IMFC Meeting April 20, 2002
April 20, 2002 IMFC Statements
Documents Related to the April 20, 2002 IMFC Meeting
Antigua and Barbuda and the IMF
The Bahamas and the IMF
Belize and the IMF
Barbados and the IMF
Canada and the IMF
Dominica and the IMF
Grenada and the IMF
Ireland and the IMF
Jamaica and the IMF
St. Kitts and Nevis and the IMF
St. Lucia and the IMF
St. Vincent and the Grenadines and the IMF
Statement by the Honourable Paul Martin|
Minister of Finance and Governor of the IMF for Canada
International Monetary and Financial Committee
Washington, D.C., April 20, 2002
When we last met in Ottawa in November 2001, in the shadow of September 11th, our discussions were clouded by uncertainty. The global economy was in the midst of a synchronized slowdown and consumer confidence was at an ebb point. Financial markets, which had been hard hit by the terrorist attack, remained fragile. Against this backdrop, there was a pressing need to sustain economic activity and to build an international consensus to choke off the financing of terrorism.
But, thanks in large part to the prompt policy actions of a number of countries, the global economy has rebounded more quickly than many had expected and the international fight against terrorist financing has yielded significant results.
We must remain vigilant on both of these fronts. There are still risks to the global outlook and too many people are trapped in a cycle of poverty and despair. Our task is to work together to identify measures that will further reduce uncertainty and promote sustainable and equitable global economic growth.
The Global Economy
September 11th was a serious shock to the already slowing global economy. Through 2001, policy-makers responded with significant monetary easing in several economies along with some fiscal stimulus, taking additional steps after September 11th. As a result, the global slowdown was relatively short and shallow. In particular, recent indicators in Canada point to a recovery that is unfolding somewhat earlier than what was expected just a few months ago.
In Canada, real GDP growth in the fourth quarter of 2001 was much higher than expected, reflecting the effects of stimulative monetary and fiscal policies and strength in consumer confidence. This, coupled with evidence of an easing in the ongoing inventory correction and the boost to Canadian exports provided by the recovery underway in the U. S. economy, has led private-sector forecasters to revise up their growth projections for Canada. The average private-sector forecast is now about 2½ per cent for 2002 and 3¾ per cent for 2003.
Ireland's pace of expansion slowed significantly last year as global growth faltered. However, the Irish economy remains competitive and resilient and is expected to expand by 3 per cent this year, with continued employment growth, and unemployment remaining in the 4–5 per cent range. The public finances are also expected to remain in small surplus in 2002. Ireland is continuing to focus on building up the country's infrastructure and on ensuring that inflation eases further as key steps to sustaining competitiveness and building the capacity for continued economic progress going forward.
The Caribbean was also affected by the synchronized global economic slowdown and the September 11th tragedy, and indeed some parts of the Caribbean were hit harder than other countries due to the heavy reliance on tourism. Given these difficulties, some countries have engaged in additional commercial borrowing and eased monetary policy, while others began to implement successful home-grown structural adjustment measures.
The rebound in global economic activity since last fall has been reassuring. But we cannot afford the luxury of complacency. The synchronized nature of the slowdown in the world economy in 2001 demonstrated the degree to which our economies are interconnected; a shock in one area of the world can quickly become a global problem. This underscores the need for policy-makers to look beyond their borders to ensure that the impacts of global economic shocks are mitigated.
And, while the risks to the outlook appear to be significantly more balanced than just a few months ago, the downside risks should not be ignored. A larger-than-expected rise in oil prices could impede the global recovery. Continuing large current account deficits and rising net foreign indebtedness in the U.S. remain a concern for the medium-term global outlook. And, the high level of nonperforming loans in Japan's financial sector continues to pose a challenge to its economic outlook.
At this juncture, the challenge for most industrial country central banks is to gauge how quickly to move monetary policy towards a stance that will contain future inflationary pressures without choking off the recovery. Obviously, this is not the problem in Japan, where deflation continues to stymie the prospects for recovery.
The risks for emerging markets and developing countries are more pronounced. Two factors figure prominently. The first is the spectre of trade protectionism, which again looms large only months after the launch of the Doha Development Initiative. We should not lose sight of the fact that the Bretton Woods institutions were created to help all countries share in the benefits of global trade and commerce. And, just as negative shocks radiate out, spilling over national borders, stronger growth in one country provides opportunities for growth and development in others. We simply cannot allow some countries to benefit from the global economy while others remain mired in hopelessness and despair. It is for this reason that our strategy to promote long-term sustainable growth must include a commitment to open markets and the elimination of trade-distorting subsidies.
The second risk facing emerging markets is the threat of financial instability. The immediate impact of the crisis in Argentina on other emerging market economies has been limited. However, more pronounced effects should not be ruled out, particularly if the situation in Argentina deteriorates further. The move to more flexible exchange rate arrangements has already helped make emerging markets more resilient to economic shocks. But, further efforts are required.
Indeed, in times like these, we must take steps to help ensure that the perceived uncertainties associated with global economic integration, such as the risk of financial crises, do not lead countries to shut their doors and turn inward. This would deny both advanced and developing countries the gains in living standards that come from the worldwide flow of goods, services, capital and ideas. That is why we must redouble our efforts to address the weaknesses and distortions in international capital markets that can contribute to financial crises.
Strengthening Crisis Prevention and Resolution
This issue has attracted considerable attention since the last IMFC meeting, stimulated, in large part, by the IMF's welcome proposal for a sovereign debt restructuring mechanism (SDRM). A SDRM would replicate, at the international level, many of the attributes of domestic bankruptcy regimes that help to facilitate timely and orderly debt workouts in our own countries.
We encourage the Fund to continue to work on this important element of the crisis-management framework. A key issue that should be addressed going forward is the priority attached to new private sector money once a debt restructuring has been reached. Here, there may be lessons to learn from debtor-in-possession financing in the context of domestic bankruptcy regimes.
Realistically, however, establishing a formal international bankruptcy mechanism will take time. And, in the meantime, there will not be a moratorium on financial crises. As a result, we need to take complementary steps to strengthen crisis prevention and resolution in the shorter term.
In this regard, we encourage the Fund and its members to make urgent progress on a number of practical issues where there is already a fair degree of international agreement, such as demonstrating greater discipline in adhering to limits on official financing in crisis situations and encouraging the use of innovative clauses, such as collective action and standstill clauses, in sovereign debt instruments.
Ideally, we want to see payments problems resolved through the voluntary restructuring of claims before they become crises. However, it is difficult to get debtors and creditors to the table as long as there is the possibility of more official lending. Credible limits on official financing would provide some much needed clarity to both debtors and creditors on how financial crises will be handled and, hopefully, prompt timely and cooperative solutions to payments problems.
Unfortunately, there will be cases when a voluntary solution is not forthcoming. And, it is for this reason that fostering the widespread adoption of collective action clauses and other covenants that can help promote the orderly resolution of financial crises has been a long-standing Canadian objective. These clauses make it easier to restructure claims -- in effect, better aligning a country's commitments to pay with its ability to pay. Canada has backed up its words with action, introducing collective action clauses in our foreign currency debt. As a result, we welcome recent proposals to facilitate their greater use and encourage the IMF to develop an action plan to catalyze the use of collective action clauses by this year's Annual Meetings.
No country ever seeks to default on its foreign debts. The potential costs are simply too great. But this reluctance to seek a restructuring of debts can lead a country to delay negotiating with its creditors. Too often in the past the result has been disastrous to the country concerned and to its creditors. What is needed is a temporary "breathing space" from debt servicing obligations that allows the debtor to implement needed policy changes to correct the payments problem. Of course, the debtor would also be expected to sit down with its creditors to negotiate in good faith on a sustainable debt-servicing plan. The standstill clause that Canada proposed several years ago would provide this "breathing space".
Recent events have underscored the need for a better framework for the timely, orderly resolution of financial crises. Canada has long advocated the need for such a framework in order to promote efficient international capital markets and limit the economic and social costs of crises. The balance of international opinion has now shifted in favour of the measures that we have proposed—standstills, collective action clauses, and limits on official financing. The time to act has come. Progress on these elements of our crisis prevention and resolution framework would represent an important step towards our goal of reducing the financial, economic and social costs of financial crises.
Of course, the easiest crisis to resolve is the one that does not occur. That is why efforts to prevent crises, through the provision of timely, reliable and understandable economic information and policy advice, are a critical component of our crisis management strategy. We, therefore, welcome recent progress in making IMF surveillance more effective and transparent, including through the Fund's work in developing and assessing internationally accepted codes and standards for sound financial sectors.
Indeed, one of the early lessons from the collapse of Enron is that, in an era of internationally integrated capital markets, we all have an interest in ensuring that financial standards are harmonized to the greatest extent possible against international benchmarks.
In this respect, the Fund should continue to help countries with limited resources and administrative capacities implement key codes and standards through the provision of advice and technical assistance. To help facilitate this important work, Canada is a founding contributor to the joint IMF/World Bank Financial Sector Reform and Strengthening Initiative (FIRST), which will provide technical assistance to help countries address financial sector weaknesses identified in Financial Sector Assessment Programs (FSAPs) and Reports on the Observance of Standards and Codes (ROSCs).
Enhanced Heavily Indebted Poor Countries Initiative
Recent updates from the Bank and the Fund on progress under the HIPC Initiative are frankly worrying. Only five HIPCs have gone through the process and three of these had unsustainable debt burdens shortly after completion or required additional funds to be sustainable. Eight to ten countries that have reached the decision point will need "topping up" to reach sustainable debt levels. We need to better understand why their debt levels are not sustainable.
On the financing side, many non-Paris Club bilateral creditors and commercial creditors are not taking part in the Initiative, meaning that poor countries will not receive all the debt relief they need to make a lasting exit from debt. This is compounded by the large existing gaps in HIPC financing.
Quick action is needed to address these problems.
First, an immediate review of debt sustainability under HIPC should be undertaken to improve our understanding of why debt levels in some HIPCs are not sustainable, including: how much is due to temporary factors that will be reversed; how much is the result of unrealistic export or growth assumptions; how much is the result of bad domestic policies; and how much is due to exogenous factors beyond the control of the HIPCs. In addition to improving our understanding of why results have not been better, it should also include a realistic assessment of all costs. We would call for this review to be completed by the end of the calendar year. It should be repeated every three years.
Second, many HIPCs suffer from a lack of debt management capacity. A comprehensive framework is needed to assist HIPC graduates with ongoing debt management, including an annual review of the status of HIPC debt. Greater technical assistance for debt management should also be provided to help HIPCs better manage their own debt.
Third, greater efforts should be made to bring non-Paris Club bilateral creditors and commercial creditors into the Initiative. We need to examine whether the current strategy of using moral suasion on commercial creditors is working, and if not, what the alternatives are.
Fourth, creditors should make information public on all new lending to HIPCs in order to ensure transparency—they should also respect proposed limits on additional commercial borrowing for HIPCs.
Fifth, we cannot wash our hands of these countries after they get through the HIPC process. If more needs to be done to help these countries be sustainable, then we must follow through to make sure it is done. If this means additional resources, then we must face up to this need.
Let me be clear here. These proposals are made to strengthen the Enhanced HIPC Initiative not to create a HIPC III. What we need now is to ensure that the commitments we made under the current Initiative are met.
Combating Money-Laundering and the Financing of Terrorism
Under Canadian leadership, the G-7 and G-20 have implemented action plans against terrorist financing that call on the international financial institutions to make important contributions to this fight. The Fund has a role to play in ensuring that the financial abuses of money laundering and terrorist financing do not pose a threat to members' domestic financial sectors and the integrity of the international financial system as a whole. To this end, we underline the importance of the IMF's enhanced collaboration with the Financial Action Task Force (FATF) to develop a practical framework for assessing countries compliance with international anti-money laundering and terrorist financing standards.
In November 2001, the IMFC endorsed an action plan formulated by the IMF to intensify its contribution to global efforts to combat money laundering and the financing of terrorism. The IMFC also urged all countries to take the specific measures set out in its communiqué as soon as possible. G-7 Finance Ministers have encouraged the IMF to report on its contribution and on the measures implemented by member countries.
For its part, Canada had already established a financial intelligence unit in July 2000, but has recently: implemented UN Security Council Resolutions related to counter terrorism, including the asset freezing provisions of UNSCR 1373; signed and ratified all UN counter-terrorism agreements except one, which it is taking steps to ratify; and committed to provide technical assistance through the IMF and other channels to help countries fight terrorist financing.
Ireland has an array of laws and the necessary institutions to deal with the financial activities of terrorists and criminals. Ireland is fully committed to the implementation of UNSCR 1373 through action at both national and EU levels and participation in the FATF. Legislation to give effect to the UN International Convention for the Suppression of the Financing of Terrorism is in the course of preparation.
The Caribbean constituency countries fully endorse UNSCR 1373 and are taking steps to comply. Important steps have also been taken to strengthen financial sector regulation and supervision. This includes efforts to operationalize financial intelligence units and the introduction of money laundering legislation. However, the limited capacity of the region underscores the importance of technical assistance in combating money laundering and the financing of terrorism. The IMF's Caribbean Technical Assistance Center (CARTAC) is already engaged in a number of capacity building projects but ongoing technical assistance will be required.
The world economy has just come through a very uncertain period. And, while some of the risks have abated, other risks remain. With our economies increasingly intertwined, we need to realize that self interest and collective interest are often aligned, requiring close consultation and cooperation to address global economic shocks and structural shifts. I hope that our deliberations today will help us advance the yardsticks in terms of agreeing on the policies needed to promote global stability and prosperity.