Transcript of a Press Conference by IMF Managing Director Rodrigo de Rato with First Deputy Managing Director Anne Krueger and External Relations Director Thomas C. Dawson

September 30, 2004

International Monetary Fund
September 30, 2004
Washington, D.C.

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MR. DAWSON: Good morning, everyone. Welcome to the Annual Meetings' press conference. To my immediate right is Rodrigo de Rato, the new Managing Director of the IMF, and to his right is Anne Krueger, the First Deputy Managing Director.

The Managing Director will have a brief statement to open the press conference, and then we will be happy, as is our custom, to take your questions. We are on the record.

MR. DE RATO: Good morning. Thank you, Tom.

Welcome to the Annual Meetings' press conference and my first press conference in an Annual Meeting as the Managing Director of the Fund. I am very happy that Anne Krueger is with us and, together with the other two members of the management team, Mr. Carstens and Mr. Kato, we have been doing a good job in the past three and a half months.

From our perspective, from the Fund's perspective, these Annual Meetings will concentrate on three areas: the World Economic Outlook, making our surveillance more effective in strengthening crisis prevention, and enhancing international support for low-income countries; those will be the three themes that I will touch most on in my speech on Sunday. I will be reporting on these issues, also, to the members at Saturday's meetings of the International Monetary and Financial Committee, and also in the Development Committee in the afternoon, and then, of course, at the Annual Meetings on Sunday.

On the economic outlook, as most of you, I suppose probably all of you were yesterday at the press conference of Rhagu Rajan, we see a positive situation in the world economy. 2004 will achieve global growth of 5 percent, which is the highest in three decades, and there will be a very slow movement down in 2005 to around of 4.3 instead of 4.4 that we envisioned last April. Growth has spread; we have strong growth in industrial countries, but also in emerging countries and, most notably, in China.

What is the challenge we see ahead and the risks we see ahead to that challenge? The challenge is certainly to keep the recovery going, and keep it going for as many years as possible. The risks we have to overcome to do that are related to how, in different situations, different countries cope with two important issues. One is the change in the monetary policy of many countries, starting by the U.S.; and the second is the effect of the oil prices on national economies and also on the world economy. The oil market has evolved in a very strong upswing in the last few months related to certainly structural changes in the economic environment, both in demand and supply, but also in some speculative movements related to shortages of supply and also to geopolitical risks. As you know, our numbers indicate that a $5 dollar barrel increase in the medium term in a year has an effect of around 0.3 percent in growth.

Surveillance is certainly at the heart of our core business. We have strengthened our crisis prevention efforts in the past decade, and we are working on having a more focused approach to our core mandate. In that respect, candid conversations, exchange of views, and collaboration with our member governments, but also the most transparency possible with public opinion, are essential in this respect. I have to say that it is a very good sign that, right now, around 75 percent of our Article IV consultations are made public by governments.

We are certainly working in surveillance in integrating more at the global, regional, and country levels, recognizing that there are systemic effects in some economies over the rest of the area and regional levels, but also on the global levels, and that we have to consider that imbalances in some economies not only affect that national economy, but do have consequences for the rest of the world. We are certainly following actively capital market developments and continue to sharpen our tools for assessing vulnerabilities, including through an increased systematic assessment of debt sustainability and a strengthened focus on national balance sheets and sound debt management.

The third issue I have mentioned to you is our role in low-income countries. It is important to recognize that a much broader development mandate of other international institutions will have a role to play in low-income countries, focusing on two very important issues for the development of those countries. One is macroeconomic policy and financial stability, and also the efficient use of resources for poverty reduction. We continue to work with other creditors, especially with the World Bank, in their efforts to reduce the situation of poverty in low-income countries. Certainly, one very important aspect of that policy is the HIPC initiative, but not only the HIPC Initiative. We are playing an active role in providing aid to recipients and also providing information that can help them make good decisions to ensure that the aid is used in the most efficient way.

This is the 60th anniversary of the Fund and that is very good news, but it also asks us to reflect on our own strategic situation. It is for that, that I had a luncheon and the Board has accepted to work on a strategic review of our core work that will take part of our time for the next months.

So, we have priorities in the future regarding that strategic review. The first will be that we are a forum of multilateral coordination. In that respect, it is more and more clear that every country not only affects itself and its policies, but affects others. The second is that we play an important role in advising our members to conduct a strong macroeconomic performance, and we believe that the resilient performance of the world economy regarding some of the very strong shocks that it has endured shows that enhancement of macroeconomic policy is paying certainly not only to the economies but, what is more important, to the citizens. Also, in that respect, as I have pointed out, the quality and persuasiveness of our advice is paramount in our bilateral surveillance, but also in our regional and global surveillance.

Once again, one of our core businesses is essentially to provide temporary financial support to all our members in moments which, for whatever reasons, there are problems in their financial situation and in their capital accounts.

Without any more introductory words, I am at your disposal.

QUESTIONER: According to public statements, the European Union is getting really close to launching accession talks with Turkey. How would it affect Turkey's economy in the short and medium term if it happens? At the same time, Turkey is working on a follow-up Stand-By Arrangement with the IMF. What would be the key features of this arrangement.

MR. DE RATO: Well, the relationship between countries at the regional level, and that is the case between Turkey and the European Union, of course, is a political issue that affects governments. We are ready to advise governments on whatever decisions they make. I have to say regarding the relationship between Turkey and the Fund that the actual program has been successful, and certainly the Turkish authorities have made an important effort to reduce vulnerabilities. We are envisioning a very strong performance of the Turkish economy this year and that it has been already official that the Turkish authorities asked us to start discussing a new program. We are doing that. We will, of course, follow the path of increasing the capacity of growth in the Turkish economy, and to do that certainly to reduce the vulnerabilities of the Turkish economy.

I do not know, Anne, if you want to add something about this.

MS. KRUEGER: No, I think that that pretty much covers it. Discussions are underway with the authorities for moving forward. Performance, as the Managing Director said, has been excellent—not good, excellent. Of course, we want to keep it that way. There are, as you know, still vulnerabilities, particularly that while the debt to GDP is going down and debt management is improving and the quality of the debt is better, it is still an issue and there are still things that need to be done to ensure that growth can be maintained over the longer term. So, we are very pleased and we want to move forward to shore up our progress.

MR. DE RATO: Well, to get Anne Krueger to say "excellent" is not easy.

QUESTIONER: The Board last night approved the first loan for Iraq. Could you talk about your concerns about how this money might be used, given the security situation there, whether that will impede the use of this first loan? Could you also talk about when you expect a second loan to be approved and how you expect the relationship to proceed from here?

MR. DE RATO: First of all, I want to say that the Fund reacts to members' needs and petitions of governments. The Iraqi government, recognized by all of the members of this institution, has asked us for a loan in the capacity of post-conflict, which, of course, we provide to many countries that have that type of situation, which is, of course, a very difficult and, in some areas, sad situation, and we have done that with the Iraqi government. The Board approved it yesterday.

I had the chance of meeting with the Prime Minister last week, and also with the Finance Minister and the President of the central bank yesterday. We will work with them, as with all of our members. As to the use of the resources, of course we will monitor it, like we do with all members, but I think that in our discussions yesterday with the responsible economic team, they have a very clear strategy for that.

As for the future, we will be working with the Iraqi government, and we will start looking at the possibility of a Stand-By program. I cannot add anything now at the moment.

QUESTIONER: Gordon Brown suggested last week that the IMF should be prepared to revalue its gold in order to fund a 100 percent write-off of multilateral debts for low-income countries. Does the Fund see any problem with that idea? Can we have your reaction to that suggestion?

MR. DE RATO: As you know, it has been done before. Of course, it depends on the willingness of the members of the Fund, of the Executive Board. For the time being, the Executive Board has not discussed this issue. Of course, management and staff, we stand ready to analyze the possible outcome if we get the mandate by the Board to do it.

QUESTIONER: If I understand correctly, just an hour ago, the Brazilian central bank revised its growth projection to 4.4 percent. Yesterday, Mr. Rajan gave the estimate of the IMF of 4 percent. How do we understand this difference in projections?

MR. DE RATO: Well, depending on the hypothesis. Are you just talking about this year or next year?

QUESTIONER: For this year, for 2004.

MR. DE RATO: Well, I cannot answer you. It depends very much on the analysis of the data right now. If the central bank is revising its growth, it is probably very sound information.

MS. KRUEGER: As you know, Brazil is also doing much, much better. In fact, the program has been going very well. Growth was slower to accelerate after the program than we expected, but has now been accelerating faster. We have been revising our growth forecasts up; the central bank has been revising their forecasts up. If they did so again today, that is more good news. But our WEO came out, as you know, this week. In order to get our numbers, we were working over the past two months, and at that time I think our estimate was consistent. So, I would take the central bank's estimate to be more good news from Brazil.

QUESTIONER: The G-7 and, notably, Germany seemed to be convinced that a lot of the oil price hike is due to price speculation. What is your view on that and would the IMF have a role in doing something about it, working on transparency?

MR. DE RATO: Well, first of all, we think that, as we have made public in recent weeks and I think that the Chief Economist said yesterday, the situation of the oil market is, in part, related not only to an increase in demand in developed and also developing countries, but also to constraints in supply. In that respect, we have been saying—and I want to use this opportunity to repeat it—that one essential issue, strategic issue for the future of the oil sector is certainly to increase production facility not only for crude oil but also for refineries. In that respect, we believe that that shortage situation of spare capacity is providing speculations in a speculative situation.

On the second question, I do think that there is room for work in more transparent statistics of the market, and we are working on that. Certainly, the collaboration of the producers will be very useful, and we are having it. We are working on that issue.

QUESTIONER: Could you elaborate on the risk that Freddie Mac and Fannie Mae have on U.S. interest rates?

MR. DE RATO: Well, we have already expressed what was our opinion about certain financial agencies in the U.S. market in the Article IV consultation, so I would refer to that.

QUESTIONER: My question is regarding Brazil. You said quite a few times in these meetings that Brazil is starting to have strong structures in its economy for growth. Ms. Krueger has just said that Brazil, after a slow growth, is starting to accelerate this growth. But if you look at the forecast for this year, Brazil still is the country with less growth expectation among the emerging markets. It is 4 percent for this year, and for next year it is a bit lower, 3 1/2 percent. My question is, is it really accelerating? Everybody says it is important in the medium and long term for Brazil to reach a balance of its accounts, but is there a possibility of increasing infrastructure investments in Brazil in the short term?

MR. DE RATO: First of all, as the Brazilian government is making public, and we have also, the Brazilian economy is performing better than we expected, which is very good news, and shows clearly that the economic climate and also the political climate are helping very much the country. I had the chance to talk with the Brazilian President and economic authorities about three weeks ago, and we believed that it is a very good time for structural reforms to boost Brazil's growth possibilities in the medium term. We see scope for reform very clear scope for reform in many areas, certainly the banking system, to reduce the spreads of the cost of borrowing, also certainly to give more flexibility to the budget, and in other areas like the labor market and the trade sector.

That has been our public advice to the government. We are working with them in that respect, and also on some technical issues. But we see clearly, and I think it is very visible, that the Brazilian economy is ready to grow more. To do that, I think the government has done a very good job in providing it with confidence and macroeconomic stability and reforms. The government has a very important reform agenda. To keep that momentum moving, the reform agenda has to be kept forward.

QUESTIONER: On China, I am wondering if you expect China to make any concessions on floating its currency and, if so, when you expect that could happen?

MR. DE RATO: I do not think the question is concessions. I think China should do what is better for its economy. It is true that, given the size and the importance of the Chinese economy, it is one of those economies in which, what it does, it affects also global issues. We have been advising on a number of issues the Chinese authorities, certainly banking restructuring, and also going forward with the privatization program, the liberalization of markets.

One of them is to provide the Chinese economy with a more flexible exchange rate system. That does not mean that it should abandon its capacities to protect itself in the capital account, but it will mean that, through a more flexible system, it would be able to be more stable to absorb external shocks better. So, I think our position is clear. We think there is room for maneuver to start moving at a pace, of course, to a more flexible exchange rate system, to do so taking the guarantees that speculative movements will not hurt the economy. We think that precisely because this is a moment of strong growth in the Chinese economy, this is a very good moment to do it. That has been our public position and we will keep it. We believe that our arguments are becoming more and more clear.

QUESTIONER: There seems to be a contradiction in the approach to India. On the one hand, it is one of the fastest growing economies. On the other, India was also told that, unless it reduces its budgetary deficits, it may face disaster at some point. Secondly, recently Ms. Krueger, in her remarkable speech, said that India can grow much faster. I was wondering whether you could elaborate on that.

MS. KRUEGER: Well, as you know, Indian debt to GDP is already fairly high, between 80 and 90 percent. The fiscal deficit is somewhere just around 10 percent of GDP, and that is an unsustainable position. There is also increasing evidence that some of the needed investment in India in the private sector cannot come, because there is some degree of inflationary pressure showing up in the economy. There are other signs where, indeed, because of the successful growth, there are productive uses to which the resources can be put, and the large public sector deficit is taking resources away from some of those uses. There are lots of scope, as you know better than I, for increasing the efficiency of expenditures and other things.

On the other hand, the budget deficit, if it keeps going, one of these days the real interest rate is going to start to rise further and, as it does, so is it going to put an even bigger pressure on the government when indeed India does need more resources for infrastructure and other things.

Now, the second part of your question is, why can India grow faster? Look, India has really started and done very well in the reform process to date. Look at what has happened in the growth rate. If India carries through on reforms, gets rid of the rest of the small-scale reservation, opens up the trade regimes and manages a more competitive environment in the private sector, manages to finance infrastructure better, of course the growth potential is higher.

QUESTIONER: My first question is if the IMF is considering any level of acceptance of the offer that Argentina is taking with its creditors, any level of sustainability; and second, if the IMF has intentions to reduce exposure with Argentina and in what manner, because Argentina is one of the three debtors, major debtors of the Fund. The third will be if you see any burden, performing debt burden on Argentina for next year.

MR. DE RATO: As was already recognized in the Letter of Intent of the Argentine government to us in March, we have been talking with the Argentine government since then. The debt restructuring issue is a very important one, and certainly should provide the Argentine society with the normalization of the Argentine economy with the financial markets. That is certainly a very important step for providing Argentina with a medium-term framework to be able to grow at its potential. That is, in our opinion, the only way for the Argentine society to start putting a clear solution to the social and economic problems of the past few years.

As you have mentioned, the government is right now in negotiations with its creditors. What we have said clearly, and I had the chance to say that in Buenos Aires, is that that is a very important moment and that the solution has to be a comprehensive debt restructuring that allows the Argentine economy to come back to the international markets.

Of course, there has to be a sustainable solution. To do that, of course, apart from whatever agreements the creditors and the debtors arrive at, there has to be a clear budgetary, medium-term budgetary framework that allows for the Argentine economy to, on one side, have resources to pay its debts but, on the other, increase the amount, increase the scope of action of the private sector in the Argentine economy. In that sense, we believe that the performance of this year's budget is satisfactory and that, based on that performance, the Argentine authorities should have a medium-term budgetary strategy for the future. That is what I can say about the debt restructuring issue.

As you know, in the Letter of Intent of the Argentine authorities to the Fund, to the Board of Directors, there is a reference that, in the year 2006, there will be a proposal by the Argentine authorities regarding that exposure, and that is the data we are going to keep. Of course, like any other country that has a line of credit with us, there has to be a calendar of repurchases.

QUESTIONER: My question is on terrorism. President Putin indicated he wants the country on a war footing. How much of a threat is terrorism for the Russian economy and for the world economy, and is there an effective way of engaging such an intangible?

MR. DE RATO: Certainly, terrorism is a very important threat, first of all, for democracy and for lives and other consequences for the economic situation in the countries that suffer from terrorism, but also in the world economy. One of the important shocks that the world economy has been able to absorb in recent years that I observed is an increase in resilience, as certainly the terrorist threat has increased, as we are all very aware.

In that respect, the strategy that the government takes against terrorism is a political issue, but the Fund certainly stands behind countries in the defense of democracy and liberty. As you know, we have also been the target of international terrorism.

QUESTIONER: My question for Mr. Rato regards imbalances in the United States and in Europe. What do you think is the main task in the United States and in Europe to reduce these imbalances? Ms. Anne Krueger, could you elaborate how urgent do you see the struggle against the budget deficit in the States?

MR. DE RATO: We believe that the three largest economies—that is the U.S., the European Union, and Japan—are certainly very important in reducing some world imbalances, essentially capital account imbalances, and each of them has to play a very important role, because we believe that that imbalance is certainly a threat to the world recovery and is a global one, so it needs more than one country to be involved in it.

In that respect, we believe that, in the U.S. case, the extraordinary expansion of monetary and budgetary policy has to cease. We are already seeing that there is this policy of going to a more neutral stance from the monetary authorities, and we believe that it is essential that the budgetary authorities do the same in the United States; that is, the reduction of the public deficit is certainly essential.

Also, the European Union has to play its role, and basically the European Union has to increase its growth. The performance of the European economies in the last, more than ten years has been unsatisfactory in terms of growth and, in that respect, we see that the structural reforms that some European countries are putting forward are in the right step. Probably, European countries have to take advantage of the upswing and to upswing at the same time structural reform so that the growth situation in Europe changes and we see a more dynamic European economy. Also, Europe has to address some of its medium—and not so medium now—risks, and also take advantage of the recovery, incorporate a more neutral stance in budgetary policy.

The Japanese economy, which has been one of the good news of this year, has to speed up reforms so as to start preparing itself for the end, we hope in the near future, of the deflationary situation and, of course, a change in its macroeconomic stance once that is achieved.

MS. KRUEGER: I think the Managing Director handled most of it quite clearly. The U.S. administration and the opposition candidates both agreed that, over the medium term, the fiscal deficit in the United States has to come down, and we certainly have been urging that in our Article IV consultations. So, I do not think anybody disagrees about that. There might be some question about the pace.

Remember, however, that American public debt is still low relative to those of many other countries so that, in that sense, while there is certainly a medium-term problem, in the short term it does not create the same degree of problem except in the sense that the Managing Director mentioned, which is, given that we are now in a strong upswing, it is time to start withdrawing the stimulus.

QUESTIONER: Today is exactly five months that new countries joined the EU. I would like to know your opinion on what are the major challenges we are facing now, and what would be the effect on the old union—I mean the enlargement, what is the effect on the old union.

MR. DE RATO: I want to say up-front that, from our point of view, the enlargement of the European Union is very good news, not only for Europe but for the world. We see that such a broad area of economic integration can provide a very useful tool for the Europeans to face and to face successfully the globalization of markets. Of course, what is required is that newcomers speed up the reforms and, to do that, reduce some of the actual macroeconomic imbalances, both in inflationary pressures, but especially in some countries the very strong increase in budget deficits. If they look at the path of other incorporations of countries to the European Union, they could learn the lesson that increasing budget deficits in that process can be very dangerous for the competitiveness of those countries.

So, we are following very closely the budgetary situation in the accession countries right now. But we think it is a very good opportunity, and that economic reform will give them a very important capacity to the access of the markets in Europe, but also to be able to compete worldwide.

QUESTIONER: On China, do you think that China, the fact that China has received an invitation to a dinner with the G-7 in any way opens the door to greater flexibility on the exchange rate of the yuan? Briefly, on Japan, perhaps the forecast of 4.4 percent growth is a little optimistic in light of the fact that the economy is perceptibly slowing down.

MR. DE RATO: We are very glad that countries in formal or informal fora discuss political issues. We think it is essential. There are many political decisions to be taken to reduce risks of the world economy and, of course, those decisions have to be taken by countries and by governments. We realize that formal or informal fora can be very useful for that. I cannot elaborate any more on that issue, but I think it is good news that countries talk to themselves and do it in whatever fashion they decide to do it, to address their different positions and the global imbalances. We see strength in the Japanese economy and we think that, given the reform agenda of the government, our projections for next year are perfectly attainable.

MR. DAWSON: Thank you very much.


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