Speech

Remarks by Agustín Carstens, Deputy Managing Director, IMF

June 29, 2005

Good evening. Let me begin by thanking Governor Alonso for his kind words, and the warm hospitality with which he has received us. It is truly a pleasure to be here in Managua, among so many friends and colleagues. Our gratitude also extends to the Central American Monetary Council, for the key role it has again played in putting together this event. This is the 4^th annual conference on Central America and the Dominican Republic, and these meetings have now become an integral part of our dialogue with the region.

The IMF Partnership and Engagement with Central America

Central America has received growing attention in recent years as a region that is inserting itself successfully into the global economy. Reflecting this development, the IMF's engagement with the region has also taken on added significance. Only last week, our Executive Board held a seminar on regional issues in Central America. Mr. Schwartz and Mr. Loyo, your representatives at the Board, will surely have already briefed you about the discussion, which I personally found to be very encouraging.

The IMF has long had active and robust links with this region and the individual countries represented. As Executive Director at the IMF's Board in the 1990s, I personally experienced the strong collaboration and good working relationship between the IMF and your country authorities. It was, and continues to be, a fruitful partnership—one based on mutual trust and a shared vision for the goals of economic growth, stability, and poverty reduction. It is my sincere hope that this partnership will be further reinforced in the future to our mutual benefit.

Our involvement with Central American countries cuts across all areas of IMF operations. Beginning with our surveillance activities, we are in constant touch with regional economies concerning economic and financial conditions. In the area of IMF financing, the economic programs of three regional countries are currently being supported by our resources—for Honduras and Nicaragua, this takes the form of concessional resources through our Poverty Reduction and Growth Facility; the Dominican Republic, on the other hand, has a stand-by arrangement from the IMF. The IMF is also an active provider of technical assistance to Central America, having fielded some 86 technical assistance missions to the region since 1990. These cover subjects spanning the entire spectrum of the IMF's technical expertise, such as money and banking, balance of payments, government finance statistics, national accounts, and data dissemination.

As you know, an important aspect of our work involves the strengthening of financial systems. In collaboration with the World Bank, the IMF has carried out financial sector assessments in all of your economies. These country-specific assessments were supplemented this year by analyses of cross-border financial sector linkages and other regional financial sector issues. The growing integration of regional economies makes such analyses a critical aspect of financial sector stability for your countries. Parts of the findings of this study have been used as the foundation for our session on financial sector issues here at the conference. For the IMF, this approach—of specifically analyzing cross-border financial sector linkages—is an innovative enhancement to our financial sector work. The positive experience we have had with pioneering this approach in Central America makes it a prime candidate for adoption in financial sector assessments for other regions as well.

This conference aside, our alliance with Central American countries also extends to the organization of joint seminars and other events. Here, two recent seminars—for Central American journalists and parliamentarians—deserve special mention. With the help of the Central Bank of Costa Rica, we organized these outreach seminars in San Jose around the middle of last month. The events helped to deepen our dialogue with the media, legislators, and other key stakeholders of the region, with a key objective being to highlight the role that legislators and the media can play in shaping public debate and in building stronger economic policies and institutions. After all, the successful implementation of sound macroeconomic policies and structural reforms requires that there be broad domestic support for relevant measures. Legislators and journalists can play a key role in this regard, including by fostering greater understanding of the trade-offs that must be confronted in economic governance by policymakers and citizens alike. I should also note that, in preparation for this conference, the IMF and the government of Guatemala organized a regional seminar in Antigua this March on tax coordination issues. This event, and the San Jose seminars of this May, are merely part of many successful joint efforts between the IMF and regional governments.

Building a Stronger Central America

A key feature of our partnership with Central America—or for any IMF member country, for that matter—is our surveillance of economic conditions in regional countries. I have already alluded to this briefly. Traditional IMF surveillance is largely focused on circumstances at the level of individual countries. However, with growing regional and international economic integration, it has become increasingly important to undertake surveillance at the regional and international levels as well.

Our approach to Central America certainly reflects this focus, particularly in light of the strengthening economic ties between regional economies. Over the past year, the IMF has stepped up its work on issues that are relevant across Central American countries, as well as those that deal directly with economic integration, such as CAFTA. Allow me to briefly summarize the key points that emerged from this work.

First, it is important to note that substantial progress has already been made in Central America in building stable democracies, regaining macroeconomic stability, and returning to a path of economic growth. I should also point out the significant advances that have been made in the social area. These advances provide a firm foundation from which to pursue further reforms, as a means towards stable growth and greater poverty reduction.

The implications of Central America's expected further integration—both globally and within the region—have been a particular focus of our work. In this connection, I would note that the speedy implementation of CAFTA is paramount. As the region becomes more integrated, there will also be a growing need for cooperation in a number of areas, including tax policy and administration and financial sector regulation and supervision. I believe we have had a very productive first day focusing on the latter, and I very much welcome the fact that you will dedicate a good part of tomorrow's discussions to the former. How to deal with the increasing mobility of tax bases, and how to avoid a "race" between countries offering tax concessions to attract investment, are indeed questions that many countries grapple with worldwide. The IMF has significant expertise in fiscal and tax policy matters, and we stand ready to offer our assistance to your countries in addressing these questions.

When we look at Central America's economic performance in recent years, we also see that growth in this region continues to lag behind other regions such as East Asia and Eastern Europe. More importantly, with the exception of Costa Rica, poverty continues to be high in Central America. Higher growth rates are clearly needed to make an effective impact on poverty reduction. How can the region's growth prospects effectively be boosted? The experience of fast growing economies worldwide tells us that it is mostly private investment that drives higher growth in a lasting way. Attracting more profitable investment is, indeed, a crucial challenge for the region, requiring continued reforms aimed at improving the business environment, including the rule of law, enforcement of contracts, streamlining regulations, and improving governance.

Despite the progress that has been made in attaining macroeconomic stability, substantial risks continue to be posed by high public debt levels and a high degree of informal dollarization in many regional economies. These factors make the Central American region vulnerable to shocks. Therefore, the region's quest for higher growth and greater resilience to shocks will need to remain anchored on continuing efforts at reducing public debt burdens and strengthening fiscal frameworks so that they respond more fully to countries' development needs and social aspirations. And the financial sector assessments I mentioned earlier have laid out a comprehensive agenda of further reforms to foster sound credit flows in support of higher growth and an environment of financial stability.

In summary, the challenge for Central American policymakers is thus to push ahead with continued reform, in order to address remaining vulnerabilities, raise productivity and investment, and increase regional cooperation in areas of common concern. Doing so will ensure that Central America's long-term growth potential is fully maximized. Indeed, the positive economic and financial conditions that currently prevail provide an excellent window within which to undertake the necessary reform measures.

In that regard, the near-term economic outlook for Central America is broadly favorable. Underpinned by a supportive external environment, and the prudent policy frameworks governments have put in place across the region, regional growth this year is projected to be around 3 percent. Global growth is also expected to remain above trend, at around 4.3 percent for 2005. Needless to say, there are risks to that outlook. These include higher oil prices, a deterioration of financial market conditions, and a disorderly adjustment of current global imbalances. However, on balance, we anticipate that the global environment will remain positive, backed by strong corporate balance sheets, subdued inflation, and supportive financial market conditions with long-term interest rates and spreads near historical lows.

Accordingly, Central American leaders should make the most of the current environment to implement reforms that will secure the region's medium—and long-term prosperity. The IMF will stay engaged with your countries as they pursue their reform agendas. Above all, we hope to continue—and enhance—the excellent partnerships that we have had with Central American economies.