The Global Economy and Financial Markets—Outlook, Risks, and
Policy Responses

1. We share the concerns that the recovery of the global economy has been weaker than earlier anticipated and that we need to remain vigilant to uncertainties and vulnerabilities. There should, therefore, be no room for complacency and policies should remain supportive of the recovery. With inflationary pressures generally subdued, macroeconomic policies in advanced countries will need to remain accommodative for longer than had earlier seemed necessary, and if incoming data remain weak, further monetary easing would need to be considered. Attention also needs to focus on policies to reduce dependence on the United States as the global engine of growth, and to support an orderly reduction in global imbalances, which remain a serious risk to the world economy. There is a clear need to strengthen corporate governance and transparency, particularly—but not only—in the United States. The recent reform package passed by the U.S. Congress provides for a welcome improvement in the framework for regulating corporate governance and accounting; the challenge going forward will be to ensure its effective implementation and enforcement.

2. In spite of the global downturn, we are meeting this year against the background of encouraging developments in Africa, underpinned by unprecedented commitment to end conflicts, forge regional economic integration and accelerate the development of the continent. Indeed, African countries are now involved in a concerted effort to eliminate conflicts and prospects for a lasting solution to conflicts are more encouraging than ever. Following 27 years of a devastating conflict, a genuine peace is taking root in Angola while the country's reconstruction gains momentum. There is peace now in Sierra Leone and between Ethiopia and Eritrea, Madagascar is now stable, the peace process in the DRC is at an advanced stage and there are peace negotiations on internal conflicts in Burundi and Sudan.

3. Many African countries have in the last several years implemented strong macroeconomic policies and structural reforms. As yet, these reforms have not significantly benefited our countries. We wish to highlight that while many of our countries have reduced their fiscal deficits, brought inflation under control, reduced external tariffs, liberalized domestic trade and privatized public enterprises, the supply response has not in general been large enough to mitigate some of the negative social impact of such reforms. Also, privatization has in most cases been rushed, leading to the sale of assets below market value, higher unemployment, private monopolies and has not always attracted private capital flows specially foreign direct investment. Furthermore, agricultural subsidies and other restrictive trade practices in developed countries have been undermining economic growth and poverty alleviation in our continent. According to a recent joint Bank-Fund study, trade barriers, mostly erected by rich countries, are eating up $650 billion each year that could otherwise be used to improve livelihoods of the poor around the world. In addition, high debt burden and the failure of countries that have reached completion point under the HIPC Initiative to maintain debt sustainability also remain serious obstacles to economic growth and poverty alleviation.

4. Nevertheless, we remain concerned about the daunting challenges that Africa still faces, in particular the fact that economic growth remains far below rates needed to reduce poverty substantially and achieve the Millennium Development Goals (MDGs). About 340 million Africans currently live on less than US$1 a day and growth prospects for the upcoming years remain clouded by the adverse weather conditions, the evolution of commodity prices including oil prices, as well as the macroeconomic impact of HIV/AIDS. Indeed, HIV/AIDS has become one of the leading causes of death in Africa with about 28 million people infected, representing approximately 70% of people infected with HIV worldwide, and life expectancy has further declined. This epidemic will significantly slowdown productivity and economic growth and is a serious hindrance to our efforts to halve extreme poverty by 2015. In addition, mortality and illiteracy rates in Africa remain the highest in the world and only 58% of the population has access to safe water. Furthermore, the technological divide continues to constrain Africa's efforts towards integration into the global village.

5. To address these challenges, Africa is rallying behind the NEPAD initiative. NEPAD is a determined effort by African leaders to promote democracy and good governance, and to eradicate poverty and place African countries on a path of sustainable growth and development. The NEPAD puts strong emphasis on the need for Africa to strengthen macroeconomic stability, accelerate structural reforms and sustain an annual growth rate of 7% in order to achieve the MDGs by 2015. To achieve this objective, we recognize that it is imperative for African countries to increase domestic savings by stimulating economic growth and confidence, improving public revenue collection and rationalizing public expenditures. However, believing that we cannot overcome these challenges alone, NEPAD considers that action undertaken at the domestic level should be complemented by action at the international level with regard to increased ODA, accelerated debt relief and greater market access opportunities for African products.

6. Indeed, greater integration through expansion of trade, higher capital inflows and labor mobility is essential in supporting the efforts of African countries to enhance growth and reduce poverty. To make globalization beneficial to all countries, we urgently call on developed countries to follow fair and transparent rules by eliminating subsidies and transfers to sectors where developing countries have a comparative advantage, in particular in the agriculture sector. In addition, we urge the international community to provide financial and technical assistance in support of our efforts to diversify African economies, expand the export base and attract FDI. Globalization that is devoid of these ingredients will only continue to lead to the marginalization of countries, terms of trade shocks, and financial instability.

The Fund's Role in Low-Income Countries

7. We warmly welcome the Managing Director's continued strong commitment to helping low-income countries, as indicated by the major policy discussions that have taken place in the last six months on the streamlining of conditionality and encouraging ownership, the promotion of market access for developing country exports, the detailed and substantive reviews of the PRGF and PRSP process and the implementation of the HIPC initiative. Moreover, the Managing Director has strongly highlighted, on various occasions, Africa's vulnerability to trade protectionism by developed countries and has repeatedly stressed that while increased aid flows are essential, trade can play an even more important role. We welcome the Fund's recent establishment of two African Regional Technical Assistance Centers (AFRITACs) as a mean of providing more effective capacity-building assistance to African countries. Our Chair is also particularly appreciative of the flexibility shown by the Fund in providing emergency financial assistance to Southern African countries affected by the recent food crisis.

HIPC Initiative: Status of Implementation

8. The HIPC Initiative has made some progress in recent years and resources are now flowing to beneficiary countries, which are helping these members reduce poverty. However, with only six countries reaching completion point so far, progress has been disappointing. The opportunity cost of these delays are enormous to the recipient countries in terms of foregone real GDP growth, investment, employment, and poverty reduction. To accelerate reaching the completion point, the Fund should further streamline HIPC-related conditionality and provide adequate technical assistance to help countries build capacity for policy implementation and minimize program interruptions.

9. External viability and debt sustainability remains a chimera for HIPC countries due to their lack of market access to developed countries, limited export diversification, dependency on primary commodities and vulnerability to terms of trade shocks and natural calamities. Indeed, although debt relief is needed upfront to allow HIPC countries to have a clean break from the past, economic diversification and market access are the key for countries to achieve long-term debt sustainability. Also, without long-term expansion in the productive and export base of HIPC countries, the increases in social spending are unlikely to be sustained beyond the HIPC Initiative itself. We would emphasize that Fund-supported programs strongly explore sources of growth in HIPC countries such as promoting export and market diversification, creation of small-and-medium-sized enterprises and investment in infrastructure.

10. A further major challenge is that of HIPC-to-HIPC debt. About 11 HIPC countries are also classified among creditors, nine of which have yet to commit HIPC relief. Meanwhile, some other developing countries who are creditors are also themselves facing debt sustainability challenges, compromising their ability to grant debt relief at comparable terms with Paris Club creditors. With these problems, it is very likely that most countries will not benefit from full debt relief past their completion point. We, therefore, urge the international community to provide grants to pay off these claims and in our view the Fund should help catalyze resources for this option.

Post-Conflict Countries

11. Post-conflict countries that are eligible for the HIPC Initiative face enormous challenges in consolidating peace and internal stability while at the same time attempting to pursue sound economic policies. They generally face acute limitations of technical and administrative capacity and have to provide for a population that is largely displaced. These obstacles compound the difficulty of developing a fully participatory PRSP. Accordingly, we urge the international community to show greater flexibility in their efforts to provide assistance to these countries. In this regard, the work of other UN agencies, especially the UNDP, should count a as track record for these countries to quickly access the HIPC Initiative. The Fund should also continue to mobilize resources to enable it to extend the post-conflict emergency assistance on concessional terms further.

Review of PRGF and the PRSP

12. Many African countries have developed and implemented PRSPs. A recent review of the PRSP process has shown that poverty-reducing strategies need to be firmly supported by concrete actions from development partners. We are of the view that these actions are needed in the following areas: (i) strengthening ownership; (ii) flexibility in using the PRSP as conditionality; (iii) better aligning the PRGF to the PRSP; (iv) conducting Poverty and Social Impact Analysis; (v) providing technical assistance to strengthen capacity; and (vi) aligning donor assistance to PRSPs. The PRSP review also contains many valuable lessons for the management and staff of the Fund and the Bank which they can profitably use as they continue their support to member countries, taking into account individual country peculiarities. Most African countries are strongly committed to implementing the lessons drawn in that PRSP review.

13. The review also shows that in some cases, the quality of interim poverty reduction strategies received less attention, as countries rushed to meet deadlines for accessing debt relief under the HIPC initiative. While there might be some linkages between access to external financial assistance and the implementation of the PRSPs, we believe that priority should be given to ensure that these strategies are well designed and that they take into full consideration country specific circumstances. The ultimate achievement of the objectives of these strategies should be the primary goal and PRSPs should play an important role in outlining development strategies. We urge the Fund to use the review lessons to dispel the impression that these strategies are prepared and implemented for accessing external financial assistance.

14. We believe that more effort is needed to harmonize sectoral policies and development priorities as outlined in PRSPs with the objectives of Fund-supported Poverty Reduction and Growth Facility (PRGF) and the Bank's Poverty Reduction Support Credit (PRSC). This also ensures that there is broader participation in the design and implementation of PRGF programs. In this regard, there is a need to provide ample room for countries to explore and present their own alternative policy scenarios and timetables. In the same vein, we urge the Fund and the Bank to help countries deepen the analysis of sources of growth and vulnerabilities and to enhance public expenditure management system as well as to mobilize domestic resources.

15. On donor support, it should be noted that it is not only the problem of alignment but also of timely disbursement of external assistance which has affected the implementation of both the PRSP and PRGF. We welcome the fact that many donors are considering aligning their support to PRSPs and to shift more of their assistance towards general budgetary support.

Strengthening Ownership

16. We commend the Fund for pursuing the approach that ownership is key to the successful implementation of economic programs and promoting growth and development. In pursuing this, it is important to highlight the following three broad efforts that can help to strengthen ownership: (i) giving greater scope to countries in designing policy scenarios; (ii) providing more technical assistance in building administrative and institutional capacity and in forging economic integration in Africa; and (iii) reversing the continuous decline in Africa's voting share in the Fund, which deprives the continent of an effective role in the many decisions that the Fund takes on Africa. Africa poses the greatest challenge to both institutions in reducing poverty. Hence the need for a stronger voice and participation in making the crucial decisions for meeting that challenge.

Streamlining Conditionality

17. The Fund has concluded the review of its conditionality and we welcome the approval of the new guidelines on conditionality, which replace the 1979 guidelines. The new guidelines are effectively streamlined and focused and intended to provide emphasis to the importance of national ownership of Fund-supported programs and the need for effective collaboration with the Bank and other multilateral institutions. Nonetheless, program countries still face a large number of conditionalities from the Fund, the Bank and the Donor community with a prevalence of cross-conditionalities, and these should also be streamlined. In addition, we urge the Fund to apply the new guidelines in a manner that avoids micro-management of African countries and promote partnership and ownership. We also urge the Fund to drop the use of structural benchmarks and indicative targets and to use prior actions more sparingly.

Strengthening Surveillance, Crisis Prevention, and Crisis Resolution

18. Surveillance remains central to the Fund's mandate to promote sustained economic growth and financial stability, and to help prevent crises. The substantial program of Article IV consultations, together with discussions on Use of Fund Resources, will continue to be a key instrument for assessing the soundness of economic policies in country members. To this extent, we welcome the progress being made in improving Fund's surveillance, by broadening the scope and modalities of surveillance to respond to the new challenges posed by the changing global economic environment. We also welcome the progress being made in strengthening multilateral surveillance, including the surveillance of global financial markets.

19. However, we believe that the Fund should continue to work to ensure that its policy advice is sound, given that effectiveness of surveillance is dependent not only on the quality of Fund's advice but also on the extent to which the member countries are implementing that advice. Regarding the latter, we express concern that while surveillance has been effective in developing countries, especially the Fund borrowers, it has been relatively ineffective in developed countries. The removal of this asymmetry is essential to enhance the effectiveness of the Fund surveillance. We are also of the view that instituting separate surveillance and program activities is not suitable, as it could lead to conflicting policy advice and could complicate communication with the authorities, as well as entail additional costs.

20. It is important to maintain surveillance focused on key areas. In this regard, selectivity of coverage should be tailored to the country's specific conditions. We are also of the view that greater selectivity in certain cases and areas could further enhance the Fund's surveillance role. One such area is the coverage of trade polices, particularly in countries where subsidies and other trade distortions have an impact on macroeconomic stability and in those cases where trade policies have global or regional implications, such as those affecting market access for the developing countries.

21. A further major issue in which the Fund has been working actively in recent years is to increase the Fund's role in crisis prevention and resolution. The key objective is to create incentives for country authorities and market participants to assess risks appropriately and to base their policies and investment strategies on these assessments. Therefore, the Fund should continue to encourage governments to adopt policies and institutional reforms to strengthen the resilience of their economies to adverse external developments and financial stress through shock absorbers, appropriate exchange rate regimes, sound fiscal policies, prudent borrowing and debt management strategies, deeper, stronger, and more diversified financial systems and domestic capital markets, but also more effective social safety nets. Equally important are policies to promote sustainable growth and an open trade environment because growth, trade, debt servicing capacity and external viability are inextricably linked. At the same time, the Fund should also pay greater attention to the factors that affect the effectiveness of the Fund's policy advice. Surveillance can only be an effective tool to promote sustainable growth and financial stability and to help prevent crises, if the Fund continues to persuade members to take timely action to address reccurring problems and imbalances.

22. In addition, the Fund should endeavor to offer effective assistance to members coping with difficulties in maintaining their access to capital markets, but it should do so in a fashion that strengthens and stabilizes the international financial system as a whole and promotes its healthy development. In this context, we warmly welcome the recent decision of the IMF Executive Board to grant Brazil a substantial Fund facility to assist the authorities in ensuring a continuing implementation of sustainable policies.

23. A major area on which the Fund has been working over the last year, has been on creating a more orderly and transparent legal framework for sovereign debt restructurings. This issue has received international attention, with the issuance of an initial set of proposals by the First Deputy Managing Director, Ms. Anne Krueger to establish a Sovereign Debt Restructuring Mechanism (SDRM). We support the efforts to construct an SDRM, which would ensure a rapid, orderly and predictable restructuring process and pave the way toward the restoration of sustainability. However, we are of the view that an SDRM should initially establish a framework to deal only with the unsustainable sovereign debts due to private external creditors, before proceeding to include other classes of debt. It is also important to adopt an approach that creates broad debtor and creditor ownership of the process and once this one has been activated, the debtor and the majority of creditors should be allowed to negotiate the terms of the debt restructuring, with a third party only involved in verifying the legitimacy of the process. In addition, we are of the view that an SDRM should deal only with foreign debt. As regards domestic debt, we believe that sovereigns generally possess sufficient tools to deal with this category of debt, and as such, it should not be included in a new SDRM. We support the establishment of a Sovereign Debt Dispute Resolution Forum (SDDRM) and are particularly in favor of an organ which could operate independently from the IMF Board and Management with clearly defined, but limited powers.

Combating Money Laundering and the Financing of Terrorism

24. We support the Fund work in combating money laundering and financing of terrorism and welcome the progress being made on this front, including by many African countries. We also welcome the four key principles approved by the Executive Board to guide the Fund's role in AML/CFT assessments and accompanying ROSCs. In addition, we are of the view that Fund staff should work collaboratively with the FATF and other financial sector standard setting bodies to implement the proposed framework.

25. We, nevertheless, insist that the Fund should confine its efforts to its mandate and expertise. In particular, the IMF should not be involved in law enforcement matters. Also, the Fund should remain cognizant of capacity constraints in developing countries and be ready to provide technical assistance to develop adequate systems to combat money laundering and finance for terrorism. However, such support should be additional and should neither lead to a diversion nor a reduction of traditional technical assistance.