International Monetary and Financial Committee Meeting
April 16, 2000
| The International Monetary and Financial Committee member for the constituency consisting of Armenia, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Georgia, Israel, former Yugoslav Republic of Macedonia, Moldova, Netherlands, Romania, Ukraine. |
Also on behalf of the countries in my constituency, I would like to welcome Horst Köhler as the new managing director of the IMF. The management of this unique institution is a formidable task and Mr. Köhler can be assured of our support. I would like to thank Michel Camdessus for many years of hard work in serving and promoting the IMF, and compliment him on his excellent performance as IMF Managing Director.
1. The role of the IMF
The IMF was established in the wake of the Second World War to promote international monetary and financial stability and economic growth. Over the years, the Fund has performed this task exceedingly well. The Fund has thereby made a huge contribution to post war economic growth and prosperity. In recent financial crises, the IMF has provided much needed leadership that restored the calm in international markets. In the aftermath of the crisis, the Fund has taken important initiatives to make the international financial system more crisis-proof. The quest to strengthen the international financial system still has a long way to go. It is clear, however, that the IMF will remain at the heart of the International Financial System.
The success of the IMF has been facilitated by its near universal membership and its quota-based governance structure through which virtually all countries are represented. Having a say improves ownership of Fund policies throughout the whole membership. The IMF can survey all economies, both big and small, industrial, developing and emerging economies alike (including all 12 countries in my constituency). This contributes significantly to the credibility of the Fund as a neutral and expert adviser on economic and financial vulnerabilities and possible remedies. The Fund is not solely a crisis manager (a `fireman'). In the context of increasing capital flows, international co-operation to promote stability and growth entails more than crisis resolution. Strong emphasis should be put on the prevention of crises by: reducing moral hazard; improving the quality of information to allow markets to take efficient decisions; assisting all its members in developing sound macro-economic policies; and helping to restore balance of payments' imbalances, even if these are not of a short-term nature. Of course, the key starting point is regular surveillance of its members by the IMF.
The IMF has, and should continue to have, certain features that are paramount to its role in promoting stability in the monetary and financial relations between countries. The first key quality is the monetary character of the IMF. It can help countries that suffer balance of payments' problems, through the temporary use other countries' excess reserves. The second characteristic is its catalytic role. The purpose of IMF credit is to assist countries in their macro-economic adjustment as well as to restore confidence. Program conditionality can consequently be seen as the more important element of a Fund arrangement with a country in crisis than the credit alone. A third important quality of the IMF is the politically neutral stance of the IMF. The aim of the Fund should be to promote monetary and financial stability and growth (and accountability and good governance), irrespective of the political preferences of its members. Lastly, the effectiveness of the Fund can to a large extent be ascribed to its focus on its core business, macro-economic stability, which has contributed to the IMF being a relatively small and efficient organization. Its sister organization, the World Bank, has expertise on micro-economic and structural issues, which encompass issues like social standards. The IMF and the World Bank have complementary mandates, which automatically implies a need for efficient co-operation. Ideally, the World Bank should base its activities on the macroeconomic framework set by the IMF, whereas this framework should take account of the World Bank's strategy.
2. IMF facilities
The range of available credit facilities should reflect the needs of all different groups of members. The design of the different IMF facilities follows directly from the principles on which the role of the Fund has been and must remain based. The revolving character of the resources of the Fund can be maintained only if high exposure on members is avoided, and if the bulk of Fund resources released under programs is committed for relatively short time periods. This implies that the Stand-By Arrangement (SBA), which is short-term and has clear access limits, must remain the main vehicle for members' use of Fund resources. In view of the co-operative character of the Fund a significant spread between the rate of remuneration and the rate of charge on this facility is neither desirable nor necessary. The rate of charge on SBA and Extended Fund Facility (EFF) should continue to reflect the interest rate in the five largest members' money markets. After all, instead of demanding a risk premium on lending rates, the Fund can and should reduce lending risk through its conditionality. Furthermore, higher rates on these facilities reduce countries' ability to repay the Fund. However, the distinction between SBA and EFF can be sharpened. EFF's should be used only if structural problems are the cause of a balance of payment need. The EFF remains an important instrument of financial support to help members facing a long-term balance of payments need, like in many cases of transition economies.
The catalyzing function of IMF resources implies that the IMF must refrain from building financial assistance packages that substitute for private contributions. Only in truly exceptional circumstances can Fund financial support above the normal access limits for Fund credit be considered. In exceptional circumstances and for the two facilities without clear access limits (the Supplemental Reserve Facility (SRF) and the Contingent Credit Line (CCL)), clear mechanisms for private sector involvement are especially important. Countries applying for an SRF should publicly announce a strategy to restore market confidence. Front-loading should be accompanied by sufficient prior actions in that field. With respect to the CCL, our first priority should be to clarify the conditions under which the facility is granted in light of developments since its inception. For instance, the recently finalized codes on transparency regarding fiscal, monetary and financial policies and the implementation of the Basle Core Principles should be included as relevant standards for good economic policies. In any event, the eligibility criteria should not be weakened. The cost of a CCL should remain significantly higher than the SBA/EFF rate of charge. If the lack of interest among members for the CCL endures, the facility should be abolished, not `sweetened'.
3. Private sector involvement
More systematic and consistent private sector involvement in the prevention and resolution of financial crises is an indispensable element of the strengthening of the international financial architecture. Market participants should more adequately assess and price the risks involved in investment decisions on the basis of a country's underlying fundamentals. Transparency with regard to the IMF's approach to private sector involvement is key to effectively improving the workings of the markets.
Private sector involvement has to have a permanent character. Debtor countries and private creditors should seek to establish strong and continuous relations. Debtor-creditor relations, together with other instruments like collective action clauses and private contingent credit lines, should be implemented in normal times to create transparency, contribute to adequate risk management and promote the orderly resolution of crises when necessary. I welcome initiatives of several emerging market countries that have introduced one or more of these instruments. The IMF should promote the implementation of these instruments.
Private sector involvement should be sought in instances of acute crisis. It is vital that in these instances, the official community, and the IMF in particular, strikes the right balance between official and private finance. Investors should be aware of the fact that in times of crisis, a temporary reduction of net repayments may have to be accepted. We all agree that the objective of IMF assistance is to create medium-term sustainability and that the focus should be on comparability of treatment between and within a country's bilateral creditors. The challenge for the IMF in the coming period is to flesh out these principles. The IMF should become more predictable in its crisis management efforts, to provide a sound underpinning for the expectations of market participants about official actions in times of crises. At the same time, we should retain some flexibility to adapt our approach to crisis resolution to the specific circumstances of practical cases.
Specifically, the IMF should develop guidelines on the appropriate division of responsibilities between the international community, the debtor authorities and private creditors. These should contain the following elements. The decision on private sector involvement should be based on the relative size of the IMF-credit, the quality of a country's policies, the origin of the balance of payments problem and the sort of credit facility that is used. The IMF should indicate the relative contributions of official finance and private sector finance and/or domestic economic adjustment required to fill the financing gap in a way that is compatible with a sustainable medium term payment profile. Moreover, private sector involvement should be a standard element in arrangements that exceed the access limits, including all SRF and CCL arrangements. In future credit arrangements, the IMF should pay explicit attention to the role that private finance is expected to play in the financing of the adjustment program. When deciding on the Use of Fund Resources, the Board should be supplied with Staff's view on the extent and the modalities of the involvement of the private sector.
4. Fund surveillance, transparency and standards
Surveillance is the key contribution by the IMF to financial stability. The Fund should focus on its core areas of expertise. Core areas are the exchange rate, monetary and fiscal policies, capital account issues, and financial sector issues. In addition, the Fund should pay more attention to external vulnerabilities of economies to enhance awareness within the Fund of risks. Structural issues should also be dealt with, but only if deemed essential for maintaining macro-economic and financial stability. An important question regarding IMF-surveillance is how to strengthen its impact. The Board should look into ways of how to deal with countries that choose to ignore the advice from the IMF. An important instrument could be increased transparency.
Commendable progress has been made in the transparency of the Fund itself. Our constituency was the first to publish an article IV report (Aruba) and by now others of our group have done so as well (The Netherlands, Croatia, Bulgaria, and Israel). Several more are in the pipeline. However we should ensure that the increasing transparency does not negatively affect the policy discussions with members, which should be frank. Market participants and national authorities have their own responsibilities in the field of transparency and risk assessments. The Fund has a role to play in the monitoring of and assistance with the implementation of standards that lie within its core mandate, in the context of Article IV consultations. It should also promote the co-ordination of the monitoring of other standards set by different organisations. Transparency of the IMF to the outside public should not go at the expense of candour of IMF judgements or lead to pre-editing of relevant information. The Board should receive all the information it requires to make proper judgements. Recommendations issued on behalf of the Fund should not bypass the Board.
Transparency of the public and private sector and the corresponding standards are also important ways to increase financial stability. In this respect, I welcome the Code of Good Practices on Transparency in Monetary and Financial Policies and the new reserve template in the SDDS. However, in deciding on future work, each new proposal should be judged by its added value and its connected costs. In other words: we should work towards optimal transparency, not maximum transparency. Reports on the Observation of Codes and Standards (ROSCs) can be very useful, especially for emerging market countries. The same holds true for the Financial Sector Assessments (FSAs). Israel intends to undertake such an assessment. It looks though that given limited resources the implementation of all the above mentioned initiatives is somewhat delayed, so more efforts in prioritizing the activities is called for.
5. Safeguarding the use of Fund resources
Existing safeguards for the proper use of Fund resources by members must be strengthened. This issue is important as it has a direct bearing on the financial integrity and credibility of the Fund. IMF funds should, in principle, be made available only to members that can make clear that they have in place adequate systems for resource management, internal accounting and risk management. I support the recent initiative of the Fund to set up fiduciary assessments to make clear whether countries have in place appropriate safeguarding mechanisms, but I believe that this initiative must be widened to make sure that all users of Fund resources have adequate internal control mechanisms. Compliance by members with internationally agreed standards and codes can be important in diminishing the incidence of misreporting to the Fund. The Fund should assist countries in collecting accurate information. The availability of accurate information is especially relevant in situations in which decisions on Fund programs are based on such information.
6. Poverty Reduction and Growth Facility (PRGF)
With the transformation of the Enhanced Structural Adjustment Facility (ESAF) into the PRGF, the focus on poverty in IMF programs for low-income countries has been strengthened. Although I fully support this reorientation, in my view the IMF should not build up its own poverty expertise. Enhanced co-ordination with the Word Bank is thus more important than ever. The core task of the IMF remains to help countries establish macro-economic stability, which is an important precondition for economic growth and poverty reduction. In order to increase ownership of PRGF programs the IMF Annual Meeting has rightly supported the PRSP concept. The IMF and its members need to support countries in improving systems for data collection, so that adequate data will be available to be able to quantify and monitor the medium term targets as set out in the PRSP's.
7. World Economic Outlook
The US is experiencing a remarkable expansion of its economy as economic growth is even accelerating at this stage of the business cycle. Some deceleration of the US economy would have been welcome amid both internal (private borrowing) and external imbalances (current account). In the current situation of extraordinary strong growth rates policy mix considerations require special attention. Although most of the Asian and Latin American countries seem to have recovered from the financial distress at the end of the last century, they still need to address the underlying causes of the crisis. In light of the recovery in Asia, moderation of stimulative budgetary and monetary policies is recommendable. Future challenges include further financial sector reform, corporate restructuring and broader institutional, legal and regulatory reforms supporting market-based activities. It is crucial that the financial (banking) system is restructured and revitalized, before new capital starts to flow into the countries. In Latin America, fiscal consolidation needs to be pursued, as high external debt ratios are still abundant. Japan seems to be recovering, albeit slowly. The authorities need to push forward with the intended structural reforms, the deregulation and liberalization of the financial sector in particular. The events that took place in Kosovo last year have had negative effects on other countries in the region, many of which are in my constituency. I would like to call on the IMF to continue its enhanced support in the form of programs and assistance to the affected countries.
The Netherlands have been able to reap the rewards of deregulation and an improved functioning of the markets, as can be witnessed from the high growth, low inflation and low unemployment during the last few years.