Transcript

October 29, 1998
9:30 a.m.
IMF Headquarters
Washington, D.C.

MR. IBRAHIM: I would like to welcome you to this press video conference of the First Deputy Managing Director of the International Monetary Fund, Mr. Stanley Fischer.

For those of you who don't know, my name is El Tigani Ibrahim, program coordinator for Southern Africa in the IMF External Relations Department. I will moderate from this side, and Mr. Robert Franco, the IMF Resident Representative in Zimbabwe, will moderate on your side.

It's approximately a one-and-a-half-hour teleconference. It's on the record, and it's under embargo until 30 minutes after its conclusion so that you do not need to feel under pressure to go out and file. We will make sure that we get to each of those who would like to ask questions. When you ask a question, please identify yourself, your affiliation, and the country you are from.

Now I would like to invite Mr. Fischer to make opening remarks, following which we will take your questions.

MR. FISCHER: Thanks very much, and good afternoon. It's a great pleasure to have this opportunity of talking to you via teleconference. I don't know what the quality is like at your end. At our end it's only moderately good, and you seem to be moving very slowly and jerkily. But I assume that's the transmission.

I will start with an introductory statement, but mainly I'm looking forward to discussing your questions about the economy of Southern Africa and about the work and the views of the IMF.

I'd like to touch on what happened in the Fifty-Third Annual Meetings of the IMF and the World Bank that finished precisely three weeks ago. There were really two issues at those meetings. The first one was how to deal with the current global economic crisis, and at the time the meetings took place, there was a very clear sense that we were in the midst of a very serious crisis. And the second was how to change what is called the architecture of the international financial system to make the type of crisis that we're in now less likely, less frequent and, when they happen, less virulent.

So let me start by talking about these two issues, and then I'll end with a few words on the economic situation in Africa, especially Southern Africa.

I think the general reaction to the Annual Meetings was that they didn't get very much done. Many had expected the Finance Ministers of the world and the central bank Governors of the world to show up and come out with a very clear plan for how to move ahead and resolve this crisis, and there wasn't such a clear plan that emerged.

I have a different view that actually a lot was achieved and that several things were set in motion that are on their way to improving the situation. And the situation has already improved somewhat in the last three weeks or so.

The first thing that happened was that we got a general recognition of the seriousness of the crisis by policymakers from all over. And when I say all over, I mean more than anything else Europe. American policymakers have been more aware, possibly because they deal more with Asia and Latin America, of the seriousness of the crisis; but Europe, which is doing very well internally, seemed a little less aware. At the beginning of the meetings, some of the European policymakers said that they didn't know why there was so much emphasis on the crisis, but by the time they left, they were not saying the same things. Initially, European policymakers were saying that they saw no reason for their policies to change, for instance, or interest rates in Europe to come down. By the end of the meetings you heard--and you have heard subsequently--European policymakers, seeing the risks on the downside, saying now that interest rates in Europe on average will come down to, at a minimum, the low level you have now in Germany and France. And there has even been some talk among some Bundesbank board members of the possibility, if the situation worsens, of a decline in European interest rates.

Of course, on that front, not only had the US Federal Reserve cut interest rates before the Annual Meetings, they also cut them another 25 basis points after the Annual Meetings. So we are moving into a period in which the central banks of the leading industrial countries are easing monetary policy to some extent--quite a lot in the United States already--and that is one of the determinants of capital flows to emerging market countries. In fact, if you look at the econometric evidence, that's the strongest determinant of the flows to emerging markets. So that's an important contribution to dealing with this crisis.

The second element that became clear during the meetings and subsequently is that Japan is moving more vigorously to deal with its banking crisis. We did see going through the Diet an important bill that would make $500 billion available for dealing with Japan's financial system. Now, there's always concern in Japan that decisions are taken but then implementation is the issue, and I would say the most encouraging thing that has come out since that bill was passed is that two Japanese banks have actually announced that they will avail themselves of the public money that has just been voted, so that the logjam which has been there all the time--banks don't want to ask for the public money because then they've got to make all their information public; they'd be required to write down loans to market value, all those things--seems now in at least two cases to have been overcome. That's an important development. And we also hear the Japanese Government announcing further fiscal stimulus.

Also--I don't think it has much to do with the Annual Meetings--the yen has strengthened significantly in the recent period. That is also a very important development that has helped East Asian economies strengthen.

Immediately after the Annual Meetings, a third important thing happened. There had been many questions about whether the United States was willing to lead in the international system in the way it had in the past. Those issues crystallized the US Congress’ attitude toward additional funding for the IMF. They have now been resolved. The Congress voted a quota increase. They also voted the $3.5 billion for the New Arrangements to Borrow, which will give us access to a further $25 billion that we could borrow in the case of systemic crisis. So the question of whether the IMF could help if the crisis worsened has been resolved. It'll take a couple of months for that money to be actually voted. In all the other countries which have been waiting to see what the United States would do before they voted, it will take a few more months. But probably by the turn of the year, that money will be available. And in the meantime, knowing that it's coming makes life very different in this institution.

The fourth thing that emerged during the Annual Meetings which is very important, is that a good part of the potential Latin America crisis, which is Brazil, is being dealt with in Brazil and the IMF negotiating an economic program. It's a very complicated negotiation because this was all undertaken in the middle of a Brazilian election campaign, both for President and for the governors of several Brazilian states, and the legislatures of the nation and some of the states. Those elections are over. The President of Brazil who announced he was going to take tough measures to deal with the crisis was re-elected easily in the second round, which ended Sunday, a few days ago. One of his allies was elected governor of the largest state, Sao Paolo. And there have been indications from one other important governor that he would support the program. So that's encouraging, and we are now moving with the Brazilians to support their program with an IMF program.

The Brazilian program is very interesting. I'd like to mention this because it bears on IMF-supported programs in Africa as well. The Brazilians are very insistent that what we have is a program of Brazil which is supported by the IMF. That is exactly correct. The Brazilians have decided what they want to do to fix their country. It involves very tough measures. But they strongly resist saying we're taking these tough budget measures, amounting to 4 percent of GDP, because the IMF wants us to. They're saying we are taking these measures because our country needs them, it is our responsibility. In words we use here, we say this program is owned by Brazil. It's their program. Of course, we can't support a program that we don't think would work. But what they're doing is very likely to work and worthy of support, and the fact that it's owned by Brazil makes it the ideal type of program to support. And that is why I expect in a week or so we will in the end reach an agreement with the Brazilians for a significant program, a large-scale program, which will have support also from other institutions, the World Bank and the Inter-American Development Bank. There is also talk that it will also be supported by additional contributions from leading industrial countries, negotiations on which are ongoing.

These four things are very important developments that change the picture today relative to where it was a month ago, and I could add to that that we see important signs of stabilization in East Asia, which is another factor that adds confidence to the view that we are in a serious crisis but not, as some have said, the worst crisis in 50 years. This is not a normal situation, but it is a situation which, with good management by countries such as Brazil, by the industrial country policymakers, by emerging market authorities can be kept under control. And we, of course, will also do what we can to make that happen.

Let me turn very briefly to the second topic which was the main focus of attention at the Annual Meetings. This is the so-called architecture of the international monetary system. I'm not sure how this architecture metaphor got into usage, but once you've said architecture, you're in for a string of rebuilding buildings and building rooms, of new fire extinguishers, new burglar alarms, and any number of metaphors. Actually, I don't think it's quite the right metaphor because what matters is not only the building, but also what goes on in it, and how the capital flows move around in this newly designed system. So I prefer to talk of reform of the international system rather than of the international architecture, but nobody's going to change the metaphor now.

Well, what are they talking about under architecture? Let me touch on a few issues briefly. We could develop them later if you would like.

There's first a great deal of emphasis on transparency, on the need for better information. It is a plain and simple fact that many people who invested in emerging markets did not really know what they were doing with their money, where they were putting it, nor what were the conditions of the economies of the countries they invested in. That situation needs to change by making more information available, by improving standards for corporate and the financial sector governance, and by improving the transparency of what is happening in the international system. We in the IMF will certainly be monitoring far more closely the direction and volume of short-term capital flows, so-called hot money, in the international system, and making that information public.

There is also a lot of emphasis on transparency of the IMF itself. That's an emphasis which we, the management of the IMF, very much welcome. The Fund is a complicated institution. We have 182 member countries. They don't all see things the same way. On the whole, the Managing Director, Mr. Camdessus, and the rest of the management, including me, believe we should be publishing much more of what goes on, of our reports on countries, of agreements reached with countries. And we are moving in that direction. And many of you have no doubt accessed our Web site, which is www.imf.org, to see what is available.

For instance, you can see the programs we have with Thailand and Korea and, indeed, Russia, for that matter, on the Web, and you can see what has been agreed.

Now, we favor that, but many members rightly make the point that transparency is very complicated and is not equal in its impact on countries. What some of our members tell us is that if the IMF tells the United States that its monetary policy is too tight, well, that is one criticism among thousands, and it will no doubt get significant attention, but it's not going to change the market situation. If, on the other hand, the IMF criticizes a small country which has sort of struggled to have access to capital markets and whose access to the capital markets is tenuous, you make a big difference in what happens to that country. The responsibilities the IMF faces are greater. So we're not so enthusiastic about your going forward with your criticisms and with your comments without some further thinking about how to do that in a way that takes care of what I think are legitimate concerns of those countries.

Now, we are moving in that direction. We have--and you will see this on the Web site--increasingly published so-called Public Information Notices, which are summaries of the discussion by the Executive Board at the IMF of country reports. These are the summing up by the Chairman of the discussion, and they're edited for only one thing, and that is market-sensitive information. Otherwise, they're published as is. That's an important development, and it's important because it's showing the way to how we can be more open while respecting the fact that we have an influence on countries which may not be wholly beneficial and that we have to exercise that responsibility clearly. But on the whole, the pressure for more transparency from the IMF is something that we welcome.

Secondly, there's an enormous emphasis on everything that was said in the architecture discussion on financial sector reform, on the strengthening of banking systems. In 1995, after the Mexican crisis, Mr. Camdessus said that we don't know what the next crisis in the international system will be, but we do know it will be a banking crisis. Well, unfortunately, he was right. He was right sooner than we would have liked to know.

At the heart of every one of the Asian crises is a weak financial system, and that emphasis on strengthening financial systems, on getting the international system--the IMF, the Bank for International Settlements, the World Bank and others--to cooperate to help countries strengthen financial systems was, I think, the strongest of the themes in the Annual Meetings. We have a tough issue of how to deliver that cooperation. Countries don't take kindly to being told that their banking systems are weak and that they need to do things. And banking systems frequently are politically sensitive as well. Those are issues on which we will need to work in the months and years ahead and on which we are starting to work.

The third element in the reform agenda is an increased emphasis on surveillance by the IMF and of what is happening in countries, reporting to the international community, on how they are doing, what the weaknesses are, and the extent to which they're meeting, say, the banking standards which they have agreed to meet, the so-called monitoring of standards. Those are all sensitive issues. They're all sensitive because they tend to bear more heavily on countries that are less developed than on those that are more developed. But they're also important because countries need to improve the strength of their financial systems and their policies.

Finally, in this area, we mentioned the very, very complex matter of how to involve the private sector in the resolution of crises. This was initially put politically as we can't resolve crises by bailing out the private sector, but when you say that, that's sort of an inflammatory statement. But you can say much the same thing without being inflammatory by saying there isn't enough public money to go around to solve the problems of a financial crisis unless some private money is involved in some way. And this is now under discussion. In some countries we are now requiring creditors in a sort of voluntary way, but with very strong pressure, to roll over certain credits because these countries just don't have the money to pay and because the internationally provided money, the IMF money, is not necessarily available for that purpose.

How this will work out remains to be seen. As I have said of every issue, it's difficult; but the private sector involvement issue is possibly the most difficult. Why? One of the problems we've seen in behavior recently is contagion. There's a crisis in Russia and this affects Latin America or South Africa. Then the question is: How do you prevent this contagion?

Well, if you go to an approach that says that the private sector has to be bailed into every crisis, then you make contagion more likely because if the private sector says, aha, I see trouble coming in Latin America, and I know that if there's a crisis, they're going to force me to keep my money there, they're going to start taking the money out sooner. So while this is not a problem that has been solved, it is very difficult. We've often been criticized--in Korea, for example--that we, the Fund, didn't tell the banks on day one you've got to keep your money in the country. The reason we didn't is very clear. Saying that in Korea, Thailand, or Indonesia when other countries in the region were in difficulties would, in our view, have increased the likelihood of pressure on those other countries. That was a concern and will remain a concern.

It's going to be a critical element in the new architecture, in the new system, but we haven't solved it yet.

Let me finally turn to how this crisis has affected Africa, and I'll be very brief. There is no question the crisis has had adverse effects, particularly for the petroleum exporters--of course, Nigeria the biggest, but also Gabon and Cameroon and Angola and others. The gold price, which is clearly affecting South Africa, had been down before the crisis, but the weaker price of gold has also hurt an important country in Africa.

The non-petroleum-exporting, non-gold-exporting countries have not been hit very hard up till now. Whether they will be depends on how this crisis plays out and whether we're going into an international recession or not. There's a lot of talk about global recession, but global recession means declines in GDP. This year the world will see, on average, growth of about 2 percent. Next year the World Economic Outlook said 2.5 percent. Possibly the number would be lower now.

Those numbers are not signaling worldwide recession, and the reason they're not is that the United States and Europe are still doing well. That's about half the world economy. If that continues, we are not in a global recession. Countries that export to the industrialized countries except those exporting to Japan will still have a good market for exports. So we need to see whether the global crisis will worsen. But we hope not. We think industrialized countries are taking measures to prevent that.

There is another way in which African countries have been affected. That's through the capital market contagion. It hit South Africa, in particular. It hit other emerging markets. What we've seen in South Africa is taking measures to defend the currency strongly and make it clear that you're willing to do that. Eventually the markets come back, as they have in South Africa.

But, you know, interestingly, if you look at the numbers for Africa as a whole, even in this turbulent environment, the numbers are encouraging. That's surprising. There were two decades in which there was essentially no growth, certainly no per capita income growth, in Africa. But now after those two decades, we're seeing the rate of economic growth rising. It's averaged about 4 percent in 1998, a little below that, and, of course, importantly, much higher in a number of countries. And it was higher also in 1997 and 1996.

So there has been an increase in growth in Africa. It's not enough because with African rates of population growth, which fortunately are coming down, you need more than 4 percent growth to make sizable inroads into poverty. But that is more encouraging than what has been seen for a long time. So is the decline in inflation, which averages now a little under 10 percent, down from 30 percent. So is the decline in fiscal deficits. It's all part of the same picture. Those are the indicators.

But we've also seen on the qualitative front that governments are freeing private sectors from a variety of controls on prices, on marketing, on imports, on investment, on foreign exchange. And we see economies becoming more efficient, again, with differences across countries. If you ask why we should be optimistic at all about Africa, don't look only at the averages. They're not that encouraging yet. It's the fact that a number of countries have applied sensible policies consistently over a number of years and have seen significant positive growth at rates--5, 6, sometimes 7 percent. Such rates really do make a difference over periods of a decade, and those outcomes, supported by the policies, are ones that provide hope for the long run.

Let me talk a little bit about the involvement of the IMF. It is never the case that the IMF should get the credit for what countries do. We try to help, but what happens is primarily a result of what policymakers themselves and the political system in the nation is able to develop internally. But we have been able to help through policy advice, through technical assistance, and through concessional loans from ESAF, the Enhanced Structural Adjustment Facility. There are 23 countries in Sub-Saharan Africa which have programs supported by the IMF, and there are commitments under ESAF arrangements in Sub-Saharan Africa totaling $3.6 billion at present. We are also providing emergency post-conflict assistance to countries like Congo (Brazzaville), and when we do that, that's typically a necessary condition that allows the mobilization of larger amounts of concessional assistance from the international community.

We are also working closely with the World Bank and making progress on the HIPC Initiative, the initiative for dealing with the external debt burden of the heavily indebted poor countries. Uganda, Burkina Faso, Cote d'Ivoire, Mali, and Mozambique have already passed the initial stage and have commitments under the HIPC, and in the near future, we hope to be considering several other African countries. So there are many countries in Africa that are moving onto the right track. But this needs to be consolidated and it needs to be intensified to make a real dent in poverty.

Now, what does that require? It needs consolidation of macroeconomic stability achievements, keeping budgets under control, keeping inflation under control. And as that is done, it means making sure that budgets focus on the right things, which include, in particular, social spending and health and education spending.

And then measures to ensure economic security. That means systematic decision making by governments, holding the line on policies, not reversing them frequently, ensuring the competence of decisionmaking, and that requires capacity building, ensuring integrity, judicial independence, transparency--all the things that sound like code words but are not code words. They are real actions that need to be taken and that are visible in some countries, but not all of them. And I would add to that trade liberalization is very important in boosting the efficiency and competitiveness of domestic producers.

It's often said that there's nothing that isn't obvious in economics. Actually, I think the fact that trade liberalization is good is something that isn't obvious. I think what's obvious is the superficial appeal of protection: let’s keep the guys out, let's give our guys the chance. But it doesn't work. History shows it doesn't work. And allowing not immediate trade liberalization, but gradual and steady trade liberalization, integrating the economy into the world economy on the trade side, is really one of the keys to growth. Not only reducing tariffs but also reducing nontariff barriers to trade and to investment and other costs of doing business.

So that's the agenda. It's not a new agenda, but it's an agenda that an increasing number of countries are taking up. That is beginning to pay off and will pay off even in this hostile environment.

I've spoken for too long. Let me stop now and we've got ample time for questions, I hope. Thank you.

QUESTION: Howard Preece, Financies Techniek, South Africa. You referred to the credible defense of currency. How do you consider the situation, Mr. Fischer, in terms where a currency requires exceptionally high interest rates to be defended if those interest rates are neither economically nor socially nor politically sustainable for any length of time? Is there any value in defending a currency which will not last once those interest rates, which are artificially high, are lowered to levels that are necessary. In other words, is it better then to let the currency take the strain rather than the interest rate?

MR. FISCHER: I don't think that that's actually the choice we've seen in Asia. There's an underlying question always: Does the country put some weight on the value of the currency and on the inflation that depreciation brings? And that's a question that is frequently around and that has to be resolved.

I think that question arose to some extent in the South African case, and there were questions about that. During those periods of crisis, interest rates have to be raised, but they don't have to stay up forever. And as we've seen in Asia, after it's clear that the country is running a coherent monetary policy, one which has particular goals--including inflation goals or a combination of inflation and exchange rate goals, and the level of activity--interest rates can come down to more normal levels.

When you're in a normal situation, then the sort of trade-off you're talking about is relevant and is something that has to be considered. In the short run, there are always difficult questions about how quickly can you reduce interest rates, how much to let the exchange rate go. As long as it's understood that the central bank is committed to macroeconomic stability and inflationary stability, those small trade-offs can be allowed. Once you're into a crisis, the notion that you should let the exchange rate run and keep interest rates low doesn't work because you tend to get into spirals of the sort we saw in East Asia until countries decided to defend the currency, established that they would do that, and then after a while, the interest rates came down. And you see in the East Asian countries now interest rates that are well below the levels in the crisis.

I think that's what the Reserve Bank has done, and we see it cutting interest rates slowly, gradually, in a way that suggests they are not going to let the situation get out of control. Somewhere down the road there will be the sort of consideration that you talk about. At that point there are serious trade-offs that need to be considered, but not in the crisis. It's not that way in the heart of a crisis.

QUESTION: Business Report, South Africa. Mr. Fischer, you talked about monitoring short-term capital flows and making that information public. Would you talk a little more about that? Making the information public to whom? And how deeply would you go? I mean, would it be what kind of capital flows to exactly what parts of the economy they're going and so forth?

MR. FISCHER: The data on international capital flows are really quite poor, unfortunately. The best data come from the BIS, and they have typically been available on a quarterly basis with a six-month lag. If you consider that, say, the Korean crisis blew up in two months, getting data that's nine months and twelve months out of date doesn't exactly help greatly. So there's a lot of work going on in the BIS to speed up the data so that we get it with a month's lag after the end of the quarter. That will help.

We inside the Fund also put together other data from financial publications. We just look at tombstone announcements, for example, to see who's lending what to whom. We put together on a monthly basis what the flows are. And currently all types of capital flows but foreign direct investment are way down.

We do not have the detail of the sort that you are talking about--data on the money going to individual sectors in individual countries. What we would like to do is get on a very rapid basis the flows from the BIS, and I believe that we could possibly also try to find ways of supplementing [inaudible] quarterly data through survey basis monthly data. And there would be no reason not to publish that, together with an analysis of what's happening.

Some people say that part of what happened in this crisis is that people didn't realize that everybody else was doing the same thing as they were. You know, everybody says it's a great idea to put money into Country X. Well, it is a great idea if the number of investors is, say, a hundred. If that number is, instead, ten thousand, it's not quite the same good idea. Information on that needs to be made public.

QUESTION: I am James Chipofya from the Malawi Broadcasting Corporation. You said, Mr. Fischer, there are several countries in Africa that are moving on the right track. We might say yes, we might say no to this kind of thing, but maybe I should get to Malawi situation because I am more comfortable with the Malawi situation. What are the characteristics Malawi may need to adopt in order to strengthen the economic base, the economic performance of the country for the benefit of the people of that country?

MR. FISCHER: The economic program in Malawi had some difficulties, as you know, during the second half of 1997, then improved in the middle of 1998, and then there were some problems particularly with maize and petroleum pricing. Those things, I am sure, are related to political difficulties in responding to adverse crops and adverse changes in prices in the international system, though it does not actually explain what happened on petroleum.

You say that the basic political problem that everybody faces in dealing with this sort of situation that Malawi faces, a poor country obviously, is how to reconcile populist pressures with the fact that what is easy in the short run is very destructive in the long run. And just to take an example, keeping maize prices low when they go up is the natural reaction to what to do when things get worse. But, of course, if you do that and if the situation continues to worsen, you have major budget problems coming your way, and then you also have adverse impacts on the domestic crops.

So the difficulty of resisting the politically convenient and in many ways the natural reaction is one that I think is very hard for many countries to deal with. Eventually, you learn it has to be done, and I think your country has, on both maize pricing and petroleum pricing, changed policies.

If you say that you are going to run your basic policies well and accept the realities of the fact that sometimes prices go up, and sometimes you have to let them go up, then you turn to what are the really fundamental determinants of growth over the longer period. Here, you need the sound macro policies that the IMF talks about. It is always embarrassing to say these things because everybody thinks that is all we say. Unfortunately, it is true. So you have to keep saying it. You say that, but then it is the structural side of life that is more important for growth. It is the emphasis on health and education in the budget in Malawi where education needs are very severe. It is making the productive use of assistance, international assistance that is available to your country for the specific sectoral purposes, and it is allowing the Malawian private sector to get on with things it does well.

I started in academic life, and the first term paper I wrote as a graduate student was on the supply response of Malawian farmers to agricultural price changes. There is a significant response in Malawi to price changes. Farmers know how to react, and letting the private markets work is actually something that works. And 30 years of research and centuries of experience says that.

So we don't have a magic formula for how Malawi can improve its situation. But in the short run, it's getting things back on track. It's getting the international assistance flying in the right directions. And in the medium run, it's letting the Malawian public and private sectors interact in ways that will be productive in the long run.

You say you know Malawi and you don't know other parts of Africa. But there are countries around--I could mention Uganda. It has many special features. But it has succeeded in growing significantly and pretty steadily over long periods following policies like these. And there are other places.

I don't want to minimize the challenges. These are real. We know that. Not every country has political difficulties, but that doesn't change what is required in the long run or the medium run to produce growth.

QUESTION: Adrienne Roberts, Financial Mail, South Africa. I sincerely hope I have my facts straight here, but I was given to understand that Japan had introduced restrictions on short selling of the yen. If that is the case, I'd be interested if you had any more detail on it, and I'd like your opinion on whether it is an appropriate response for Japan or elsewhere, assuming, of course, that the short selling can be interpreted as a speculative attack.

MR. FISCHER: Yes, I saw that report yesterday, two days ago, and I didn't follow up on it. So I don't actually have any more details other than to know that there is that report.

I'd be amazed if the Japanese authorities managed to succeed in preventing short selling of the yen. It's not sold only in Tokyo; it's sold in many other places. So possibly they'd have an impact on Japanese institutions, but I'd be very surprised if that would have a great deal of effect on Japan.

Of course, what's going on now in Japan is an unwinding of short position. People who borrowed yen are repaying them because of the turmoil among the hedge funds. And it's not only the hedge funds; it's also banks that were a part of this activity.

QUESTION: Samantha Ensling, Business Day in South Africa. Mr. Fischer, there are fears in some quarters of a credit crunch, specifically in emerging markets. Is it a fear you share? And what will the IMF do to alleviate this?

MR. FISCHER: There is no question that there have been elements of a credit crunch recently, especially in emerging markets. And during the Annual Meetings we were told by lots of emerging market countries it's not only that the spreads are high, it's also that we just can't borrow. That situation is beginning to change. We see Argentina has borrowed, Chile has borrowed; private firms in Brazil are going back into the market. But the markets are still far from normal.

It was also the case that there was concern in the United States that we were seeing really remarkable increases in spreads between government paper and corporate paper, even between long-term government bonds and treasury bills. There was a sense that there was some seizing up of the credit linkages. But the cuts in US interest rates that took place in the last month have helped alleviate that, and we see a gradual--delicate, I would say--reopening of the markets for some countries.

I was very, very struck when we had a meeting with Latin American Finance Ministers in Washington nearly two months ago at the start of this crisis by what the Argentine Finance Minister said in that meeting. It was a private meeting. He said, you know, these crises come and go. We've seen them before. It will go away, and we will have access to markets. But the terms on which we have access to markets will depend very much on how we handle ourselves during the crisis. If we keep our heads and don't do crazy things, if we don't try to shut off transactions through controls, do non-market-friendly things, we'll do much better.

That's a true description of what the Argentines did in 1995. That's why they did so well in subsequent years, and I think that was a very important lesson for everybody. But it is a tough period for many emerging market countries right now.

QUESTION: My name is David Masunda from Channel Africa Radio. I want to bring you back to Africa. First, there's been criticism that the amount that you disburse in Africa is negligible compared to, for instance, the billions which you poured into Russia. Could you comment on that one?

The other issue I wanted to find out is, as you may know, there is a war raging in Southern Africa, and one of the countries involved is Zimbabwe, with which you have a program. What effects does the war have on the Zimbabwean program? Is it at all causing the delay in disbursement of the money that the Zimbabwean Government was supposed to have got by now?

MR. FISCHER: On the amounts of loans, over seven years, we have lent $18 billion to Russia in total. It's an economy of about $600 billion. On an annual basis, relative to GDP, I don't think--but I could be wrong, and possibly I shouldn't stick my neck out--that that's not very different relative to GDP to what is being provided in many African countries.

One of the problems we face in Africa, and it's a real problem, is with the availability of ESAF resources. As you know, ESAF is concessional, very low interest money, and for that we have to go out and persuade our members to provide us with some way of subsidizing our normal loans. The techniques are very complicated whereby they give us the money. But we need in essence to either subsidize the interest or get countries to make loans or to provide us with low-interest financing to do that, because that's not part of the normal way that the IMF does business. Our normal loans, our loans to Russia were all at treasury bill interest rates. And so the other constraint to face is on ESAF. It's a very tough situation, and it's particularly complicated.

Unfortunately, vis-a-vis South Africa now, one of the ways that is being proposed to finance ESAF is for us to sell some of the gold we have, which we could sell at a profit and use the profits to subsidize loans to Africa. You can understand that for at least one important country in Africa, this is a rather complicated matter.

But, you know, if you look at the overall flows of aid to Africa, to poor African countries, the numbers are quite large in many countries. There are many countries in Africa getting 10 percent of GDP in assistance. There are occasionally countries getting 20 percent of GDP in assistance. And, of course, all the emphasis is on the debt repayments and on the fact that there are large amounts of debt outstanding. But even for most of the heavily indebted countries, there are positive transfers, that is, the aid is greater than the payments out.

So we would like and we are pushing very hard right now to get more money for ESAF, and we would dearly like to do that. The Managing Director occasionally has crusades. I would say that ESAF is one of his crusades. He never misses an opportunity, whenever some visiting Finance Minister comes in to ask him how he's doing on his ESAF contribution.

I should also mention that some developing countries, including Botswana, have actually made contributions to ESAF, and we, of course, place especial weight on the fact that some of the poorest countries have been able to provide assistance in this way to their fellow developing countries.

So the answer is we'd like to maintain the ability to provide low-interest assistance, and we keep beating the bushes to find the money to do that.

On the war in Southern Africa and the program with Zimbabwe. That program is based on a particular agreed budget, which of course has some military expenditure in it. It would be very difficult to continue to support the program if the budget deficit were very different from what had been agreed. As I understand, the impact so far on the budget has in fact been reasonably small, and it is not the case as of now that the hold-ups in Zimbabwe over the program were related to this issue. But the fact is that there is a budgetary issue, that we have made agreements on the budget, and that that will have to be looked at as things go forward.

With regard to the war in the Democratic Republic of Congo, I think everybody, and certainly we in the Fund, are extremely hopeful that President Mandela's peace initiative succeeds. People in the Democratic Republic of Congo surely do not deserve to go through yet more years of war and dislocation. It is such a potentially rich country which deserves peace. That is needed for prosperity to develop. So everybody hopes that this situation can be resolved without the war continuing.

QUESTION: Mr. Fischer, my name is Ben Kangwa from Zambia National Broadcasting Corporation. I have two quick questions on the structural adjustment program and the privatization program in Zambia.

First of all, the structural adjustment program that has been introduced by the World Bank and the IMF in many developing countries, and particularly in Zambia, has brought more misery. For example, there is increased poverty and local job downsizing or right-sizing, as you call it. What do you think could have gone wrong in Zambia? And what do you think Zambia should do?

Then, secondly, Zambia has been commended by some donor countries, and in particular the World Bank, for having implemented the privatization program faster than many other countries. But to many local people, the program has destroyed local industries, especially the agricultural and manufacturing sector, forcing Zambia to be a trading country. I don't know what your opinion is, especially that Zambia is endowed with so many natural resources.

MR. FISCHER: Thanks very much. I actually grew up in Mazabuka, so I know Zambia quite well. On the general charge of structural adjustment programs bringing poverty, this is a very tough issue to deal with. But it fundamentally is not correct. It is almost always the case that when the IMF is called into a situation, there's an underlying problem. And the question that has to be answered is: Would the situation have been better without the assistance of the international institutions, the World Bank and the IMF? And it is very hard to make the case that that would have been so.

What these programs promote is things that many years, many centuries of experience suggest are necessary for an economy to operate well. It just isn't the case that if you run large budget deficits and you have high rates of inflation that an economy is operating well.

So the simple things we say about the need for budget restraint, the need to maintain low inflation, the need to ensure that the balance of payments deficit isn't too large, sound very tough but they're straightforward rules of good behavior that work everywhere. And typically those are the main items in an IMF program.

It's not impossible for a country to do well by running a massive and growing budget deficit for a year or two. You know, you can run a populist policy for a year or two. It was done in Latin America in the 1980s. And then you hit a brick wall. You don't have the money to continue doing that, and then you have to retrench. And that's the phase at which the IMF is called in, and they say you're the guys who forced us to retrench. Actually, the situation forced the retrenchment.

One of my teachers at MIT--he was Russian-born--told me that in the cholera epidemics in Russia, it was an occupational hazard of doctors to get killed because they would be sent into the areas where the epidemics were. And all that the people knew was that every time there was an epidemic, there were doctors. And they put the two things together.

Well, we have somewhat the same problem. Every time there's an economic problem, we are there. And you are inclined to think it is we who are responsible for the problem.

Then on the structural side--privatization, trade liberalization and so on--those are things that, by and large, work. The trade liberalization always. Privatization: there are examples around the world of well-run public companies. It's not always true that the private sector runs better than the public. But when you look at very tough situations--I could take ZCCM as one, where you have a public company that's losing $20 million a month, in a poor country, that cannot afford it and yet for political reasons finds it very difficult to deal with--you're in a situation which has to be resolved in some way. Nobody is willing to provide those $20 million a month to continue that situation. It needs to be solved. Privatization seems to be the route.

It will be another case where people will say, well, look, they privatized and then there was unemployment. But the reason they had to privatize is the previous situation was not sustainable. Zambia cannot afford a mining company that loses such a large share of GDP every year. And so that would have to be done in order to get Zambia to use effectively those phenomenal natural resources.

In Chile, which is a great success story, 40 percent of its exports still consist of copper. Of course, that economy diversified enormously, but you can, with copper, despite low prices recently, export on a significant scale. Zambia has failed under the public sector ownership to modernize those mines. That has to be done. There are other problems, too, but that has to be taken care of. In the short run it perhaps looks disadvantageous, but in the long run it is an essential part of allowing Zambia to use some of the phenomenal natural resources that you point to.

So you understand the political complexities of explaining these things. We'll privatize but there will be a decline in the labor force, and that sounds like the worst thing. But you have always to ask, compared with what? And compared with what is to try to continue taking a very large chunk of Zambia's budget to subsidize the copper mines, and it just can't be done. That's the unfortunate odd fact of life that needs to be faced.

QUESTION: Mr. Fischer, my name is Thabo Kobokoane from the Business Times, South Africa. My question is related to South Africa. I'm not sure if you have been briefed by the South African Government on the job summit which is taking place tomorrow. There has been talk and serious concern has been raised in some quarters, in particular by statements that one of the many agreements that will come out of there will have serious implications for the fiscal deficit set out in the macroeconomic strategy, which I'm well aware that you are aware of. Has there been any contact between yourself and the South African Government vis-a-vis possible adjustment to the macroeconomic strategy? And if so, can you give us any hint of it?

MR. FISCHER: Well, I'm always told you should never make forecasts, especially about the future, and tomorrow is the future. So we don't actually know what will come out of the job summit, and I know there are many suggestions. We did meet, as we always do, with the Finance Minister and the Governor of the central bank and the party that accompanied them to the Annual Meetings. And we discussed the overall macroeconomic situation, including at that time the value of the rand, which was much weaker than it is now. They indicated that they intended to try to stay the course on the macroeconomic targets that South Africa has set out. It's something that I'm sure they'll make the appropriate decisions on. As I said about Brazil, South Africa makes its own policies. They've made them very well.

What has been done on the macroeconomic side by the government in recent years is a remarkable achievement, particularly in the fiscal area, to keep control of the budget process. And I would be surprised if whatever happens tomorrow would lead the South African Government to change its determination to achieve the macroeconomic targets that it has set out.

QUESTION: Mr. Moiane, from Savana, Mozambique. Mozambique has been mentioned in some IMF literature as an example in achieving a rapid macroeconomic stability and in keeping inflation at a very low rate. But when we look at the living conditions of the people of the country, we find that they are not improving. And the productive sector is getting increasingly less money from the banking system. I would like to hear your comment on the situation of Mozambique.

MR. FISCHER: Well, Mozambique is a story in recent years. The growth performance of Mozambique, starting to be sure from a very weak starting point, has been very impressive, and it is a testimony to what your government has been willing to do and has had the courage to do. All the temptations have been there to go for the more populist remedies, but your government kept macroeconomic control, brought inflation down--not all at once but gradually.

I don't have enough information, unfortunately, as to what the distribution of the growth in Mozambique has been. But with the high growth you've had in recent years, which in our data is shown as averaging something like 8 percent in the last five years, I would be very surprised if that rate of growth does not reach down--gradually, to be sure--through the economy, including to agriculture, where a large part of the population is employed. And we're projecting continued high growth: 9 percent this year, 9.6 percent next year.

While I do not have direct evidence--and so I can't contradict you on the basis of data--it’s hard to believe that with growth rates like this, which would mean that by the year 2000 the income per capita would be double in real terms what it had been seven years ago, that that doesn't affect everybody in the country in some way, and that you'd be seeing that happening.

As to the concern that credit is not reaching the relevant institutions in the private sector, again, I have to confess that I don't know enough about Mozambique to be able to answer that question specifically. But it is almost always true in most countries that as a banking system is being restored to health, and yours really is being restored to health, there is a period in which the banks tend to rebuild their balance sheets and are reluctant to go into private sector lending. Then, as you see them stabilizing and as you see confidence returning to the private sector, the flow of credit begins. So I wouldn't be in the least surprised to see credit flows to the private sector beginning to expand.

In fact, if I look at the aggregate data, I am a little surprised by what you say. Looking at our numbers, we have net credit to the government decreasing from 1994 through 1997 and then staying flat. And credit growth for the rest of the economy growing by 30 percent in 1994, 26 percent in 1995, 22 percent in 1996, 32 percent in 1997, 18 percent this year. Those are very high rates of credit growth to the non-government sector. Now, I'm sure there are many who would like to have credit flowing more rapidly, but that's a pretty impressive rate of growth of credit. I don't have the fingertip feel for the economy that you probably have in the Mozambique case, but if I go on the basis of these numbers and also look at the fact that interest rates have declined significantly as inflation has come down, I would suspect that the flow of credit is being restored pretty rapidly, even in the Mozambique economy. That's what the data say. But I could ask staff to follow up with you later since I feel I haven't quite answered your question fully.

QUESTION: Reg Rumney, SABC, South African Broadcasting Corporation. I'd like to ask about whether the IMF is planning to sell gold, not only for ESAF but also for further debt relief in terms of HIPC or even beyond that. Are there any plans?

MR. FISCHER: Well, you've touched on a delicate issue, so let me be clear on a couple of points.

First, we plan to finance our contributions to HIPC in part through ESAF, so it's the same thing. It's not two separate issues as to whether we sell the gold for HIPC or for ESAF.

But let me explain the sensitivities on the sale of gold. First of all, there's a sensitivity on the part of producer countries, and that's very obvious. There's also a concern on the part of others that the IMF's ultimate crown jewel, its ultimate assets, its ultimate credit standing, depends in important part on its gold. We have around 100 million ounces of gold. By our nature, we make loans to countries that are in difficulty. So, in some sense, the IMF, because it lends to countries that have trouble getting financing from other sources, does not lend, by and large, to countries whose standing in the credit markets is superb. If it was, they probably wouldn't be borrowing much from us. So we need to keep our reserves. So we will not get into a situation in which we sell the bulk of our gold. We need to provide that reassurance.

The question that the Board has discussed is whether--to use very delicately worked out language--to optimize the use of our reserves. And whether, as part of the optimization of the use of our reserves, we might care to shift the form of some of those reserves from gold to something else. But the Board has not made a decision. This is not a decision that the management of the IMF can make. Important shareholders are very concerned about our reducing the value of gold holdings, and it's something that still has to be worked out. But it will undoubtedly be on the agenda in the coming year because we need to be in a position to carry out what we, as the management, and most of the Board think is an obligation of the Fund, namely, being able to provide concessional assistance to poor countries. We need to have more financing for that.

QUESTION: Ezequil Mavota, Radio Mozambique. I would like to know what are the measures that were agreed at the last meeting of the IMF in order to strengthen the HIPC process.

MR. FISCHER: I didn't detect in the last meetings that there was any change in the basic design of the HIPC Initiative. In many ways, what is constraining HIPC is the availability of finance. It's a temptation to think, well, you could just write off debt and that's it. But in terms of the balance sheet of the IMF, there are assets and liabilities, and if we write off debt, we've got to find some other way of covering that loss of assets.

The concern that many have in the HIPC Initiative is that, of course, adverse circumstances have affected many of the countries that were indebted. Sometimes governments change. You're dealing with a new government to which you'd like to be more friendly or at least more accommodating. But there's always a concern that if you write off the debt, you can get into the same situation again where countries borrow excessively, and then you need a second round.

So while the management of the Fund certainly strongly supports the HIPC Initiative, there's also a concern that it be done in a way that ensures that countries that get relief now do not run bad policies and then come back for a second round of relief on the basis of an increased capacity to borrow in the future.

The three-year and the six-year periods are there to try to assure everybody that there is a change in the underlying economic policies that helped make the debt situation so severe in the first place. That seems to me a reasonable thing to do. And, as you know, in the case of countries that had a good track record before the HIPC Initiative, the six years period has been shortened.

My guess is if HIPC is enhanced in any way, it would be to broaden it to include more countries as money becomes available, rather than to intensify or speed up much the assistance to individual countries. That's a guess as to the way it will go. But this is an issue that continues on the international radar screen all the time.

QUESTION: My name is Thomas Nkhoma, Botswana Press Association. I would like to know why is the IMF criticized for promoting what is termed inefficient and counterproductive policies?

MR. FISCHER: There are things that are difficult to understand and things that are easy to understand. The role of the Fund is a very complicated one. I was discussing just yesterday with the Managing Director the fact that we're being urged to simplify our message. Just make it simple, say we're doing the right thing and it's all straightforward.

The problem is it isn't so straightforward, and how to make an economy operate well is not a straightforward thing. Some of the things that need to be done in the short run look counterproductive. Tightening a budget in an economy in crisis in order to ensure that it can be sustained over the long period may create problems. And you can be sure that when a government that has got into trouble and is, say, spending a lot of money on the army, is advised by the IMF that it should tighten the budget, it will not say the IMF is here telling us to tighten our budget and we have to do that. They'll say the IMF is forcing us to cut health spending. Well, actually, we normally try to protect health spending.

We don't, by and large, go out and criticize governments very explicitly. We try to avoid that because we've got to work with them and we don't believe typically that we're dealing with people who are inherently bad. We just deal with people who are in a situation that's very difficult. So we're not going to spend our time saying, aha, those guys are saying X but it's really Y. So we're always in the situation where we are there being attacked and trying to respond in a professional way. That's the only way we can respond.

I believe that over the course of time, as the IMF advice succeeds in countries, attitudes change. I see it very much in Latin America. In the 1980s we were attacked so bitterly by Latin America, which had got into a debt crisis by enormous overspending; and all these policies--all the things that are being objected to in Africa now: privatization, getting budgets in shape, improving the banking system--were attacked as inappropriate, outrageous, et cetera. If you go to Latin America now, it's more conservative, more orthodox than we are, and they welcome us now. It happens, and it happens in countries around the world that our advice has been appreciated. It never happens immediately.

So we have to do our job. We have to try to explain ourselves to you. We appreciate very much this opportunity. We'd love to be loved always, but we even more like to help countries do what needs doing and earn the deeper love that comes with success rather than the short-run love that comes with saying what is popular.

So I guess the answer to your question is yes, I think that we're frequently misunderstood. Frequently, it's convenient to misunderstand us because it takes the political heat off the government. But, as I said, the programs that work best are not those that are seen as having been imposed on countries. They're the programs in which the country says we have to do these things for our own sake. We have the IMF’s support and its financing, but it's what we are doing. Those are the ones that work. Those are the ones that we like best. And those are the ones that I hope we can have more of.

[Edited transcript]