Minister of Finance of Belgium
International Monetary and Financial Committee
Washington, D.C., April 16, 2000
| The International Monetary and Financial Committee member for the constituency consisting of Austria, Belgium, Belarus, Czech Republic, Hungary, Kazakhstan, Luxembourg, Slovak Republic, Slovenia, Turkey. |
The countries in our group would like to pay tribute to the accomplishments of Mr. Camdessus during his 13-year tenure as Managing Director of the International Monetary Fund. They also wish to assure the new Managing Director, Mr. Köhler, of their full support.
1. World Economic Outlook
It is encouraging that the world economy is recovering so rapidly from the financial crisis of 1997–98. The recovery can be seen in every country that suffered a significant drop in economic activity. The latest World Economic Outlook projects positive growth for every economy it covers.
The picture in Southeast Asia is truly remarkable. Korea's case is illustrative. The World Economic Outlook of October 1998 projected that Korean GDP would decline by 1 percent in 1999, but in actuality it increased by over 10 percent. Actual outcomes exceeded expectations in other countries as well. Having seriously underestimated the Asian crisis at its beginning, we have finished by underestimating the ability of the affected economies to recover quickly.
From this I draw three conclusions: First, before the crisis the IMF and other analysts failed to detect the vulnerabilities building up in the Asian economies, because they were masked by strong growth. Second, the response—consisting of sizable and swift external financing, tight monetary policy, relatively easy fiscal policy, and structural and institutional reforms—was successful. It quickly brought the desired results of financial stability and renewed rapid growth. The recovery also had the support of favorable external conditions, including strongly growing imports in the advanced economies and a reversal of the decline in commodity prices. Third, we must energetically pursue the reformation of the international financial architecture, with special attention to crisis prevention.
The fact that growth has been stronger than expected must not be permitted to weaken the implementation of the remaining structural reforms. It is one thing to achieving rapid growth following a steep recession, but quite another to make that growth sustainable. There are still serious problems and weaknesses in the financial sectors and corporate balance sheets of some of these countries, and until they are cleared up their economies will remain at the mercy of adverse shocks.
Japan could contribute importantly to a durable Southeast Asian recovery. It is therefore disappointing that despite repeated massive fiscal stimuli, Japan's economic growth remains fragile. The room for further fiscal stimulation is disappearing rapidly due to the high public debt. There is skepticism about the usefulness of further monetary easing. The only other way of stimulating economic growth is to implement much needed structural reforms such as liberalizing domestic markets and strengthening the financial system. There, it is needful to finish, quickly, the work of purging bad loans from bank balance sheets so that financial mediation can resume. The future holds other important tasks, which include completing the structural reformation of the financial system to make it more effective and competitive.
In most Latin American countries the recovery is less impressive than in Southeast Asia, but even so things are much better than expected. The speed of Brazil's recovery from the crisis of early 1999 was remarkable, and owes much to the authorities' decisive efforts to correct the main weaknesses in their economy. In Latin America as in Asia, better than expected outcomes should not lead to complacency. Many countries, including the largest, still have big current account deficits and large external financing needs, and are thus still hostage to changes in external conditions. Unless they can reduce their reliance on external savings, their growth prospects will remain unduly dependent on developments in the international capital market.
The robust growth in the United States makes a large contribution to recovery in the emerging market countries. But economic success confronts policymakers with new challenges. The growth of domestic demand continues to outpace the growth of production, producing a series of imbalances. The large and growing current account deficit will cause problems if foreign investors become less willing to purchase claims on U.S. economy. The wealth effects of high stock valuations has further depressed private savings. Despite the budget surplus, U.S. growth depends heavily on external financing. Monetary policy should remain focused on its main objective of maintaining price stability, but cannot afford to ignore the growing effects of equity market developments on consumption and investment. Meanwhile, fiscal policy must be careful not to worsen the imbalance between domestic demand and supply.
European growth is becoming stronger and stronger. In addition, it appears that private sector employment is increasing faster than during previous upswings. Despite the recent increase in interest rates, the ECB's monetary policy remains supportive of economic growth. The European Monetary Union's first year was a success, and the common currency has already brought important benefits, including the rapid growth of the corporate debt market and increasing merger activity. But for the countries of Europe to harvest the full benefits of monetary union, the remaining structural rigidities must be decisively addressed.
In today's world of highly mobile capital, Europe cannot afford conditions that are less attractive to investment and entrepreneurship than conditions in other countries. This is why the European Union, at the recent Lisbon meeting of the European Council, agreed on a new strategy to make itself, during the next decade, the most competitive and dynamic knowledge-based economy in the world, capable of sustained growth with more and better jobs and greater social cohesion. Flexible, dynamic product markets combined with a highly productive labor force created by a comprehensive system of education and training that is open to all, under an effective and modern welfare state: this is the European model.
Worldwide conditions are presently favorable and the European Union's macroeconomic outlook is the best in a generation. This provides a good opportunity to speed up reforms in the areas where much has still to be done, the labor market and product markets such as telecommunications and the internet being obvious first priorities. Strong growth should also help relieve adjustment fatigue, enabling countries to step up their fiscal consolidation and reach the objectives of the Stability and Growth Pact. For the faster growing countries in the Union, a more restrictive fiscal policy should be the main means of avoiding overheating, so as to allow monetary policy to continue supporting growth in the interests of the whole Euro area.
Strong economic activity in western Europe will also assist rapid growth in the transition economies of central and eastern Europe. The far reaching structural reforms already implemented have produced strong growth and confidence in the countries closest to membership in the European Union. With their transition now largely complete, these countries can focus on preparing themselves for EU accession. While they have made good progress toward aligning their inflation and public deficits with EU levels, further work remains to be done in adjusting their economies and legal frameworks to reach EU standards.
It is welcome that 1999 saw Russia, too, finally achieving relatively strong growth. But Russia's relatively good macroeconomic performance comes mostly from the positive effects of ruble depreciation and the increase in oil prices, and will not be long sustained without further efforts to address the long-standing structural and institutional issues.
At the end of 1999, Turkey launched a disinflation program supported by a stand-by arrangement. It includes a large front-loaded fiscal adjustment, a preannounced crawling exchange rate peg, and an ambitious set of structural reforms most of which were approved by parliament at the outset of the program. They include reforming the pension system, accelerating privatization, reinforcing the banking sector, and overhauling the system of financial support for agriculture. The initial results are encouraging: domestic interest rates fell from 90 percent in November 1999 to 35 percent last month, and Turkey's access to the international markets has improved as expected. All this contributes to Turkey's remarkable economic turnaround, with growth now expected to exceed 5 percent this year.
Despite the rapid improvement in the world economy's growth prospects, we must not forget that this improvement is unevenly distributed, with many countries remaining extremely poor. Global prosperity cannot be sustained unless it is widely shared. Helping the poorest countries to break the vicious circle of poverty, low growth, and high indebtedness will be among the most important challenges facing the international community in coming years. The international community must contribute its share, not only by providing debt relief where this is needed and deserved, but also by opening their market to exporters from the poor countries. On their side, the authorities of poor countries must accomplish the needed reforms and improve their policy implementation so that the resources freed up by debt relief can be effectively used for poverty alleviation and improving human resources through better education and health care.
2. The Role of the Fund
To promote growth, employment, and welfare everywhere, the world needs orderly international monetary and financial relations. By joining the IMF, countries commit themselves to the pursuit of these objectives. "The Fund is much more than a crisis lender. Through surveillance and technical assistance, as well as through lending, it is a powerful force for good macroeconomic policies and the prevention of crises around the world," as Acting Managing Director Fischer said before the International Financial Institutions Advisory Commission.
To the countries of our group, advanced economies, transition economies, and emerging market economies, the Fund has given valuable advice on the conduct of macroeconomic policies and the reforms that are needed to prepare them to benefit fully from integration into the world economy.
The Fund's financial support enables countries to achieve progress greater than would otherwise be possible, thanks to its disciplining effects and the increased credibility it lends to countries' policies, domestically and in the international markets.
It is fair to say that the Fund has greatly helped the Czech Republic, Hungary, Slovenia, and the Slovak Republic in their transition toward market economies and to have advanced so far in their preparations for EU accession. Kazakhstan is another good example of a country that successfully implements adjustment policies in the framework of a Fund program though it does not need financial assistance on other than a precautionary basis. The cooperation between the Fund and Turkey, and the present stand-by arrangement, offers another striking example of the unique and indispensable part played by the Fund in helping them find coherent and definitive solutions to long-standing problems. Fund advice will also help Turkey prepare for EU membership.
Worldwide, there are many other cases that exemplify the Fund's indispensable role, not least in the poorest countries. The Fund's involvement in the less developed countries promotes the macroeconomic stability they need for sustainable growth and durable poverty reduction. It gives the donor community the assurance that their assistance will be used to maximum effect.
Admittedly the Fund has not always achieved its goals. In most cases failure was due to the difficulties countries encounter in implementing the policies they need. But the Fund, too, must constantly improve its performance, the quality of its surveillance, and the effectiveness of the programs it helps countries design and implement. Much progress has already been achieved in improving surveillance. It is altogether fitting that the further improvement of surveillance figures on today's agenda. The same hold true for the review of the Fund's lending instruments.
The Fund's indispensable expertise and universal membership give it a legitimacy not possessed by other bodies, which cannot take its place at the center of the international monetary and financial system. The Fund's actions and policies must continue to respond to the needs of the whole membership, while taking into account of the new challenges presented by economic and financial globalization. The Fund's effectiveness can be maximized by close cooperation with the World Bank and appropriate collaboration with other institutions.
3. Reviewing the Fund's Facilities
The SBA and SRF have been very helpful in carrying out the Fund's mandate: they do not need drastic changes.
Countries without immediate balance-of-payment needs but threatened by financial contagion should be entitled to relatively high precautionary access, provided their policies are strong.
The fact that no country has yet requested a CCL is no reason for easing its eligibility criteria. Eligibility for the CCL is in itself a mark of excellence that increases a country's resistance to contagion. Countries should strive for that distinction. The large amount of credit under a CCL justifies an interest rate higher than that of an SBA.
Several poor countries and transition countries facing protracted balance-of-payments problems, still need medium-term Fund financing when implementing basic structural reforms. Access to the EFF should be limited to these countries. It should no longer be used by relatively well-performing emerging economies, nor on a precautionary basis. All EFF credits should be reviewed after four years to see if early repayment, before the standard ten-year term, is feasible.
The revolving nature of Fund resources should be ensured by strictly requiring early repayment once the balance-of-payments outlook improves, rather than by raising the interest rate on normal amounts of credit. Prolonged use of Fund resources by poor performers should be remedied by prudence in the renewal of Fund credits, by requiring prior actions, and by frontloading program implementation.
4. Private Sector Involvement in Resolving Crises
Fund financing should not distort market behavior. General principles should be established specifying when concerted action will be needed to ensure that private credit is maintained rather than replaced by official credit. Instruments should be further developed to make concerted actions more effective. All this will influence market behavior and limit moral hazard.
Countries should take advantage of good times to establish and maintain close relations with their creditors. Fund surveillance should include the assessment of those relations.
Normally, sound policies backed by a moderate amount of Fund credit will suffice to persuade private creditors to finance most of a country's balance-of-payments needs. Continuing this kind of lending, known as "catalytic," will help avert moral hazard.
But when access to Fund resources in excess of the normal limits is required to counter a temporary loss of confidence, concerted actions should be taken to involve the private sector. Fund-supported programs should aim at stabilizing the country's finances in the medium-term through a balanced mix of adjustment and financing including participation by the private sector. The Fund should review and assess the country's own efforts to finance its balance of payments with private resources. All existing creditors, public or private, and all important categories of credit instruments, should participate on comparable terms.
In the worst cases, where a country runs out of foreign exchange reserves, a temporary suspension of its external debt service may be unavoidable pending agreement with the Fund on a satisfactory adjustment program. Countries should consult with the Fund before taking such drastic steps, which may damage its own and other countries' access to capital markets.
In the exceptional circumstances when a country needs to suspend the service of its external debt, the Fund can lend to that country only if it continues to negotiate in good faith with its creditors to obtain that they remain involved in the resolution of the crisis in accordance with the financing plan under the Fund-supported program.
The idea of extending the Fund's jurisdiction under Article VIII 2(b) to the suspension of sovereign external debt payments and temporary, non-discriminatory exchange restrictions on capital outflows should be considered further. By approving such measures, strictly limited to what is necessary, the Fund can contribute to the workout of a severe balance-of-payments crisis that is less disruptive for the country, its creditors, and the international community.
5. Strengthening Safeguards on the Use of Fund Resources
Reliable information is essential for the functioning of the Fund, and for ensuring that the Fund's resources are used for their intended purposes. There have recently been cases where inaccurate information led to continuation of Fund credit when it was no longer justified. Misreporting of data to the Fund is worrisome. It impairs the Fund's ability to monitor members' policies and may destroy trust between the Fund and a member. It weakens the Fund's standing with the public, and impairs its ability to provide financial support.
I welcome the Board's decision to strengthen ex ante safeguards and to conduct "safeguards assessments" to verify whether the internal control, accounting, reporting and auditing systems of central banks of countries borrowing from the Fund are adequate to ensure the integrity of operations. These assessments will be limited to central banks and other agencies in charge of foreign reserve management operations. However, cases have also occurred involving misreporting of fiscal data. Safeguards assessments should therefore, over time, be extended to ensure reliability of fiscal data as well.
I also welcome the Executive Board's intention to tighten the rules on remedial measures in case of misreporting. The guiding rule should be, that if a country has received payments from the Fund without entitlement, because the data supporting the decision to pay were erroneous, that country is obliged to repay any proceeds which the Board determines were paid on the basis of the incorrect information, and that would not have been paid on the basis of the correct data.
This rule should apply to any payment made under any Fund credit tranche, Fund facility, PRGF loan, or HIPC operation.
The current two-year statute of limitations should be changed to allow recovery as long as improperly disbursed credit tranches are outstanding.
Cases of misreporting should be investigated impartially and thoroughly. To avoid conflicts of interest and protect the future working relationships between the Management and staff and the country concerned, cases of misreporting should be investigated by an independent panel and should not use auditors engaged at the time of the suspected misreporting.
I urge the Board to implement these decisions forcefully. I am certain that enhanced frameworks will preserve the cooperation and trust between the Fund and its members.
6. Review of Fund Surveillance and Links With Standards and Codes
The Fund's surveillance over exchange rate policies and balance-of-payments sustainability has changed substantially since the Mexican and Asian crises. It needs to change further.
For many years, the Fund assessed countries' financial positions by means of a financial programming model based primarily on flows such as fiscal and current account deficits or savings/investment imbalances, rather than on financial stocks or values-at-risk. The Asian crisis has shown the limitations of this approach. Surveillance must increasingly use stress testing to determine what values are at risk from interest rate or exchange rate volatility. This requires thorough analysis of the consolidated balance sheets of all important sectors of the economy: the government's accounts, the central bank's accounts, the banking sector's accounts, and—unavoidably—the accounts of the corporate and household sectors.
This analysis must measure maturity mismatches and exchange rate exposures. It must determine what can be done to reduce or better manage financial vulnerabilities throughout the economy. This will promote stability and a better risk/growth mix. This approach will require the development of macroprudential indicators and debt- and reserve-linked indicators of external vulnerability, and will provide a better integrated assessment of a country's liquidity and balance sheets.
The present practice of selecting what non-core issues should be dealt with based on their macroeconomic relevance is valid, but may be difficult to implement in practice. For one thing, sometimes macroeconomic relevance can only be seen in retrospect, and can only be demonstrated by a detailed study of the issues. A case in point is the recent Asian crises, which stemmed from poor governance in the financial and corporate sectors which did not seem to be part of the Fund's core business.
Including non-core issues in Fund surveillance does not mean that the Fund itself should always find solutions to the problems it identifies. Other institutions and forums possess a wealth of expertise which the Fund should not hesitate to use.
Examining the stability of financial systems is clearly a core responsibility of the Fund, linked to its mandate to protect the stability of the international monetary and financial system. Monitoring countries' compliance with standards and codes of best practices is very helpful. The Fund must take the lead in identifying financial weaknesses in all countries, including a financial system's vulnerability to suddenly reversing capital flows. The World Bank is responsible for assisting its borrowers to develop their financial systems. Close Fund/Bank collaboration is required.
7. Progress on the HIPC Initiative and Poverty Reduction and Growth Strategies
Among the Bretton Woods institutions, the primary responsibility for poverty reduction belongs to the World Bank. The Fund must seek the Bank's advice on how macroeconomic policies and related structural reforms can best contribute to poverty reduction.
But the responsibility for reducing poverty belongs even more closely to the poor countries and their people than to the international financial community. Ownership is what matters most. The Bretton Woods institutions must continue to base their efforts on poverty reduction strategies designed by the country's government in close consultation with lawmakers, the business community, labor unions, and NGOs working with the poor. Such collaboration will strengthen the country's ownership of its poverty reduction strategy and the policies it entails.
The present pace of debt relief should be speeded up. The Fund and World Bank should consider how this might be done within the present framework. By the same token, the countries to benefit from debt relief must speed up their plans for ensuring that the resources freed by debt relief are properly spent.
Debt relief alone will not get the poor countries onto a sustainable development path. For too many Central African countries, a perpetual state of war is the major obstacle to economic and social development. Only when these countries' leaders have shifted their attention away from nonproductive activities and toward economic and social progress can international assistance go beyond humanitarian assistance. The recent ceasefire in the Democratic Republic of Congo could mark the beginning of a new era of reconstruction and progress, aided by the full support of the international community.
The HIPC Initiative and poverty reduction strategies must also be promoted by giving exports of low income countries unrestricted access to industrial country markets and by limiting export credit on non-concessional terms to poor countries. To monitor adherence to these understandings, I suggest that the advanced countries voluntarily agree to review their own practices in these matters during their Article IV consultations.