2002 Annual Meetings of the IMF and the World Bank Group
September 28, 2002
Documents Related to September 28, 2002 IMFC Meeting
Republic of Azerbaijan and the IMF
Switzerland and the IMF
Kyrgyz Republic and the IMF
Republic of Poland and the IMF
Republic of Tajikistan and the IMF
Turkmenistan and the IMF
Republic of Uzbekistan and the IMF
Statement by the Honorable Kaspar Villiger
President of Switzerland and Minister of Finance
International Monetary and Financial Committee
Washington, D.C., September 28, 2002
The current global economic and financial environment continues to be characterized by a large degree of uncertainty. After a brief interlude of optimism based on several economic indicators suggesting a more rapid global economic rebound, we are again faced with downward revisions. The rapid shifts in the balance of risks has underscored the fragility of the situation and policy makers should be careful not to underestimate the current vulnerabilities. While a further relaxation of monetary and fiscal policies might be necessary in light of a weakening economic environment, the main question is how much scope remains for such policies.
The deterioration of the global outlook has also exacerbated pressures on many emerging market economies. Unfortunately, new crisis situations have emerged and others continue to remain unsolved. These financial crises entail enormous costs for the respective populations and have required significant amounts of official financial assistance. I agree with the Managing Director's conclusion that the progress in the reforming the international architecture has led to an increased resilience of the global economy to shocks. However, much remains to be done. We must strive to increase the effectiveness of Fund surveillance so as to encourage members to reduce persisting vulnerabilities. We must also push ahead with the our efforts to strengthen the crisis resolution framework.
2. Global Policy Challenges
The apparent lack of a growth locomotive capable of driving the global economy seems to be the main current economic problem. Prospects of a fast rebound of economic activity in the United States have vanished, and with it the expected growth stimulus for the global economy. This stimulus would have been crucial to put the recovery in the euro area on a more solid basis and provide Japan with a much needed boost to overcome its long recession.
I am concerned by the fact that the current outlook for the world economy resembles the situation we had one year ago. Unfortunately, however, the downside risks are higher. In many advanced economies, much of the room for fiscal and monetary policy stimulus has been used up. In the United States, official interest rates have been aggressively cut, while fiscal measures have considerably weakened the medium-term fiscal position. In the euro area, the possibilities for countercyclical policy measures are constrained by the fact that inflation is close to the 2 percent ceiling of the European Central Bank and by the requirements of the Stability and Growth Pact. In Japan, bolder monetary stimulus and various fiscal packages have so far been ineffective.
Conditions in global financial markets have also deteriorated substantially. The erosion of investor confidence and increased risk aversion have worsened financing conditions for the corporate sector as well as emerging markets. At the same time, consumers, who have played a crucial role in the United States and elsewhere in supporting economic growth, will have to cope with the negative wealth effects from the significant fall in equity prices since March of this year. As regards the correction of longstanding global imbalances, the depreciation of the U.S. dollar that has accompanied the deterioration in global financial markets has so far been orderly. This is a welcome development, but has at the same time contributed little to the unavoidable narrowing of the U.S. current account deficit. As prospects of slower growth in Europe and Japan also do not contribute to reducing the global trade imbalances, the risk of a more abrupt and disruptive adjustment remains, or has even increased. Finally, oil prices have risen and the risks are on the upside.
The most serious deterioration in the outlook, however, has occurred in Latin America. With regional output declining and international capital markets virtually closed for most countries, the economic and financial stress is increasing dramatically. I remain concerned about the lack of progress in tackling the devastating economic crisis in Argentina, as the costs of economic dislocation and the rising social tensions make a rapid resolution of this crisis imperative. I welcome the Fund's intense cooperation with Argentina, but the main responsibility for setting the stage for moving forward decisively lies with the Argentine authorities.
In Europe, economic performance in Europe has clearly been disappointing, and recent data from the euro area do not provide grounds for optimism. In Switzerland, growth in the first half of 2002 has been considerably weaker than anticipated, and growth projections for 2002 and 2003 had to be further revised downward. The Swiss National Bank has cut interest rates twice this year, lowering the target range for the three-month Libor twice by 0.5 percentage points in May and July. However, with economic activity suffering from a weak global demand for capital goods and a strong Swiss franc, and private and government consumption remaining as the sole pillars of economic activity, growth is unlikely to pick up speed before mid-2003.
3. Strengthening Surveillance
The ongoing efforts of the Fund to improve the effectiveness of its core activity - surveillance - are crucial in our endeavor to achieve greater stability in an increasingly globalized world. The Fund's role as an advisor for each and every member through its bilateral surveillance, as well as its role as an advisor to the global community through its regional and multilateral surveillance are particularly important in the current uncertain environment. However, the effectiveness of Fund surveillance hinges on the adequate coverage of the main policy areas and on the willingness of members to follow the Fund's advice.
In my view, the conclusions drawn from the recent surveillance review correctly underscore both of these aspects. The Fund's surveillance mandate has been extended to new areas that are relevant to promote sustainable global growth. This extension was necessary to take into account the changing global environment and allows the institution to cover important areas such as financial sector issues, capital account developments, and external debt sustainability. However, making the expanded surveillance operationable will depend on a) how well the Fund can maintain the balance between focusing on the core areas, while adequately covering other issues of macroeconomic relevance, and b) how well surveillance can be targeted to country-specific circumstances. The new operational guidance note for staff on surveillance activities provides important clarifications on these issues.
As regards the willingness of members to follow the Fund's advice, quality, candor and transparency are key ingredients for maximizing the impact of surveillance. The overall quality of surveillance reports is already at a high level. The challenge is now to maintain the level of quality notwithstanding the expanded scope of surveillance. The candor of reports has continuously increased over the past years. However, in crucial areas such as exchange rate issues, vulnerability factors, and governance problems, further improvements are necessary. Given the sensitivity of these issues, it is imperative that the policy dialog be open and take into account the socio-political circumstances of the country. Taking into account the political feasibility of policy recommendations is important for increasing their effectiveness. However, care must be given to balance the political realities with the economic necessities.
Transparency plays a particularly important role in the effectiveness of surveillance. Making Article IV reports available to the wider public enhances the impact of policy assessments and advice by increasing peer pressure on members as well as strengthening domestic ownership. I was very encouraged by the increasing number of voluntary publications. With around 60 percent of Article IV reports published, the Fund has made enormous progress in enhancing transparency. However, we must ensure a better coverage of the membership and a further increase of the share of published reports. If the momentum cannot be maintained on the current voluntary basis, I would favor introducing the presumption of publication for surveillance reports in the future.
4. Improving the Framework for Crises Resolution
Recent developments have once again underscored that notwithstanding the significant progress achieved so far in strengthening crisis prevention, financial crises will continue to occur. Over the past months, the Fund was again called to assist member countries suffering from capital account crises with large financial packages. These interventions have once again put the spotlight on the Fund's role in crisis resolution. In my view, we have still not succeeded in sufficiently clarifying our crisis resolution framework.
In this sense, I warmly welcome the recent progress that has been achieved in following up in the various areas outlined in our last communiqué. The strengthening of the analytical framework for debt sustainability and the clarification of rules for exceptional access are crucial for making the country-specific decisions more transparent and consistent. While the work has shown that in crisis resolution a strict rule-based approach is not feasible, policies and procedures have been strengthened and operationalized. I am particularly encouraged by the significant progress made in a key area of the Fund's crisis resolution framework, namely the strengthening of the legal framework for sovereign debt restructuring. The work on the contractual and statutory approaches has demonstrated the wide consensus that exists on the necessity to find better ways to deal with the heterogeneous creditor community that many members are faced with.
The work on the contractual approach has benefited from the intensive cooperation between the Fund, G-10, and the private sector in developing model collective action clauses. The strong involvement of the private sector and the fact that the proposed model clauses intend to leave significant room for taking into account debtor/creditor specific circumstances should help in achieving wide-spread acceptance. However, ultimately the degree of acceptance and, thereby, the success collective action clauses will hinge on the private sector's willingness to participate.
While the Fund can play only a supportive role in promoting collective action clauses, it has a key role in defining the statutory approach. I very much welcome the progress in discussing the precise modalities of a Sovereign Debt Restructuring Mechanism (SDRM). I continue to strongly support the creation of such a mechanism. The SDRM will provide a framework for the orderly, timely and predictable resolution in the exceptional cases, in which debt restructurings are necessary. By reducing the legal uncertainties, the costs of restructuring processes will diminish for all parties involved. In my view, the preliminary discussions show a broad-based support for such a mechanism. While a lot of work is still necessary to finalize the operational details of an SDRM, there appears to be consensus on the main thrust of the exercise.
I urge management to maintain the momentum achieved over the last twelve months by moving ahead rapidly in refining the elements of a future SDRM. A central part of these efforts will be the text of the amendment of the Articles of Agreement, which will provide the legal basis for the SDRM. I hope the Executive Board will be able to consider the results of this work before the next IMFC meeting.
An SDRM will only work if there are clearer rules for access to IMF resources. The recent discussion on access limits showed that it is currently unreasonable to expect a lid on lending. This, however, makes it all the more important that cases of exceptional access are truly exceptional and do not occur—as we have had over the recent past—at a rate of one every other month. We all are aware that the principles of openness, transparency, and accountability were not fully respected in these cases. Now, I was happy to note that the Executive Board and IMF management have agreed on a number of rules and procedures to be observed in cases of exceptional access. I am looking forward to seeing these rules applied and procedures followed in future cases.
5. Fund Assistance in Low-Income Countries
The Fund continues to play an important role in the global effort to improve living conditions in low-income countries. The progress in implementing the Heavily Indebted Poor Country (HIPC) initiative is particularly noteworthy. Although the deterioration of the external environment for HIPC members have somewhat slowed down the process, I think it is important to underscore the very significant achievements of the initiative. 26 countries are receiving debt relief under the initiative, leading to a reduction of their overall outstanding debt stock by two-thirds. The substantially lower average annual debt service of these countries has allowed them to free up resources for social expenditure which directly contribute to poverty reduction.
At this stage of the HIPC initiative, increased attention has to be paid on how to ensure debt sustainability after countries reach their completion points. Long-term debt sustainability hinges critically on the quality of macroeconomic policies and is thus largely in the hands of the countries themselves. For those exceptional cases, in which exogenous shocks fundamentally change the economic circumstances and adversely affect the prospects for long-term debt sustainability, the initiative has the flexibility to ensure a sustainable debt stock by providing additional debt relief at the completion point.
Some stakeholders are criticizing the HIPC initiative for not allowing fast enough progress. Many of the delays stem from longer-than-expected preparations of PRSPs and difficulties in the implementation of adjustment programs. In my view, such delays are not necessarily a bad thing. They provide an opportunity to enhance the quality of the poverty reduction strategy, including by deepening the participatory process. Furthermore, the costs of the delay are mitigated by the interim assistance by major creditors.
In some cases, policy slippages have led to higher-than-expected debt ratios at the end of the process. In my view, providing additional debt relief in these cases before establishing an adequate Fund track record would be ineffective. Higher-than-projected new borrowing has also led to higher debt ratios, underscoring once again the importance of strengthening debt management and of exercising caution in attracting new foreign debt, including from the IFIs.
Regarding financing issues, I gladly note that the Fund's activity in the low-income countries is securely financed for the next few years. I also welcome the small but steady increase of bilateral contributions to the PRGF-HIPC Trust. Furthermore, I am pleased to note that additional pledges were received, which will allow for post-conflict emergency assistance to be subsidized until 2004. Switzerland's contribution amounts to US$ 1 million.
The implementation of the Poverty Reduction Strategy Paper (PRSP) approach is moving ahead steadily and in the right direction. There have recently been encouraging trends in certain countries, particularly the tightened links between the PRSP process and budgetary procedures. However, one of my concerns for the success of the PRSP initiative is closely linked to this issue, namely the still inappropriate capacity and political commitment in the area of budget and debt management. These and other issues, such as setting achievable intermediate indicators and better alignment of donor practices remain to be tackled. I remain confident that the PRSP process will continue to evolve in a positive way, so as to provide a comprehensive development framework for all stakeholders.
6. Combating Money Laundering and the Financing of Terrorism
The broad-based support of the Fund membership to move forward in anti-money-laundering (AML) efforts and combating the financing of terrorism (CFT) has led to substantial results in implementing the action plan. The main challenge was identified to be the continuation of the close cooperation between the Fund, the World Bank, and the FATF, and to avoid an undue duplication of work in order to arrive at a uniform, cooperative and non-discriminatory assessment process. There has been substantial progress, and I would like to commend the elaboration of a comprehensive common AML/CFT assessment methodology in a matter of less than a year as well as the exemplary Bank/Fund collaboration. I welcome that the momentum will be maintained as the FATF Plenary and the Bank and Fund Boards will consider a final draft in early October and the 12-month pilot program will start thereafter.
7. Independent Evaluation Office
I welcome the conclusion of the first study prepared by the Fund's Independent Evaluation Office. The high quality evaluation on the "Prolonged Use of Fund Resources " provides valuable recommendations for Management and the Executive Board. It is encouraging to see that many of the suggestions reinforce the measures that are already being implemented in the context of reform efforts within the Fund.