The Global Economy and Financial Markets - Outlook, Risks, and Policy Responses

Our Annual Meetings this year take place against the background of promising signs of an upturn in the global economy. We are pleased to note that many industrial economies have eased fiscal and monetary policies to spur the recovery process, while economic data and forward looking indicators, particularly in financial markets, point to a strengthening of global growth during the second half of 2003 and in 2004. Growth among emerging markets has, on the whole, held up reasonably well, being supported by improvements in policy performance and favorable external financing conditions, and increases in non-oil commodity prices. We particularly note that China and the rest of Asia have remained major contributors in sustaining global output, while the economic activity in Latin America, especially in Argentina and Brazil, has rebounded.

Nevertheless, we are mindful of the risks that continue to weigh on the upturn. In particular, the recovery is not broad-based across the major industrial countries, with the USA remaining the major engine of global output growth. Structural impediments in the labor and product markets remain largely unaddressed in major economies while the recent appreciation of the euro might constrain the pace of recovery in that region. In addition, in Japan, the outlook remains clouded by entrenched deflation and weaknesses in the corporate, financial, and public sector balance sheets.

The recovery is also associated with major current account and fiscal imbalances that have the potential to spark disordered adjustment in major currencies and undermine export led recover. Moreover, trade protectionism in industrial countries will continue to constrain growth and hinder poverty reduction efforts particularly in low-income countries, while uncertainties in the oil market and geopolitical tensions are also sources of concern to the nascent recovery.

In this context, there is a need for a global cooperative approach on policies to strengthen the recovery process and to avoid the disorderly unwinding of global imbalances. We are also of the view that, in industrial countries, monetary policies should remain supportive of growth while fiscal frameworks should aim at restoring fiscal balance and at putting the social security systems on a sounder footing to help meet the impending costs of aging populations. In addition, structural reforms need to be accelerated in the labor and product markets, particularly in the Euro area, while aggressive measures are needed to address deflation in Japan. As regards emerging market economies, the authorities need to persevere with strong macroeconomic policies, while addressing structural impediments and strengthening financial systems to reduce vulnerabilities.

Furthermore, progress with agricultural reforms, particularly among the largest industrial economies, is critical to improve market access for developing economies and therefore boost growth prospects. To this extent, a successful outcome of the recent WTO Ministerial meeting in Cancun would help in curbing protectionist pressures and achieving further trade liberalization, as this would also contribute to strengthen confidence in the global economic recovery. We cannot but express our deep disappointment with the failure of the Cancun meeting which represents a major setback to the objectives of global growth and poverty reduction. We believe that there is a need to adopt a rules-based process for decision-making in the WTO that would involve all country members and that trade negotiations should be concluded within the agreed timeframe. Advanced economies should respect their long-standing commitments to open their markets to developing countries, phase out subsidies in agriculture, and remove quotas and high tariffs in such areas as textiles and clothing. We, accordingly, urge the Fund to intensify its advocacy role and pressure for multilateral trade negotiations resume shortly, and be conducted in a manner consistent with the principle of comparative advantage and the development needs of countries.

Africa Outlook

Growth in Africa has remained resilient in the past three years, notwithstanding the global downturn, reflecting improved macroeconomic policies, higher prices of some commodities, and debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. Many countries on the continent have achieved macroeconomic stability and undertaken key structural reforms. Fiscal deficits in Africa have been reduced and annual average inflation is leaning towards the single digits. Notable progress has also been made in reducing current account deficits and in liberalizing trade and exchange systems.

Notwithstanding these achievements, we have concerns regarding some trends that continue to frustrate efforts aimed at accelerating poverty reduction. Indeed, economic growth rates remain way below the minimum threshold of 7 percent that is necessary to reach the MDGs while growth in per capita income masks growing skewedness in income distribution. The continent has the highest rates of unemployment in the world, while high growth in some countries is quite often not accompanied by employment creation. In addition, Africa is the continent most affected y the HIV/AIDS pandemic, and is most vulnerable to exogenous shocks, including in particular adverse weather and commodity prices fluctuations, while current international geopolitical situation and the related security concerns have crippled the tourism sector and increased insurance premiums, adding new areas of vulnerability.

Against this background, we acknowledge that Africa faces the greatest challenge in meeting the MDGs and that efforts on a number of fronts are critical to rejuvenate growth. These efforts being undertaken by African countries, rallied behind the NEPAD, include addressing conflicts which hinder economic development and undermine the effectiveness of private sector investment; persevere with prudent economic policies and strengthen institutional capacity; intensify the fight against HIV/AIDS and malaria, invest in infrastructure and accelerate economic integration in Africa, which offers many opportunities for trade expansion and economic diversification and strengthen the role, design, and monitoring of our PRSPs. To complement most of our efforts, we count with the support of the Fund and the donor community in mobilizing adequate financial resources and technical assistance to enable Africa to meet the MDGs.

While most of these areas do not fall in the core purview of the Fund, we believe that Fund involvement in our countries will not be effective if these areas are not adequately addressed. In this regard, we look forward reviewing the design of Fund programs so that the Fund develops instruments for intervention in these areas, in collaboration with other institutions.

As regards trade aspects, most African countries have pursued trade liberalization and have scored favorably on the Fund' index of trade restrictiveness, without showing significant impact on the poor, particularly the rural areas, where the bulk of the population lives. This absence of a positive impact on the poor can be attributable largely to a number of constraining factors, such as lack of marketing expertise, poor infrastructure, lack of technological development, and lack of access to industrial countries' markets. These areas need also to be addressed in depth if trade is to effectively contribute towards poverty reduction in Africa.

In terms of conflict resolution, it is clear that Africa is the continent most afflicted by conflicts, which are a real drag on economic and social development. However, there is more hope for permanent peace in Africa now than ever before. Firstly, there is growing realization and commitment on the continent to addressing this problem; secondly, the recent Summit of the African Union declared conflict resolution as a key priority; and thirdly a growing number of countries are signing to the Peer Review Mechanism under NEPAD. Reflecting these African leaders' commitments, there is notable progress in resolving major conflicts, that had regional implications, and in promoting democracy and good governance on the continent, thereby creating conditions for permanent peace, real economic development, effective use of foreign aid and attracting FDI. However, against a background of budgetary constraints in most African countries, these efforts need to be complemented with adequate financial assistance and we urge the international community to lend its full support to the AU and the NEPAD initiative.

Indeed, it is clear that a substantial increase in aid - over and above existing commitments - is needed if countries are to meet the MDGs. To this extent, we welcome the initiatives launched by different countries and institutions such as the US, Canada, the UK, the EU and the UN, aimed at mobilizing resources to front-load needed assistance. We urge that these initiatives be closely coordinated for them to be effective in raising the necessary financing. This is particularly important given that the poverty reduction agenda, as spelt out in the MDGs, is racing against time. We are especially keen to see the response of the international community regarding the UK's IFF initiative, which was fully endorsed by African countries. We believe, indeed, that the IFF offers a way of doubling current aid flows, giving countries the front-loaded resources and the long-term commitment they need to meet the MDGs. We are, therefore, of the view that the Fund, in collaboration with other institutions, should examine the merits of the IFF and other proposals and report back to the 2004 Spring Meetings.

The role of the Fund in Low-Income Countries

We acknowledge the work undertaken by the Fund to evaluate its role, policies, and instruments in low-income countries in order to better serve them. The Fund is a key player in promoting sound economic policies and has a vital role to play in delivering high levels of growth with stability and poverty reduction in low-income countries, and in promoting low-income countries effective integration into international financial markets.

However, tailoring the role of the Fund to the needs of low-income countries is a complex task, given that achieving macroeconomic stabilization in these countries, which is the core area of the Fund, hinges on their success for addressing longer-term development issues, which fall within non-core areas of the Fund. In our view, lasting macroeconomic stability would only be achieved if low-income countries could: (i) maintain political stability; (ii) successfully diversify their production and exports and fiscal revenue bases; (iii) convert their domestic and external debt into sustainable burdens; and (iv) generate employment.

In addition, bringing about these structural changes requires time and careful program design and sequencing. We, therefore, recognize that beyond macroeconomic stabilization, the Fund should also take into account those fundamental aspects in program design for low-income countries that will contribute to higher sustainable output growth. Such aspects could include strategies for: (i) promoting private sector development, including by helping to put in place appropriate monetary frameworks to facilitate credit access; (ii) improving absorption capacity for aid; and (iii) broadening tax bases. Moreover, it is of utmost importance that the Fund strikes a balance between realism and ambition in program design and in making growth projections.

Promoting the role of the private sector in the economy, particularly the small and medium-scale enterprises, is critical to diversifying production and alleviating unemployment in low-income countries. To this end, it is crucial that the Fund promotes fiscal and monetary frameworks that contemplate the provision of concessional start-up credit for these enterprises. This is why we urge the donor community to consider channeling some of their grants and soft loans, on one hand, for on-lending to small-to-medium scale projects to promote productive and export ventures and to generate employment and, on the other hand, into infrastructure, including regional projects that promote productive sectors and private sector activities.

The Fund has also an important role to play in cushioning the impact of shocks on low-income countries. Given the lack of diversified productive and export base and low revenue base, in low-income countries, exogenous shocks are a substantive source of macroeconomic instability. These shocks range from down-turns in the global economy, adverse developments in terms of trade, and volatility in oil prices, to natural disasters. Believing that the key to enhancing the resilience of low-income countries is to promote diversification, enhance their market access and promote regional integration, we are of the view that the Fund should provide policy advice and technical assistance as well as resources to help low-income countries to minimize the impact of these shocks and help prevent low-income countries from diverting scarce domestic resources towards urgent short-term needs.

HIPC Initiative-Status of implementation

We welcome progress made so far in alleviating the debt burden of HIPCs that allowed countries to enjoy increased social spending. However, we express our concern with the pace of implementation of the HIPC Initiative which remains extremely slow. We note that 38 countries have reached decision point, yet only eight countries have reached completion point after the Initiative was established four years ago. Indeed, inherent problems in the design of the programs has not facilitate its implementation and this why we believe that a more flexible approach should be followed, when considering the challenges faced by countries in reaching the completion point.

In addition, we are of the view that debt relief should not be unduly delayed solely because of concerns on governance. Although good governance is critical to development, it is important to note that there are judgmental issues involved in measuring governance, and more importantly, even with the best of commitments from country authorities, strengthening institutional capacity to enforce good governance takes time. We know that perceptions do not change dramatically, just as corruption and other vices could not be eliminated overnight. Besides, governance is a global problem affecting both the public and private sectors in developing and developed countries alike. In addition, it has been recognized that corruption in developing countries is often fueled by firms in developed countries. We urge, therefore, for a more flexible approach to the issue of governance, particularly when it appears to constitute a cog in the wheel of progress towards reaching the completion point.

We welcome the increasing number of creditors that are committing themselves to deliver debt relief on HIPC terms, appreciate the decisions made by Libya to provide debt relief and by India to write-off all the claims to HIPCs and urge the remaining creditors to follow suit. Threats of litigation remain, however, a serious concern for many HIPCs and we believe that moral suasion continue to be a valid exercise in this connection.

PRSP Progress in Implementation

Progress in implementing PRSPs, as well as social and structural completion point triggers, appears impressive. It is noteworthy to mention that government ownership of the poverty reduction strategy is strengthening. Notwithstanding this progress, a number of studies seem to suggest that absolute poverty, in some regions, particularly in sub-Saharan Africa, is actually increasing. We, therefore, believe that a better analysis of the sources of growth as well as of the factors that constrain growth is necessary to carry out. In addition, we are of the view that there is need to synchronize PRSPs implementation, with the UN Millennium Development Goals, which points to the urgent need to accelerate the harmonization of the areas of PRGFs and PRSPs.

Financing of the PRGF and HIPC Operations

We understand that HIPCs' GDP growth has been adversely affected by a prolonged slowdown in export market growth and also by high oil prices. These factors would tend to push up the costs of the HIPC Initiative and would thus warrant a significant increase in resources to implement the initiative.

It is important that the Fund provides adequate resources for topping-up debt relief at completion point for those cases that have experienced fundamental changes in their debt sustainability outlook, due to either adverse terms of trade shocks or natural calamities, especially unfavorable weather conditions in the case of sub-Saharan Africa. However, we believe that donors' additional debt relief beyond their commitment under the HIPC framework should not be included in the calculation of the topping-up.

Regarding the PRGF, we are concerned about the inadequacy of resources for the self-sustaining PRGF. It is projected that beyond 2005, lending capacity under the self-sustained PRGF will be SDR 660 million, way below the current level of SDR 1.1 billion per year, and could be further reduced. We welcome the fact that the Fund is beginning to examine other financing options that would enable sustaining current levels of PRGF lending beyond 2005. In that context, we urge the Fund to explore the use of its own resources, including GRA resources. An area of concern has to do with the inclusion of countries in protracted arrears in the costing of the HIPC Initiative and we welcome the Fund's timely consideration of this issue.

Voice and Representation

We remain concerned by the fact that as many as 44 countries of Sub-Saharan Africa are represented by only two chairs on the Fund's Executive Boards. In addition, the quota share and voting rights of Africa continue to decline, which further undermines the voice and effective participation of Sub-Saharan countries in the two institutions.

We would like to express our disappointment for the lack of progress in respect of governance issues in the Bretton Woods Institutions to reflect the calls made at various fora, including the Monterrey Summit on Financing for Development, the Development Committee and also at the last IMFC meeting. It is, indeed, our strong view that a serious process to reform the governance structures in both institutions needs to be developed to better reflect the global reality of the 21^st century rather than the middle of the 20^th century.

However, the whole process appears to have lost momentum. While we appreciate the capacity enhancing decisions taken so far by the Executive Boards to address the heavy workload of the offices of the largest multi-country constituency of both institutions, we would like to, once again, reiterate our position that potential measures taken to address issues that are administrative in nature should not overshadow the need to address more fundamental issues such as those related to increasing the basic votes and providing additional chairs for Sub-Saharan African countries. This can only be materialized with the required determination and political will of all Governors.

The Twelfth General Review of Quotas was concluded early this year without any increase in the Fund's financial resources and more importantly to a redistribution of quotas. We truly hope that the Thirteenth General Review of Quotas reconsider the quota formula as well as increase the basic votes. Notwithstanding this, it is our firm belief that the effectiveness of the Sub-Saharan countries' participation in the decision-making process in the BWIs can only be enhanced through additional representation in the Board of Directors. We do also think that a decision in this regard does not need to be kept hostage to the conclusion of the current general quota review.