1. Introduction

The global economy is set to grow at a significantly lower rate than we expected a year ago. The combination of lingering aftereffects of the bursting of the equity bubble and new uncertainties stemming from the conflict in the Middle East and, to a lesser extent, the Severe Acute Respiratory Syndrome (SARS) has undermined a rapid output recovery. This has put additional strain on many countries that are dealing with increasing fiscal pressures, stagnating investments, and rising unemployment rates.

I am encouraged by the most recent developments that indicate that the postponed global recovery could take place in 2004. I agree with the overall assessment that downside risks have diminished since our last meeting. While some of the remaining risks are beyond the control of policy makers, it is important to emphasize that each member country can contribute to further improving the balance of global risks. Resolving regional conflicts, implementing sound domestic economic policies, and working together to ensure that the Doha Round can move forward our common endeavor to further liberalize international trade are crucial in this respect. The IMF and other international institutions play an important role in their respective areas of expertise.

2. The Global Economy and Financial Markets

The most positive development since our last meetings is that financial stability concerns have eased, and with it the substantial downside risks to the outlook. However, with weaker than expected growth in the euro area and a still fragile recovery in Japan, the robustness and sustainability of the global recovery continue to depend on the outlook for the United States. The good news is that over the recent weeks, evidence of an accelerating U.S. economy has been accumulating. The potentially bad news is that such an unbalanced global recovery will further exacerbate global current account imbalances, clearly increasing the risks of disorderly adjustments.

Undoubtedly, the U.S. economy has surprised us now for several years, mostly on the positive side. Once again, most recent indicators suggest that there is a substantial upside risk to the growth projections. However, the increasing deficits in the current and fiscal accounts and the high level of household indebtedness give some reason for concern.

To make the recovery less U.S.-centric, stronger growth in the euro would be a key ingredient. Although there are some positive signs, the recovery will clearly lag behind. The slowdown in the euro area has proved deeper and more prolonged than expected, reflected in the sizeable downward revisions in the current World Economic Outlook. The main message for Europe that the IMFC has now been given for years remains valid, namely that in order to reach higher sustainable growth, structural reforms have to be advanced and fiscal pressures contained. Regarding fiscal accounts, I find it striking how fast self-imposed fiscal rules became binding in several countries during the downturn. In my view, the main lessons to be learned is that most fiscal rules have failed to enforce the necessary surpluses during times of high growth, thereby not providing room for automatic stabilizers to play during downturns.

For emerging markets, the outlook seems to be generally favorable, although uneven across countries. It is also noteworthy that net capital flows to emerging markets in 2003 are projected to rise to their highest level since the mid 1990s. However, it is important that the favorable financing conditions do not distract from the need to address remaining medium term vulnerabilities. Although several countries have made significant progress in this regard, debt levels continue to remain high in many countries. Fiscal consolidation and institutional reforms will be essential to reduce financial volatility and achieve sustainable growth. This is even more true for developing countries, were growth prospects depend critically on an acceleration of structural reforms and a general improvement in the investment climate.

3. Strengthening IMF Surveillance and Promoting International Financial Stability

Strengthening IMF Surveillance

Over the past years, a wide range of initiatives has been taken to adapt the IMF's surveillance framework to the changing requirements since the mid-1990s. These efforts have been characterized in several ways—strengthening, enhancing, broadening, streamlining—depending on the specific goal of the proposal. However, the thrust of all these measures is the same: increasing the effectiveness of IMF surveillance. While it is too early to make a definitive assessment of the overall success of these efforts, in my view, tangible improvements have been made in the surveillance framework.

More effective surveillance can clearly help members strengthen their economic policy frameworks, thereby contributing to the prevention of financial crises. However, I strongly believe that the responsibility for the first line of defense against crises lies squarely on each and every member, namely in implementing sound economic policies and strengthening institutions. The temptation to use the IMF as an easy scapegoat for policy failures should be resisted.

The numerous initiatives that have reshaped IMF surveillance have not only strongly expanded the mandate, but also made it increasingly difficult for staff to implement all the new guidelines in an evenhanded and high-quality manner. In many countries, especially low-income countries, the increased scope and the frequent changes in the surveillance process are overburdening their administrative capacities. I welcome the intensive efforts that are being made to consolidate the progress made under the various surveillance initiatives and to refine certain elements. Given the significant broadening of the scope of surveillance, particular attention must be given to adequately linking the various outputs.

The refinements that have been made regarding debt sustainability assessments are welcome. I attach great importance to a better understanding of the policy challenges stemming from debt sustainability issues. This applies not only to emerging markets, as underscored in the latest World Economic Outlook, but also for advanced economies and low-income countries. It is important that the standard assessment is applied consistently across the whole membership to ensure consistency and comparability. However, additional assessments taking into account country-specific circumstances can provide valuable inputs for policy makers.

I also welcome the decision to strengthen the Fund's transparency policy. I continue to believe that the sea change that has taken place in this area is a crucial element of our strengthened surveillance. No effort should be spared in order to make the work of the Fund as transparent as possible. Moving to presumption of publication for all country papers was a step into the right direction. I particularly welcome the intention to make publication a pre-condition for management approval in high-access cases. Confidence building is a key goal of such programs and, therefore, justifies the application of higher publication standards.

Independent Evaluation Office (IEO)

Of course, the IEO also plays an important role in making Fund surveillance more effective. The first three evaluations were of excellent quality and provided a welcome independent assessment of several aspects of surveillance practices. I would like to take this opportunity to warmly thank Mr. Ahluwalia and his staff for the first Annual Report of the IEO. I encourage the Executive Board and management to ensure an adequate follow up on the many valuable recommendations.

Contingent Credit Lines (CCL) facility and Precautionary Arrangements in Crisis Prevention

Making use of the Fund's lending capacity for crisis prevention rather than crisis resolution through the CCL facility was considered an important complement to enhanced surveillance. While this is certainly an interesting idea, I remain unconvinced that it can be made workable. Countries with strong policies do not need Fund support, as the lack of demand for the CCL has proven. It also seems to me that modifying precautionary arrangements to provide an alternative to the CCL would lead up the same blind alley. I do not believe that the expiration of the CCL facility will weaken the Fund's crisis prevention framework and should thus be allowed to expire in November 2003.

The idea of providing resources to resist contagion aims at a problem with little empirical relevance. To be sure, external developments can adversely affect member countries, but such shocks are usually propagated through fundamentals. They cannot be resolved by liquidity assistance alone but require measures that seek to improve fundamentals. Even in the limited case of pure contagion, the right mix between financing and adjustment depends on the exact transmission mechanism. Rather than investing a lot of our resources in possible measures to help countries with good policies to become more resilient to crisis, we should focus our resources on helping countries to pursue good policies. After all, good policies are the best means to crisis prevention.

Crisis Resolution

Our work on improving the framework for crisis resolution has slowed down considerably since the Spring meetings, and progress is currently being made mainly on the contractual front. This progress is important and very welcome, particularly as regards collective action clauses. However, I remain unconvinced that this approach will establish a framework sufficiently robust to meet the challenges of sovereign debt restructurings. Conceptually, the proposal for a Sovereign Debt Restructuring Mechanism (SDRM) remains the most comprehensive solution. It is difficult to see how contractual clauses could be designed to deal with all of the issues raised in the development of the SDRM. I accept that it is currently not feasible to move forward with the SDRM. But given the shortcomings of its alternatives, the complexities of debt restructurings could soon bolster the need for a comprehensive framework.

Collective action clauses, which can be a valuable complement to the SDRM, had a similar fate. After voluntary inclusion of collective action clauses in sovereign bond contracts had been recommended by the G10 in 1996, this initiative fell back into oblivion until recently. I very much welcome the apparent shift toward the use of such clauses in international sovereign bonds issued under New York law. Particularly deserving is the inclusion of clauses that are broadly in line with the model clauses proposed by the G10, although I agree that it is too early for the Fund to formally endorse a set of model clauses.

We have taken note of the recent discussions on a Code of Good Conduct and thank the Banque de France for their facilitation of the discussion between the private sector and emerging countries. In the absence of any other more promising mechanism, such a Code would at least define the respective roles and duties of private sector participants and emerging countries. This could have a positive effect on the rapid resolution of sovereign financial crisis.

Over the last several years the IMF's lending has become increasingly concentrated on a few emerging market members that received exceptional access to Fund resources. It now unfortunately appears that these Fund-supported programs will most likely be prolonged and extend over a number of years. This could impair the revolving nature of IMF lending. Moreover, as other IFIs are among the main creditors of the same countries, there is also a potential risk that borrowing costs may rise in these institutions.This development has raised two important issues for us to consider. First, we have to ensure that any decisions we take in the future preserve the financial capacity of these international financial institutions to respond quickly in crisis situations. Second, we need to improve our crisis prevention and resolution framework further by strengthening Fund surveillance, improving debt sustainability analysis, and increasing transparency in order to deal better with sudden and complex financial crises that require large amounts of Fund resources, especially when such crises involve unsustainable sovereign debt.

4. Accelerating Poverty Reduction and Strengthening Economic Growth in Low-Income Countries

The Fund is playing an important role in assisting low-income members in their endeavor to reach the Millennium Development Goals. This is underscored by the numerous programs supported under the Poverty Reduction and Growth Facility (PRGF) and the progress achieved with the HIPC and PRSP Initiatives. The wide acceptance that the PRSP approach has gained over the last years is encouraging. In further implementing the approach, I encourage the Fund, together with the World Bank and donors, to continue to support countries in strengthening their public expenditure management, in putting more weight on the costing of policy measures, and in better aligning their PRSPs with national budgets.

I welcome the progress under the HIPC initiative. So far commitments for debt relief have been made to twenty-seven countries amounting to US$33 billion in net present value terms. I am aware that in certain cases, progress has been slower than envisaged. This is primarily due to the difficulty of a number of countries to maintain macroeconomic stability. It is important that the authorities of the countries concerned take measures to address these problems. In my view, relaxing the criteria of the current HIPC framework to speed up the process would be the wrong answer. Debt relief without sufficient assurances that macroeconomic stability will provide the necessary basis for an effective use of these additional resources would defeat the purpose of the Initiative.

I continue to believe that the HIPC initiative provides sufficient flexibility to grant additional assistance to countries suffering from exceptional exogenous shocks. I also strongly favor retaining the current methodology under which such a `topping up' at the completion point is calculated. Moving to a methodology that excludes additional bilateral assistance provided over and beyond the HIPC Initiative would entail significant additional costs for all multilateral institutions. These would have to be covered by additional bilateral resources. Considering that the benefits of a change in methodology would accrue to only a few countries, mobilizing bilateral resources does not seem feasible at this time.

In conclusion, I welcome the start of what I hope will be a fruitful discussion on the future role of the Fund in low-income countries. I am convinced that the Fund has an important role to play in these countries, mainly in providing temporary financial assistance in support of macroeconomic reform efforts. One of the challenges moving forward will be to adapt the Fund's instruments to assist those countries that have already successfully maintained macroeconomic stability over some time. Countries should be encouraged to graduate from the Fund's financial assistance once macroeconomic policy has gained sufficient strength and progress in capacity building has been achieved. Graduation from financial assistance and the move towards a surveillance-based relationship with the Fund will also be important to ensure that the currently envisaged lending capacity of the self-sustained PRGF Trust will be sufficient.