Press Release No. 99/15

Press Release: Communique of the Interim Committee of the Board of Governors of the International Monetary Fund

April 27, 1999

1. The Interim Committee held its fifty-second meeting in Washington D.C. on April 27, 1999 under the Chairmanship of Mr. Carlo Azeglio Ciampi, Minister of the Treasury of Italy.

2.Developments in the World Economy; Policy Response in Recent Crises

a.Developments in the World Economy

The Committee was encouraged by a number of policy actions and developments since its October 1998 meeting that have helped to improve market confidence and reduce the risks of a global recession. Nonetheless, the outlook is for world output growth to remain sluggish in 1999 while a moderate recovery is foreseen for 2000. Serious challenges remain that will take some time to resolve.

Among the positive developments, the Committee noted that:

• Activity in most of the Asian crisis economies seems to be turning towards recovery. Continued progress with structural reforms will help to restore and maintain economic dynamism in the longer run.
• In Brazil, the situation has stabilized since early March. Spillovers to financial markets elsewhere in the region have generally been moderate, reflecting in part the past decade’s efforts to strengthen fiscal positions and to build sound financial systems.
• The U.S. and Canadian economies have continued to grow remarkably strongly, while inflation has remained subdued.
• Investor sentiment toward emerging markets has broadly improved since the beginning of the year. In mature financial markets, sentiment has improved markedly since last October, as concerns about the risk of a liquidity shortage have subsided.

Notwithstanding these positive developments, there have also been some concerns. The crisis in Brazil, although it has abated since early March, has imparted a contractionary impulse to other Latin American countries and to the world economy. In Japan, despite some improvement, short-term prospects remain uncertain, and growth in much of Europe has further slowed below potential. In Russia, economic activity has been recovering from the low point in September, monthly inflation has decreased, but the fiscal and debt imbalances remain unsustainable. Commodity-exporting countries—many of which have incurred steep losses in export revenues since the start of the Asian crisis—face significant adjustment challenges.

The Committee considered the policies that would be required to address the downside risks to growth and other policy challenges—in particular, the continuing uneven pattern of growth among the United States, the euro area, and Japan, which has contributed to a marked widening of global trade imbalances. Priority should be given to an appropriate mix of macroeconomic and structural measures aimed at generating early, vigorous, and sustained recoveries in the crisis-afflicted emerging market countries; to policies of financial restructuring and domestic demand led growth in Japan; and to policies for supporting domestic demand in Europe. In this connection, the Committee recognized the important policy initiatives in Japan aimed at stimulating domestic demand and easing financial sector strains, but stressed the importance of Japan implementing stimulus measures until growth is restored, using all available tools. The Committee welcomed the recent interest rate reduction by the European Central Bank. The Committee emphasized the importance of open and competitive markets as a key component of efforts to sustain growth and stability in the global economy. It encouraged further trade liberalization, including market access for developing country exports, and looked forward to the launch of a new round of trade negotiations at the WTO in November with a balanced agenda that addresses the concerns of all WTO member countries.

The Committee welcomed the start of European Economic and Monetary Union (EMU), which should contribute to financial stability and sustainable growth in the euro area and globally. Members of the euro area need to attack the root causes of high unemployment. An appropriate policy mix to support stronger domestic demand, accompanied by structural reforms in labor, capital, and product markets, is essential to enhancing growth and employment prospects, especially in the medium term, in order for the euro area to be a major source of growth in the world economy.

b.Policy Response in Recent Crises

The Committee endorsed the broad strategy adopted, and noted the lessons learned, by the international community in dealing with the Asian financial crisis. It pointed to the progress made by Korea, Thailand, the Philippines, and Indonesia under IMF-supported programs, which had been responsive to evolving circumstances—including through the strengthening of social safety nets—and had benefited from the support of the international community. While noting that the worst of the crisis was over, the Committee stressed that serious challenges remain ahead and thus urged the countries affected to persevere with the needed reforms, and so lay the basis for a resumption of sustainable and high quality growth.

Drawing lessons from the crisis, the Committee emphasized, in particular, the need to address in a timely way the sources of economic vulnerabilities, such as inappropriate policy mixes, leading in particular to significant exchange rate misalignments; excessive debt accumulation; imprudent debt management policies; financial sector fragility particularly in a situation of weak financial supervision and regulation; limitations in information available to markets; weaknesses in corporate structures; inappropriate sequencing of capital account liberalization; and deficient risk management by creditors. It also emphasized the critical importance of strong national ownership of programs.

On Brazil, where public sector imbalances have been at the root of the crisis, the Committee expressed support for the authorities’ revised economic program and emphasized the importance of its full implementation as well as the continued support of the private financial community for Brazil.

In reviewing prospects for Russia, the Committee stressed that, despite recent improvements, vigorous action is needed to tackle the root causes of the crisis, especially persistent fiscal imbalances, structural rigidities, and financial sector weaknesses.

Regarding exchange rate regimes, the Committee noted that desirable arrangements may vary across countries, and that any regime must be supported by disciplined policies and robust financial systems. Recent crises have demonstrated that the policy requirements of maintaining a pegged rate are demanding, in particular in an environment of increased mobility of international capital. However, at the same time, the Committee observed that a number of economies with fixed exchange rate arrangements, including under currency boards, had been successful in maintaining exchange rate parities. It requested the Executive Board to consider further the issue of appropriate exchange rate arrangements, including in the context of large-scale official financing.

Building upon the useful review by the Executive Board of IMF-supported programs in the Asian financial crisis, the Committee requested the Executive Board to discuss ways to further improve IMF surveillance and programs so that they better reflect the changes in the world economy, in particular potentially abrupt large-scale cross border capital movements.

3.Strengthening the Architecture of the International Monetary System

The Committee noted that broad agreement had been reached on key aspects of a strengthened architecture and welcomed the actions by the Fund in a number of important areas. Nevertheless, it remains to develop some issues further and to implement several of the proposals that have been put forward. The international financial system needs to be strengthened to reduce the risks posed by weaknesses in policy and by the volatility of capital flows, and also to facilitate access to capital markets by the many countries that have not yet benefited from globalization. With that in mind, the Committee considered several of the interrelated elements of the reform agenda and called on the private sector, national authorities, as well as on the Fund and other institutions and fora to carry forward this work in the months ahead. The Committee requested the Executive Board to consider further the systemic aspects of prevention. It recognized the central importance of Fund surveillance in carrying forward this reform agenda.

a.Forestalling and Resolving Financial Crises

The Committee emphasized that prevention of crises remains the key. It endorsed the Executive Board’s decision to establish a contingent credit line in the Fund. This new instrument is an important component of the ongoing effort to strengthen the architecture of the international monetary system. The new contingent credit line will help countries pursuing sound and sustainable policies to maintain stability, even in the face of deteriorating global financial conditions. This facility will provide an important instrument of crisis prevention, by creating further incentives for countries to adopt strong policies, notably debt management and sustainable exchange rate policies; to adhere to internationally accepted standards; and to involve the private sector in a constructive manner—thereby containing the risks of financial market contagion, while taking into account the potential impact on the Fund’s liquidity.

Further work is needed on crisis prevention, in particular in conjunction with the private sector: improved risk assessment and its reflection in pricing; better data, including on private sector capital flows; strengthened monitoring of capital flows, in particular short-term flows; more information about countries’ policies and the Fund’s assessment of these policies; adherence to internationally recognized standards; stronger financial systems, and improved regulatory oversight of highly leveraged institutions, including hedge funds, and of offshore banking centers.

The Committee endorsed the Fund’s intention to intensify its work with member governments to put in place as soon as possible mechanisms that could facilitate the avoidance or orderly resolution of crises, inter alia:

• Adhere to sound principles of debt management, avoid excessive accumulation of short-term debt and, more generally, maintain an appropriate structure of liabilities;
• Establish systems for high-frequency monitoring of private external liabilities;
• Maintain effective communication with private capital markets;
• Maintain adequate foreign exchange liquidity, including by considering the establishment of contingent credit lines, call options, or similar arrangements with private creditors;
• Support proposals that seek to eliminate the present regulatory bias in favor of short-term interbank credit lines;
• Identify other arrangements that could better assure continuing private financing in times of potential stress.

The Committee also noted that, in future international bond issues, sovereigns should consider the inclusion of provisions that would facilitate orderly resolution of debt crises. The Committee invited the Board and other relevant fora to explore appropriate ways to introduce collective action clauses in sovereign bond issues.

The Committee also encouraged further consideration of the appropriate response in cases of severe liquidity crises, and stressed the importance of seeking appropriate involvement of the private sector in a cooperative way. The Committee reaffirmed the general principle that borrowers should honor their debts. It noted the Fund’s preparedness, under appropriate conditions, and in extreme situations to lend in the presence of arrears to private creditors, thus allowing the Fund to promote effective balance of payments adjustment during possibly protracted negotiations with creditors. The Committee asked the Executive Board to continue its work on all these issues, and report to the Interim Committee, including on ways to assure more orderly debt workouts.

b.Institutional Reform and Strengthening and/or Transforming the Interim

Committee

The Committee agreed that the Fund should remain at the center of the international monetary system, while improving in a pragmatic manner the modus operandi of its institutional components and cooperation with other institutions and fora.

The Committee asked its deputies and the Executive Board to explore further the scope for institutional improvements, including of the Interim Committee, and to report at the next meeting of the Interim Committee.

c. Capital Movements

The Committee encouraged the Fund to continue its work on the appropriate pace and sequencing of capital account opening and, in particular, to further refine its analysis of the experience of countries with the use of capital controls, and to explore further issues related to the Fund’s role in an orderly and well-supported approach to capital account liberalization.

The Committee reiterated the importance of timely and comprehensive data on capital flows for effective Fund surveillance of this area. It welcomed the agreement to improve data on short-term liabilities of the official sector in the context of strengthening the Special Data Dissemination Standard (SDDS) as an important first step, and the arrangements to facilitate access to creditor-side external debt data prepared by the Fund, the World Bank, the BIS, and the OECD. The Committee urged moving forward expeditiously with the efforts under way to improve data on capital flows.

d. International Standards and Fund Surveillance

The Committee welcomed the Fund’s progress in developing, disseminating, and monitoring the implementation of internationally recognized standards, given the contribution that the observance of standards will make to strengthening the international financial system. In particular, the Committee welcomed:

• The strengthening of the SDDS, notably by adopting a comprehensive template for the dissemination of data on international reserves and related liabilities. The Committee strongly encouraged members that have not subscribed to do so. It also called for increased efforts at participation in the General Data Dissemination System. The Committee called on all subscribers to the SDDS to begin disseminating data according to the reserves template, and encouraged completion of the work on transition plans for external debt data and indicators of financial sector soundness.
• The completion of the Manual on Fiscal Transparency to assist members in implementing the Code of Good Practices on Fiscal Transparency. The Committee encouraged all members to work toward improving fiscal transparency in line with the Code.
• The progress achieved in developing a draft Code of Good Practices on Transparency in Monetary and Financial Policies; and the broad collaborative effort to this end by the Fund and other international agencies and bodies. The Committee encouraged the Board to complete its work on the development of the Code as soon as possible, and not later than the Annual Meetings, and to proceed promptly in preparing, in cooperation with appropriate institutions, a supporting document to the Code.
• The Committee also took note of the progress made in developing other standards relevant for the functioning of the international financial system (accounting, auditing, banking supervision, bankruptcy, corporate governance, insurance and securities market regulations, payment systems, etc). It encouraged standard-setting bodies and organizations to continue their efforts to develop comprehensive standards. The Committee welcomed the Fund’s work in the area of insolvency laws. It called on the Fund to continue its collaboration with the World Bank, United Nations Commission on International Trade Law (UNCITRAL), and other relevant institutions in promoting effective insolvency systems. While noting their voluntary nature, the Committee also encouraged countries to adopt the new standards as they are being developed.

In the context of Fund surveillance, the Committee encouraged the Fund to develop the process to encompass the standards and codes relevant to international financial stability. It welcomed the Fund’s use of experimental case studies in the preparation of transparency reports and the planned financial system stability assessments, in order to better identify and address the practical issues that need to be considered. The Committee encouraged the broadening of the experiment to a large group of countries and to take stock of these experiences to improve work in this field, and also encouraged the Fund to use transparency reports on a trial basis as a part of its surveillance.

e. Transparency—Recent Progress and Perspectives

The Committee underscored the importance of greatly increased transparency—of national government policies, of private sector reporting, and of international financial institutions, including the Fund. It welcomed the progress that had been made by the Fund in furthering transparency in members’ economic policies and its own operations, including:

• greater use of Public Information Notices (PINs) for Fund policy discussions;
• a presumption toward release of Letters of Intent/Memoranda of Economic and Financial Policies and Policy Framework Papers underpinning Fund-supported programs;
• the issuance of a Chairman’s statement capturing the key points of the Board discussion following Board approval or review of members’ arrangements;
• the liberalization of access to the Fund’s archives; and
• a pilot project for voluntary public release of Article IV staff reports.

The Committee requested the Executive Board to continue work on furthering transparency and urged more countries to participate in the pilot project to ensure its success. The Committee underscored that efforts on transparency should not undermine the role of the Fund as confidential advisor to members. It reaffirmed the importance of strengthening the Fund’s contribution to transparency by more public information on, and evaluations of, the Fund’s operations and policies.

4. HIPC Initiative and ESAF

The Committee noted that the time had come to give new impetus to efforts to further reduce the debt of low-income countries undertaking strong adjustment programs. The Committee welcomed the further review of the HIPC Initiative and encouraged the Executive Board of the IMF—together with the Board of the World Bank—to develop more specific proposals to strengthen the current framework so as to enhance debt relief to countries in need in a way that strengthens incentives for the adoption of strong programs of adjustment, reform and good governance. This relief should provide a clear exit from unsustainable debt burdens. In this context, the Committee recognized the need for appropriate burden sharing among creditors. The Committee looked forward to a report at its next meeting on ways to enhance the link between HIPC Initiative assistance and poverty reduction.

In light of the increased costs associated with the proposed modifications to the HIPC Initiative, and since contributions remain significantly below the financing needs of interim ESAF and HIPC Initiative, the Committee stressed the need to redouble efforts to secure the full financing of these initiatives. It also urged the Executive Board to adopt as soon as possible the decisions needed to ensure that the initiatives are fully funded. The Committee welcomed the substantial progress that has been made in securing additional loan resources for the current ESAF. Members were encouraged to come forward as soon as possible with the resources required to support ESAF operations until the start of the interim ESAF in 2001.

5. Fund Assistance to Post-conflict Countries

The Committee welcomed the measures agreed by the Executive Board to enhance Fund assistance to post-conflict countries, including improving the terms of emergency post-conflict assistance and providing higher access over a longer period in appropriate circumstances. It also welcomed the Executive Board’s preparedness to consider, for those post-conflict countries with arrears to the Fund, on a case-by-case basis, relaxing the requirement for payments to the Fund as a test of cooperation, provided the member is cooperating on policies and that other multilateral institutions take at least comparable action. The Committee noted that the debt burden of the heavily indebted poor post-conflict countries would eventually need to be addressed under the HIPC Initiative. The Committee asked the Executive Board to consider further steps in cooperation with the World Bank.

6. Regional Economic Impact of the Kosovo Crisis

The Committee endorsed the need for a rapid, substantial, and coordinated response by the international community to the economic consequences of the Kosovo crisis. Such a response is urgently needed to ensure that sufficient aid is provided to alleviate the suffering of the refugees from Kosovo and to ensure that countries in the vicinity of the crisis have access to external financing to support their efforts towards macroeconomic stability and structural reform. The Committee stressed that it would be highly regrettable if the considerable progress being made by the affected countries in reforming their economies was set back because of a lack of external financing, on appropriate terms, to meet these increased needs. It emphasized that all humanitarian relief costs should be financed by external aid and grants. Other external financing needs arising as a direct consequence of the crisis should be met from both bilateral and multilateral sources. The international financial institutions should play an important role in this effort. External financing of balance of payments and budget costs in affected countries that are ESAF-eligible should also be provided on highly concessional terms and the Committee looked forward to the ongoing discussions of the affected countries’ external debt positions in the framework of the Paris Club. The Committee asked the Fund and the Bank staffs to continue their work in coordinating the international response to the economic impact of the crisis in close cooperation with other interested agencies and donors.

7. Quotas, NAB, and Fourth Amendment of the Articles

The Committee welcomed the coming into effect of the New Arrangements to Borrow (NAB) and the increase in quotas approved under the Eleventh General Review, which will provide the Fund with the financial resources that will enable it to carry out its mandate at the center of the international monetary system. The Committee noted the relatively slow progress in members’ acceptance of the Fourth Amendment of the Articles, allowing for the special one-time allocation of SDRs. The Committee called on members that have not done so to complete the necessary procedures promptly.

The next meeting of the Interim Committee will be held in Washington, D.C. on September 26, 1999.

ANNEX

Chairman

Carlo Azeglio Ciampi

Managing Director

Michel Camdessus

Members or Alternates

Ibrahim A. Al-Assaf, Minister of Finance and National Economy, Saudi Arabia

Gordon Brown, Chancellor of the Exchequer, United Kingdom

Antonio Casas González, President, Banco Central de Venezuela

Antonio Fazio, Governor, Banca d’Italia

(Alternate for Carlo Azeglio Ciampi, Minister of the Treasury, Italy)

Peter Costello, Treasurer, Australia

Liu Mingkang, Deputy Governor, People’s Bank of China

(Alternate for Dai Xianglong, Governor, People's Bank of China)

Emile Doumba, Minister of Finance, Economy, Budget and Privatization, Gabon

Hans Eichel, Minister of Finance, Germany

Pedro Pou, President, Central Bank of Argentina

(Alternate for Roque B. Fernández, Minister of Economy and Public Works

and Services, Argentina)

Viktor Gerashchenko, Chairman, Central Bank of the Russian Federation

Marianne Jelved, Minister of Economic Affairs, Denmark

Abdelouahab Keramane, Governor, Banque d'Algérie

Sultan Bin Nasser Al-Suwaidi, Governor, United Arab Emirates Central Bank

(Alternate for Mohammed K. Khirbash, Minister of State for Finance and

Industry, United Arab Emirates)

Pedro Sampaio Malan, Minister of Finance, Brazil

Trevor A. Manuel, Minister of Finance, South Africa

Paul Martin, Minister of Finance, Canada

Kiichi Miyazawa, Minister of Finance, Japan

Robert E. Rubin, Secretary of the Treasury, United States

Syahril Sabirin, Governor, Bank Indonesia

Bimal Jalan, Governor, Reserve Bank of India

(Alternate for Yashwant Sinha, Minister of Finance, India)

Dominique Strauss-Kahn, Minister of Economy, Finance and Industry, France

Kaspar Villiger, Minister of Finance, Switzerland

Jean-Jacques Viseur, Minister of Finance, Belgium

Gerrit Zalm, Minister of Finance, Netherlands

Observers

Andrew D. Crockett, General Manager, BIS

Nitin Desai, Under-Secretary-General for Economic and Social Affairs, UN

Yves-Thibault de Silguy, Commissioner for Economic, Monetary

and Financial Affairs, European Commission

Wim F. Duisenberg, President, ECB

Katherine Ann Hagen, Deputy Director-General, ILO

Donald J. Johnston, Secretary-General, OECD

Renato Ruggiero, Director-General, WTO

Tarrin Nimmanahaeminda, Chairman, Joint Development Committee

John Toye, Director, Division on Globalization and Development Strategies, UNCTAD

James D. Wolfensohn, President, World Bank

Javad Yarjani, Head, Petroleum Market Analysis Department, OPEC