Transcript

Friday, April 27, 2001
Washington, D.C.

Participants:

Horst KÖHLER, The Managing Director, IMF

Stanley FISCHER, The First Deputy Managing Director, IMF

Thomas C. DAWSON, Director, External Relations Department, IMF

Proceedings:

MR. KÖHLER: First, the world economy is going through a very difficult phase, and policymakers representing our 183 member countries are coming here, first and foremost, to discuss what needs to be done to give renewed momentum to global growth. You heard the IMF's forecast yesterday from Mr. Mussa. Our best guess is that there will be a marked slowdown, but that it will be relatively short-lived, with the recovery beginning in the latter part of this year and gathering strength in 2002. At our meeting this weekend I expect our members to be in broad agreement on the policies needed to strengthen global growth and to contain the risks. I believe in this way they will provide a much needed boost to confidence.

The second main topic for the IMFC will be the IMF itself. At our annual meetings in Prague I set out my vision for the future of the IMF which was fully endorsed by the membership. The meetings this weekend will provide an opportunity for our members to take stock of the reforms we have been making, and to provide further guidance for our work. For this purpose, I have presented the IMFC with a report and a statement on the IMF in the process of change. This covers most areas of our work. But what are the main issues? Our most important objectives are, improved crisis prevention and financial sector stability. As you know, I do think that this institution, the IMF, has to try to achieve as a global public good, a strong contribution to the stability of the international financial system. And financial sector stability is the core issue in this.

The Fund took many initiatives in the wake of the Asian crisis—for instance, in the areas of data dissemination; improved transparency; standards and codes; vulnerability analysis, etc. I do think these initiatives have made the international financial system stronger. I expect our members to reaffirm their support for these initiatives and push for the full implementation.

But, we need to do still more to put crisis prevention at the heart of the Fund's activities. Highest on our agenda is further work on early warning systems for crises. There is a need to combine quantitative indicators of vulnerability, with judgment from the field, our missions, and the markets. In this context, we need in particular to develop a better understanding and judgment about the working of capital markets. Our new International Capital Markets Department will play an important part in this effort. We will also continue to develop a regular informal dialogue with the private sector through the Capital Markets Consultative Group.

Good policies, ladies and gentlemen, are still the best precaution that members can take against crisis, and must take against crisis. We must, therefore, seek ways to encourage countries to be ambitious in the adoption of good policies in non-crisis situations, and therefore it is time to make operational the Contingent Credit Lines, CCL, an instrument to resist contagion in international financial markets.

The IMFC will also review progress in the Financial Sector Assessment Program, our joint effort with the World Bank, to diagnose strengths and weaknesses in member countries' financial sectors. We have successfully completed a pilot phase, and are now in the process of defining the continuation of this program for at least 24 additional countries in each of the coming two years. The Fund is actively engaged further in the review of offshore financial centers, and most recently the Executive Board has agreed on an ambitious work program to enhance international efforts to counter money laundering.

These three elements, together, form a comprehensive approach to strengthening the soundness of financial systems in member countries, and thereby the international financial system as a whole. I consider this as a priority activity of a focused IMF, and an important contribution to crisis prevention.

We are also engaged in a process of streamlining IMF conditionality, particularly in the structural area. Structural change is indispensable for sustained growth, but countries cannot do everything at the same time. So, there is a need to set priorities. By paying attention to country's administrative capacities, and by focusing on what is really critical for the macroeconomic objectives of programs, we will make conditionality more effective. There has already been a reduction in the average number of conditions in PRGF programs, and this is strengthening country ownership and the political support needed for sustained implementation of reforms.

As you know, we have asked for public participation in the debate on conditionality through the IMF's website. This is a further example of the increased openness of the Fund. Yet, another is the Independent Evaluation Office, which will begin work under the leadership of Mr. Montek Singh Ahluwalia, this August. This office will help to reinforce the culture at the Fund and enhance the transparency and accountability of our work.

Ladies and gentlemen, the third main theme of this weekend's discussions is our work to help our poorest member countries strengthen economic growth and reduce poverty. This is, of course, a joint effort with the World Bank, and you have already heard from Mr. Wolfensohn about it this morning, so I will be brief.

As you know, 22 of the world's poorest countries have now seen their debt burdens reduced through the enhanced HIPC Initiative. We are now doing our utmost to ensure that the other eligible countries benefit as well. The joint meeting of the IMFC and Development Committee will also take up our assistance to post-conflict countries and the progress in implementing the Poverty Reduction Strategy Paper (PRSP) process and Poverty Reduction and Growth Facility.

There are now 36 countries involved in the PRSP process. While the track record is short, this new approach is already achieving positive results. And I was able to convince myself on my joint visit to Africa with Mr. Wolfensohn in February. These results include better growth performance in a number of countries, and increased and better targeted social spending. At the same time, it is clear that everybody involved is learning by doing. Both poor countries and donors want to use the PRSP process as a key tool for developing and monitoring poverty reduction programs.

This means we will need to keep working to develop consultative mechanisms, provide poverty impact analyses, and strengthen the tracking of social expenditures. It also means that the IMF and the World Bank and the donor community will need to devote even more effort to build administrative capacity in poor countries to carry out these tasks, while showing flexibility and understanding of the unique situations in each country.

Ladies and gentlemen, these are the three main items on our agenda: the world economy, the IMF in the process of change, and poverty reduction strategies. There is also an over-arching theme: that is, this is all work in progress, to make globalization work for the benefit of all. That was the main theme of Prague. And we want to respond to this objective.

Globalization means increasing interdependence, and it means that more than ever there is a need for effective international cooperation. We are pressing toward a new level of policy dialogue and debate in the IMF, to make sure that we are facing up to crucial problems in the interconnected world in a timely manner. The need for this is even more clear now as we face a critical moment for the global economy. So above all, the spring meetings should boost confidence by demonstrating the determination of our member countries to act together in the appropriate manner.

Ladies and gentlemen, I would also like to say something on crisis management. I have convened yesterday a meeting of the Executive Board of the IMF to discuss Turkey's economic program. The Board expressed strong support for the program, and commended the Turkish authorities for their efforts in implementing the program's measures. Although final details of the program still need to be resolved, the IMF stands ready to support Turkey on its way to economic recovery.

Additional financing from the Fund and the World Bank in support of the program would be in the order of 10 billion U.S. dollars.

That is my introductory statement, and I now, of course, take your questions.

QUESTION: I would like to ask you a question on crisis management on Argentina. This is of great interest to Brazil. We have learned in recent weeks a statement of Mr. Cavallo, the minister of economy in Argentina, saying the Fund was irrelevant. We heard this week that in two telephone calls from the Fund management to the authorities in Argentina, for Mr. Cavallo to meet with the IMF team, that is in Buenos Aires, and we heard remarks yesterday from Mr. Mussa that are not particularly cheerful about the situation in Argentina.

My question is this: Is the quality of the dialogue with the authorities in Buenos Aires right now a problem? In terms of substance, what assurances are you waiting for, do you need from the Argentinean government in order to have a program, to be able to present a well formulated Argentine program to the Board? How soon do you think this will happen?

MR. KÖHLER: I can tell you that the quality of the dialogue between the IMF and the Argentine authorities, and particularly Minister Cavallo, is absolutely good, and productive. And, I am not aware that anyone urged Mr. Cavallo to have a dialogue.

MR. FISCHER: It certainly wasn't me.

MR. KÖHLER: I can report directly about my direct dialogue, that is I met with Mr. Cavallo in Toronto, and I had telephone conversations, and these conversations, again, have been absolutely open, frank, and constructive.

To the substance, it is, no doubt, there is some concern about the situation in Argentina, but, indeed, I do think that everything is in place to find a good solution to overcome the problems. We do think that Minister Cavallo's approach, particularly with the competitiveness law, is right.

Secondly, the minister said that he wants to bring and will bring the existing arrangement with the Fund back on track. That means the fiscal targets have to be back on track.

And thirdly, the minister didn't ask for money. He said we don't need that because we will find the way out with growth, and the private sector. And, I absolutely think this is the right approach. I will meet with him tomorrow. We will discuss indeed the fiscal measures to be taken to bring the program on track. What I heard from my staff on a provisional basis is that there will be a positive outcome, but I have to wait until this talk with Mr. Cavallo.

QUESTION: Maybe you can also talk about countries that are not in trouble. The World Economic Outlook has pointed to China and India as factors of stability in the international global situation. I was wondering, sir, whether you are also increasing the growth rate of India, which is stuck now at 5.6, while the government says it is growing at 8 or 9 percent. I wonder whether you have any thoughts on that.

MR. KÖHLER: I would like to respond to you that I am indeed happy that growth is strong and stable in China and India. Even the Managing Director of the IMF needs some encouragement, so there is some. And, these are big economies. The issue of growth in India is, of course, an issue of implementing further structural reforms. I think your minister, Minister Sinha, and the government is absolutely right to have defined structural reforms as the major vehicle to lift up this growth rate of 5 to 6 percent, to maybe 8 percent and even more. It is possible. More growth is needed to find a decisive breakthrough against poverty. So, I think the commitment for reforms should now be implemented into action on a broad scale. And I'm sure the authorities know about that, and are ambitious with that.

QUESTION: I would like to ask you again about Argentina. We know that the Argentina government didn't ask for more money. That's good. But, I would like to ask you about the worst-case scenario. Because, I talk about worst-case scenario, and we would like to know what the International Monetary Fund could do if there is a default.

MR. KÖHLER: As you know, politicians say we are not going to give answers to hypothetical questions, so let me be a kind of politician. That is an absolutely hypothetical question.

But it gives me the opportunity clearly to say that I do think it is right to stick to the convertibility law and the currency board, and I do see no reason why there should not be the assumption and the assessment, the judgment that there is a way out to growth, based on this framework.

QUESTION: Mr. Köhler, I would like to ask you if you think pressure on the ECB will lighten up given the U.S. GDP numbers we saw this morning suggesting that the U.S. is not slipping into a recession, and in fact deflationary pressures are growing.

MR. KÖHLER: I don't think that we are in a very nice world even with first quarter growth numbers for the U.S. economy. There is still the recognition that in the U.S. and in all other regions, growth is slowing down. That is the crucial point. There is no region taking up the slack. And, I do not think that it is appropriate to assess a debate, what is the right policy response to this situation as being qualified as just only pressure on the ECB.

You may know that I myself was very much involved in the formulation of the Maastricht treaty and the independence of the European Central Bank. This treaty is even more strongly formulated than the Bundesbank law. And, I am a deep believer in this. So, it is certainly up to the central bank counsel, ECB, to take a decision based on their judgment, on their objectives. But it is, I think, right for this institution to speak up about the broader picture in the context of our surveillance obligation, and also to have a debate about interconnections in a globalized world, and this is my point. I do think that we should be aware of linkages between the slowdown in the U.S., the slowdown in Asia, and, of course, the slowdown in Europe. These are linkages not only via trade, the linkages are via financial and corporate connections. Stock prices, and business confidence. I would like to underline that I do think that an interest rate cut in Europe could be helpful. I myself am not formulating an urgent request, but I am giving my assessment and based on that I do think it would be helpful.

QUESTION: What would be the duration of a stand-by arrangement with Turkey? And secondly, do you have any idea about the order of magnitude of a first installment when you reach an agreement, the first payment? And thirdly, would it be for budget purposes, and at the same time supporting the foreign reserves? Do you have an idea about how these could be split?

MR. KÖHLER: I think we have ideas and we should have ideas, but we should discuss it very carefully with Minister Dervis when he comes here this weekend to Washington. The formal negotiation about the program, has not yet ended. It is absolutely premature to talk about these questions today.

QUESTION: Mr. Köhler, unfortunately I have to follow-up on Turkey. I give you a bridge where you can answer. I'm not talking about what the Turks are thinking. I'm talking about how you protect your position for the IMF in terms of the big size of the program, and the American criticism and the indications of Mr. Treasury Secretary O'Neill. We are a little bit worried and a little bit confused on the following issue: We thought that the package might be smaller from the IMF, and might be an element of burden sharing from other sources, G-7 sources. Maybe BIS, maybe the European Union. And yet, the overriding conditionality job would be the IMF's. On that structure, to avoid criticism later on, but have a larger program that is needed, with a more component of burden sharing, and then also including some indications of what you think about what the Bank should do with their agreement, it would be a different sort of program.

MR. KÖHLER: Every crisis case is a particular case. So, therefore, we have a case-by-case approach. And, we are now dealing with Turkey. We need to solve a problem. Referring to the specifics of the problem. If there is a need to take money, we have to take it to solve the problem. We do think that the number of 10 billion dollars is justified, because of the strength of the program and the specifics of the problems.

And this is the case-by-case solution. I do think that this outcome is not, at least for the Managing Director of the IMF, there is not a burden sharing, as you call it, between the bilaterals and the IMF. I am not too worried about that. Because I have the full unanimous support of my shareholders expressed in the Board, including the U.S., which means this Board appreciated the handling of this crisis through the IMF. And, even more so, major shareholders all expressed their appreciation that the Fund was in the lead to find a solution. And, I could have thought about a different solution, but in this case it was necessary to also find a rapid solution because talking and talking would have worsened the situation, and would have made the fiscal problem even bigger. So we had to decide on a concrete solution, and we think the outcome is reasonable. It will work, and in the end it could strengthen the standing and reputation of the IMF.

QUESTION: [Interpreted] In Mexico, we're talking about a credit line, or rather contingent credit, we're speaking a lot about the possibility of the International Monetary Fund granting a new credit called contingent credit to support the economies that are in risk of contagion from a global crisis. I would like to know if you could tell me first what would this credit consist of? What are the candidate countries for this contingent credit? Is Mexico likely to obtain such credit?

And I would also like to know what does the Fund think about whether the peso is risking being overvalued as in 1995? And lastly, do you have any kind of forecast as regards the risks Mexico is facing in light of the global deceleration?

MR. KÖHLER: Mexico, of course, is so close to the United States—and this means so close geographically, and in terms of trade and commerce to the U.S.—that it will suffer from the slowdown of the U.S. economy. The growth for this year will be lower than without this marked slowdown in the U.S. The even more important and encouraging point is that Mexico has made, and is continuing to make, a very, good sound policy. It pays off now that the fundamentals of the Mexican economy are strong and that the government of the new president is continuing to make it even stronger. So I am very confident that Mexico will weather the storm. It will have to accept lower growth rates, but it will come out of this even more stronger.

Secondly, we are indeed in talks with the Mexican authorities to make the Contingent Credit Lines, CCL, operational and to make it operational for Mexico. The basic idea of this facility is to reward good policies. There are elements we are still in the process of discussing with the Mexican authorities, but even this is in very good shape. Mexico has, for instance, agreed to a Financial Sector Assessment Program, and the findings of these programs are very good, very strong.

Thirdly, the government has embarked on a very sound transparent fiscal policy, launching a project for tax reform. All of this is good, and in my view justifies clearly that if the Mexican authorities would like and decide to ask for this credit line, they should get it. I hope we can finalize the talks during the course of the next month, before summer.

As for the peso overvaluation, I will refrain from discussing or commenting on particular exchange rates. But I think in Mexico they have a very good and reputable central bank. They will take the right action if there is a need.

QUESTION: Your chief economist, Michael Mussa, was rather scathing in his criticism of the European Central Bank, and you did echo his belief that they should cut interest rates. How forcefully will you be putting that sentiment to them here on the weekend?

A second question on Turkey. Their last program didn't last very long, and we're told that this program will have at least some measures that they will have to implement before they actually get the money that you're promising for them, but how certain can you be, nevertheless, if given the fragility of the coalition government there that they will be able to succeed in this program?

MR. KÖHLER: Let me first say that I didn't ask for an interest rate cut. I said it is helpful. (Holding up a newspaper.) I feel I am the chief of the IMF, but I am not this chief. Mr. Mussa is a brilliant economist. Sometimes he also overstates his fear, his vision, to make a nice and entertaining presentation; so his formulation may not have been the absolute appropriate one. But, the more important thing is this is a brilliant, excellent, serious economist. So, we should not focus on whether or not he put pressure on someone in the ECB. It was the pointed argument of a serious economist. That should be part of our discussion, and I'm sure that the colleagues from the ECB and central banks from Europe will do so. So this weekend's discussion will be constructive. And no one has the absolute truth. I am absolutely sure that Mr. Duisenberg and others will have arguments for their position, and they will elaborate here on that, and then we will discuss it together and come to a joint conclusion.

Turkey, there is no absolute certainty, but there is a high probability that this program works. Why? I think the Turks have gone through a difficult, painful process of recognizing reality. And, the most important thing is that they now have a floating exchange rate. This will help. It paves the way for getting out of this crisis with growth.

Secondly, I am not amused by how some people, commentators, judge Turkish people. The Turkish people are solid people, hard working, well known for paying back loans, debt. This should also count.

Thirdly, under the leadership of Minister Dervis an adjustment program has been put together that goes very far. It withstands all comparisons to other adjustment programs. And, in particular, it is true that they make a strong stab in restructuring the bank sector, which is the core problem.

This program is also based on clear commitment and action to combat corruption and to make the political process more transparent, to depoliticize the economy. All of the political parties in the coalition are involved in the program. So there is no absolute certainty, but a high probability that it works. And anyway, it deserves the support of the international community.

QUESTION: Mr. Managing Director, I would like to ask you about Indonesia. As you know, the political situation in Indonesia is explosive, potentially. The government is not in a strong position to deliver on many promises. On the central issue of the budget deficit, just last month the government said it would be hard to keep it under 5 percent of GDP. More recently, it has committed itself to 3.7 percent of GDP. My question is, do you find this credible in the political circumstances in Indonesia? If so, what next? If not, how are you going to proceed in Indonesia?

MR. KÖHLER: I must admit that it is indeed a tragedy what happens in Indonesia. And, no one, including the Fund, can judge itself free of part of the responsibility for this tragedy. But we should also not confuse ourselves. At the end, nothing works, and no international support works if there isn't a minimum degree of political stability and if you want, law and order. Unless this is established, I can't see how support can be efficient, because Indonesia deserves support, will get support, but there is a need for law and order. And this has to be reestablished. Indonesians themselves, that is their obligation to deliver on that.

The budget—I think there is commitment, and there is also commitment from the Fund to go a long way to support Indonesia. But, the budgetary issues are, if you want, at the core also of the political problem. If there is not an order that can control financing, then all money that is spent is lost money. So, we need to know what is the basic order in this country in order to implement our strong commitment to work with Indonesia to help it find a way out of the crisis.

QUESTION: There have been some G-7 members that have made criticisms about the way the IMF was managing crises, and according to some press releases the American administration would like the IMF to first get some results from the countries before giving them the money. What is your comment?

MR. KÖHLER: I think the U.S. administration has the same desire as the IMF and the international community. We want support programs, crisis packages, to be successful. And, if a new administration comes in with a fresh look, I think this does no harm. I do think, therefore, that crisis prevention is and should be even more at the heart of the Fund.

Secondly, I do think that we should have a look how, through prior action, the governments can demonstrate that they are serious with their commitment to do the right things. I think this is the approach Secretary O'Neill has taken. I think it is a reasonable approach, and we are exercising it, for instance, with Turkey.

QUESTION: Argentina. You said the other day in the press conference you gave with the press agencies that you needed more precisions on the Cavallo plan. What kind of precision are we talking about? Are we talking about how he is going to cut the budget, the deficit, the numbers? That is first.

Second, I wanted to know your opinion. You know that he has proposed to include the euro in the convertibility plan, to peg it not only to the dollar, but also to the euro. And, I wanted to know your opinion on that.

MR. KÖHLER: The precision is exactly what you hinted at. We want to know how Argentina comes back on track with the fiscal targets set out in the IMF arrangement, and we are going to discuss that tomorrow with the minister, and I look forward, really, to hear his ideas and suggestions and hope that we can agree on that.

On the basket idea, I must say, I am still a strong believer in a good role for the euro in the long run, but it has nothing to do with this issue of Argentina. I think, and my working assumption is absolutely clear, there is a convertibility law, there is a currency board. We base our cooperation and our advice on this framework, nothing else.

QUESTION: For Brazil, what are the risks of contagion from Argentina?

MR. KÖHLER: There are some signals, some signs of spillover, as can you recognize it with the interest rate spreads. So everybody should be vigilant. But here, it is also true what I already said about Mexico. Brazil has strong economic fundamentals. It improved a lot since its crisis some years ago. It has, I would say, an absolutely outstanding performing central bank. It has a clear commitment from the government and Minister Malan to stay the course of fiscal solidarity. So I have no doubt that Brazil can weather and will weather the storm. There is tension, but no need for panic.

MR. DAWSON: Thank you. We will see you at the closing press conference.