2003 Spring Meetings: News Releases, Speeches, Committee Papers, Documents and Background Information
Statements Given on the Occasion of the IMFC Meeting
April 12, 2003
Documents related to the International Monetary and Financial Committee (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
Minister of Finance of Switzerland
Speaking on behalf of Azerbaijan, Kyrgyz Republic, Poland, Serbia and Montenegro, Switzerland, Tajikistan, Turkmenistan, Uzbekistan
International Monetary and Financial Committee Meeting
Washington, D.C., April 12, 2003
Our meeting today takes place at a time when an unusually high degree of uncertainty characterizes the global economic outlook. While uncertainty is always inherent to economic outlooks, particularly at turning points, the conflict in the Middle East has added a new dimension. In the months following our meeting last September, economic indicators were already providing mixed signals as to the pace of global recovery. Downside risks were fueled by the uncertainties regarding the prospect of war. Now, consumers and investors have to deal with the uncertainties regarding the conclusion and the aftermath of the hostilities and the potential global impact of the conflict.
While the global economy may still take off in the second half of 2003, the downside risks have increased. It is important that member countries implement sound domestic economic policies to mitigate the impact of the current adverse environment. International institutions should stand ready to assist members in these efforts.
2. The Global Economy and Financial Markets
Developments since our last meeting have led to a renewed downward revision of global economic growth. Among the many challenges the deterioration of the global environment poses to policy makers, I would highlight the following. First, it is now clearer that the dependence on the US economy as an engine of growth has increased. The potential for other major economies to provide growth impulses is very limited. This is worrying, since the recovery in the US is likely to be lackluster, as consumption growth will stay subdued. The latest labor market figures are not encouraging. This, together with the expected deceleration in housing prices and the energy price shock will have a negative impact on consumer spending.
Second, the dependence on the outlook in the US is likely to increase global imbalances and the associated vulnerabilities in the medium term. While the weakening of the dollar during the last months has reduced existing imbalances to some extent, this could be only a temporary development. A permanent reduction of global imbalances will require other regions, particularly Europe and Japan, to tackle the longstanding structural problems that are preventing the achievement of higher economic growth.
Third, I fear that significant post-bubble problems could prove far more persistent than generally presumed. Some of the financial sector's deep-seated problems, such as those of the insurance sector, have yet to be resolved. The scenario of a prolonged period of depressed or very volatile equity markets would not only continue to weigh down on consumption spending, but also hold back private investment, which is key to any sustainable recovery.
Fourth, consumption spending has been quite resilient in face of the negative wealth effect stemming from the collapse of equity markets. This was mainly due to the very strong housing markets in many industrial countries. However, risks of a major correction in real estate prices are increasing, which could add significant pressure to already weakening private demand.
Fifth, financial crises in several major emerging markets have left them extremely vulnerable to the external environment. These countries rely on an export-led recovery and a rapid return to international capital markets to cover their large external financing needs.
Finally, the short-term prospects are dominated by the consequences of the war in Iraq. The conflict has led to higher equity and exchange rate market volatility, as demonstrated over the past weeks. Consumer and investor expectations have been negatively impacted, influencing behavior over the short to medium term. Oil prices have been extremely volatile and it is unclear if the significant reduction that has occurred in the recent past will persist. The timing of the formal conclusion of the war and its aftermath will be important factors in determining the beginning of a broad recovery.
Taking into account the current environment, the projections in the World Economic Outlook would seem to be on the optimistic side. Realistically, I think we should not expect to be able to upgrade our forecast figures any time soon.
3. Strengthening Crisis Prevention
Given the severity of recent financial crises, we have to renew our focus on crisis prevention. It is crucial to underscore that nurturing good domestic institutions and pursuing sound economic policies in each member country is the first and most effective line of defense against the risks of financial crises. Fund surveillance can play a key role in helping members identify and eliminate weaknesses in their institutional and policy frameworks.
I welcome the efforts undertaken by the Fund to adapt its surveillance framework to the changing requirements since the mid-1990s. The Standards and Codes Initiative has been an important means to distil and spread best practices in a number of areas. Increased emphasis on the identification of vulnerabilities is appropriate, and Financial Sector Assessment Programs (FSAPs) and debt sustainability analyses have become very useful elements in this respect. These efforts have contributed to increasing the quality and effectiveness of Fund surveillance.
I think we should now focus on consolidating the progress through a steadfast implementation of the various initiatives that were launched over the last years. Ensuring effective links between the many new instruments and policies will be of particular relevance. Administrative capacities of many members - especially low-income countries - are severely tested by the increasing burden of the various surveillance exercises. Acceptance of the surveillance framework hinges on demonstrating that all the pieces fit together and can deliver more effective advice. Consolidating the framework also means setting clear priorities and being selective among the wide range of issues that would potentially require the Fund's attention. Surveillance should remain focused and flexible in order to be able to respond to an ever-changing economic environment; priorities must be set among countries and issues.
Finally, no effort should be spared in order to make Fund advice as candid and transparent as possible. In that sense, I welcome the steps that have been taken to make surveillance in program countries more independent. I think there is merit in letting a fresh pair of eyes assess the program strategy of members, particularly those with exceptional access to or prolonged use of Fund resources. A careful evaluation of the experience with these first measures will be necessary, to assess if a further strengthening of the framework would be useful.
4. Improving the Capacity to Resolve Financial Crises
Improving the crisis resolution framework has been an integral part of our ongoing work to strengthen the international financial system. By putting in place an effective framework for resolving financial crises in a rapid and orderly fashion, the Fund can contribute importantly to reducing the very high costs such crises entail. I welcome the intensive work that has been undertaken on these issues over the last six months. This has led to important progress in the area of Fund lending in capital account crises and of defining the features of a statutory sovereign debt restructuring mechanism (SDRM).
As regards the SDRM, I warmly welcome the significant progress that has been made in reaching a broad agreement on the features of such a mechanism. I remain convinced that introducing such a framework would fill an important gap in the current financial architecture. A more orderly framework for sovereign debt restructuring would contribute to both crisis prevention and crisis resolution. It would provide investors with greater incentives to differentiate country risks, and countries greater incentives to follow sound policies. This should discourage over-lending and over-borrowing from occurring in the first place. If sovereign debt crises occur, it would make their resolution less costly by providing incentives to resolve the collective action problem in reaching agreement on a debt restructuring.
The results achieved in the short time span since our last meeting are impressive. I would like to congratulate the Fund for this achievement. The intensive debate within the Fund as well as during the outreach efforts with a wide range of interested parties has brought forth a comprehensive and feasible SDRM. I urge the Fund to continue the work on the SDRM with the aim to resolve the remaining issues and to broaden the support within the financial community. I look forward to a report on progress in this area.
The intensive work on the SDRM has also stimulated work in other areas. Good progress has been made in the area of promoting collective action clauses (CACs) in bond issuances. The work of the G-10 and the private sector has brought forth various proposals for model collective action clauses. The recent inclusion of such clauses in Mexico's bond issuance under New York law was an encouraging further step, representing important progress for the contractual part of the two-track approach. Switzerland is in the process of accommodating G-10-type collective action clauses in its legal framework. We intend to introduce CACs in our own sovereign bond issues and are exploring ways to facilitate the issuance of bonds with CACs by sovereigns on the Swiss market.
I also welcome the initiatives to develop a code of good conduct. Both the contractual approach and the development of codes are important complements to the SDRM proposal. However, it is important to recall that only the statutory approach can effectively deal with inter-creditor equity concerns and collective action problems across bond issues or between bondholders and other creditors.
The current lack of an orderly framework for sovereign debt restructuring is to a large part responsible for the pressure the Fund often faces to engage in large scale crisis lending, even if there is no reasonable chance that such lending will solve the debt problem. If the issue is debt sustainability, providing further official financing will rarely solve the problem. Rather, the source of the crisis must determine the appropriate balance between domestic policy adjustment, private financing (including debt restructuring), and official financing.
I thus strongly welcome the definition of an operational framework that will guide our lending policy in cases of exceptional access to Fund resources. The provision of large financial packages by the Fund in the recent past has raised a number of difficult questions. On the one hand, the decision process within the institution was quite opaque, given the often lacking information and severe time constraints. On the other hand, market participants did not have a clear idea of what guided the Fund's policy on exceptional access. The new framework aims at improving the internal process and at making the Fund's lending decisions in the context of capital account crises more predictable. Its success will hinge on strict implementation. A welcome effect should be greater selectivity in lending.
5. Implementing Initiatives to Support Low-Income Countries
The Fund plays an important role in low-income countries. This is underscored by the progress in both the implementation of the Heavily Indebted Poor Country (HIPC) initiative as well as the numerous Fund-supported programs under the Poverty Reduction and Growth Facility (PRGF). Concerning the HIPC initiative, important progress has been made. Twenty-seven countries have received commitments for debt relief under the initiative, which represents about two-thirds of their outstanding external debt stock. The substantially lower average annual debt service of these countries has freed up resources for social expenditure, which directly contribute to poverty reduction.
The HIPC initiative has been criticized for not allowing fast enough progress. Many of the delays stem from longer-than-expected preparations of PRSPs and difficulties in the implementation of adjustment programs. In my view, such delays are not necessarily a bad thing since they provide an opportunity to enhance the quality of the poverty reduction strategy, including by deepening the participatory process. On the question of topping up assistance at the completion point, we should be very cautious with proposing changes to the current framework that would increase the amount of debt reduction to be granted by the multilateral creditors. In my view, the additional burden the IFIs would have to assume is too high. For specific cases, in which prospects for long-term debt sustainability after the completion point are adversely affected by exogenous shocks that fundamentally change the economic circumstances, the initiative has the flexibility to ensure a sustainable debt stock by providing additional debt relief at the completion point.
Taking the initiative forward, we should increasingly focus on the prospects for maintaining debt sustainability beyond the completion point. These primarily depend on the terms and volume of new borrowing by the HIPCs and their ability to generate revenue and promote growth through sound policies. Assessing the prospects for long-term debt sustainability requires realism of the assumptions underlying the projections of future debt levels and correct expectations of what the HIPC initiative can achieve. A need to clarify the objectives of the initiative is one of the main findings of the recent review by the Bank's OED. The recommendations of the review should feed into the progress report for the Annual Meetings.
Regarding financing issues, I note with satisfaction that the Fund's activity in low-income countries is secured through 2005. But it remains important that all pending bilateral contributions be made effective soon.
I welcome progress in implementing the Poverty Reduction Strategy Paper (PRSP) approach. In moving ahead, it will be important to further strengthen the approach by integrating PRSPs more closely into the political and administrative processes of the respective countries. In our view, aligning the PRSPs more tightly to national budgets will be critical in order to render PRSPs more realistic, prioritized and operationally relevant. This calls for well-functioning budget planning and execution. It is therefore crucial to support the countries in building institutional capacity for budgetary and fiscal management. Also, it will be important to give increased emphasis to economic growth. Since growth is central for reaching any development goals, PRSPs should include strategies for private sector development and for the diversification of export sectors.