Annual Meetings 2003
2003 Annual Meetings: News Releases, Speeches, Committee Papers, Documents and Background Information
Statements Given on the Occasion of the IMFC Meeting
September 21, 2003
Documents Related to the September 21, 2003 IMFC Meeting
Austria and the IMF
Belgium and the IMF
Republic of Belarus and the IMF
Czech Republic and the IMF
Hungary and the IMF
Republic of Kazakhstan and the IMF
Luxembourg and the IMF
Slovak Republic and the IMF
Republic of Slovenia and the IMF
Turkey and the IMF
Statement by Mr. Didier Reynders, Minister of Finance of Belgium
On behalf of the constituency consisting of Austria, Belarus, Belgium, Czech Republic, Hungary, Kazakhstan, Luxembourg, Slovak Republic, Slovenia and Turkey
International Monetary and Financial Committee (IMFC)
Dubai, September 21, 2003
On behalf of the countries of my constituency, I wish to thank the authorities of the United Arab Emirates for their warm welcome in Dubai, and congratulate them on their excellent preparation of the World Bank and IMF 2003 Annual Meetings.
The Global Economy - Outlook and Policy Prospects
The latest economic data from the major industrial countries justify a cautious assumption that the global economic growth is finally gaining strength. Growth already seems quite brisk in the United States, and has also picked up in Japan. In the countries of the euro area, growth was flat for the first half of this year, but leading indicators suggest that here, too, moderate growth can be expected in the second half of 2003, strengthening further towards potential in 2004.
In emerging market countries, too, the latest developments are encouraging. Partly due to low interest rates in mature markets, but mostly thanks to the pursuit of sound policies and structural reforms, market sentiment has improved significantly. The price of emerging-market debt rose, the costs of borrowing fell, and improved access to international capital market has enabled many emerging market borrowers to pre finance their 2003 borrowing needs. And despite continued low growth in Brazil and some other Latin American countries, the conditions are in place for it to accelerate in the future. In emerging Asia, the effects of SARS seem now to belong to the past, and the region is likely to continue to be the most dynamic in the world economy. The welcome progress in implementing the Fund supported program is also contributing to robust growth in Turkey, despite the adverse effects of regional uncertainties.
Although the effects of past shocks are fading away and the investment excesses of the late 1990s are gradually being worked off, and though stimulative policies are in place, we must be aware that there still exist downside risks to this outlook.
One such risk stems from the continuously high world-wide concerns about security and its damaging effects on market confidence and resulting volatility. There is little economic policy can do to reduce such risk.
Another risk to the global outlook—which has been discussed repeatedly during our previous meetings—is the risk stemming from the continued large external imbalances in the world economy, and the threat that their adjustment will be abrupt and disorderly and will destabilize the international financial market and slow down global growth.
The U.S. current account deficit has now reached a level that clearly cannot be sustained in the medium term. The build up of this deficit, and of related large capital flows to the United States, may indeed reflect the relative attractiveness of the faster growing U.S. economy in the past. But its orderly reduction to a more sustainable level must be of concern to all countries, since a disorderly adjustment would have world-wide negative effects.
Starting with the United States, the policy priority should be to formulate and implement as soon as possible a credible and ambitious plan of medium term fiscal consolidation. The recently implemented tax cuts and spending measures have given a welcome growth stimulus, to both the U.S. and the global economy. But the large U.S. borrowing needed to finance the fiscal deficit could eventually push up world interest rates, and nullify the initial growth stimulus of a looser fiscal stance. In addition, continuous large fiscal deficits are likely to further increase the already high current account deficit and make its orderly adjustment even more difficult.
Stronger growth in countries other than the United States, based on robust domestic demand, is another necessary condition for the adjustment of global external imbalances. The performance during the first half of the year has been disappointing in many countries of the euro area. While fiscal policies have allowed automatic stabilizers to play, budget deficits will have to be corrected according to the rules of the stability and growth pact. Leading indicators point to a gradual strengthening of output while recent developments show that the political will exists to further implement structural reforms in the framework of the Lisbon agenda in order to achieve stronger growth.
In Japan, recent data showing a stronger than expected second quarter growth are encouraging. But this positive news should not lead to complacency. Deflation and deflationary expectations are still strongly entrenched, and despite the welcome progress with the banking sector reform, including the recognition and write off of nonperforming loans, there still exist serious problems that block the appearance of robust sustained growth. Monetary policy has been appropriately easy, but given the persistence of deflation, the Bank of Japan should consider a further application of quantitative easing. In view of Japan's exceptionally high public debt, fiscal policy must focus more on ensuring the long term sustainability of the public finances. It is the structural problems whose resolute solution would contribute the most to ending the deflation and ending Japan's decade of malaise.
Next year will be an important milestone for the eight transition economies that will become members of the European Union. Their EU entry should further solidify the market confidence that they already enjoy as EU candidates. That confidence, coupled with the expected acceleration of growth in Western Europe, should provide an important boost to their growth and speed up their real convergence with the current EU members. But in the long term, the speed and durability of the real convergence will depend mainly on the domestic policies of the EU candidates. Many of these still face the important and difficult task of putting public finance on a sound footing, so as to ensure long term fiscal sustainability and comply with the requirements of the Stability and Growth Pact. Sound public finances should also contribute to pave the way for the adoption of the euro at a later stage.
Economic growth has remained unexpectedly robust in Russia, Kazakhstan, and some other CIS countries. While the relatively high price of oil has helped boost the economic activity of the oil exporting countries, progress with structural reforms and sound macroeconomic policies have also been factors. Belarus also, although it does not benefit from high oil prices, recorded relatively solid growth, though it will take more reforms for Belarus to achieve its full growth potential.
Since the period of financial crisis in 1997-1998, the emerging Asian countries have made important progress in addressing the weaknesses and problems of their economies. Their strong external positions, very high foreign reserves, and rapid growth testify to the success of their efforts. But with success comes the new responsibility of playing a larger role in reducing the external imbalances in the global economy. As the Asian economies become stronger and more resistant to market volatility, they can help reduce those external imbalances by relying more on domestic demand to support their growth.
In countries whose foreign reserves have reached very high levels, the marginal benefits of additional reserve accumulation can be very low. In such cases, due consideration should be given to adopting a more flexible currency regime or intervening less in the foreign exchange market. The role of these countries in the world economy makes an orderly adjustment of global imbalances impossible without their full participation. Relying on only a few currencies as counterparts to the depreciation of the US dollar, and on only a few countries to bear the brunt of reducing the U.S. current account deficit, is not a workable alternative.
The Importance of the Doha Development Agenda
Trade is a driving force of economic growth. All countries stand to reap large benefits from an orderly liberalization. But none of this will happen unless both the advanced and the developing countries agree to further liberalization of their trade. The inconclusive ending of the Cancun negotiations should not be considered the end of the Doha Round. The effort to restart the negotiation process should begin as soon as possible. The Fund must stand ready with financial support for countries whose balance of payments will suffer negative near-term shocks caused by trade liberalization.
Strengthening IMF Surveillance and Promoting International Financial Stability
The Fund must continue correcting the weaknesses revealed in its surveillance by the capital account crises that have surfaced periodically since the mid-1990s. These include:
The Fund's task of collecting data from countries, which includes helping countries collect and publish their own high quality statistical data in a timely manner, are of the first importance for preventing financial crises. Without reliable information from it members, the Fund cannot fulfill its surveillance mandate. More countries should subscribe to the Fund's data dissemination standards.
Transparency concerning policy intentions and decisions, including via the publication of countries' staff reports, enables markets to make informed credit and investment decisions.
The Financial Sector Assessment Program (FSAP) must be considered as part and parcel of the Fund's surveillance mandate under Article IV.
The Fund must, in its country analysis, pay more attention to vulnerabilities in the balance sheets of the economic and financial sectors of countries.
Analyses of debt sustainability can give early warning of impending crisis; they should receive close attention and play a significant role in policy formulation and Fund surveillance. Therefore, the Fund should continue to improve its debt sustainability framework.
Surveillance must be strengthened for countries making use of Fund resources.
The Fund should improve, not only the quality of its technical analysis, but also its role as an effective policy advisor. The Fund's surveillance should help countries overcome internal political resistance to changes in policies that are necessary and ultimately beneficial for them.
The Contingent Credit Line (CCL) is redundant. The Fund's other instruments, including precautionary Stand-By Arrangements and surveillance in general, are better suited to countries' needs, which include preventing crises, promoting good policies and strong institutions, informing the markets about members' policies, and reassuring members that Fund resources will be available, if justified, to help them resist pressures from the financial market.
Progress with Crisis Resolution Initiatives
The Fund's groundbreaking proposal for a Sovereign Debt Restructuring Mechanism (SDRM) has recently persuaded several sovereign issuers to introduce Collective Action Clauses (CACs) in their bond issues in New York.
The Fund should actively promote G-10 model based CACs during its surveillance and its contacts with market participants. It should not hesitate to give warning when it sees clauses beginning to emerge with majority restructuring thresholds that are too high to materially improve crisis resolution. The EU has undertaken clear commitments in that regard and some of its Members have already introduced such clauses in order to support the efforts of emerging market countries.
The Fund should continue seeking ways of solving those collective action problems that are not addressed by introducing CACs into individual bond issues, for example, by assessing the feasibility of aggregating claims and working on SDRM issues in general.
Because of its relevance for the functioning of the international financial system, the Fund should be closely involved in establishing the Code of Good Conduct on Sovereign Debt Restructuring, and monitor its implementation.
Accelerating Poverty Reduction and Strengthening Sustainable Economic Growth in Low-Income Countries
The Fund must continue to play its part in the implementation of the strategy agreed at Monterrey to reach the Millennium Development Goals:
The Fund should continue to help low-income countries implement their Poverty Reduction Strategy Papers (PRSPs) in its core areas of expertise, i.e. macroeconomic and financial policies, by means of surveillance, technical assistance and concessional loans under the Fund's Poverty Reduction and Growth Facility (PRGF).
The Fund and the World Bank should continue to assist the heavily indebted poor countries (HIPCs) to reduce their debt burdens thanks to the implementation of the HIPC Initiative.
In the course of its bilateral and multilateral surveillance, the Fund should actively monitor the economic and financial policies of the advanced countries and their effects on the rest of the world, with particular attention to aid flows and trade openness vis-à-vis the developing world.
Following a low-income country's successful completion of the HIPC Initiative, the Fund should provide an early warning to the international community if that country is planning to borrow more than it can sustain. To that end, the Fund should take account of a country's per capita income when assessing the maximum debt that it can sustain without jeopardizing its development goals.
The Fund must continue to play a small but important financing role in the low- income countries, in order to secure for all countries the benefits of the macroeconomic stability and financial discipline that Fund-supported programs bring about in low-income countries.
The Fund and the World Bank must advise low-income countries about how to prepare in advance for exogenous shocks, and how to diversify their exports. The Fund should also continue its role as an important catalyst of financial assistance when countries are hit by an exogenous shocks, and alert donors to the unaddressed financial needs of countries.
Let me thank Deputy Managing Director Shigemitsu Sugisaki, who has assisted many of the countries of our group in his capacity as the Management Team member responsible for their relations with the Fund. They valued his professionalism and readiness to enlist the Fund's assistance.
We also pay tribute to the departing Economic Counselor of the Fund, Kenneth Rogoff, who, during his all too short tenure, has consistently given sharp assessments of the world economy and wise policy recommendations.