Transcript of a Press ConferenceBy Managing Director Rodrigo de Rato with John Lipsky, First Deputy Managing Director, and Masood Ahmed, Director, External Relations Department
Washington DC, April 12, 2007
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MR. AHMED: Good morning. Welcome to the press briefing with the Managing Director of the IMF, Rodrigo de Rato and the First Managing Director, John Lipsky. This is an on the record press briefing, both for those of you in the room and those who are participating through the Internet. The Managing Director is going to make some opening remarks, then we will open it up for questions. When we do, please identify yourself and your agency.
MR. DE RATO: Thank you, Masood. Good morning, and welcome to our Spring Meetings. Also I want to welcome and thank those who are participating through the web. This is a very good opportunity for John and myself to meet ahead of the Spring Meetings with all of you, and as you know, on Saturday and Sunday, we will hold the meetings of the IMFC, the International Monetary and Financial Committee, and the Joint Development Committee of the Fund and the World Bank Group.
At the beginning of this week, I had the opportunity to present to the public covering the agenda of this meeting for us and the IMFC, so I can be brief in these opening remarks.
Let me first start with the world economy. As Simon Johnson, our new Economic Counselor, told you yesterday, we expect that global growth will remain solid in 2007, approaching 5 percent, which brings this to the sixth year of expansion, and this is certainly a very significant expansion of the global economy and one of the longest sustained periods of growth in the modern era. Going through some of the most important economies, the bigger ones, the U.S. economy, as we all know very well, has slowed this year. We have seen signs of continued weaker housing market and also in recent data, a softening in business investment, but our expectations, as Simon pointed out yesterday, is that the U.S. economy will regain momentum through the course of this year and in 2008. At the same time, global growth prospects remain good in the rest of the world. You can talk about a bigger, a more broad world growth that is less dependent on the U.S. growth. In that respect, recovery in Europe has broadened and growth in Japan is broadly on track. Expansion in emerging markets continues, with strong growth both in India and China but also in other countries. Developing countries are also recording significant rates of growth, which is certainly an essential element of a reduction of poverty.
From the point of view of risk, downside risks to this benign global scenario are less now than they were only a few months ago, the last time we had a press conference like this one in September. Part of this change in this risk is because of declining oil prices from the very high levels of last summer, and that has produced worldwide less pressures on inflation. However, as Jaime Caruana, our financial counselor, said yesterday or the day before to you, presenting the Global Financial Stability Report, market risk and credit risk have risen, and we have seen some instances of questionable lending. We have been even through an extended period of benign financial conditions and low volatility, but recent market turbulence has reminded us that downside risks still exist and are very present.
Looking into global imbalances, I have noted that the risk of disorderly adjustments remains low, but the cost to the world economy will be very high if it will materialize. With this point in mind, last year we initiated a multilateral consultation on global imbalances with five major participants to discuss the challenges and policy options and also to identify potential policy solutions. This will be an important part of our meetings on Saturday. John and myself will be briefing the IMFC, and we will talk about this probably during your questions today.
Let me just say that discussions under this modality of multilateral consultations, a new instrument for us, has been constructive, and the engagement of the participants has been very welcome. Most generally, I see multilateral consultations as an evolving and important new process for the IMF work on surveillance and one that I hope will continue in the future, not only on the subject of global imbalances but maybe on others.
Another risk to the global economy that was highlighted yesterday and the day before by my colleagues comes from rising protectionist sentiment. There is also a shared responsibility here among major players, larger economies, industrial and emerging economies to bring the Doha Round to a successful conclusion. This would be the most important step to limit the risk of protectionism, and that has to be made very clear. Pascal Lamy, the Director General of the WTO, will be here on Saturday, and he will have an opportunity to address the IMFC on this very important question.
Let me now turn to the medium-term reform agenda of the Fund. As I have told you on more than one occasion, our medium-term strategy that was launched in the Annual Meetings of 2005 is aimed at supporting the goal of making this institution more focused on the problems the countries are facing today, which in many respects problems and opportunities are in many respects related to global markets and globalization in general.
What is the state of the strategy today? Well, I would say that the evolution of our medium-term strategy is on solid ground. We are making progress, and I am pleased with the strong start we were given at the Singapore Annual Meetings last September, for instance on the questions of governance, voice and quotas. I will inform the IMFC of the progress we have made on key features of the medium-term strategy like strengthening surveillance, quotas and voice, long-term sustainable financing of the institution, our role in emerging economies and in crisis prevention, and our role in low-income countries and the collaboration with the World Bank. Those will be the main items on the agenda of the IMFC apart from the global outlook.
My report to the IMFC on these issues will be released shortly today, but let me focus now on a few items. First, surveillance, which is a core function of the institution. In a globalized economy where global and financial policies of one country may affect other countries in a much more significant way than before, international cooperation is more important than ever before. That is why strengthening surveillance over macroeconomic policies including exchange rates is at the center of our modernization. My objective is that the Fund should give evenhanded advice based on comprehensive technical analysis to all of its members. Improving the quality of our exchange rate surveillance is important. I have urged our members to revise the 1977 Decision on Surveillance of Exchange Rate Policies. My goal here in proposing an update of this decision is that it should correspond to our current best practices without imposing any new legal obligations on our members. Another part of the strategy is to improve our practice, for example, by deepening our analysis on exchange rates and spillovers between countries and markets including in our consultative group on exchange rate issues. We are also strengthening our analysis of financial markets and financial sector issues and also working to integrate that analysis in our overall assessment of economic policies, that is the Article IV consultations that we do with all countries on a yearly basis. I think we have made important changes inside the institution to address this issue. Further, we are strengthening our multilateral surveillance work by more systemic coverage of regional issues through publications of regional economic outlooks. The latest outlooks on Asia, Africa, Americas, and Europe will be presented to you and to our members on Friday and Saturday by the area departments. Regional focus work means each of our members is better able to draw useful lessons and parallels from among and within the Fund's near universal membership.
Another key element of the reform is quotas and governance. We took an essential step in Singapore, and I want to thank all the countries for their very constructive position there. In Singapore our Governors agreed to a two-year program of change, starting with the quota increase for China, Korea, Mexico, and Turkey. We are now developing a new quota formula to guide a second round of quota increases which that formula should be simple, transparent, and capture members' relative positions in the global economy. Our objective remains to reach an agreement of the new formula in these two years, but if possible in the 2007 Annual Meetings to be held in Washington in the fall.
In parallel, and this is a very important element of the Singapore agreement, work is also advancing on measures that will ensure that their representation for low-income countries is protected and enhanced and their voice is strengthened. We are also working to create a more sustainable foundation for our financing. An imminent persons group led by Andrew Crockett has already reported to me, and the Fund Executive Board has discussed the report. The report was the subject of a press conference almost the same day that it was presented -- or the same day that it was discussed at the Board. The Board has already held two meetings with Mr. Crockett, and he will be present in our discussions this weekend with the Governors.
A continuing priority in 2007 will be to make us more effective in helping low-income countries to move towards achieving the Millennium Development Goals, and in that regard, we are focusing on what we believe we can do best, that is macroeconomic policy advice, consultation and analysis. We are also focusing on improving the way in which we collaborate with other institutions but especially with the World Bank. In this context, we also asked a group of very important people, and I want to thank them as I also thanked the ones who worked on the income model of the Fund. That second group was led by Pedro Malan, and it presented its conclusions also to both Boards, the Board of the Bank and the Fund, and it has held two discussions with our Executive Board on the proposals of that report. As I said, our Executive Board at the Fund has had initial discussion on this work, and we will take this forward in consultation with the World Bank in the coming weeks. This will be also a subject of discussion at the Development Committee on Sunday. So as you can see, we continue to have a busy and full agenda of reform, and I look forward to productive discussion this weekend. Now I will be more than glad, John and myself, to take your questions. Thank you.
MR. AHMED: I am going to start taking questions now. Start with the gentleman in the back over there.
QUESTION: Thank you. If I could address John Lipsky, if you are going to participate in briefing on the weekend on global imbalances, which seem to be a euphemism for the U.S. twin deficits and the subtext of currency policy in China and the others who lend to the United States, is the risk increasing with every passing year? How does the IMF see it and what can the IMF do about it?
MR. LIPSKY: Let me be sure I understood. Specifically which aspect of these questions is the risk, the risk is global imbalances risk to stability, growth progress, is that too broad to cast it?
With regard to the issue of global imbalances, as I am sure you are all aware, it is not a new problem and a new issue. It has emerged in this decade in a new way in the context of unexpectedly favorable economic growth performance of the global economy and relatively low underlying inflation. So the challenge is, for sure, to preserve this favorable economic performance while reducing risks to sustaining the favorable growth and inflation outlook through reducing global imbalances.
The IMFC back in 2004 laid out a clear strategy for achieving that goal, and that strategy called on all countries, all members and all major groupings to enact the policy changes that would produce the structural shifts necessary to achieve that goal. That has been the focus of the multilateral consultations that we will be discussing with the IMFC on Saturday and it seems to me that there is already a path towards progress that over the past year that there has been signs of stabilization in imbalances and progress towards implementing policies that are consistent with the IMFC strategy. So for sure there is lots to talk about, but it seems to me that there has been -- as I say, there is a clear road map, and we have made some progress. Thanks.
MR. LIPSKY: In summary, the IMFC strategy is straightforward. For the U.S., the task is to increase savings, including through fiscal consolidation. For the euro area and Japan, the task is one of structural reforms that will increase potential growth and policy shifts that will enhance the growth of domestic demand. For the oil producing countries, energy producing countries, new investments in energy production facilities and also measures to improve efficiency and increase domestic absorption, and for countries of emerging Asia, especially those following fixed or pegged exchange rate policies, structural reform plus measures that would increase flexibility with the goal of increasing both domestic -- with sustaining strong domestic growth while enhancing the role of domestic demand. As I say, that was laid out clearly way back in 2004 and provides a policy task for essentially all the Fund's membership.
MR. AHMED: Thank you very much. I am going to move over to the left now and then come back.
QUESTION: My question is to you, Mr. De Rato. You said emphatically that we must bring the Doha Round to a conclusion. It sounds more like a very romantic statement, but can you tell us practically how do you think we can move forward on this issue when the United States and Europe have shown time and time again that they are not prepared to move from their positions that led to the crash of these talks?
MR. DE RATO: I think on the Doha Round, we all realize that, first of all, one of the big successes of the world economy in the last decade, and one of the reasons why we are seeing this very benign and positive scenario is because of trade liberalization and trade expansion in the world, and that has benefited emerging economies, it has benefited industrial economies, and it is beginning to benefit low-income countries. So we are not moving into unknown territory. We know that is good for the world economy. At the same time, the multilateral framework is what has made the difference, not only because it allows the Most Favored Nation principle is applied but also because it allows that a system of solution of conflicts can be also put into place, and that is an extremely important step in a better managed and more efficient world economy and the benefit of citizens.
The Doha Round has already produced important questions that are on the table and that are very positive, especially for low-income countries to integrate themselves into the global economy. What is needed now is the extra mile that is necessary for an agreement, and I think we are all aware that on that extra mile there is special responsibilities, special responsibilities of leadership for certainly the U.S., Europe, and Japan, but also for the large emerging economies. We need an agreement, a final agreement on farm subsidies and agricultural liberalization, but we also need an agreement on industrial liberalization. So I take this question and this opportunity to call again on the negotiators, very specifically on the negotiators of the key countries which are certainly industrial countries but also some of the large emerging economies to make the final efforts to give the world a very important push in the right direction to consolidate this historical momentum of growth that is changing the lives of so many people in so many countries.
MR. AHMED: Thank you.
QUESTION: From Spain to the Managing Director. I would like to ask if you could elaborate a bit more on the quota, where the progress is now, and in particular on the GDP, if there is any discussions on using PPP as a part of the GDP calculation.
My second question will be if you hope or you are going to try to seek an agreement, a formal agreement from G-7 countries to renounce to any quota increase in the second ad hoc quota increase after the new quota. Thank you.
MR. DE RATO: Well, on the formula, the quota is a key element of the governance of the institution because through the quota, decisions are made, allocation of resources are decided, and even capacity to absorb financial packages is also decided, so it is a key question of the governance of this institution. The quota is decided by formula, so the formula is a key question in itself. I think the important decision in Singapore was to decide that the actual formula that is in place was not sufficiently simple and transparent and that we need to move to a more transparent formula that will allow calculated quotas to really represent the real weight in the world economy of the different countries. This is very important for a public institution like this one because that representation, that real representation and accepted representation introduces important steps of legitimacy in the institution.
The discussion on the formula right now of course is about the components of the formula, and as you mentioned, GDP, as I think everybody will understand, is certainly an obvious component of the formula that tries to measure economic weight, but also there are other components, like openness, trade and financial openness, and there are also countries that claim that variability and reserves should be part of this discussion among other possible components. As you mention, on the GDP, there is a discussion of if it should be GDP at market prices or we should introduce other concepts, like PPP, but also other possible technical approaches. This is too soon for me to give a clear line of where things can stand. The staff has been providing the Executive Board with important papers. We already have held two or three different discussions on these issues. As you can expect, I cannot still say that we have narrowed down differences, but I think we are all identifying what are the crucial questions, and I think at the same time there is a positive attitude that is to keep things on the table. There has not been positions of taking extreme positions against any possible solution. Of course, countries have their own position, and that is completely understandable. So I think that we are moving in a context of consensus, but still we have not arrived there.
The meetings this weekend will help me and my colleagues to listen to the Ministers and receive political guidance on some of these questions, and then that should give us a framework to propose to the Executive Board more specific and probably narrow down options as to arrive to the Annual Meetings with a more detailed description of what components and on what definition will and should compose the future formula.
On the G-7, there is no such thing as G-7 in the International Monetary Fund. There is different countries. So there is G-7, G-20, G-11, G-24, and I am sure we will have more G's in the future. All the G's are welcome, so this is -- we get along with the different G's, and I think we are part of the discussion of the different gatherings, and I think that is part of what is today the institutionalization of dialogue in the world. There is nothing wrong, and it is something that is moving in different directions.
Industrial countries -- European Union, Japan, U.S., Canada, and others -- are very important shareholders in this institution, like many other countries, and they have not only their own views, but I have to say they have also usually, and I want to welcome that, a view that goes beyond their national interests. This is crucial for a multilateral institution. It is impossible to have a multilateral approach to issues without going beyond your strict national interests. At the same time, it is also clear that governments are bound by the national interests, and that is what is all about multilateralism.
MR. AHMED: Okay, I am going to have one question here, and then I have a question from the web.
QUESTION: Turkey, is gearing up for two critical elections later this year, and political tensions are rising. Do you see a possibility that such tensions could adversely affect or even derail the economy and in a related way, are you concerned that the government could resort to an election economy throughout the rest of the year and probably you will have a statement about this? Thank you.
MR. DE RATO: First of all, let me tell you, I think Turkey is one of the success stories of recent times in the world economy, and I think we all have to salute and congratulate not only the Turkish authorities but also the Turkish society for having done so, and if you look at the reform agenda of Turkey in recent times, it has been impressive. So it is a country that has changed for the better and is facing its challenges.
Elections are a very important and welcome democratic process, but elections have their own dynamics, but that is not only a Turkish characteristic. It happens everywhere. Of course, we think that even during an election campaign the overall strategy, macroeconomic strategy that has to be kept in mind by policymakers, but I will ask John maybe to give you a more detailed analysis of how we see Turkey right now.
MR. LIPSKY: Yes, thank you. The questions relate to the potential impact of the political campaign on policies, but as you know, the government over the past few years in the context of Fund programs has been following a program, a policy of fiscal stringency responsibility that has been hallmarked by the maintenance of a primary surplus of 6 1/2 percent of GDP over the past few years, and that has been accompanied by structural reforms and by improving, notable improvements in inflation performance. There is a Fund program with Turkey in effect this year, and the Turkish authorities have indicated their intention to maintain these broad trends, a fiscal surplus, primary surplus of 6 1/2 percent of GDP, continued structural reforms including new progress on social security and pension reforms, and on the part of the central bank, they continue to follow an anti-inflationary policy. As you may know, there has been a mission in Turkey that in fact issued a statement today that reported on the discussions that have just concluded with the Turkish authorities and that have been successful in reaching understandings about how the program will be implemented in the coming months and that we remain very optimistic about the government's commitment to appropriate policies within the context of the program, and it is our expectation that this will be another hallmark in Turkey's improvement that has been sustained over years that in the context of a political campaign that these broad outlines of policy that have produced success are continuing and will be maintained in the future.
MR. AHMED: Okay, I am going to ask a question that has been sent in [via the online Media Briefing Center]. His question is what aspects of the U.S. economy is the IMF most concerned with at this time?
MR. DE RATO: Well, I think that taking into account, first of all, that we see a soft landing, if you want to say it that way, to the U.S. economy, I think that us like all the other observers, we are looking to not only the evolution of the housing sector or the implication of the housing sector in other areas of the economy, like for instance the recent weak data on business investment. Also the deterioration in the financial conditions of some markets like the subprime market. But overall we see, as I said, a soft landing of the U.S. economy, and as my colleagues told you yesterday, we see that through the end of this year, beginning of next year, the U.S. economy should move into growth around potential.
John, do you want to add anything?
MR. LIPSKY: I think just to make clear that our forecast anticipates growth this year in the U.S. economy about 2.2 percent, so down, a noticeable slowdown from last year, but in terms of trajectory, our base assumption is that we will see gradual reacceleration back towards a trend rate close to 3 percent by the end of this year, so what we are anticipating, as the Managing Director has indicated, that the slowdown in housing is going to stabilize and that the decline in business capital spending is going to be reversed and reaccelerate, so those are base assumptions of our forecast that imply two trend changes during the course of this year that will bring us to the end of the year with a solid outlook.
MR. AHMED: The lady on the right there.
QUESTION: In Mexico the Congress has approved the pension reform and is going to deliberate about the fiscal reform. Could it help the economy grow this year or when are we going to feel the benefits? The question is for Mr. Rodrigo de Rato, please.
MR. DE RATO: Muchas gracias. Thank you very much. Well, we see the Mexican economy having to absorb some effects from the slowdown in the U.S. economy. In the short run we all know that Mexico's growth rate is closely linked to that of the United States, especially in the U.S. industrial sector. At the same time, the macroeconomic policy in Mexico is very strong, both in terms of fiscal policy, but especially in terms of inflation, and we see the need of structural reforms in Mexico to accelerate growth potential, as you mention. One of these is certainly the sustainability of public finance because, as you know very well, a very important area of public finance in Mexico is linked to the oil sector, and the need to sustain public finances through reforms in expenditures like pension reforms or through reforming taxes by broadening the tax base, which is certainly a very important question in the future of Mexico will allow the public sector to develop investment policies and social policies and at the same time allow the energy sector to have a more dynamic investment attitude or path. I think that is a key question for the future of Mexico, so I think we all have to welcome the pension reform, but not only because of it but also because it shows a step into consensus policies in economic reform that has eluded Mexico for quite a while, so in that respect I think it is very important that the framework we see right now in Mexican politics in which there is a capacity to conform consensus agreements on key economic issues on key reform issues that starts with pensions and will continue, I hope, with tax as the government has stated, and also move into structural reforms like the energy sector and better business climate. We truly believe that that is the key strategy for Mexico to reap the benefits of a very successful macroeconomic evolution but also of a very successful trade liberalization.
MR. AHMED: The gentleman over in the back there.
QUESTION: The question is going to be for Mr. De Rato in Spanish. [IN SPANISH] Yesterday we learned about the lower expectations of growth for Latin America. What is the real growth potential for the main economies of the region? What they should grow in order to go hand in hand with the population growth?
MR. DE RATO: [ANSWERED IN SPANISH] We are all aware that one of the great challenges of Latin America is to increase its integration with the world economy. Latin America still depends a lot on raw materials for economic growth. It requires greater integration of manufacturing and industry. There is a need for greater foreign investments, moreover when you compare to other regions such as Asia and Eastern Europe. There are two key questions there. Naturally, you can speak of the region in general, and that means simplifications. Speaking in general terms, the region is much better its macroeconomic policies, debt inflation are much better. But, the region needs structural changes that are adapted more to the world economy and makes it more attractive for investments both and foreign. The fact that Brazil and Peru are near investment grade is great news for everybody. So is the macroeconomic evolution in Mexico, Brazil, and naturally in Chile, the economy that started this path earlier than others.
Certainly, the growth in Latin America is lower than other regions, and the reason is that the benefits of a good macroeconomic situations are not being transmitted to growth, because the markets are not sufficiently open, and competitive. Moreover, social policy is, for example, countries need greater tax revenues in order to have more effective social policies. We have seen progress in several countries such as Mexico and Brazil, Chile and Argentina where poverty has been falling significantly. Would we still need policies that help the population to recoup the confidence lost throughout recent economic crises?
MR. AHMED: I am going to take that lady over there.
QUESTION: Would you like it in Español?
MR. DE RATO: I would rather stay with my official language. They pay me in English.
QUESTION: Okay. On Argentina, we had yesterday all the projections of GDP growth and inflation and all that, but as you know, in Argentina there is at this moment a big scandal about manipulation of the data and the statistics, there has been a lot of complaints from the private sector that the government is manipulating politically this data, so I was wondering if you have a comment on this and what the IMF is going to do about it.
MR. DE RATO: First of all, let me tell you that we see that the economy in Argentina continues to grow strongly, based on domestic demand, but also with a very supportive external environment, everything that could be good for Argentina externally is good -- interest rates, demand of commodities, trade partners -- so in that respect these are good times. We have to take advantage of them. As I said before, there has been a very welcome reduction of poverty in Argentina in recent years, and we are now in pre-crisis levels. That does not mean that there is not still a poverty challenge, but I think this is a very welcome evolution.
At the same time, looking at Argentina, one sees that growth is going to move slowly to a more sustainable path. That is good, but we see at the same time an increase in inflation and an increase in public expenditure that is reducing fiscal balance. I think those two questions have to be really addressed together with the business climate, and that requires a transparency in the rules of business investment and others.
On the specific questions of the quality of information and data, first of all, let me say a general question. Every country requires to have the best and most transparent economic data, and it will not help confidence to not respect these type of questions, and this is true for everywhere. I am not talking specifically for any country. Confidence is a key element of the modern economy.
On the specific changes that the government has introduced on methodological changes on the compilation of inflation data, we have not yet looked at them in detail. We will do so when we do the Article IV on Argentina. The Article IV in Argentina should be done by the end of the year. That will be the moment for us to make an opinion. Nevertheless, we have already said in last year's Article IV that administrative measures are a short-term remedy for inflationary pressures and that monetary policy should play a stronger role. To do that, supply constraints in the economy have to be addressed by a reform agenda, but on the specific methodological questions, I think that we will have to look at them once we start the Article IV consultation in the fall. Thank you.
MR. AHMED: Okay, I know many of you still have questions, but I am afraid we have run out of time today. We will have another press conference on Saturday afternoon after the IMFC. We look forward to your participation then. Thank you very much.
IMF EXTERNAL RELATIONS DEPARTMENT
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