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Reshaping the IMF's Role in the 21st Century, Remarks by Agustín Carstens, Deputy Managing Director, IMF
June 29, 2006
1. Good evening. I am delighted to be here among so many friends and colleagues. Let me first thank Governor Valdez for the warm hospitality with which he has received us in this beautiful setting. I would also like to recognize the Central American Monetary Council for the key role it plays in pulling this august event together each year. This 2006 gathering marks the 5th anniversary of these conferences on Central America, Panama and the Dominican Republic, which have now become an integral part of our dialogue with the region.
2. The IMF is a steadfast partner with our member countries in the region, and I believe that the relationship between the Fund and the region has improved greatly over the last few years. It is a relationship that is now marked by frank and open dialogue. Economies are generally doing better, and the IMF is intent on helping its members bolster their economic growth. But as in other regions, important challenges still remain—the achievement of higher sustainable growth, the reduction of poverty, and the consolidation of macroeconomic stability. At the IMF, we have been re-assessing our role and examining how we can be more effective in helping our members overcome some of these challenges.
3. I would like to take this opportunity to share some reflections with you on reforms now underway at the IMF to ensure that the organization stays in step with the needs of our members. The twenty-first century is presenting the international community with important macroeconomic challenges. We put a lot of thought, over the last few years, into the role the IMF should play in the future, to continue to foster international cooperation and help our members adapt to the new challenges of globalization. This led to the emergence of our Medium-Term Strategy.
4. The Medium-Term Strategy reflects a growing consensus that enhanced effectiveness of the IMF's surveillance, rather than financing per se, will be key to ensuring the organization's continued relevance as a keeper of international financial stability. It also addresses our changing role in emerging market countries, and prescribes measures for effective engagement in low-income countries. Furthermore, it takes up the governance and financing of our institution. The specific proposals in the strategy have garnered strong support from our membership. This evening, I would like to refer to them briefly.
Enhancing Our Surveillance Role
5. The difficulties in tackling unprecedented global imbalances and the challenges facing individual countries underscore the need for stronger exercise of the Fund's policy analysis and advice to its member countries. Ensuring the effectiveness of surveillance lies at the heart of our medium-term strategy.
6. Our new surveillance framework encompasses a new focus on multilateral issues, including global financial issues, and especially the spillovers from one economy onto others. As a global institution, the Fund is strategically placed to provide a forum and serve as catalyst for multilateral debate and action. However, our bilateral Article IV consultations do not really allow for discussion of joint policy actions, and our global surveillance instruments—our World Economic Outlook and Global Financial Stability Report—are designed more to present in-depth analysis than to catalyze action.
7. It was against this background that we proposed a multilateral consultation procedure to complement existing arrangements. Our first multilateral consultation will focus on narrowing global payments imbalances while maintaining robust global growth. To this end, we have asked a number of countries to come together to discuss the issue. Those participants are China, the euro area, Japan, Saudi Arabia, and the United States. Some of the countries have large current account deficits or surpluses; and together, the participants represent a very large share of world output. By cooperative actions, they can play a major role in producing an orderly unwinding of global imbalances, and go a long way toward sustaining world growth as demand and saving patterns adjust.
8. The multilateral consultations on global payments imbalances are taking place over the rest of this year, beginning with staff discussions with each participant during the next few weeks. Multilateral meetings with all the parties involved will follow this. These meetings will be held at both the technical level and with senior policy makers. All other IMF members will be involved in the process through the Fund's Executive Board and eventually the International Monetary and Financial Committee (the IMFC). The latter provides guidance for the organization at the ministerial level. We expect the discussions to focus essentially on how we can help make action happen in several countries together. The process will require a flexible and informal approach on our part, and the involvement and commitment of high-level policy makers on the part of the participants. There is a lot of work to be done, and it will take time. Global imbalances did not build up overnight, and will not be solved overnight. We are confident, however, that we can make progress on resolving this vital issue.
9. In sum, our surveillance is adapting to new global realities. It will be more action-oriented, and include strengthened analysis and monitoring of the exchange rate policies, risks and potential spillovers in our member countries. We aim to promote greater awareness of regional contexts and cross-country experiences; to elevate the coverage of financial sector issues in Article IV reports; and to focus surveillance more effectively by streamlining Article IV reports in alternate years for selected countries.
10. These regional conferences on Central America, Panama and the Dominican Republic have already been a step ahead in the direction of regional surveillance. They provide an excellent forum to discuss regional cooperation and joint policy actions, and will form an important part of the new surveillance framework.
Supporting emerging markets
11. Emerging market countries have become major players in the world economy. The rapidly expanding reach of private capital markets has given rise to unprecedented opportunities and challenges in these emerging economies. It should, therefore, be no surprise that financial issues will be at the center of our work in these countries. We envisage a major push to integrate financial sector analysis with the macroeconomic analysis that has traditionally been the focus of our surveillance. This will require some organizational changes within the Fund, but also the active participation of our members.
12. Despite the current benign situation in global financial markets, the risk of financial crises is not over. And a central lesson from the past decade is that it is far preferable to prevent crises than to try to cure them. Our Managing Director has proposed that, to help prevent crises, the Fund could provide contingent financing for countries that have strong macroeconomic policies, sustainable debt, and transparent reporting, but which remain vulnerable to shocks. A well designed contingent financing instrument can support good policies and, thus, provide signals of strong crisis prevention efforts. We will be discussing ways to take forward this idea over the summer.
13. To be more attractive than previous approaches, the instrument would need to provide for more automatic drawings for programs that are on track, and provide more finance up front. Conditions would be narrowly focused on policies to maintain macroeconomic stability and reduce vulnerabilities.
14. Some emerging markets have regional arrangements for pooling their reserves and providing contingent financing to their members. These arrangements are useful, because accumulating large amounts of reserves to self-insure against crises is costly. The scope for expanding such safety nets would rise with a group's confidence in the economic policies of its members. The Fund can play a valuable supporting role here; therefore, we are exploring modalities for further engagement in this area.
15. We are also focusing attention on how the IMF can be more helpful in cases of sovereign debt restructuring, including our policy of lending into arrears. It is important to ensure that we have instruments and policies that allow lending and dealing with the complications of sovereign debt restructuring. While the IMF must be neutral between sovereign debtors and private creditors when debt restructuring becomes necessary, our function at the center of the global financial system requires that we promote the resolution of arrears, preferably fostering a cooperative approach.
Low-income country engagement
16. The IMF has an equally critical role to play in low-income countries. In recent years, there has been considerable progress in contributing to economic development and poverty reduction through the Poverty Reduction and Growth Facility. We recently introduced more flexible instruments, notably the Policy Support Instrument and the Exogenous Shocks Facility.
17. One of our challenges is to marshal the expected rise in aid flows and debt relief to low-income countries. This is to ensure that the increased funds are absorbed in a manner consistent with macroeconomic stability, higher growth, and the attainment of the United Nations Millennium Development Goals. This requires a deeper and more focused engagement, including new understandings with the World Bank and other agencies on an appropriate division of labor. The IMF and the World Bank have also been called on to monitor and report on progress towards achieving the MDGs.
18. Debt sustainability is also important. Recent debt relief by the international financial institutions, including through the Multilateral Debt Relief Initiative (MDRI), has had a positive impact. We are refining the joint IMF-World Bank debt sustainability framework with the aim of helping countries to implement sound medium-term debt strategies and strong public expenditure management and tax systems.
19. The International Finance and Monetary Committee has urged all creditors to work with the Fund and the World Bank to adhere to responsible lending, so that low-income countries do not spiral into a new cycle of over-indebtedness. It is also critical that our policy advice, support for capacity building, and financial assistance are closely aligned with the countries' evolving needs and poverty reduction strategies.
Quota and Voice
20. As a cooperative institution, the effectiveness and credibility of the Fund must be safeguarded, and its governance enhanced. As such, it is important for all our members to have fair voice and representation in the organization. We are examining how an ad hoc quota increase would improve the distribution of quotas to reflect important changes in the weight of countries in the world economy. A lot of work will go on in this area in the coming months, and we hope to take concrete proposals for fundamental reforms to the IMFC for agreement at our September Annual Meetings in Singapore. Early progress will require a two-stage approach. Such a strategy could involve ad hoc quota increases for the most underrepresented members in the near term, followed by further steps at a later stage. Agreement on an increase in basic votes will be key for strengthening the voice of the smallest members.
Internal Financing
22. Finally, let me say a few words about our internal financing. The recent drop in credit, and the associated drop in income, has raised the issue of the long-term sustainability of the Fund's finances. Our overall financial position remains strong from the perspective of our balance sheet. However, income risk has now emerged as an important issue. It is no longer tenable to finance the Fund's surveillance role and its capacity building activities from margins on adjustment lending alone. The very valuable public goods we provide —like the prevention of financial crises— need to be financed through an income structure that is compatible with the activities of the institution. We are confident that our members are both mindful and supportive of this.
23. The key objective is to place our institution on a sound financial footing over the long term. To achieve this, we realize that we must have a new business model, based on a stable source of long-term income. Developing a political consensus around any particular measure will take time. Of course, we also need to remain efficient, and we are examining opportunities for further cost-savings in the delivery of our services.
Conclusion
24. The development of a medium-term strategy for the IMF has been a process rich in debate within and, more importantly, outside of the organization. The priority now, after strong support from our 184 shareholders in April, is to proceed with the implementation of reform measures that will make our 61-year-old organization better able to prevent and resolve crises. Today's challenges are considerably different from those of 1945 when the IMF was created. Our recent Spring Meetings provided us with a strong and renewed mandate to address the world's financial imbalances and to help our membership adapt to the new realities of globalization. We intend to pursue reforms wholeheartedly, making the IMF more fit for purpose in this 21st century global economy.
25. Thank you very much.
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