Annual Report of the Executive Board

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HIGHLIGHTS

Safeguarding Stability Amid Uncertainties

During the 2002 financial year the IMF faced important new challenges in an unusually unsettled world environment. These placed increased demands on the institution in two of its main areas of responsibility: preserving world economic and financial stability and assisting in the global war on poverty.

After a period of strong expansion, the global economy experienced a widespread slowdown during the 2001 calendar year. Contributing to this were further downward adjustments in equity prices, together with a rise in energy prices and the tightening of monetary policy in industrial countries that had occurred in 2000. The already weak international economy was further affected by the September 11, 2001, terrorist attacks in the United States, which had a substantial—although largely temporary—impact on economic conditions. By early 2002, however, thanks in large part to actions taken by key central banks to lower interest rates, there were encouraging signs that growth was recovering, although serious concerns remained in a number of countries.

In the face of the prevailing uncertainties, the IMF continued to work on the reform of the international monetary system and to focus on its core responsibilities, among them helping to prevent financial crises among its members.

Following are some of the highlights of the IMF's work during FY2002:

IMF Lending

The IMF's regular and concessional lending increased strongly as the slowdown in the world economy contributed to a worsening of the balance of payments difficulties of several members whose access to international capital markets was curtailed.

• Commitments under the IMF's regular loan facilities—Stand-By Arrangements and the Extended Fund Facility (EFF)—tripled, to SDR 39.4 billion¹ (almost $50 billion) in FY2002 from SDR 13.1 billion (almost $17 billion) in FY2001. The largest commitments were Standby Arrangements for Brazil and Turkey, SDR 12.1 billion and SDR 12.8 billion respectively. Of the commitment to Brazil, SDR 10 billion was provided under the Supplemental Reserve Facility (SRF), which is designed to assist members experiencing a sudden and disruptive loss of market access. A growing volume of IMF financing commitments are now treated as precautionary, with borrowers indicating that they do not intend to draw on the funds committed. Actual drawings were made in only 16 of the 34 Standby and Extended Arrangements in place during the year. As of the end of April 2002, undrawn balances amounted to SDR 26.9 billion.
  
  
• The IMF's net uncommitted usable resources amounted to SDR 64.7 billion ($82 billion) at the end of April 2002. The liquidity ratio (the ratio of net uncommitted usable resources to liquid liabilities) was 117 percent, significantly lower than the 168 percent reached a year previously, but more than three and a half times the low point reached before the 1999 increase in IMF quotas.
  
  
• In FY2002, the IMF's concessional lending for poverty reduction continued to be channeled through the Poverty Reduction and Growth Facility (PRGF) and the joint IMF­World Bank Initiative for Heavily Indebted Poor Countries (HIPCs). During the financial year, the Executive Board approved nine new PRGF arrangements totaling SDR 1.8 billion, with total disbursements amounting to SDR 1.0 billion, compared with SDR 0.6 billion in FY2001. By end-April 2002, 26 HIPC-eligible members had been brought to their decision points under the enhanced HIPC Initiative and one under the original Initiative, and the IMF had committed SDR 1.6 billion in grants and disbursed about SDR 0.7 billion.

Surveillance

The IMF conducts surveillance over the exchange rate policies of its member countries to ensure the effective operation of the international monetary system. To this end, it regularly discusses with members their economic and financial policies and continuously monitors economic and financial developments at the country, regional, and global levels.

• In April 2002 the Executive Board completed in large part its latest biennial review of the principles and implementation of IMF surveillance. While the review found that the current system of surveillance was working well, it identified a number of areas where further efforts were needed, including enhancing coverage of institutional and structural issues, especially relating to financial sectors, and improving analysis of debt sustainability.
  
  
• The Board in September 2001 discussed the IMF's role in promoting an open trading system and trade liberalization. Directors agreed that the IMF should stress the need for a successful launch of the Doha trade round; continue to address trade issues in the context of surveillance and IMF-supported programs; lay the groundwork for trade liberalization through its technical assistance; and cooperate closely with the World Trade Organization and the World Bank.

Strengthening the International Financial System

Since the Mexican crisis of 1994–95 and the Asian crises of 1997–98, much has been done to strengthen the international financial system and the capacity of the IMF and its members for crisis prevention. Nevertheless, it would be unrealistic to suppose that all countries will be able to avoid crises at all times. Thus, work has also advanced toward assisting countries to resolve crises.

• The IMF has strengthened its monitoring of members' vulnerability to external crises by drawing on updated World Economic Outlook projections, early warning system models, detailed analyses of countries' financing requirements, market information, and assessments of financial sector vulnerability and risks of contagion.
  
  
• In recent years, the IMF has actively promoted increased transparency of its members' policies, sought to improve public understanding of its own policies and operations, and encouraged feedback from both national authorities and the public. Through its website (www.imf.org) it releases a wealth of information on its activities.
  
  
• During FY2002, the IMF reviewed its Data Standards Initiatives and approved a Data Quality Assessment Framework, integrated with the Reports on the Observance of Standards and Codes (ROSCs).
  
  
• Recognizing the critical importance of concerted action to strengthen financial systems, the IMF continued to conduct financial "health checkups" under the Joint IMF­World Bank Financial Sector Assessment Program (FSAP). By April 2002, 27 countries had completed their FSAP participation, and 50 others had committed to participate.
  
  
• During the year, discussions continued on a range of issues relating to resolving financial crises and the role of the private sector. A plan of work on crisis resolution outlined a four-point program designed to increase the IMF's capacity to assess a country's debt sustainability; clarify the policy on access to IMF resources; strengthen the tools available for securing private sector involvement in resolving financial crises; and examine a more orderly and transparent legal framework for sovereign debt restructurings. Proposals for a new sovereign debt restructuring mechanism were spelled out in late 2001 and early 2002 by Anne O. Krueger, the IMF's First Deputy Managing Director.
  
  
• The IMF's work on anti-money-laundering issues acquired increased importance after the September 11 attacks, when it was extended to combating the financing of terrorism.

Lending Policies and Conditionality

The IMF regularly reviews its "conditionality"—the conditions it attaches to its financial assistance to ensure that it is repaid (so that its resources become available to other members in need) and that external viability, financial stability, and sustainable economic growth are restored in the borrowing member country—and its policy on access to its financial resources.

• The latest review of conditionality, which was still in progress at the end of FY2002, emphasized that conditionality must be applied in a way that reinforces national ownership, should focus on policies critical to achieving a program's macroeconomic goals, and set a clearer division of labor between the IMF and other institutions, particularly the World Bank.
  
  
• After reviewing the policy governing members' access to its resources, the IMF determined to maintain current annual and cumulative access limits, but agreed to later review the policy involving high access to resources.

Poverty Reduction

Reducing poverty in low-income countries is a major international challenge, and the IMF continues to play its role. Besides the lending mentioned above, the IMF took a number of steps in FY2002 to reinforce and strengthen its support for reform and development efforts in low-income countries.

• The IMF received about SDR 7 million in contributions from five members to subsidize the rate of charge on Post-Conflict Emergency Assistance.
  
  
• The IMF and the World Bank jointly reviewed the Poverty Reduction Strategy Paper (PRSP) approach, which, combined with sound policies, is expected to put countries on a path to sustainable growth and poverty reduction and toward achieving the UN's Millennium Development Goals.
  
  
• The IMF—jointly with the World Bank, Asian Development Bank, and European Bank for Reconstruction and Development—sponsored an initiative to help the seven low-income members of the Commonwealth of Independent States accelerate growth and poverty reduction.
  
  
• A review of the PRGF in March 2002 emphasized the need to build on progress in several specific areas, including designing policies to foster pro-poor economic growth, improving the quality and efficiency of government spending, coordinating program design with the World Bank, and enhancing communication with authorities, donors, and civil society in PRGF countries.
  
  
• Late in the financial year, the IMF reviewed the status of the HIPC Initiative and the movement toward long-term external debt sustainability. At that time, HIPC countries had received commitments of $40 billion (in nominal terms) in debt relief.

Technical Assistance and Training

IMF technical assistance supports the institution's surveillance and program work, and its importance has grown steadily in recent years. Recommendations emerging from the FSAP, the adoption of international standards, tracking indicators for the HIPC Initiative, and combating money laundering and the financing of terrorism have all increased members' requests for technical assistance.

• During the year, the IMF's Caribbean Regional Assistance Center was established; two more centers will open in late 2002 in East and West Africa under the IMF's Africa Capacity-Building Initiative.
  
  
• The IMF Institute increased training by about 9 percent over FY2001. A Joint Regional Training Center for Latin America was opened, bringing the number of such regional centers to five.

Organization, Budget, and Staffing

FY2002 saw several major changes within the IMF.

• The IMF bid farewell to First Deputy Managing Director Stanley Fischer and to Economic Counsellor and Director of the Research Department Michael Mussa and welcomed their successors—Anne Krueger and Kenneth Rogoff. Jack Boorman, who stepped down as Director of the Policy Development and Review (PDR) Department, retained his position as Counsellor and became a Special Advisor to the Managing Director. He was succeeded as PDR director by Timothy Geithner. Gerd Häusler joined the IMF as Counsellor and Director of the new International Capital Markets Department, which came into being in FY2002.
  
  
• The Independent Evaluation Office became operational.
  
  
• The IMF's internal budgeting process was reviewed by a panel of external experts, who made a number of recommendations. Some of these have already been put in place, while other changes will be introduced in FY2003 and FY2004.

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After the end of the financial year, on July 23, 2002, the Democratic Republic of East Timor became the 184th member of the IMF.