Statement by Mr. Pedro Malan
Global Economic Outlook and Policy Responses
1. Since the meetings in Prague, changes in the world economy leading to a less favorable global environment have heightened the need for immediate policy actions and added a sense of urgency to unfinished reform agendas. During the last few years, the Fund has repeatedly pointed out that the United States was growing at an unsustainably fast rate and stressed the need to increase potential and actual growth in both Europe and Japan. The Fund called for policies that would allow for a soft landing in the United States and for an acceleration of structural reforms in Europe and Japan that would increase growth in those regions, allowing for a rebalancing in global growth in an orderly and gradual fashion. However, policy actions did not match these policy recommendations, calling into question the effectiveness of the IMF's multilateral surveillance.
2. The main concern regarding global economic prospects now is that the slowdown in the United States can produce a significant adverse impact on other major industrial and developing countries. These prospects seem more likely as Japan and the major economies in the euro area continue to face difficulties to strengthen their domestic demand. Japan's economy has already shown some weakening, while the euro area begins to display signs of slowing activity.
3. While some deceleration in the U.S. growth rate was appropriate to adjust its external imbalances, it is crucial that this deceleration happens in a gradual and orderly fashion and is supported by actions in other industrial countries to strengthen their economies and to sustain global demand.
4. More ambitious and speedier structural reforms remain the key to increase potential growth both in Europe and Japan. However, in the short term, to avoid the risk of a sharper contraction in global growth, policy makers should rely on macroeconomic policy instruments to sustain domestic demand, as structural measures will take time to produce effects. Further easing of monetary policy may be called for in the United States if conditions remain weak. A cut in interest rates in Europe already appears necessary at this stage, while it would still be appropriate to expand liquidity in Japan.
6. Times of increased international volatility and uncertainty pose significant challenges to developing countries. While a few of them may be in a position to adopt expansionary policies and contribute to sustain global demand, for most of the developing world it will be essential to maintain tight macroeconomic policies and adjust them flexibly as required by changing circumstances. All developing countries would also have to expedite their structural reforms. At the same time, it is important that an appropriate and stable flow of private financial resources to developing countries is maintained to avoid contractionary measures.
7. Policy responses to the global environment are needed both at the national and the international levels. Thus, the Fund and the international community must stand ready to help countries that have good macroeconomic policies and are prepared to adjust policies further in case of financial distress. Given that both aggregate quotas and the quotas of some emerging markets have become less representative of economic reality, the Fund's role of coordinating "ad hoc" financing packages has been an essential aspect of the international financial system in this era of increased capital mobility. If such international financial mechanisms were to falter, we may face a situation of a decreased pace of integration to world trade and financial markets as countries will self-protect themselves by accumulating larger international reserves through trade and current account surpluses, thus imparting a deflationary effect to the world economy.
8. Equally important for increasing global welfare is faster liberalization of trade regimes, especially those in the advanced world that continue to discriminate, through non-tariff barriers and anti-dumping practices, against the goods that developing countries produce more efficiently. Rapid trade liberalization as well as a reduction of subsidies, particularly in agriculture, can make an important contribution for the better functioning of the world economy, increasing welfare and reducing global poverty.
9. Brazil attained its main macroeconomic objectives last year. Real GDP growth accelerated to 4.4 percent; the average unemployment rate fell; consumer price inflation was limited to 6.0 percent, in line with the government target; the external current account deficit narrowed and continued to be more than fully financed by foreign direct investments. Fiscal accounts continued to improve, with the primary surplus of the consolidated public sector reaching 3.5 percent of GDP in 2000 and the overall deficit (PSBR) of the consolidated public sector declining to 4.6 percent of GDP, from 10 percent in 1999.
10. The policy framework for 2001 and 2002 aims at further sustained growth of output and employment, the maintenance of a sustainable external position, and continued improvement in living standards -especially for those in lower income groups- in a context of declining inflation. Economic policies will continue to center on fiscal austerity, a monetary policy geared to achieve a lower inflation target, a largely clean float of the exchange rate, and the completion of pending structural reforms.
11. The fundamentals of the Brazilian economy are strong and the country is in a much better shape to withstand external shocks than it was a few years ago. In a preventive and proactive response to the worsening of the external environment, the government has decided to strengthen its policy framework. It announced an increase of the primary surplus target for 2002 from the earlier established 2.7 percent to 3 percent of GDP, keeping this same indicative primary surplus target for 2003 and 2004. In response to inflationary pressures arising mainly from the exchange rate depreciation, the central bank increased interest rates by 100 basis points since mid March. Brazil has also significantly over performed its fiscal target, with the primary surplus of the consolidated public sector reaching R$15 billion in the first quarter of this year, compared to a target of R$10.1 billion. The government also reiterated its intention to pursue vigorously the passage in Congress of a number of pending legislation aimed at reducing costs and increasing efficiency of both the public and the private sectors.
12. The Colombian economy has performed well, despite the delicate security situation that the country has been facing. Economic growth, estimated at 2.8 percent of GDP in 2000, recovered significantly after the slump in 1999. Inflation achieved its projected one-digit levels; there was a strong fiscal adjustment in 2000; the current account registered a small surplus; international reserves have increased and remain at comfortable levels. There has also been an improvement in the financial sector. However, unemployment remains high. Structural advances have been made through tax reform and the passage (for first reading) of the amendment on territorial transfers. Legislation will be proposed on fiscal responsibility and pension reform. Most public financing needs for 2001 have been covered by placements in the euro and U.S. markets, this latter with support of a World Bank guarantee.
Strengthening the IMF Surveillance of Financial Markets and Crises Prevention
13. Financial markets and international capital movements play a central role both on macroeconomic stability and economic development. We welcome the Managing Director's emphasis on strengthening, upgrading, and reorganizing the Fund's work in this critical area.
14. With the FSAP/FSSA initiative, the Fund had already taken an important step to establish a comprehensive process to analyze national financial sectors, which are the main conduits of the demand for capital. To detect problems and weaknesses, and help countries to design appropriate policy responses in this sector, it is essential to both take advantage of the significant opportunities generated by international financial markets and to minimize the risks involved. Our chair supports the FSAP/FSSA initiative and the voluntary nature of participation. We also believe that, on cost-effective considerations, it is important to be selective in the scope of such assessments and to prioritize the issues to be covered based on their importance for macroeconomic and financial stability, according to each country's specific circumstances.
15. Fund surveillance of supply conditions in international capital markets, currently done through the International Capital Markets Reports and the quarterly reports on emerging market financing, will now benefit from two important new initiatives of the Managing Director that we fully support. The creation of a Capital Markets Consultative Group and the establishment of a new International Capital Markets Department will help to better understand the forces driving the supply of international capital and the systemic issues related to international capital markets, contribute to improve coordination of the Fund's work and to increase the level of Fund expertise in this area.
Streamlining Conditionality and Strengthening Ownership
16. We wish to thank the Managing Director for his personal interest and welcome the interim steps he has already taken to streamline structural conditionality. The Board has responded positively to the Managing Director's leadership and identified significant areas of consensus, as well as points requiring further discussion. It is important that the Board moves forward, keeps the current direction, and reaches a conclusion on this topic by the time of the next Annual Meetings.
17. Let me say that we do not see this as an exercise designed to weaken Fund conditionality. Conditionality plays an absolutely essential role in safeguarding the temporary and proper use of Fund resources and is an indispensable part of Fund financing. The exercise is about streamlining and better focusing conditionality, designing fewer and smarter conditionality that are more effective, that help to strengthen implementation and to make programs more successful, and minimize the problems and distortions of the current situation.
18. Conditionality has expanded significantly during the last decade, blurring the distinction between different types of arrangements in terms of program contents. This exaggerated expansion of conditionality has become dysfunctional, detrimental to the Fund's effectiveness, and has made program implementation unnecessarily more complicated.
19. Such dysfunctional expansion has occurred mainly in the area of structural conditionality. We recognize that in a number of cases, structural reforms are a necessary component to ensure medium-term sustainability of macroeconomic stabilization. In those cases, Fund programs will have to continue to rely on structural reforms that are within its core areas of expertise to complement macroeconomic stabilization. However, it does not logically follow from the recognition that structural reform may be important to ensure sustainability of macroeconomic stabilization, that conditionality is needed to implement each and every structural reform. It is not Fund conditionality what "gets things done". What gets things done is ownership, technical and administrative capacity to deliver, and political capacity to convince parliaments and win public opinion support. It is ownership that we need to strengthen to get better implementation and better results.
20. Excessive reliance on conditionality can actually detract from national ownership, make program implementation harder, and adversely affect sustainability. Overloading a program with conditionality that clearly cannot be implemented can have an adverse effect on credibility and thus reduce investor confidence rather than strengthen it. The manner of presentation, the timing and the sequencing of structural reforms play a major role in the government's capacity to implement and to sustain them.
21. The notion of national ownership implies, on the one hand, the responsibility, legitimacy, and accountability that the national authorities alone have to decide which economic policies to implement, their pacing, sequencing, and intensity. On the other hand, it implies a genuine commitment on the part of the national authorities to be serious in implementing the policies they have agreed with the Fund, in faithfully reporting to the Fund, and in promptly taking corrective measures that might be needed due to unforeseen changes of circumstances. Together with good initial program design and adequate financing, these characteristics are what make Fund programs successful.
22. While the revision of conditionality is not a merely quantitative exercise, it is clear that there is considerable room for streamlining structural conditionality since, according to the Fund study, in the past only 29 percent of structural benchmarks included in programs were critical to the macroeconomic objectives and only 44 percent were actually implemented, and therefore no link could be detected between the number of conditionality and successful implementation.
23. As we stressed earlier, the real purpose of conditionality is to safeguard the temporary and proper use of Fund resources, rather than getting things done. We would submit, therefore, that a criterion for streamlining and better focusing would be to use conditionality solely to ensure the implementation of those program objectives within the Fund's core areas of competence that are critical for safeguarding the temporary and proper use of Fund resources.
24. Structural reforms that are relevant and desirable, but not critical for achieving these objectives, may even be included in certain programs due to the specific country circumstances, but should not become part of conditionality. Instruments other than conditionality, such as policy advice, technical assistance, capacity building and training should be used to support them.
25. We agree that it is necessary to shift from the current practice of comprehensiveness in the coverage of conditionality to a presumption of parsimony. If, exceptionally, it is felt that it may be warranted to include in programs conditionality which lie outside the Fund's core areas of expertise, the burden of proof that they are critical for safeguarding the temporary and proper use of resources should fall upon those that propose such inclusion.
26. A sharper distinction of the conditionality content among different types of facilities seems also to be needed. This approach is already used, for instance, in the CCL, which is based on demanding eligibility criteria, no conditionality prior to activation and after activation conditionality limited to macro-economic rather than structural policies. Similar types of distinctions may be attempted between the stand-by, the EFF, and the PRGF as far as structural conditionality is concerned. We would envisage, for instance, that the stand-by, which is intended for balance of payments difficulties of a short-term or cyclical nature, as a general rule would have lighter or no structural conditionality, while the EFF, which is intended for long-term balance of payment problems and to support structural reforms, would have a strong component of structural reforms. Similarly, the PRGF, which is intended for long-term assistance and deep-seated balance of payments problems and for poverty reduction, would require a stronger structural component than the other two facilities. A sharper distinction of the conditionality contents of different types of arrangements would allow to vary the coverage and contents of conditionality according to country-specific circumstances, and yet preserve the essential principle of uniformity of treatment amongst members.
27. We are in favor of greater coordination with the World Bank and other international organizations in terms of financing, policy advice, technical assistance and training. But it might be simplistic to think that better coordination will solve the problem of excessive conditionality, which is a problem that exists in the World Bank as well as within its areas of expertise. Our chair would not favor, for instance, to include in Fund programs conditionality that cover the areas of specialization of the Bank or vice-versa, nor other forms of de facto or disguised cross-conditionality. Our chair has been a strong proponent in the Bank of a new approach towards middle-income countries. But such an approach will necessarily differ from the intense monitoring and joint reporting features currently adopted for low-income countries, since low-income countries have different problems, and relatively lower technical, administrative and institutional capacity than middle-income countries.
Combating Financial Abuse and Money Laundering
28. Our Chair strongly supports a strengthening of international cooperation in combating money laundering and financial crime and an intensification of the Fund's activities in this area in a way that is consistent with the Fund's mandate and principles. Unregulated and unsupervised or poorly regulated and supervised financial systems can pose a potential risk of financial instability that, in some cases, may be transmitted to other countries. Money laundering distorts the efficient global allocation of resources and creates international negative externalities that can adversely affect other countries.
29. The Financial Action Task Force 40 Recommendations are recognized as the key international standard to deter money laundering by a large number of countries, including mine. The Fund should also recognize the FATF 40 Recommendations as the international standard in this area and determine how they could be made operational in Fund's surveillance and technical assistance. The Fund, however, should not get involved with those aspects of the FATF 40 Recommendations that are related to criminal and law enforcement matters, or issues that are outside its core areas of expertise. Our chair also considers that anti-money laundering issues should not be covered under conditionality. The FATF 40 Recommendations should have the same voluntary nature and treatment already agreed for the other international standards used by the Fund in its operational work.
30. An approach based on international cooperation is preferable to one based on confrontation and would yield better in the long run. The Fund has a broad membership and a tradition of due process and uniformity of treatment of all members that make it well placed to contribute to this issue. We would like to encourage the Fund to explore with the FATF forms to foster countries working more closely together on this issue under a constructive and cooperative multilateral approach. The current process of revision of the FATF 40 Recommendations provides a good opportunity to listen to the concerns and suggestions of non-FATF members through an appropriately inclusive outreach process to which the Fund could contribute.
31. Efforts to combat money laundering are needed in all countries be they offshore financial centers or major international financial centers. Global consolidated supervision can be a powerful instrument to combat money laundering. The solution lies not only in better supervision in offshore financial centers, but also in more effective consolidated supervision by home countries. These considerations should inform the coverage of the Fund's work in this area.
32. Brazil's efforts to combat money-laundering date back to 1991 when it ratified the Vienna Convention. In March 1998, Congress approved a new law that allowed for a major overhaul of the legal and operational framework to combat money laundering. The new law expanded the list of antecedent crimes associated with money laundering, created a Financial Intelligence Unit (COAF), and extended the obligation of reporting suspicious transactions beyond the banking system to encompass stock exchange brokers, commodity dealers, real estate agents, credit card companies, leasing and factoring companies, lotteries, jewelry and precious metals dealers, and fine arts dealers. The reporting of suspicious transactions increased substantially reaching 7,451 as of December 2000 and led to 114 criminal inquiries in which 98 persons were indicted. Brazil is a member of the FATF, accepts and complies with the FATF 40 Recommendations. Brazil hosted in August 2000 a meeting in Brasilia to launch a South American Regional Financial Task Action Force. As a result, a memorandum of understanding creating the South American Regional FATF was signed in Cartagena, Colombia, last December 9.
33. Colombia has been participating for a long time in the fight against money laundering and has strengthened its regulatory and institutional framework for that purpose. It has ratified the Vienna Convention, signed bilateral agreements, and is participating in the South American FATF. Since 1992, the government has issued regulations introducing the "know your customer" principle for financial sector operations. Later, through additional legislation, it became mandatory as well for insurance sectors, games of chance, and securities exchange. The creation of the Information and Financial Analysis Unit within the Ministry of Finance in 1999 strengthened the institutional framework. This unit operates as a financial intelligence unit, has ample legal powers to request information, and to conduct investigations on money laundering. It centralizes and channels to the Attorney's office all reports regarding suspicious operations. The supervisory organizations, especially the Superintendence of Banks, have established procedures, in accordance with international standards, especially, the 40 recommendations of the FATF, for the prevention of money laundering, and rely on a very strict system of penalties.
34. Last October, Panama approved two new laws that substantially strengthened its anti-money laundering framework, which has been in operation since the early 1990s. The new laws broadened the definition of money laundering, enhanced the exchange of information with other jurisdictions, facilitated the transmittal of suspicious transactions reports, and brought the trust companies under the Superintendence of Banks' jurisdiction. A self-assessment of compliance with anti-money laundering legislation was completed with Fund assistance in November 2000. During the last Article IV consultation, the staff assessed positively the steps adopted by Panama and was of the preliminary opinion that the Panamanian banking regulatory and inspection practices comply with Basle Core Principle 15, related to money laundering. A module 2 assessment under the OFC initiative has been requested by Panama to the Fund and is scheduled to be concluded next month.