The International Monetary and Financial Committee statement on behalf of the constituency comprising Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden

Introductory remarks

The Nordic and Baltic countries wish to express their deepest sympathies with victims and their families affected by the September 11 terrorist attacks against the United States. In the aftermath of these attacks it is more vital than ever that we continue our work on global cooperation and move forward with renewed strength. It is therefore important that the International Monetary and Financial Committee meets here today and demonstrates a united approach in addressing the urgent issues of restoring global growth, fighting world poverty and combating abuses of the international financial system and the financing of terrorism.

Strengthening the Global Economy

The outlook, risks, and vulnerabilities and the policy response of the international community

Global economic activity had slowed down already by summer, and the deceleration has been accentuated by the attacks. Consumer and business confidence has been seriously eroded also outside the United States. The crucial question is what economic policies can do to bolster confidence.

In the past year we have experienced large asset price corrections and crises in key emerging markets. So far the repercussions on the financial markets have been limited. Imbalances, however, remain, and continue to create risks to global financial stability. Against this background, the Fund's work on capital market issues is increasingly topical. It is important to continue strengthening the international financial system through implementing effective supervisory and regulatory frameworks in order to develop robust national financial sectors.

In the United States, monetary and fiscal policies have been actively used to mitigate the slowdown. The substantial monetary easing has no doubt supported asset prices and cushioned the slowdown. However, given the private sector imbalances, the effectiveness of the easing for boosting the economy remains to be seen. The slowdown in inflation leaves room for manoeuvre. The very easy stance of monetary policy should however be tightened as soon as the economy starts recovering.

Fiscal policy should be designed mainly from a medium term perspective in order not to undermine the public sector balance. Otherwise, the effects of expansionary fiscal policy in a situation with high private indebtedness and rising unemployment are uncertain. Moreover, the expectations of a worsening fiscal position may dampen the effects of monetary policy through pressures on long-term interest rates. Over the medium term, care should be taken to keep the public finances on a prudent course, thus addressing concerns related to low national savings and the large current account deficit.

In Japan the room for manoeuvre in macroeconomic policies is very limited. The domestic economy remains weak and the problems of the banking sector have not been resolved. A determined policy line is now essential to bring about a turnaround in the confidence and address the structural problems of the Japanese economy.

We welcome the Japanese Government's medium term approach to restrain public expenditures and to expedite economic reforms necessary for a mature and open market economy. We also welcome the Japanese authorities' acceptance of taking part in the FSAP.

The EU economies have been clearly affected by international developments despite the relatively sound fundamentals. However, discretionary fiscal policy measures to boost the short-term growth would run the risk of being ineffective and might increase long-term interest rates. Expansionary fiscal policies would also limit the room for manoeuvre for monetary policy. Thus, it is important that fiscal policies continue to be geared towards fulfilling the objectives of the Stability and Growth Pact. Compared to the United States, there is little risk of the effects of monetary policy being dampened by over-indebtedness or over-investment in the private sector. The interest rate cuts that the ECB has implemented should boost growth in due course.

Continued economic reforms on labour, product and capital markets are essential for strengthening internal growth dynamics.

Growth prospects in EU accession countries have moderated. Export flows are expected to decelerate but investment flows are holding up quite well, and the CEE economies are less exposed to the global downturn. The preparations for EU membership reduce vulnerability to contagion effects. Macroeconomic stability has been generally established as a prerequisite for the longer-term objective of real convergence with EU. While inflationary pressures and moderate current account deficits are inevitable in the convergence process, the policy mix should safeguard against the appearance of unsustainable imbalances. The momentum in structural reforms should be maintained.

In many emerging market economies, developments in major advanced economies have aggravated domestic economic problems. A sustainable improvement of their situation depends ultimately on the domestic policies these countries pursue. For countries suffering from acute problems, like Argentina and Turkey, the focus should remain on the implementation of the current reform programs and on efforts to promote private sector involvement, in order to restore confidence.

Clearly, other emerging market economies in Latin America and in Asia are also exposed to macroeconomic and currency risks. Expediting structural reforms, for example to strengthen fragile banking systems, would create more margin for tolerating external shocks.

In Russia, favorable macroeconomic conditions provide a window of opportunity to implement the necessary structural reforms. Further improvement of the investment climate is needed for a diversified and more robust economy to materialize. While we welcome the recent strengthening in reform efforts, we urge the Russian Government to broaden and deepen these efforts.

A strong balance-of-payments position calls for vigilance in fiscal and monetary policies in order to avoid inflationary pressures. It is promising that fiscal and monetary discipline have improved.

Sustaining poverty reduction in low-income countries

Many of the low-income member countries have felt the effects of the simultaneous slowing of growth in the major industrial countries. The effects have come through a number of channels and materialized as a weakening of their balance of payments. For example, economies relying to a large extent on tourism may be hit particularly hard. The Fund, however, appears to have both the awareness and preparedness to stand ready to take a range of steps to mitigate these impacts, including through additional financing where policies are sound. This might well lead to increased demand for PRGF resources, which is an issue that has to be properly addressed.

The global effort to reduce poverty has become one of high priority. Debt relief is one integral part of this concept. This constituency continues to support the enhanced HIPC Initiative. Major progress has already been achieved in implementing the Initiative and a number of countries have begun to receive debt relief, on average reducing these countries' debt service obligations by half. It is essential for these countries that the freed resources be used effectively for poverty reduction. Such action would also strengthen the credibility of the HIPC Initiative.

The long-term success of the Initiative hinges upon managing to break unsustainable debt dynamics in the countries concerned. The primary objective of the Initiative of restoring debt sustainability should not be weakened. In this regard, concrete efforts to increase domestic savings for investments should be part of the strategy.

A challenge in the period ahead is to bring the remaining eligible countries to their decision points as soon as conditions in these countries permit. These are countries often plagued with a legacy of turmoil and lags in the implementation of their economic programs. We urge these countries to take all the measures needed to qualify for debt relief.

The enhanced HIPC Initiative provides for the consideration of additional debt relief at the completion point if there are fundamental changes in a country's economic circumstances due to exogenous shocks. While meant to be truly exceptional, cases of this nature might be forthcoming if the situation in the world economy deteriorates substantially. We note, however, that the first indications are that this need might be modest and limited to a few cases.

A country-driven PRSP process is now the basis for the IMF and World Bank support to low-income countries. Poverty reduction strategies are also increasingly taking the center stage in development policy, both among donors and recipients of aid. We urge HIPCs and other low-income countries to vigorously pursue their poverty reduction strategies, as this will be the way forward to build a broad international response to fighting poverty. Early experience with the PRSP program has been encouraging and we look forward to the pending comprehensive review of it.

Recognizing the close link between economic growth and trade, both being necessary elements to reduce poverty, we consider it truly important at this critical juncture to succeed in launching a new round of multilateral trade negotiations. The negotiations must address the issues of interest to developing countries, such as improved market access for their products.

Finally, we welcome the Fund's role in the preparations for the International Conference on Financing for Development, which will be held in March next year in Monterrey, Mexico, and we look forward to its success. We hope the conference will provide progress towards achievement of the millennium development goals, by enhancing the mobilization and effective use of resources to this end.

Combating Money Laundering and the Financing of Terrorism

Money laundering and financing of terrorism are global problems and international cooperation must be stepped up to address them. The Fund has already agreed on enhancing its contribution to this effort to fight money laundering and financing of terrorism on a global scale. Key ways in which the Fund can participate within its core areas of competence include intensified focus on anti-money laundering (AML) elements in all relevant supervisory principles and in the surveillance of the financial systems. The Fund's technical assistance should be extended to capacity building of AML measures in the member countries committed to combating money laundering. The Fund's work in the Financial Sector Assessment Program includes elements that clearly complement anti-money laundering efforts. In addition, the Reports on Observance of Standards and Codes can help countries to establish systems which can facilitate detecting financial abuses. The Fund's focus should be on financial supervisory and regulatory aspects, while law enforcement aspects should be handled by the national authorities.

Eradication of financial abuse worldwide will be a complex task requiring participation by the all the parties concerned. We fully endorse the present international strategy emerging to fight money laundering and financing of terrorism. Primary responsibility for AML efforts and combating terrorist financing rests with individual countries as well as with the Financial Action Task Force and specialized agencies, but we believe that the international financial institutions are well positioned to contribute to this endeavor. Given the wide-ranging nature of the AML agenda, information sharing and close cooperation between many different institutions will now be vital.

Concluding remarks

In this difficult period, it is important to demonstrate that we are committed to collaborate actively, both regionally and globally, to find the proper response to deal with the weaknesses in the world economy, and, equally important, that we find the proper ways to manage globalization so that the poorest countries stand to benefit from it. The IMF will have an important role in this global effort in the time ahead.