Speech

A Strengthened Surveillance Role for the IMF, Remarks by Mr. Agustín Carstens, IMF Deputy Managing Director

May 12, 2006

1. I would like to thank Mr. Paul Volcker and Mr. Jacob Frenkel, co-chairs of the Group of Thirty, for the kind invitation to participate in this 55^th plenary meeting of the Group of Thirty. I am delighted to take part in this discussion on "the IMF in a New Era," a subject that obviously has some relevance for us at the Fund.

2. Twenty-first century globalization presents the world community with new challenges. The IMF has an important role to play in fostering international cooperation and helping individual countries meet these challenges. Over the last few years, we have been re-examining our role to ensure that we stay in step with the needs of our members. This has led to the emergence of our medium-term strategy—a strategy that was overwhelmingly supported by our membership at our Spring Meetings in Washington just last month.

3. The medium-term strategy encompasses work in various areas. It provides new directions for enhanced surveillance by the Fund. It addresses our changing role in emerging market countries. The strategy also entails measures for more effective engagement in low income countries, where progress is critical in order to attain the Millennium Development Goals. It speaks to issues around the governance of our institution, and to capacity building in our member countries. As much as it would be interesting to touch upon all these areas, I want to concentrate my remarks on issues particularly relevant to this audience. I would therefore like to dwell primarily on surveillance, and on the IMF's role in emerging market countries, and on the Fund's governance and income position.

Enhancing Our Surveillance

4. The difficulties in tackling unprecedented global imbalances and the challenges facing individual countries underscore the need for stronger exercise of the Fund's policy analysis and advice to its member countries—of course, what we refer to as surveillance. Ensuring the effectiveness of surveillance remains one of our key objectives, and this lies at the heart of our medium-term strategy. The proposals that we presented at our recent Spring Meetings have garnered strong support from our membership.

5. Our new framework for surveillance encompasses four key elements. The first is a new focus onmultilateral issues, including global financial issues, and especially the spillovers from one economy on others. In this new approach, the Fund will engage in multilateral consultations. Essentially, a widespread view brought out by deliberations on the Fund's future is that there is not enough engaged debate to resolve global macroeconomic problems. As a universal institution, the Fund is better placed than any other forum to be a catalyst for multilateral debate and action. However, our bilateral Article IV consultations do not really provide much opportunity to discuss opportunities for joint policy action, and our global surveillance instruments—of our World Economic Outlook and Global Financial Stability Report—are designed more to present in-depth analysis than to catalyze action.

6. It was against this background that a multilateral consultation procedure was proposed—to complement existing arrangements. Initiating these multilateral consultations will allow the Fund to take up issues comprehensively and collectively with several members at once and where relevant, with entities formed by groups of members. These consultations will be an important vehicle for building a common vision for action on issues like global imbalances, something that would lessen risks for countries all over the world.

7. Under our new framework, our member countries and their institutions will strengthen the commitments that the make to each other under the Fund's Article IV, on which surveillance can focus on monetary, financial, fiscal and exchange rate policies. So that all members have an opportunity to be heard, our Executive Board and the International Monetary and Financial Committee will be involved in the new procedure for multilateral surveillance.

8. In sum, our surveillance is adapting to new realities in the world. It will be a more action-oriented surveillance, and it will also include strengthened analysis and monitoring of the exchange rate policies, risks and spillovers in our member countries.

9. Individual country surveillance will be at the heart of our mission. Here we aim to promote greater awareness of regional contexts and cross-country experiences; to elevate the coverage of financial sector issues in Article IV reports; and to focus surveillance better by streamlining Article IV reports in alternate years for selected countries. As a whole, our focus will be sharper and our outreach enhanced.

Supporting Emerging Markets

10. We intend to pay particularly close attention to our emerging market members. These countries have emerged to occupy an important position in the world economy, and many have stepped up to become major global players. As they continue to pursue sound policies and integrate effectively into world trade and capital markets, they make a welcome contribution to global economic stability and avoidance of financial crises.

11. Already, the rapidly expanding reach of private capital markets has given rise to unprecedented opportunities and challenges in these emerging economies. It should, therefore, be no surprise that financial and capital markets issues will be at the center of our work in these countries. We envisage a major push to integrate financial sector analysis with the macroeconomic analysis that has traditionally been the focus of our surveillance. This will require some organizational changes within the Fund, but also the active participation of our members in this endeavor.

12. Emerging market countries have accumulated large amounts of reserves to self-insure against crises. This approach is costly. The current benign situation in global financial markets should not lull us into thinking that the risk of financial crises is over. The Fund's capacity to lend substantial amounts under appropriate safeguards is central to its ability to help emerging market members deal with the risks associated with large and volatile capital flows. But a central lesson from the past decade is that it is far preferable to prevent a crisis from developing in the first place than to try to cure it after the fact. The Fund needs a financial instrument to help prevent crises. Our Managing Director has proposed that the Fund could provide contingent financing for countries that have strong macroeconomic policies, sustainable debt, and transparent reporting, but which remain vulnerable to shocks. We will be discussing ways to take forward this idea over the summer.

13. In the design of any new instrument, we must ascertain the right balance between meeting potential users' concerns about predictability and intrusive Fund conditions and ensure that Fund resources are safeguarded. A well designed contingent financing instrument can support good policies and, thus, provide signals of strong crisis prevention efforts.

14. We are also considering how we can play a greater role in supporting regional arrangements for pooling reserves. We feel the Fund should be open to supporting regional and other arrangements for pooling reserves, including by signaling sound policies. The foreign currency reserves of emerging market countries are sufficient to meet the potential needs of most members of this class—unless the largest ones are simultaneously struck by financial difficulties. Some groups, for example in Asia under the Chiang Mai Initiative and in the Andean region under the Fund for Latin American Reserves, have already set up funds for contingent financing. While it would be up to these groups to determine the terms for access, the scope for expanding such safety nets would rise with a group's confidence in the economic policies of its members. The Fund can play a role here, focusing on regular and intensive surveillance. We expect to explore modalities for further engagement in this area.

15. We have also focused attention on debt restructuring and lending into arrears. It is important for us to ensure that we have lending instruments and policies that allow lending in adequate amounts and deal with the complications of rare but important cases of sovereign debt restructuring and arrears.

16. While the Fund must be neutral between sovereign debtors and private creditors when debt restructuring becomes necessary, its function at the center of the global financial system requires that it promote the resolution of arrears, which damage confidence in the debtor and in the system as a whole. The requirement that arrears be regularized remains appropriate and in the interest of both creditor and debtor. Recent experience has raised some practical questions, which we are looking at. For example, there is the question of whether the Fund should express views on the macroeconomic parameters that determine settlements. There is the question of what constitutes a good faith effort to resolve sovereign arrears.

17. Fund lending during a debt restructuring should depend on an agreed medium term fiscal envelope and macroeconomic framework, since disputes over the range of reasonable offers hampers debt restructuring programs.

Quota and Voice

18. As a cooperative institution, we feel it is necessary to safeguard the effectiveness and credibility of the Fund, and to further enhance its governance. As such, we feel it is important for all our members to have fair voice and representation in the organization. We are examining how an ad hoc quota increase would improve the distribution of quotas to reflect important changes in the weight and role of countries in the world economy. A lot of work will go on in this area in the coming months, and we hope to take concrete proposals for fundamental reforms to our governing committee for agreement at our September Annual Meetings in Singapore. The bottom line is that we are unlikely to see meaningful international collaboration if all participants do not feel they have a fair weight and voice in the forum.

Internal Financing

19. Finally, let me say a few words about our internal financing. The recent drop in credit, and the associated drop in income, has raised the issue of the long-term sustainability of the Fund's finances. Our overall financial position remains strong from the perspective of our balance sheet, which has continued to strengthen over the recent past. However, income risk has now emerged as an important issue.

20. A variety of measures is available for broadening our income base. We are taking steps to manage our reserves more actively. We are considering user fees for some of our services, including technical assistance. But, in doing so, we need to be sure that we are able to protect our low-income member countries (for example, by establishing a donor-financed trust fund for technical assistance).

21. Ultimately, our objective is to place our institution on a sound financial footing over the long term. To achieve this, we realize that we must have a new business model, based on a stable source of long-term income. Developing a political consensus around any particular measure—be it conversion of gold into earning assets or an annual fee linked to quota or anything else—will take time.

22. In short, it is no longer tenable to finance the Fund's surveillance role at the center of the international financial system, and its capacity building activities from margins on adjustment lending alone. We produce very valuable public goods—like the prevention of financial crises—that need to be financed, irrespective of our activities. We are confident that our members are both mindful and supportive of this. We cannot have an income structure that is incompatible with the activities of the institution. What we must do is find the right formula. At the same time, of course, we need to remain efficient, and we are re-examining opportunities for further cost-savings in the delivery of our services.

Conclusion

23. The development of a medium-term strategy for the Fund has been a long one. However, it has also been one rich in debate—not just within the Fund, but more importantly, outside of it. The priority now, after strong support from our shareholders last month, is to move forward with implementation.

24. On a broad scale, we emerged from our recent Spring Meetings with a strong and renewed mandate to address the world's financial imbalances and to help our membership adapt to the new realities being shaped by globalization. Our 184 shareholders have enjoined us to proceed with reform measures that will make our 61-year-old organization better able to prevent and resolve crises. Today's challenges are considerably different from those of 1945 when the IMF was created. We intend to pursue reforms wholeheartedly, making the IMF more fit for purpose in this 21^st century global economy.

25. Thank you for listening. I look forward to hearing your reflections and to talking more with you about the role of the Fund as we open up this session to discussion.