Speech

Deputy Managing Director of the International Monetary Fund
At the IMF Seminar For Legislators of Central America
San José, Costa Rica, May 19-20, 2005

1.Thank you, Mr. Gronlie, for your kind introduction. It is a pleasure to be here in San José, and I join Mr. Gronlie in welcoming all of you to this seminar. Let me first thank the Costa Rican authorities for opening their doors to us to hold this important meeting, and for providing us with warm hospitality.

Building Strong Relations with Our Member Countries

2. The IMF has long worked with the legislators of member countries, through meetings at our headquarters in Washington and in country capitals. More recently, we have broadened our outreach and dialogue with parliamentarians, and this seminar is an example of that effort. Your presence here today reflects the important role that you play in your respective countries. Legislators have key responsibilities in approving and monitoring national budgets, and in formulating and approving legislation on economic reforms. So, in order to provide advice and assistance to your countries in these areas, it is important that the IMF knows your views on issued related to the mandate the institution has been given.

3. Our outreach efforts—to lawmakers in this case—also reflect the increasing focus we are giving to strengthening the sense of ownership of economic policy programs by the countries themselves. In the specific case of low-income countries, strategies to reduce poverty must be designed by countries themselves, on the basis of broad consensus across society. As the people's representatives, legislators have an important part to play in formulating these strategies, and in building consensus for reforms. By maintaining robust and constructive relationships with policymakers, legislators and other stakeholders, we can better tailor our advice and assistance to the most pressing needs of the countries.

4. Conversely, these types of events are also excellent opportunities for legislators to get to know the IMF better. We firmly believe that the effectiveness of our interaction with countries can be enhanced by fostering greater awareness of the IMF's unique purposes and responsibilities. In this regard, as you may know, the IMF is not a development bank, and we do not provide development loans. Rather, our mandate is largely focused on the promotion and maintenance of macroeconomic and financial stability, both in individual countries and at the international level. This does not mean that we are not interested in countries' development and economic growth. On the contrary, the Fund's work is guided by the conviction that macroeconomic stability is a precondition for achieving those very important goals. Our efforts may be conveniently divided into three main types of activities:

5. Surveillance - In the surveillance process, each country engages in a regular consultation with the IMF (usually annually), during which its economic and financial policies are analyzed and discussed between IMF staff and the country's authorities. A staff paper on the consultation is then presented to our Executive Board—comprising 24 Executive Directors representative of the IMF's membership—for discussion and comment. This opportunity for each country to undergo a regular peer review of its economy and policies, and identify weaknesses and areas for improvement, is an important benefit of the surveillance process. With increasing regional economic integration in different parts of the world, surveillance is also conducted at regional levels.

6. Lending - The IMF provides temporary financing to countries to assist them in correcting temporary balance of payments problems. For the poorest IMF members, longer-term financing is also available, and on concessional terms; in this case to address structural balance of payments problems often associated with excessive external indebtedness. IMF lending is typically furnished in the context of an adjustment program aimed at correcting the country's underlying economic problems. The goal is to help the country emerge from its difficulties with a stronger economy, and reduce the likelihood of recurring financial troubles.

7. Technical Assistance - Many countries lack adequate capacity and knowledge in the formulation and implementation of strong economic policies. In response, the IMF provides technical advice and assistance to these countries, primarily in the areas of macroeconomic and financial policymaking. Subject areas where assistance may be provided range from banking supervision, to tax and customs administration, to national statistical systems.

8. In all of the IMF's activities, we are guided by one unchanging principle—that is, how best to serve the needs of our members and help them address their economic challenges. And while many may assert that the IMF applies a one-size-fits-all approach in its work, the fact is that we do not have a standard formula when making policy recommendations. Each country is unique in its circumstances and needs, and the IMF's advice takes full account of those factors. Furthermore, our strength and comparative advantage as an institution comes from our diverse and broad membership of 184 countries, which enables us to leverage on the experiences of different economies in assessing what policies may or may not work in a given set of circumstances.

A Strong Policy Framework for Central America

9. In the case of Central America, the IMF continues to work closely with your governments in their quest for strong economies characterized by accelerated and sustainable growth. Here, I am pleased to note that there have been noticeable advances in the last decade. Spurred by increased foreign investment and greater export diversification, regional growth was relatively strong during the 1990s, at about 4.5 percent per year. This was accompanied by substantial progress in taming inflation, which has been reduced to the single digits. Trade and financial openness also increased notably during this period. Underlying these advances is a stabilization of the region's economies—a most welcome and encouraging development. That is because stable economies are the foundation for greater investment opportunities and growth, both of which are key ingredients for further economic progress, job creation, and poverty reduction.

10. These gains provide a solid basis for carrying economic reforms to the next level. There are important challenges ahead. Clearly, poverty is still widespread in most regional countries. Economic and social progress remains constrained by weak institutions and political difficulties. The potential benefits of regional trade remain unrealized because the framework for regional cooperation and integration is still undeveloped. Addressing these issues will give the Central American economies more leverage to fully exploit their extensive growth potential.

11. More specifically, the sessions later this afternoon and tomorrow will discuss in detail the major reforms and economic challenges which confront Central America. For the moment, let me just highlight what we see as some priorities for this region, taking into account the common history that the countries share, cultural and social similarities, and growing integration.

12. First, it would be important to enhance regional collaboration. To compete successfully in the global economy, the Central American countries could cooperate more closely with one another. By doing so, countries can maximize the benefits of economic integration while at the same time reducing the risks. In particular, increased coordination is needed in the areas of banking supervision, tax policy and administration, and large public investment projects. The Central American and Dominican Republic Free Trade Agreement with the United States—or "CAFTA-DR"—would certainly bring important benefits, and the region has rightly set high expectations for this important agreement. In that connection, the legislative ratification process, still pending in some countries including the U.S.A., needs to be expedited.

13. Second, countries should continue to pursue fiscal reform. Most countries in Central America have seen debt-to-GDP ratios rise over the past decade, which means that it will be critically important to bring debt dynamics back to a sustainable path in the future. Much work remains to be done to strengthen countries' tax collection and improve budgets, as well as to better meet the needs for investment in infrastructure, human capital, and support for the poor.

14. Third, financial systems in the region would need to be further fortified. The banking reforms undertaken by the various countries have already strengthened systems and made them more resilient to external turbulence. These reforms must continue in order to rekindle lending in an environment of sound prudential and supervisory standards. Regional coordination in financial supervision is also imperative, to keep pace with the accelerating financial integration among Central American economies.

15. Fourth, steps must be taken to improve the overall investment and business climate. The region is keenly aware of the need to improve the business environment and attract foreign direct investment, one of the aims being to maximize the potential benefits of CAFTA-DR. It would therefore be wise to further assess impediments to doing business; continued improvements in infrastructure, by encouraging private sector participation in this area; strengthening of the rule of law; and lowering the cost and regulatory burdens of doing business. As countries compete for FDI, it would also be important for regional governments to coordinate their respective fiscal incentives for such investments, to avoid weakening the fiscal position of each country through a "race to the bottom".

16. Fifth, improvements are needed in the areas of transparency and governance. This is a major challenge which is faced by not only countries in this region, but also by many others all over the world. Transparency in government and fighting corruption are top priorities for improving the investment and business climate. They are also key to sustaining domestic support among citizens for their governments' policies and reforms. Eradicating corruption must therefore be a central element in the entire range of reforms that will be implemented.

17. As you can see, the reform agenda for Central America is significant. What is encouraging is that support and consensus have already been growing throughout the region for fundamental economic principles such as macro discipline and low inflation. The challenge going forward is to build on that support and consensus to deliver a critical mass of reforms, stability, and growth over the next few years, which will result in greater employment, poverty reduction and, in general, a significant improvement in the well-being of the population. This will also enable the countries to make considerable strides towards meeting the Millennium Development Goals.

18. Once again, let me welcome all of you to this seminar, and thank you for your interest and participation. The seminar's organizers have put together an excellent program, and I am confident you will find their presentations informative and useful. We are also looking forward to a free exchange of views and ideas with you over the next two days. It is hoped that with this seminar, we can learn how to work better as partners, improve our respective policies, and interact more constructively.