November 2001 IMFC Statements
IMFC Ottawa Meeting
Republic of Armenia and the IMF
Bulgaria and the IMF
Bosnia and Herzegovina and the IMF
Cyprus and the IMF
Georgia and the IMF
Republic of Croatia and the IMF
Israel and the IMF
Republic of Moldova and the IMF
former Yugoslav Republic of Macedonia and the IMF
Kingdom of the Netherlands-Netherlands and the IMF
Romania and the IMF
Ukraine and the IMF
Statement by Mr. Gerrit Zalm |
Minister of Finance of the Netherlands,
International Monetary and Financial Committee
November 17, 2001
International economic developments
After the tragic September 11 events, policymakers have acted to sustain financial stability and it is encouraging to see that the financial system has displayed resilience. To further guide economic development, national authorities can contribute to sustaining confidence by taking appropriate measures. First, this involves implementing structural reforms, which is the appropriate way to raise potential growth. Second, fiscal policy should remain consistent with medium-term stability. Third, it includes concluding a successful WTO round.
The projected decline in inflation coupled with sound fundamentals, including the achieved fiscal consolidation, have positioned the euro area well to cushion the negative effects of the economic downturn. In the US, monetary and fiscal policies have both been eased to support growth. Consumer and business confidence have dropped sharply, but these indicators may have less predictive power in these uncertain and unprecedented times.
Emerging markets in Asia are affected by the slowdown in world trade, the downturn in the high tech sector and the situation in Japan, where the outlook for recovery is still remote. However, more flexible exchange rates, lower public indebtedness and better corporate and financial governance make Asia better positioned today to resist financial instability. The high public debt in Japan rules out further fiscal expansion and structural reforms in the banking and corporate sectors are crucial to revive economic growth.
Increased risk aversion in financial markets weighs heavily on some of the economies in Latin America, especially in the already fragile circumstances of Argentina. The countries in Eastern Europe and the CIS are withstanding the global slowdown relatively well, although some are vulnerable to trade shocks from Turkey. Emerging markets with country specific vulnerabilities are most clearly affected by financial market turbulence. The fact that capital markets continue to differentiate between low and high quality risks in emerging markets indicates that sound policies are rewarded. Financial sector reforms in particular are key to promoting the benefits while limiting the risks of integration into international financial markets. In the African region, it is projected that growth rates will slow down as well, as commodity prices fall relative to the cost of manufacturing imports.
The role of IMF in the current economic situation
In the currently fragile economic situation, perhaps more than ever, the IMF should continue to provide its membership with policy advice through its regular surveillance process. In this way, the IMF, in co-operation with the World Bank, can make an important contribution to sustain financial stability and to revive economic growth. Inevitably, low-income countries and some emerging countries will be hit hard by the current crisis and the associated economic slowdown. Although domestic policy adjustments by members are the primary channel for the initial response to these developments,the IMF should stand ready to provide these countries with additional funding. The IMF is well equipped to fulfil this role and the recent streamlining and focussing of the activities of the IMF have further enhanced the effectiveness of the institution. In this light, there is no need to introduce new financing facilities. Also, it remains important that member states receive comparable treatment; that access limits are in principle adhered to and that the application of PSI is advanced. In this context, the catalytic approach in our view means simultaneous contributions of the private sector alongside official contributions, rather than a temporary bail out on the assumption that this will elicit an adequate restoration of private sector financing.
Combating money laundering and the financing of terrorism
We fully support the battle against money laundering and against the financing of terrorism, as this constitutes an important pillar in strengthening the international financial system. First and foremost, the main responsibility in combating these undesirable elements lies with individual countries. Nevertheless, there is also a role for the World Bank and the IMF. Given its mandate, especially the World Bank can play an active role to advance financial integrity. This is already embodied in its conditionality and technical assistance. The activities of the IMF should be focused on restricting harmful practices that threaten national or international macro-economic stability. This could be done by supporting other fora through technical assistance and surveillance in the fields of regulation of the financial sector and supervision. In this light, we welcome the development of a methodology paper, which gives the Fund staff common ground to review anti-money laundering elements incorporated in the Basle Core Principles, IAIS and IOSCO standards. This methodology paper could be used in FSAPs and OFC-assessments. Furthermore, the IMF and the World Bank should intensify their co-operation with institutions like the Financial Action Task Force (FATF) and other organisations with expertise in the field of anti-money laundering. In this light, we recognise the FATF 40 Recommendations as the appropriate international standard for combating money laundering and support the design by the FATF of a separate module for anti-money laundering. The FATF should assess this module as the IMF retains its focus on its macroeconomic competencies and refrains from law enforcement issues. If carried out on a uniform and voluntary basis, such an assessment by the FATF could be included in the ROSC process.
Poverty reduction and debt relief
It has been two years since the enhanced HIPC Initiative, the PRSP concept and the Poverty Reduction and Growth Facility (PRGF) were introduced. Within the overall goal of channelling resources towards poverty reduction through providing deeper and faster debt relief to more countries, country ownership was recognised as a key priority. We also stressed participation, local capacity, pro poor content, partnerships and aid co-ordination as essential elements. I also attach great importance to the ongoing review of the PRSP process, including the PRGF programs. The findings will probably confirm that local capacity and genuine country ownership have been the most important factors for success or failure of the PRSP process, while the development of pro-poor policies is proving to be a major challenge in the PRSP process. Process issues have been critical and absorbed a great deal of our attention so far. We should now concentrate on the content of Poverty Reduction Strategies (PRS) and help countries to develop policy scenarios with a better poverty focus. In this respect, Poverty and Social Impact Analysis (PSIA) is an essential tool and I urge the Bank in particular to extend the PSIA to a greater number of PRS-countries. IMF co-ownership is key, but the Bank should take the lead. In order to safeguard the continuity of the PRS process, the Bank and the Fund should assist PRS-countries in formulating realistic macroeconomic scenarios, including fall back options reflecting a deterioration in the external environment. At the same time, donors should work hard to align their aid to the PRSP's. I believe there are still too many projects outside the PRSP framework and there is still too little budget support for good policies. I am also concerned about the high demands from donors relating to the content of the Poverty Reduction Strategy. Donors should not expect perfect strategies, which reflect every priority they can think of. Of course, there are key lessons we have learnt in development practice. If a PRSP is lacking in this respect or if it does not comply with lessons learnt, then donors should respond by intensifying their policy dialogue. The response should not be in the form of demands by way of additional loan conditions. In addition, donors should prevent that "adverse external circumstances" take the form of a lack of Official Development Assistance (ODA). This would make attainment of the Millennium Development Goals more difficult.
Higher ODA would also enable us to deal with the unresolved financial issues of the HIPC Initiative. The HIPC Trust Fund needs new pledges in the amount of $ 700 million by mid 2002, to ensure smooth progress of the HIPC initiative within regional and subregional institutions. In addition, the HIPC Trust Fund urgently needs the conversion of pledges into real payments by donors. As a result of delaying payments, the net present value of existing pledges decreases. I urge donors who choose to pay later to maintain the net present value of their pledges.
Donors made a commitment not to compromise the integrity of IDA when they agreed upon the "pay-as-you-go" approach to cover HIPC financing. This approach leaves IDA with major unfunded gaps in the financing framework. In this approach, IDA enters into commitments while the financing in the next few years fully has to come from internal World Bank resources. Without more donor compensation, this threatens to undermine the financial integrity of the Bank as fewer additions can be made to reserves. This also erodes the capacity of the Bank to make additional means available to other poor countries out of its net income. The Bank has even announced its intention to pre-finance HIPC cancellations of IBRD loans (USD 860 million) out of IDA, despite the absence of donor commitments for compensation. I trust that our commitment not to compromise IDA will be fulfilled, but at the same time, I feel a need to remind others every now and then.
The Boards of the Bank and the Fund recently confirmed that it is possible to provide additional debt relief at the completion point to HIPC countries experiencing severe exogenous shocks. However, this option should not be an excuse not to provide additional assistance during the interim period in response to adverse developments to prevent exogenous shocks from frustrating the implementation of a PRS. Countries facing severe humps in their average debt service ratios (more than 10 percent of the value of yearly exports, for example) should also be in a position to benefit from such additional compensation.
I also urge the Bank and Fund and donors to take into consideration the domestic debt burden of some developing countries. It would be short-sighted to limit ourselves to external debt in the debt sustainability analysis, as many country cases (Bolivia, Ghana) have shown. African Ministers raised this issue as well, at a meeting in the Netherlands on the New Partnership for African Development.
Furthermore, the IFIs should step up their efforts to resolve in the HIPC framework the issue of post-conflict countries' outstanding arrears, which are currently estimated at USD 5 billion. Under current rules, these arrears exclude them from participating in the HIPC Initiative.
Finally, the British proposal to include countries from the former Soviet Union into the HIPC Initiative should be supported, assuming that they qualify. The possibility to admit additional countries is of course already part of the Enhanced HIPC Initiative.
All these steps would result in a substantial increase of the costs of the HIPC Initiative. Donor support will therefore have to be increased, before the HIPC Trust Fund faces liquidity and/or commitment constraints.