For more information, see United States and the IMF
to the International Monetary and Financial Committee
April 16, 2000
I would first of all like to welcome the selection of Horst Köhler as the next Managing Director. We look forward to working with him as we all deal with the critical and challenging issues facing the IMF. I would also like to express sincere appreciation to Stanley Fischer for his excellent stewardship of this institution as Acting Managing Director.
Over the past several years, the challenges facing us at these meetings have been acute as a global financial crisis unfolded. The challenges we face today are different but no less important: the challenge of ensuring sustained and more balanced global growth in the major economies; of reducing vulnerabilities in emerging markets; promoting durable development and delivering on the expectations for the debt initiative; and pushing forward with IMF reform. In today's positive environment—in which global growth rates are projected to be the highest since before the Asian crisis—the major industrial economies must not yield to complacency or, in the cases of Europe and Japan, to lowered expectations. Emerging market countries must not lose reform momentum, but rather should take advantage of the more favorable environment to develop stronger, less vulnerable economic and financial systems. And as shareholders of the IMF, we must redouble our efforts to adapt the institution to a changing global economy.
As we gather for these meetings we must also be mindful that, although global economic conditions are better than they been for some time, fundamental questions are being posed about economic integration and the role of the international financial institutions in that process. If there is one point in this debate on which everyone is united, it is the desire to improve the situation of the world's poor, and a desire to ensure that a more global economy advances this goal. The differences are about the best means for achieving this. It is incumbent on all of us, whether inside or outside the official meeting halls, to think carefully and rigorously about the most effective ways that the IMF, the World Bank and the other international financial institutions can support broad-based economic development and help make integration redound to the benefit of people. While we may disagree on precise aspects of the institutions' role, there can be no doubt that they are fundamental to achieving this objective.II. Policy Challenges in the World Economy
Prospects for further strengthening of the global economy continue to brighten. Indeed the underlying fundamentals of the expansion of the major economic areas have strengthened since our last meeting. Significant challenges remain, however.
In the United States, during the last eight years, large budget deficits have been transformed into large budget surpluses, and net national saving has risen. Fiscal policy remains focused on debt reduction, the long-run solvency of Social Security and Medicare, and making other investments that would enhance the economic expansion. After twenty-eight consecutive years of running a deficit, the Federal budget has been in surplus for the last two fiscal years, and the level of debt held by the public has been reduced for the first time in thirty years. Yet we, too, need to do more. We must strengthen national saving by encouraging household saving, and ensure that inflation remains in check. Also, we must not let progress be dissipated by irresponsible tax cuts.
Better growth performance requires appropriate macroeconomic policies. But it also requires an optimistic vision of what is possible, and a determination to aim for higher goals. At their recent Special Council in Lisbon, European Union leaders set an ambitious target of raising growth in the EU to an average of 3 percent per year in this decade and creating 20 million new jobs. This target is demanding. But it is also achievable with the right policies, and is essential if the world is to return to more balance without sacrificing growth. Raising potential growth rates and lowering unemployment, in the end, will require substantial structural reforms to remove barriers to investment opportunities, including with respect to new technologies. And as potential grows, macroeconomic policies must be supportive, so that economies actually achieve the gains in jobs and output that structural policy changes make possible.
I continue to share the concerns of my Japanese colleagues about the prospects for the Japanese economy. There have been some positive signs, and we can all hope that the worst is past and look for growth to resume this year. Yet while Japan has taken a number of important policy steps, it is far from clear that a sustained recovery is at hand, and all the tools of macroeconomic and structural policy must be used. Beyond this, Japan needs to keep working to restructure its banking system—including more aggressive disposal of non-performing assets—and make further progress on market-opening deregulation.
If Europe and Japan can achieve these higher goals, there will be benefits not only to their own citizens in the form of more jobs and higher incomes, but to the global economy as well. It will allow the industrial countries to continue providing a favorable environment for developing country recovery and expansion while facilitating adjustment in the United States.
The challenge for emerging market economies is to put in place policies that will sustain non-inflationary growth and limit their economies' vulnerability to a time when the external environment is no longer so benign. They need to take advantage of the current favorable economic conditions as an opportunity to hasten restructuring, rather than see them as an indication that such restructuring is no longer necessary. In Latin America, this means, first and foremost, more prudent management of debt in both the public and private sectors, including greater reliance on longer-term, domestic currency debt, and stronger financial systems so that external pressures do not result in significant domestic shocks. It also means improving fiscal positions, maintaining sound, credible and consistent economic policies that underpin the choice of exchange rate regime, and avoiding risky "fixed-but-adjustable" regimes.
In Asia, recovery has been much stronger than expected, but continued progress on financial and corporate restructuring is critical. Without it, financial institutions may be either unable or unwilling to provide the required financing for investment and growth. Looking forward, allowing for market-led exchange rate adjustment has the twin attractions of taking pressure off interest rates, which would help banking and corporate debt restructuring, and dampening market expectations that the authorities are returning to the pegs, or quasi pegs, that contributed to their vulnerability to crisis before.
The Russian economy has strengthened during the past year, but the positive trend appears to be largely dependent on exogenous and potentially temporary factors such as the improved competitiveness from ruble devaluation and the increase in oil prices. Without comprehensive economic reform, the Russian recovery is unlikely to be sustainable. In this context, the Russian authorities need to move ahead with critical economic reforms, in particular taking actions to strengthen the rule of law, including secure property rights and contract enforcement, as well as implementing key structural reforms that will spur competition and attract investment, both domestic and foreign. Russia must also address the serious weaknesses in its banking system and further discourage the culture of non-payment. It is also critical to intensify the fight against corruption and money laundering. While the international financial institutions can support Russia's efforts, it is up to the new Russian administration to undertake reforms in Russia's own interest.
In the poorest developing countries, the greatest immediate imperative has been to extend support to the victims of drought in Ethiopia and flooding in Mozambique. Beyond these immediate tragedies, however, is the need to alleviate poverty and promote stronger, broad-based economic growth. In Africa, while we have seen notable improvement in the economic record in several parts of the continent, the challenge for many of Africa's leaders remains the creation of conditions of peace, stability, democracy, openness to trade and market-based incentives, and good governance. We are prepared to help through HIPC debt reduction and continued support of reform, but responsibility for creating such conditions lies with the authorities of these countries.
Another important challenge, and a key dimension of supporting global growth, is trade liberalization. In this vein, we strongly support efforts to build a consensus for the launch of a new round of multilateral trade negotiations. We urge the IMF and World Bank, for their part, to more fully incorporate policies promoting trade integration and capacity building in Fund programs and Bank operations, making clear that they are prepared to offer enhanced support to those countries committed to an ambitious program. We also urge the IMF to work on a priority basis with the World Bank, WTO and other relevant institutions to improve the effectiveness of the Integrated Framework for Trade-Related Technical Assistance for Least Developed Countries.
III. Strengthening the International Monetary and Financial System and Reforming the IMF
The U.S. vision for reforming the IMF is based primarily on what we see as the defining new reality of the global financial system: that the private sector is the primary source of capital for growth. We believe that the IMF must increasingly reflect this reality in its operations and institutional structure. There are four key areas for reform:
1. A new paradigm for surveillance, with a greater focus on promoting transparency and the flow of information from governments to markets and investors, and greater attention to financial vulnerability as well as macro-economic fundamentals.
2. A more strategic financing role focused in emerging markets on protecting against contagion and resolving financial emergencies, and in poorest countries on supporting macroeconomic stability and growth in programs with a new emphasis on poverty reduction.
3. Greater emphasis on promoting market-based solutions to crises.
4. Governance, transparency and accountability in the IMF itself.
1. A New Paradigm for Surveillance
The IMF has already strengthened surveillance by promoting more complete, transparent and timely distribution of data focusing on financial sector vulnerabilities, and sharpening analysis of exchange rate regimes. Going forward, our objective should be a qualitative shift in the nature of IMF surveillance, one that focuses increasingly on the collection and dissemination of information for investors, markets, and the public as a whole, as well as on country policies to reduce financial vulnerabilities. Such a reorientation will not only contribute to stability in the financial system, but will also help countries reap the benefits of global capital markets. To attain this objective, however, it is imperative that countries work together in the Fund, as well as through their own actions, to implement a broad commitment to a new spirit of openness.
Transparency and Disclosure. We have seen some important progress, with more countries complying with the Special Data Dissemination Standard (SDDS), and agreement in the Executive Board on important steps to highlight information on country adherence and compliance in a new quarterly publication, in PINs on Article IV reviews, and in Article IV reports themselves. This will help reinforce the SDDS as the international standard for disclosure of national economic data; we urge more countries to subscribe and comply.
Looking forward, a number of additional steps should be taken. While we are pleased that subscribing countries are making progress in reporting reserves according to the new template, we urge the reporting of reserve data with a shorter than required lag. The United States has begun reporting reserve data on the Treasury website, consistent with the new template and more frequently than the SDDS requires. The Fund has usefully tightened the standard for external debt data as a part of the SDDS, but disclosure of debt service schedules and currency breakdowns are needed to provide a fuller picture of countries' obligations. Given the role that fragile banking sectors played in the East Asian crisis, we believe it will be of central importance to add to the SDDS the relevant financial sector indicators, and we look forward to early progress in the Fund in developing these indicators.
Vulnerability Indicators. Recent experience shows that a lack of information about countries' liquidity and balance sheet positions contributed to crises by encouraging (or at least not sufficiently discouraging) the buildup of imbalances, which exacerbated negative sentiment as the crises developed and the bad news inevitably came out. The IMF has usefully begun to include vulnerability indicators in a number of recent Article IV and program documents. It is now time to take the next step and systematically incorporate such indicators of liquidity and balance sheet risk into the Fund surveillance process, both bilateral and multilateral. The Fund should also move to regular publication of key indicators that academic research and recent experience show are important in highlighting potential problems before they grow severe.
The IMF and World Bank are collaborating on improving members' debt and reserve management. It will be important to press ahead with the completion of a concise set of guidelines by the Fall 2000 meetings. These guidelines should take account of the following principles:
Codes and Standards. The international community has made enormous strides in the last few years in developing international codes and standards to support financial stability. And while there are still a few critical gaps, such as debt management and deposit insurance guidelines, our key task now is implementation. It is critical that countries undertake to meet the twelve codes identified as key in the Compendium of Standards recently adopted by the Financial Stability Forum.
To help spur progress in implementing these key standards, the international community should consider a wide range of market, official, and regulatory incentives. These incentives can take a variety of forms—disclosure and transparency, technical assistance, official financing, market access decisions, regulatory actions, and supervisory guidance. Market discipline is probably the most effective mechanism to encourage implementation, but market participants will need greater disclosure and transparency to better assess countries' observance of standards. That is why it is important to continue, expand, and publish the IMF's experimental Reports on the Observance of Standards and Codes (ROSCs), formerly known as "transparency reports." We also believe that countries should be able to disclose their IMF Financial Sector Stability Assessment (FSSA) if they so choose.
Another incentive is the assessment process itself. The IMF should play the leading role in assessing countries' progress in implementing international standards as part of its surveillance function. Thus, I note with satisfaction that more countries have volunteered to participate in the Financial Sector Assessment Program (FSAP). The concept of the various assessment programs—the Reports on the Observance of Standards and Codes and the financial sector assessments —is sound, and I would hope that by the end of this year we will have garnered enough experience to put both programs on a more permanent footing.Money Laundering. With rapidly advancing technology and increasingly close links among our economies, money laundering today is truly global. National efforts and enhanced international cooperation will be needed to fight it successfully. The IMF and the World Bank have an important role to play in encouraging and supporting countries in their fight to curb money laundering. Where appropriate, the IMF and World Bank should begin incorporating international counter-money-laundering standards in their financial sector assessments and programs.
2. A More Strategic Financing Role
Consistent with the goal of adapting the IMF to the rapid growth and evolution of private capital markets, we believe the IMF should adopt a more strategic financing role in emerging markets that is focused primarily on forestalling contagion and providing appropriate financing for emergency situations. This will require the Fund to streamline its financing instruments and adjust the incentives associated with financing.
We attach great importance to the Executive Board's broad review of IMF facilities. Priority should be given to completing it in the next several months. The Executive Board has already taken some steps to eliminate or streamline a number of facilities that are no longer necessary. And there is considerable agreement on the general direction in which we need to move, including the need for further streamlining so that facilities are better structured, on the central role of Stand-by Arrangements, the desirability of making the Extended Fund Facility more effective and better targeted, the positive experience thus far with the Supplementary Reserve Facility, and the importance of pursuing adjustments to the Contingent Credit Line.
It is important to move forward with further concrete steps. We believe that the IMF should come to rely on a few core instruments for the bulk of its lending, and that those instruments should incorporate incentives that support a more strategic financing role for the Fund. I would like to lay out several specific proposals to accomplish these aims.
First, pricing. Providing conditioned finance to help countries mitigate short-run balance of payments problems is a fundamental part of the IMF's work. Access to Fund resources should nonetheless be made available on terms that provide an incentive for countries to rely increasingly on private financing when they can access private markets. In our view, all non-concessional Fund lending should in future be based on the principle that charges should escalate the longer countries have Fund money outstanding and, above certain thresholds, the bigger the scale of financing. There is also a strong case to be made for an overall increase in the basic rate of charge.
Second, modifications to the Contingent Credit Line (CCL). The international community has a strong interest in encouraging countries to take early steps to prevent crises, implement sound policies to reduce vulnerability to crisis, observe internationally-agreed standards, and rely on private capital markets where available. This is the purpose of the CCL. To enhance its use as a preventive tool, we suggest reform in three areas. First, it is important to differentiate the CCL more clearly from financing available at the time of crisis by reducing its price. We would also favor dropping the commitment fee for the CCL as, in our view, there is a tension between charging a commitment fee for an instrument that is most successful if it is not activated, and reimbursing the fee if the instrument is activated. Secondly, eligibility criteria should be clarified. Finally, we propose that countries should have greater assurance that, if they have committed to a specific policy program with regular performance reviews and remain faithful to those commitments at the time that crisis hits, they will be able to draw on a CCL.
Third, limited and effective use of the Extended Financing Facility (EFF). In our view, the utility of this facility is in supporting those few, carefully targeted cases where bold structural reforms are needed to secure stabilization and where the balance-of-payments benefits of structural reforms may require a long time to appear. These conditions are most likely to be met by lower-income transition countries undertaking far-reaching structural reforms to secure stabilization, and countries with income slightly above the threshold for PRGF-eligible financing.
And, finally, post program monitoring. Further work on the structure and incentives behind Fund facilities must also address incentives related to use of IMF money after it has been drawn. When a bank makes a loan to a company, it closely monitors the company's performance until the loan is fully repaid. The same logic applies to the Fund's lending relationship with borrowers. Currently, there is too much of a gulf between conditionality and surveillance for the latter to provide adequate post-program monitoring.
3. Promoting Market-Based Solutions to Crises.
Given the dominant role of private capital in today's global financial system, when the IMF is responding to financial crises it should focus on promoting market-based solutions. Several basic presumptions should guide the Fund's approach with respect to the private sector.
In cases where debt restructuring is needed, the IMF should adhere to certain operational guidelines. Notably, its programs should put strong emphasis on medium-term financial sustainability, and aim to strike an appropriate balance between the contributions of official external creditors, including the IFIs, and private external creditors. The IMF should encourage the country to aim for balance in treatment of different classes of private creditors, and to involve all classes of material creditors. The Fund should not micromanage the details of any debt restructuring or debt reduction negotiations. Rather, the IMF should underline the possible consequences to the country of any failure to secure the necessary contribution from private creditors on appropriate terms. These could include the need for a program revision to provide for additional adjustment by the country concerned or the option of reduced official financing. And finally, the IMF should be prepared to lend into arrears if a country has suspended payments but is seeking to work cooperatively and in good faith with its private sector creditors and is meeting other program requirements.
4. Modernizing the IMF
Adapting the IMF to an evolving international financial system must also involve steps to modernize the IMF as an institution. This process has begun, with progress in a number of areas. But there is much more to be done.
Safeguarding IMF resources and misreporting of information to the Fund. We very much welcome the recent Executive Board agreement on a framework of strengthened measures to safeguard IMF resources and to discourage misreporting of information to the Fund—in particular the new requirement for current and future program countries to publish external audits of central bank financial statements and to provide the Fund with information on their auditing and control mechanisms. These measures must now be vigorously and uniformly applied. This is of fundamental importance to the IMF's public support and the integrity of its financial operations.Evaluation. We also strongly welcome the Executive Board's agreement to establish an independent evaluation office, and we look forward to early action by the Fund to put this office in place as quickly as possible. Design of the structure, terms of reference, and other operating procedures for this office will be central to its success in increasing the IMF's effectiveness and accountability. In this respect, it will be critical to ensure full independence for the office, transparency about its work program and results and ongoing external consultation.
Transparency in Financial Transactions. The recent Executive Board agreement on quarterly publication of the Financial Transactions Plan, formerly known as the Operational Budget, represents an important step forward in the IMF's efforts to increase transparency generally, and public understanding of its financial operations in particular. I think we all recognize, however, that the IMF needs to take further steps to make information about its finances more accessible and understandable to the public. This should include improvements in the presentation of its summary balance sheet.
Liaison with Market Participants. A more modern IMF must be closely in tune with the thinking of financial market participants and have a complete and up-to-date understanding of market trends. In a time when the size of global capital flows vastly outweighs the resources of the IMF, close contact with private market participants is of increasing importance to the Fund's ability to fulfill its mandate to support effective balance of payments adjustment. In December, I proposed that the IMF establish a group to deepen its knowledge of market participants. I look forward to the early establishment of such a liaison group.
In addition to ongoing steps in these important areas, we believe that two new initiatives are also needed to modernize the IMF—and the IFIs more broadly.
Governance Structure. If the IMF is to work credibly and effectively in this new century, its governance structure, as a matter of principle, must better reflect the realities of the changing global economy—in particular, the growing role of emerging economies. The IMF's liquidity position is comfortable, and there is no case for a general quota increase. But changes in the international monetary system, including relative economic and financial strength among countries, need to be more fully reflected in the IMF—so that countries with a growing economic and financial role see a parallel increase in their standing in the institution. An outside group of experts is already reviewing the formula for calculating IMF quotas. We look forward to their conclusions, which should be made public. We believe that an immediate follow-on review should be undertaken to build on this effort. The follow-on review should be undertaken with the goal of presenting initial options and considerations in time for the Annual Meetings. The related issue of how countries are represented in the Executive Board is also critically important.
A Process for Selecting Leaders. The principles of transparency and accountability are increasingly fundamental to the work of the IMF and other international financial institutions. These principles should apply to the process of selecting the leaders of these organizations. This selection process should aim to:
- take fully into account the views and interests of all countries, including emerging market economies and the developing world; and
- contribute to the credibility and effectiveness of the institutions.
To accomplish these aims, we propose that each institution, when it anticipates a change in leadership, establish an outside advisory committee to review a panel of candidates. The committee should be representative of the institution's membership. The broad criteria for assessing candidates - including leadership and experience - should be disclosed, as should the advisory committees. We look forward to discussing these proposals with other members of the international financial institutions.IV. A New Framework for Debt Relief and Poverty Reduction
Last year, we endorsed a new framework linking faster, deeper, and broader debt relief and new concessional loans to country-driven national poverty reduction strategies. We all have a great interest in seeing this process succeed.
The new approach rightly places poverty reduction at the center of IMF and World Bank programs in poor countries and emphasizes better integration of poverty reduction and macroeconomic policies. A central feature of the new framework is greater openness and public consultation about national development priorities. It also reaffirms the principle that, to fully capture its benefits, faster debt relief must be underpinned by high quality poverty reduction and growth strategies.
Just as poverty reduction is not possible without growth, we also know that growth is not possible in the absence of a sound macroeconomic framework. Toward that end, the new Poverty Reduction Strategy framework represents a fundamental change in Fund operations in poor countries. Rather than withdrawing the Fund from these countries altogether, as some argue, the new framework sets out a clearer division of labor between the Bank and the Fund. The Bank takes the lead in providing advice on the design of growth-enhancing national poverty reduction strategies, diagnostics, and structural reforms, with particular emphasis on improving the poverty-orientation of public expenditures. Given the Fund's unique expertise, it will appropriately focus on promoting sound macroeconomic policy and structural reforms in related areas such as tax policy and fiscal management. This division of labor must be accompanied by a streamlining of IFI conditionality to avoid overlap and promote coherence. Both institutions must focus on a smaller number of clear performance targets that are aimed at maximum poverty impact, are set more realistically, and are then more vigorously adhered to.
The IMF, World Bank, and the countries themselves must all do their part to ensure that last year's replacement of the Enhanced Structural Adjustment Facility with the Poverty Reduction and Growth Facility is more than just a name change. In designing the PRGF, a strong effort was made to build on past lessons and to incorporate suggestions put forward in evaluations of the ESAF and during extensive consultations held last year by the World Bank and IMF on linking debt relief to poverty reduction. Going forward, we expect the PRGF program to continue to build on recent progress in the following ways:
This new framework holds the potential to transform the way in which governments, civil society, IFIs and the donor community work together to improve the poverty impact of adjustment. While countries and the institutions are still making the transition under the new framework, we are seeing indications of real progress since the PRGF was established seven months ago. While experience varies greatly across the 30 countries that have already begun to draft Poverty Reduction Strategy Papers, the efforts to work in consultation with civil society groups have, over all, been encouraging. We urge the Fund and the Bank to continue their efforts to support the development of sound, country-led strategies, and look forward to periodic progress reports and a full review of the PRGF and the broader PRSP process by end 2001.
Going forward, we must strike a reasonable balance between, on the one hand, the strong humanitarian case for providing debt relief rapidly and on the other hand, the economic imperative that the right policies be in place so that debt relief is integrated into meaningful growth and poverty reduction. We must, of course, work to ensure that the enhanced HIPC program is fully financed. The United States is actively working to secure Congressional approval for our full contribution to this critical undertaking, and for the IMF to be able to utilize fully the interest income on the profits from off-market gold sales.