Transcript of a Press Briefing with Rodrigo de Rato, Managing Director on the IMF's Medium-Term Strategy

September 19, 2005

Monday, September 19, 2005
Washington, D.C.

MR. Dawson : [In progress]—11:00 a.m. this morning. Otherwise, this is on the record. And as indicated in the invitation, the purpose of this briefing is the medium-term strategy. Much as I know you would like to ask questions on the WEO or debt relief, or whatever, and much as I know the Managing Director and Ms. Krueger, would like to answer them, we are just going to try to restrict this to the subject at hand, which is the medium-term strategy.

Mr. Managing Director?

MR. de RATO: Thank you very much.

Good morning. As Tom reminds us, we should try to be focused on the medium-term strategy.

This was an idea that I discussed with Anne just a few weeks after I became Managing Director last June. And we decided that it was a good moment for a lot of reasons.

One, because I was a new Managing Director, but that is not necessarily the most important one.

The second was there was a discussion at that time, and still has been going on all year, about the Fund and its history, it was the 60th anniversary; and also because, well, the experiences in the last five, six years in the Fund have been extremely important in many respects, capital markets, low-income countries, the beginning of a true global surveillance, capital account issues, and also some internal issues like quotas, but not only that, the movement towards a more medium-term budget framework.

Some contributory pressures by the constituency like in one sense asking the Fund to pursue a very tight budgetary policy, and at the same time adding new responsibilities in terms of new areas of work, for instance, anti-money laundering, but also others.

So all that we thought was enough for reflect on the strategy of the Fund. So that is the work that's being done through a group of people that worked with Anne for the whole year, and at the same time we had different meetings for different reasons, many of them related to the 60th anniversary. I remember some in Washington, some in Europe, others in Asia, that give us the chance to discuss with people, government, civil society, academia, how the Fund was perceived. That, and after several discussions also in the Board, and foremost, discussions and lunches, and no formal paper, to a paper that was written during the summer after many drafts during all year, and that is what I presented to the Board at the beginning of September, if I remember, September 1 or the last day of August.

As you have the paper, I won't go over it in detail, but you have realized that the main theme is certainly how to provide countries with useful tools to cope with what we believe is today the most important issue regarding countries, which is globalization and integration into international economy.

My experience previously as a government official, and then in this last year as Managing Director of the Fund, dealing with many governments, is that the integration into international economy is a challenge not only for low- and middle-income countries, but for many developed countries. I have found that the debate about how to react to the globalization forces is something that not only, as I said, low-income and middle-income countries are facing, but also quite developed countries are facing too.

At the same time, this year has been dominated here with a lot of work on global imbalances, and the fact that we see those global imbalances changing and evolving, and we believe that certainly an important way to approach it is in a consensus or a concerted way, and in that respect the Fund plays a central role for those types of discussions among different countries.

That, of course, takes us to issues related to global surveillance, regional surveillance, and as you have already seen or will see in the WEO when it is presented Wednesday, we have already done quite a substantial amount of global imbalances that I think would be very useful for the discussions here next weekend.

Capital markets is an issue that's always been at the center of the work of the Fund, but right now needs certainly a very important approach, how we understand them, how we analyze the messages that come from the capital markets, how we advise medium-size economies and developing economies to face capital markets, to develop national capital markets. All that has changed even in recent months. The evolution of interest rates is making the approach to debt management very different in many middle-income countries than it was only a few years ago.

Issues related to capital account are also a very important question for many member countries. Of course there is a political discussion of should all members of the Fund should or should not abide by a rule that is not written, that liberalization of capital account is a requirement. That is not at all the position that we are taking here because that's an open question right now. What we are taking here is to advise the governments of how to apply their own decisions regarding capital account liberalization, and how to sequence it in the future. Certainly, we see important forces that influence governments in the way they approach their opening of the capital accounts, also important worries that many governments have regarding that. I think the Fund—we think the Fund could certainly play a very important role in that issue.

The policy regarding low-income countries is at the center of the review, as you probably have seen. This year has already been very important in that respect, and I even think these past few weeks and the moment we are right now also, we are engaged in important discussions regarding low-income countries, the PSI, the shocks facility, debt relief, the sustained financing of the PRGF. All those issues show clearly that we are working intensively with low-income countries, and our policy to low-income countries.

Questions regarding the institution, I mention certainly the question regarding quotas, that's a very important debate that we believe is due, and we hope to bring forward in the next few months.

This strategic paper should help us and help the Board and help countries to take future decisions, some of them budgetary decisions, as we move in the fall in the medium-term budgetary framework. Some others regarding very specific discussions like the compensation system, but I think that we have to have a clear idea of what we want to be, and then decide what kind of people are we going to have here, others regarding very immediate work that we will have to do preparing the work program for the next semester. So there is different levels of influence of this paper.

Nevertheless, I think the paper has been extremely useful for organizing our thoughts. I want to thank many people in this, certainly Anne and the Steering Committee, but also many people outside the Fund who have discussed with us in different seminars and meetings, and also the whole of the Board, that all along from the first discussion that we had in December to the last discussion that we had in the end of August, was extremely active and gave me a lot of ideas to refine this paper.

Anne, I don't know if you want to add anything.

MR. DAWSON: And if I could ask if you could identify yourselves and your organization, because we are of course recording this.

QUESTION: Andrew Balls, Financial Times. I just had two quick questions. The first one was the sense in the document that the Fund has to think about doing less of something, that it's a thinly stretched institution. Can you just tell me some things where, one or two things where there is maybe the Fund should be pulling out a little bit.

And then a second thing. There's discussion in here that the Fund needs to do much more analysis of the Millennium Development Goals, which seemed to me really didn't seem the Fund's job to be doing that. That seems like somebody else's job. So why is there this strong sense of the Fund has to do more analysis based on the Millennium Development Goals?

MR. de RATO: Well, regarding issues that we will have to streamline, I think there is a need for doing continuous reviews on issues on which we have been working maybe for 10 years, and in which a lot of the work has already been done, for just an example, standards and codes. I think the Fund has done extremely important work in making countries-economic policy of countries much more transparent through very intensive work of standards and codes, but maybe looking into the future, we believe that an area which we probably don't have to be doing the same amount of work.

I think that approach should be done in other areas. I mean looking, if we have already come to a mature situation in certain work in which we might continue providing, of course, assistance, but not at the same level of increase, or even reducing assistance.

Certainly another issue is to streamline our work procedures. We still have a lot of things to do.

Another area in which we have to work to maximize the use of our resources is certainly collaboration with the World Bank. And then I get into the second question.

The Millennium Development Goals is a commitment of many levels and instances and institutions, but we are one. So that means that we are engaged in the Millennium Development Goals, to help countries achieve them, and to help countries help other countries to achieve them, and also our own policies are—for instance, the PRGF clearly is regarding that. But we are not the only ones involved on this. It's certainly work of others, certainly the World Bank, to analyze specific policies in specific countries, that is, if the amount of resources devoted to this type of objective, health, education, for instance, is sufficient, but I think we can provide an overall view if the financial envelope of a country is sufficient to achieve or no achieve (?) goals. So I think in that area we will be working more intensively with the World Bank.

And we would like to really make it clear for countries, both donors and recipients, if a certain financial situation will be able to provide resources to achieve the Millennium Development Goals or not. Maybe the detail of how those resources are used or are lacking is not so much our area of expertise. Probably it is not. But the overall financial envelope of a program with a country of a poverty reduction strategy, certainly is our work, and I think we can provide light there as how sufficient is those general resources, overall resources are going to be towards the Millennium Development Goals or not.

QUESTION: [Inaudible] Press. You mentioned the voting quotas debate. Can you give us a sense of how far that it's got, for example, how you see it evolving in terms of a possible redistribution of votes, and whether you've already been in consultation with the big shareholders, the U.S., Japan, European countries as to what they might be willing to accept in terms of reform?

MR. de RATO: Well, I think here we have different problems facing the institution. I think the work has to start by making all Chairs aware that this is an important issue to be resolved now. Now, of course, is not necessarily in the next few months, but in this period of time.

I think that most of the Chairs are very aware of that. So I think that that will allow us to move to another stage in which we can work with the Board on different solutions to the issue.

There are many issues here to be discussed. The first one is how you calculate the weight of countries. That's not necessarily obvious. We have a system but we might have to analyze if that system is the correct one.

And then of course that will bring some consequences, substantial consequences that will make countries have to discuss among themselves how to apply those consequences. Some movement is needed, in my opinion, and I think that is what I'm trying to convey to the Board and to the Ministers, some movement is needed because there are some cases in which we are risking—not necessarily we are right now—but we are risking losing legitimacy, and I think that's a strategic question for an institution like this one.

At the same time I think we'll have to avoid a tendency of countries-not necessarily only of countries—but of discussing this issue as a zero sum gain. At the end this is not so much a question of small percentages, decimal points of weight, but of the whole institution being perceived as a global institution. Also there are questions not only regarding the weight of countries in the world, but also basic votes that will affect, for instance, Africa.

So I think that if really I perceive—and I think there's a good chance I will—that there is a general consensus on the Board that this issue deserves to be detailed and analyzed, that will be a very important part of the next work of the Fund during 2006. But still I think that from here to December we will have to work to see if there is that minimum political consensus to move forward. I really think that it's needed, and it will be very important if we are able to engage in a discussion during the next months, maybe the next year, or maybe longer than that, but start moving.

This is an important issue. It is an urgent issue, but it's not necessarily an immediate question of a few months, but I think that once we start moving, I think we will see some light on the issue.

QUESTION: Paul Blustein with the Washington Post. Could you respond to the criticism that's been made even before this document comes out, that it ought to put a lot more emphasis on the Fund's role in more aggressively dealing with the global imbalances by, particularly by taking on China's currency policy, for example, criticizing members much more openly when they are engaged in currency manipulation. I mean I'm sure you are aware of—

MR. de RATO: Yes. I'm aware of that criticism. We've been looking at that certainly since I'm here, and I think before, to the fact if China and others, not necessarily only China, was engaged in currency manipulation. Certainly the Chinese—which by the way have changed their mechanism, they changed their mechanism only a few weeks ago—have claimed during the past 10 years that their main objective was related to macroeconomic stability. and I think we have to all agree that although certain moments the Chinese currency was arguably, by some undervalued, the fact is that it has—in other moments it resisted devaluation in a very important way, and that was very effective for Asia and for the rest of the world.

I think these discussions about currencies, well, the time frame in which you look at it is very important. Our analysis always shows us that really the main objective of the Chinese was macroeconomic stability. Nevertheless, certainly before I came here-and maybe Anne has more memories of that-we have been advising the Chinese to move into exchange rate flexibility, and to allow their exchange rates to be more market determined. And that I think was much before all those voices became so, well, so—I don't know, how do you say—loud asking the Chinese to move.

I think we have provided the Chinese with a good technical analysis and good technical framework to help them move, and have them change. Of course, the decision has been theirs, and I'm not claiming that they made it only based on our analysis, but I think we've been a good adviser. We've been a good adviser. And certainly we've been, I would say, the first adviser to be talking about this a long time ago.

Right now I think the issue is much more how they use the new system, and we have been advising them—although it has only been a few weeks or month and a half since they moved—we have already been advising them that they have to be using this system more and more until aligned market forces determine the price of their currency, and that that will be certainly in their advantage.

So we are aware, I'm personally aware of all those positions. I have to say that we never saw the basis for that, although we looked into it, and that is, like everything, is arguable, but that's our position. And we also think that the Chinese have made the right first move. Now the important thing is how they apply it, and that they keep having a more market-based currency system.

QUESTION: If I can just follow up in terms of—I mean I appreciate—

MR. DAWSON: We're drifting a little away from the strategic—

QUESTION: Well, no, no. I mean, no, I'm actually trying to put it back into the strategic review. I mean I appreciate your addressing the Chinese situation specifically, since I mean I wasn't trying to—that was sort of the main thrust of my question, but I guess my question is about the strategic review, the argument that the Fund ought to, in terms of its medium-term priorities, ought to be making it clear that when countries are found to be engaging in currency manipulation, that it will be extremely aggressive about this issue.

I mean did you consider—

MR. de RATO: Well, I don't think—I mean that's part of our core mandate, and given the fact that we are engaged in country analysis every year is clearly that currency issues come in most of the Article IV consultations, one way or another. We make judgments and opinions about currencies of very open economies like the U.S., to currencies with a [inaudible] system that are less flexible.

So it's part of our routine analysis of countries. It is nothing—in which I have to put an emphasis—new. Certainly, it continues to be part of our [inaudible] but we are already doing it clearly. I don't know in how many Article IV's we talk about the currency of the country, but I mean [inaudible] to look into it because it's certainly very, very often.

MS. KRUEGER: It's addressed in all of them.

MR. de RATO: It's addressed in all of them, so it's part of what we do.

QUESTION: [Inaudible] with Market News International. The IMF has frequently had to defend your surveillance system, frequently in times of economic crisis. And now, as I recall in this report, you're talking about modifying surveillance, how you do the surveillance or improving it. I'm wondering where are the areas that you think the surveillance needs improvement or where it needs a different focus.

MR. de RATO: Well, bilateral surveillance is certainly the center of our work in our relationship with countries. And we believe that to have a useful surveillance we have to streamline—already was done quite substantially in the previous period with the other Managing Director and with Anne. But right now I think that the question is to focus surveillance in issues that are of immediate importance for the government and for the country.

So it's not so much you have a checklist of many issues in which we go over every time we analyze an economy, but to concentrate on the ones that are really posing challenges to that country in a certain moment of time, and many of them, many of them—not all of them—but many of them are related to the strategy of the country to integrate itself into the global economy, not all of them but many of them.

So we believe that our advice has to be much more focused in the threats and in the challenges that governments are facing, and maybe not going over a long list of issues every time we discuss a country, which is in most cases yearly. That of course is not necessarily a one-size-fits-all. It will depend on the situations of the country, so that already has to have a certain degree of flexibility.

That has also consequences for how we organize our work inside. Area departments, who are the ones who directly deal with countries, have to do one thing that has two sides. One is to demand and to ask the other departments, policy departments, to provide them with tools and talent to analyze the specific issues in countries. And the other is to allow their teams to be more practically oriented in some issues.

Let me put you an example. Capital markets. As I said before, we see clearly the need to reflect on what we do on capital markets, how we do it, how we are organized, how we use our resources. And we have asked a group of people people to help us in that under the leadership of Bill McDonough. Well, that shows that we are extremely aware of that's a big challenge for us because it's a big challenge for countries, how to use capital markets, to develop their own domestic capital markets, and for us to get lessons and to get information from the capital markets.

But at the same time—coming back to your question—area departments, which will ask policy departments to help them and to work, thinking of bilateral surveillance as a very specific and practical approach. At the same time area departments have to be open to be influenced by a policy department on certain issues in which maybe there is not so much a tradition of macroeconomics. For instance, everything related to capital markets I think is an important issue.

So there is a two-way influence here. One is that the main surveillance work of the Fund is and is going to continue to be Article IV cnsultation and bilateral surveillance, and that should determine work of both area and policy departments. The other is that area departments have also to be very aware that some policy issues, for instance, financial and capital market issues, but not only these ones, have to be taken into account when they design a specific Article IV consultation for a country.

QUESTION: Can I just follow up very quickly? You think there is—that streamlining of work, in addition to making the work more efficient within the Fund, will help to avoid missing a potential problem or not appropriately signaling a potential problem to the markets that are reading these reports?

MR. de RATO: You mean that if we are too focused, we will miss other issues?

QUESTION: No, the reverse, that if you continue how you're doing it now with doing a long checklist, you'll miss issues.

MR. de RATO: Well, I think that first of all I want to emphasize that this is not a one-size-fits-all, so every country deserves that we look into the bilateral issues, in the bilateral surveillance specifically for it. In general probably we'll have to streamline and be very focused because while we're working with countries every year and the challenges that a country is facing, giving a determined political agenda or political circumstances, economic circumstances, are usually very specific.

Of course, you can make a long list of problems that everybody faces sooner—and nothing is perfect—and you could be as long and as detailed as you want—but we believe that it is not useful for governments, is not useful for the country, and is also not useful for something you mentioned, which is signaling.

In the report, in the strategic review there is some mention of the Fund being part of the debate. We believe that we are and we should continue being close adviser to governments and a confidential adviser, but at the same time I think we'll have to be engaged in debates in this open society. And that I think that streamlining of surveillance helps us to put emphasis on, well, certain issues that in a specific moment in a society, are specifically important, and that are part of a debate, a social debate, which we can participate because we are not politically motivated and it is not our job to get into political debates.

But I think that there are many issues in many places in the world, subsidies, aging, tax basis, the use of increased aid. I think there is a huge list of issues that depends on where you're talking about in which there's a public debate, and I think the Fund has an opinion to make, has a point to make, that of course, well, it's not necessarily going to be shared by everybody, but I think we can and we should be part of debates.

MR. DAWSON: Leslie?

QUESTION: Leslie Wroughton from Reuters. We saw in the Annual Report that the demand for borrowing from the Fund has been sharply reduced, and then you mention over here as well, you know, the issue of what happens when the earnings from large Fund arrangements recede. Does this in any way change the role that the IMF is playing in any way?

MR. de RATO: Not necessarily the role. The role of the IMF is to advise and support countries in achieving macroeconomic international stability. Of course to do that in 2005 is not the same as to do it in 1946. And we identify many reasons why that's different. One of them clearly is globalization and the private capital markets. We saw already at the end of the '90s that most of our shareholders' crises, if not all, were going to come to the capital account, and we see that the role of the private sector, the private market, is increasingly important.

And we see in the next last years a very substantial change in the way the markets are reacting and judging different economies, and the opportunities that opens to countries. So we continue helping them.

At a certain moment of time, there will be need for us to provide financing, certainly. Various people who want to judge that in the sense of how important was the Fund financing in a world of closed capital markets and global standard, and how important it is today? Well, everything has changed. So everything is different at the size of the things today. But I think that when we have to provide financing for a country, be it because there is a capital account problem, be it because is a transitional and open its economy to more free trade, be it because there is a sharp curve because of the increase in the price of commodities, well, for that country in that specific moment, that financing is very important. That is I think what counts, not from the broad picture from the world economy, that financing is more or less percentage-wise bigger or smaller. The question is that for that country in that moment, that financing is essential, and we should provide it.

For others we see there is new needs. Signaling has become a real important issue for many low-income countries that may not be one to be engaged, might not need or might not be one to be engaged in a traditional program with us, but precautionary systems or signaling questions are important for them, and we can provide that.

Will our work or the type of work we do now have consequences in how we generate revenues? Probably yes. But I think that's an important issue certainly. But not necessarily has to determine how we judge everything.

Also, well, we are in a very benign financial environment, extremely benign. The price of risk has been reduced tremendously, even since I'm here—I'm probably one of the last who came here—I mean the price of risk has been reduced almost to more than half. Is this the world forever? Well, I think there's many doubts for that, so to make judgments right now of the levels of the need of finance of countries based on such a benign scenario, at least I think it's not advisable. I think we'll have to have a broader view.

An institution that has 60 years of history and with 184 countries, cannot judge its policies for the last three years one way or the other. In three years time we might be in a completely different scenario, and in six years time we might be back where we are right now. So I don't think that should be a determining issue. Of course we'll have to follow that for many reasons, but I think that is not a determinant force that we can take for granted that has to be—that is going to be here forever.

In fact, as we are seeing in all of our work, actual circumstances are extremely benign, meaning that countries and authorities and private citizens have to be aware that those circumstances might change to a more, you want to call it, historical media, and that would change a lot of things in a lot of places.

QUESTION: [Inaudible]. I would like to ask two questions. One, I'm sure to prepare this report you have looked at past experiences and what the Fund has done. And I wonder if, I mean, the biggest crisis was Argentina, if there was something that you learned in that crisis that has helped you shape this paper and your looking forward for the Fund.

And the second question will be, currently there is a large percentage of loans outstanding of the Fund that are concentrated in a few countries, Argentina, Brazil, Turkey, I think, and I wonder if that's something that is of concern of something that you'll want to change somehow?

MS. KRUEGER: Yes. On your latter question, it is of course of some concern whenever there's concentration, but if you look back historically, you'll find there was concentration before. I think in the year 2000 there were three countries that had a bigger percentage. None of them are now on the debtor rolls at all. You know, if we are a revolving fund, I think it's always going to be the case that there will be a few of the larger ones, and as you know, we have an exceptional access policy.

All three of the ones you mentioned are of course paying us back, so there are net reflows in all three cases.

QUESTION: [Inaudible] and Russia?

MS. KRUEGER: No, Turkey. It was—Russia was one. Korea was another. Indonesia, wasn't it? I think.

In any event, I did at some point, about a year and a half ago, look and check, and the three are just completely different than they were then, even though there was the concentration then.

As to what we learned, I think I wouldn't have said Argentina. I would have said that starting with Mexico in 1994, there was what people regard as a new form of crisis, i.e., one where obviously capital flows lead to a much larger denouement than used to happen. And in that regard there's been a lot of learning I think in the Fund, in the policy community, in academia, and everywhere else. I mean this really did raise aspects and considerations that weren't there before.

Obviously, as the Managing Director said, even that came about because of the increasing relative importance of private capital flows, which in the 1980s were a much smaller fraction of total than they are now, and the total itself is bigger both relative—absolutely, but also relative to either world GDP or the GDP of the countries, and that does force a rethink. I don't think there's any doubt about it, but I wouldn't have said that it was Argentina particularly, so much as it was the whole range of capital account crisis countries.

QUESTION: To follow up on Leslie's question. On funding the Fund's work in the future, and the possibility mentioned in the report of the Fund investing its capital, I just wanted to ask two things on that. The first one was whether you think there's going to be support for this from the member countries?

And the second one is, I just wonder what it actually means. Does it mean that countries which have made motion or commitments actually have to stump up cash? What does it mean in terms of those who provide the capital?

MR. de RATO: Well, the issue of our income is a question that the Board's discussing, so it's very early for me to debate that issue. Certainly we'll have to provide a goal with different alternatives, and one of them proposes us using [inaudible]. I cannot right now give you more detail because it's in its very early stages.

QUESTION: Fine. But in principle—I'm showing my ignorance—just in principle I was wondering what it would mean for the member countries. I mean is it the case that people who have motion or contributions actually have to stump up cash? I mean that's not—

MS. KRUEGER: [Inaudible]. If you do a selective capital increase, then it's the ones who indeed are getting larger shares in the Fund.

QUESTION: Fine. So that links to the-

MS. KRUEGER: But it's a small fraction of the [inaudible]. It's not the entire thing.


MR. DAWSON: We'll lift the embargo at 11 o'clock, and we will see you all of course on the [inaudible].



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