IMFC Meeting April 20, 2002
April 20, 2002 IMFC Statements
Documents Related to the April 20, 2002 IMFC Meeting
Republic of Azerbaijan and the IMF
Switzerland and the IMF
Kyrgyz Republic and the IMF
Republic of Poland and the IMF
Republic of Tajikistan and the IMF
Turkmenistan and the IMF
Republic of Uzbekistan and the IMF
Statement by the Honorable Kaspar Villiger|
President of Switzerland and Minister of Finance, Speaking on behalf of Azerbaijan, Kyrgyz Republic, Poland, Switzerland, Tajikistan, Turkmenistan, Uzbekistan, Federal Republic of Yugoslavia
International Monetary and Financial Committee
Washington, D.C., April 20, 2002
Only a few months ago, the outlook for the global economy was characterized by an unusually large degree of uncertainty. The unexpected quick and synchronized downturn that took place in most advanced economies during the second and third quarter of last year combined with the tragic events of September 11 presented an environment, in which economic forecasting was essentially a guessing game. Assessing the medium-term impact of the terrorist attacks on consumer and investor confidence, particularly in the U.S., was nearly impossible, and the downside risks presented in the interim World Economic Outlook last December appeared very real.
I am encouraged by the steady stream of positive economic news over the past months. The balance of risks has clearly shifted and the rebound in global growth seems more rapid than most of us would have dared to hope for. The resilience of consumer spending was certainly an important element in providing the basis for what appears to be a fairly mild global recession. However, I also think that the significant progress in implementing sound and stability-oriented macroeconomic policies in many member countries has played an important role. Monetary authorities have successfully anchored inflationary expectations at a low level and credibility in fiscal consolidation is well-established. Looking forward, it will be crucial not to undermine these successes. An important challenge will be the timely and appropriate adjustment of monetary and fiscal policies taking into account the more positive global economic outlook.
While the main responsibility for sound economic policies lies in the hands of each country, the IMF has an important role to play in providing policy advice to the whole membership through its bilateral and multilateral surveillance activities. I remain convinced that IMF surveillance is a key element for successful crisis prevention. Enhancing the effectiveness of surveillance must remain a top priority. Of course, recent examples have only underscored what we all know, namely that financial crises can never be totally avoided. Therefore, efforts to improve the existing framework for crisis resolution must continue. I welcome the recent Fund proposal that relaunches the debate on an important outstanding issue, i.e., dealing with sovereign debt restructuring.
2. Global Policy Challenges
The rapid recovery of economic activity in the U.S. comes at a very propitious time. The global economy is looking for a strong source of growth. The U.S. recovery can provide an important stimulus for revitalizing output growth in continental Europe and helping Japan overcome its protracted recession. However, this growth pattern would do little to decrease the existing imbalances in the global economy, such as the high U.S. current account deficit and the apparent overvaluation of the dollar. Fortunately, the resilience of productivity growth in the U.S. during the downturn should help avoid an exacerbation of these imbalances.
The main challenge for the U.S. will be the timing of shifting monetary policy to a more restrictive stance. Following the expansionary stance last year in response to the downturn, a significant amount of monetary stimulus is currently in the pipeline. Although I recognize that some downside risks to the rapid recovery in the U.S. remain, I am somewhat uneasy with the recommendation to wait for further evidence before tightening the monetary stance.
In Europe, the recovery stands on less firm ground. Although consumer and business confidence indicators have stabilized, the robustness of private consumption remains one of the main risks to the European outlook. Should additional signs of weakness emerge, the room for further monetary stimulus should be used.
In the Asia-Pacific region, Japan poses the largest policy challenge. Although the export sector is responding to the exchange rate depreciation, domestic demand remains weak and deflationary pressures continue. The authorities still face the difficult task of balancing the need to provide further fiscal stimulus to boost economic activity and the need to initiate fiscal consolidation. I am concerned by the negative impact of high and rising debt levels on consumer and investor confidence. Decisive action is also needed to tackle the long-standing structural problems in the banking sector.
Macroeconomic performance in the Commonwealth of Independent States (CIS) has remained robust in the face of the global downturn. Solid growth in Russia continues to provide a strong stimulus for the region. However, the significant economic slowdown projected for 2002 will highlight the medium-term policy challenges that many of these countries are facing. The varying degrees of reform progress and the lack of tangible results following years of structural reform efforts under the guidance of international financial institutions have left many poor countries with unsustainable levels of external debt. In this context, I welcome the recently launched initiative for the seven low-income CIS countries (CIS 7). I hope that the improved coordination among donors and the renewed efforts by countries to push forward the lagging structural reform efforts will help lift the countries onto a high and sustainable growth path.
Finally, a major challenge for economic policies could also stem from a strong increase in oil prices. At present levels, oil prices should not have a significant impact on the global economic outlook. However, price developments have been quite volatile and political factors have introduced a large degree of uncertainty.
3. Strengthening Crises Prevention and Improving the Framework for Crises Resolution
Since the financial crisis in Mexico 1994/95, numerous initiatives have been implemented in the Fund to reduce the risks of future crises. Although financial crises have continued to occur and will do so in the future, I am convinced that the steps taken over the past years have contributed significantly to increasing the crisis prevention capacity of the Fund. Of course, the two most recent financial crises have once again raised questions in the public as to the effectiveness of the Fund's surveillance and program activities. We must continue to refine the use of the broad spectrum of instruments available to the Fund. In particular, we should recognize that an important element of crisis prevention is also a strong and credible framework for crisis resolution.
To this end, I welcome Management's recent initiative to establish procedures for orderly sovereign debt restructurings. A statutory framework along the lines of the proposed Sovereign Debt Restructuring Mechanism (SDRM) is appealing. Such a framework would make the debt restructuring process more orderly by effectively dealing with difficult issues such as the collective action problem within a heterogeneous creditor community, uniform application of obligations in all member countries, and facilitating the creation of an internationally recognized entity for dispute arbitration.
The intent of creating an SDRM is to establish clear procedures for sovereign debt restructurings. Such a mechanism must be nested in a much broader context to assure that its activation will be very rare. This means promoting a number of complementary policy issues, most of which have been on the table for a while.
First, in order to ensure that the SDRM is a measure of last resort, it is important that decentralized and market-based solutions can be found without actually having to activate the mechanism. The general inclusion of majority action clauses in international sovereign debt contracts would greatly enhance the potential for reaching such preemptive solutions. An SDRM could help promote a wide-spread use of such contractual adjustments.
Second, in order to ensure the transparency and predictability of the framework, the level of access to Fund resources needs to be clearly foreseeable. Defining credible limits to lending should diminish the potential for moral hazard and improve the scope for making accurate risk assessments.
In the period ahead, it will be important to discuss in detail the scope and operational modalities of an SDRM. At the same time, the widespread use of collective action clauses in debt instruments should be promoted and the assessments of debt sustainability improved. I look forward to a consensus on the broad strategy in this area by the time of the Annual Meetings.
Surveillance continues to be the Fund's key instrument in crisis prevention. The recently concluded biennial surveillance review underscored the breadth of the Fund's coverage. In my view, the extension of the surveillance mandate to new areas that are relevant to promote sustainable global growth is justified. The institution has managed quite well to maintain the balance between focusing on the Fund's core areas and adequately covering other issues of macroeconomic relevance. I welcome that the assessment of the financial sector has become a standard element of surveillance. In the period ahead, efforts need to be made to improve the quality of financial sector surveillance in countries that have not participated in the FSAP. Given the importance of financial sector soundness in crisis prevention, ways should be found to better focus the scarce staff resources.
The Managing Director correctly underscores that effective crisis prevention hinges on the member's willingness to follow the Fund's advice. Recognizing the lack of leverage in the area of surveillance, we must strive to provide consistent, credible, and frank policy advice. Two issues are particularly relevant in order to increase the impact of surveillance. First, further enhancing transparency. The important steps taken to increase the transparency of Fund surveillance have been successful both in increasing peer pressure on members as well as improving the quality of the staff's work. Second, ensuring an evenhanded application of Fund surveillance across the membership. While taking into account country specific circumstances in defining the scope of surveillance, efforts must be made to dispel the notion that assessments of large advanced economies are less stringent.
4. Streamlining Fund Conditionality
A key ingredient of a successful economic reform program is strong country ownership. I welcome the further work aimed at streamlining Fund conditionality, as this could enhance program ownership. As I have stressed in the past, the streamlining exercise should not be seen as a means to weaken overall conditionality. Ownership and program conditionality are complementary, and the aim is to better focus conditionality on the Fund's core areas of expertise. While this entails a more parsimonious approach to structural conditionality, country circumstances and the type of facility should dictate the specific modalities of conditionality. Moreover, streamlining conditionality should imply tighter selectivity of lending. A more careful account should be taken of cases in which a lack of ownership is apparent.
To resolve the tension between ensuring uniformity of treatment and taking into account the diversity of economic programs, a clear and operational framework for defining the scope of conditionality is necessary. In this context, particular attention should be given to determining when a structural measure is critical for achieving the macroeconomic objectives of a program. Conditionality associated with critical structural measures must remain in Fund programs. Streamlining Fund conditionality also means closer cooperation with the World Bank. I welcome the significant efforts that have been made to ensure a mutually reinforcing approach of both institutions, particularly in low-income countries. A more systematic cooperation and a clear division of work that takes into account the respective responsibilities of each institution is crucial for effective programs.
5. Concessional Assistance by the Fund
With 36 active programs under the Poverty Reduction and Growth Facility (PRGF), the Fund demonstrates its ongoing commitment to provide assistance to its low-income members. I remain convinced that the Fund, in close cooperation with the World Bank, plays an important role in these countries. Sound monetary and fiscal policies are the basis for any development strategy. We believe the outcome of the Monterrey conference on Financing for Development should promote a wider acceptance of such policies, thus giving additional support to the Fund's important work in the low-income countries. Switzerland and Poland have contributed to the financing of the PRGF and the PRGF/HIPC Trust Fund. I welcome the fact that nine lenders, including Switzerland, have been able to mobilize new loan resources to finance PRGF operations during the four-year interim period.
The adaptation of the PRGF two years ago to strengthen the focus on poverty reduction and growth was an important step to enhance the effectiveness of financial assistance in low-income countries. Moreover, firmly anchoring Fund assistance in the long-term strategy set out in the country's Poverty Reduction Strategy Paper (PRSP) helps to overcome the often criticized lack of coordination among bilateral and multilateral donors. I was encouraged by the overall positive results of the first reviews of the PRGF and the PRSP approach. The main features of PRGF-supported programs aimed at increasing ownership, improving pro-poor fiscal spending, and emphasizing good management of public resources appear well-incorporated in the country frameworks. However, it is too early to draw definitive conclusions. In my view, achieving higher aid effectiveness will depend on progress in the following areas:
For many heavily indebted poor countries (HIPCs), the HIPC Initiative has freed up valuable additional resources for poverty alleviation. The coordinated action by all creditor groups to bring debt ratios to sustainable levels combined with strong policy performance by the HIPCs are a good recipe to ensure a permanent exit from debt rescheduling. While many countries have reached their decision points, I am concerned by some of the developments since the previous review of implementation of the HIPC Initiative.
First, program implementation has been relatively poor, leading to significant delays in reaching the completion points. In my view, the deterioration of the external environment has often played only a minor role. Without adequate economic reform efforts, HIPC debt relief will not ensure debt sustainability. Second, pressures are increasing to make the rules of the HIPC Initiative more flexible to compensate for lacking performance. The existing framework has already been adapted to take into account initial experience and contains sufficient flexibility. I firmly believe that a further weakening of the requirements would undermine the initiative's success and create unfortunate disparities of treatment. Third, the costs of topping-up debt relief at the completion point should be kept under careful review given the existing strains on PRGF/HIPC Trust Fund resources. Finally, I am concerned by the weak participation of non-Paris Club and commercial creditors. An important strength of the initiative lies in mobilizing all creditor groups. I urge staff to do its utmost to ensure full creditor participation and transparently flag all problems.
To conclude, I welcome the progress achieved in mobilizing the resources to make the Fund's Post-Conflict Emergency Assistance compatible with the payment capacities of low income countries. Switzerland has pledged USD 1 million to the subsidy account.
6. Combating Money-Laundering and the Financing of Terrorism
The broad-based support of the Fund membership to move forward in anti-money-laundering (AML) efforts and, more recently, combating the financing of terrorism (CFT) has led to substantial results in implementing the action plan. The main challenge in the period ahead will be to continue the close cooperation between the Fund, the World Bank, and the FATF in order to arrive at a uniform, cooperative and non-discriminatory assessment process. An important instrument to ensure uniform treatment will be the establishment of a common AML/CFT assessment methodology based on existing standards, providing the basis for a comprehensive AML/CFT ROSC. I call on the relevant financial institutions and standard setters to cooperate closely in order to establish a coherent basis for future assessments and avoid an undue duplication of work in conducting such assessments. Based on our experience with the FSAP, I would strongly argue in favor of aiming at a AML/CFT assessment as a stand-alone ROSC module. Integrating it into the FSAP would overburden this already complex exercise and risk detracting attention from other aspects of the financial sector that are crucial for financial system stability and crisis prevention.