Global Economic Outlook and Policy Responses

1. The spring meetings take place amid increasingly hopeful signs that the world economic slowdown has bottomed out, and that a global recovery is already underway. This constrasts sharply with the mood of the Ottawa meetings last November, when fears escalated that the loss of confidence and disruption of activity following the tragic events of September 11 would push the world economy precariously toward recession. Despite the encouraging global economic prospects, there remain risks to world expansion, if economic and financial imbalances, which persist among the major industrial countries, unwind in disorderly fashion. Policy makers across the globe will, therefore, continue to face important, if widely varying, challenges.

2. Recent economic indicators are suggesting that a global upturn is not only underway, but beginning to firm, confirming early expectations priced in in financial markets. Real sector data, particularly in the United States, indicate that the downside risk of unrealized market expectations has somewhat dissipated recently. A more front-loaded recovery of the U.S. economy led to an upward revision by 0.8 percentage point of its 2002 GDP growth, compared to March 2002 projections. After expanding by 2.5 percent in 2001, world output is now projected to grow by 2.7 percent in 2002 and 4.1 percent in 2003.

3. Whereas the baseline scenario has improved markedly since the interim WEO was released last December, several areas of concern remain. A source of risk refers to the various imbalances produced during the long economic expansion of the mid-1990s that could potentially be adjusted abruptly leading, for instance, to a correction of the U.S. dollar, and hence, to a brisk narrowing of the current account imbalances. Although this outcome cannot be ruled out, we attach a low probability to the risk of abrupt adjustments. Growth differentials are likely to continue to favor the U.S. economy, leading to slightly wider current account imbalances, while the fight against deflation in Japan may lead to a weakened yen vis-à-vis the U.S. dollar.

4. Another source of concern regards the evolution of the international price of oil in the near-future. High uncertainty regarding the security situation in the Middle East has augmented the volatility of oil prices and increased the likelihood that energy prices, which were originally expected to fall this year, could become more neutral, with an upside risk.

5. The macroeconomic policy stance in the major currency areas should remain supportive of the recovery. It is important that stimulus is not withdrawn before clearer signs of a recovery are sufficiently established, so as to avoid a significant adjustment in asset prices when the economy is still in a fragile position.

6. In the United States, recent indicators increasingly point to recovery, with market sentiment indicators rebounding, domestic consumption showing resilience, and manufacturing output bottoming out. Activity is picking up even more rapidly than projected, given all the policy stimulus not yet fully realized and the continued resilience of productivity growth. The United States' medium-term fiscal framework should be kept on a solid path to avoid that a deteriorating fiscal position gives rise to wider imbalances, further adversely affecting long-term interest rates.

7. Despite some signs of a possible bottoming out in economic activity in Japan, the authorities need to push ahead vigorously with measures directed at bank and corporate sector restructuring, which will remain the key to restoring confidence and reestablishing prospects for solid growth. Meanwhile, monetary policy needs to remain focused on ending deflation.

8. Recent business confidence surveys and a pick-up in industrial production point to an emerging recovery in the euro area. While the upturn is likely to be somewhat slower and come later than in the United States, Europe's strong fundamentals have contributed to global stability. Monetary policy should remain supportive even in the occurrence of a modest decrease in ex-ante real interest rates. In addition to maintaining a supportive macroeconomic policy stance, it is key that structural reforms be more thoroughly implemented, with special emphasis on labor market reforms, capital market integration, and trade liberalization.

9. It is of critical importance for all countries to resist protectionist pressures and to ensure that substantive progress is made with multilateral trade negotiations under the Doha round. In particular, advanced countries must decisively address their trade policies and trade-distorting subsidies that hamper macroeconomic prospects and have adverse implications for developing countries' market access. In this respect, the recent decision by the United States to provide unjustified protection to its steel industry has been disappointing.

10. The prospective recovery in industrial countries should play a central role in supporting activity in emerging markets, along with continued efforts by these countries, aimed at strengthening economic fundamentals, to reduce vulnerability and enhance potential output growth. More consistent macroeconomic frameworks in many countries, with stronger fiscal positions and increasing reliance on floating exchange rate regimes, have strengthened the resilience of these economies to confront adverse external shocks. In addition, swift policy adjustments in major emerging markets, together with the financial support channeled through the Fund, contributed to limit the degree of contagion from Turkey and Argentina in 2001 and early 2002.

11. Economic performance in Latin America in 2002 will likely be uneven across countries. The recovery should be strong in Mexico and Central America, in tandem with the economic recovery in the United States. The situation in Argentina remains very difficult, with a significant contraction in output in 2002 appearing unavoidable. The adoption of a floating exchange rate regime, the pact with the provinces, and the passage of a tight budget by congress provide a strong indication of the resolve and commitment by the Argentine authorities to address the financial crisis. It is clear, however, that it would be very costly to Argentina to overcome this difficult situation without financial support from the international community. We call on the Fund to move quickly to conclude an arrangement with Argentina and on the World Bank and IDB to remain supportive of the efforts of the Argentine government.

12. Despite the deterioration in the economic environment in 2001, Brazil kept its economic program on track. The size and scope of shocks, of both external and domestic origins, severely tested the country's macroeconomic framework. Sustained fiscal discipline, a floating exchange rate, and pre-emptive monetary policy formed a consistent macroeconomic basis that allowed the country to respond flexibly and swiftly to a challenging economic environment in 2001. Economic activity weakened significantly in the last three quarters of 2001, and the year ended with a modest GDP expansion estimated at 1.5 percent. Recently released economic data, however, indicate that an upturn is underway. Business and consumer confidence indicators convey a widespread perception of improved economic conditions and outlook. GDP is projected to grow around 2.5 percent in 2002, based on a positive contribution by net exports and on a rebound in private consumption and investment. The renewal of IMF financial support was also important in maintaining foreign investors' confidence during the turbulent second half of last year. Given improved external market conditions, the Brazilian government announced that it will treat the program as precautionary from now on, and will pay ahead of schedule all SRF resources that were drawn last year. Maintenance of the current macroeconomic framework and policies, together with further progress in structural reforms, will allow Brazil to achieve in the coming years higher economic growth, in a context of lower inflation and external viability.

13. Notwithstanding the adverse international economic environment and the very difficult internal security situation, Colombia has continued to make progress under its economic program. Policy implementation has been satisfactory and a number of significant reforms have been implemented. Economic growth is recovering and GDP growth is projected at 2.5 percent in 2002. Colombia has enjoyed successful access to international capital markets and the exchange rate, under a flexible regime, has shown remarkable stability. Inflation has continued to decline and the annual 6 percent target is clearly within reach, thanks to the successful implementation of its inflation targeting framework. The economic upturn in the United States will help Colombia to increase exports and support its economic recovery.

14. While the section of the World Economic Outlook assessing the causes behind the incidence of debt crises in Latin America presents some interesting points, it is important to guard against generalizations across countries and to recognize recent progress. Some countries in the region have been able to reduce macroeconomic vulnerability by means of fiscal consolidation and adoption of floating exchange rate policies, along with progress made in enhancing credibility of their monetary policy regimes. There has also been progress in the deepening of domestic capital markets, which has contributed to limit external vulnerability. While there may be high macroeconomic volatility in Latin America, strong prudential regulation and financial system supervision can work as an effective deterrent to avoid that volatility be transformed into vulnerability.

Strengthening Crisis Prevention and Resolution

15. A central mission for the Fund is to make surveillance more effective in influencing policy outcomes in member countries. Quality of the policy dialogue is the single most important factor in enhancing the effectiveness and impact of surveillance.

16. Several crisis prevention initiatives that have been launched since the Asian crisis are beginning to bear fruit. In addition to crisis prevention, it is important that Fund surveillance places greater attention to the positive and negative externalities on other members of domestic economic and financial policies of individual countries. This is particularly important with respect to the main industrial countries. The global and regional impacts of policies of the major industrial countries need to be placed high in the hierarchy of concerns to be addressed by Fund surveillance, being accorded equal priority as external vulnerability in emerging markets. This should be done both in bilateral and multilateral surveillance. Given the cooperative nature of the Fund, uniformity and even-handedness of treatment are paramount aspects of the surveillance process that need to be constantly monitored. Trade issues, including those related to trade-distorting subsidies and non-trade barriers, for instance, should be covered not only in the case of countries with serious trade distortions that hamper their own development prospects, but also in large advanced economies, whose trade policies have adverse implications for developing countries' market access.

17. A recent example of high quality multilateral surveillance was the in-depth analysis of the market for credit transfer instruments in industrial countries contained in the new Global Financial Stability report. The analysis was not only opportune, but also relevant to assess developments in credit markets with potential repercussions far beyond national financial systems.

18. Surveillance in program countries tends to be more effective in generating concrete policy actions, when compared to non-program countries. For the duration of Fund programs, given the importance of restoring market confidence and of solving the acute problems which led to the program, it may be natural that program activities take precedence over surveillance. Having two separate sets of assessments by Fund staff for the same country during the same period of time would create confusion for the authorities, market participants, and the public in general. However, in cases of programs off track, repeated programs, or prolonged use of Fund resources, it makes sense to have a fresh pair of eyes looking into the overall economic strategy and policy options. These are tasks that go beyond surveillance and which involve program design and review.

19. In addition to crisis prevention, the Fund has been working in a number of areas to strengthen the framework for crisis resolution in extreme circumstances. When an external debt restructuring cannot be avoided, it is important to minimize the costs of such painful process for all involved -the country concerned, its creditors, the other debtor countries in the same class, and the international community. While there are shortcomings in the current debt restructuring process, the same can be said with respect to proposals recently made to establish a statutory framework for sovereign debt restructuring. Careful assessment is needed of the potential costs and benefits of alternative approaches vis-à-vis the current process of debt restructuring. Any new initiative in the area of crisis resolution should not contribute to increase the likelihood of debt restructurings when they are not needed, should not contribute to reduce international capital flows or increase borrowing costs to other borrowers in the same class, and should not put at risk the formation of domestic savings and the development of domestic debt markets. Moreover, we should not underestimate the importance of international cooperation in providing financial support for crisis resolution.

20. The framework agreed by the international community in Prague recognized these trade-offs and emphasized the reliance on market-oriented solutions and on voluntary approaches, stressing that contracts must be honored to the fullest extent possible. These principles should continue to inform the Fund's work in the area of crisis resolution, including the work on debt restructuring. A purely contractual approach to be agreed between debtors and creditors to make collective action easier in sovereign debt restructuring is a preferable alternative to statutory approaches.

21. It would be important not to rush the analysis and discussion of this complex issue. Getting it right is more important than doing it fast. Moreover, there is a major debt restructuring unfolding in Argentina, on which it would be important to have the Fund constructively engaged so that all of us could learn from that experience.

Size of the Fund and Distribution of Individual Quota Shares

22. The Fund has been able to combine universal membership, weighted voting power giving majority control to creditor countries, and a relatively small governing board organized around country constituencies - characteristics that have endowed it with its superior operational agility and efficacy. Preserving the legitimacy of this organizational arrangement depends on the ability to appropriately adapt the quota structure to better reflect both changes in the world economy and in the relative economic position of member countries. Arriving at a consensus on a new quota formula that can better support these objectives is an essential aspect in designing the new architecture of the international monetary system, and should be treated with the corresponding priority.

23. Over the years, the aggregate quotas of the Fund increased at a considerably slower pace than world GDP, international trade, and international capital flows. The shrinking relative size of the Fund, along with under representation of a number of fast-growing emerging market economies, have required that financial support of the Fund during financial crises become a large multiple of the member's quota, with sometimes complementary support by bilateral official financing. Part of what is considered as large access to Fund resources may, in fact, be a combination of a small aggregate size with an inadequate quota share distribution. While progress in increasing private sector involvement in the resolution of crises is a useful complementary initiative, it cannot solve the issues of the shrinking relative size of the Fund and the inadequacy of the current quota formulas, which need to be addressed on their own, during the Twelfth General Review of Quotas.

Streamlining Conditionality and Enhancing Ownership

24. We wish to thank the Managing Director for his personal interest and leadership in streamlining conditionality, and searching for ways to enhance country ownership. Streamlining does not intend to weaken conditionality, but to make it better targeted and more effective, increasing the success of Fund programs.

25. While there was substantial streamlining conditionality in PRGF arrangements, less progress was made in stand-by arrangements. Also a large portion of structural conditionality still lies outside core areas of the Fund. Greater and more explicit effort should be made to demonstrate, in every case, that conditionality in non-core areas are included only when they are critical to the success of the program, such as when they have large impact on the fiscal and external balances. The significant increase in the use of prior actions, beyond those measures whose effects are needed prior to the commencement of the program, may create costs to members by unduly delaying needed Fund assistance.

26. Greater use of outcomes-based conditionality and of floating tranche disbursements should also be considered on a case-by-case basis. Giving symmetric treatment to privatization revenues and investment expenditures of state-owned enterprises and the possibility of some carry-over of fiscal over- or under-performance at year end are technical issues related to conditionality that need to be examined by the Fund.

Combating Money Laundering and the Financing of Terrorism

27. The abuse of the financial system for money laundering, financing terrorism and the practice or support of criminal activities can have significant adverse economic consequences, both at the national and international levels. It can compromise the integrity and create reputational risks for domestic financial systems, generate negative cross-border externalities, and distort the efficient allocation of resources worldwide. These reputational risks arise from important ethical considerations, since the world's public opinion will no longer tolerate the use of the financial system as a hideout for ill-gotten money, or as a conduit for financing criminal activities.

28. Our chair will continue to give strong support to the IMF's involvement in the fight against money-laundering and the financing of terrorism, in a manner that is consistent with the Fund's mandate and expertise and that respects the cooperative nature of our institution. We are pleased with the progress achieved so far in developing a methodology for assessing countries' efforts in combating money laundering and the financing of terrorism, and hope that it will lead to the approval of a ROSC in this area that is applied in a uniform, voluntary and cooperative way.

29. We are pleased to report that our constituency has responded swiftly to the IMFC's call last year for increased efforts in combating money laundering and the financing of terrorism. Brazil, which is a member of FATF and is fully compliant with all the FATF 40 recommendations, signed last November 10, 2001 the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism and is submitting the Convention for approval by Congress. The United Nations Security Council Resolutions 1267, 1269, 1333, 1373 and 1390 dealing with prevention and suppression of the financing of terrorist acts have been implemented by Brazil. As a member of FATF, Brazil has recently completed a self-assessment questionnaire about the eight special recommendations approved in October 2001. According to the FATF, Brazil fully complies with six of the special recommendations and partially complies with recommendations 1 and 2 since it has not yet ratified the UN Convention for the Suppression of the Financing of Terrorism. Terrorism and terrorism financing were already considered crimes by Law 7170, of December 14, 1983, and predicate offences of money laundering, according to Law 9613, of March 3, 1998. The Brazilian legislation authorizes the freezing of assets of terrorists, even if the terrorists' names do not appear on the list approved by the United Nations. However, as of March 2002, no terrorist funds have been detected in Brazil. COAF, the Brazilian Financial Intelligence Unit (FIU) is responsible for receiving reports on any suspicious transactions as well as examining and identifying occurrence of money laundering. COAF is also responsible for coordinating cooperation and exchange of information. Since its establishment in 1998, COAF has received and analyzed 13,842 suspicious transaction reports and has recorded 205 cases of exchange of information with other countries' Financial Intelligence Units.

30. Colombia, which is currently a member of the U.N. Security Council, has implemented Resolution 1373 and submitted a report to the Counter Terrorism Committee pursuant to paragraph 6 of the Resolution. Colombia's financial regulations incorporate the principles of know-your-customer, reporting suspicious transactions to the FIU, adopting codes of conduct and implementing the Integrated System for the Preservation of Money Laundering. Colombian criminal law severely penalizes activities such as money laundering, terrorism and managing of assets related with terrorist activities. In April 2001, Colombia's anti-money laundering efforts have been evaluated, at its own request, by the South American FATF (GAFISUD). The Colombian authorities have made public the lists of terrorists issued by the U.N. Security Council and required all financial institutions to report any transactions with enlisted persons. Colombia established its Financial Intelligence Unit in 1999 and is a member of the Egmont Group.

31. In the Dominican Republic, which currently has the chairmanship of the Caribbean FATF and is a member of the Egmont Group, Congress approved in March this year a modification of Law 50-88, widening the definition of predicate crimes for money laundering to all crimes punishable with prison terms longer than three years, which includes terrorism. UN Resolutions 1267, 1333 and 1373 have been presented to Congress for approval. The Superintendence of Banks has issued instructions to financial institutions to freeze any funds in the names of persons listed as having links to terrorist activities. In tandem with these initiatives, the Superintendence of Banks made it mandatory for all banks to implement the "Guide to Prevent Money Laundering Activities". A new draft law that allows for bank secrecy to be waived and provides for strengthening of anti-money laundering capacity was approved this February by the Central Bank Board and will be submitted by the Executive to Congress.

Fund's Support to Low-income Countries

32. We wish to commend the Managing Director for the open and inclusive review of the PRSP process, where important contributions were made by representatives from low-income countries. The PRSP process has generated a stronger sense of ownership among governments and has given a more prominent place to poverty reduction in policy debates. PRSPs are also the key instrument through which donors can better align their concessional assistance with the low-income countries' priorities. Donors need to actively seek to reduce the administrative burden of aid procedures on recipient countries, increase the amounts of assistance, and improve the predictability and timeliness of aid flows. There is also need to place increased attention on the sources of growth both in PRSP and in PRGF-supported arrangements. More emphasis needs to be given to measures that can increase productivity, accelerate economic growth, and create an enabling environment for the private sector investment.

33. While welcoming the progress achieved under the enhanced HIPC Initiative, we believe that the retroactive country cases need to move faster towards reaching the completion point. The remaining eligible countries, most of which are post-conflict cases, also need to be brought to their decision points, as soon as conditions permit. The Fund needs to continue working with the authorities in these countries to develop sufficiently flexible strategies for moving towards debt sustainability.

34. The worsened international environment, compounded by the decline in agricultural commodity prices, has negatively affected developing countries and especially HIPCs' export earnings, growth, and revenue performance over the last two years. This has deteriorated the external debt sustainability outlook for many HIPCs and increased the risk that some countries could relapse into an unsustainable debt situation over the course of the decade. There is also need for more realistic export growth assumptions in the debt sustainability analysis (DSA). Topping up or additional relief at the completion point may be required for those HIPCs that are pursuing good policies but were adversely affected by exogenous circumstances.

35. Debt relief, however, is not an aim in itself. Less-developed countries should be given greater trade access, receive higher foreign investment flows and improve their participation in the international economy as means to achieve higher economic growth. We are encouraged by the results of the Monterrey Conference and look forward to post-Monterrey actions with similar level of engagement.