The strength of the global recovery has moderated since the International Monetary and Financial Committee met in April 2002, and the level of uncertainty surrounding the outlook for the world economy has increased. The challenge that members of this Committee face is to ensure that institutions and policies are in place to respond to this heightened uncertainty. Where this is not the case, countries must be prepared to adjust policies promptly to restore confidence and growth.

Restoring Confidence in the Global Economy

The source of the increased uncertainty over the outlook for the world economy stems from the recent decline in global equity markets, weaker-than-expected growth in a number of major economies, and the sharp deterioration in some emerging markets, especially in Latin America. These are worrying developments, although we should not lose sight of the overall resilience of the world economy and financial markets to numerous shocks. Immediately following the tragic events of September 11, 2001, many feared that the global economy and financial markets would be severely disrupted. But these concerns did not eventuate because of decisive policy action.

We have also seen the resilience of a number of economies to external shocks. In particular, the solid performance of many members of this constituency in the face of slowing growth in the world economy is a clear demonstration of the benefit of sound macroeconomic policy frameworks and sustained structural reform. The fundamental message remains, good policy matters.

The most likely scenario is for a moderate strengthening in world economic growth over the next twelve months. There are, however, a number of risks to the outlook. The long-running correction in global equity markets may continue and weaken economic activity; a sharp and persistent increase in energy prices would lower growth prospects; and levels of risk aversion may increase, exacerbating financing problems in emerging markets and delaying the projected pick-up in investment in industrial countries. Importantly, there is the risk of an abrupt and disorderly correction in external imbalances among major currency areas.

Responding to these risks will require leadership and international cooperation. Since many of them stem from developments in the major industrial countries, those countries carry a particular burden in taking the necessary policy action to reduce uncertainty, restore confidence and to provide the impetus for sustained global growth. However, all countries, regardless of size or stage of development, have a responsibility to ensure that they have in place sound policies and institutions, along with the flexibility to respond to unexpected shocks.

Macroeconomic policies in the major industrial countries must remain accommodative and should the outlook weaken and inflationary pressures remain contained, further stimulus may be necessary. While decisive and forward-looking policy responses are required, action must always remain consistent with meeting medium-term objectives, especially in terms of fiscal consolidation. In addition, a concerted international effort is necessary to address concerns regarding corporate governance and accounting standards.

Concerns over a disorderly unwinding of external imbalances among the major currency areas would be ameliorated if there was stronger domestic demand growth in the euro area and Japan. The euro area must give priority to fiscal consolidation and accelerate the pace of labor and product market reform in order to raise its growth rate. Developments in the Japanese economy are particularly important to the members of this constituency. While policy steps have been taken, and there have been some tentative signs of a lift in activity, an integrated reform strategy centered on corporate and banking sector restructuring, and supported by further monetary easing and gradual fiscal consolidation, would help Japan end deflation and achieve sustained economic growth.

Tangible progress toward freer multilateral trade would also provide a significant boost to confidence and contribute to reducing uncertainty. Despite the world economy benefiting substantially from previous free trade initiatives, progress has been relatively uneven across countries and markets. Trade barriers particularly effect the poorer countries. Freer trade in agriculture, including the elimination of distorting subsidies, would bring sizeable benefits for both developed and developing countries. Leadership from key industrial countries will be crucial to the success of the Doha trade round. At the same time, in order to take full advantage of the gains from freer multilateral trade, developing countries must take concrete steps to reduce their barriers to trade.

Strengthening Crisis Prevention and Crisis Resolution

Although individual countries have the main responsibility for developing and implementing effective policies in response to heightened uncertainty, there is a pressing need to reaffirm that international cooperation exists in order to support confidence. The International Monetary and Financial Committee must show leadership in promoting international economic policy cooperation and demonstrate tangible progress in strengthening efforts towards crisis prevention and crisis resolution.

Surveillance is at the forefront of the Fund's role in promoting economic and financial stability. While the coverage of surveillance has expanded in line with the changes in the global economic environment, it is important to remember that surveillance is not an end in itself. Surveillance will only be effective in promoting strong, stable growth if the Fund's policy advice translates into policy action across the membership. To be effective, Fund policy advice has to be of high quality, it must show an understanding of a country's needs and circumstances, and it is not helpful if that advice moves beyond the core areas of the Fund's interest and expertise. Importantly, the Fund should not simply tell countries what policies should be adopted, it should also assist them in the task of identifying how needed reforms can be implemented.

The 2002 biennial surveillance review has been completed and a new Guidance Note has been finalized. The challenge will be to implement this framework on a consistent basis across the membership and to ensure that surveillance ultimately does translate into positive policy action by members. The Fund must ensure that it learns from experience and is continually assessing and improving the effectiveness of its surveillance. In particular, greater attention must be given to improving the effectiveness of surveillance in major economies and enhancing the role of surveillance in program countries. We should be very mindful of the fact that recent crises have occurred in countries already subject to a Fund program.

Well-focused program conditions are critical if programs are to successfully meet their objectives. The review of conditionality has resulted in a revised set of Guidelines. The task now is to apply these Guidelines and ensure that programs include only conditions that are critical, but all that are necessary, to achieve program objectives, and that these conditions are sequenced appropriately.

Towards strengthening crisis prevention, progress has been made in a number of areas, including: the development, dissemination and adoption of internationally-accepted standards and codes; greater transparency of countries' policies and the activities of the Fund; encouraging countries to release macroeconomic data more frequently and on a more consistent basis; and undertaking increasingly in-depth financial sector surveillance through the Financial Sector Assessment Program (FSAP). There has been progress, but there can be no sense of complacency. We place considerable importance on the forthcoming review of the FSAP and the Reports on the Observance of Standards and Codes (ROSC) initiatives, to ensure their original objectives are being met.

The length and duration of crises can be effectively curtailed by decisive policy action on the part of individual countries and support from the international community. Progress on developing a more robust framework for crisis resolution remains mixed. Several important issues have been advanced, including providing somewhat greater clarity to the conditions under which the Fund will lend into arrears and the fundamentally important work on a framework for robust debt sustainability assessments. Steps have also been taken to define the criteria for exceptional access while strengthening the decision-making process for handling exceptional access requests. However, what counts is what the Fund actually does rather than what it says it will do. Ultimately, it is the quality of the judgments that are taken in each case and whether the frameworks are applied consistently, which will determine whether the Fund is successful in helping to resolve crises. In effect, each decision will be part of the ongoing process of defining the role and success of the Fund. It is important that its actions are consistent with its stated intentions. This has not always been the case.

This constituency has been a strong supporter of the need for a more effective way of restructuring sovereign debts that are judged to be unsustainable. Progress has been made in developing the contractual and statutory approaches to facilitating a more orderly restructuring of sovereign debt. These approaches are mutually reinforcing and should be pursued in tandem.

The Fund should continue to play a central role in developing consensus between private creditors and key borrowers on a contractual framework for resolving unsustainable debt burdens. In particular, further consideration needs to be given on how to kick-start the inclusion of collective action clauses in key jurisdictions. Leadership is required.

It is pleasing that progress has been made towards gaining consensus on the scope of debt which would be covered under a sovereign debt restructuring mechanism (SDRM). More detailed elaboration of the key features of the SDRM will help to build consensus in support of the mechanism. Importantly, more needs to be done to explain to a wider audience its benefits and the role of the Fund in its operation.

We need to accelerate our work on the contractual and statutory approaches to sovereign debt restructuring, and we must not let planning be a substitute for action. There should be a commitment from this meeting of the International Monetary and Financial Committee that members are prepared to put their words into action.

Quotas

The Board of Governors will shortly receive a report on the Twelth General Review of Quotas. Determining the size of the Fund's resources is a complex issue that requires some difficult judgments. From the discussions to date, it is evident that there are differing views as to whether there is now a need to increase the size of the Fund's resources through a general quota increase.

The members of this constituency believe, however, that one of the most pressing issues the Fund faces in terms of quotas is the need to address the fact that some countries are particularly under-represented. It is essential that the substantial gap between quota shares and the relative economic position of several countries be closed. The existence of this gap and the implications it has for the overall governance of the Fund, will increasingly bring into question its legitimacy as a truly representative international financial organization. In particular, in our region, Korea, Singapore and Thailand are significantly under-represented and we call on the international community to resolve this situation.

Confirming the Commitment to Assist Low-Income Countries

Alleviating poverty through improved economic management and governance should remain the priority of the Fund's work in low-income countries.

Poverty Reduction Strategy Papers (PRSPs) have provided a good framework for countries to establish a policy environment that nurtures private sector led growth and investment and gives poor people the opportunity to participate in a market economy. It will be important that the lessons learnt to date are incorporated as we move forward. Integrating the PRSP process more consistently into domestic decision-making processes, institutions and national development strategies, and better aligning donors support with countries' PRSPs, are necessary if the initiative is to fulfill all of its objectives. The Fund should play its part by ensuring that PRGF-supported programs are closely aligned with country-owned strategies.

The full implementation of HIPC will be a significant achievement, with the potential to reduce the debts of 38 of the poorest and most indebted countries by two-thirds, or more than $60 billion in NPV terms. Already, HIPC and associated bilateral debt relief totaling over $40 billion in NPV terms has been committed to 26 countries. Progress on HIPC has taken time, as expected. Although several of the countries yet to qualify for relief can be expected to do so shortly, others have not been able to take advantage of the initiative, and appear unlikely to do so quickly, mostly because of conflict.

In some cases it will be necessary to consider additional debt relief at completion point where exceptional exogenous shocks have caused a fundamental change in a country's economic circumstances, as was agreed for Burkina Faso. Decisions on top-ups, however, must be informed by robust debt sustainability analyses on a case-by-case basis.

Ultimately, HIPC - while addressing the particular vulnerabilities confronting 200 million poor people living in highly indebted countries - is only one of a range of mechanisms for the international community to support poverty reduction. Although HIPC has significantly reduced the debt of the world's poorest and most vulnerable countries, sustainability will depend on future levels of borrowing, how productively borrowed resources are invested, access to external markets for exports, and maintaining a policy environment that is conducive to private sector growth, savings and investment.

Preventing Money Laundering and the Financing of Terrorism

The Fund and its members have made substantial progress in responding to the IMFC's call to strengthen defenses against money laundering and the financing of terrorism. The Bank and Fund proposal for a 12-month pilot project provides for a comprehensive assessment that would respect the mandate of the different institutions involved. Implementing this proposal will require flexibility and cooperation on the part of the institutions involved. We need to ensure that there is effective use of the limited expertise available; overlap between different institutions is minimized; and adequate technical assistance is available to help overcome any capacity constraints in meeting the challenges of the enhanced AML/CFT measures.

While noting that challenges remain in meeting the enhanced measures, members of this constituency are active in the fight against money laundering and the financing of terrorists. Substantial progress has been made by our members towards signature and ratification of the International Convention of Terrorist Financing and the implementation of Security Council Resolution 1373, with legislative changes pending in a number of countries. Assessments under the draft methodology will be completed by more than half the members of our constituency over the next two years. At the same time, many of our small Pacific Island States are participating in a regional technical assistance project to strengthen their legal and institutional frameworks.