance of the IMF conditionality associated with financing. Moreover, it is difficult to understand why the Fund should increase the rate of charge on its resources while being effectively protected from the risk of default by the status of a preferred creditor.
As for suggestions that the Fund introduce a system of graduated charges on its resources according to the amount and/or the length of time IMF resources are outstanding, the idea is not new. In 1993, after prolonged attempts to introduce better incentives through differentiation of the rates of charge, the IMF terminated this practice. There is little reason to believe that it will be more productive under today's circumstances.
2.2. Safeguarding Fund Resources
We noted recent initiatives aimed at strengthening safeguards on the use of Fund resources. Despite the number and variety of existing safeguards, they do not sufficiently guarantee that resources provided under a program will be used for the purposes agreed with the Fund. Therefore, we do not object to introduction of the new instrument of safeguards assessments as a matter of principle. However, we are of the view that the proposed mechanism cannot prevent the deliberate and willful misuse of Fund resources. At the same time, the instrument of safeguards assessments may help reduce risks related to deficiencies in the internal reporting systems of central banks. Also, it might contribute to a strengthening of internal controls in the central banks of member countries.
We support basic proposals aimed at reducing the risk of misreporting of information to the Fund. Existing remedial measures to be taken in cases of misreporting may be deemed satisfactory. It is important that these measures be applied uniformly to all member countries.
2.3. The Fund's Surveillance and Links between Surveillance and Standards/Codes
We welcome the Fund's actions to strengthen its surveillance and extend surveillance to those areas directly connected with the vulnerability of member countries to economic crises, including the financial sector and the capital account of the balance of payments.
At the same time, as part of its surveillance the IMF should focus on the areas of its direct responsibility, which include balance of payments sustainability and macroeconomic development of a country as a whole. This would encompass monetary, fiscal, and exchange rate policies pursued by the government and actions taken to foresee and prevent international financial crises. The Fund should not, as a general rule, delve deeply into areas not related to its mandate. The sole exception might be those issues that directly and substantially influence the macroeconomic situation in the country.
We acknowledge the progress achieved by the IMF in the development and dissemination of international standards. In particular, important steps have been taken to strengthen the Special Data Dissemination Standard (SDDS). Publication of timely, comprehensive and accurate data on reserves and external debt of member countries may have a positive effect on the performance of international capital markets and ensure more precise assessment of financial risks. At the same time, we would like to note that constantly "raising the bar" in the SDDS may make it harder for new countries to subscribe to it and for current subscribers to comply with the standard.
We agree with the need to assess the degree to which the individual IMF member countries observe international standards and codes. At the same time, we oppose hasty decisions to include the assessment of observance of standards and codes in the practice of the Fund's surveillance activities. The development and introduction of codes and standards is still in a pilot phase, and their implementation by certain countries requires substantial effort and/or outside technical assistance. Therefore, adherence to standards and codes should remain voluntary, and their interrelation with the practice of surveillance should be refined as experience is accumulated and the standards themselves are more broadly disseminated.
2.4. Involving the Private Sector in Forestalling and Resolving Financial Crises
The proposed framework to guide decisions on private sector involvement in IMF programs is still far from being a system of "clear rules." Nonetheless, it is an important step in addressing the difficult issues, which the IMF has encountered in recent years. In the future, we would like to see the element of judgement reduced even more. However, we can hardly expect automaticity in the decisions on private sector involvement, because the Fund's estimates of financing gap must rely on very imprecise assumptions concerning capital flows.
Thus far, the accumulated experience of concerted involvement of the private sector is still quite limited. In Ecuador, the Fund has yet to test its policy of lending into arrears to the private sector. For various reasons, programs with Ukraine and Pakistan were interrupted during discussions on restructuring of sovereign debt to the private sector. We do not know how these discussions would have gone if these countries had had continued access to Fund resources. It is also still too early to draw conclusions on the impact of the IMF's actions to involve the private sector on the cost of external borrowings by emerging market countries. Owing to the limited amount of accumulated experience, the proposed framework should only be viewed as a sort of intermediate product in need of substantial reworking.
It is clear now that difficulties in forecasting the balance of payments needs, the variety of debt instruments, and the rapidly changing economic environment require a case-by-case approach to private sector involvement in the specific countries. The IMF should resort to concerted private sector involvement only as a last resort, when reliance on the Fund's traditional catalytic role is clearly insufficient. We believe that the IMF should not intervene in a country's discussions with its private creditors by suggesting the terms of debt restructuring. The IMF can make the largest contribution in the resolution of crises by assisting the authorities of a crisis-stricken country in developing a strong program leading to financial viability.
3. Progress on the HIPC Initiative
We approve the Fund's actions to enhance the HIPC Initiative to provide larger debt relief for the poorest countries, and we are satisfied with the progress on its implementation. We believe that country-owned poverty reduction strategies are an important and integral component of the enhanced HIPC Initiative. We hope that they will become an effective instrument in the effort to improve social indicators in the poorest countries.
We are not entirely satisfied with progress on the mobilization of the financing needed for the enhanced HIPC initiative. As a member of the Paris Club of creditors, Russia is participating actively in the implementation of the HIPC Initiative. Nonetheless, we would like to emphasize that the goals of the Initiative may be achieved only with the participation of all the creditor countries on an equal basis. We believe that unanimous support for the HIPC Initiative in discussions at the Fund and the World Bank will result in comparable concrete actions on the part of non-Paris Club bilateral creditors. To this end they should provide the poorest countries with debt relief under terms that are at least comparable with Paris Club terms. As part of this general approach it should be possible to examine separately those cases in which bilateral creditors are themselves among the poorest countries.