September 16, 1999

This report contains a comprehensive survey of the Fund's progress in strengthening the international financial system. I would like to highlight a few key issues.

The work on "architecture" has entered a new phase:

• There are fewer announcements of new initiatives, but greater focus on the specification and implementation of existing ones. This shift in emphasis is expected and entirely appropriate.

• Much of the work is highly complex and resource-intensive for national authorities, as well as for the Fund and other international institutions and fora, and it is essential that the momentum be maintained to carry the work through to fruition.

• As some elements will take some time to implement fully, regular reports to the Interim Committee are useful to help ensure that the progress in carrying out the requests of the Committee is monitored.

A few examples illustrate the extent of progress so far, including in areas that I suggested were priorities in my statement for the last Interim Committee meeting.

• Many national authorities (45 at latest count) have indicated a willingness to participate in the pilot program for release of Article IV staff reports, which is now well underway. Moreover, 80 percent or more of member countries now agree to the release of program documentation and Executive Board assessments of Article IV consultations.

• Countries are making progress in adhering to the standards developed in the Fund's core areas, although more progress is required in the period ahead.
  • The SDDS continues to gain greater prominence in both the official sector (including by the Basel Committee in its discussions on the Capital Accord) and by the private sector (including in investment house newsletters and analysis). All subscribers should adhere to their commitments under the strengthened SDDS, notably to join those who have already begun to implement the strengthened standard on reserves. The next stage is the strengthening of external debt data. In most countries, greater coordination of agencies within the country would enhance the efficiency of the data provision process.

  • Countries should be encouraged to implement the Code of Good Practices on Fiscal Transparency and, now that it has been finalized, the Code of Good Practices on Transparency in Monetary and Financial Policies.

• The Executive Board has discussed again, in the context of further case studies, how to develop the proposal for reports on transparency or, more generally, on progress in implementing standards. In the year ahead, particular focus will be given to ways to bring other institutions, including the World Bank, more fully into the process of monitoring standards beyond the Fund's core areas. The World Bank has agreed to experiment with the joint preparation of reports.

• National authorities and international institutions will need to do more to encourage the development, adoption, and implementation of relevant internationally recognized standards applied to the private sector.

• Helpful evaluations of the Fund's surveillance and research activities have been concluded, and we will over the coming months be distilling the lessons they hold for these activities.

Strengthening Financial Systems

• Fund-Bank collaboration on financial sector work has intensified, including through regular meetings of the Financial Sector Liaison Committee (FSLC). The joint Financial Sector Assessment Program (FSAP), having been agreed in concept, is now moving to operational reality. The Fund and the Bank are in the process of undertaking several financial sector assessments, and progress will be reviewed.

• National authorities are intensifying their assessments of financial systems, helped by the Fund and others, and aligning national practices with international principles. A new methodology has been developed for assessments of adherence to the Basel Core Principles (with 24 countries so far assessed). Moreover, the international community will need to respond to the consultative document on revising the Basel Capital Accord. This is a very full agenda, and crucial to the efforts to reduce vulnerabilities.

• The Financial Stability Forum (FSF) has begun its work, and the Interim Committee will be hearing from the Chairman of the FSF on progress, including work on possible sources of vulnerability from the activities of offshore centers, highly leveraged institutions (HLIs), and from short-term capital flows. From these endeavors, we expect recommendations early next year, including for the disclosure of information by the private sector.

Involving the Private Sector in Forestalling and Resolving Crises

• Further progress has been gained in recent months in better identifying the sources of risk in country exposure and in considering possible preventative and ex ante measures, many of which have been put forward earlier.

• Much practical experience has also been gained since the last Interim Committee meeting in effectively involving the private sector in specific country cases. The complexity and variety of country cases have highlighted many conceptual and practical issues that will need to be addressed. I expect this to be a major focus of our efforts in the months ahead.

In other areas of reform previously identified, more discussion is needed before comprehensive proposals can be agreed. Such areas include capital account issues--the role of capital controls and possible amendment of the Articles of Agreement to provide for the liberalization of capital movements--and other systemic issues, including the implications of recent crises for the appropriateness of exchange rate regimes. Analysis and discussions on these topics have been an important focus for the Fund in recent months and will continue to be in the period ahead.

• Discussion is ongoing with potential users of the Fund's Contingent Credit Line (CCL).

• One systemic issue that I highlighted in April--the need to reform the ESAF, as well as to secure the full financing for the ESAF and the Fund's participation in the HIPC Initiative--is being addressed in separate reports to the Interim Committee. There is no doubt, however, that the successful integration of a larger number of developing countries into the global financial system will depend on the correction of unstable and unsustainable debt structures of the poorer countries.

The Fund has a very busy agenda on architecture issues, and will continue to be fully engaged in implementing what has already been suggested. The same is true for national authorities, other international institutions and fora, and for the private sector, and we must ensure that adequate resources are devoted to these efforts. The recent return of a degree of calm in markets and recovery in the crises countries should not be permitted to cause the agenda to languish. Reform of the international financial system must remain a top priority if we are to lessen the risks of a recurrence of recent financial crises.