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2001 IMFC Statements
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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

World Economy

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 Asia.

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 experience.

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.

External Vulnerability

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 Asian-Pacific region.

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".

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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.