Speech

Transparency and Sound Macroeconomic Policies
Remarks by Mr. Takatoshi Kato
Deputy Managing Director
International Monetary Fund
at the Extractive Industries Transparency Initiative (EITI)
London Conference, 17 March, 2005

Your excellencies, ladies and gentlemen:

It is a great pleasure to be here for today's Conference on the Extractive Industries Transparency Initiative. This is, indeed, a unique international initiative, bringing together governments, companies, NGOs, and international institutions, all with the single focus of improving transparency with regard to extractive industries. Prime Minister Blair and the UK Government deserve credit for their leadership of the initiative, and all involved have reason to be pleased with the progress made to date.

Transparency and the IMF's macroeconomic policy mandate

This session is on "Why transparency matters". Earlier speakers have already illuminated important dimensions of this broad subject. As a representative of the International Monetary Fund, I thought it would be most useful for me to talk about transparency in the context of the institution's mandate, which is to help all our member countries achieve and maintain high levels of employment and real income. To this end we provide advice and financial and technical assistance related to our core areas of expertise, namely macro-economic and financial sector policies and the associated institutions. For our low-income members, these efforts are geared also to support of poverty reduction strategies.

Our policy dialogue with countries rich in natural resources focuses on the particular macroeconomic policy challenges that they face. One is volatility in international prices and the associated fiscal vulnerabilities. Another is the tendency for appreciation in the real exchange rate which harms the rest of the economy-the so called Dutch disease. These countries also face pressures to decentralize their fiscal systems so that the regions where the resources are found receive what they consider a fair share. And given that natural resources are exhaustible these countries must consider how to ensure intergenerational equity.

Transparency, institutions, and governance

Experience has shown that transparency can play an important positive role in helping countries address these policy challenges, by informing public debate and improving public trust. Transparency also helps strengthen public institutions, which is a key issue for many low-income countries. Weak institutions result in poor governance, and poor governance is now widely regarded as perhaps the major impediment to growth, development and poverty reduction. For instance, the need for better governance features prominently in the UN's Millennium Project's report on Investing in Development and the recent report of the UK's Africa Commission.

Improving governance is complex. It involves changing institutions, cultures and traditions. There is still a lot still to be learned in this area, and in the meantime approaches differ on how to go about it effectively. But almost everyone agrees that transparency makes institutions function better by rendering them publicly accountable. Accountability improves their service delivery; it will also bolster their functional independence, very important for central banks but also for revenue administrations and procurement agencies. Transparency helps institutions forge coalitions, among broader government and civil society, in support of their missions.

IMF transparency initiatives

Let me now say a few words about how in recent years the IMF itself has been active in developing tools for promoting policy transparency to assist our members. These tools include a standard to enhance the availability of timely and comprehensive statistics, and two codes and accompanying manuals on policy transparency─one focusing on monetary and financial policies and the other on fiscal policy. The most recent addition to this set of tools is the Guide on Resource Revenue Transparency, which supplements the general manual on fiscal policy transparency with good practice examples of specific relevance to countries with large extractive industries. We expect that it will be especially useful to EITI participants as they address the challenges that I mentioned earlier associated with prudent fiscal management of their extractive industry revenues.

As an additional service to members, we offer to assess how their policy practices compare to the codes. We encourage publication of these assessments, the strong demand for which is very encouraging. In assessing natural resource rich countries, IMF staff will use the Resource Revenue Transparency Guide.

IMF support of the EITI

Against this background, I would now like to discuss how we see the role of the EITI in helping resource rich countries address their governance challenges.

The EITI addresses these problems with a focused approach: a full public accounting of current government resource revenue. This focus is also its strength. It has great public appeal, and can be equally supported by a great many stakeholders. We see it as complementary to the IMF's broader approach. Guided by our policy transparency codes, we advocate transparency not just in the collection of natural resource revenue, but also in the fiscal regime giving rise to this revenue and the management of that revenue. We also promote transparency in how the revenue is used, emphasizing that all government spending should be coordinated through the budget.

The approaches of the EITI and the IMF reinforce each other. That is why we have been from the beginning supportive of the EITI in a variety of ways. IMF staff has been encouraging countries to consider EITI participation, IMF Management has publicly expressed its support of the EITI, and the IMF Executive Board has praised countries that have decided to participate. On an ongoing basis, IMF country teams are assisting governments with implementation, while from headquarters the IMF staff works with DFID, the World Bank, and other stakeholders to advance the initiative.

In sum, we believe that the EITI Principles adopted in 2003 remain appropriate, and that the EITI has made encouraging progress. We support the Statement of Outcomes, including the proposed EITI criteria.

Looking ahead

We look forward to the successful implementation of the initiative. To this end, it would be helpful for EITI to provide participants with guidance while at the same time allowing for flexibility in implementation to accommodate country specific circumstances. The Source Book is a valuable resource that should be developed further to offer EITI participants a rich menu of implementation options.

With quite a few countries now poised to start implementation, much more experience will be gained rapidly. We must recognize our differing mandates but work together pragmatically towards the goal of making publicly available comprehensive and credible information on natural resource revenues. The IMF will continue to support this process, both in our country work and in discussions with stakeholders on the future development of the initiative.

Thank you.