IMFC Meeting April 20, 2002

April 20, 2002 IMFC Statements

Documents Related to the April 20, 2002 IMFC Meeting

Austria and the IMF

Belgium and the IMF

Germany and the IMF

Denmark and the IMF

Spain and the IMF

Finland and the IMF

France and the IMF

United Kingdom and the IMF

Greece and the IMF

Ireland and the IMF

Italy and the IMF

Luxembourg and the IMF

Kingdom of the Netherlands-Netherlands and the IMF

Portugal and the IMF

Sweden and the IMF

Statement by Mr. Rodrigo de Rato, Second Vicepresident and Minister of Economy of Spain, in his capacity as Chairman of the EU Council of Economic and Finance Ministers, to the International Monetary and Financial Committee, Spring 2002 meeting
Washington, DC
April 20, 2002


1. I submit this statement in my capacity as Chairman of the EU Council of Economic and Finance Ministers. It focuses on recent economic developments and policies, in particular in the EU and in emerging market economies, on crisis prevention and resolution, on poverty reduction and financing for development and on the fight against the abuses of the international financial system.

2. This meeting of the IMFC is the first one following the successful introduction of euro notes and coins on 1 January 2002. Euro notes and coins have smoothly and rapidly made their way into the daily lives of 300 million people. The operation, conducted on an unprecedented scale and welcomed by the public, has gone remarkably well. The cash changeover has represented the concluding act of the move to a single currency. Most of the benefits of the euro started to materialise with the creation of the euro three years ago. The smooth changeover to euro notes and coins will reinforce these positive effects.

Macro-economic developments in advanced countries

The EU is at the turning point...

3. The EU is starting to restore non-inflationary economic growth in the short-term and is pursuing the ongoing process of structural reforms aimed at enhancing its medium term growth potential in accordance with the commitments taken at the Lisbon Summit two years ago. Indications of economic recovery have been emerging, notably on the corporate side. However, as downside risks still remain we remain both vigilant and determined to contribute to the expansion of the world economy.

4. Several factors support the European economy and favour the pick up of growth expected for the course of this year: (i) the EU economy maintains solid fundamentals, which have been substantially improved in recent years, contributing to strong output growth, low inflation and substantial job creation; (ii) the decline in inflation and inflation expectations, recent tax reductions in several countries and favourable financing conditions will be conducive to higher domestic demand; (iii) and there are no significant internal or external macro-economic imbalances.

5. The European Union has already demonstrated last year its ability to react in order to support confidence and growth : along with other EU Central Banks the ECB reduced its key interest rates in response to declining inflationary pressures, and in conformity with the Stability and Growth Pact the EU member states let the automatic stabilisers work. Macroeconomic policies will continue to support a well-balanced economic expansion.

  • The counter-cyclical work of automatic stabilisers in the short-term has allowed for cushioning the downturn without undermining the structural positions. Together with tax reductions, it has provided a significant support to growth, which broadly compares to the effects of the fiscal stimulus in the US in 2001. Budgetary policies will be geared to maintaining or achieving public finances close to balance or in surplus in the medium run while supporting sustainable growth by letting the automatic stabilisers work symmetrically, as envisaged in the Stability and Growth Pact. Member States confirmed at the Barcelona Summit their commitment to maintain or reach a balanced budget position by 2004. Tax reforms and expenditure restructuring will improve the quality of public finances. Particular attention is also being paid to the longer-term sustainability of public finances, including through : raising employment rates - especially for older workers; reducing public debt ratios; and, where needed, adapting social security systems, including pension systems, while preserving an adequate level of social protection. This will help in meeting the future financial challenges resulting from ageing populations, and foster stable macroeconomic conditions.

  • In the euro area headline inflation has been on a downward trend from an exceptional temporary peak since May 2001. First indications are that the euro cash changeover had a negligible impact on consumer prices at the aggregate level. The monetary policy of the ECB will continue to focus on the maintenance of price stability, thereby supporting economic growth. This task will be facilitated by sound economic policies and continued wage moderation.

6. The European Council in its meeting of Barcelona reaffirmed the importance of structural reforms and reviewed the progress made since the Lisbon Council. Structural reforms will be speeded up to strengthen the EU growth potential. Three areas require priority action, i.e. labour markets, financial markets and network industries :

  • A strategy with a view to increasing the flexibility of labor markets has been set up, including reform of tax and benefit systems, and measures to achieve higher labour force mobility.

  • The commitment of achieving an integrated and efficient European financial services market in 2005 (2003 for securities and risk capital markets) has been reaffirmed.

  • In the field of energy, transports and communications networks, strong commitments to open the markets to competition have been agreed. In particular, all European non-household consumers will enjoy free choice of electricity and gas supplier as from 2004, benefiting to at least 60% of the market. The importance of public services has also been reaffirmed.

...and international circumstances might also be improving.

7. Although world economic growth is still low, we expect it to recover during the course of the year on the back of appropriate macroeconomic policies in major industrialised areas. In this context, we reaffirm that it is important for all countries to stay committed to an open multilateral trading system. We call on the US administration to also remain committed to free trade principles and practices, as well as to the rules of the WTO.

8. In the US, clear indications of economic recovery have emerged, and there are signs that the US economy has bottomed out and growth is picking up. However, the strength and the duration of the recovery are still subject to a degree of uncertainty and downside risks cannot be ruled out, especially as imbalances that built up during the expansion remain. On the fiscal side, tax reductions and additional expenditures have been useful to sustain domestic demand in the short run but, over the medium term, care should be taken to keep the public finances on a prudent course.

9. In Japan, continued weak economic performance and deflation are due to the downturn in potential growth in the last decade and the weak conditions of domestic demand. The emphasis should be put more clearly on the acceleration in the pace of structural reforms, and in particular more action is needed to remove bad loans from balance sheets. The macro-economic policy stance should remain as supportive as possible. The formulation of a medium-term programme of fiscal consolidation is necessary in order to bring the public debt burden under control. On the monetary side, the ability of monetary policy to support growth will remain limited without an acceleration of structural reforms and improvements in the financial sector's balance sheets.

Macro-economic developments in emerging market economies

10. Several emerging market and transition economies have been confronted with additional challenges as external financing conditions have become more challenging. Further intensive efforts to implement structural reforms in all emerging market and transition economies to minimise vulnerabilities to external shocks are necessary.

Economic and financial developments in EU accession countries have on balance been favourable during recent years, reflecting also the beneficial impact of the accession process. In 2001, the candidate countries even performed as one of the most dynamic economic regions in the world. Structural reforms are still underway, and the key challenge in most countries and sectors is to maintain the present momentum of reforms. The EU also expresses strong support for the Turkish efforts to reform the economy and strengthen its public finances.

Further improvements in Russia's situation and progress in the transformation of Russia's regulatory framework are encouraging elements. Nevertheless, continued efforts are required to improve the investment climate, which is key to a sustained high rate of domestic and foreign investment and, therefore, to sustainable growth.

In emerging Asia, the economic deceleration has been triggered by external shocks, particularly in the technology sector. Despite significant progress in reducing vulnerabilities, further efforts are needed through accelerated financial and corporate reforms, as well as efforts to keep fiscal policies sustainable over the medium term.

11. The global downturn has doubly affected Latin America, through the contraction of export markets and the slowdown in the trend of capital inflows, vital for a hemisphere crucially dependent on foreign saving. The EU strongly encourages the efforts of the Argentine authorities in making the necessary steps for the successful start of negotiations with the IMF on a comprehensive program, which would help to overcome a critical situation in Argentina. Such a program should be based on inter alia : (i) a sound and transparent macro-economic framework - including a realistic and sustainable fiscal strategy at all levels of government as well as sound and consistent monetary and exchange rate strategies; (ii) a sound banking system; (iii) an international debt restructuring process in order to allow for the necessary financial relief to achieve long-term sustainability and; (iv) the strengthening of the institutional framework and the restoration of legal certainty in order to improve the investment climate and restore confidence. A broad political agreement will be required to ensure the effectiveness of such a programme.. In the meantime, the EU will explore ways to facilitate trade and, in coordination with the IMF and the World Bank Group, to make technical assistance available, as well as to facilitate debt restructuring.

The reform of the international financial architecture

Despite significant progress, strengthening crisis prevention and resolution is still a challenge

12. Recent events have shown the need for better equipping the international community to prevent and manage financial crises. Crisis prevention is crucial for promoting and preserving financial stability. However, once a crisis occurs, the international community should have the appropriate tools to manage the situation and respond appropriately.

- Crisis Prevention

13. Crisis prevention has been the pivot of the IMF work in the last years and progress has been significant. Substantial work has been conducted to develop and promote the implementation of internationally recognised codes and standards and to strengthen the monitoring of financial systems; these efforts may have contributed to reduce the occurrence and the extent of crises in the last few years. We encourage all member countries to adopt these codes and standards and to take part in the ROSC and FSAP process. We welcome efforts under way to further integrate this work in the Fund's regular surveillance. The IMF should continue to identify countries with adequate policies for eligibility under the Contingent Credit Line.

14. Past experience shows that most crises arise from vulnerabilities due to inconsistent macroeconomic and structural policies that have not been detected and corrected in time. Increased attention should be given to domestic monetary, fiscal and financial policies, and should notably focus on the consistency of the exchange rate regime with the overall policy framework and on the sustainability of the debt position, notably in article IV consultations and in the context of further refinements in early warning systems. We encourage the Fund and its member states to move toward full publication of Article IV reports.

15. To be fully effective in bringing about early and pre-emptive policy action, IMF surveillance needs to be transparent, objective and accountable. The IMF must be able to undertake a critical assessment of programmes, including existing ones in order to strengthen their efficiency. We invite the Fund to make an assessment of the interlinkages between surveillance and programme design functions with a view to strengthening efficiency and accountability. IMF's effectiveness can now be strengthened by work performed by the Independent Evaluation Office (EVO).

16. We welcome the IMF's review of conditionality and wider efforts to enhance country ownership of IMF-led programmes. We should ensure that conditionality continues to cover all elements necessary to the success of the programme and encourage greater Fund-Bank cooperation

- Crisis Resolution

17. Key principles for crisis resolution have been set at the Prague Annual Meetings in September 2000. The Prague framework relies on a combination of domestic adjustment, official financing and private sector involvement, based on the assessment of a country's underlying payment capacity and prospects of regaining market access. Hence, the involvement of the private sector (PSI) should be a standard element of crisis resolution.

18. We welcome the work of the IMF on PSI, including on debt sustainability and market access. However, more work needs to be done in areas such as modalities for standstills and fairness of treatment among creditors. In particular, a balanced and fair contribution among all types of creditors is essential to ensure the effectiveness of Private Sector Involvement. Market-oriented solutions and voluntary approaches are preferable to ensure that the private sector remains engaged in a constructive way in crisis resolution. However, in cases where the private sector should not be willing to remain involved at terms and conditions consistent with the broad medium-term sustainability of the country's debt profile, concerted solutions may be necessary to exert additional pressure to secure such an involvement. A more predictable framework needs to be developed. We call for the implementation of the proposals made by the EU at the IMFC one year ago on PSI, in particular :

  • First, we look forward to the discussion at the IMF Board on strengthening its policy on access limits. To ensure that access to Fund credits beyond normal limits is provided only in exceptional circumstances, it should be subject to special criteria and procedure.

  • Second, there is a need to enhance the ability of the IMF Board to thoroughly assess the sustainability of countries' financial positions, through a staff analysis based on realistic and transparent assumptions, covering a sufficiently long period of time, and including comprehensive stress-tests.

  • Third, better ways to encourage the private sector to remain involved in emerging market economies in times of crisis should continue to be explored.

  • Fourth, there needs to be a comprehensive, transparent, and effective monitoring system of PSI along debtor countries' adjustment processes.

  • Fifth, we invite the Fund to explore further incentives to promote the inclusion of CACs in bond contracts as a way to facilitate : market based voluntary solutions; the implementation of standstills; and more formal solutions as mentioned below.

We invite the Fund to work on these issues to make concrete proposals at the next Annual Meetings.

19. We urge the IMF to further analyse the modalities of informal approaches based on standstills and a policy of lending into arrears. The latter policy needs to be clarified and extended.

20. In cases where countries suffer an unsustainable debt position, more formal solutions should be envisaged. We welcome the recent outline for a new approach to restructuring sovereign debt (SDRM) made by the IMF First Deputy Managing Director. We look forward to work with the IMF to examine all the legal, institutional and procedural implications of the SDRM. One important issue to be considered concerns the specific role of the IMF in this mechanism, given its central role in the functioning of the international financial system. Finally, the SDRM should be considered as part of a coherent and wide-ranging strategy for dealing with financial crises, and should therefore be developed not as an alternative, but in parallel with the operational improvement and further implementation of the PSI approach established in Prague.

Agreed allocations of SDRs should be implemented

21. Finally, any assessment of the adequacy of resources, in particular SDR allocations, has to be based on the IMF's Articles of Agreement, which stipulate that consideration of a general allocation of SDRs requires taking into account the global need for liquidity at the international level. The IMF Board agreed a special one-time allocation in September 1997, which would increase the proportional SDR allocation of developing countries as a group. This allocation has still to be activated through implementation of the related amendment to the IMF's Articles of Agreement, which awaits ratification by the United States. We call on the US to ratify this amendement.

Financing development and fighting poverty

Adequate financial resources have to be devoted to development....

22. Enhancing the mobilisation and effective use of resources, both public and private, to support the progress towards the achievement of the Millennium Development Goals (MDGs) is essential for development and poverty reduction. First and foremost, developing countries have a crucial role to play in ensuring, through appropriate structural reforms and policy measures, that a stable and enabling environment is in place for generating, attracting and channeling adequate resources - be they domestic, external private or public - to foster development and poverty reduction. A major element in creating such an environment is good governance and appropriate institutional capacities.

23. Advanced countries should make efforts to increase their development assistance in the context of their long-standing commitment to reach the UN goal of 0.7 percent of GNI target for ODA. The EU agreed in Barcelona to examine the means and timeframe that will allow each of the Member States to reach the UN goal of 0.7% ODA/GNI. Those Member States that have not yet reached the 0.7% target commit themselves - as a first significant step - individually to increasing their ODA volume in the next four years within their respective budget allocation processes, whilst the other Member States renew their efforts to remain at or above the target of 0.7% ODA, so that collectively a European Union average of 0.39% is reached by 2006. In view of this goal, all the European Union Member States will in any case strive to reach, within their respective budget allocation processes, at least 0.33% ODA/GNI by 2006. We are also committed to increasing the effectiveness of ODA by: (i) reducing transaction costs in delivering aid; (ii) promoting the shift from stand-alone projects to programmatic lending; (iii) strengthening measures to ensure that export credit support to low-income countries is not used for unproductive purposes; (iv) untying aid for the least-developed countries through the immediate implementation of OECD DAC commitments, and considering further ways to improve the effectiveness of ODA, including through measures aimed at further untying aid; (v) and undertaking to move where possible towards a common pool approach to reduce the cost of delivering aid. Finally, adequate financial resources should be devoted to ensure financing of Global Public Goods.

24. We stress the need to broaden and strengthen the participation of developing countries and countries with economies in transition in international economic decision-making and norm-setting. To those ends, we also welcome further actions to help developing countries and countries with economies in transition to build, including through technical assistance, their capacity to participate effectively in multilateral forums.

25. Openness to trade fosters economic growth and contributes to reducing poverty. Therefore, the EU warmly welcomes the "Doha Development Agenda" which will address crucial issues of most interest to developing countries. The EU has already taken major steps in this area through the "Everything but Arms" initiative, the improvement of its trade-related technical assistance and capacity building, and the recently adopted new EC's Generalised System of Preferences regulation. We encourage other industrialised countries which have not yet done so to take similar action.

... and the role of the international financial community, including the IMF, is essential to contribute to this aim.

26. The international financial community must continue to contribute to the fight against poverty. Macro-economic stability and growth are pre-conditions for poverty reduction. The role of the IMF in helping countries to achieve the Millenium Development Goals (MDGs) is instrumental. We support the IMF's engagement in its poorest member states and welcome the fact that issues related to poverty reduction and growth are now being addressed within IMF programmes in close co-operation with the World Bank.

27. The integration of the IMF's activities in the poorest member countries in the overall framework provided by Poverty Reduction Strategy Papers (PRSPs) allows for substantial improvements in co-ordination, effectiveness and efficiency of IMF assistance, as the PRSP-framework offers a concrete opportunity to design national and international efforts towards the MDGs. The recent broad review of the PRSP approach demonstrated the usefulness of the PRSP as an instrument that has already visibly increased the poverty orientation of many developing countries' policies, and that has provided impetus to more effective external support. It also demonstrated that in all PRSP countries, poverty-related expenditure in public budgets has undergone a clear increase. PRSPs have made progress towards additional participation of civil society; have supported the delivery of basic social services, including through an appropriate revenue base; have offered more prominence to cross-cutting issues such as governance; and have also provided impetus to the discussion on development cooperation and impact monitoring. Nevertheless, it is also clear that some weaknesses remain which need to be properly addressed, notably the weak monitoring and evaluation systems, the lack of good intermediate indicators, too optimistic growth assumptions and the weak integration of PRSPs in existing decision making processes. PRSPs should continue to revolve around two main political axes : (i) reorienting budget priorities to the social sectors; (ii) and improving the legal and institutional environment for private investment.

28. The Poverty Reduction and Growth Facility (PRGF) is the key policy instrument of the IMF for providing support to its poorest member countries. We welcome the IMF's open and consultative approach to the PRGF Review, and support measures to ensure the continuous improvement of the PRSP/PRGF process. The main risks to the implementation of poverty strategies derive from weaknesses in planning, and in tracking poverty and social spending. First, the international financial community should continue to work with governments to improve Public Expenditure Management systems, with a specific focus on primary education and health, and every PRGF should include a report on progress being made in this field. Second, PRGF ownership should be increased through Fund/Bank work on Poverty and Social Impact Analysis. Third, the systematic incorporation of PSIA in PRGF-supported programs, and the capacity of PRGF countries to undertake macroeconomic analysis should be enhanced, also through technical assistance focused on capacity building. Finally, PRGF countries should work with the Fund and the Bank to ensure that more complete budgetary data on poverty reduction spending be available in all PRGF documents by 2003.

29. Unsustainable debt dynamics have acted as a constraint on the ability of the poorest countries to pursue growth and development. The EU welcomes the substantial progress made so far in the context of the enhanced HIPC initiative. We believe that the primary objective of the initiative should continue to be the restoration of debt sustainability. We therefore welcome the fact that the IMF and the World Bank will systematically assess each HIPC's debt sustainability at its completion point. Following this review, additional debt relief could be provided for those countries that, having reached the completion point, are experiencing an unsustainable debt burden due to exceptional exogenous factors such as worsening global growth prospects and declines in terms of trade. We encourage all countries to provide, on a timely basis, their share of multilateral financing and bilateral debt reduction On the debtors' side, we urge the group of HIPC countries that have not reached their decision point to take all the necessary measures to come forward for debt relief.

Fighting against the abuses of the global financial system, including the financing of terrorism

30. The EU reiterates its commitment to fight against the abuses of the financial system, including money laundering, harmful tax practices and insufficient regulatory frameworks and practices in the financial area.

31. Money laundering is both a potential source of financial instability and a tool for financing terrorism. The EU is intensifying the degree of co-operation and co-ordination among Member States in combating money laundering. The authorities of the Member States took particular care, and were indeed successful, in establishing effective anti-money laundering measures in the context of the cash changeover to the euro.

32. We reaffirm our strong support to the Financial Action Task Force (FATF) whose Forty Recommendations constitute the anti-money laundering international financial standards, and we take an active part in the revision of the FATF recommendations to enhance the quality of the standard. We call on countries listed by the FATF to make all necessary effort to implement the relevant recommendations by June this year. As we already did in the case of Nauru, we will continue to implement the coordinated countermeasures recommended by the FATF against the jurisdictions in which no progress has been made.

33. In the fight against terrorism financing, the EU is committed to implementing rapid and coordinated initiatives. We strongly support the special recommendations laid down by the FATF at its plenary session in October 2001 related to the fight against the financing of terrorism and will take swift steps to comply with the special recommendations. We call on all other countries to follow suit.

34. We welcome the decision by the Fund and the World Bank to contribute to the fight against money-laundering within their respective mandates. We urge them to quickly develop their technical expertise and capacities in this area, taking advantage of the current state of work developed by the FATF.

35. The EU also welcomes the work of the OECD to address harmful tax practices. All concerned countries - OECD Member-states, non-OECD countries and tax haven jurisdictions - should eliminate their harmful tax practices in due course.

36. We welcome the new steps taken by the Financial Stability Forum (FSF) to improve the compliance of OFCs with internationally agreed information and cooperation standards. While recognizing that some OFCs have taken some positive actions, we urge strongly those OFCs that have not yet undertaken an IMF assessment to do so and to disclose its results. We call on the IMF to accelerate its assessment programs, taking into account both legal standards and cooperation practices.