Speech

The Role of Transparency and Accountability for Economic Development in Resource-rich Countries, Address by Agustín Carstens, Deputy Managing Director, IMF

January 27, 2005

The Role of Transparency and Accountability for Economic Development in Resource-rich Countries
Address by Agustín Carstens
Deputy Managing Director of the International Monetary Fund
At the Regional Workshop on Transparency and Accountability in Resource Management in CEMAC Countries
Malabo, Equatorial Guinea
January 27, 2005

On behalf of the IMF, I would like to welcome you to this workshop. Let me first thank President Mbasogo and the authorities of Equatorial Guinea for hosting this event. I would also like to thank all participants of this workshop for your interest in the subjects of transparency and accountability. Your presence here is yet another sign of the continuing focus being paid to good governance in the region.

The workshop today features as themes the twin concepts of "transparency" and "accountability." These concepts are important pillars of democratic governance in modern societies. However, in thinking about what I should say today, it occurred to me that, in my native Spanish language, there is no word that single-handedly captures the meaning of the Anglo word "accountability."

Webster's English Dictionary defines the term "accountability" in two ways. First, it is "the quality or state of being accountable." Second—and this is particularly relevant to public officials like yourselves—the term could also refer to "the obligation or willingness to accept responsibility or to account for one's actions." Many of you are Spanish-speaking, and I think you would share my view that we do not have a concept equivalent to "accountability" as just described. Now, if language reflects culture, does this then indicate that the concept of accountability is only significant in some cultures but not others? I would certainly think not. On the contrary, language and culture should evolve to embrace elements that are essential for governments to perform effectively in modern societies. Accountability is a perfect example of such an element.

Transparency and accountability are critical for the efficient functioning of a modern economy and for fostering social well-being. In most societies, many powers are delegated to public authorities. Some assurance must then be provided to the delegators—that is, society at large—that this transfer of power is not only effective, but also not abused. Transparency ensures that information is available that can be used to measure the authorities' performance and to guard against any possible misuse of powers. In that sense, transparency serves to achieve accountability, which means that authorities can be held responsible for their actions. Without transparency and accountability, trust will be lacking between a government and those whom it governs. The result would be social instability and an environment that is less than conducive to economic growth.

In the case of oil-producing countries, these concepts take on even greater importance. Oil wealth creates major opportunities, especially in developing countries. The government—including parliamentarians—plays an important role in managing these opportunities. At what pace should the oil be extracted? How should the proceeds be used? Which investments will best address the country's development needs? The decisions made on such issues can have a long-lasting impact, and can affect the well-being of today's as well as future generations in a society.

Yet, at the same time, the experiences of some developing countries in the management of oil wealth offer dramatic illustration of the problems that could be posed by resource riches. Typically, the exploitation of oil generates very large and sudden revenue inflows. This change alone creates significant challenges for developing countries, not least because their administrative systems are often not well-equipped to handle such flows. Throw in the uncertainty associated with volatile oil prices, and you have an added layer of complexity that further strains an already over-burdened system. At best, these circumstances challenge the most able policymaker on how to handle the new-found wealth. At worst, they present prime opportunities for outright corruption.

Adequate transparency and accountability are therefore critical for ensuring that resource wealth is managed for the benefit of the whole population. Transparency in oil sector operations allows democratic debate on how oil wealth should be handled. In that regard, while the economic implications of poor oil resource management are clear, we must never overlook the likely social consequences of such failure.

In recognition of the importance of these issues, there have been many recent initiatives at the international level which are aimed at promoting transparency in natural resource management. Let me just briefly highlight a few major developments, which will be discussed in greater detail later today as part of the workshop program:

• The first is the IMF's new Guide on Resource Revenue Transparency. This guide is part of the IMF's framework on best practices in fiscal transparency more generally. Within that overall framework, it was recognized that resource revenue management presented a unique set of problems for all countries which derive significant revenue from natural resources. I have already touched on two of these problems, that is, the size and volatility of resource revenue flows. As a result, it was considered useful to develop more specific recommendations on transparency in resource revenue management. The guide is still a work in progress, but a draft has been produced and is published on our website. Comments on the draft are currently being sought from country authorities, civil society, the natural resource industry, and the general public.

• The second international development I wish to mention is the Extractive Industries Transparency Initiative, commonly referred to by its acronym "EITI." Launched in September 2002, the EITI encourages governments, companies, international organizations, and other interested parties to work together to develop a framework to promote transparency in payments and revenues arising from extractive natural resources. A major component of the initiative is the publication of, on the one hand, payments by companies to governments and, on the other hand, payments received from companies by governments. Discrepancies between the two would suggest possible irregularities.

• Third, the Group of Eight countries (G8) has also started a broader transparency and anti-corruption initiative. In June 2003, the G8 issued a declaration on "Fighting Corruption and Improving Transparency." Among other things, the declaration encouraged countries to volunteer for fiscal transparency assessments by the IMF and to publish the results of such assessments.

• Fourth, and very importantly, there are also multilateral initiatives in Africa itself. These include aspects of the New Partnership for Africa's Development (NEPAD), with its emphasis on good governance and accountability.

I have touched on just four examples of recent international initiatives dedicated to the promotion of transparency, accountability and good governance. They are part of a much wider range of initiatives, including work on standards and codes, which aim to improve the quality of policymaking and investment decisions. Together, these initiatives demonstrate the firm commitment of the international community to promoting good practices in these areas.

However, important as they may be, these international initiatives will be of little use unless they lead to real reforms in individual countries. Indeed, experience shows that countries which adhere to the principles of transparency and accountability tend to achieve better economic results. There are examples of this not only among developed states, but also developing ones, including in this region. Let me give a few for illustration.

I start with Botswana. Botswana is not an oil producer, but it is a country where the sound management of natural resource wealth over many years has yielded tangible benefits for the country. As you may know, diamond production accounts for about a third of Botswana's economy. Through proper planning and management, Botswana has created an effective regime for handling diamond production revenues that is also conducive to business and investment. To begin with, although more than half of government revenues is derived from diamonds, Botswana's tax rates are generally low, and the tax legislation is simple and transparent. As public spending increased in response to higher revenues, significant shares of diamond revenues have also been saved. These savings boost the country's foreign exchange reserves, which have been managed prudently and transparently by the central bank. The government also has in place medium-term plans to channel diamond revenues into capital investments.

Together, these policy decisions have played a large role in Botswana's economic and social development over the last 20 years. During that period, real GDP growth has averaged nearly 9 percent per annum, and per capita income has risen above $3500. Impressive gains were also made with respect to many social indicators and the Millennium Development Goals—for example, the achievement of gender equality in primary education. These are truly impressive successes.

Among the oil-producing countries of this region, there are also examples of advancements in transparency. Take the Republic of Congo for instance. With assistance from the IMF and the World Bank, the Republic of Congo has made significant progress in improving transparency and accountability in the oil sector. The steps taken are still relatively new, but the following actions are worth noting:

• First, starting in 2003, government oil revenues are being certified quarterly by an external auditor. The certification reconciles revenue payments due from oil companies to the government with the revenue receipts of the government.

• Second, an audit firm of international reputation has undertaken audits of the 1999–2001 and 2002 external accounts of the state oil company (SNPC). In addition to auditing the company's consolidated financial statements, the audit firm also reviewed the internal controls and fiscal agency functions of the state oil company (notably oil sales, oil-based financing, and sovereignty expenditures). The Republic of Congo has committed to carrying out these audits on an annual basis.

• Third, the government has published on its official internet sites a vast amount of information on the oil sector. These include:

- the oil revenue certification reports mentioned earlier;

- significant excerpts from the recent audits of the state oil company;

- an action plan to reform the state oil company's operations (including its accounting system, internal controls, management information system, and reporting and accountability mechanisms);

- the production sharing contracts for all oil fields; and

- monthly oil production and revenue data.

• Fourth, the government and the state oil company have organized seminars on the oil sector for parliamentarians and the public.

• And finally, the government has publicly announced its commitment to adhere to the Extractive Industry Transparency Initiative (EITI).

Nigeria too has made advancements in transparency in the oil sector. It is among the first to participate in the Extractive Industries Transparency Initiative. The publication of the financial results of licensing rounds is one of Nigeria's principal commitments under the EITI. The IMF is helping Nigeria fulfill its undertakings under the EITI.

I have spoken quite a bit about developments in transparency at the international and country level. Let me now say a few words about how transparency and accountability in our member countries are also critical for ensuring that the IMF is effective. As many of you know, the bread and butter of our work is in what we call "surveillance." This is the regular exercise of analysis, policy dialogue and advice that we carry out with each of our 184 member countries, developing and developed alike. A chief purpose of this exercise is to help spot potential dangers in time to allow member countries to act to avoid trouble. Such dangers range from an unsustainable debt position, to an accelerating inflation rate, to a misaligned exchange rate. Above all, the objective is to avoid major economic crises, which could have adverse effects on the vast majority of a country's population.

The surveillance process relies on the transparent sharing of reliable information and candid discussions between the staff of the IMF and the authorities. This is followed by an honest peer review of the findings and recommendations by the Directors of our Executive Board, who represent our membership. If there is no transparency, the advice that the IMF provides based on our surveillance will be flawed. This will prevent the IMF from carrying through its very important role of trusted advisor.

As with surveillance, efficient IMF lending programs also require transparency and accountability. The IMF lends foreign exchange to member countries experiencing balance of payments problems. This lending usually takes place only when all other creditors have turned their backs, and certainly under terms more favorable than would be available elsewhere. Of course, this lending is conditional on the commitment of the authorities to take certain policy actions. These policy actions are designed—by the authorities and IMF staff together—to ensure that the country's underlying problems will be resolved, which will also enable it to repay the IMF. Without transparency and accountability, this process cannot function. The agreed policy actions may prove inadequate or inappropriate. The country's problems may get worse, instead of better.

I think it is clear, then, that transparency and accountability benefits everyone—the IMF, its member countries, and their populations. With this workshop, we hope to advance understanding and acceptance of good practices in transparency and accountability. Given the increasing role of parliaments in economic policymaking, engaging parliamentarians on this issue is especially important. It helps to promote awareness of the importance of good governance and enhances country ownership of reform efforts. This workshop also provides a valuable opportunity for the Fund to better understand the specific challenges faced by CEMAC countries and the ways in which you are grappling with them. Such an understanding is critical to our ability to act as a global advisor and to bring to bear the experiences of the membership in our advice.

Once again, let me thank all of you for being here today. The workshop's organizers have put together an excellent program, featuring speakers who are experts in their respective fields. I am confident you will find their presentations informative and useful, and I look forward to a very productive set of discussions.

Thank you.