2001 IMFC Statements
IMFC Ottawa Meeting
Statement by Mr. Rodrigo de Rato, Second Vicepresident
and Minister of Economy of Spain to the International Monetary and Financial
Committee, Speaking on behalf of Costa Rica, El Salvador, Guatemala, Honduras,
Mexico, Nicaragua, Spain and Venezuela|
Washington, D. C., April 20, 2002
We meet today in a substantially different mood than we did in our last meeting in Ottawa.
The economic slowdown and the September 11 events posed serious challenges to the world, but the international community reacted promptly and with strong coordination to those challenges. As a consequence, the world economic outlook is much better now and the framework for dealing with issues of anti-money laundering and combating the financing of terrorism is now much stronger. Additionally, substantial advances have taken place recently in our fight against poverty and to open new development opportunities for the low-income countries. We should not be complacent, however. There is still much work to be done and we should continue addressing the challenges ahead. We share the responsibility to continue implementing sound macroeconomic and structural policies and to renew our commitment towards stable and sustained growth and the eradication of poverty.
The Fund has lived up to the challenges during this period by a decisive implementation of the crisis prevention and crisis resolution frameworks, by making substantial contributions to help the poorest countries, and by advancing the international agenda in the fight against money laundering and terrorism financing. The topics selected for this meeting are rightly chosen. They focus on the main priorities of the Institution and the international debate on policy issues.
The world economic outlook
Latest data signal the beginning of a world wide recovery, with a global growth rate of 2.8 percent estimated for 2002. If this scenario is confirmed, we could conclude that the downturn has been less pronounced on this occasion than in previous cycles, and that the economic impact of September 11 has been smaller than previously expected. This positive outcome has been due, in our opinion, to four factors. First of all, the swift implementation of coordinated macroeconomic policies in the major areas of the world, particularly in the United States and the European Union, but also in other countries. Secondly, the development in recent years of ITC related industries, and its positive effects throughout the whole economy. Thirdly, the implementation of structural reforms in different regions of the world and the systematic use of monetary and fiscal policy, for several years now, to promote a stable macroeconomic environment. Finally, the less pronounced downturn might be a proof, among others, that the crisis prevention policies implemented by the Fund and its decisive support in crisis resolution have started to bear fruit.
There are, however, significant downside risks in this new situation. Among them, the persistence of global imbalances, the structural shortcomings in Japan that need to be rapidly addressed, some concerns about a conflict escalation in the Middle East and a protracted instability in various emerging markets. The international community should remain vigilant. The authorities of the major economic areas and the international financial institutions should stand ready to implement further measures if so needed.
In the United States, a strong recovery seems to be well underway. However, downside risks should not be underestimated. Macroeconomic imbalances persist and an early unwinding of them might pose a threat to the nascent recovery. Swift changes in financial markets or a substantial increase in oil prices could bring about additional risks. Moreover, although private consumption appears to be robust at this stage, it seems that the scope for further increases is limited. Macroeconomic policy should continue supporting activity notwithstanding that there is a considerable stimulus in the pipeline. This is specially true for the monetary policy that should remain vigilant until the downturn is fully over. As to the fiscal policy, it does not seem that there is a need for further stimulus now, while, in the medium term, the country should return to a fiscal consolidation path. On commercial policy, protectionist temptations should be resisted.
Economic recovery is also starting in the European Union based on strong internal demand underpinned by the implementation of sound macroeconomic policies and the advancement of structural reforms. Europe has been less affected by the economic slowdown and it has been a source of stability in the current cycle vis-à-vis other major economic areas in the world. Monetary policy, further to attending its primary target of price stability, has supported economic activity. Fiscal policy is being implemented in full compliance with the Stability and Growth Pact, but at the same time, letting the automatic stabilizers to operate in those countries with fiscal positions close to balance or in surplus, and therefore providing both stability and a substantial support to activity.
On structural reforms, much has been done in the past but still there is a long way ahead. Under the Spanish Presidency of the EU, the European Council of Barcelona held last March 15 has taken decisive steps in accelerating the pace of structural reforms in Europe with the two-fold objective of promoting further integration and increasing potential growth. Those reforms are related to labor markets, financial and network industries, and creating a more competitive economy.
The smooth and successful introduction of Euro coins and notes at the beginning of this year is contributing further to the integration of the European economies and it will bring significant long-term benefits to the world, as the single currency is now totally operational.
Japan will be the single major country to experience a negative growth rate in 2002. The Japanese authorities must continue implementing their program of structural reforms in a strict and decisive way in order to create renewed internal opportunities for investment and to recover investor and consumer's confidence in the economy. Monetary and fiscal policy should remain supportive of activity in the short run, while aiming at fiscal consolidation in the middle run.
The outlook for emerging countries in Asia and Eastern Europe is highly encouraging. These positive prospects should be bolstered by addressing underlying structural weaknesses and sound and sustainable macroeconomic policies.
In Latin America, there are encouraging signs of recovery, especially among those countries that have implemented appropriate policies in the past. Mexico, Chile, and to a large extent Brazil and some other countries as well, have been implementing stable and sound macroeconomic policies that have brought about improved fiscal accounts, lower levels of inflation, and stronger external positions. These countries enjoy now higher growth prospects and are better suited for benefiting from the recovery in the more advanced economies. Political stability is also an important factor that is having a positive effect on growth prospects.
The situation in Argentina should be a matter of concern for the whole international community. We encourage the government to implement adequate policies to overcome the serious economic and social difficulties that the country is undergoing. So far the risk of financial contagion has been limited, but we should not underestimate the political and economic implications that the Argentina's crisis may have in the region. Further to the policy advice that is already provided, we urge the Fund and the international community at large to stand ready to support Argentina as soon as the right policies are in place.
The economic slowdown in industrial countries over the past few years, accelerated by the events of September 11, and the reduction of non-fuel commodity prices affected considerably the economic outcome in many developing countries, particularly in most low-income countries, through lower receipts from exports and tourism. The outlook in these countries for the next few years will depend mainly on the economic recovery in industrial countries and on the stabilization of commodity prices, but also on their efforts to implement sound macroeconomic policies and the concessional multilateral and bilateral financing they receive.
Crisis prevention and resolution
Crisis prevention is a matter of high priority and Fund efforts in this regard should continue. We support the work of the Fund on bilateral and multilateral surveillance, transparency, observance of standards and codes, and Financial Sector Assessment Programs.
The main emphasis of surveillance should be in the Fund core areas of responsability: macroeconomic policy, exchange rates and balance of payments. However, given the economic and financial changes that have taken place in the world, the Fund has rightly expanded its attention towards structural policies and financial and institutional issues. This change of focus will probably have an impact in the financial and human resources of the Fund that should be updated in order to be fully prepared to address the new challenges.
Surveillance in program countries should be reinforced in order to provide a right assessment of policies. Without creating artificial and unnecessary separations, it is reasonable that Article IV consultations are conducted with an appropriate distance from the decisions related to the use of Fund resources.
The Fund should be prepared to provide assistance to countries during periods of crisis. This is a basic function of the Fund and it should be developed in the best way possible, taking into account these three main elements: firm commitment to support, efficient policy tools, and sufficient financial means.
Continued liberalization of trade and capital transactions has brought about an increase in frequency and magnitude of capital account crisis in emergency economies since the mid-90s. Large amounts of financial resources are needed to cope with this new type of crises that usually imply costly domestic adjustments with pervasive macroeconomic effects. The Fund has responded quickly and with ample means in the past to resolve this type of crises. While keeping the same flexible and efficient approach, based on the resolve and commitment to provide support, the Fund should develop further appropriate tools to understand and manage those crises. It must also have sufficient financial resources. The need to have appropriate financing means is also underscored by the increasing uncertainties in the world economy and the diminishing relative size of Fund resources in relation to the main variables in the world economy.
The creation of the Capital Market Department is a welcome measure, however, we would favor more involvement of this Department in countries that use Fund resources. Additionally, the Fund should pay more attention to institutional issues in those countries. With this purpose, the Fund capacity to understand the political and administrative constraints should be developed further.
The Prague framework is our central reference for PSI. The discussion of the remaining aspects of that framework should be accelerated and concluded as soon as possible. Its implementation should be made in a voluntary and market-friendly manner to the largest extent possible and according to the three following guidelines. Firstly, that there are no negative consequences on the financing flows towards emerging countries, including portfolio and foreign direct investment; secondly, that there is no negative discrimination between domestic and external PSI; and thirdly, that there are no detrimental effects on the domestic financial sector of the debtor country that plays a key role in the economy.
The Prague framework points out that more concerted actions are needed when the catalytical approach is not sufficient to facilitate a rapid return to market access. The Fund should continue analyzing different options so as to develop a more orderly and transparent framework for sovereign debt restructuring. We support the inclusion of collective action clauses in sovereign debt contracts as a way to promote earlier resolution of debt restructurings. To avoid negative implications on emerging market economies, the use of these clauses should be generalized. To this end, the introduction of legal changes in major jurisdictions could be helpful. Furthermore, statutory changes at the international level might be needed to ensure a less costly and more rapid debt restructuring. We encourage the Fund to continue analyzing costs and benefits of both contractual and statutory approaches on creditor and debtor countries. In addition, we urge the Fund to explore ways to increasing its capacity to assess debt sustainability issues and to start soon a review of the access policy to Fund resources.
Reducing poverty and promoting the development of low-income countries is one of the major challenges of our times. Some progress has been made in recent months. Now it is the moment to implement the steps decided in Monterrey and to strengthen the cooperation among the Fund, Bank and the United Nations towards the internationally agreed development goals.
The international conference in Monterrey has established a comprehensive strategy to fight poverty and to increase the financing for development. We fully support the two-pillar approach endorsed in the conference. The developing countries should implement sound and credible policies based on strong institutions and good governance. They must create the appropriate conditions and incentives for expanding foreign trade and facilitating an environment conducive to investment, including FDI.
The international community, on its part, has great responsibility in supporting the low-income countries struggle against poverty by providing concessional financing and technical assistance, and by creating more trade opportunities and encouraging direct investment. The commitment of the European Union to achieve the ODA target of 0.39 percent of GDP, that will represent an increase of Euro 7 billion per year of concessional aid, is an important step forward. On the other hand, the new trade round launched in Doha has opened new opportunities for trade liberalization that should take particularly into account the needs of the developing countries and those sectors where they might have a competitive advantage.
The PRSP approach has proven to be an effective way for concerting efforts in the fight against poverty. The Fund's support to low-income countries is well focused and the link between PRGF and PRSP should be maintained. Given the current availability of PRGF resources, it seems appropriate the Managing Director call to give consideration to mobilizing additional loan and subsidy resources. Spain has recently made effective its contribution to the PRGF for an amount of SDR 300 million, a substantial amount considering the quota that Spain has in the Fund.
It is encouraging to note that 26 countries have reached the Decision Point under the Enhanced HIPC Initiative. Nevertheless, we should admit that the Initiative could progress faster and more efforts should be devoted to speed it up. Several challenges remain ahead. First of all, the countries should conduct their policies in a way that facilitates compliance with the Initiative and with the Poverty Reduction Strategy. Financial resources by themselves will not be sufficient to eradicate poverty without the commitment to reform and the maintenance of a policy program that gives sustainability to this effort.
Secondly, it is necessary to obtain full participation of all creditors in the relief process. The initiatives taken recently in the Fund to encourage non-Paris Club creditors to comply with the recommendations of the HIPC Initiative go in the right direction.
Finally, another important challenge is to address the question of debt forgiveness by some HIPCs and multilateral creditors. The international community, creditors and financial multilateral institutions should find pragmatic solutions to this problem. Spain has proactively contributed to alleviate it by a debt swap with Nicaragua and Guatemala for an amount of US$368 million and is currently working in a further arrangement with Costa Rica. We encourage other creditors to take further measures to alleviate this problem. The steps that the Fund has recently decided on will help to facilitate an early resolution of it.
The Fund has made a remarkable effort in streamlining conditionality which will have a lasting effect on encouraging ownership and having more successful programs. The results of a more efficient conditionality will only become apparent in the mid-term, but we should continue implementing it now in a forceful way. We look forward to the conclusion of the current review of conditionality and to the subsequent adoption of new guidelines by the next IMFC meeting.
Conditionality should concentrate on the critical areas for program success, specifically in the Fund core areas of responsibility, or when the impact on fiscal and external balances is substantial. Structural conditions might be useful when trying to remove hurdles that limit economic growth or that promote poverty reduction, for example in countries with PRGF programs. It might be also pertinent to require structural conditions in emerging countries that may need to restore balance of payments viability or to achieve a prompt return to market access.
Given that there are considerable differences among countries, conditionality should be adapted to each country's peculiarities and decided on a case-by-case basis, notwithstanding the principle of even-handed implementation among the membership. The administrative capacity of the country involved should also be taken into account. Streamlining conditionality is not an exercise of just limiting the number of conditions, but ensuring that the conditions are appropriate and correctly linked to the program objectives. In this regard, coordination and exchange of information between the Fund and the World Bank should be strengthened.
We note with satisfaction that there has been a significant progress in the fight against money laundering and combating the financing of terrorism. The international community is acting united and in a coordinated fashion to set new standards of international compliance with the measures to limit financial abuse.
The Fund, in close coordination with the World Bank, has responded promptly to the calls made by the IMFC Ottawa meeting. We fully endorse the expansion of AML/CFT assessment methodology to include the assessment of legal and institutional aspects and elements related to combating the financing of terrorism. Although this methodology could be further refined, it is important to continue assessing compliance with the FATF recommendations through FSAPs and offshore financial center reviews to detect and strengthen areas of weakness in the AML/CFT regimes. It will also be helpful to assess compliance with the AML/CFT recommendations through Article IV consultations applying the recently developed questionnaire. The Fund will need to increase its human and financial resources to be able to perform this new function and to provide technical assistance to the countries in need.
We are now in a crucial juncture. We should look ahead and keep momentum to progress even further in our fight against financial abuse. The FATF 40 + 8 Recommendations is the international standard in the struggle against money laundering and combating the financing of terrorism. To be consistent with that standard and to continue making progress in the future, a single assessment methodology must be developed by the Fund and the Bank in close cooperation with the FATF, hopefully by our next meeting in Autumn.
The Fund should analyze further how to implement the new single assessment methodology once it is finalized. Different modalities for conducting the assessment need to be discussed further. Perhaps the combination of expertise and resources by the Fund, the Bank and the FATF could be the best alternative.