Governor of the Bank of Venezuela
Before the Interim Committee Meeting
Washington, D.C
September 26, 1999
| The Interim Committee member for the constituency consisting of Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Spain and Venezuela. |
1. World Economic Outlook
I welcome the WEO that has been recently presented to us. It very correctly points out that the global economy and financial conditions have certainly improved since the turbulence we experienced in 1997 and 1998. Still, vulnerabilities persist.
Broadly, I agree with the Board's description of the short-term prospects for Europe and Japan. In the case of Japan, although there are good expectations for growth, there are still important structural problems that should be addressed. This also applies to Europe , particularly in the labor market.
The performance of Japan will be crucial to the pace of growth in Asia, as well as in other emerging markets. In my view, the fiscal situation, as well as the performance of the Japanese currency sustain the possibility for growth. Greater appreciation of the yen could affect its short-term prospects for continuing the turn-around of its economy. It is of particular concern that further fiscal consolidation is required in the European front to sustain stronger growth. As I already mentioned, although structural reforms might not necessarily have an effect on the short-term growth in the area, they require that these issues be addressed to avoid negative pressures.
The case of the United States economy, in my view, is a little bit more complex. On the one hand, there could be a case for concern when taking into account the domestic and external imbalances and the need for adjustment. Yet, one would have to concede that the US authorities, on the one hand have an important degree of freedom for stimulus; and, on the other, the depth and flexibility of financial institutions, as well as well as the influence of technology in the market place, give a new dimension to negative speculation with respect to the equities market. In any case, the performance of the Federal Reserve is to be given very high praise. It has been cautious, it has been opportune, and so far it seems to have also been adequate. Taking into account the importance of the US economy for emerging markets, and in fact for the rest of the world, we certainly hope that this attitude continues to be maintained. Still, taking into account the difficulty in determining the very long growth trend in the US economy, that could be attributed to an economic cycle, the possible effect of important structural changes based on technology, if a slowing down of that growth begins to take place, the authorities should take all measures possible to assure a soft landing.
I would like to reiterate an issue brought forth by this Chair at the time of discussion of the WOE in the Executive Board. Considering globalization, this decade has been characterized by inadequacies in the process of liberalization of the financial sector and its negative effect, as can be witnessed by the banking and exchange crisis during this period. As we discuss the issue of liberalization of the capital account, institutional capacity, particularly relating to the financial sector, should be foremost in our discussion.
2. Progress in Strengthening the International Monetary and Financial System
2.a Involving the Private Sector in Forestalling and Resolving Financial Crises
This is, indeed, a very delicate subject. As it is discussed, markets can react affecting the accessibility to markets by emerging and transition economies and, possibly, influencing spreads in detriment of already fragile financial and economic circumstances in many of these markets and debtor countries. Although it is important to define, as quickly as possible, if and how the private sector would play a role in financial crises, just as important is the need for caution that requires an approach that does not make matters worse.
One element for consideration is the factor of risk in participating as an investor or creditor in sovereign financing. As markets have changed considerably in the last ten years, when direct banking finance through syndicated loans were the norm, today most of the resources come through capital markets via bond placements. This entails that for restructuring, among other things, bond holders must get involved , as well as other public and private creditors. The use of standard clauses for restructuring on sovereign bond issues might be a step in the right direction. Initiatives taken by triple A rated sovereigns, as well as those that issue paper in the domestic markets, might be instrumental in fostering their acceptability without necessarily affecting other financial characteristics related to risk by the issuers.
A collective framework for negotiations among debtors and lenders, through ad-hoc creditor committees in the case of bond placements, appear at this moment to be an alternative. Defining the role of the Fund is not necessarily an easy task. In any case, the fundamental issue in a restructuring is the generation of liquidity and the elimination of insolvency. In the case of sovereigns, the basic elements are the fundamental policies that will generate the proper adjustment process to foster the capacity of the country to pay in the short-term and on a sustainable basis on the medium and longer-term. This capacity to pay centers in the strengthening of the fiscal accounts, as well as the external sector, both core areas of Fund activity.
Another element that must be taken into account is the role of supervision and the regulatory framework relating to financial institutions. The role of the Basle Committee on banking supervision that has focused on capital adequacy is most relevant. Efforts along this line are welcome, but are certainly not enough. On the one hand, the lack of sufficient and timely information relating to the level of exposure and concentration are major issues to be dealt with by regulators; on the other hand, the element of representation is not necessarily one of the strongest characteristics of the Basle Committee and it might strengthen its analysis and actions if this issue was addressed in a proper manner. The efforts to strengthen institutional capacity at the World Bank to address the financial sector should lead to better analysis and help in determining different possibilities for involving the private sector in crisis prevention and resolution.
Although one must recognize significant efforts that have already begun to monitor private debts, particularly short-term private debt, the design of private contingent credit lines, improvements in debt assessment and management in many countries, through Article IV consultations, as well as the Bank, contribute to this process.
For debtors these issues are of great concern to help in minimizing the radicalization of restructurings at a time of crises. In most, if not all cases, when crises arise, private funds leave debtor countries when those funds are most needed. They are usually difficult to turn around on a short term basis, but they have benefited and enjoyed the good times. Maintaining certain levels of financing throughout the resolutions of the crises can certainly speed up the time of recovery when coupled to strengthening fundamentals. Another aspect is the significant role that can be played in avoiding acceleration or other legal procedures caused by defaults. Time is of the essence for analyzing the situation, determining a course of action on a macro basis, and negotiations to take place, so that both debtor countries and creditor countries go down the right path.
In my view, the role of the Fund should be centered on its expertise. The collaboration of the Fund with debtor countries should focus on macroeconomic policies which will be the basis for changing the payment situation at a time of crisis of any particular country. The support and presence of the Fund should be instrumental in generating credibility for restructuring and confidence that economic and financial situations will change for the better based on sound economic programs.
Efforts will only be effective if all parts are represented, and proposals and contributions are considered seriously. In this regard, developing countries have a large experience in having difficulties, and know well the specific implications and restraints of their economies, specially regarding to institutional capacity, structure, and the depth of their markets. Efforts to understand the positions of creditors, debtors and multilateral organizations have to be placed in the center of all discussions if we really want to prevent future crises effectively. This will give the discussions a sense of practicality, always needed to be successful. In this regard, the private sector, as one of the players, is called to open its spectrum in terms of how to benefit from international stability rather than only the specific transactional relationship with their creditors. I believe that they will perceive greater benefits from financial stability.
2.b Choices of Exchange Rate Regimes
The choice of the subject of Exchange Rate Regimes is a timely one. It could be a permanent subject to be discussed for the totality of the next millennium. To my mind, the analysis and process of decision-making or policy advice related to exchange rate regimes must be dealt with on a case-by-case basis. Different alternatives to exchange rate regimes all have their benefits and their costs. They are related not only to economic factors, but also of a political nature. Independent of the exchange rate regime, as usual, the central issues are the need for the existence of strong fundamentals. Changes in exchange rate regimes will not automatically correct critical problems such as disequilibria in the fiscal sector, financial area, and the like. It is critical, though, that economic policies be consistent with the regime.
In effect, I strongly believe that there is no single exchange rate regime, and associated policies, as the most desirable one for all countries on a permanent basis. Even when taking into account particular circumstances of specific countries, there are no simple or very clear answers leading to a choice of exchange rate regime. Economic, financial, and institutional development, as well as other factors, require that this subject be dealt with after thorough analysis. The role of the Fund, in this context, in my view, should possibly focus on the characteristics of policy issues that would be required to better support a particular exchange rate regime.
It is well known that many countries prefer flexible exchange rates when the economy is exposed to external shocks, or the economy has important and generally expanding involvement with modern global financial markets, because this allows greater flexibility to adjust the exchange rate to circumstances. However, this is not always true when those shocks are of short duration and there are high expectations with respect to the exchange rate. In this case, it is sometimes better to manage the situation trying to absorb the adverse impact using international reserves (if possible) while the situation is reverted, of course, by maintaining sound fundamentals. In other words, a possible recommendation for applying a flexible exchange rate regime could not work well always, even for countries exposed to external shocks. In addition, there are experiences in emerging market countries which show that pegged exchange rate regime can be workable, if policies and institutions are credible and support adequately the exchange rate regime.
Sometimes, it is preferable that exchange regimes be accompanied by other mechanisms like macroeconomic stabilization funds, which have proven their usefulness in periods of distress and instability coming from the external environment. In no case, should this mechanism be interpreted as a substitute for sound macroeconomic policies.
Not wanting to delve further into the debate of fixed exchange rate regimes, different types of pegs, and a free floating exchange rate regime, globalization adds another important element to the subject at hand. Recent experiences have highlighted the concern for dealing with systemic problems, external shocks due to contagion, large and sudden capital flows that impose a greater need for an institution like the Fund to play a leading role in many of these issues to generate, whenever possible, a dampening of volatility and the avoidance--to some extent--of over spill from country to country of critical problems.
The role of symmetric surveillance, within the context of the International Monetary Fund, is of particular significance. There is a need to moderate volatility among major currencies. The fact that basically three major currencies are utilized as pegs by emerging and transition countries in substantial number of cases, emphasizes the significance of this role. On the other hand, from a practical perspective, when one takes into account the effect that exchange rate fluctuations in general have on the real economy and on nominal prices of emerging and transition economies, the importance on those major currencies is accentuated. Sizable fluctuations in international private capital flows, which contribute to major macroeconomic disturbances, should also be placed under the watchful eye of the Fund, even though one can conceive that imbalances from capital flows are part of the international scene, they do not necessarily occur derived from a currency crisis.
2.c Orderly Liberalization of Capital Movements
At the outset, I would like to stress that I am in favor of the liberalization of the capital account. It is also important to underscore that adequate policies touching on fundamentals are the essence of stabilization and confidence in the economy.
From what I have seen of the agenda of the Executive Board, in the past few months much emphasis has been given to the application of controls in the capital accounts, and not too much emphasis has been given to the issue of liberalization and the sequencing of that process. This chair has sustained that controls should be applicable on a voluntary basis, particularly to respond to vulnerabilities exacerbated by external shocks. One would expect that these controls would be applied for a relatively short period of time, thus allowing the country in question to implement the required policies and begin to offset unwarranted disequilibria. The issue of ownership is very important in the process of liberalization, if sequencing that process is a multi-faceted evolutionary process of a longer term nature. The imposition of liberalization might be contrary to the commitment in following it through from beginning to end.
The process of liberalization should be a gradual one. It is essential to take into account that limitations of institutional capacity, plus the lack of depth of financial and capital markets in many emerging and transition economies, would require careful and timely sequencing of the process of liberalization. Much has been said about the importance of the financial sector and the need for further supervision and regulation in relationship to the opening of the capital account; yet, that is not enough, as other markets and institutions must be capable of responding to the complexity and volatility of capital movements.
Not too long ago, initiatives were taken proposing possible changes of the Articles of Agreement, to give the Fund jurisdiction in dealing with capital movements. To many, this is not necessary but, moreover, as I stated in our meeting last April, more work has to be done on the significant cost liberalization can imply if other elements are not considered, such as the volatility of financial markets, as well as others, which, generally, develop more in the medium to long-term range, than on the short one.
2.d Institutional Reform and Strengthening and/or Transforming the Interim Committee
We welcome the steps taken to strengthen the Interim Committee and its transformation, as proposed by the Executive Board. This chair has very strongly supported, on a permanent basis, that discussions of core issue related to International Monetary Fund and World Bank should be centered on the Bretton Woods Institutions. However, much care has to be placed in avoiding overlapping and diminishing the authority of organs already functioning adequately. The fora provided for those discussions, on the one hand the Executive Board and, on the other, the Interim and Development Committees, as well as the Board of Governors, are appropriate and sufficient to deal with issues at hand. In my view, as far as I have seen, no other grouping responds to the essential principle of representation, as well as do these Bretton Woods Institutions. Moreover, the formation of new groups and the selection of participants in those groups, based on an unknown authority, and on criteria also of a dubious nature, do not uphold the principle of transparency and the motivation of participation for all the members of this international community. I have heard with interest the criteria in creating new groups, based on the systemic importance of countries, if that includes countries, and would hope that include countries who suffer the effects of systemic shocks.
3. Y2K Contingency Planning
We welcome the initiatives to move forward in the creation of a Y2K credit facility. It is an important step in avoiding financial crisis. Care must be taken that in preempting unwarranted situations, we either do not provide for an adequate response or create rigidities that go against the grain of the objective in creating this facility. For these reasons, we strongly support that access limits be in an the area of a 100 percent of quota, with the flexibility that possible debtors, on a case-by-case basis, and based on possible needs, access amounts greater than a 100 percent of quota. Recognizing the characteristics of such facility, which entails certain risks, I agree that a surcharge is appropriate in this case. What does not seem to be appropriate would be a surcharge between 200 and 250 basis points over regular Fund charges. This proposal would bring costs to debtors close or equal to private financial markets but, more importantly, create a burden that does not recognize the structural elements related to institutional capacity building that in most, if not in all cases, contributed to Y2K problems.
4. Reforming ESAF and Securing IMF Financing for the ESAF and the HIPC Initiative
As this chair emphasized during the Spring Meetings, the issue of financing ESAF-HIPC should be consistent with the proposals to amplify its scope.
I would like to commend the Managing Director for his very active involvement in obtaining financing for ESAF-HIPC. His proposal to sell up to 14 million ounces of gold in an off-market transaction, benefiting the institution from the revaluation of the portion of the gold sold and repurchased, deserves support. The utilization of the resources of the SCA2 Account are a proper source to complement these efforts. In any case, the principle of equitable burden sharing still seems to be an essential requirement in the efforts to promote this important facility. At least, as of today, and to my knowledge, one would also need to recognize the very significant and--to some extent--disproportionate effort being carried out by smaller industrialized countries, emerging and transition economies, to this end.
The Fund, as it has done in the past, can play a significant catalytic role accelerating structural reforms, and the establishment of social safety nets which are proper in Fund programs. These are short-term in nature. The expertise, experience, and focus of the Fund may complement, yet at the same time contrast considerably with the characteristics of the issues, the process, and efforts to deal with poverty alleviation. This issue is of a long term nature and has a microeconomic scope. For these reasons, we believe that the World Bank should be the institution that should deal with poverty alleviation.
5. Progress Reports on Strengthening Fund Surveillance and Programs
5.a Integrating Social Sector Issues in Fund Policy Advise and Fund-Supported Programs
The idea to promote social indicators generates conditionality of a social nature in Fund programs. The establishment of a code of social good practices has to be looked at very, very carefully. Individual country circumstances would indicate that governments should look at their own internal circumstances and act accordingly. Of special concern is the issue related to involving broad participation by civil society on these issues. In a world of increasing transparency and accountability, one sees with concern how, in some important countries, certain organizations that are not at all transparent, and that no one knows to whom they are accountable, exert significant pressure on certain governments that, in turn, respond without effectively knowing if they are responding to "civil society."
The preparation of a poverty reduction strategy paper is a good initiative. The outlook of a paper of this nature would probably entail that it be prepared on a case-by-case basis for each country, taking into account the significance of ownership in developing and, of course, implementing a strategy. The process and the participation of different sectors of civil society should be very carefully chosen, so that their views are, in effect, legitimate view for that society.
5.b Standards and Transparency Initiatives
I welcome the attention that has been dedicated to the implementation of standards. Yet, these standards pose a few concerns that should be taken into account in their application and possible monitoring in the future. From a country's perspective, the assessment derived from surveillance in the application of standards can have an impact on the relationship between the country's authorities and the Fund. Many of the national authorities have seen the Fund as an advisor that has been given a very special trust. It deals with issues that can be of a confidential nature. It is difficult to determine how the advisory role can be clearly matched with the process of preparing and publishing assessments on standards. There could be an issue of conflict of interest. Another aspect related to these assessments on standards is how the market will perceive them. There is, in my view, a delicate situation that warrants for substantive care to avoid misinterpretation of those reports and the identification of the Fund as a rating agency.
Another important element from a country's perspective is the need to recognize that the establishment of standards precludes the existence of an adequate institutional capacity. This will entail that if the right conditions are not present, the Fund should play a role with technical assistance. At the same time, this obviously has implications relating to the establishment and assessment of those standards. Very intimately related to these points is the need to develop ownership in this process by the national authorities. This element, to my view, is of central importance to the commitment to apply any standards that might be established by a national authority. A gradual and interactive approach is necessary in the future work of the Fund in this area.
Again, I would like to reiterate the position of this chair that the Fund concentrate on its core activities. It would, therefore, be necessary that the Fund cooperate with the World Bank, if it be the case, in developing standards in non-core areas. This approach of cooperation is not necessarily limited to the World Bank, but could cover other multilateral agencies.
I welcome a detailed assessment of the human resources necessary to carry out the development of standards, as well as the process of monitoring their application. It might be rather costly and, taking into account a proposed gradual approach to the subject, one might consider that in-house expertise might be developed in time to carry out these efforts efficiently.
5.c Financial Sector Reform
Recent financial crisis in Asia have emphasized the need for financial sector reforms, although there were many causes of a macroeconomic nature for those crises, vulnerabilities in the financial sector played an important role in those situations.
Experiences derived from exposed analysis point out the intrinsical value of transparency, of having adequate and timely information and the need to develop an adequate regulatory framework with strong regulating agencies.
The crisis brought out the difficult issue of moral hazard in confronting a financial crisis, its costs, and the possible collapse of domestic financial sector and the payments system with its concomitant effect on the rest of the economy.
Experiences in the restructuring of the financial sector indicate that it is a complex process of a medium-term nature that requires careful planning and implementation. In these efforts, consideration must be given to deal with institutional aspects of each country and with the particular nuances of the individual members of the international community.