For more information, see United States and the IMF

Statement by Treasury Secretary Lawrence H. Summers
to the International Monetary and Finance Committee
Prague, Czech Republic
September 24, 2000

List of IMFC Statements
IMFC Communiqué

I would first of all like to thank our hosts of the Czech Republic for the care, organization and hospitality that has characterized these annual meetings. I am also pleased to join Horst Koehler at his first IMFC meeting.

I.  Prospects and Policy Challenges in the World Economy

We meet at a time when the outlook for the global economy is better than it has been for a number of years. But it would be a mistake to consider the positive outlook as in any way ensured, or to fail to take advantage of the current environment to address a number of ongoing challenges: the challenge of ensuring sustained, balanced global growth in the major economies; of reducing vulnerabilities in emerging markets; of supporting continued economic reform and growth in transition and developing countries; and of strengthening the international monetary system and reforming the IMF.

In the United States, while healthy growth and low inflation continue, we are mindful that we must not take our expansion for granted. We continue to direct fiscal policy toward debt reduction and enhancing the long-run solvency of Social Security and Medicare, but we must do more. We must also make targeted investments that would assist working families and extend the benefits of our economic expansion to all segments of our society.

Prospects in the other major industrial countries have also continued to brighten since our last meeting. But it would be a mistake to yield to complacency. Europe and Japan need to push ahead with reforms that will allow them to lock in their recent gains, which in turn will help ensure that the major economies continue to support a favorable global environment. In Europe, the stronger growth and reductions in unemployment long looked for are now arriving. But for better performance to endure, Europe will require substantial structural reforms to remove barriers to investment opportunities, including opportunities with respect to new technologies.

We have all been heartened by recent signs of recovery in Japan. But to help ensure that the still-fragile recovery takes firm hold, it is critical to maintain supportive fiscal and monetary policies. Japan must also keep working to strengthen its financial system—with a special emphasis on disposing of bad assets, improving transparency and disclosure, strengthening supervision, and adopting effective and flexible resolution techniques—and make further progress on market-opening deregulation.

Emerging market economies face the challenge of taking full advantage of the more positive environment to implement policy improvements that will reduce vulnerability and promote sustained, non-inflationary growth. In Latin America, countries need to strengthen further their fiscal positions and continue their efforts to improve the resilience of the region's financial sectors by increasing private ownership of financial institutions, improving prudential regulations and supervision, and dealing with problem assets.

In emerging Asia, the authorities need to focus on fully recapitalizing banks so they are better positioned to force debtors to restructure, strengthening bankruptcy regimes to force debtors to negotiate, and privatizing intervened financial institutions. They should also allow for greater market determination of exchange rates to help limit inflationary pressures, facilitate the natural adjustment of current account surpluses from post-crisis highs, and reduce the need for higher interest rates, which complicate debt restructuring.

Growth has picked up in the transition economies of Central and Southeastern Europe, reflecting both an improved external environment and the reduction of tensions in Kosovo, while price levels have remained relatively stable. The Czech Republic is climbing out of recession. Countries in the CIS are also demonstrating stronger economic performance, with a few exceptions. Ukraine will post its first year of real GDP growth since independence. The Russian economy has continued to strengthen, in part because of external factors, providing a stronger foundation to address Russia's reform challenges. The government's economic program lays out a sound reform strategy. The key is implementation. While Russia has taken a good first step in approving tax reform, the sustainability of growth will depend to a large extent on Russia's ability to take action on other key structural issues as well—such as strengthening the rule of law and the financial system—that have been hindering Russia's development for years. Combatting money laundering and establishing accountability and transparency in the central bank are critical in this context.

The transition process has proved more complex and challenging than any of us anticipated, but we are now in a position to begin making informed judgements about what works and what does not. We know, for example, that as the government's role in the economy diminishes, and some measure of macroeconomic stability is achieved, countries should move swiftly to put in place the institutional and policy underpinnings to support a market economy, including strengthened legal institutions and enforcement, creation of a sound commercial banking system and robust financial markets, privatization, deregulation and trade liberalization, and initiatives to combat corruption. Otherwise, there is real risk that the transition process will stall, giving vested interests an opportunity to secure their grip on the economy and undermine competition.

In Sub-Saharan Africa, circumstances vary widely across the continent. Several countries are recovering from devastating natural disasters, others are dealing with the economic consequences of commodity price shocks, others are emerging from conflict, and too many are suffering devastating losses due to HIV/AIDS. Despite the difficulties, a considerable number of countries continue to pursue effective economic reform programs that are paying dividends, and overall economic prospects have improved. But there is a need to diversify economies to reduce vulnerability to commodity price shocks; develop stronger agricultural growth strategies based on enhanced productivity and rural poverty reduction; improve governance and fiscal management; continue lowering trade barriers to attract investment and increase competition; and increase spending on health and education, especially on HIV/AIDS.

The global community, African and non-African alike, must place much greater emphasis on formulating comprehensive anti-AIDS strategies, encompassing social awareness campaigns, education, prevention, and community involvement, as well as public health responses. Finally, we would point to the need for devising and implementing effective peace agreements in conflict situations, which if left unchecked will undermine much of what Africa has achieved over the past 5 years. Conflict and HIV/AIDS are the most serious threats to Africa's economic future.

II.  Strengthening the International Monetary System and Reforming
the IMF

The first IMF annual meeting of the new millennium provides a special opportunity to look back at the experience of the past several years, in particular the events of 1997-1998 when we confronted the challenge of a global financial crisis. While it would be premature to say that the final lessons have been drawn from that experience, sufficient time has passed to allow us to reach some basic understandings about it as well as its implications for avoiding future crises and dealing more effectively with them when they occur.

A core understanding is that these were capital account crises, where significant underlying weaknesses—unsustainable budget deficits, short-term external obligations far in excess of reserves, unsustainable exchange rate regimes, and weak banking systems—left economies vulnerable to panic. The shift in investor sentiment and the rush by local and foreign investors to hedge or reduce exposure resulted in waste and upended lives for many innocent people.

This reality has shaped the international community's response in charting a course for reform of the international financial architecture. That course has emphasized the importance of three major changes, both at the national and international level, aimed at avoiding crisis and responding more effectively when it occurs:

(1) Preventive care through safer policies — At the national level, especially in emerging market economies, this means, for example, strengthening national balance sheets so as to reduce excessive leverage, and improving banking regulations, supervision and accounting practices to pave the way for stronger, more efficient financial sectors and deeper capital markets. It also means, crucially, avoiding vulnerable fixed-but-adjustable exchange rate regimes in favor of arrangements that help a country ride out and adjust to the inevitable tremors and shocks.

(2) Increased transparency and stronger surveillance — To avoid the kind of surprises that spark panic, and to encourage discipline born of the knowledge that information is being widely shared, countries need to adopt stronger transparency and disclosure requirements, and, generally commit to a new spirit of openness. To complement this effort, the international community needs to complete the development of a framework of international codes and standards to provide minimum benchmarks for countries in areas such as bank supervision and securities market regulation.

(3) An IMF that is better equipped for crisis response — Last week's agreement on reform of IMF facilities is a major step forward towards this goal and complements other improvements of the past several years—notably the creation of the Supplemental Reserve Facility and the Contingent Credit Line and the elimination of other facilities. Taken together these reforms help provide the IMF with the tools needed to deal with modern capital account crises while avoiding, as far as possible, distorting the incentives of investors and government.

While there is still much to be done in these and other areas related to strengthening the financial architecture, there are signs that the emphasis placed on them over the past several years has already led to constructive change. In countries that have experienced liquidity crises, the ratio of external debt to foreign reserves has more than halved since 1996; that same group of countries has seen short-term debt as a share of total external debt fall from 34 percent in 1996 to 18 percent in 1999. Greater foreign participation in domestic banking systems is adding resilience to the financial sectors of, for example, Argentina, Mexico, Brazil and Korea. And we are seeing evidence that more countriess—some 14 at last counts—are moving away from vulnerable exchange rate regimes. In short, while the international financial system has evolved incrementally and, certainly, needs to continue to evolve, we can already discern a different architecture than we had even a few years ago.

The IMF has played and will continue to play a central role in this evolution. Along the way, the Fund has evolved significantly itself. We very much welcome the reforms the management of the Fund has embraced over the last few years. Going forward, we expect this mutually reinforcing dynamic to continue, especially in the following critical areas.

1.  More Selective Financing

Part of redefining the IMF's role has been to make clear that its greatest success will be if it avoids lendings—in other words, if it prevents crises. And if the IMF does lend, it would do so on a short-term basis, encouraging countries to develop sustained access to private markets and avoid repeated reliance on IMF finance. Nonetheless, the terms and conditions of IMF lending are among the core tools that the international community has for encouraging strong policies both before crises emerge and once countries face balance of payments problems.

In the run-up to these meetings in Prague we have seen a very important step by the Executive Board to change dramatically the IMF's core lending instruments. I want to commend the Board as well as management for their work. They have come to terms with the difficult issues of adjusting incentives and restructuring facilities in a way that provides a framework for financial support that is consistent with the modern realities of global capital markets and the revolving character of IMF finance. The package of measures agreeds—strong early repurchase expectations, limits on medium-term lending, surcharges for higher levels of access under normal lending instruments, enhancements to the Contingent Credit Line, and strengthened post-program monitorings—required compromise from all IMF members.

We believe the result will be a stronger and more resilient IMF going forward, one which supports and does not supplant access to private capital markets. And, importantly, the agreement signals that the institution is indeed capable of and willing to evolve to equip itself for future challenges. This is vital to preserving the value of the institution and to maintaining broad-based support for it. We encourage the IMF to follow through on the changes agreed and adapt ongoing operations to reflect the spirit of this agreements—that IMF finance must be predominantly short-term, priced to discourage casual or excessive use, and accompanied by incentives to repay as quickly as possible.

With this objective in mind, we propose that the Executive Board undertake quarterly reviews of outstanding obligations with a focus on countries that have, or have regained, sufficient access to private markets.

2.  Better Focused Conditionality

Equally important to the price and other features of IMF lending facilities are the policy conditions on which IMF programs depend. My view remains that when crises come, there can be no hard and fast rules for an effective response. As the sources of crises vary, so must the solutions. And the success of programs depends most importantly on countries' commitment to following through consistently.

The IMF is about to undertake a review of conditionality. This is appropriate and timely, given our recent experiences with crises as well as the international agenda to equip the IMF for the future. In considering this issue, I believe we should be guided by the basic principle that, in crises, the effectiveness of IMF programs depends on their being focused on the conditions necessary for restoring confidence, growth and a return to capital market access, rather than on all those changes that are desirable for improving economic efficiency. This principle is easy to state yet hard to apply. We can not afford to exclude, ex ante, issues critical to the financial system, the capacity to enforce contractual arrangements, systematic corruption or failures of governance, and core social issues where they are relevant to success. But streamlining and greater focus must be pursued if we are to improve the effectiveness of the IMF.

3.  Crisis Prevention through Transparency and Strengthened Surveillance

At the spring meetings this chair called for a broad commitment to a new spirit of openness, involving a qualitative shift in the nature IMF surveillance and degree of transparency. This objective reflects our conviction that crisis avoidance is possible only if relevant information is made widely available to the parties most concerned, both private and public, and systematically monitored.

IMF Transparency and Disclosure. Over the past several years, we have seen the IMF move impressively forward in its policy and practice with respect to transparency. The fact that progress has been incremental, occasionally controversial, and on some points still less than what it should be, does not change the fact that a quasi-revolution has taken place in this area. Only three years ago, the lid on IMF policy, program and surveillance documents was virtually closed and the Fund website was in its infancy. Today, the IMF and member countries publish a broad range of policy, program and surveillance related documents. I'm pleased to note, for example, that Public Information Notices (PINs) are issued following Article IV consultations about 80 percent of the time. Nearly 50 countries have released their Article IV staff reports in contrast to the anticipated 20. Nearly all Letters of Intent are released (90 percent between June 1999 and July 2000). The Fund's rich and constantly updated website receives over 100,000 hits a day. Currently, the biggest lag may be in the public's awareness of just how much information about the IMF is available.

We welcome in particular the recent decisions taken by the IMF Board to make the pilot project for release of Article IV staff reports a permanent program, to encourage the publication of staff reports on the use of Fund resources and to adopt a more systematic approach to the release of policy papers and Public Information Notices following discussions of policy issues. We also note with appreciation the start in August of the Fund's new practice of publishing its Financial Transactions Plan on a quarterly basis.

Yet there is more to be done. Broadly speaking, we need to reinforce the notion that standard operating procedure is to release information unless there is a compelling reason not to do sos—and avoid backsliding from this principle. In particular, we strongly believe that countries benefiting from Fund financial assistance must make public the nature of their reform programs and commitments, including Letters of Intent, Memoranda of Economic and Financial Policies and Technical Memoranda of Understanding. We also look forward to wider participation and greater consistency in the transparency practices of the Fund and member governmentss—so that there is a steady flow of information across the full range of IMF activities, for instance with release of Public Information Notices following all Article IV discussions.

Vulnerability Indicators. Indicators of liquidity and balance sheet risks for countries that have access to international capital markets are an essential component of IMF surveillance. More widespread use and dissemination of these indicators will better inform markets and policymakers alike and help to avoid severe crises such as those we have seen in the last decade.

The IMF has made progress in incorporating indicators of liquidity and balance sheet risk in Article IV staff reports. However, the scope and consistency of these indicators remain limited, including for the most systemically important emerging markets. The IMF should move promptly to develop a process for making these indicators more widely available along with detailed analysis. This requires coming to a conclusion about which indicators are most useful and formulating the outline and content of a publication for disseminating them. By the spring meetings the Fund should have this process well underway.

SDDS. One of the key vehicles for promoting the flow of information from governments to markets and investors is the IMF's Special Data Dissemination Standard (SDDS). We are increasingly hearing from market participants how important it is for them to have access to the kind of information provided through this and similar channels. We are therefore pleased to see that more countries are subscribing to the SDDS. At the same time we are concerned that a number of important countries do not yet subscribe. We are encouraged that Brazil and Russia have committed to subscribe to the SDDS and are working on improvements to their statistical systems. We look forward to their subscribing as soon as possible. We urge all subscribers report reserves according to the new template.

Liability Management. One of the key lessons of the recent crises is that particular attention needs to be given to managing the risks to a government's balance sheet created by a large stock of liabilities with a short residual maturity. This is especially true if the stock of maturing obligations is large in relation to levels of liquid reserves. We are pleased that the Executive Board has held a first discussion on a draft set of joint World Bank/ IMF debt management guidelines and look forward to agreement by next spring. These guidelines should recognize that decisions about public debt and reserve management must take into consideration the country's overall balance sheet. Attention needs to be given, for example, to the impact that a negative shock to the private financial sector could have on overall liquidity and the government's own balance sheet.

Codes and Standards. The development of a framework for international codes and standards is, in some respects, the new frontier for surveillance. This framework will help promote financial stability by setting minimum performance benchmarks in the key areas of financial regulation and supervision, data transparency, macroeconomic policy, and institutional and market infrastructure. Work has advanced significantly in recent monthss—gaps, such as public debt management and deposit insurance, are being addressed; assessment methodologies are being developed; and assessments are underway. But the critical task remains: encouraging countries to implement key economic and financial policy codes and standards.

The twelve standards highlighted in the Financial Stability Forum's Compendium of Standards serve as minimum benchmarks that all countries should voluntarily and explicitly seek to meet or exceed. We welcome the ongoing effort, in which the IMF participates, to develop a range of market and official incentives. In this regard, we welcome the recent report of the Follow-Up Group on Incentives to foster implementation of standards. While the official community can help to encourage countries to make progress in implementation, market discipline will ultimately prove the most effective incentive. For market discipline to be effective, and for the larger international community to be better informed of progress mades—or steps still neededs—transparency and disclosure are required.

As I said when we last met, assessments are themselves a key incentive for implementation of standards, but they cannot serve this function if they are not available to the markets. When the Executive Board revisits the Reports on Standards and Codes (ROSC) program later this year, we hope to see agreement on a presumption of disclosure. Moreover, the results to date make it clear that this program should grow: more modules from more countries on more standards, including those relating to market integrity, will be critical to measuring progress in promoting financial stability. With an increasing number of ROSC modules posted on the IMF website, there is little doubt that, over time, their value as an important risk assessment and development tool will be proven. In this regard, we welcome the recent outreach efforts conducted by the IMF, World Bank and Financial Stability Forum in major market centers, and encourage the IFIs and standard-setting bodies, along with national authorities, to conduct further exercises of this kind.

We attach particular importance to assessment of the quality of bank supervision and securities market regulation, which are integral elements of strong financial systems. The joint IMF-World Bank Financial Sector Assessment Program (FSAP) provides a critical vehicle for undertaking such assessments and identifying vulnerabilities as well as developmental needs. We believe it is very important, in the interests of transparency and disclosure, that countries be allowed to share their Financial System Stability Assessments with a wider audience: it is not in the interests of the IFIs, their membership or the surveillance process to preclude this. As such, we strongly believe that the ROSC and FSAP programs should become permanent elements of IMF surveillance.

4.  Combating Abuse of the Global Financial System

Abuse of the global financial system is a clear case of a "global public bad"—indeed, it is the dark side to international capital mobility. The international community has begun to take action against financial abuse, including the public release of three lists of uncooperative or problematic jurisdictions, and has called on the international financial institutions to join in this effort.

Assisting in this effort should be seen as an integral part of the IFIs' mandate to protect the integrity of the international financial system. Money laundering activities have the potential to cause serious macroeconomic distortions, misallocate capital and resources, increase the risks to a country's financial sector, and hurt the credibility and integrity of the international financial system. Both the IMF and the World Bank already help countries develop and reform their financial systems, improve governance and fight corruption. They are therefore well placed to encourage and support members now on any of the three lists noted above to get off them, and to help keep members off lists in the first place. This does not mean that the Fund or Bank should engage in law enforcement activities, which are certainly outside their mandates. But both can play a greater role in fighting abuse and preserving the integrity of the international financial system.

We therefore urge the IMF and World Bank, consistent with their mandates, to institutionalize the fight against financial abuse and to report on their efforts by the time of the spring meetings. To initiate this effort, the Fund and the Bank should prepare as soon as possible a joint report on their roles in protecting the integrity of the financial system against abuse. In our view, the Fund could incorporate work on this issue into various activities, including technical assistance, surveillance, financial sector assessments, and lending conditionality, where relevant and appropriate. We believe country programs and loan operations should incorporate, as appropriate, preconditions and performance criteria designed to help countries make real and measurable progress in combating money laundering. ROSCs offer a flexible process for incorporating assessments of countries' observance of the FATF Forty Recommendations as another separate module.

5.  Market-Based Solutions to Crises

When a modern capital account crisis occurs, the country, its creditors and the international community as a whole have an enormous stake in the restoration of confidence. Given the scale of private flows in today's global financial system, the IMF always needs to focus on promoting market-based solutions to financial difficulties. Appropriate private sector involvement in responding to financial crises is important because the official sector often cannot and should not handle the financing alone. Several basic presumptions should guide the Fund's approach:

  • First, those countries that have established a strong dialogue with their creditors will be more likely to avoid crises, and better equipped to work with their creditors to find cooperative solutions should they become distressed.

  • Second, IMF lending should be a bridge to private sector financing, not a long-term substitute. Official lending should be a first step towards a more durable solution.

  • Third, the IMF's assessment of a country's underlying payment capacity and prospects of regaining market access should guide the international community's approach.

  • Fourth, where appropriate, the official sector should support approaches—as in Korea and Brazil—that enable creditors to recognize their collective interest in maintaining positions, despite their individual interest in withdrawing funds.

  • Fifth, sometimes it will be necessary for countries to seek to change the profile of their debts to the private sector to focus on short-term financing gaps. Their agreements should do so in a way that does not add to problems down the road.

  • Finally, the IMF should be prepared to lend into arrears if a country has suspended payments but is seeking to work cooperatively and in good faith with its private sector creditors and is meeting other program requirements.

Last spring, the IMFC laid out a set of operational guidelines to orient the Fund's approach to those cases where a debt restructuring is needed. These emphasized the need for the IMF to place strong emphasis on a borrower's medium-term financial sustainability and to aim to strike an appropriate balance between the contributions of official external creditors, including the IFIs, and private external creditors. Going forward, the Fund needs to work to continue to make this broad approach operational, focusing in particular on ways to improve the sovereign debt restructuring process, including steps to make the process more transparent to private creditors, and on developing criteria to help better assess a country's underlying financial situation, prospects for rapid return to the markets, and medium-term financial sustainability.

6.  Modernizing the Structure and Operation of the IMF Itself

If the IMF is to be effective in promoting transparency, accountability, good governance and adjustment among its member countries, it must continue to evolve in these areas itself. The Fund has clearly shown a capacity to evolve, in some cases with admirable success, but this is an ongoing process.

Establishment of Independent Evaluation Office. We very much welcome and endorse the Executive Board's agreement on terms of reference for a standing, independent Evaluation Office. This is an important step forward in strengthening the transparency, accountability and effectiveness of the IMF. In this regard it will be critical for the office to establish a track record that demonstrates independence, transparency with respect to work program and results, and a commitment to external consultation. We look forward to this office's becoming operational as soon as possible and no later than the spring meetings.

Liaison with Market Participants. We are very pleased that the Capital Markets Consultative Group has been established and met for the first time earlier this month. This is an important aspect of modernizing the IMF. At a time when the volume of global capital flows greatly outweighs the resources of the IMF, close contact between the Fund and private market participants is essential.

Safeguarding IMF resources and misreporting of information to the IMF. We welcome the strengthened framework for safeguarding IMF resources and dealing with incorrect information provided by member countries in connection with their use of Fund resources. Early experience with the new mechanism has been broadly encouraging. Now it is essential to apply it rigorously and uniformly. It is absolutely critical to the credibility of the Fund that, in cases of misreporting, the Executive Board is informed promptly and in advance of consideration of new or ongoing programs, that information about each case is released promptly to the public, and that an appropriately severe set of remedies or penalties are applied, including early repurchases.

Governance Structure. We are pleased that work on this important issue has been engaged. If the IMF is to work credibly and effectively, its governance structure, as a matter of principle, must better reflect the realities of the changing global economy. The Executive Board's consideration of the Cooper Report was an important step, helping to identify and highlight certain difficult and complex considerations underlying this issue. We urge the Executive Board to continue its work on this matter.

Cooperation with Other Institutions. We urge the IMF and World Bank to follow up on the commitments made during the spring meetings to work with the WTO and other relevant institutions to improve the effectiveness of trade-related technical assistance, and to more fully integrate policies promoting trade liberalization and trade capacity building into Fund programs and Bank operations.

We welcome recent steps to increase cooperation between the IMF and the International Labor Organization, including the inclusion of the ILO as an observer at both the Development and International Monetary and Financial Committees. We urge the Fund to cooperate more systematically with the ILO, drawing from the experience of past pilot programs.

III.  IMF Support for Poorest Countries

Our main statement on the HIPC Initiative and PRSP process will be conveyed at the Joint IMFC/Development Committee meeting.

We have a shared desire to see as many countries as possible take the steps needed to reach decision points this year with credible safeguards to maximize the chances for success. Ultimately, the measure of HIPC's success will not be the amount of relief provided, or the speed with which it is given, but the extent to which it promotes real, discernible poverty reduction, more rapid growth, and a durable exit from unsustainable debt.

Regarding financing the IMF's participation in HIPC, I want to emphasize that we are doing everything possible to secure Congressional authorization to transfer to the PRGF-HIPC Trust the remaining investment income from the IMF's off-market gold transactions. The President and I will continue to do our utmost to obtain authorization.

PRGF. Last year, both for its own merits and as part of the broader set of enhancements to the HIPC Initiative, we agreed on the replacement of the Enhanced Structural Adjustment Facility (ESAF) with the Poverty Reduction and Growth Facility (PRGF). We are still at an early stage in the transition from ESAF to the PRGF. Staff has made a good effort to support that transition, but there is a great deal of work to be done to ensure that the PRGF's sharper focus on growth and poverty reduction is reflected in program design.

The sharper focus should be evident, in our view, in the pace, content and sequencing of reforms. It should also be reflected in the streamlining of conditionality. While there has been some evidence of this evolution, we need to see more explicit discussion in program documents so as to more clearly demarcate the shift from ESAF to PRGF. We are convinced that a stronger effort to document operational and programmatic changes will reinforce the intended new focus of the PRGF and help ensure that the public better understands and fully appreciates it.