June 21, 2007
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MR. AHMED: Good morning to you. I am Masood Ahmed, and this is our regular press briefing.
Let me welcome also the journalists who are participating via the Media Briefing Center and encourage you to send in your questions early so we can get to them during the course of the briefing.
As always, we are going to be embargoed until 11:00 today here, Washington time, which is 1500 GMT.
Today, I would like to organize this briefing slightly differently. I would like to do it in two parts. First, I would like us to focus on any questions that you have on the 2007 Decision on bilateral surveillance on which we've just released a package of material, and then we'll go on to other housekeeping matters and any other issues on which you have questions.
To get started on the first part, which is the 2007 Decision, I'm also happy that today we've got with us Carlo Cottarelli, who is the Deputy Director of the Policy Development and Review Department, and Tessa van der Willigen who is Assistant Director in the same department. Carlo and Tessa have both worked extensively on the 2007 Decision and are here to respond to any specific questions that you have on the Decision itself.
Before moving to your questions, let me just remind you of the package of material that you should all have received by now. I will walk you through what that is. First, you should have got a public information notice which comprises the background and the summing up by the Executive Board of the discussion that adopted the Decision. It also has attached to it the text of the actual Decision.
Second, you should have three background papers which provide the staff work that led up to the Decision. These titles of them are a Proposal, a Supplement to the Decision and the Companion Papers, the three background papers that you have got. I mention them because in the summing up, there are references to some of the paragraphs in these papers. So if you want to cross refer, those are the papers to go to.
Third, you should have a press release which contains a statement by the Managing Director welcoming the approval of this Decision.
Finally, you have a fact sheet which summarizes the key points of the Decision and provides additional material to clarify some of the key concepts that are used in the Decision including the concept of external stability and clarifying the work underpinning currency manipulation. So you have got two additional bits of text that are associated with the fact sheet.
That is, if you like, the package of material. Since it is a large package, I just wanted to spend a minute making sure everybody was on the same page.
Let me also just say before taking your questions on it that as we have said before and indeed at many of these briefings, we do see the approval of the 2007 Decision as a key part of the initiatives to strengthen the surveillance framework of the IMF and indeed as a key plank in the implementation of the Medium-Term Strategy which the IMF has been implementing since it was launched in the Fall of 2005. So that is, if you like, by way of background.
Let me now take your questions on this. Please identify yourself and your affiliation.
QUESTIONER: There are lots of questions on this one. Perhaps you could explain to us one of the big issues that are looming here. First of all, how do you assess that a country is manipulating its currency and, if so, do you immediately call that country in and start talking to it and then there's an expectation that it will then change the way it operates its system? If it doesn't, what happens then?
MR. AHMED: Okay, I'll turn to Carlo for how we assess manipulation in this context and then what's the process that is supposed to unfold after that assessment has been made.
MR. COTTARELLI: Masood, thank you very much.
You actually find a definition of what manipulation is in the fact sheet that you have been given, but essentially manipulation requires two things: First of all, that a country attempts and actually manages to affect the nominal exchange rate and, second, that in doing so it does so for the purpose of securing what we call an unfair competitive advantage which means trying to achieve an undervalued real exchange rate to increase its net exports. So, in plain language, a country is trying to keep an undervalued exchange rate to boost its net exports on the balance of payments.
This is something that can be assessed through various methodologies. We are economists. We use different techniques to assess whether the exchange rate is undervalued. These, by the way, are not new techniques, but a few months ago, we issued a paper to describe some of the methodologies. These are recommended methodologies, but we also use a lot of judgment to assess whether an exchange rate is fundamentally undervalued.
As to the second part of your question, well, when we find a country is running an undervalued real exchange rate and manipulating its currency, we conduct discussions with this country. That is part of our everyday work in our Article IV consultations but also outside our Article IV consultations.
QUESTIONER: Can I have a follow-up on that one?
Yesterday, Mr. Paulson was on the Hill and as you know there's a lot of discussion regarding China. You can't have this discussion without pointing to what's going on between the U.S. and China. Mr. Paulson said that the IMF surveillance will help move China in the direction of increasing its flexibility of the currency. So the IMF surveillance, the way you've done this now, is going to help move that. What does he mean by that?
What the Fund has been doing until now hasn't changed very much other than you have said that it needs to move in its best interest. But what changes now at all, if anything, that would convince China and make the U.S. feel that you're doing the job that he mentioned?
MR. AHMED: Well, I think what I would say on that is that first, obviously, I'm not going to comment on what Secretary Paulson said, but the general point that you're raising, it's important for us to be clear about. This is an exercise that is aimed at improving and modernizing the framework of surveillance as it applies to all 185 member countries of the Fund. It would be a mistake for us and for you to think that this is aimed at a particular country. It's not aimed at any particular countries. It's an exercise that is aimed across the membership.
Indeed, one of the results that we expect will come about from providing greater clarity both about what the focus and scope of surveillance done by the Fund is, what is expected of the Fund in regard to this work and by providing greater clarity about what is expected of member countries in terms of how they manage their economies, in particular how they manage their exchange rates, what is and isn't acceptable from that point of view. That greater clarity will serve to underpin and reinforce the even-handed treatment across the membership, and that is very much one of the objectives, if you like, of this exercise, one of the expected results.
QUESTIONER: With that in mind, without this being aimed at one particular country, was there one thing which caused the IMF to decide that you needed to update the 1977 Decision and how did you come to this point where this was necessary?
MR. AHMED: In terms of what it was that led us to this point, I think the first point that I would make is just to bear in mind that this replaces a Decision that was approved 30 years ago. So we're talking about 30 years later, a different world in which we're operating.
If you look at the 1977 Decision that this replaces, that Decision reflected the key concerns of that period which were focused on preventing exchange rate manipulation for balance of payments purposes and on gaining an unfair competitive advantage or avoiding short-term exchange rate volatility.
Now, if you look at that by contrast with the most prevalent exchange rate-related problems since 1977, these have either been maintenance of undervalued or overvalued exchange rates for domestic reasons or, more recently, capital account vulnerabilities. So, in a way, the international economic framework within which the countries are carrying out their macroeconomic management policies has changed, and the surveillance focus of the Fund needs to updated to do that. That is, if you like, the substantive agenda.
The second part is that surveillance is the core business of the IMF, and it's important that, if you like, the legislative framework, if you want to think of it that way, that underpins this core business brings together in one comprehensive place the rules of the game, what is expected and updates it to reflect best practice. If you like, it is, in a way, good housekeeping for your core business to have that framework.
That's what led to a decision to review the 1977 Decision first, see how it needed to be updated, a process of long discussion amongst the membership as to how best to go about that and then finally an approval by an overwhelming majority of the Executive Board representing low income countries, developing countries, emerging markets, advanced countries, all of whom feel that this is now a good framework to take forward. Most important now for us is to take this forward and implement it in a way that achieves the objectives that have been laid out and does so in an even-handed way.
QUESTIONER: Just a follow-up, this can't be taken up without mentioning China because they have been discussed so widely about the possibility of manipulating their currency. Was that tied in at all?
Did you look at the framework of what you had updating it 30 years later and realized that this is a time where China is constantly being discussed and whether or not they are manipulating their currency and whether or not something can be done? Did that in any way contribute to your work?
MR. AHMED: I think the response I would give to that would be of course the Fund has an ongoing dialogue with China on surveillance, on macroeconomic issues and our views on how, in particular, exchange rate flexibility can help the Chinese economy and particularly by making monetary policy a bit less constrained are out there and have been said repeatedly.
Now, this framework, which is the one that we're talking about, is one that looks at the range of issues facing the membership of which China is one country but not the only member. Across the membership, then you say, well, what can be done in a way that updates it to deal with all of the problems? So, again, this is not an exercise that's been done with a view to focusing on a single member.
QUESTIONER: My question, I hope you mind there will be two centered on two countries.
Of course, you said the core business of the IMF is surveillance. I wish to ask how you describe in general terms the current situation of the Central Bank of Tanzania—that is the first question—bearing in mind that the government is one.
The main second question now is the issue recently that I'm sure you have heard of, the general strike that paralyzed activities in Nigeria, and it has to do with the hike in the price of petroleum products. What has the IMF got to do with this?
Particularly, this policy has more or less put restrictions on profitability and it has upset the situation after the transition in the country. So do you really think Nigeria needs such accommodation, given its huge unhealthy financial results?
MR. AHMED: If you'll allow me, what I'd like to do is pick up on both of those questions, but I'll do that after we finish the questions on the `77 Decision and then I'll come to those. So if you're okay with that, just hold on for a few minutes. I'll come to those questions in a few minutes.
Any more questions?
QUESTIONER: How does one manage market sentiment with regard to the surveillance? Obviously, when you've brought a country into having discussions, their status is going to be leaking to the markets or do you gesture to the market what is happening and then you discuss it with the country? How do you manage that?
How do you expect that the market and the volatility that you see in the markets right now? How do you manage that with this type of surveillance?
MR. AHMED: I will ask that to Carlo.
MR. COTTARELLI: Surveillance is in the first place our discussion with the country in question, through which we take into account the views of the country, we discuss its economic conditions, and in the process we report it to our Board. That's the first purpose of surveillance.
Our staff reports are prepared for our Board. As you know, we are now publishing most of the reports for a variety of reasons, including because we think that this is useful, important information for the Fund to provide and important for the market to be informed. As you know, we also have a deletion policy in case confidential information is included in our reports.
We think that more information is actually good for the market in general, so we don't think there is a fundamental inconsistency between providing information and stabilizing markets. Actually, the lesson from the 1990s is that sometimes instability was caused by lack of sufficient information. But we do, of course, have the deletion policy regarding confidential information that is in our reports.
QUESTIONER: At what stage, at what point do you decide that you need to take the discussion at a higher point with a country.
MR. COTTARELLI: You mean, if I understand your question, a discussion regarding?
QUESTIONER: Yes, when you've noticed that the seven indicators. You obviously looked at the principles which are the guide and then you look at the indicators. Then it says at some point you would bring that country in for more discussions. At what point do you bring that country in for those discussions?
MR. COTTARELLI: It is, of course, as you can understand, a matter of judgment to decide when. So I cannot give you a specific answer in terms of trigger. There is no magic trigger. It's a matter of judgment.
It's a judgment that staff has to form based on economic indicators and the seven indicators and in general the economic conditions of the country. It is also a judgment fundamentally that has to be made by our Board. The Executive Board of the Fund is fundamentally the entity that exercises surveillance. So there is a lot of judgment involved in this, and I can tell you there is no magic formula.
QUESTIONER: (off mike)
MR. AHMED: Would you hit your microphone so we can record it? I think you've got to press some little button next to it. There you go.
QUESTIONER: Sorry. After a country has been brought into consultations and let's suppose that they're deemed unsatisfactory, what is the next step?
MR. AHMED: Well, I think the important point here is that this is a process about clarifying the framework. There are no additional or different enforcement mechanisms as a result. By providing a greater clarity to what is expected of the members in terms of managing their exchange rates and other parts of the economy, in terms of what is acceptable and what is not acceptable and greater clarity about what the focus of the surveillance by the Fund should be, you then have the opportunity for a more focused discussion of that country's circumstances and policies in the Board where all the membership is represented. So that's, if you like, the first point at which that review takes place.
Then for many members the next phase which is that their documents, their reports done by the staff and the Board discussion, are actually made public. As you know, now something like 80-some percent of the surveillance reports done for countries are made public. As a result of that, there's the additional, if you like, public discussion that would follow of the Fund's Board's reviews as reflected in the summing up that would come out of the Board, based on the staff document itself.
Dialogue and persuasion are and will be the key instruments that the Fund has in its arsenal. In a cooperative institution where all the membership is represented, those instruments can be quite powerful.
So we do have one more question that's just come in [via the Media Briefing Center] and his question is: What is the IMF's definition of fundamental exchange rate misalignment?
It seems to me to be a kind of question I should pass on to Carlo.
MR. COTTARELLI: You can find a very specific answer to this question in, I believe, Box 4 of the fact sheet. So I will just read it to make sure I don't many any mistakes.
Fundamental exchange rate misalignment is a deviation of the real expected exchange rate from its equilibrium level, that is, the level consistent with the current account(stripped of cyclical and other temporary factors)in line with economic fundamentals.
What we would do is to look, first of all, if the current account position of the balance of payments of a certain country is in line with its long-term determinants, what we call the fundamental determinants of the current account after eliminating temporary factors—cyclical influences, any kind of factor that is temporary, including delayed adjustment to previous events including previous movements in the exchange rate.
Once we have determined whether the current account is in line with these fundamentals, then we compute what is the exchange rate movement that would be required to move the current account into equilibrium. If this exchange rate movement is broadly zero, we will say that the exchange rate is broadly in equilibrium. Otherwise, it will be, as we say, fundamentally misaligned.
But I would like to underscore here, as we do in our fact sheet, that minor deviations, low deviations from equilibrium will not be regarded as relevant from the point of our surveillance. We are really talking about significant deviations from equilibrium. Again, there is no magic number here, so judgment will have to be used, but I want to underscore that low deviations will not be regarded as relevant.
MR. AHMED: I will take one more question on this, and then I'll move on to the other bits.
QUESTIONER: Thank you.
Now that the surveillance is in effect, the new surveillance, do you have a number of countries who will be the first to be looked at or who have already qualified for having these consultations?
MR. AHMED: Well, our objective is that this framework that is now going to be in place will be applied to all countries going forward. So it is not a question of saying it's applied to these countries and not to others. It's applied to all of them. Going forward, that's the basis on which the bilateral surveillance work will be done.
There's a practical issue of how best we phase this in to consultation processes that are underway already and depending on how advanced they are, on which we are working. But the intention is to apply this framework which has been approved by the Board to all the countries going forward.
Let me now take this moment to thank Carlo and Tessa also for their participation but turn now to any other questions that you have. We've already got the two questions, one on Nigeria and one on Tanzania. Before I do that, let me also just give you a couple of pieces of information which may be useful to you.
First, to say that tomorrow, Friday, here at 9:30 which is 1330 GMT, John Lipsky, the First Deputy Managing Director, will give a press conference on the preliminary conclusions of the Article IV consultation with the United States. The concluding statement and the press conference will be under embargo tomorrow until 11:00. You can participate in that press conference by being here or through the Media Briefing Center.
Joining Mr. Lipsky will be Anoop Singh, Director of the IMF's Western Hemisphere Department, Ranjit Teja who is Deputy Director there and Tam Bayoumi who is the Chief of the North American Division.
Let me also say that on June 28 and 29, Murilo Portugal, the Deputy Managing Director of the IMF, will be visiting San Jose in Costa Rica to participate in the Sixth Annual Regional Conference on Central America, Panama and the Dominican Republic which has been organized jointly by the Central American Monetary Council, the Committee of Finance Ministers and the IMF. The details on this conference are available on our web site, and if you'd like more information, please contact my colleagues in the Media Relations Division.
Let me now turn to the two questions that you asked, one on Nigeria and one on Tanzania. Let me start with the one on Nigeria if I may. I think your question was, sir, what is our assessment of the ongoing strikes that are underway there.
What I would say is that we encourage the government to engage in consultations with the various groups as it considers the opposition to the fuel price increases, to the VAT, rate adjustments and the partial privatization of oil refineries. We think it's important for the government to address these concerns, taking into account also Nigeria's long-term interest of boosting sustainable economic growth and poverty reduction. So that would be our response on Nigeria.
Now on Tanzania, let me see if I can give you something more specific. I think what I can say on Tanzania, the information I have now that I can give you on Tanzania is that as we understand it, the government under the auspices of the comptroller and auditor general has required that there be a special audit of the Bank of Tanzania's accounts, and this audit is going to be conducted, as you probably know, by an international ISA-compliant firm that's selected through a competitive bidding process.
The terms of reference for this audit have been discussed with the Fund staff, and the Fund staff fully support the authorities' response to the problems that have arisen in the Bank of Tanzania and the process that is underway. So that's what I can give you now on Tanzania.
Do you want to come back on that?
QUESTIONER: Yes. First on the Nigerian issue, maybe I can rephrase my question. What is IMF's role in those hikes in the products? That's on Nigeria.
Do you think Nigeria needs such extra income in this program in the background of this?
On Tanzania, I wanted to look at it from the point of whether the governor there is one of your own. Say, for example, you are sending your staff and whether they can comment on a certain code of conduct there, a particularly standard you expect them to live by and work. Is the IMF worried that such a thing could be happening where your staff is involved?
MR. AHMED: On Nigeria, in terms of what is the IMF's role in these, I don't have the specific information that I could give you more except to say that these are policies, decisions that are taken by the government of Nigeria, that they want to take forward to deal with the challenges that they see in terms of managing sustainable growth.
I'm not sure that in this case the question is what is the IMF's role in the sense that this is a program that the Nigerian authorities have taken forward. Our view of that is the one that I've just given you. So I don't think I have anything more to say on Nigeria.
QUESTIONER: So the IMF's view is that you support that?
MR. AHMED: The IMF's views are the ones that I just gave you which is that it's important for the government to address these concerns because we think it is important, these issues that have been raised, but do so in a way that also takes into account the need to generate sustainable growth in Nigeria. That's the sort of view that I've given you, and I don't have anything more at this point to give you than that.
On Tanzania, again, I'm not sure that there's any more that I can give you compared to what I've given you now.
If there's anything more specific, another question, I could ask you to talk to my colleagues who work on Nigeria or on Tanzania. They could certainly give you that, but I don't have any more specific information on that that I could give you at this point.
QUESTIONER: These are two just housecleaning issues here.
When are we going to actually get the embargoed text of the report from Mr. Lipsky tomorrow? Is there going to be a paper or is that something which is an oral report?
And you said this is the preliminary report. When do we actually get the full report or at least a ballpark time of the month?
MR. AHMED: As to when we'll get the embargoed text for tomorrow, I think the answer for that is going to come from Bill Murray who is about to tell us the answer to that.
As to the second question that you raise, which is when are we going to get the results of the Board discussion of the Article IV consultation, it's towards the end of July that we expect that there will be an Article IV discussion.
I should also take this up with you to say that, in fact, over the next month and a half or so we're going to get opportunity for a Board discussion of a number of systemically important economies that will be coming together in that period, and so after that we'll also be putting out on our web site all of that material at the same time.
Now, as to the question, I think I've just got an answer here, which is probably the same one which says 8:45 a.m. for embargo tomorrow.
QUESTIONER: One other question, I guess on the subject of currency manipulation. Are there any countries right now that the IMF believes are manipulating their currency and, if not, what was the last country where that was a concern, where you guys reached the conclusion that somebody was manipulating the currency?
MR. COTTARELLI: No, I don't think that I can now talk about any specifics regarding the implementation of the Decision. As I say, we will assess not just the issue of manipulation but the issue of other aspects of the Decision, including the new Principle D, the new principle for the guidance of exchange rate policies for members, whether this Principle D is being implemented. Principle D relates to avoidance of exchange rate policies that cause external instability.
We are going to assess this new principle, and we are going to assess manipulation if there are cases of manipulation for a specific reason, as I mentioned, for balance of payments reasons, and we are going to do this for all the countries in the world, but I cannot comment on specific countries.
QUESTIONER: Even from an historical context as far as countries that have manipulated their currency in the past, is that something that you guys can comment on?
MR. COTTARELLI: No. What I can tell you is that there are a number of countries for which in our reports, we have indicated that there are exchange rate misalignments. The fact that we find exchange rate misalignment is not new. You find in our reports, including published reports of course, references to exchange rate misalignments. What will happen, and we are already actually doing this, is that we will give perhaps more attention than in the past to these issues.
The other thing that I would like to underscore is that the concept of misalignment does not refer only to countries that are managing the exchange rate. Misalignment may be observed also for countries that are floating, and it may be due in that case to domestic policies rather than to their exchange rate policies. So it's something that we have done, but we would prefer at this point not to come up with specific names.
MS. VAN DER WILLIGEN: May I add something?
MR. COTTARELLI: Yes.
MS. VAN DER WILLIGEN: I think we should also emphasize that in the 30 years since the 1977 Decision was adopted, when there was already in there and indeed in Article IV an injunction against manipulation, it really hasn't been very clear what that meant. Part of what the new Decision does is make a lot clearer what that means, to guide members to avoid it and allow the Fund to form clearer views on whether it's going on or not.
So, in a way, the answer to your second question, whether members have been found to be doing this before is no, because we weren't very clear what it meant.
MR. AHMED: Thank you very much. That's very useful.
QUESTIONER: Can I have just a follow-up question?
MR. AHMED: Sure.
QUESTIONER: At this point, you don't have a list of, let's say, more urgent countries?
MR. AHMED: I'm sorry, what?
QUESTIONER: Urgent countries to go and reevaluate. Really, after 30 years time, this timeframe for surveillance, and I think it was IMF's desire to arrive at this decision. At least Mr. de Rato repeated enough times.
So at this point, this new framework has been approved. You have more clarity. Through dialogue and persuasion, as Mr. Ahmed said, you can influence more these countries.
What I really want to ask is that you don't have a list of priorities, or you do at this point, of countries with which you want to talk?
MR. AHMED: Just to be clear on process, as you say, we have a framework. We think it's important. We've certainly recognized the need for it, but more importantly the Board overwhelmingly endorsed and approved the fact that we should have this framework. Now this is the framework that we will apply to countries as they come up in the process, the normal process of consultations of Article IV.
It's not like there's a new framework that's now going to change the ordering in which we look at some countries rather than others. This is the new, if you like, modernized, updated, clearer framework that's certainly going to apply to all countries going forward as they come up.
If there are no more questions and none from the Media Briefing Center, thank you very much. As I said, embargoed until 11:00.
See you here, I gather, in the same room in three weeks time. Thank you.
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