November 7, 2002
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The recent meetings of the IMFC and the IMF's Board of Governors provided an important opportunity to take stock of the challenges facing the global economy, and the role of the Fund in meeting those challenges. The IMFC stressed that the Fund must be an active participant in the effort to build a better globalization—one that is more inclusive, and better balances the risks and opportunities of the global marketplace. And Governors agreed with the assessment in my report on the IMF in a Process of Change—that we are beginning to reap the benefits of reforms already introduced through the hard work of member countries, the Executive Board, staff, and management, but also that we have a lot of unfinished business.
Over the past two years, the Fund has refocused on promoting sound macroeconomic policies as a precondition for sustained growth, and safeguarding the stability of the international financial system. We have identified ways to strengthen the Fund's surveillance and its capacities for crisis prevention. We have stepped up our work on national financial sectors and international capital markets. We have agreed to streamline and focus IMF conditionality, in order to promote ownership and make Fund-supported programs more effective. We have taken on new responsibilities in the fight against money laundering and the financing of terrorism. We have sharpened our involvement in the fight against world poverty. And we have worked to build a culture of openness, listening, and learning at the Fund. Now it will be crucial to press ahead with the steadfast implementation of these initiatives, in close cooperation with the World Bank and other partners.
At the same time, I sense that the membership of the IMF is aware of the need to strengthen confidence in the global economy by investing in better globalization. As I stated during the Annual Meetings, I see five central tasks that comprise an integrated concept for further reform:
Tackling this agenda will be challenging, and will require efficient use of staff resources and strict prioritization. The proposed work program through the 2003 spring meetings is built around the implementation of ongoing initiatives, while also moving forward as quickly as possible with further reforms. It falls into eight broad areas:
The above agenda, while reflecting our key priorities, is clearly very heavy, and we will need to ensure that we streamline the documentation that staff prepares and the Board discusses as much as possible. It will also be important to adhere as closely as possible to the Board calendar once it is established following the discussion of this work program, and to avoid undue bunching.1
The Global Outlook and Financial Markets
The IMFC noted that the global economic recovery is proceeding at a slower pace than expected earlier this year. Downside risks have heightened the need for vigilance, while the challenges associated with persisting imbalances will require attention over the medium term. Building on the collaborative approach adopted in Ottawa a year ago, member countries must stand ready to adapt policies as necessary to foster broad-based and sustained growth, strengthen policy and regulatory frameworks, and support durable poverty reduction. The Fund will continue to have a key responsibility in helping member countries identify and address vulnerabilities at an early stage and will remain strongly engaged with members facing exceptional difficulties, notably in Latin America.
To help monitor the situation closely, sessions on World Economic and Market Developments (WEMD) will be held in November, January, and March, the last in conjunction with the next semi-annual World Economic Outlook (WEO) discussion. Discussions on the quarterly Global Financial Stability Report (GFSR) are planned for November and February, and the Board will have an opportunity to review the scope and timing of future GFSRs based on the experience thus far.
Strengthening Fund Surveillance and Crisis Prevention
A priority for the period ahead will be the implementation of the conclusions of the 2002 bilateral surveillance review. The Board will have the opportunity to discuss a number of important dimensions of the Fund's surveillance framework in the period before the IMFC. Several aspects of the new operational guidance for Fund surveillance will bear close scrutiny as they are implemented in Article IV consultations. These include the scope and coverage of surveillance, the candor, quality and impact of our advice, and the focus on vulnerabilities. In program countries, Article IV consultations will provide windows of opportunity to review, with a fresh perspective, the policy frameworks of members. Drawing on the experience with the additional steps being taken to improve our surveillance, the Board will consider, in March, further steps to make surveillance more effective.
In December, a joint Fund/Bank paper reviewing the experience under the FSAP will draw lessons from the program and discuss the modalities of assessments, reassessments, and updates, as well as resource constraints, with a view to strengthening guidelines for future work. The paper will also draw together the financial sector surveillance framework that is emerging from the FSAP and other financial sector work, and consider ways to ensure effective delivery of follow-up technical assistance. A related paper will review the experience with the Basel Core Principles assessments. The Board will also discuss in December a joint Fund/Bank review of standards and codes, which will assess the experience with ROSCs, and recommend steps to improve the effectiveness of this initiative in promoting institutional development and improved economic performance.
A key aspect of crisis prevention is our ability to provide confidence to members pursuing sound policy frameworks that there is an effective safety net to help them cope with turbulence in international capital markets. Thus, I remain convinced that the Fund should have the capacity for a rapid, flexible response, to help countries protect themselves against risks in the global economy. This issue will be taken up in January, in the context of a paper putting forth alternative approaches, including possible modifications in the Fund's Contingent Credit Lines (CCL) and other forms of high-access precautionary arrangements.
Following on the review of data provision to the Fund earlier this year, the Board will consider in early January proposals for strengthening the application of Article VIII, Section 5, as part of the strengthened Fund framework for dealing with misreporting and nonreporting by members on an evenhanded basis.
At a seminar in February, the Board will have an opportunity to explore issues relating to dollarization, on the basis of papers on macroeconomic policy issues in dollarized economies, and on the monetary policy implications of dollarization. A seminar on financial globalization will be held in early March.
Work is underway on several other aspects of surveillance that could be considered by the Board in the period after the spring 2003 meetings. In particular, we are evaluating structural changes in the global financial services industry, including consolidation, and the potential implications for international capital markets. The Board will consider in June ways to reinforce progress in improving transparency and promoting broader publication of staff reports. A liquidity (i.e., debt and reserves) management framework is also under development, as a complement to assessments of debt sustainability. In addition, work continues on developing financial soundness indicators, and it will be useful to review progress with these as well as with the Fund's Data Standards Initiative. An analysis of informal fund transfers mechanisms and the Hawala System would also help deepen our understanding in this area. Finally, a review of exchange rate policies in developing countries is underway, which could be the basis of a seminar. The post-spring meetings agenda will, however, be subject to review and possible amendment.
Strengthening Crisis Resolution
The IMFC endorsed the Fund's continuing work to strengthen the framework for crisis resolution, which is intended to provide members and markets with greater clarity and predictability, including about the decisions the Fund will take in the area of crisis management. This work will proceed on several fronts.
A more systematic framework for judging debt sustainability, approved recently by the Executive Board, is now being applied in our work on use of the Fund's general resources and surveillance of countries with significant access to financial markets. Directors will have the opportunity to comment on, and help guide the application of, the new framework in country papers as they come to the Board. After the spring 2003 meetings, we should be in a position to review issues that may have arisen and possible further refinements.
To help improve the incentives for stronger risk management by policymakers and the financial markets, improve the pricing of risk, and minimize moral hazard, the Board recently discussed strengthened policies for access to Fund resources and agreed on criteria to make access policy clearer, Fund decisions on access more predictable, and thereby to help ensure that exceptional access remains truly exceptional. Following up on that discussion, the Board will examine in December issues in operationalizing the new framework for access to Fund resources in capital account crises. The paper will include procedures for early Board consultation in cases where exceptional access is considered. It will also discuss the appropriate maturity of Fund lending in capital account crises, and the regular review of access policy under the credit tranches and the Extended Fund Facility.
The IMFC welcomed the progress made with the contractual and statutory approaches to restructuring unsustainable sovereign debt. The Fund will do its part in working with the official community and the private sector to develop collective action clauses and promote their inclusion in international sovereign bond issues, and the IMFC will be apprised of progress in April. The Committee called on the Fund to develop, for consideration at the spring IMFC meeting, a concrete proposal for a statutory sovereign debt restructuring mechanism (SDRM). As a first step, the Board will have an opportunity to discuss in December operational and design issues related to an SDRM. It is envisaged that a revised version of that paper, reflecting the guidance of Executive Directors, will be prepared for discussion with experts from the private sector and the official community, possibly at a conference organized by the Fund in January. On the basis of the Board discussion and the external outreach, a further paper with a concrete proposal for a statutory sovereign debt restructuring mechanism is planned for Board consideration in early March. It is envisaged that throughout this period there will be significant complementary outreach efforts, which should allow staff to benefit from a wide range of expertise and views and to build support for—and allay concerns about—the proposed mechanism.
A paper on a financial policy framework for management of systemic banking crises will be discussed in February. It will seek to draw lessons on the general principles, strategies, and techniques underlying effective management of systemic banking crises, based on accumulated experience.
The topics planned for the period following the spring 2003 meetings include the effects of a sovereign's policy actions in the context of a debt restructuring on its ability to regain access to capital markets.
Fund's Role in Low-Income Countries
The IMFC endorsed the Fund's continuing role in helping poor countries meet the Millennium Development Goals by supporting economic reforms aimed at accelerating growth and reducing poverty. The IMFC also urged the Fund and the Bank to continue to cooperate closely. Joint papers will be considered on Bank/Fund collaboration on public expenditure issues in February and, as requested by the Development Committee, on a framework for monitoring policies and actions toward achieving the Millennium Development Goals, in March. Also in March, the Board will consider a progress report on aligning the PRSP and PRGF approaches.2
Following the spring meetings, the Board will discuss a set of papers reviewing the Fund's assistance to low-income countries. The papers will consider how, in the medium term, the Fund can best support low-income members in diverse circumstances, including countries with no balance of payments need for Fund resources and countries affected by commodity or other shocks.
Program Design and Conditionality
We will need to give a high priority to effective implementation of the new guidelines on streamlining conditionality, so that they in fact result in stronger ownership of programs, more successful program design and implementation, and improved collaboration with the World Bank. Two Board discussions relating to issues affecting the design of Fund programs and Fund conditionality are also envisaged prior to the spring meetings. Building on the discussion on staff-monitored programs at the biennial surveillance review, the Board will consider, in January, a paper on monitoring members' policies for the purpose of providing a signal to public or private creditors. The Board will also discuss in January the conclusions drawn by the internal Task Force on the recent IEO report on prolonged use of Fund resources.
Following the spring meetings, the Board will have an opportunity to consider a paper examining Fund-supported programs containing trade conditionality and assessing the implementation, sequencing, and impact of trade liberalization, with a view to refining our trade policy advice.
Combating Money Laundering and the Financing of Terrorism (AML/CFT)
The IMFC commended the substantial progress in implementing the action plan to intensify work on anti-money laundering and combating the financing of terrorism agreed in November 2001. It endorsed the conditional agreement by the Fund and Bank Executive Boards on a 12-month pilot program of AML/CFT assessments and accompanying ROSCs that would involve the participation of the Fund and the Bank, the FATF, and FATF-Style Regional Bodies (FSRBs), and the single comprehensive methodology for such assessments developed by the Fund in collaboration with the Bank and FATF. The FATF Plenary in October endorsed the AML/CFT methodology and its use by the FATF, the Fund, and the Bank as part of the 12-month pilot program of assessments. Executive Directors will be provided shortly with a report describing the outcome of the FATF Plenary and proposing a decision giving final approval to the methodology and the 12-month pilot program of assessments. In March, an interim report on the pilot program of assessments will be provided as requested by the IMFC, with a full report to follow at the conclusion of the program.
Quotas, Fund Finances, and the Cooperative Nature of the Fund
In order to safeguard the cooperative nature of the institution, it is important to ensure that the Fund has adequate quota-based resources, that the distribution of Fund quotas reflects developments in the world economy, and that the voice of all members is heard in the Fund's decision-making processes. The Executive Board will consider in December a paper proposing a report and resolution for submission to the Board of Governors in January on the Twelfth General Review of Quotas. In February, the Board will have an opportunity to discuss issues concerning the voice and participation of developing and transition countries in decision-making in international financial institutions, prior to the completion of a joint background document requested on this topic by the Development Committee for its spring 2003 meeting.
The next review of the Fund's liquidity position will have been held on October 25, and a paper on the Fund's policy on accumulating precautionary balances will be discussed in November. The periodic reviews of the Fund's income position will take place in November (lapse of time) and April.
Other Policy and Administrative Topics
A paper on the Fund's external communications strategy, for discussion in January, will examine, inter alia, the role of Executive Directors in implementing the strategy.
In preparation for the annual Board discussion in late April on the FY 2004 Administrative and Capital Budgets, the Budget Committee will consider papers on further budgetary reforms in October, and on the medium-term budgetary framework in February. The 2003 review of staff compensation will take place in March.
Diversity issues will be discussed in November.
Following the spring meetings, it is envisaged that the Board will conduct the review of the Compensatory Financing Facility; revisit the issue of charging for the Fund's technical assistance; and consider the second report of the Independent Evaluation Office, on capital account crises.
