I. The Global Economy and Financial Markets

Prospects for a lasting recovery of the world economy have improved. At the same time, considerable downside risks remain. In industrial countries, the stance of monetary policy is appropriate. Fiscal policy should combine a credible consolidation strategy with sensible short-term impulses. Structural reforms should be accelerated. In emerging markets, vulnerabilities should be reduced, and stronger institutions should be built. The burden of adjustment to global imbalances should be shared more equally.

Prospects. Geopolitical uncertainties have declined, as mirrored in falling oil prices. Financial markets are willing to take greater risks as reflected in the resurgence of share prices and reduced interest rate spreads. The recovery of the U.S. economy is strengthening. At the same time, overall economic growth in emerging markets, and developing countries remain strong, accompanied by improved macroeconomic stability. Growth in Asia is particularly encouraging. In industrial countries, price stability has been achieved, and interest rates are at historic lows. Companies have made considerable progress in cutting costs and raising productivity. Balance sheet adjustments, necessitated by the bursting of the equity price bubble, have progressed. A number of industrial countries, especially Germany, have embarked upon key structural reforms. In sum, preconditions for a sustained recovery are in place.

Risks. However, if reported profits will not live up to financial markets' expectations, setbacks to market confidence are likely. This would hamper companies and financial institutions in their effort to reduce debt and to increase equity. Given the massive increase in the United States' budget deficit and the sustained high current account deficit, international confidence in the U.S. dollar could further weaken, resulting in a disorderly depreciation. Related to this, growing frictions in the global currency system, as reflected in the rapid increase in currency reserves in Asia, give rise to concern.

Industrial countries. Efforts at structural reform and medium-term fiscal consolidation must be stepped up. The United States should implement a credible medium-term fiscal consolidation strategy. Japan should accelerate its efforts to reform the financial and the corporate sector, while striving at ambitious fiscal consolidation over the decade. The member states of the European Union should continue to reform labour markets, deepen internal market integration, improve investment in education and research, and progress with structural consolidation of public budgets. Social security systems should continue to be adjusted to the expected ageing of the population, especially regarding pensions and health care systems. Germany prepares itself to meet the challenges ahead. Substantial further reforms in product and labour markets as well as in the health and the pension systems are underway, combined with cuts in subsidies and entitlement programs. By the end of this year, core reforms will have been passed by the parliament. To foster domestic demand in a still difficult environment, the German government plans to advance the 2005 tax relief to 2004. Germany remains committed to reduce the structural budget deficit in order to reach in the medium term a budget close to balance or in surplus, as required by the Stability and Growth Pact.

Emerging markets. High public debt in many emerging markets remains a risk, in particular, if a large share of this debt is either short-term, with flexible interest rates or denominated in a foreign currency. Emerging markets should, therefore, take advantage of recent improvements in capital market access to redress the structure of their liabilities and to put public finances on a more solid basis. Germany welcomes the progress made in several emerging markets to pursue sound macroeconomic policies. Efforts in emerging markets to increase the stability of the financial system will reduce the risks of capital flow reversals. In cases where economic fundamentals support an exchange rate appreciation and currency reserves are ample, a more flexible exchange rate could foster the domestic as well as the global adjustment processes. However, in a number of cases structural reforms of the domestic financial sector have to be undertaken prior to a transition to fully flexible exchange rates and liberalised capital accounts.

Doha Development Agenda. Germany regrets that the Fifth Ministers' Conference of the WTO in Cancún has come to a close without concrete results. A chance for laying timely foundations for more economic growth and enhanced participation of developing countries through targeted trade liberalisation and stronger rules has been lost. As an export oriented nation, Germany continues to have an utmost interest in successfully negotiating the Doha Development Agenda. Hence, Germany will take, together with its partners in the European Union, all efforts necessary to promote a quick resumption of the negotiations.

II. Strengthening IMF Surveillance and Promoting International Financial Stability

Since the Asian crisis, substantial progress has been made in strengthening the framework for crisis prevention. The key challenge is to put the new framework into practice. Implementation should have priority over further refinement.

Surveillance. Germany continues to attach high priority to surveillance as the IMF's key instrument for crisis prevention. A certain degree of stability of the surveillance framework is needed in order to facilitate its consistent and effective application. Recently agreed improvements in the surveillance framework should be implemented expeditiously. In particular, debt sustainability assessments should be extended. The Fund's staff should assemble all relevant information in order to facilitate assessments at short notice and high frequency. This should also help to ensure a rectifying policy response. Growth projections should aim at being more realistic, as also suggested by the Independent Evaluation Office. The Fund should make alternative growth forecasts a standard element of its analyses. The assessment of exchange rate behaviour and transmission mechanisms as well as appropriate exchange rate regimes should resume a central importance in staff analysis, in particular in case of current account imbalances and the use of Fund resources.

Standards and Codes. Germany welcomes the ongoing efforts to strengthen the observance of international standards and codes. Financial Sector Assessment Programs (FSAPs) and Reviews of the Observance of Standards and Codes (ROSCs) have become an important source of market information. By voluntarily participating in a comprehensive FSAP, to be completed soon, Germany sends a clear signal of support for this strategy of crisis prevention. The Fund should continue to encourage more member countries to participate, in particular systemically important ones. Germany agrees with the recently initiated streamlining of the number of annual country assessments and the examination of observed standards per country.

Transparency. The effectiveness of the Fund's policy advice can be further strengthened through progress in publication of IMF documents. Germany appreciates the progress reached so far, and welcomes the recent Board decisions to encourage more publications of IMF documents. The measures adopted will contribute to a better public understanding of both the Fund's work and members' policy measures. Moreover, transparency also allows the Fund to benefit from the judgement of external experts and observers.

Precautionary arrangements. While surveillance remains the Fund's primary tool for crisis prevention, precautionary arrangements within the traditional framework of Stand-By Arrangements can also serve a useful purpose in this context. However, the best protection in times of a deteriorating environment remains a credible commitment to pursue sound policies. In contrast, Germany regards exceptional access of Members to Fund resources under a precautionary arrangement as problematic: the volume of potential liquidity needed in capital account crises is, by nature, highly uncertain; and such an arrangement could increase perceived vulnerabilities and thereby have a negative impact on a country's risk assessment by financial markets. Germany, therefore, cautions against further modifications of precautionary arrangements, also in light of the experience with Fund's Contingent Credit Lines scheduled to expire in November 2003.

Access Limits. Limits to official sector finance are fundamental in providing incentives for sound policies in borrowing countries and prudent risk-taking among private creditors. The consistent application of the new exceptional access framework is essential. This will also help to limit the concentration of the Fund's credits.

Collective Action Clauses. Germany welcomes the remarkable progress made during this year in introducing collective action clauses (CACs) in bond issuance under foreign jurisdictions, with various countries following Mexico's lead. Recent experience indicates that the inclusion of CACs has no impact on interest rate spreads. Hence CACs can now be regarded as the desirable market standard for bond issues under foreign jurisdictions. In order to promote the adoption of CACs in bonds issued under German law, legislation to provide for explicit legal clarification is underway.

Code of Conduct. Germany also supports the current efforts to develop a Code of Conduct for debtors and creditors. A Code of Conduct could promote a constructive dialogue in good as well as in bad times, with benefits for crisis prevention and resolution. Germany believes a Code of Conduct would also provide a useful benchmark for assessing whether market participants comply with the criteria for Fund lending into arrears.

Issues for further consideration. The recent discussion on a Sovereign Debt Restructuring Mechanism has raised a number of issues which are relevant for the orderly resolution of financial crises. Once a suspension of payments has become inevitable, the resolution of collective action problems, such as equal treatment of creditors, hold-out problems, or aggregation of voting across different debt instruments, is likely to remain difficult. These issues need to be kept under close observation and analysis by the IMF. Germany is looking forward to continuing the discussion of comprehensive debt restructuring frameworks.

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

The task of reducing poverty and raising growth rates in low-income countries (LICs) is fourfold: first, to mobilise domestic resources, in particular through investment in human capital, improvements in institutional capacities and better infrastructure; second, to provide bilateral and multilateral aid including debt relief; third, to open markets for trade and capital flows unilaterally and multilaterally; and fourth, to improve the framework for macroeconomic stability. The IMF has a key function to help LICs to create and maintain a framework for sustainable economic growth. Well-targeted technical assistance might be required at all stages of Fund involvement.

Poverty Reduction and Growth Facility. The Fund should maintain the Poverty Reduction and Growth Facility (PRGF) as the principal framework for its assistance to LICs. The progress achieved so far within the PRGF is most welcome and encouraging. Poverty Reduction Strategy Papers (PRSP) that take account of macroeconomic and/or fiscal constraints at an early stage should be acknowledged as the basis for Fund involvement. Hence, the alignment of PRSPs and the PRGF needs to be improved further. PRGF lending should be linked to countries' reform commitments and reform capacity. This ensures its most efficient use. In order to prevent the prolonged use of Fund resources, viable exit strategies are important. The Fund should explore possibilities of addressing exit strategies for "pre-emerging market countries". As the HIPC initiative progresses and a clear exit strategy is implemented, the financial pressure on the PRGF is expected to decrease. The planned self-financing of the PRGF Trust Fund should therefore not be called into question. The Fund's policies for macroeconomic stabilization must be closely inter-linked and co-ordinated with the World Bank's and other donors' policies in order to reduce poverty, to foster structural reforms, and to strengthen private sector development.

HIPC Initiative. Based on the decision taken at the Cologne summit in 1999, Germany will relieve debt of eligible HIPC countries worth over €6 billion. It does top-up the debt relief adopted by the Paris Club for these countries to 100%. Germany regards macroeconomic stability, satisfactory implementation of the PRGF and good governance as essential to the successful completion of the HIPC Initiative. This conditionality must be adhered to, even if this means a delay in reaching the decision or the completion point. It is only by complying with conditionality that the foundations for a lasting economic recovery of these countries can be laid.

IV. Other Issues

IMF Quotas and Governance. Germany welcomes the recent discussion on quotas, voice and representation within the framework of the Thirteenth General Review of Quotas. At present, the Fund is in a strong liquidity position. It has sufficient financial resources to respond adequately to members' future financing needs. For the time being, there is no need for a general increase in quotas. A new quota system should be as simple and transparent as possible. The relative economic strength of member countries in the world economy should remain the guiding principle. Financing contributions have to be ensured. Germany supports the proposals to incorporate a variable measuring financial openness in a new quota formula. The administrative measures taken to enhance the capacity of Executive Directors' offices of developing and transition countries make a valuable contribution to strengthening their voice.

Combating money laundering and the financing of terrorism. Germany notes with satisfaction the progress achieved to date with the 12-month pilot program on assessment of anti-money laundering and combating the financing of terrorism (AML/CFT) by the Financial Action Task Force on Money Laundering (FATF), IMF and World Bank. The new Forty Recommendations adopted by the FATF in June 2003 should be integrated into the common methodology of FATF, IMF and World Bank. This should further the world-wide implementation of these standards. Before the end of this year, the FATF, IMF and the World Bank should agree on a revised joint methodology for performing assessments.

Independent Evaluation Office. Germany strongly appreciates the work of the Independent Evaluation Office (IEO), especially the candid and frank assessment of difficult and sometimes delicate topics. The assessments and recommendations of the IEO are important elements to strengthening transparency and internal governance of the IMF. Germany encourages the IEO to continue its excellent work. Germany expects decisive implementation of the recommendations in the three evaluation reports so far, in particular regarding improved documentation, increased candour and more realistic program assumptions.

Iraq. Germany is prepared to support civil reconstruction in Iraq. For 2003, the federal government has earmarked up to €50 million in the federal budget and a further contribution of €25 million to the EU emergency assistance. Germany shares the Paris Club decision, within the context of an informal moratorium, not to expect any payments from Iraq before the end of 2004. The revenues from oil sales expected in the medium term should be used by the Development Fund for Iraq to finance reconstruction. Germany supports the engagement of the international community in Iraq that has already started. In particular, Germany endorses the work of the World Bank and United Nations in establishing the so-called International Multi-Donor Trust Fund, through which, especially, further humanitarian aid projects and the reconstruction of infrastructure is to be financed.