The terrorist attacks perpetrated on United States soil last September 11^th, are having important worldwide political and economic consequences. After the attacks, normal businesses were disrupted due to the uncertainty caused by them and the fear of new threats. Given the insecurity levels in the aftermath of the attacks, the Annual Meetings of the International Monetary Fund and the World Bank, originally to be held in October, were postponed. However, it is important to reaffirm the commitment that it is precisely in these times of hardship that the free world is united and that the IMF stands ready to assist their member countries. Furthermore, to be better prepared to face this uncertain economic environment we need to work together, developed and developing countries, in order to preserve consumer and investor's confidence. Hence, I would like to express my sincere gratitude to the Canadian government for organizing these important meetings, which will provide us an excellent opportunity to analyze the prevailing situation in the world economy, the challenges we face ahead and to identify ways through which international cooperation can be enhanced.

Before September 11th, the risk of a pronounced global economic slowdown was already a cause of concern. The synchronized decline in economic activity in the three main currency blocks was having important consequences in all economies in the world. The terrorist attacks did exacerbate this problem. Although the immediate policy response by developed countries was timely and appropriate, the damage done to consumer confidence, particularly in the United States, was significant and will certainly delay the economic recovery process. Thus, it is reasonable to believe that further monetary stimulus in this country will be needed and that such stimulus, together with a well-targeted fiscal package, should eventually have a positive effect on consumer sentiment, boosting private sector demand.

The fiscal package is a key component of the economic boost to the United States because given the country's highly indebted private sector and overcapacity, further reductions in interest rates in an environment of increased uncertainty may have limited impact. Thus, I think a fiscal stimulus targeted to those more inclined to spend the extra money coming from the fiscal package will eventually have the desired effect on consumption. Furthermore, and perhaps more important, this fiscal stimulus should be designed and implemented in a way that it is perceived as not threatening the long term fiscal position of the country. Otherwise, its crowding-out effect could undermine the efforts to increase private sector investment and consumption.

Even assuming that the expansionary fiscal and monetary policies are correctly designed and implemented, the main risk we face in coming months is that the effectiveness of these policies could be adversely affected by the perception of further terrorist attacks. Furthermore, if this perception materializes, its impact on private spending would be significant, further complicating the economic recovery process. In this context, I strongly support the emphasis that has been given, and should continue to be given, to increase security levels and to combat money laundering and the financing of terrorist activities.

In the case of the Euro area, I share the view that the automatic stabilizers should be allowed to operate fully on the revenue side, allowing those countries where more room exists to use fiscal policy to stimulate the economy without jeopardizing the Growth and Stability Pact. I welcome the recent reduction of interest rates by the European Central Bank. Given that inflationary pressures in the area are falling and economic activity is decelerating rapidly, further monetary policy easing might be needed. Finally, I would point out the importance of giving more emphasis to the structural reform agenda in the area, in particular those reforms related to labor and product markets. I also commend the Bank of England's recent decision to ease monetary policy. Even though the UK's economy will be the better performer of the G-7 economies, I think their decision to reduce interest rates is timely and appropriate.

In Japan, I would reiterate what I said last April. Without a decisive implementation of the much-needed structural reforms -especially in the financial, corporate and labor sectors- any economic policy would be of limited effectiveness. These reforms may prove socially and politically difficult to implement but, without them, a solution to the present economic situation in Japan will be difficult to achieve.

The current economic environment will hard hit developing countries, especially those with large financing requirements and substantial exposure to commodity prices. For the first time in the last ten years, net capital flows to emerging markets during 2001 are set to turn negative and the outlook for 2002 is not very encouraging. This means that further economic adjustment and more emphasis on the structural reform agenda are key to preserve both internal and external confidence. Consequently, contrary to what developed countries ought to do, those developing economies with large borrowing requirements and refinancing needs in the short-term will need to apply tight monetary and fiscal policies in order to preserve market confidence. Although these policies will further affect its short-term economic outlook, they will set the ground to fully benefit from the expected global economic recovery. On the other hand, in those economies where substantial financial resources have been accumulated and their borrowing requirements are modest, more room of maneuver exists to stimulate the economy through fiscal and/or monetary policies. Additional corrective measures will be needed in those countries in which the fiscal accounts and/or the external balance is highly dependant on the development of commodity prices, which will accentuate its regular declining tendency as a response to recent events.

The global deceleration process will particularly affect low-income countries. I am especially concerned about the impact this deceleration will have on those economies under the HIPC initiative that were already achieving important results towards attaining debt relief. A lower demand for their products and depressed commodity prices are severely affecting their economic performance. Looking forward, it will be important to assess these countries' economic progress in the context of the economic environment they are confronting, objectively evaluating the impact in their PRSP and PRGF-supported programs. We cannot and should not afford to risk the progress achieved so far.

Even before the terrorist attacks, international trade volumes were already on a downward trend, and a further reduction is expected for the rest of this year. A lower global demand explains to a great extent this reduction but, since September 11^th, two additional factors are further affecting international trade volumes. Namely, higher transportation costs, associated with increased insurance premiums, and stricter security measures across borders. Although there have been encouraging efforts by some developed countries, in particular Europe, under the so called "everything-but arms" initiative, to give greater access to goods produced in less developed economies, I would strongly call advanced economies to resist any protectionist pressure derived from the current economic situation. This can also be a good opportunity for advanced economies to show their commitment to free trade, specially in those areas like the agriculture and textile sectors, upon which many developing countries' export industries rely on. The current World Trade Organization sponsored discussions provide a timely opportunity to show cooperation in all these respects.

In sum, if the perception of further threats do not materialize, and there are no additional attacks, I am confident that the set of economic measures already in place and those in the pipeline in the United States and other developed and developing economies, will help resume a sustained global economic growth in 2002. Those developing countries that under present circumstances are adjusting their economic policies in order to maintain adequate confidence levels will thus benefit more from the recovery. Once the world economy enters into the recovery phase, commodity prices should regain its upward trend, alleviating the situation in many developing and low-income economies that have seen their terms of trade and access to international markets severely affected.

The International Monetary Fund has played a key role in the solution of past economic crises and I expect this will be the case in the present juncture. The main problem we confront today is a serious deterioration of consumer and investor's confidence due to a synchronized deceleration of all developed economies. There is no doubt that it is every country's responsibility to implement adequate economic policies in order to preserve and, if possible, improve its economic fundamentals. But, given the general economic deterioration the world is experiencing, the Fund also plays a key role in restoring international, and in some cases national, confidence.

Given the economic implications of this synchronized economic slowdown in the developed world on developing economies and on the potential demand for official financing, the Institution could enhance its actions by promoting more discussion on and coordination of developed countries' economic policies, and also by suggesting alternative solutions to the current economic problems they face. In short, the IMF needs to strengthen its surveillance role in the developed economies, redoubling emphasis on the need to reinforce the implementation of structural reforms. In relation to emerging market economies, the Fund's surveillance process is in the process of being improved with a new and more comprehensive framework to assess these countries' economic vulnerabilities, giving more emphasis to crisis prevention. I welcome the progress achieved so far, but I would like to underline that these assessments would better serve their pre-emptive objective as long as the results are shared, and in those critical cases discussed on an ongoing basis, with the relevant country authorities. The results of these informal consultations should be kept confidential, if the countries' authorities so decide.

Safeguarding the Fund's ability to respond swiftly to the current international environment could also enhance international confidence. The deeper deceleration in the world economy is having an important impact on commodity prices, negatively affecting the terms of trade of developing and low income countries. It has also affected developing countries' access to the international capital market. In this context, and given the speed and intensity with which the downturn has spread from one country to another, I would like to emphasize that the Fund plays a key role in providing timely financial assistance to fill existing financing gaps. Moreover, in a worst-case scenario of a more pronounced or a longer deceleration in the world economy, front-loading financing might be necessary. A prompt reaction by the Fund is essential to safeguard the economic fundamentals of these countries.

During the last seven years, the Fund has been dealing with capital account crises that demand substantial amounts of official financing, well beyond the existing access limits. Every time such a crisis occur, the exceptional circumstance clause needs to be used in order to give sufficient Fund financing to the country affected by the crisis. Two comments arise from this evidence. First, access limits were defined to cope with current account crises, not with crises in the capital account. If we recognize that these new type of crises require a higher amount of official resources to be solved, then the traditional access limits would need to be modified accordingly or we would need to accept a more frequent use of the exceptional circumstance clause. Two, even if access limits are increased or the exceptional circumstance clause is used with more flexibility, it still remains open the question whether the Fund is adequately stocked with the sufficient amount of financial resources to handle these new types of crises. The impact of the current economic environment on an ample spectrum of developing countries and the risks we face if the economic recovery in the industrialized world proves to be more prolonged than what it is expected, could exacerbate this situation even more. This calls for frequent reviews of the financial situation of the Fund in view of the rapid changes the world economy is experiencing, as is clearly shown in the economic projections of the Fund for this and next year. In this context, I would emphasize the urgency of approving the still pending Special One-Time Allocation of Special Drawing Rights.

Last April I very much welcomed the inclusion of combating money laundering in the work program of the Fund, stressing that this is a problem of global concern that calls for a strong cooperation among all countries and international organizations. Today, this issue, and its relationship with terrorism activities, becomes of utmost importance, calling for a united front among all member countries.

In particular, we should aim at strengthening international cooperation on counter-terrorism in multilateral fora, enhance our bilateral cooperation and information sharing systems-both at the national and international levels-, revisit our domestic legal frameworks in order to avoid the misuse of the financial system in support of terrorism activities and to explicitly typify terrorism and terrorism-related activities as crimes.

I welcome the rapid response of the Financial Action Task Force (FATF) in updating the list of international standards geared towards combating the financing of terrorism activities. These new standards, together with the 40 recommendations that were already in place to combat money laundering, should enable us to fortify our financial systems against these pernicious activities.

This expanded responsibility calls for greater cooperation among countries and I think the Fund, being a near universal institution, is well equipped to make an invaluable contribution to deal with this new task. However, we also have to take into account that these new responsibilities demand additional financial and human resources. Thus, we have to provide the institution with the means to comply with these new responsibilities.

As we progress in the implementation of the new standards, I am sure many lessons will be learned and many experiences could be shared. Hence, I would call the Fund to maintain a lead role in this very important issue, maintaining close contact with all the membership, providing technical assistance and also learning and sharing information and experiences. As has been done by the Fund on other occasions, I would suggest the Managing Director to take the lead, with the cooperation of the FATF, in organizing an international conference on fighting money laundering and financing terrorist activities in order to share experiences in relation to the implementation of the new set of principles. Valuable lessons could be drawn from them.