Speech

Address by Mr. Murilo Portugal
Deputy Managing Director, International Monetary Fund
At the High-Level Dialogue on Financing for Development
United Nations, New York, October 23, 2007

Mr. Chairman, thank you for the opportunity to address this gathering on this most important topic of development financing. The International Monetary Fund is a committed partner in the international community's effort to help developing countries reduce poverty and reach the Millennium Development Goals. We give high priority to effective collaboration with the donor community, and gatherings like this are essential to fostering such collaboration. I would like to share with you our assessment on recent events in financing for development. I will also speak about how the IMF is improving its support of developing countries.

But let me begin by touching on the economic outlook for the developing world. Many developing countries have seen remarkable improvements in macroeconomic performance in the past few years. The positive growth trends the developing world is experiencing are broad-based, affecting all major regions, although the underlying driving forces for higher growth can differ from country to country. Sub-Saharan Africa, for instance, is experiencing its strongest growth and lowest inflation in over 30 years. Growth there should reach more than 6 percent in 2007. In developing Asia, growth is expected to reach almost 10 per cent this year.

Thus far, developing countries have weathered the recent financial market turbulence very well. The financial market turmoil has been largely an industrial country phenomenon. Some emerging economies with more integrated financial markets or with high external vulnerabilities have felt the ripple effects of the turbulence, but these impacts have been more muted than in previous episodes of financial turbulence.

Overall, our outlook for the developing world remains favorable, albeit with some increased worries about downside risks related to tightening credit conditions or further delays in concluding the Doha Round of trade negotiations. Our positive view is largely driven by the fact that developing countries are in a better position than they were a decade ago, having reaped the benefits of the economic reforms and improved macroeconomic policies that they have pursued. Governments have strengthened their public finance management and tax administrations; trade regimes are more open; and progress is being made to improve the investment climate. The need to fight weak governance and corruption is receiving more attention than ever.

Many developing countries are pursuing more sustainable macroeconomic policies. The double- and triple-digit inflation rates of the 1980s and 1990s seem well behind us—with average inflation rates down by almost one-half since 1999, to an average of 5½ percent in 2006. In addition, many countries have been able to build up considerable foreign exchange reserves and are better prepared to weather unexpected shocks.

There is also reason for optimism about the impact of these developments on poverty reduction. The 2007 Global Monitoring Report—a joint product of the World Bank and the IMF—shows progress in poverty reduction across all regions. South and East Asia and Latin America seem to be on track to reach the income Millennium Development Goal (MDG) by 2015, while emerging Europe, Central Asia, the Middle East and North Africa have largely eliminated extreme poverty. But the picture is different in Sub-Saharan Africa, where, unfortunately, only a handful of countries are positioned to meet the income poverty goal, despite considerable progress they also were able to make. Of course, average numbers can conceal differences in performance and vulnerabilities across countries, so the international community must remain vigilant in every region.

While it would be fair to say that many developing countries have improved their economic and social policies and are thus living up to their side of the understandings reached at Monterrey five years ago, there is a need for the donor community to adhere more closely to the commitments made then, as well as later at Gleneagles in 2005.

Developing countries need more financial assistance. Official development assistance has grown in real terms over the past decade, but much of that increase reflects exceptional debt relief operations. And total official development assistance actually declined in real terms in 2006. Fulfilling the commitments made in Gleneagles to double aid to Africa by 2010 will require a very rapid acceleration in aid disbursements, well above what is currently envisaged for the G7.

Some positive signs are emerging, however, as several donor countries are making efforts to raise their aid budgets. In this regard, I welcome the recent commitment by the European Union to reach the overall aid target of 0.7 percent of Gross National Income in official development assistance by 2015.In addition, the donor community is more aware of the need to improve the quality of aid and to put in practice the objectives of the 2005 Paris Declaration on Aid Effectiveness.

The Fund welcomes the emergence of a variety of players in the donor community—in particular, non-DAC bilateral donors, global funds, and private foundations. The non-DAC donors can make a real difference to the development effort, as their own experience allows them to bring a fresh perspective. Global funds and private foundations have access to non-traditional funding sources and are playing increasingly important roles: three percent of official development aid is channeled through global funds, and donations from private foundations are estimated at between 10 and 25 billion dollars a year. The initial experience with innovative financing mechanisms, such as the International Financing Facility for Immunization and the airline ticket tax, has also been positive. This increase in the number and variety of donors highlights the importance of effective donor coordination to ensure that aid is well harmonized and aligned with country priorities. It is also important that the predictability of aid is enhanced. To the extent countries are able to plan the timing and extent of aid inflows, they can maximize their development impact, and minimize and eliminate any harmful unintended macroeconomic consequences.

Mr. Chairman, let me also say a few words about the role of the IMF in helping countries to reach the Millennium Development Goals. We have taken a careful look at our macroeconomic and fiscal policy advice to low-income countries to see how to make the best use of scaled-up aid inflows. I highlight four major conclusions of this review:

• First, the Fund must continue to help countries create and maintain a sound macroeconomic environment in which they can use aid fully and well. This involves the careful coordination of fiscal, monetary, and exchange rate policies. But, Fund-supported programs will from now on be designed to support the full spending and absorption of aid and to allow smoothing of expenditures over time so that unanticipated aid shortfalls do not interrupt development expenditures.

• Second, countries and their partners have to plan ahead. Medium-term fiscal and debt frameworks are critical to making maximum use of aid resources, as they help to formulate spending plans and forecast resource availability. The Fund, together with donors, will work to strengthen countries' capacity to develop such medium-term frameworks.

• Third, overtime, countries should strengthen their own revenue efforts so as to replace declining aid flows. Key policies in this regard include broadening the tax base and strengthening revenue administration. The Fund is providing technical assistance to help them enhance domestic resource mobilization.

• Fourth, improving the efficiency of aid-financed spending programs will require further strengthening of fiscal institutions, including public financial management systems. We have stepped up our technical assistance to low-income countries to help them make progress in these areas.

We are also intensifying our efforts to improve collaboration with donors. In this regard, I welcome the Secretary General's recent initiative to establish the Africa Steering Group to help speed up implementation of the MDGs. I was very pleased to participate in its first meeting in September, and we look forward to making a practical contribution to the work of the Steering Group: we will, together with the DAC Secretariat, coordinate the work of the thematic group on aid predictability.

To be effective in our common endeavor to reach the MDGs, we realize that the IMF must remain credible in the eyes of all its members, including the developing countries. I am therefore happy to be able to say that progress is being envisaged on the Quota and Voice reforms in the IMF. There is broad recognition among our members that the Quota and Voice reforms should lead to an increase in the voting share of developing economies as a whole, and this has been reaffirmed by the IMFC in its meeting last Saturday in Washington.

Let me finish by saying that we consider that there are grounds for optimism about the prospects for poverty reduction in coming years thanks to the progress made by many developing countries in reforming their economies and by donors in aligning and harmonizing their assistance. It is also clear, however, that the Millennium Development Goals cannot be reached without significant increases in donor assistance. We therefore call on the international community to make its commitments to increase aid a reality.

Thank you.