2002 Annual Meetings of the IMF and the World Bank Group
September 28, 2002
Documents Related to September 28, 2002 IMFC Meeting
Antigua and Barbuda and the IMF
The Bahamas and the IMF
Belize and the IMF
Barbados and the IMF
Canada and the IMF
Dominica and the IMF
Grenada and the IMF
Ireland and the IMF
Jamaica and the IMF
St. Kitts and Nevis and the IMF
St. Lucia and the IMF
St. Vincent and the Grenadines and the IMF
Statement by the Honourable John Manley
Minister of Finance of Canada
International Monetary and Financial Committee
Washington, D.C., September 28, 2002
Since we last met, the prospects for the global economy have clouded somewhat. In April, we were confident that our prompt policy responses to the tragic events of a year ago would contribute to a strong, sustained rebound in global growth. While this remains the most probable outcome, a number of uncertainties have emerged in the intervening months. Economic activity has slowed in a number of major industrial countries. Asset prices have been volatile, reflecting, in part, high-profile corporate financial scandals, heightened geopolitical tensions and rising oil prices. And a number of Latin American countries have experienced financial difficulties, which in the cases of Brazil and Uruguay, led to extraordinary financial support from the Fund.
These developments reinforce the need to sustain efforts to bring about broad-based sustainable growth and continue the work to help safeguard international financial stability. This is, after all, the primary role of the IMF. By promoting financial stability, the Fund has supported the open, dynamic global economy that has been the wellspring of prosperity for millions around the world and the source of hope for millions more. The goal, quite simply, is to bring prosperity to all the world's citizens. The challenge for us here, today, is to ensure that the Fund is equipped to make this promise a reality.
Economic Prospects in the Constituency
The global economy weathered the uncertainty associated with last year's terrorist attacks much better than expected. The Fund staff expects global growth, which slowed to about 2¼ per cent last year, to rebound to about 2¾ per cent this year and strengthen further next year. Against this background, economic performance within the Canadian constituency has varied.
Canada's economy has performed exceptionally well. In the first half of 2002, Canada's economy grew at an average annual rate of more than 5 per cent, coupled with the strongest employment growth in almost a decade. Strong consumer and business confidence is apparent in solid household spending and machinery and equipment investment growth. Canada's strong performance is the result of a commitment to sound public finances and low and stable inflation, which made possible timely tax cuts and interest rate reductions. Since April 2002, robust Canadian growth has led the Bank of Canada to engage in measured reductions in monetary stimulus. Looking forward, Canada's outlook is bright - in fact, the IMF forecasts that Canada will lead the G-7 countries in economic growth in both 2002 and 2003.
After the very rapid expansion of the period 1995–2000, the Irish economy has managed a soft landing, with growth slowing to the 3-per-cent range this year. However, wage and price behaviour, which has not yet adjusted to the changed conjuncture, remains a concern. There has also been a sharp erosion of the former substantial budget surplus. Following the recent election, the government is taking decisive steps to address these issues. On this basis, when recovery in the global economy takes hold, Ireland looks forward to reaching an annual growth rate of 4 to 5 per cent in the medium term.
Growth in the Caribbean, meanwhile, remains subdued, as these open economies continue to grapple with a decline in travel and the slowdown in the global economy. Public finances have generally worsened as weak economic activity reduced revenue and strained social programs. In response, Caribbean governments are intensifying economic reforms and consolidating budgets to improve their international competitiveness and build the basis for renewed expansion. However, since these economies are inextricably linked to the global economy, they will likely face modest growth prospects if current global trends continue.
Risks to the Outlook and the Policy Challenges
Although the global recovery is expected to continue, concerns have emerged about the strength and durability of the expansion, and projections for growth next year in the industrial countries, especially in the U.S. and in the euro area, have been revised down. This reflects a number of factors. In particular, the collapse of major U.S. companies, notably WorldCom and Enron, amid accounting irregularities has adversely affected investor and consumer confidence and contributed to a sharp weakening in stock prices that will ultimately affect private spending decisions. There have also been some sharp shifts in currency markets, with the U.S. dollar falling against a range of currencies. While a weakening in the U.S. dollar is not unexpected, abrupt movements in currencies do pose challenges for economies through their impact on trade flows.
Corporate scandals may have also reduced investor appetite for risk across a wide range of assets, including emerging market debt. In this respect, the outlook for the global economy has been further clouded by financial crises in Latin America. The situation in Argentina, which has been in crisis for some time, continues to be critical. Other economies in the region have also had to seek IMF assistance, in particular, Brazil, Paraguay and Uruguay. While Argentina's crisis has had some impact on economies in the region, for the most part the root of the economic problems are domestic.
Sound Policy Frameworks and Effective Corporate Governance
These developments make it all the more important for increased vigilance by policy makers in all Fund members. In the industrial economies, the stance of central banks is broadly appropriate, but they must continue to carefully monitor the strength of their domestic economies. On the fiscal front, automatic fiscal stabilizers should be allowed to operate, although some economies may find that room for fiscal easing is limited.
Sound monetary and fiscal policy frameworks will help reduce uncertainty and bolster confidence. But they are not enough. Effective governance arrangements that allow markets to assess, weigh and evaluate risks are also required. Indeed, they are an essential part of a well-functioning market economy.
For all economies, recent corporate scandals point to the necessity of conducting comprehensive reviews of systems of corporate governance and financial disclosure. In Canada, federal and provincial regulators, accounting standard bodies and industry are taking steps to bolster investor confidence. For instance, federal and provincial regulators and Canada's chartered accountants announced in July the creation of a new auditor oversight body to improve the quality and integrity of public company audits. Canada's accounting standards body is working to address the accounting issues raised by recent corporate scandals. A number of initiatives to review corporate governance practices are underway in Canada. As in other countries, strengthening investor trust and market integrity will require actions from a wide range of capital market participants.
Strengthening Crisis Prevention and Crisis Management
For emerging and developing economies, recent events are another stern reminder of the need for strong policy frameworks based on sound monetary policy, strengthened financial sector supervision and regulation, and the adoption of prudent public debt and fiscal management. The Fund has an important role to play in assisting its members through technical assistance and its surveillance function; important progress has already been achieved as a result of the joint Fund/World Bank work on Reports on the Observance of Standards and Codes (ROSCs) and the Financial Sector Assessment Program (FSAP). But, as recent crises demonstrate, more work needs to be done. Of especial importance is the need to identify and avoid currency mismatches. Another key challenge is promoting good governance--here, again, creating the institutions that allow markets to accurately assess risks. In this respect, we believe the Fund and the Bank should explore how best to help countries systematically identify weak governance and design standards so that progress can be effectively measured.
The Fund's surveillance role is critical, as it can identify emerging problems and policy imbalances before they become crises. After all, the easiest crisis to resolve is the one that doesn't happen. We will work with all Fund members to further enhance the Fund's ability to play an important role in crisis prevention, and we invite the Fund staff to prepare options for strengthened surveillance procedures that we can review at the spring meetings. But we have to recognize that financial crises will occur despite our best efforts at prevention. And, for the Fund to play an effective role in promoting financial stability in an evolving international financial environment, it has to be equipped with the appropriate set of tools to resolve international financial crises. International financial stability benefits all Fund members--and all should work to promote it. This, too, is an important part of the governance challenge. And, while important steps have already been taken since the last IMFC meeting, more work needs to be done.
Our efforts are based on a comprehensive approach comprising three elements.
The first is the contractual approach to crisis management, involving the development and adoption of new contingency clauses in sovereign debt contracts. These would spell out, as precisely as possible, the process and procedures by which outstanding sovereign debt would be restructured were borrowers to find themselves unable to service their obligations. Private sector legal experts, working with the official sector, have helped to identify model clauses that could be widely adopted by emerging market borrowers. And, following the lead of Canada and the U.K., all of the members of the European Union have agreed to incorporate collective action clauses in their foreign bond issues. These are encouraging developments. But we shouldn't be under any illusions that simply agreeing on these clauses will by itself improve crisis management. Borrowers must incorprate them in their debt instruments if they are to have any effect. The evidence is mounting that it is in their interest to do so.
The second element of our strategy for improving crisis resolution is the ongoing work by the IMF staff to design a sovereign debt restructuring mechanism (SDRM). The goal here isn't to impose a Fund-sanctioned "solution" on private lenders—far from it. Rather, the purpose of the SDRM is to complement the contractual approach with an investor-driven framework to deal with the myriad of private sector claims that do not have contingency clauses. In the absence of such a framework, private creditors will be reluctant to participate in timely restructurings, which can actually preserve the value of their claims, fearing that their "contribution" to a sustainable solution will not be matched by other creditors, who refuse to participate in a concerted restructuring in the hope of extracting higher payments. In this respect, the development of an effective SDRM will protect private creditors and promote emerging market debt as an asset class by ensuring comparability of treatment and inter-creditor equity in debt restructurings. The statutory approach, however, is an ambitious and challenging undertaking that will take time to develop. For this reason, we welcome the Fund staff's work to date and the discussion by the Board of it, and we encourage the staff to continue this important effort.
The third element in our efforts to strengthen crisis management is greater discipline in adhering to presumptive limits on official financing. This simply reflects the fact that private creditors will be unwilling to--indeed, need not--participate in a comprehensive restructuring if there is an expectation of exceptional access in IMF programs. There is broad agreement on this point. There is, frankly, less agreement on how best to ensure adherence to presumptive limits. This is an issue on which more work is required. It is clear, however, that exceptional access should only be forthcoming where it can be demonstrated that it would be consistent with a rigorous debt sustainability analysis.
Spreading Prosperity for All Through Sustained Growth, Debt Relief and Trade
The Fund's ability to promote international financial stability is key to our collective goal of ensuring that the global economy works for all. But the Fund also plays a central role in providing advice on how best developing countries can achieve the balanced growth that is the surest, most effective engine of sustained development. And, the Fund has helped to spread global prosperity through its participation in the Heavily Indebted Poor Countries (HIPC) Initiative for poorer countries to escape crippling debt burdens. Its long-term success requires actions to keep the initiative on track, including securing the involvement of all creditors and ensuring full funding of the HIPC Trust Fund. The framework also needs to be implemented flexibly as some countries may require additional assistance when they complete the process. Looking ahead, we need to think beyond debt relief. We need to acknowledge that the real driver of debt sustainability is a strong policy environment conducive to growth. The HIPC Initiative only provides an opportunity that countries themselves must seize to address underlying governance problems.
Along with the development of domestic capital markets that promote investment and savings, trade is—and must be—a major contributor to sustainable growth for least developed and emerging markets alike. Improved market access for developing countries must be our goal. As the Fund staff and others have pointed out time and again, the potential benefits to developing countries of improved access simply overwhelm current levels of direct development assistance.
Of course, the IMF is not a negotiating forum and, with the Doha Development Agenda now engaged, the Fund should not take on issues for which our respective trade negotiators are responsible. On the other hand, a review of that Development Agenda shows clearly that many of the concerns surrounding further trade liberalization raise issues well beyond the competence of trade negotiators to address. There is, for example, an obvious relationship between tariff revenue and other tax administration. The small states in my constituency are rightly concerned that lost tariff revenue could impact on budgetary planning, macroeconomic frameworks and even social safety nets. Over 80 different such issues of "implementation," as it is called in Geneva, have been raised.
The most valuable contribution that the Fund can make, along with the World Bank, is to provide honest, high-quality analysis of those implementation issues that raise questions where fiscal and monetary policy, or the macroeconomic framework, are called into question. This would provide information to better inform the negotiators, and likely would highlight those areas where sequencing of liberalization, capacity building or technical assistance may be required. Timely work by the Fund, hopefully well-coordinated with the Bank, could help to ensure success at a key World Trade Organization General Council meeting in December, and ultimately at the Ministerial Conference next year in Cancún.
Combatting Money Laundering and the Financing of Terrorism
The use of the international financial system for money laundering and the financing of terrorism are two new challenges facing the international community. Canada attaches a high priority to the Fund's role in ensuring that such financial abuses do not threaten members' domestic sectors and the international financial system.
In addition, we welcome the recent agreement to conditionally add recommendations developed by the Financial Action Task Force to combat money laundering and the financing of terrorism to the Fund's and World Bank's financial sector assessment framework. The 12-month pilot project of anti-money laundering and terrorist financing assessments and accompanying ROSCs that will be undertaken by the Fund and other bodies will contribute to the further development of an effective framework in this area.
The Fund has had to evolve over the past 50 years in response to the evolution of the global economy and its changing membership. Throughout this process, the goal has been to deliver on the vision that guided its creation--a stable, growing global economy that creates prosperity and provides opportunities for all the world's citizens. That remains the challenge. But, as we have seen, the Fund is vulnerable to the criticism that its recommendations and policy advice are inappropriate, with adverse consequences to those it is designed to assist. All of this underscores the importance of the Independent Evaluation Office, which Canada championed at the Fund. The creation of this group, together with the efforts to increase the transparency of the Fund, demonstrates our commitment to ensuring that the Fund remains an effective instrument in promoting the goal of prosperity of all.