The IMFC meets at a time of heightened risk and uncertainty. There is concern over the consequences of the conflict in Iraq, which comes on top of an already weak and vulnerable global economy.

In this environment, the IMFC must demonstrate that there is international resolve to help restore confidence and ensure that the global economic recovery reasserts itself.

Each national policy maker has the responsibility to ensure that their policies are appropriate to their economy's circumstances and consistent with the objective of achieving sustained economic growth. In an increasingly integrated world, it is also important that the external effects of national policies, particularly those of the larger economies, are recognised.

International cooperation is vital, now more than ever. We must ensure that the international economic organisations fulfill their mandates. The IMF has a key role to play in helping to strengthen the global economy and in responding to the needs of members, including assisting those who are adversely affected by the conflict in Iraq. It is also vital that the Doha trade round succeeds and that the World Trade Organisation ensures open and fair markets so that all nations can benefit from increased world trade. We must translate rhetoric about the need for international cooperation into concrete action.

The Global Economy and Financial Markets

In recent months, the prospect of conflict in Iraq has weighed on financial markets, driven oil prices higher and adversely affected consumer and investor sentiment. The focus now is on what the conflict may mean for the global economic recovery, and here considerable uncertainty exists. The outlook for the global economy will be influenced by how quickly this high degree of uncertainty abates. Oil prices are also critical, as continued high prices will have a depressing effect on global growth.

The global economy and financial markets have been resilient despite a series of major shocks in recent years, such as the tragic events of September 11, 2001, crises in a number of emerging markets, and the collapse of some major corporations in the United States.

Yet while displaying commendable resilience, the recent bout of uncertainty has impacted on a world economy which was already vulnerable. Even before concerns about the conflict in Iraq began to dominate attention, there was increasing uncertainty about the strength of the global economic recovery.

In all of the major economies - the United States, Japan and the euro area - pressures and difficulties are evident. In the United States, while supporting activity in the short run, consumer spending and increasingly large fiscal deficits are exacerbating longer-run imbalances and pose adjustment risks down the track. Unfortunately, if the recovery in the United States falters, there is little prospect of growth in Japan and the euro area providing support to the global economic recovery. In both Europe and Japan, near-term growth prospects appear to be relatively weak while financial sector pressures, especially in Japan, remain a constraint. The result is that global imbalances are likely to continue to rise and the possibility of a disorderly adjustment remains a risk. Beyond the major economies, many emerging markets face significant risks and growth prospects for many developing countries remain heavily dependent on the major economies. One relatively bright spot on the global economic scene has been Asia.

In this uncertain global economic environment, and with inflationary pressures generally moderate, macroeconomic policies in the major economies should remain supportive of growth. Should the expected recovery fail to materialise, further stimulatory measures may be required. However, policy makers in these economies have limited room to manoeuvre.

The current limited room for manoeuvre is a reminder of the importance of ensuring that there is sufficient policy flexibility in order to respond to the unexpected. It is also a reminder that policy makers should not lose sight of medium-term objectives. While the current environment is not conducive to fiscal tightening among the major economies, and the automatic stabilisers should be allowed to operate, it is essential that any policy responses to address short-term concerns do not sow the seeds of even greater longer-term problems. In particular, for the major economies, fiscal consolidation has to remain a medium-term priority and it needs to be pursued in the context of credible medium-term fiscal plans.

The current vulnerabilities in the world economy, in particular the absence of a more balanced growth among the major economies, stem in large part from structural problems in Japan and the euro area. As such, a fundamental step towards strengthening growth prospects would come from a greater sense of urgency in the European economies to addressing the rigidities in their product and labour markets and more concerted efforts by Japan in strengthening its financial system.

The experiences of some countries through this period of weak global growth have demonstrated the benefits of maintaining sound economic fundamentals and a clear medium-term orientation of policy settings. Economies with sound macroeconomic policy frameworks and having undertaken comprehensive structural reforms - and these include a number of members of this constituency - have been rewarded with relatively strong economic performance.

We cannot over emphasise the benefits that substantial progress towards comprehensive trade liberalisation in the Doha round would have in demonstrating international cooperation, bolstering confidence, promoting stronger world growth and assisting in poverty reduction. In particular, freer trade in agriculture would result in benefits for both developed and developing countries.

The unexpected outbreak of Severe Acute Respiratory Syndrome (SARS) has already caused suffering and, very unfortunately, loss of human life. Our sympathy and support goes to the individuals and countries that have been affected by this outbreak. SARS has disrupted the normal functioning of life in many Asian countries, and poses a risk to all countries. Most governments across Asia have responded promptly, taking measures to limit the spread and impact of the outbreak on communities and economies. This is a problem that knows no boundaries and we encourage all countries to provide full international cooperation and support to ensure that this outbreak is dealt with appropriately.

Strengthening Crisis Prevention

While much progress has been made in recent years to strengthen the international financial system, the current conjunction of events and significant vulnerabilities in the global economy demonstrate that there is still much work to be done.

Many of the risks currently facing the global economy have long been discussed in the context of Fund surveillance. This underscores the challenge for surveillance. The Fund will only be effective in helping members achieve sustained growth, and promoting global economic and financial stability, if its advice translates into policy action across the membership.

Effective Fund surveillance requires timely, accurate and comprehensive data; high quality analysis; appropriate prioritisation according to country circumstances; being open to different perspectives; and effective communication with authorities and the public in member countries. While the Fund has a sound surveillance framework in place, there is scope for improvement.

Initiatives to strengthen surveillance have been advanced following the 2002 biennial surveillance review. Steps are being taken aimed at enhancing data provision to the Fund, encouraging the adoption of standards and codes, providing more focused financial sector assessments and improving debt sustainability and vulnerability assessments. There is a continuing focus on improving the effectiveness of surveillance in program countries by ensuring that a fresh perspective is taken rather than being limited by the existing program framework. Importantly, IMF staff are paying more attention to the social and political context in which their advice is to be implemented. There is also an effort to follow how authorities respond to policy challenges over time, to develop an understanding of when Fund advice has and has not been followed and why. These initiatives are becoming evident in individual Article IV consultations.

The focus must be on continuing to rigorously implement these initiatives. In particular, both IMF management and the Executive Board have an ongoing responsibility to assess the effectiveness of surveillance as individual country cases are considered. The Fund must be engaged in continuous learning aimed at improving the effectiveness of surveillance.

One of the most useful things the Fund has to offer its members is the benefit of cross-country policy experiences. This should be an area of strength for the Fund, and one where it adds particular value.

Ensuring a climate of candour between the Fund and country authorities is vital if the Fund is to provide truly useful and relevant advice to its members. If the Fund is to be effective, it should strive to be a trusted insider in members' policy-making processes rather than an independent commentator. In particular, the Fund should avoid any steps that would cast it as being equivalent to a rating agency.

While the Fund should not become involved in the political process in member countries, it can assist in building support for adjustment measures by helping to articulate and communicate the benefits from such measures.

The standards and codes initiative and the Financial Sector Assessment Program (FSAP) are important aspects of the Fund's crisis prevention efforts. There is a growing acceptance by IMF members of the standards and codes initiative and it is receiving increased attention from financial market participants. The Fund should continue to encourage broader participation in the initiative according to where the benefits are likely to be greatest. At the same time, there must be adequate follow-up on existing assessments so that they continue to be useful and relevant to members. Reviews of standards and codes (ROSCs) should provide policy makers with a road map of what is required to achieve best practice. Priorities must always be determined with reference to a country's capacity constraints, with technical assistance being provided where needed to facilitate implementation. While the main audience of ROSCs is the member country, there should also be continued efforts to educate the private sector about ROSCs.

The FSAP has made an important contribution in providing a comprehensive and strategic approach to identifying the strengths and weaknesses of countries' financial systems. Going forward, there is a need to sharpen and prioritise the FSAP process to ensure it achieves its objectives efficiently and effectively. It is also essential that there be adequate follow-up, including technical assistance where relevant, if member countries are to get the most out of the process.

The Fund and its members have continued to make progress in strengthening defences against money laundering and the financing of terrorism. We look forward to the progress report on the 12-month pilot of the comprehensive assessment methodology to be presented at the Annual Meetings.

Improving the Capacity to Resolve Financial Crises

Notwithstanding the most concerted efforts towards strengthening crisis prevention, crises will still arise. At best, we can hope to reduce their frequency and severity. We have been strong supporters of the Fund's efforts to develop a better framework for crisis resolution. Important initiatives have been moves to strengthen the Fund's debt sustainability analysis, and to clarify the criteria and process for exceptional access to Fund resources. Ultimately, however, the key test will be the judgments that are made in individual country cases. If the Fund is to maintain its credibility, if it is to give clear and consistent signals to markets as to when Fund support will be forthcoming, it is essential that the policies on access to Fund resources be applied as consistently as possible.

There has been a vigorous and constructive debate on ways to develop a more orderly approach to restructuring sovereign debts that are judged to be unsustainable. At the centre of this debate has been the development of a proposal for a Sovereign Debt Restructuring Mechanism (SDRM), for which Fund management, particularly First Deputy Managing Director Anne Krueger, and staff are to be congratulated.

The debate has been instrumental in developing a better understanding of the issues related to sovereign debt restructuring and advancing work in a number of areas to improve restructuring arrangements. In particular, there is a growing awareness within financial markets that there is a need for a better process, there is recognition of the important role of creditor committees, there is an improved dialogue between official and private sector creditors, there has been renewed momentum on the design and use of collection action clauses, and discussions have begun on the possibility of a voluntary code of conduct for sovereign restructuring. Much has been achieved.

Despite the good progress made, there is not agreement on all the details of the SDRM proposal. More fundamentally, while we remain supporters of a well-designed SDRM, there does not appear to be sufficient support to amend the Articles to provide for the establishment of an SDRM. Looking ahead, it is important that we build upon the momentum that has been achieved.

There is a need to continue to focus on improving the arrangements to handle situations where a sovereign's debts are unsustainable including, in particular, collective action clauses and advancing the voluntary code of conduct. By definition, being a voluntary code, the development of the initiative must come from debtors and creditors, but the Fund has a role in facilitating progress. The recent decision by Mexico to include collective action clauses in its sovereign bond issue subject to New York law was a welcome development. There should be an ongoing effort by the Fund to educate markets about the benefits from the inclusion of collective action clauses. These areas should be the immediate focus of attention, but we should also not lose sight of the benefits from having the SDRM in the tool kit of crisis resolution.

Implementing Initiatives to Support Low-Income Countries

Generating sustained growth and reducing poverty in low-income countries requires the pursuit of good policy and sound institutions in the countries themselves, reduced trade barriers for their exports and support, through both financial and technical assistance, from the international community.

The Fund has important initiatives in place to support growth in low-income countries, including access to concessional financing under the Poverty Reduction and Growth Facility (PRGF), providing advice on macroeconomic policy and related institutional issues and assisting to build capacity in these areas via the provision of technical assistance. The ongoing task is to ensure that these are effectively implemented and improvements are made as needed.

This learning culture is already evident - the Fund is adapting with greater experience under the Poverty Reduction Strategy Paper (PRSP) framework. Based on experience so far, the focus is now on better aligning the PRGF with PRSPs and better linking the PRSP process with national budget processes. The Independent Evaluation Office review of the PRGF and PRSP processes currently underway should also provide valuable lessons. Further, there are important efforts to enhance collaboration with the World Bank.

With Heavily Indebted Poor Country (HIPC) and associated bilateral debt relief, the international community has committed $40 billion in net present value terms to 26 countries. Under the HIPC initiative, there is flexibility to provide interim debt relief while countries put in place sound institutions and policies to provide a basis for sustainable growth and lasting debt sustainability. Although it is taking time for countries to move to a final exit from the initiative, the recent progress by Benin and Mali provides reassurance that the process is working.

The HIPC initiative also allows flexibility to provide additional debt relief at completion point for countries that suffer a fundamental change in their circumstances because of exceptional exogenous shocks between the decision and completion points. Decisions on additional relief should be based on rigorous debt sustainability analyses which take full account of debt relief.

Full creditor participation has always been an important principle underpinning the HIPC initiative. We strongly encourage those creditors who are yet to participate to do so.

We welcome efforts to enhance the voice and participation of developing countries in decision making at both the Fund and World Bank.

Finally, if the Fund is to be a truly representative international financial institution, we need to address the fact that some members' quota shares are significantly below their relative position in the world economy. We look forward to the status report on quotas and governance issues to be presented to the IMFC in September.