April 12, 2000

The attached Report provides a comprehensive update on work underway in the IMF to help strengthen the international financial architecture. Extensive progress is being made on all facets of this work, both in the Fund and in other fora. Much of the work remains explicitly experimental, including through pilot programs that will draw to a close over the course of the year.

It is likely that the Executive Board will, within the next few months, be able to draw conclusions from the pilot exercises and move toward decisions for more permanent reform. Coming to this point will require continued major efforts by national authorities and the international institutions, and it is critical that the recent rapid momentum be maintained.

The Report emphasizes that much of this work will come together in the context of IMF surveillance, although this will also pose new challenges. In particular, we will need to think carefully about how we can draw on ongoing work, and on expert skills, in other organizations to better inform surveillance.

Let me briefly outline the main elements of our work.

Transparency and Standards

• Efforts to increase the transparency of member’s policies and of Fund policy advice have progressed significantly, with around one-third of the membership participating in the pilot program for the voluntary release of Article IV staff reports. The vast majority of members now release PINs after Article IV consultation discussions, and almost all members using Fund resources are releasing program documents.
   
• Further progress has been made since the September 1999 Interim Committee meeting in developing and strengthening standards. The SDDS has been strengthened, the GDDS is moving into its operational phase, the supporting document to the Code of Good Practices on Transparency in Monetary and Financial Policies is progressing well, and the Basel Core Principles (BCP) methodology has now been finalized.
   
• Significant progress has been made in preparing assessments of members’ observance of standards through the experimental Financial Sector Assessment Program (FSAP) and Reports on the Observance of Standards and Codes (ROSCs). The Fund is undertaking assessments only in areas of its direct operational focus. Covering the full range of standards important to economic and financial stability requires that the international community pursue a shared approach to undertaking assessments, bringing in the skills of other expert bodies. Difficult issues remain to be resolved before this can be fully integrated into surveillance on a lasting basis.

Strengthening Financial Systems

• The FSAP pilot, which covers a diverse range of financial systems and geographic regions, is making a promising contribution to better assessing financial sector risks and vulnerabilities. Feedback from participating national authorities has been generally positive and their suggestions are helping to refine the Program. While final decisions on modalities will need to await the completion of the pilot, the Board has supported the incorporation of vulnerability assessments derived from the FSAP into Article IV surveillance, and has agreed to continue the program.

Assessing External Vulnerability

• The IMF and World Bank are collaborating on a series of projects designed to improve external liability management. Work is underway on debt and reserve-related indicators of vulnerability, sovereign debt management and the development of domestic capital markets. This work will come together in a paper to be considered during the summer on guidelines for sovereign debt management. Related work is underway on structural and institutional factors in foreign exchange reserve management, high-frequency monitoring of external liabilities of domestic banking systems, macro-prudential indicators of financial sector vulnerability, and on early warning systems for external crises.

Involving the Private Sector

• We have made concrete progress in our work on this essential issue. Two recent efforts to secure private sector involvement through the restructuring of international sovereign bonds have been encouraging and the principle of appropriate private sector involvement now seems reasonably well accepted, including by the private financial community. However, more work is needed to construct an operational framework for securing involvement. The Board has considered a framework proposed by staff building on the principles and framework articulated by the G-7 Finance Ministers in their report to the Köln Economic Summit. Under this framework, private sector involvement could be ensured primarily through reliance on the IMF’s traditional catalytic role if the member’s financing requirements are moderate, or if the member has good prospects of rapidly regaining market access on appropriate terms even when financing requirements are more substantial. More concerted forms of private sector involvement would be required if the financing requirement is large and the member has poor prospects of regaining market access in the near future, or if the member has an unsustainable debt burden in the medium term. There is a range of opinions on whether there should be a threshold level of official financing above which there would be a presumption of concerted private sector involvement.
   
• While the suggested framework is promising, difficult analytical judgments are required to make it operational. Flexibility will be required in handling individual cases, and the form of private sector involvement will depend on the circumstances of each case. We will continue to work on the analytical underpinnings and operational issues involved in making the framework operational.
   
• Executive Directors have noted the importance of contacts with creditors on an ongoing basis for preventing the occurrence, and mitigating the severity, of crises; encouraged the establishment of creditor committees if needed and on an ad hoc basis; agreed that temporary and voluntary market-based standstill arrangements could be desirable in some circumstances; and seen merit in incorporating collective action clauses into international sovereign bond contracts.

IMF Facilities

• The Board has initiated a major review of IMF financial facilities to assess the extent to which the ways in which IMF financial assistance is provided may need to be modified. This effort has produced a significant streamlining through the elimination of four facilities in the last few months. The Board will be exploring potential modifications to other non-concessional facilities, in particular to encourage greater efforts at crisis prevention by members—especially in its reconsideration of the CCL—and to find the right balance of incentives and disincentives regarding the use of Fund resources in the context of increasingly widespread access to private financing by member countries. Concrete decisions will require greater clarity on the role of the IMF in the international financial system and will be influenced by progress on other key aspects of the system’s design. These issues will continue to shape much of the Executive Board’s work in coming months.

Conclusion

We have made good progress across the board, but more remains to be done in reforming the Fund and in strengthening other aspects of the international financial system. The issues involved are complex and will require continued extensive discussion to incorporate the perspectives of the entire membership. We need also to draw on the experience and views of the private sector and other official fora. The momentum of all of these efforts to strengthen the international financial system must be maintained.