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

January 24, 2008

Washington D.C.
January 24, 2008
Webcast of the press briefing

MR. AHMED: Welcome to our regular press briefing. Just to remind those of you who have logged in or have not been to the last couple of the briefings, we have changed the time of these now to 9:30 a.m. Washington time (1430 GMT) on a regular basis. We are also advancing the embargo time to 10:30 a.m. Washington time (1530 GMT). Again, this will help people in Europe and Asia to be able to file stories in time for their deadlines.

Let me start off by making a few announcements. First, I want to announce a slight change in the date for the release of our World Economic Outlook [and Global Financial Stability Report] updates. You remember I said we were planning to release them tomorrow, Friday. Over the last three weeks or so, there has been quite a lot of development both in market and in policy, and we are trying to make sure that we incorporate all of these developments in our revised numbers. As you know, in the case of the IMF we don't do these numbers simply at the very aggregate level; we try to build on the country level knowledge that we have.

And we will, therefore, be releasing them next week, in the middle of next week rather than tomorrow. So it just takes a couple of extra days to make sure we're fully factoring in the analysis and the effects. So I just want to make sure that you are aware of that. Media Relations will update you on the precise time and date for next week, but it is going to be in the middle of next week that we're now going to put these out.

In the meantime, of course, there are opportunities between now and then for us to be setting out our views on policy issues. We put out a statement on the action taken by the Federal Reserve on Tuesday.

And during this weekend, the Managing Director will be in Davos, where he will be speaking on Saturday on a panel on the world economic outlook. And, of course, while he is there, there will be an opportunity again for him to set out the Fund's analysis and recommendations.

Secondly, I'd like to also bring to your attention that today we are issuing a statement on behalf of Andrew Crockett, who is the chairman of the committee that was set up to study the sustainable long-term financing of the Fund. And some of you will remember that a year ago today, the committee that Andrew Crockett chaired and which had a number of other eminent personalities on it produced a report which set out a new financing model for the IMF, which was better suited to the diversified roles that the Fund plays and which relied less on the income from Fund lending which had previously been the primary source of income for the Fund. Recently, the Managing Director met with the Crockett Committee to review and brief them on discussions that had taken place since that committee's report over the past year, both on income but also on the expenditure side. And the Managing Director outlined his vision to the committee of an integrated approach to income and expenditure that we are now working on. Mr. Crockett has set out the statement which, following this meeting, welcomes the further development of the link between income and expenditure that has taken place since they met. So that statement will be put on the Fund's website after the embargo expires at 10:30 a.m., and it is already posted now on the Media Briefing Center for those of you who are interested in following up on it.

Finally, let me say a word about management travel and engagements. I have already mentioned that the Managing Director will be in Davos this weekend. Let me also tell you that in February the managing director will be visiting Japan, India and China. This will be his first trip to Asia since he assumed his post. He will be in Tokyo on February 8-10, which are the dates for the G-7 Finance Ministers and Central Bank Governors Meeting, but he also has the opportunity while in Tokyo to meet with Japanese authorities. Then he is going to be in India from February 11-13, where he will have a set of meetings with the authorities, but also have an opportunity to engage in meeting with think tanks and opinion makers, and he will deliver a speech on the 13th in New Delhi at the Indian Council for Research on International Economic Relations. And then he will go to Beijing for February 14-15, where again he is going to meet with the authorities there to exchange views on a range of economic issues, including the global and region situations.

I should also tell you that the First Deputy Managing Director, Mr. Lipsky, is going to speak today at the Center for Global Development at 5:00 p.m., where he's going to be giving remarks at the launch of the latest book from the Center for Global Development and the Inter-American Dialogue. That book is called "Fair Growth: Economic Policies for Latin America's Poor and Middle Income Majority." If any of you are interested in finding out more about any of these events, please contact my colleagues in the Media Relations.

So that's what I have by way of announcements. Let me now turn to any questions that you have and again remind journalists who are participating on line, to send in their questions now so we can get to them during the course of this briefing.

QUESTIONER: When do you see the [Managing Director] coming up with a firm—I gather it's going to be a proposal that he's going to announce. And when do you see that coming out, and has the Board already discussed all these measures?

MR. AHMED: You're talking about the topic of the income and expenditures.

QUESTIONER: Income and expenditures, correct.

MR. AHMED: On income and expenditures, the objective we're working towards is that for the IMFC in April we will go back with an integrated approach to income and expenditures. And the income work had been quite developed initially by the committee headed up by Mr. Crockett, and they have set out a range of ideas, of measures that could be pursued to give us that diversified model. On the expenditure side, we have been actively working over the last three months to try and see what can be done both to reduce the Fund's expenditures, but also to refocus the Fund at the same time in a way that would be more responsive to the needs of the membership.

And just to remind you, the numbers that we have been working towards is that there is an overall gap between the income of the Fund and the current expenditure of the Fund of about $400 million a year. The proposal that we envisage is that a quarter of that gap, which is about $100 million a year, will be met through a reduction in the Fund's expenditures, and that the remainder, $300 million a year, will be met through using some combination of the various approaches on generating income that has been set up. On the expenditure side, what we are doing now is working through how that gap can be—how that $100 million reduction can be achieved. As I have also mentioned previously, that will entail a reduction in the number of people working in the IMF by up to 400 people. So we need to focus on making sure how this reduction will take place.

We have a budget process, and the budget process means that in March there is going to be the decision by the Board on the budget for fiscal year 2009 and also indicative budgets for 2010-2011. Prior to that budget meeting, obviously, we need to have clarity on precisely what the scope and incidence, if you like, of the cuts will be that will generate the $100 million savings. So that's sort of timetable for that. In parallel, we're working on the income side. The Managing Directors have set out a very integrated approach, which means that we want to make sure that both of those advance, which will the enable us to have the integrated package ready and able to present it for ministers and governors to look at, at the IMFC in the middle of April. That is a desired time table.

QUESTIONER: Just to follow up, with the fact that since Mr. Strauss-Kahn met with the committee, could we assume that a lot of these recommendations that they made are going to be in the proposal about to come out?

MR. AHMED: What we can assume is that when they made their proposals, there was broad support for these as being sensible, reasonable ways of moving forward. And just to remind you that the measures that the committee had come up with at the time, principal measures were to expand the Fund's investment authority, including investing part of the Fund's quota resources and creating an income-generating endowment through the proceeds of a limited sale of the gold that the Fund has as well as resuming reimbursement to the Fund for the administrative costs of managing the program of financial assistance that we now have for low income countries and possibly charging for some of the services that we provide. So it's sort of a range of measures, and they have different impact and different, if you like, effects on the revenue stream.

The Managing Director has been engaged in discussions with the authorities of different member countries on which subset of these measures would come on the broadest possible support. So I don't think that there have been many new ideas put on the table since then. It will be some subset of these ideas, probably, but which precise subset and in what measure I don't think we are at the point yet of being able to say. And from our point of view, in a way that is very much a decision for the membership in terms of what it is that the countries find that it is both easiest, most feasible, and most sensible from their point of view to support.

Our basic approach is there is an aggregate gap of $400 million. We believe it needs to be filled for the Fund to be able to deliver on its objective. We believe that we need to contribute partly towards filling that gap through reducing the expenditures of the Fund and refocusing the institution to be more responsive. And the remaining gap to be filled from some combination of income measures that are most feasible for the membership.

QUESTIONER: A couple of things on the current market turmoil. First, obviously, we'll all be looking forward to seeing the new update at WEO, but if you could share your projections for my particular part of the world, the Russian and the former Soviet Union, how can they be affected?

MR. AHMED: I'm going to be very brief on this, which is to say I think our overall view on the current turmoil be set out in the statement on Tuesday. And you have seen that, and certainly I can refer to it if people just have not had a chance to look at it yet. But in terms of the impact of that on specific regions, countries, our projections for 2008, that's precisely what my colleagues are working on now, and that will be very much the focus of the briefing that Simon Johnson and Jaime Caruana will do in the middle of next week. I need to hold off on that until the middle of next week when they are able to come to you with what's our considered view of it.

QUESTIONER: Obviously, people also keep discussing the roots of the turmoil or the crisis, if I may use the word. One unusual perspective offered by Alan Greenspan a month ago was that he saw the roots in the dismantling of the former Soviet Bloc, and the effects it had on the international financial and economic system. What is your opinion on that particular assessment?

MR. AHMED: I don't want to comment on Mr. Greenspan's assessment directly of his word. What I will say is that we have set out our own views on both the emergence of the problems. If you look at what we said in the Global Financial Stability Report last April, which is now going back almost a year, we were already at that time pointing out the dangers and risks that were posed by the spread of subprime borrowing and the consequences that might have.

And in the middle of next week when we do our press briefing, we will not only be looking at projections; we'll also be looking at and setting out our views on the financial markets and the lessons that we are able to draw and go from it. So I think we'll give out our views on it.

Obviously, there are a variety of reasons, and different people have different perspectives that they're emphasizing, but what I'd like to do is focus on our own views on that.

QUESTIONER: To follow up on that one. Obviously, at least from my perspective, the unusual aspect of this turmoil is that it originated in the developed world and in the United States, and it affected and has been affecting mostly the developed powers, economic powers of the world. From what you see, is it their disregard to the warnings that you just mentioned you made beforehand? Or were the warnings, frankly, a little bit late in timing? Was there a lack of foresight both on their part and on your part?

MR. AHMED: I think it's absolutely right to say that the problems originated in the subprime area, particularly in the U.S. market. And then they have, subsequently, however, spread across markets and across countries. So I think today if you look at the extent of financial market turmoil and the impact it is likely to have, we need to think of it not as something that's limiting but which will likely have repercussions in many countries. And both developed and emerging markets and low-income countries, in different ways, are going to be affected by this.

Now, as to what were the balance between—did people identify the risks and the risks weren't acted on? Or were there things that happened that weren't anticipated and weren't identified? As we have said before, some dimensions of it is people did identify the risks, not just the IMF but others also had been pointing to it. In other dimensions, people were surprised both in terms of how problems spread from one market to the other and what channels were used. We were discovering that some of the channels perhaps were new because of the nature of the financial globalization. What's the right balance as to whether the issues were identified and not acted on, or whether they were new issues is the kind of reflective analysis that, when we do the GFSR in April this year, we'll be looking back and coming up. So I'm not going to give you a kind of preliminary view on that but say that that's certainly the kind of issue that we should be looking at and that others will be looking at. And indeed many people, if you read in the press, are giving commentary, our own assessment of it will come out within April.

QUESTIONER: The sovereign wealth funds that are being discussed, and that was that our (inaudible). Again this is a topic, frankly, offered and insisted on, by these very same countries' capitals—Washington, London, whatever. They are worried about that problem. The impression here is that the agenda is being set by the people who at this particular point probably should have other worries, more important worries. And that, those worries are global, as you just mentioned; that many countries that did not have anything to do with the origin of the crisis now have to deal with the consequences of the crisis. So maybe those countries would say: "Wait a minute. We don't want to discuss that. It's not a real problem, let's discuss what the real problem is."

MR. AHMED: The first thing that is important for us to note is that the recent announcements by a number of sovereign wealth funds injecting capital into systemically important banks is something that we welcome. It should help replenish their capital base, and it should help contain the impact of large bank losses on credit markets and maintain the capacity of these banks to lend rather than to curtail the size of their balance sheets. And it's also a good indication of the fact that a number of these banks, which have been affected by the financial market crisis in terms of losses, are actively engaged in restructuring their balance sheets. So I think that's an important development and one which we should recognize and welcome.

Now, at the same time I should mention that the IMF has been working with a number of sovereign wealth funds. We've been engaged in a dialogue with sovereign wealth funds to help identify what are the best practices on issues such as governance and accountability structures, which will ensure that the operations and investments of these funds are conducted transparently. And what's the objective of this exercise? We hope that the development of best practices, which engaged and through the participation of these funds will help to allay some of the concerns which I think you were alluding, to which on the one hand are concerns by a number of commentators about whether the lack of transparency in some sovereign wealth funds and in their investment strategies may not be driven by entirely commercial objectives, and at the same time—and this is the point I want to stress—there's also concern in countries with sovereign wealth funds that their activities may be affected by protectionism in some of the recipient countries. So helping to clarify and allay some of these concerns we think, through some set of best practices that they believe still can share in and that they're engaged in helping to develop, would be a useful contribution to addressing some of the points that you raised.

Now, I still have another question that I've just got in from the Media Briefing Center—before I come to you? So I've got a [question] saying: "On your statement this week, you expressed the IMF support for fiscal stimulus package in the U.S. Meanwhile, the IMF has urged the U.S. to reduce its fiscal deficit. What has made the IMF change its mind? Also, what kind of measures should be included in the package to make it most effective?"

Now, I think what I want to say on that is that we have indeed taken the view that over the long term fiscal sustainability is the key issue. And looking at the fiscal deficit in the U.S., part of that's an important part of it. But what we have also taken note of is that in the current circumstances, where the United States has been most affected by recent economic and financial developments, we have taken the view, as we had set out in our statement on Tuesday, that the action taken on the monetary side of easing—in the case of Tuesday by 75 bases points—is appropriate and is helpful. We've also noted that the financial markets' prices are consistent with expectations of significant future rate declines, and we are confident that Federal Reserve will respond to new developments and new fundamental and financial developments as needed. At the same time, we have taken the view that in these circumstances, targeted and timely fiscal measures could provide near-term support for demand. And that's recognition of the fact that for fiscal measure to have that impact they need to be timely, and they need to be targeted. So that's the kind of our view on it. Now, in terms of going beyond what is your overall assessment of prospects in the U.S., I would again say defer that to next week, when Simon and Jaime will be talking about our outlook. But let me just clarify that.

QUESTIONER: A consultation mission started its work today in Italy in preparation of the Article IV, and in Italy there is strong political uncertainty at the moment. We don't know if we will have our government in place this evening. There is going to be a vote in the Senate, and I want to ask two related questions to you: Do you think that this situation could influence in any way the work of the IMF delegation? And more broadly and more to the point, is this potential political instability creating any concern [for] the IMF, or what concern [do you have] on the economic and financial stability of the country?

MR. AHMED: There is a certain amount of instability that you referred to. We do have an Article IV consultation mission that is due to start today. That mission has arrived in Italy, and as far as we're concerned for the moment, that's our plan and that's how we're going to work. Beyond that, I would prefer to wait until the mission itself has advanced its work and has a view on the economic and financial outlook. And, as I mentioned to you last time, they will be issuing a concluding statement, and that would be the time for us to give you more on the economic outlook. But I think for today that's all I can say on Italy.

QUESTIONER: You said a few weeks ago, you said that the IMF was not forecasting a recession in the U.S. But your statement the other day seemed to ratchet up that level of concern. Has it changed its mind since? Does it still believe that there is not a chance of a recession? And a follow-up would be on the fiscal stimulus side. There are discussions now with Congress and the White House on the content of that stimulus package—and this includes some tax cuts and rebates or rebates. What do you think should be the content from the Fund's point of view? You know, what should the content of that fiscal package be? And would tax cuts be appropriate considering the circumstances?

MR. AHMED: So you had two questions. On the first, we still see a period of below-potential growth as the most likely scenario for the U.S., given the economy's good starting position. And I think it's important to remember some of the elements of that: high profits, strong corporate and household balance sheets, and support also from the macroeconomic policies. And in a way, the macroeconomic policies that have been taken and that I mentioned are aimed at ensuring that the part of macroeconomic developments does in fact go down that route. There are risks on the down side. So clearly there are risks that we've already identified, but our most likely scenario remains for the U.S. economy a period of below-potential growth.

Now, on the second question you raised, which is what is our view on the content of a fiscal package, I don't have much to add to what I've said, which is I'd appreciate that there are discussions underway between the administration, Congress, et cetera, on the fiscal package. From our point of view, what is important is what we said the other day, which is that for it to contribute, it needs to be timely and targeted. And beyond that, in terms of precisely how it's done, we're looking at it but we don't have a view that I can share with you.

QUESTIONER: The follow-up on that. When you look at the discussion between the experts on the recession in the U.S., hypothetical recession at this point, most of the people seem to be of the opinion that the worst case scenario would be for the recession to be prolonged Even if it's not very deep if it's long, then it's the worst. Some people—at least some people I spoke to—said that this stimulus package leads exactly to that scenario; that it cannot prevent the recession if it has already started as some people believe, but that it will definitely dampen the effects, and that it will lead the recession to be long, even if shallow. So if we look at the less likely scenarios—I understand that you just mentioned that the most likely is what you just described—if we look at the less likely, isn't this dangerous?

MR. AHMED: The U.S. economy is the largest economy in the world. A lot of people analyze it, write about it, have views on different ways in which it could work. What I can set out is, this is sort of our most likely scenario. We can have a long discussion about risks and how they might materialize in terms of scenarios, but in a way I think that the conversation that my colleagues who work on the U.S. desk would be happy to have; but it's not a position of the Fund on which, I've just set out, as being sort of our main position.

QUESTIONER: Britain's Gordon Brown recently called for the IMF to take a much tougher role in surveillance of global instability to act more like a central bank would, a more independent body with more clout, and also suggested that an insurance fund could be developed by the IMF to help countries who were not the source of financial stability to cope with any kind of repercussions. Thanks.

MR. AHMED: Our reaction to that is that we definitely do believe that (inaudible) has said that the Fund needs to focus more on the area where you have a comparative advantage. That area is the link between the macro and the financial sector. That's where increasingly countries are themselves focusing because of the impact of financial globalization and how it affects their economy. That is increasingly where they are looking to the IMF to get input. To do that, the Fund needs to not only refocus our efforts but also to be used by the membership in addressing those issues, and indeed in many ways we are. So very much I think the role of the Fund in strengthening the surveillance in those areas is key.

You will recall that we have recently updated our surveillance framework in 2007, and the very much purpose of that updating was to focus on the external stability concerns and was to ensure that what was good practice became the norm in surveillance. And it was also to introduce more candor and forthright assessment analysis. So all—I mean that direction of travel is certainly very much one that the Fund is pursuing.

Now, in terms of the regular, what kind of financial mechanisms we can have to support member countries in addition to our existing mechanisms, as you know, we have been looking at a rapid access line as one possible way, in which we could support countries that generally have good performance and help them to avoid financial crisis by providing a financial credit line. That or other ideas are also being explored. So the Fund is very open to seeing how we can ensure that our instruments and our surveillance function can continue to be updated to respond to the changing needs of our membership. And that's very much part of the refocusing of the Fund that Mr. Dominique Strauss-Kahn, the Managing Director, has launched.

I have a question on Turkey that has now come in. I might just take that before—and this is a question which says: "How does the IMF comment on the recent tension between the Turkish government and the Central Bank of Turkey over the issue of moving the central bank to Istanbul?" Well, I think our response on that is that this is a matter for the Turkish government just to where they locate the central bank. I don't think the IMF has a view on it one way or the other.

QUESTION: And, Masood, do you have any comments on Kenya?

MR. AHMED: On Kenya, first of all I'd like to refer you to the statement that was issued by the Managing Director on January 3. We have in that statement and subsequently continued to be deeply concerned by the post-election unrest in Kenya. We've called for a cessation of the violence, and we've expressed our sympathy and condolences to the families of all the people who have lost loved ones in this violence.

We've also noted, and continue to do so with concern, that supply disruptions emanating from the problems in Kenya are affecting other countries in the region. And along with many others, we are appealing to all parties to act to avoid a humanitarian disaster and to ensure adequate supplies of essential goods and services for the people of Kenya and also for the neighboring countries which rely on Kenya as a transit [inaudible]. And we continue to hope that the current political impasse will be resolved quickly so that Kenya can maintain macroeconomic stability and economic growth.

I have another question on the forecast in the Media Briefing Center, and I will take this before wrapping up. It says: "When you say the IMF review regarding the U.S. economy is of a period of low growth, does that mean the IMF is now projecting growth lower than the 1.9 percent initially projected for this year?"

First to simply remind you that we're going to come out with our projections next week, and that's when we're going to talk about our numbers. But I would also say that we do think that since we did our projections in October in the World Economic Outlook, a number of the downside risks that had been identified in that projection have since materialized. And we think that this will result in a downward effect on the projections of growth for 2008 compared with 2007 for a number of economies, and—I've already said that before, and I'll just repeat that today—as to precisely what is the effect of the U.S. economy, and what is our current projection for it, how that relates to the projection we made last October, that's what Simon Johnson and Jaime Caruana will deal with next week when we have the press briefing on the WEO and GFSR updates.

So if you're agreeable with that, I'm going to close off now. Thank you very much. Our next press briefing will be in two weeks, same time.


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