Transcript of a Press Briefing by Masood Ahmed, Director, External Relations Department, International Monetary Fund

January 10, 2008

Washington D.C.
Thursday, January 10, 2008
Webcast of the press briefing

MR. AHMED: Good morning to you. Welcome to our regular press briefing, first of this year, so happy new year to all of you. I'm Masood Ahmed, and I would just like to start with a couple of announcements.

First, let me just to remind those of you who are here and do not know that we have moved the briefing time up to 9:30 a.m. [Washington time].

Let me also just take a minute to update you on the fact that we are going to be releasing updates on the World Economic Outlook and the Financial Markets Update associated with the Global Financial Stability Report on Friday, January the 25th. And the release of those documents will be at 11:00 a.m.[Washington time]. Before their release, on the same day, the documents will be put up on the Media Briefing Center for people to look at, at 7:00 a.m., so you will have four hours to go through them. And at 9:00 a.m. that morning, there will be a press briefing with Simon Johnson, who's the Economic Counsellor, and Jaime Caruana, who's our Financial Markets Counsellor. They will be able to answer any questions that you have and to elaborate on the documents themselves.

Those documents, which will give you our updated assessments for the outlook for 2008 as well as an update on our assessment of financial market developments, will be of interest to you. Let me also say that the World Economic Outlook Update will include our baseline forecasts, not only for 2008 but also for 2009. So this will be the first time that we will be putting out our baseline forecast for 2009 as well as the risks associated with them.

Another point on management travel, let me just mention to you that the Managing Director is going to be attending the World Economic Forum in Davos on January 25th and 26th. He will be speaking at the panel there on the global economic outlook. I'm sure there will be opportunities for media interaction there.

Let me invite those of you who are on the Media Briefing Center to now pose any questions that you have.

QUESTIONER: Good morning. I have seen that the IMF has posted on the website yesterday that there's been a recalculation of the purchasing power parity (PPP) figures that has resulted in about a half point reduction in growth forecasts for the years 2002-2007. And I wanted to know a bit more about why this recalculation was done and how that affects the current forecasts and possibly for the update coming at the end of the month. Thank you.

MR. AHMED: The numbers that we posted on the website are a revision to the numbers on growth that we have been posting for the past few years, as you say, from 2002 to 2007. The reason those revisions have been made is because there is now a new set of data on purchasing power parities that has been updated through the International Comparison Program that the World Bank, the UN, other agencies and the Fund are all part of. And these purchasing power parity numbers basically, because of the revisions, have changed the relative weights of different countries in the world economy. And, particularly, what they have done is that they have resulted in a substantial downward revision in the relative size of some emerging markets—China and India—in terms of their share of the world economy.

The way the Fund does its global projections is that it uses these purchasing power-based weights of different economies to pad up their growth rates so that you then get a global growth number. And because China and India have been growing faster than the rest of the world, and because their weight in the world has now gone down because of the new revisions that have been done on purchasing power parities, the total number for growth has also gone down because the faster growing economies have actually turned out to be a smaller share of the world than was assumed under the previous purchasing power parity numbers that had been used.

And so the aggregate effect of this is that it shaves about half a point off the global growth estimates using purchasing power parities. It doesn't affect the growth rates for individual countries; they still grow at the same rate because purchasing power parity is simply about how you add them up. But it does affect the aggregate numbers.

I should also say, notwithstanding that even after these revisions, the share, the contribution that the emerging markets have made to global growth continues to be substantial over the past few years. China, for example, even after this revision, still accounts for more than a quarter of the global growth last year. So these numbers are not about a different assessment of how economic outlook is changing. It's got nothing to do with our assessment of a slowdown in the world economy, it's simply a different way of adding up the growth rate, the same growth rates for countries but using weights that have been revised to be more accurate.

QUESTIONER: It's interesting to stay on that topic. The big question now is when these figures came out several weeks ago, maybe even last month, the issue that arose was, how is this going to affect the quota discussions, if anything at all? Because PPP was going to be a significant part of the new formula, can you still see that argument going on, or do you think that there might be some sort of adjustment in that?

MR. AHMED: I think that what these new revisions mean is that as we move forward in the quota discussions, we will be using, obviously, these revised estimates in calculations of the relative weights of economies whether we do it by putting PPP in the formula or whether it would be applied through a filter which, as you know, there are sort of two approaches that people have been talking about. I don't think that the fact that we have new numbers changes the dynamics of that discussion.

QUESITIONER: And PPP is going to be a significant part of that?

MR. AHMED: I still think that the conversation [has] been going on about how PPP should play a role; the fact that PPP should play some role in the determination of relative shares and quotas, I think, is broadly accepted. The issue is how it should play a role, what its relative weight should be: Should it be through a blended formula of PPP and market-based PPP? Or should PPP, GDP, come in as a separate variable?

That's the discussion that's happening. And I don't think that that debate which is still ongoing is going to be changed because we've had a new set of numbers, because the fact is that it's a conceptual reason for including them, and the fact that you have more accurate data simply means you have more accurate data.

QUESTIONER: Right. Was the IMF surprised by the revisions? How large the revision was? I mean, the fact that these economies are 40 percent smaller than what was originally, that's pretty big.

MR. AHMED: I think if you look at the PPP, the Interactive Comparisons Program project, which is a multi-agency project that the World Bank in particular has been actively involved with, many of these PPP numbers, historically, have come about through surveys that have been done. Because, in essence as you know, what they do is try to compare the relative prices of similar goods across countries, and then try and compute what would be the implied exchange rate that would make them equal.

So some of these surveys were old; some of them were partial. And this time around, you've actually got a much more comprehensive dataset, which includes surveys done on China, on India and other countries, about 140 countries, for which we do have now much better data than has historically been used.

I don't think that most people, including us, were expecting that the revisions would be as significant, necessarily, in some countries, but in a way this is actually a much better and more systematic dataset than historically has been used for those calculations.

I see I have a question coming in from the Media Briefing Center on Peru. The question on Peru says: "Peruvian officials said that Peru is withdrawing from the Fund's program next spring. That move would follow similar decisions by Brazil, Argentina and Uruguay. How did you take the Peru's announcement as the Fund is concerned on its relevance in current world affairs?"

I am not aware of that announcement that you're referring to, and we'll certainly look at it and come back to you to see if there has been such an announcement. What I can say to you is that, as you imply, there is a program that the Fund is supporting in Peru, and Stand-By Arrangement which was approved by the Board about a year ago, almost exactly a year ago, and on which there has been a review completed. The second review was completed in late December, so about a month ago, and there is a mission of the Fund, as scheduled, to conduct the third review under this program. And I think that's tentatively scheduled for May. So that's our current understanding and program of work in relation to this Stand-By Arrangement in Peru. But I'll certainly follow up on this announcement that you're referring to. And if there's more to it, we'll come back to you on that.

QUESTIONER: Good morning. I'm going to bring you to Italy with my question. Talking of an IMF mission, that is an IMF delegation on the verge of going to Italy in preparation for the Article IV at the end of January. If you could specify the days.

And I'm especially interested in what you think is going to be the question that IMF delegation is going to pose to the Italian authorities, and who they are going to meet, especially in these phases? It's very important for Italy to know what are the areas where the IMF delegation will focus its attention.

MR. AHMED: First of all, just on the facts, as you say, the next Article IV mission is scheduled for the end of this month, and I believe the dates that are tentatively being considered, that are being programmed, are from January 24th for about 10 days thereafter.

As to who they will meet, I think the agenda of meetings is still being elaborated. It's still a couple of weeks away from there, but I would imagine that it would be very similar to that of last year, which is to say that the mission will be meeting with relevant ministers and their staff, central bank officials and their staff, and also with parliamentarians. But I don't have more specifics on that.

As to the focus of the mission, I'm not sure there's a whole lot I can add at this point a couple of weeks away from the mission, except to refer you first of all to the statement that we issued at the end of December which you might recall, which welcomed the improvement in the fiscal accounts and which came in much better than had been originally anticipated.

And also noted in that statement that they provided a good starting basis for a better than budgeted outcome and strength and adjustment effort in 2008. So, clearly, that will be part of that agenda, to look at the prospects for 2008 and the policy associated to achieve that outcome. We will also be looking at the sort of standard range of issues for current union members such as Italy, which is to say fiscal, financial, and other policies relevant to determining sort of domestic economic stability. I'm not sure there's much more than I can add at this point to it, but certainly at the end of the mission we will have a concluding statement, which will then give you our views coming out of the mission.

QUESTIONER: At the end of the mission, you mean when you publish the PIN or before that? I mean as soon as the mission come back to Washington we are going to have a statement? Or when the Article IV is ready?

MR. AHMED: I'm working on the assumption, that it'll be the end of the mission where they do the concluding statement. And, of course, when they come back and the Article IV [document] is completed, it goes to the Board, and there will be the standard PIN. So it'll be the standard process.

QUESTIONER: Just the last question about Italy could sound funny, but it is not. The tragic situation of the trashing Naples, which makes some people start doubting, I mean, many things about Italy's resilience and strength, do you think IMF will ask a question about Italy things to deal with this Naples trash situation?

MR. AHMED: I'm not aware. [This is] what I've got in terms of briefing and I'm afraid I can't give you any more on that.

QUESTIONER: The Managing Director has announced that there are going to be cutbacks. When does the IMF see this happening? Obviously, there's been budget allocations going on now. Is this going to be a process? Is it going to be a one-off-thing as soon as the budget process is done? Can you maybe just run us through? And also, when does the Fund think that it can come out with some sort of new income model, and decisions on gold reserves and so on?

MR. AHMED: First of all, just to put this in context, we have been asked to come back for the Spring Meetings with a set of proposals on an integrated model for income and expenditure, which is to say a new financial model as well as expenditure side. What the Managing Director has said already is that we see that the bulk of the gap, which is about $400 million a year in a steady state as to going forward—about three-quarters of [the gap] is to be filled through new sources of income. Now, a year ago the Crockett Report came up with a range of ideas. Most of these had a lot of support, so now the issue is to move forward on some of those ideas.

But we've also said that we believe that some of that gap, about a quarter which is to say about $100 million, needs to be filled by cutting back on our expenditures. And we see the need to cut back expenditures partly as a way of responding to the income gap, but also it is part of a broader agenda for refocusing the institution to increase and strengthen its relevance and legitimacy and, in particular, to try and refocus our work on those areas and with those sets of skills that are most relevant to our members going forward.

So the broader framework within which we're looking at these expenditures cuts is part of a refocusing exercise. And just to give you examples, in terms of our work on surveillance which is a core part of the Fund, what the Managing Director has said already is that he sees a comparative advantage of the Fund as being the focus on the linkages between the real and the financial sector. No other institution focuses in the way in which the Fund does. And you can work this through other areas as well. So there's a refocusing exercise underway, and part of that is also about looking at the set of skills and then the size of the institution.

In that context, if we were to reduce our budget expenditures by about $100 million, this would translate into a likely involved net reductions in staff of up to 400 people and out of a total staff that we have of around 2,600. So it's up to 400 people.

And the Managing Director has started discussions, consultation within the institution with staff on this. He is also talking to the Executive Board. The Executive Board is reviewing these proposals and ideas, and he has begun to talk to shareholders, members of the Fund about some of these ideas and directions as well.

So our timetable remains that we will feed this into the scheduled budget discussions in line with the idea of agreeing a new and income expenditure framework before the spring meeting. And, as you know, the budget meeting comes out, it takes place before the IMFC [International Monetary and Financial Committee] meeting. So that's our current timetable for taking this forward.

QUESTIONER: The other question I have is on Pakistan. I believe the Bhutto assassination that's happened since the last briefing. What do you see the implications of this, not only for Pakistan but for the region and does this at all affect what the Fund? The Fund doesn't have a program in Pakistan, but does it affect anything that the Fund is doing in Pakistan?

MR. AHMED: The Fund doesn't have a financial program, but the Fund is engaged in Pakistan through its work on surveillance, through the work we do on technical assistance. And that engagement continues, and, obviously, when any economy in any country such as Pakistan goes through a period of difficulty or instability, or a political difficulty, and that has an economic impact. And, obviously, the Fund is monitoring that effect.

But I think other than that, it's not something that affects our relationship except insofar as we are monitoring economic prospects in Pakistan and continue to do so.

QUESTIONER: Do you have any outlook on what the impact is going to be of Bhutto's assassination and/or death and any further economic implications?

MR. AHMED: What I should say is, first of all, that if you step back a bit and look at Pakistan's economic performance over the past few years and just look at the last fiscal year, which is 2006-2007, the economy did perform well and had a GDP growth rate of over seven percent, and reserves have been strong and strengthening. So that's sort of where we're coming from. Also, the economy has shown considerable resilience, I would say, to domestic political tensions and to turbulence and international financial markets.

Now, immediately following the assassination of former Prime Minister Bhutto, the local stock market experienced significant losses after reopening on December 31st, but has recovered, in part, subsequently. There have also been some reserve losses following the attack, but the reserve position remains strong. In terms of currency markets, the Pakistani rupee has depreciated moderately since December 27th. And as far as spreads are concerned, the EMBI global sovereign spread for Pakistan has widened by 170 basis points as of January the 3rd, relative to its level before the attack. So clearly, there was a sort of initial effect.

Now, further developments will to a large extent hinge on stabilization of the political situation. Our assessment now is that real GDP growth is likely to be lower than originally projected. The original projection for 2008 was around seven percent. And the external current account deficit will be higher, but in that we should note that this will be as much due to the recent increase in oil prices which is affecting current account deficits in a number of countries and—but also some reduction in capital inflows, in particular portfolio investment flows. But, having said that, I should say that we still want to stress that the country has a very solid reserve position and also want to stress that it has a strong track record now of macroeconomic performance and growth on which to build.

QUESTIONER: Any update on when there is going to be a mission to Argentina?

MR. AHMED: All I have here is that we anticipate that we will undertake the next Article IV consultation in the first half of the year, and in the meantime we have a dialogue with the authorities—including the fact that we have a resident representative there. But I don't have a precise date for the mission yet.

QUESTIONER: You are going to release your new world economic outlook, but a lot of those are coming out these days, the World Bank, the UN, all these institutions are lowering their growth projection for 2008. Could you anticipate if the IMF whose last data, I think, was a projection of 4.8 percent for global growth in 2008, will lower this number? And also, as major risk for the new year, do you keep seeing a recession in the U.S. and the risk of inflation in Europe?

MR. AHMED: First of all just to say, we are in the process of updating the numbers, so I don't want to prejudge what comes out of it. But as I've said before, and that's still our view, that compared to the projections that we had done in October in the World Economic Outlook, we think that the downside risks, a number of the ones that were identified at the time, have materialized and even now risks to global growth remain on the downside. And, as a result, we do see the outlook for 2008—the growth prospects—being dampened compared to our expectations and the central scenario in October. Now, exactly how much and where, is precisely the work that is underway in the teams now and will come out within a week and a half or in two weeks.

Now, the other point you raised is, what is our view on the U.S. economy? As you said, we do think that the U.S. growth outlook has clearly weakened further, reflecting an intensification of housing sector and related financial market strains. Although the recession risks have increased, at this point, we do not forecast a recession for the U.S. as our central scenario. In Europe and Japan, growth does appear to be decelerating and will certainly be affected by a U.S. slowdown. And, finally, on headline inflation, yes, it has increased in the U.S. and in the Euro area, largely reflecting pressures from energy and other commodity prices. This has manifested itself mainly in the form of headline inflation so far because it's coming in through food and energy prices, as I said. But there are concerns that there will be a possible secondary impact on core inflation, and we are continuing to monitor that. And that would pose a challenge for monetary policy, particularly in light of the rising downside risks to growth, because it would limit the ability of central banks to be able to deal with one without affecting the other.

I should also say on inflation that we think that several emerging markets are now facing inflationary pressures from strong domestic demand as well as from higher food and energy prices. And a number of them have appropriately tightened monetary policy in response to these increased pressures from inflation.

QUESTIONER: Is there some worries from the IMF that if the Fed continues to cut rates that that would complicate the issue for headline inflation, that it would make it much more difficult?

MR. AHMED: The concern about the ability of central banks, with the Fed and others, to cut interest rates and at the same time the worry about inflation is certainly shared, not just by the IMF but by central banks and authorities themselves. But it's a question of finding the right balance at any given time, and so far we've been supportive of the actions that the Fed has taken.

QUESTIONER: And do you think that the Fed's rate cuts have kept the U.S. away from that recession? I mean you said that the risk of recession has increased, but that you do not think that there will be a recession. So do you think that the Fed's monetary policy, so far, kept that recession at bay?

MR. AHMED: What we've said is that, and what we continue to say at this point, is that so far we think that the actions that have been taken on monetary policy have been supportive and timely. So that's probably as far as I can go on that.

I think on Peru, I have some more information, which is simply to add to the point that in response to [the previous] question, which is to remind you that the Stand-By Arrangement that I referred to with Peru is precautionary, which is to say that there have not been any disbursements associated with it. And, as I said on the question of whether they're going to exit from the arrangement or not, I don't have any more information. But, of course, when many countries follow good policies which applies in the case of Peru, then at some point it's natural that they would exit from a Fund program. I don't have any specific information on that particular case.

Our next press briefing will be at the same time in two weeks. Thank you all very much.


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