2001 Spring Meetings
Statement by Mr. Hans Eichel, Minister of Finance of Germany, to
the International Monetary and Financial Committee Meeting on April 29, 2001
April 29, 2001
1. The expected slowdown in global growth will be more pronounced than we expected at
our last meeting in Prague. We should not be overly pessimistic, however: Compared with growth
in the world economy in the years before, this year will still be respectable.
2. Another factor is that, this year, growth will be supported by a normalisation of oil prices.
Furthermore, the scope for economic policy action has increased in many industrial countries in
the past few years owing to successes in combating inflation and consolidating government
budgets. Globalisation has been a major factor leading to the implementation of structural reforms
which have strengthened the economies. Despite clear differences between individual cases, the
emerging economies, too, have become less vulnerable to crises.
3. In the past few years, growth has accelerated considerably in the United
States—not least on account of the widespread use of new information and
communications technologies. It was also apparent, however, that this acceleration could not
last—imbalances have run up over the past few years which are reflected, above all, in
excessive stock prices, increasing household debt and a high current account deficit. The
associated risks to global economic development must not be underestimated.
4. It is therefore all the more important to use the available scope for proactive
macroeconomic policy measures. The Fed's interest rate cuts of two percentage points so far this
year will not fail to have an impact in stimulating the economy. Furthermore, large-scale tax cuts
are in the offing, and these will help to stabilise shaken consumer confidence.
5. The slowdown in the global economy is also affecting the euro area. Even so, its
growth will clearly exceed that of the two other main currency areas this year. Even though
considerable differences among member countries still exist, the euro area's vulnerability to
external developments is limited for several reasons. The share of exports to the USA is
comparatively small and slumps on the stock markets play a much less important role in both
investment financing and consumer confidence. Additionally, growth in the euro area in 2000 and
2001 will be given more support by domestic demand, which is being strengthened not only by tax
cuts in several member states and persistent growth in employment, but also by lower oil prices
than last year.
6. The German economy continues its upward trend. However, cyclical momentum
has dropped off recently. The outlook remains positive despite some weakening. Growth will
continue on track, albeit less buoyantly. This is supported by the favourable conditions in place,
not least due to the economic and fiscal policy course set by the German government including a
major tax reform and significant structural reforms for instance in the telecommunications and
energy sector . Therefore, I expect real GDP to grow by 2 % in 2001 and 2 ¼ % in 2002.
This is significantly higher than the growth rates of the 90s. Between 1991 and 1998, average
annual growth amounted to merely 1.3% in real terms. For these growth projections to become
reality, it is vital for the global economy to regain strength rapidly.
7. According to forecasts, Japan will not experience the recovery this year which
everyone is hoping for and which is important precisely for stability in South-East Asia. Economic
activity has slowed down once again and the situation in the financial sector is difficult. There is
limited scope for fiscal policy action, and the high level of government debt calls for a
medium-term strategy of consolidation.
8. In order to counter the persistent deflationary tendencies, the Bank of Japan recently
adopted liquidity policy measures. To ensure that these measures actually support activity in the
real economy, the main priority will be a rapid solution to the problem of bad loans in the banking
sector combined with structural reforms in the corporate sector. It is a welcome development that
the Japanese government has started to tackle these problems with the package of measures
presented at the start of April.
9. With a few exceptions, there was a further improvement in the economic situation in the
majority of emerging economies last year. A favourable external environment played a
major part in this. The slowdown in global growth that is now becoming apparent will also leave
its mark on the emerging economies, however.
10. Declining demand, especially for IT products in the United States, will undoubtedly hit
the emerging economies in South-East Asia particularly hard. The resulting risks are
mitigated by generally comfortable current account positions but, even so, the - at best - sluggish
progress in undertaking the necessary structural reforms in some countries and political
uncertainty might harm investors' confidence in the region.
11. By contrast, the economies of Latin America are much more strongly oriented
to domestic trade and, furthermore, have a regionally more diversified export structure. However,
the need for external financing in the region is high. Continued structural reforms and measures
for consolidating government budgets are important for strengthening investor confidence.
12. For the emerging economies in Central and Eastern Europe, developments in
the countries of the European Union will have the greatest impact. The cyclical risks are therefore
to be assessed as lower. But here, too, continued structural reforms remain important, and large
current account deficits point to the need for a tighter fiscal policy.
13. Allow me to conclude by saying this: The global economic situation requires our
undivided attention. But it must not obscure our view to the future. Open markets and
liberalised movements of capital are major elements of increased growth and prosperity in all
countries. Stronger regional cooperation can help to contain global risks and make increased use
of the advantages of globalisation. I therefore welcome the recent start of negotiations on the
creation of a free trade zone for the Americas and the envisaged closer cooperation in South-East
14. There is no conflict between stronger cooperation at the regional level and stronger
cooperation internationally. We therefore all have to work hard for the initiation of a new WTO
round in November and for successful negotiations to lay the foundation for a new surge in
growth in the global economy.
15. In connection with issues of trade, we also have to take particular account of the interests
of the world's poorest countries. At this point, I therefore wish to endorse the "Everything
but Arms" initiative of the European Union, which since March 2001 has been securing the
poorest developing countries free access to the markets of the EU member states.
Streamlining Conditionality and Strengthening Ownership
16. Conditionality is an indispensable element of IMF financial assistance. In the context of a
Fund-supported program, financial assistance and policy adjustment constitute an integrated
response to a country's economic difficulties. At the same time, national ownership is a key
component of the successful and sustained implementation of any such program. However, there
is no trade-off between ownership and conditionality. Clearly, in some cases strong ownership
may reduce the need for extensive and detailed conditionality, and in other cases extensive and
detailed conditionality may support national ownership of a reform program. In cases where
ownership is insufficient, the Fund should limit or completely deny financial assistance.
Implementation of prior actions is a convincing test for a program country's commitment to its
economic reform agenda.
17. There is indeed scope for streamlining and focussing conditionality in order to enhance
the effectiveness of Fund-supported programmes whilst safeguarding IMF resources and not
weakening conditionality. We share the concern that conditionality which is excessively broad and
detailed or unfocused and unduly intrusive can detract from ownership. Therefore, we welcome
the current discussion on streamlining and focusing Fund conditionality. Policy measures,
including structural reforms, should only be part of Fund-supported programs if they are critical
for the program success and return to macroeconomic and financial stability. This has to be
assessed case-by-case. Furthermore, conditionality should take due account of the specific
circumstances of the program country, particularly with respect to its actual implementation
capacity. Conditionality should leave a maximum possible scope for countries to make their own
policy choices, making use of the Fund's technical assistance if required. We encourage the Fund
to develop proposals for the revision of the conditionality guidelines reflecting these
considerations following the principal that less is often more.
18. We call upon the Fund and the World Bank to improve cooperation and collaboration in
the field of conditionality. Where appropriate, prior coordination between the Fund and the World
Bank is strongly warranted. Moreover, both should focus on their specific mandates and areas of
Private Sector Involvement
19. We welcome the progress achieved in further developing the framework for private sector
involvement in preventing and resolving financial crises. Nevertheless, more work needs to be
done to ensure a transparent, consistent and coherent implementation of the agreed framework.
The current framework might need to be further strengthened and made more predictable. The
access limits under SBA and EFF facilities should be adhered to. Financing beyond these limits
should be made available only in truly exceptional cases involving in particular substantial risks of
contagion with systemic effects. In this context, the IMF should further look at the conditions of
its policy of lending into arrears and explore the general principles for the use of standstills by
crises affected countries as a measure of last resort. However, the overriding objective should be
to facilitate voluntary or concerted private sector involvement at an early stage.
20. We agree with the Managing Director`s report that further work is necessary on an
analytical framework for identifying external vulnerabilities and on developing principles for
prudent external liability management. Although early warning systems cannot predict crises with
certainty, they are still useful tools for crisis prevention policies, and the private sector attaches
more and more importance to the development of such early warning systems. It is also important
to complete the work on the revised guidelines on foreign exchange reserve management in the
next months. Germany has taken an active part in this work. The exchange reserve management
guidelines are a useful complement of the revised debt management guidelines, already discussed
by the IMF Board. Strict adherence to these two guidelines can contribute to preventing
insufficient reserves and an unsustainable debt situation.
Transparency and Accountability
21. We welcome the more systematic release of Fund's policy papers and the new approach of
voluntary publication of country papers. The new approach will promote a better understanding
of member policies and the Fund's actions and thereby adequately response to earlier criticism
from outside the Fund. However, market sensitive information must remain confidential.
22. Regarding the Fund's strengthened financial sector work, we would like to underline the
central role which the Financial Sector Assessment Program (FSAP) plays in this context. FSAPs
are an essential instrument to help countries enhance their resilience to crises and cross-border
contagion. The agreement to carry out up to 30 country assessments per year is most welcome in
this context. Germany, like other G20 countries, has expressed its intention to participate in the
FSAP. While the ultimate goal is to assess the entire membership, resource constraints suggest
giving priority to emerging countries with systemic importance, with external sector weaknesses
or financial vulnerabilities. For these countries, early FSAPs would be most helpful.
Standards and Codes
23. Standards and codes must assume a more and more prominent role in crises prevention.
We therefore welcome the successfully enhanced Fund work in this area which made standards
and codes a key tool for making member's economic and financial systems more resilient. On a
voluntary base, member countries should be encouraged to adopt relevant standards and codes.
Furthermore, assessments of the implementation of standards and codes will be discussed in the
context of Article IV surveillance. However, due to limited resources, the Fund has to set clear
priorities regarding the selection of countries and standards which are to be assessed first.
24. While we generally support efforts aiming at an appropriate reflection of different
conditions across the Fund's membership in the course of ROSC assessments, it is equally
important to aim at uniformity of treatment across countries when applying standards and to
maintain their universality. Otherwise it will prove difficult to ensure a wider incorporation of
ROSC results into the risk assessments and investment decisions of market participants and thus
to enhance the efficiency of the market mechanism. In order to efficiently address financial sector
weaknesses identified by ROSCs, the Fund, other standard-setting bodies as well as bilateral
donors should expand the provision of technical assistance in that field.
Combating Financial Abuse and Money Laundering
25. Money laundering is a problem of global concern with potential of threatening the stability
of financial systems and distorting optimal allocation of macroeconomic resources. We support a
more active and prominent role of the Fund and the World Bank in combating money laundering
as agreed to by recent board decisions. We encourage the Fund to further intensify its efforts in
this area and to make assessments of the implementation of the anti-money laundering standard an
integral component of its surveillance. In our view, especially the inclusion of Offshore Financial
Centers into the Fund's financial sector work constitutes another important step by the Fund to
prevent financial abuse.
26. In this context, we welcome the recognition of the FATF 40 Recommendations as the
appropriate anti-money laundering standard. The FATF's Recommendations should serve as the
tried measure for the efforts of the Fund in combating money laundering. We are optimistic that
the IMF's active involvement in the ongoing process of revising the FATF 40 Recommendations
as well as the participation of a wider range of countries in that exercise will further broaden the
international acceptance of the FATF Recommendations, which are already the basis for
the work of regional anti-money laundering institutions in the Caribbean, the African, and the
Independent Evaluation Office
27. We welcome the Executive Board's selection of Mr. Montek Singh Ahluwalia of India as
Director of the new Evaluation Office (EVO). We hope that the EVO will be established as soon
as possible. The EVO together with other evaluation mechanisms will further strengthen the
Fund's external credibility, accountability and effectiveness.
Selection Process of the Managing Director
28. We welcome that the Executive Directors of the Fund and the World Bank have
successfully concluded their work on the "review of the progress for selection of the
Managing Director of the Fund, and the President of the World Bank".
* * *
29. The joint efforts of the international community and the IFI's have already helped 22
countries to reach their decision points, which has provided them with debt service relief of 34
billion US$. Due to the difficult political situation in most of the remaining countries, progress
will from now on require more time. Any weakening of necessary adjustment requirements would,
however, jeopardize the objectives of the HIPC initiative. Peace agreements and the
embracements of reforms are necessary prerequisites for taking part in the initiative for those
countries which are still engaged in conflict.
30. Debt relief alone will not resolve all problems. Therefore, the international community has
to continue to support the reform process in the HIPC's to promote a sustainable and socially
well-balanced growth. Some of the essential elements of a comprehensive reform effort are the
mobilisation and efficient use of all domestic financial resources for growth and poverty reduction,
fostering private investment and the economic participation of all groups of society; this has to be
supported by open markets in developed countries for HIPC's exports.
31. To avoid a renewed build-up of unsustainable debt in HIPC's, an effective debt
management and sound budgetary procedures for the tracking of poverty-related spending are as
important as the implementation of a systematic monitoring of the development of HIPC's
external debt through regular debt sustainability analysis by the IFI's.
Supporting Post Conflict Countries
32. The strengthened efforts of IMF and World Bank to support post-conflict countries are
an important element of the strategy for fighting poverty. The measures currently under
consideration include an early access of the post-conflict countries to technical and financial
assistance. The assistance must, of course, be tailored to the special needs and the limited
absorption capacity of the individual countries.