Intervention by Mr. Gerrit Zalm, Minister of Finance of the Netherlands
Interim Committee Meeting
September 26, 1999

The Interim Committee member for the constituency consisting of Republic of Armenia, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Georgia, Israel, former Yugoslav Republic of Macedonia, Republic of Moldova, The Netherlands, Romania and Ukraine.

1. Institutional Reform and the Strengthening of the Interim Committee

The IMF should remain at the heart of the International Monetary and Financial System. By combining wide membership with well-defined procedures for representation through constituencies, the IMF and its fora are better suited than other informal or ad-hoc groupings to discuss and decide on matters relating to the monetary and financial system. The participatory nature of the decision making process in the IMF guarantees `'ownership'' of and accountability for Fund policies in all IMF members. The functioning of the Interim Committee can be strengthened. Improving the preparation of the IC by a deputies-IC on an as needed basis is a clear means of reinforcement. With recent economic crises taking place in emerging markets, I recognise that there is a clear need to improve participation of these countries in the discussion on international monetary affairs. Further strengthening of the IC could take place through the creation of working groups of flexible composition under the IC, with the appropriate participants being selected on the basis of the topic under consideration. Topics for discussion in such working groups could include private sector involvement in forestalling and resolving crises, liberalization of capital flows or choices of exchange rate regimes.

2. Private Sector Involvement

Private sector involvement in the prevention and management of international financial crises is one aspect of the international financial architecture in which progress thus far must be considered insufficient. I call upon the IMF to strengthen its work in this area.

Good debt management is a crucial element of sound preventive policies. I urge the Fund to work on best practices for sound debt management and, in this context, to further look into market-based innovative instruments that a country could use to limit its external vulnerability, such as private contingency credit lines. In addition, debtor countries should be stimulated to improve and maintain good relations with their creditors, just as corporations put a lot of effort in maintaining good relations with their investors. A way to improve relations is through the use of so called `debtor-creditor' committees. I think this can help to prevent investors' panic caused by uncertainty and will also facilitate efficient co-operation during crisis management. The IMF, together with other relevant fora and the private sector, could formulate some basic principles and guidelines on how to set up and run such a committee. It will be far easier for the debtor countries to set up a proper functioning system if they do not have to re-invent the wheel over and over again. In addition, principles and guidelines will help to make `debtor-creditor' committees a standard feature of a country's debt management.

A promising possibility is the inclusion of rollover options in debt contracts, in order to create a predictable and transparent process for the role of the private sector in crisis resolution. Along with other proposals to bring about orderly procedures for the involvement of the private sector in international financial crises, maturity call options deserve more attention by the IMF. In addition, the resilience of countries to financial market turbulence can be enhanced by the strengthening of the domestic financial sector. Surveillance and technical assistance by the Bretton Woods institutions can stimulate the implementation of the recent initiatives in this field.

I welcome the Fund's increased focus on involving the private sector in crisis management. The case by case approach has succeeded in securing private contributions to the funding of members' financing gaps. However, the approach also carries a number of risks. First, this is not very transparent, making the pricing of debt difficult. Furthermore, considering every case on an ad hoc basis might also lead to unequal treatment of countries as well as of creditors. While recognising that every crisis situation has its own specific characteristics, I see a clear need for establishing general principles for the involvement of the private sector in international financial crises. Encouraging emerging markets and the private sector to make use of collective action clauses in bond contracts is one way of achieving this. I also think that the advanced economies could set a strong example by including collective action provisions in their own bonds. Equal treatment for different sorts of creditors also means that it would not be right to restructure only the debt that is relatively easy to restructure, while letting other creditors off the hook.

3. Exchange Rate Regimes

I welcome the analysis and discussion by the Executive Board of appropriate exchange rate regimes in emerging market economies. The success of a foreign exchange arrangement does not rest on the intrinsic superiority of fixed versus flexible regimes, but on their coherence with macro-economic and structural strategies. As far as fixed exchange rate regimes are concerned, what is called for is a commitment of the authorities to the chosen regime by supportive macro-economic and structural policies and by proper debt management. Furthermore, countries with fixed exchange rate regimes should pay appropriate attention to the right response in case the exchange rate moves out of line with fundamentals. The Asian crisis showed once more that countries should exit fixed exchange rate regimes in times of economic calm instead of waiting for the market to enforce the abolition of an exchange rate peg. Factors influencing the choice of the appropriate exchange rate regime should also include the sequencing of capital account liberalisation and financial sector reform and the degree of development of the foreign exchange markets.

4. Orderly liberalisation of capital flows

The international community should proceed with the orderly liberalisation of capital controls and national authorities should continue to avoid as much as possible the use of capital controls. I call upon the Fund to continue to assist member states in their efforts and to my mind, the Fund should be given an explicit, official mandate to underpin this work. I regret that in the last six months we have booked little progress in this field.

Orderly liberalisation of international capital flows is beneficial as it increases growth potential in two ways. Firstly, it makes additional resources available to economies through more efficient allocation of these resources. Secondly, it enhances the disciplinary workings of the markets on domestic policy making. However, to prevent excessive turbulence, this liberalisation should proceed in an orderly fashion. That is to say, it should proceed hand-in-hand with the strengthening and liberalisation of the domestic financial sector and in combination with efforts to put the domestic economic policies on a sound footing. Furthermore, right sequencing is important, where foreign direct investment should probably be liberalised sooner and short term capital flows later.

To promote stable economic growth, sound macroeconomic and prudential policies, including an appropriate exchange rate regime are vital. Capital controls are no substitute for this. If and where present, they should therefore be temporary, as little distortionary as possible and they should be regarded as means to gain time for policy makers to put their house in order. Their effectiveness depends on the administrative capacities of national authorities and possibilities to circumvent the controls.

5. Fund surveillance, standards and transparency initiatives

To improve crisis prevention, we have worked on strengthening surveillance, increasing transparency and developing and implementing standards. These efforts have put considerable and diverse demands on the IMF. It is important that in our efforts we set clear priorities so that the Fund is not overburdened and consequently weakened in the process.

The first field where priorities are called for is Fund surveillance, where the Fund should focus on its core areas of expertise. Core areas are the exchange rate, monetary and fiscal policies, capital account issues, and financial sector issues. Structural issues should also be dealt with, but only if deemed essential for maintaining macro-economic and financial stability.

The second field is transparency of the public and private sector and the corresponding standards. I welcome the Code of Good Practices on Transparency in Monetary and Financial Policies and I look forward to the finalisation of a manual, which should provide us with concrete examples on ways to implement the Code. The Netherlands stands ready to meet the requirements of the new reserve template in the SDDS. However, in deciding on future work, we should judge each new proposal by its added value and its connected costs. After all, more transparency is no free lunch and we should keep in mind that transparency is not an end in itself, but a means to strengthen the functioning of markets.

The third field concerns transparency by the Fund itself, where commendable progress has been booked. In this light, the gold transaction to facilitate the Fund's contribution to the HIPC initiative is a regrettable step. As regards the pilot project for voluntary publication of Article IV reports, The Netherlands, Croatia, Romania, Israel and Aruba have committed themselves to publication. However we should ensure that the increasing transparency does not negatively affect the policy discussions with member states, which should be frank. Secondly, the IMF should not turn into a rating agency, however much the markets may call this desirable. Market participants and national authorities have their own responsibilities in the field of transparency and risk assessments. The Fund has a role to play in the monitoring of and assistance with the implementation of standards that lie within its core mandate, in the context of Article IV consultations. It should also promote the co-ordination of the monitoring of other standards set by different organisations. Thirdly, transparency of the IMF to the outside public should not go at the expense of candour of IMF judgements or lead to the pre-editing of relevant information. The Board should receive all the information it requires to make proper judgements.


Over the years, the Netherlands has always been a strong supporter of debt relief for the poorest countries and we have always backed up our support financially. We have forgiven almost all our outstanding bilateral ODA-debt to these countries, we have tried not to be the cause of the mounting debt problems of the poorest countries by providing bilateral aid only in the form of grants during the last decade, and we have made substantial donations to the HIPC funds of several multilateral institutions, including the Fund.

It should therefore come as no surprise that the Netherlands supports the proposed modifications of the HIPC Initiative with the purpose of providing wider and deeper debt relief whilst encouraging recipient countries to conduct good policies. I support the idea of using floating completion points, and stress the importance of including key social and economic reforms as conditions for completion. These key reforms must be clearly described, easily monitored and must be consistent with a medium to long term strategy for growth and poverty alleviation designed jointly by the Fund, Bank and participating governments, with room for participation by civil society.

Now that the enhanced HIPC framework has attracted broad support, it is high time that agreement is reached on full financing and equitable burden sharing. The Fund should be certain of the financial backing of its commitments to debt relief and for the continuation of ESAF. Resources should be provided in such a way that it does not compromise the resource transfer to other poor countries nor affect negatively the financial position of the Fund. Securing an agreement on funding that meets these conditions must have absolute priority.

As part of the proposals to secure financing of the Fund's share in the HIPC initiative and for the continuation of ESAF, the proposal for increased contributions by the Fund through non-reimbursement of the General Resources Account for the costs of administering ESAF can be accepted. We have expressed grave doubts about the proposal to revalue part of the Fund's holdings of gold through off-market transactions, and I note with regret that an 85% majority in favour of this proposal exists in the Fund. The gold sales proposal that was originally on the table was preferable by far, since that plan would have delivered real resources for debt relief, whereas the current proposal is simply creative accounting. This method of freeing Fund resources for debt relief is not transparent, and in effect leads to generating the bulk of financing through a decline in the Fund's reserve position. I am concerned about this proposal which basically comes down to weakening of the Fund's reserves. I therefore advocate a strong form of ring-fencing of off-market transactions involving a repurchase to prevent the future use of this instrument. In this respect, the speed at which the amount of gold to be revalued was increased from 10 million ounces to 14 million ounces is worrying.

It is very important to realize that the success of HIPC initiative depends on securing full financing for all participating multilateral institutions. The Netherlands therefore proposes to consider the costs of all multilateral institutions that must be borne by bilateral contributions jointly and to reach agreement on a fair burden sharing mechanism for all these costs.

I believe that the costs of bilateral debt relief under the HIPC initiative should be considered separately from the costs of the multilateral creditors that must be financed through bilateral donations. The fact that countries have large debts outstanding from HIPCs is a consequence of the creditors' own policies. Since the early nineties, the Netherlands has had a policy of providing ODA only in the form of grant and in this form has provided on a cash basis, USD 6 billion in aid to the HIPC countries from 1990 to 1998.

In conclusion, it is of the greatest importance that we maintain the focus on good policies in the modified HIPC initiative and secure full and equitable financing for debt relief quickly, so that the road to sustained growth and poverty reduction in highly indebted poor nations is cleared.

7. IMF and Social Policy Issues

I welcome the increased attention to social policies and issues in IMF-supported programs and I am particularly pleased that the Fund is taking recommendations from the external evaluation of ESAF seriously.

When addressing the role of the Fund in social issues, the first principle must be that the Fund's core area of expertise, sound macro-economic policy advice, forms the basis of its contribution to growth and poverty reduction. In terms of the design of Fund programs, there should be a distinction between `normal' balance of payments support and ESAF programs. When the goal is to alleviate short-term balance of payments problems, the Fund's aims in the social sphere should be limited to mitigating adverse short-term social effects of the program. ESAF programs, on the other hand, should be designed with a long-term goal of growth and poverty reduction in mind, in close co-operation with the World Bank. It is a positive development that the IMF proposes a new approach towards ESAF, one in which, through a joint IMF-World Bank framework, the social objectives of the recipient country are integrated into the policies that are implemented under ESAF.

Because the expertise of both IMF and World Bank is required for the design, implementation and monitoring of policy programs that ensure growth and poverty alleviation, intensive co-operation between the Fund and the Bank is in order. I support the joint formulation of a Poverty Reduction Strategy Paper by the Fund, Bank and governments as a vehicle for such co-operation. The PRSP should be the basis for designing Bank and Fund lending operations in developing countries and serve as a framework with which all ESAF and Bank supported programs must be consistent.

8. WEO

I agree with staff's assessment that the outlook for the world economy has improved but that the downward risks are still considerable. Notably, the speed with which current account imbalances between the major economic regions will unwind is an important factor.

Developments in the U.S. are of key importance. It is still unclear whether the long expected economic deceleration is currently taking shape.

The better than expected figures in Japan are more than welcome, but the fragile recovery is currently threatened by the steep rise of the yen. It is important that corporate and financial sector restructuring efforts maintain momentum.

Recent figures would indicate that economic recovery in the core countries of the eurozone may be faster than expected. Monetary conditions in the eurozone are sufficiently accommodative and the pace of budgetary consolidation in most countries of the eurozone is on track. The major challenge in most eurozone countries now is to use the economic upswing to push forward with structural reform, which has been long overdue.

The events that took place in Kosovo this year have had negative economic effects on other countries in the region. Five out of the six most affected countries are members of my constituency. Coherent stabilisation policies and support from the international financial institutions are important for further economic development in the region. Therefore I would like to call on the IMF to continue its enhanced support in the form of programmes and assistance to the countries involved.

In Asia, economic recovery is under way. Although this is to be welcomed, it should not distract authorities from the continued urgency of structural reform, in order to place economic recovery on a sustainable footing. The economic situation in Latin America continues to improve, although downside risks persist. A point of attention for some countries is their relatively high external debt ratio. Sustained growth in Latin America can only be achieved if it is supported by sound fiscal and monetary policies as well as strong commitments to structural reform. In the transition countries, the economic benefits in countries that are early in the reform process, becomes more visible each year. These countries not only show better medium term growth performance but are also more resilient against external shocks. Countries in which structural reform has lagged behind should learn from this experience.

9. Y2K Facility

Despite the efforts that have been made around the globe to deal with the Y2K problem, a certain degree of uncertainty about the potential economic and financial consequences of the problem remains. In my view, existing facilities are likely to be adequate to alleviate any liquidity needs that might arise from Y2K related problems. However, by introducing a special facility, the Fund underscores its readiness to come to the aid of countries experiencing problems due to the Y2K bug. To deter unnecessary use, the surcharge on this facility will not be any lower than that of the SRF and CCL. Moreover, in our view the access limit of 50 percent of quota should be seen as a strict maximum. If a country needs even more liquidity support, it is doubtful whether its problems are caused solely by the Y2K-bug. In that case it should revert to regular IMF facilities.