Statement by The Hon. Peter Costello, Treasurer of Australia to the International Monetary and Financial Committee, Ottawa, November 17, 2001

November 2001 IMFC Statements

IMFC Ottawa Meeting

Australia and the IMF

Federated States of Micronesia and the IMF

Kiribati and the IMF

Republic of Korea and the IMF

Republic of the Marshall Islands and the IMF

Mongolia and the IMF

New Zealand and the IMF

Philippines and the IMF

Republic of Palau and the IMF

Papua New Guinea and the IMF

Solomon Islands and the IMF

Seychelles and the IMF

Vanuatu and the IMF

Samoa and the IMF

Statement by The Hon. Peter Costello
Treasurer of Australia¹
to the International Monetary and Financial Committee

Ottawa, November 17, 2001

We meet in unusual and challenging circumstances. The major economies are experiencing a synchronised slowdown for the first time since the early 1980s. The tragic events of September 11 have exacerbated the weakening in global economic growth and introduced an unusually large element of uncertainty into the outlook.

These events have provided policy makers with a reminder that continued strong economic growth and a benign international environment cannot be taken for granted. Events have also demonstrated that sound economic fundamentals are essential if policy is to have the flexibility to respond to the unexpected.

Perhaps most importantly, we have been reminded that we live in an integrated world where economic developments and policy decisions in one country impact on many others. And, in light of their importance to the global economy, it is the major industrial countries that bear the greater responsibility for reacting vigorously to the economic challenges we face.

The main objective we should set ourselves is to restore confidence and global economic growth for the benefit of all people. Meeting this challenge will require decisive economic leadership and a coordinated international response.

It is against this background that we are particularly grateful to the Canadian Government for hosting this special meeting of the International Monetary and Financial Committee. This is an important meeting.

Strengthening the Global Economy
It is evident that the global economy was weakening more than expected prior to the impact of the events of September 11. Policy makers, and the IMF, should be asking "what did we miss?". In part, it is because we underestimated the impact of a weakening international economic environment on the growth prospects of a number of individual economies. Understanding how these linkages operate should be a focus of the Fund's ongoing work. This will be crucial for effective policy making in the future.

Compounding the weakening international outlook is the aftermath of the terrorist attacks on September 11. The adverse impact on investor and consumer confidence has raised the risk of a deep and prolonged period of global economic weakness. Restoring confidence is essential to reducing the likelihood of a sustained slowdown.

Slowing growth in the major economies has had a significant impact on the emerging markets and developing economies. There is the direct impact through trade channels, with a number of economies in Asia particularly affected by the sharp downturn in global demand in the technology sector, while others have experienced a decline in tourism receipts following September 11. But perhaps the more pervasive influences are through financial linkages and the compounding interplay of increased uncertainty leading to declining confidence. Sovereign spreads for emerging markets have widened. Reassuringly, there is some evidence of differentiation, indicating that good policy settings are being recognised by financial markets. However, bond markets have largely closed for emerging economies as a result of increased risk aversion flowing from the deeper-than-expected slowdown of the global economy and the impact of events in Argentina. If this high risk aversion continues unabated, a number of emerging markets will face significant financing pressures.

Now, more than ever, sound economic policies are required. Strong structural foundations and sound macroeconomic policies are essential in providing flexibility to respond to weakening economic conditions. A number of economies will regret that they did not make necessary reforms when global conditions were more favourable. While it may now be harder, it is still essential for all economies - advanced, emerging markets and developing alike - to tackle needed reforms vigorously in order to build confidence and underpin a sustained recovery. There is little room for weak fundamentals in the current environment.

Slower growth and an uncertain global environment will lead to pressure for countries to close their doors and look inward. We must not let this happen. Increased integration and trade between economies will continue to be the major engine of growth and prosperity. There are significant growth benefits, both for rich and poor countries, associated with further trade liberalisation. Multilateral negotiations offer the greatest chance of achieving greater market access. One of the most significant contributions that the major economies can make to assisting developing economies make meaningful inroads into reducing poverty is to address restrictions in markets of importance to those economies, in the context of a comprehensive multilateral trade round.

In responding to the weakening in the global economy and pronounced uncertainty we must ensure that policy responses are appropriately balanced. Policy makers should not over react to current events, but should instead be mindful of the medium-term consequences of their actions. Nevertheless, policy makers must also consider the risks that entail from waiting for `hard evidence' of the magnitude of the global slowdown. Insufficiently vigorous policy may result in a deeper and longer global downturn.

The decisive policy actions taken by monetary authorities, particularly by the US Federal Reserve, to stabilise financial markets and reduce interest rates following the September 11 attacks is to be applauded. With the risks in the major industrial economies tilted towards slower growth rather than inflationary pressures, we would encourage these economies to use all the flexibility they have to support growth through further monetary policy easings. The same applies to fiscal policy settings. The automatic stabilisers should be allowed to operate and well-targeted discretionary fiscal easing should be implemented when consistent with medium-term objectives.

Like all countries, the members of this constituency are affected by the slowdown and increased uncertainty about the global economic outlook. Many members of the constituency have already taken action to respond to the slowdown in growth, and stand ready to respond further should it be considered necessary.

Australia and New Zealand continue to expect solid growth in 2002, and strong economic foundations mean they are well positioned to adjust to a prolonged global slowdown. In Australia, economic growth will be underpinned by solid growth in domestic demand, particularly housing. With inflation subdued and weakening external conditions, monetary policy has moved to an easier stance in recent months. Australia should also benefit from its very sound fiscal position. Growth in the New Zealand economy is expected to be supported by ongoing, albeit more moderate, domestic demand growth, lower interest rates and a low exchange rate. The Reserve Bank of New Zealand has eased monetary policy and New Zealand's strong fiscal position means the automatic stabilisers can be allowed to operate fully.

High reliance on information technology related products has made the Korean economy vulnerable to the weakening in the global economy and, in particular, the deterioration in global demand in the technology sector. Nevertheless, Korea is well placed to weather the global downturn. Continued progress in financial and corporate restructuring and a high level of reserves will provide strength to withstand possible disruptions to the international capital market. Further, the authorities have eased monetary policy, and a strong fiscal position and low public debt has allowed room to conduct counter-cyclical fiscal policy.

The Philippines has been particularly affected by the global slowdown, given its dependence on the electronics sector and the increased risk aversion affecting emerging markets. The Philippine authorities have focused on strengthening policies in order to boost confidence and preserve access to financial markets. Moderate inflation over the past ten months has allowed an easing of monetary policy. Helped by this moderate inflation and expected positive growth, the authorities are committed to pursuing fiscal consolidation and will continue to aim for the 4½ per cent deficit target for 2001.

The smaller members of this constituency are also more than usually vulnerable to current global economic developments. Tourism is an important sector for some of the Pacific Island economies and the Seychelles, while economies such as Mongolia and Papua New Guinea are vulnerable to weaker commodity prices and possible interruptions to external official financing.

The Fund has a particularly important role to play in responding to the downturn in the global economy. It must stand ready to assist members which experience financing difficulties, but such assistance should always be in support of commitment to required policy adjustments. The Fund will need to be proactive and engage in an early policy dialogue with members. It takes time to develop programs, and we encourage the Fund to step up its ongoing dialogue with members and explore possible financing needs at an early stage for those members most heavily affected. It will be important to ensure that the Fund maintains adequate resources to discharge its responsibilities.

It is also important that the Fund not be distracted from assisting its poorest members fight poverty. The enhanced Heavily Indebted Poor Country (HIPC) initiative, and the Poverty Reduction and Growth Facility (PRGF) and the Poverty Reduction Strategy Paper (PRSP) processes are important tools in this regard. We welcome the review of the PRSP process and recognise the importance of taking all possible steps to maintain engagement with those countries emerging from conflict so as to facilitate their participation in the HIPC initiative. We also urge the Fund not to neglect other low-income countries, such as the Pacific Island countries, that, while not benefiting from initiatives such as HIPC, have very real and unique development needs of their own.

Combating Money Laundering and the Financing of Terrorism

Recent events have demonstrated that the international community must increase its efforts to combat crime and terrorism. Members of this constituency are fully committed to the task of preventing criminals from benefiting from the proceeds of crime and preventing terrorists from obtaining finance. This task will require a coordinated international effort.

The Fund is making an important contribution to combating money laundering by intensifying its focus on the anti-money laundering elements of financial supervisory principles. The Fund is also working closely with other international institutions involved in combating money laundering, particularly the Financial Action Taskforce (FATF), and has increased the focus on money-laundering issues in Article IV surveillance when relevant. We welcome the progress that has been made.

In strengthening efforts at combating money laundering and the financing of terrorism, respective international institutions must focus on areas where they can contribute most effectively. For this reason, we believe that the Fund's intensified involvement in this area should be based on the following key principles: effectiveness in strengthening the international financial system; maintaining consistency with the Fund's policies; exploiting the Fund's expertise and comparative advantage; avoiding overlap or duplication with the efforts of other international bodies; and achieving ownership by member countries.

We welcome the work that is underway with the World Bank in preparing and piloting an anti-money laundering Methodology Document, which incorporates 19 of the FATF 40 Recommendations. We see merit in expanding the Methodology Document to incorporate additional FATF recommendations, including the Special Recommendations on Terrorism Financing, provided such expansion is consistent with the above principles. Priority must also be given to expanding technical assistance to correct deficiencies in countries' anti-money laundering regimes, along with improved international coordination in the provision of such assistance.

Status of the IMF's Reform Agenda

The current state of the global economy highlights the importance of the Fund's reform efforts--in particular, the focus on crisis prevention (which covers a number of initiatives central to the Fund's mandate) and efforts to enhance surveillance and strengthen financial systems. We welcome the advances made on crisis prevention initiatives and the review of conditionality since the Spring Meetings and we look forward to further progress.

Recent developments have highlighted the need for more decisive action in the difficult area of private sector involvement (PSI) in crisis resolution. It is important that the international community reach a common understanding as to the `catalytic' role which the Fund can play, and seriously consider how more concerted forms of private sector involvement could operate. It is also important that the Fund make accurate assessments of the severity of a crisis and appropriate amount of PSI. We particularly endorse the need to consider establishing a credible legal framework to address sovereign debt workouts as part of crisis resolution.

¹On behalf of the constituency comprising Australia, Kiribati, Korea (Republic of), Marshall Islands (Republic of), Micronesia (Federated States of), Mongolia, New Zealand, Palau (Republic of), Papua New Guinea, the Philippines, Samoa, Seychelles, Solomon Islands and Vanuatu.