Speech

Address to the Tripartite Review Committee Meeting of the Pacific Financial Technical Assistance Centre by Agustín Carstens, Deputy Managing Director, International Monetary Fund

March 28, 2006

Governor Narube, Honorable Ministers of Finance, Distinguished Representatives of Agencies and Embassies, Ladies and Gentlemen:

It gives me great pleasure to take part in the Tripartite Review Committee Meeting of the Pacific Financial Technical Assistance Centre (PFTAC) today. This is the first time that I have had the opportunity to visit Fiji, and to witness directly the operational aspects of PFTAC. I have just finished some meetings with the authorities in Australia and New Zealand, and am delighted to conclude my Pacific tour with this visit to Nadi.

In this address, I propose to cover the role of regional technical assistance centers, including PFTAC, in the IMF's work; the economic performance and prospects of Pacific island countries; and the Fund's strategic goals in the future.

Role of Regional Technical Assistance Centers

As Deputy Managing Director of the IMF, part of my portfolio covers the IMF's five regional technical assistance centers around the world, which are located in Africa, the Caribbean, the Middle East, and the Pacific. The Pacific Finance Technical Assistance Centre was the first of these, and since its establishment in 1993, it has maintained a high standard for quality technical assistance delivery. The IMF is proud to serve as the executing agency for PFTAC.

Earlier this month, I wrote to all of you in your capacity as members of PFTAC's Steering Committee to inform you of the IMF's Executive Board Review of the Fund's regional technical assistance centers, and the follow-up actions taken by staff. I have sent the same letter to the members of the steering committees of the other regional technical assistance centers. I would like to take this opportunity to discuss those proposals further, and their impact on PFTAC.

The conclusions of the Executive Board review drew heavily on the independent evaluations of the regional technical assistance centers, including the recent evaluation of PFTAC's operations. The evaluations themselves were also made available to the Board in their entirety. In their discussion of the review, the IMF's Executive Directors highlighted the important role the regional technical assistance centers play in helping their beneficiary countries build the institutional and human skills capacities needed to underpin macroeconomic policy. They noted that the centers are well appreciated by the countries they serve, and are an important addition to the IMF's technical assistance toolkit, complementing the traditional technical assistance provided from IMF Headquarters.

At the same time, the Executive Board noted some opportunities for strengthening the regional technical assistance center model. The IMF Executive Board considered the strengthening of the management, organizational structure, and the financing model of the regional technical assistance centers to be a key priority. The bulk of these opportunities relates to internal IMF organizational issues, and have been dealt with through an Operational Guidance Note which has just been issued to staff. However, because the steering committee is at the heart of the regional technical assistance centers' governance structure, I would like to highlight for you a few issues arising from the Board discussion that are related to the steering committee.

As you know, the steering committee is central to the regional technical assistance center concept. Its members provide strategic guidance for the center, and contribute to setting priorities. The steering committee structure is designed to ensure strengthened ownership of technical assistance plans by the member countries. The steering committee also ensures that the composition of resident advisors and the use of short-term experts are matched to member countries' needs, and it has a review role in assessing the implementation and follow-through of recommended technical assistance.

While the steering committee provides the strategic guidance for PFTAC, the day-to-day management of the center is conducted by the center coordinator. You are all familiar with this set-up, and I will not dwell on it further, other than to note that we take the center coordinator's role, as the key interlocutor between the steering committee and the IMF, very seriously. The current PFTAC coordinator, Mrs. Susan Adams, is here with us today, and I have every confidence that as a seasoned economist with many years of experience in technical assistance work, and as a manager, she will excel in this critical role.

Another key element of the organizational structure is the role of the resident advisors, and the short-term experts who work with them. They are the expert-knowledge base of the center, and are critical in determining the technical assistance needs of beneficiary countries. IMF departments are responsible for selecting the most capable candidates, and thereby ensuring the high quality of the technical advice and training that PFTAC provides. I can assure the steering committee that the IMF is committed to maintaining the quality of technical assistance provided by the centers to the same high levels as that of technical assistance provided by IMF Headquarters.

As you may know, in recent years the IMF has undertaken a number of technical assistance reviews, including a comprehensive review conducted in 2005 by the Independent Evaluation Office. These reviews have pointed to ways in which the effectiveness of our technical assistance can be enhanced through a more systematic tracking and focus on results rather than inputs, or even primary outputs. As part of our effort to focus on results, the IMF staff has been developing a results-based management system, which is being piloted in the regional technical assistance centers. This includes PFTAC. This system is intended to integrate our inputs to prescribed outputs and outcomes, so that we can begin to measure, more effectively, what is getting done on the ground rather than simply how much time and money are spent to do it. The system is linked electronically to the IMF's Technical Assistance Information Management System, which means that PFTAC's operations can be seen and monitored within the context of the IMF's larger technical assistance program. This facilitates the efficient use of resources, as well as oversight and coordination internally. We briefed participants about this system yesterday, and shall continue to improve it over time, in order to optimize technical assistance delivery in all five Centers.

Thus, as you can see, the IMF is very conscious of the need to make sure that the technical assistance we provide is effective, and produces the results desired by beneficiary countries. The work we are carrying out in PFTAC is designed to achieve this result. I welcome your thoughts on the results of the review of the IMF's regional technical assistance centers, and on the issues I have just raised.

Finally, and most importantly, I would like to take a moment to thank PFTAC's donors. This center would not exist without the generous financial support of our five donors, and I would like to personally thank the Asian Development Bank and the Governments of Australia, Japan, Korea, and New Zealand for their ongoing support. I would particularly like to thank the Government of New Zealand for the tripling of their support to PFTAC in this new funding cycle. Our appreciation similarly goes to the United Nations Development Programme (UNDP), our original collaborator in developing PFTAC. I understand that UNDP remains actively interested in PFTAC's activities. We are also grateful to the Reserve Bank of Fiji, which generously provides the offices for PFTAC, and Governor Narube for serving as Chairman of the PFTAC Steering Committee.

And now, let me now move on to talk about some broader issues beyond PFTAC specifically.

Overview of Economic Performance and Prospects in the Pacific Region

The Pacific region faces many challenges in developing its economies and raising living standards over the medium term. Throughout the region, countries face problems, including slower economic growth, increased poverty, heightened governance concerns, lack of private sector activity, and questions about aid effectiveness. In several parts of the region, there have been additional concerns about fiscal indiscipline, and potential political uncertainties.

But some things are changing. There have been some notable achievements over the past two or three years. Solomon Islands is achieving good progress in building on the positive impact of the intervention in 2003 by the Regional Assistance Mission to the Solomon Islands (RAMSI). Papua New Guinea has raised official external reserves to historically high levels, with the maintenance of macrostability and higher oil and mineral export prices. Fiji is enjoying strong tourism growth, helping to offset the loss of textile markets and the potential loss of sugar markets in 2007. Samoa, Tonga, and Vanuatu are receiving more reliable airline service, in partnership with an Australian airline. Marshall Islands and Micronesia are successfully implementing their renewed compacts of free association with the United States which run through 2023. Some worrying fiscal deficits have been brought under control, most notably in Papua New Guinea and Solomon Islands, although insufficient public expenditure control, transparency, and accountability remain a concern in many countries. On the external front, balance of payments and debt problems have largely been avoided, helped by generous aid receipts. Exchange rate policies are broadly appropriate.

Another positive sign was the final approval by forum leaders at their meeting in Papua New Guinea in October 2005 of the Pacific Plan for the upcoming ten year period, which was prepared by the Pacific Forum Secretariat with the strong endorsement of Australia and New Zealand. It covers the need to promote the private sector, strengthen public enterprise reforms, address corruption and law and order problems, and encourage integration and trade liberalization. The overall emphasis on the importance of structural reforms is welcome. Of course, the key to success will be the pace of implementation of the many recommendations in a highly ambitious overall strategy.

While these initiatives are encouraging, the outstanding challenges remain formidable, especially to achieve the goal of faster sustainable economic development. The relatively low growth performance in the region is clearly apparent, although it is also evident that inflation has been less serious than in other developing country regions.

Strengthened efforts are required to achieve higher medium-term growth. The authorities of all countries should accelerate structural reforms to improve public sector efficiency, create private sector employment opportunities, and alleviate poverty. Samoa is the most advanced in the reform process, which has been underway there for the past decade. The benefits are now being increasingly seen in higher investment, including foreign direct investment. Fiji is also attracting considerable foreign investment in the tourism sector. However, in most other parts of the region, there has been minimal interest from abroad because of cumbersome and restrictive administrative regulations.

The Pacific island countries share many economic characteristics. These include smallness in terms of GDP and population; narrow productive sectors based on primary commodities with little diversification into manufacturing; fiscal pressures limiting the effectiveness of monetary policy; few export products; high import penetration shares; vulnerability to terms of trade fluctuations; and frequent natural disasters, especially typhoons. It is encouraging that most countries have prepared their own medium-term development strategies which incorporate measures for fiscal consolidation; the introduction of more modern monetary policy frameworks; ensuring sound financial systems; and creating more favorable business climates. There is now an urgent need to develop more specific and integrated policy advice into many of the national plans.

Now is an opportune time to push these national reform plans forward because economic conditions in the rest of the world are expected to be favorable in the period ahead. Despite higher oil prices, global growth has continued to exceed expectations, aided by benign financial market conditions and accommodative macroeconomic policies. The global economic expansion also is becoming more balanced. Among industrial countries, the United States remains the main engine of world growth, but the economic expansion in Japan is well established, and there are signs of a more sustained recovery in the euro area.

The Asia and Pacific region continues to outperform the global economy, led by the strength of China and India. Strong external demand remains a key driver of growth in the region, but domestic demand is picking up across the region, particularly as employment and income growth is rising. Further oil price increases could pose a significant threat to economic growth, both in the region and the rest of the world. Another major concern is that medium-term vulnerabilities associated with global current account imbalances continue to increase. With the risks of inaction rising with time, the key challenge for global policymakers is to take advantage of the favorable conditions anticipated in the period ahead to address these vulnerabilities.

The IMF's Medium-Term Strategy

To meet this challenge and the new challenges that twenty-first century globalization—with rapid movements of capital and swiftly changing competitive conditions—presents, last September the IMF's Managing Director published a report on the Fund's medium-term strategy.

Work on this strategy has five key areas of focus:
• Making the IMF's surveillance more effective;
• Responding to the different needs of member countries for policy advice and temporary balance of payments financing;
• Helping countries build institutions that are needed so that all can benefit from globalization;
• Prioritizing the IMF's work and adapting its organizational structure, including the division of labor with the World Bank; and
• Improving governance by addressing the issue of fair quotas and voice for all our member countries.

To strengthen the Fund's surveillance, we must focus our analysis and policy advice on weaknesses and distortions that encourage crises or hinder adjustment to changing global conditions, and to help bring about corrective action. To achieve this we will need to make our advice more selective, and focused and tailor it well to local conditions. Regional issues, global imbalances, and the spillover effects of one country's actions on the rest of the world will have to get greater attention. And we will need to put more emphasis on financial and capital markets issues.

For emerging markets, the current favorable financial conditions have diverted attention away from the risk of capital account crises, but these risks remain, and we will need to use the IMF's financial capacity more effectively to support emerging market economies in reducing their vulnerabilities and help prevent crises.

We also need to refocus and strengthen the role of the IMF in low-income countries within our core competencies. The Multilateral Debt Relief Initiative is now operational, as are our new Policy Support Instrument and Exogenous Shocks Facility. As additional resource flows become available to help countries achieve the Millennium Development Goals, the IMF will need to help them make effective use of those resources, through our policy advice and technical assistance. In the process, we also need to strengthen cooperation and complementarity with the World Bank and the donor community.

I spoke earlier about the results of our review of the IMF's technical assistance and the ways these affect the PFTAC. More generally, we are trying to strengthen the quality and responsiveness of our technical assistance and training activities, in coordination with major global and regional donors.

Last but not least, it is important for the IMF to make progress in the near term on the quota issue, so that our governance structure reflects changing realities and assures a fair voice for all. Quotas for many member countries, including a number in Asia but also countries in other regions, have become increasingly out of line with these countries' economic weight in the global economy. Making early progress in addressing this issue is important for the perceived legitimacy and effectiveness of the IMF. This should not be seen as a zero-sum game, since all members stand to gain from measures to preserve and increase the IMF's effectiveness. Our aim is to be able to demonstrate concrete progress on these issues by the time of the 2006 Annual Meetings, in Singapore.

With this, I would like to conclude my remarks. I welcome an open dialogue about what we, in the IMF, can do to further strengthen PFTAC's operations. I also look forward to talking to you during the breaks and at the end of the day, to better understand the individual challenges facing your countries.

Thank you.