A quarterly magazine of the IMF

December 2001, Volume 38, Number 4

In the aftermath of the terrorist attacks on the United States, Horst Köhler, Managing Director of the IMF, called for a coordinated international response to deal with weakness in the world economy and the new risks in the global economic outlook. He cautioned that, in the immediate future, economic policies would need to be framed in an exceptionally uncertain environment.

Köhler made his comments in a statement to the IMF's Executive Board that was also transmitted to the IMF's Governors and released to the public. While he noted that "there are good reasons to expect that the current deterioration of economic conditions may be relatively short-lived," he added that there was a "nonnegligible probability of a worse outcome" that would involve lower economic growth and increased financing difficulties for many countries. The IMF, its member countries, and other international organizations would need to coordinate their policies in responding to these developments and risks.

Global outlook

Even before the attacks, the Managing Director said, there had been a marked economic downturn in all major regions of the world. In the aftermath of the attacks, there would be a slowing of activity, particularly in the United States but also elsewhere. The situation of emerging markets and developing countries had become more difficult, with reduced access to global financial markets and deeper declines in demand and in commodity prices. In addition, security concerns after the attacks were translating into higher costs for airline transport, reduced tourist travel, and higher prices and transportation costs for goods.

The United States had been the main engine of world growth for the last decade, the Managing Director said. A further softening in the United States would significantly affect the Latin American and Caribbean countries, and tourist destinations worldwide. Emerging market debtor countries would be affected by the reluctance of international investors to take risks; emerging Asian economies would feel the impact of lower demand in the industrial countries, including for high-tech products; and lower demand and commodity prices were likely to cloud further the outlook for primary producers.

Köhler said that there could be a large impact in either direction on oil prices. Lower oil prices would benefit the net fuel-importing countries, many of which were among the poorest countries. Higher prices would have the opposite effect, although they would benefit the petroleum exporters, including some emerging market borrowers.

Role of the IMF

Faced with the current situation, Köhler said, the IMF could take a number of steps to help its member countries. He encouraged members to review their policy frameworks and approach the IMF early to discuss the implications of recent developments for their economic policies.

• The advanced economies had a key responsibility to ensure that their macroeconomic and financial policies support an early return to sustainable growth and financial strength. The steps already taken to ease monetary policy in these countries were an appropriate and welcome response; if necessary, these countries should take the opportunity for some further easing. Automatic fiscal stabilizers should be allowed to work as a first step, and some discretionary fiscal easing might also prove appropriate—although this should be consistent with a country's medium-term needs. An acceleration of structural reforms needed to raise countries' growth potential over the medium term would contribute strongly to restoring confidence.
• Emerging market economies were vulnerable to any interruption of private financial flows, and sound economic policies were imperative. For its part, the IMF could (1) encourage eligible countries to consider its Contingent Credit Lines (its precautionary facility designed to assist members with strong policies and financial systems to resist contagion from capital market disturbances), (2) consider new programs supported by the Supplemental Reserve Facility or Stand-By Arrangements, and (3) consider augmenting or rephasing access to its resources for those countries that already have arrangements with the IMF.
• The IMF stood ready to help developing countries by approving new Stand-By Arrangements, or augmenting or rephasing existing arrangements, and by compensating members experiencing shortfalls in their export earnings through its Compensatory Financing Facility (CFF).
• For low-income countries, where a three-year structural reform program was either in place or could be agreed rapidly, the IMF would stand ready to make available additional resources under the Poverty Reduction and Growth Facility (PRGF). For those members not in a position to consider a three-year program, Stand-By Arrangements would be an option. The IMF would also encourage countries to seek additional concessional resources from official sources and work to encourage a positive response from creditors where necessary, including assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative.

The Managing Director stressed that the IMF's existing financial instruments and policies appeared adequate but added that the IMF would be ready to adjust its policies if necessary. He also emphasized that recent events should not hinder the IMF's support for low-income countries in the immediate circumstances.

Worldwide response

"The IMF's response should be part of a concerted response by the international community," Köhler emphasized. This would require a whole range of institutions to become engaged.

• The participation of the multilateral development banks would be essential to provide sectoral advice and because additional project and program financing and budget support would be needed in some countries. For this reason, the heads of the IMF, the World Bank, and the regional development banks had set out a coordinated response.
• Export credit agencies would need to play a role in assuring the continued availability of trade finance.
• The Paris Club of industrial creditor governments might need to be involved in rescheduling the obligations of some members to official creditors.
• Reengaging the private capital markets would be key to a more rapid recovery. In this connection, the IMF's Capital Markets Consultative Group, designed to strengthen the dialogue between private and official creditors, would be an important vehicle in reaching out to the private sector.
• The launching of a new trade round was critical to bolster confidence. It was equally important to ensure that there was no loss of momentum on the various initiatives of the industrial countries to increase the access of poorer countries to their markets.
• Efforts to vigorously implement anti-money-laundering initiatives should be fully endorsed. The IMF, in concert with other institutions, was further strengthening its role in this effort.

In conclusion, Köhler said that the international community should meet "to lead this coordinated approach to the deteriorating world situation." For this reason, he reiterated his support for an early meeting of the IMF's ministerial-level International Monetary and Financial Committee and the Joint Development Committee of the IMF and the World Bank. (This meeting was subsequently scheduled to be held in Ottawa on November 17-18, 2001.)

IMF Releases Reduced World Economic Outlook Projections

Economic prospects for 2001-02 have weakened since the IMF released its World Economic Outlook projections in May 2001, and downside risks have been further exacerbated by the September 11 terrorist attacks on the United States. In the IMF staff's most recent World Economic Outlook, published in October 2001, growth projections have been reduced for almost all regions. This worsening reflects a variety of factors, including the greater-than-expected impact of the global slowdown in a number of regions; a delayed recovery in the United States; weakening domestic demand growth and confidence in Europe; the prospect of a period of slower growth in Japan as it presses ahead with structural reforms (although these will have substantial medium-term benefits); the continued decline in information technology spending, which affects Asia in particular; and deteriorating financing conditions for emerging markets, especially in Latin America.

Global slowdown

GDP growth is now slowing in almost all regions of the globe, according to the IMF staff projections, accompanied by a sharp decline in trade growth. In response, many countries—especially the United States—have eased macroeconomic policies, most recently in mid-September in the aftermath of the terrorist attacks. This easing, along with the gradual abatement of oil prices and of other shocks that have contributed to the slowdown, should help support economic activity and confidence in the period ahead. But substantial uncertainties and risks persist as the downturn makes the world more vulnerable to further unexpected developments, and a significant danger of a deeper and more prolonged slowdown remains.

The terrorist attacks have also increased uncertainty. The challenge facing policymakers is how best to limit these downside risks while promoting an orderly resolution of the imbalances in the global economy over the medium term.

Global growth—which in the World Economic Outlook is projected using purchasing power parity weights—is now projected at 2.6 percent in 2001 (see table), 0.6 percentage points lower than was expected in May 2001 and a decline of over 2 percentage points from the unusually rapid pace in 2000. Growth in the United States is projected at 1.3 percent, 0.2 percentage points lower than in May 2001, with activity expected to begin to pick up modestly in the latter part of this year as the effects of previous policy easing take hold. The outlook for the other industrial countries has weakened more significantly. In the euro area, growth has been marked down by 0.6 percentage points to 1.8 percent, driven by a sharp weakening in domestic demand growth, particularly in Germany, and by the greater-than-expected impact of the global slowdown. Of most concern, the prospects for Japan have become increasingly somber. With GDP now projected to decline by 0.5 percent in 2001, more than 1 percentage point worse than earlier projected, Japan is now likely to experience its fourth recession of the past decade. (A recession is defined as two quarters of negative real GDP growth.)

Developing and transition countries

Prospects for most developing and transition countries have also deteriorated. Growth has been marked down sharply in the Western Hemisphere, where activity has been adversely affected by Argentina's renewed financial difficulties, as well as by political uncertainties and other shocks, including the energy crisis in Brazil. Capital inflows to most countries—except Mexico—have also slowed, which is a cause for concern given the region's large need for external financing. In emerging Asia, growth in China remains resilient, but many countries have been hard hit by slowing global growth and the downturn in the electronics cycle. The impact has been exacerbated by intraregional trade linkages and developments in Japan. Growth prospects have also weakened moderately in the Middle East owing to lower oil prices and cuts in production and the ongoing crisis in Turkey. Projected growth in Africa has also been reduced, although it is still expected to be higher than in 2000, aided by improved weather and an easing of security problems in several countries. In contrast, the outlook for the transition economies has remained broadly unchanged.

World Economic Outlook's output projections (Annual percent change)       Current projections Difference from May 2001 projections1     1999     2000   2001 2002 2001 2002 World output 3.6 4.7 2.6 3.5 -0.6 -0.4 Advanced economies 3.4 3.8 1.3 2.1 -0.6 -0.6 Developing countries 3.9 5.8 4.3 5.3 -0.7 -0.3 Countries in transition 3.6 6.3 4.0 4.1 — -0.1 Source: IMF, World Economic Outlook, October 2001 (Washington: International Monetary Fund). 1Updated using purchasing-power-parity weights, which are summarized in the Statistical Appendix, Table A of IMF, World Economic Outlook, October 2001.

Impact of terrorist attacks

This forecast has not been adjusted for the September 11 terrorist attacks on the United States. Clearly, recent events will have an impact on economic activity in the short term and add to the already significant downside risks both in the United States and elsewhere. The attacks have taken a terrible toll in human lives and resulted in substantial property damage, but their direct impact on U.S. activity is likely to be moderate; moreover, indications are that the financial infrastructure around the world has held up well. However, the indirect effects may be more substantial, including the possibility of a sustained deterioration in consumer, corporate, and financial confidence; of a flight to quality in financial markets that could exacerbate existing weaknesses associated with financial stability or funding; and of higher oil prices.

While it is too early to make a full assessment of such risks, the recent interest rate cuts in the United States, Canada, and Europe, accompanied by moderate additional easing in Japan, will be helpful in sustaining confidence and activity.

Torsten Sløk is an Economist in the World Economic Studies Division of the IMF's Research Department

External Financing for IMF Technical Assistance

As part of its mandate, the IMF provides technical assistance to member countries working to strengthen their capacities for effective economic management. This assistance focuses on the IMF's core areas of competency—macroeconomic policy, foreign exchange policy and systems, fiscal policy and management, and macroeconomic statistics.

As the IMF's membership expanded and many countries adopted market-oriented economic systems, technical assistance activities grew rapidly in the early 1990s. The IMF has also been called on to mount large, coordinated efforts to provide technical assistance promptly to countries emerging from armed conflicts. This demand continues to rise as the IMF helps member countries to adopt international standards for financial, fiscal, and statistical management; heavily indebted poor countries (HIPCs) to design and manage debt- reduction programs; and low-income countries to formulate and implement poverty reduction and growth programs.

As these demands have grown, the IMF has set priorities in its technical assistance to focus on key policy and program areas, and to strengthen coordination. The IMF has also increasingly collaborated with other donors in raising financing for its technical assistance program.

The IMF now spends some $100 million a year on technical assistance work—around 20 percent of its annual administrative expenditures. While the IMF finances its technical assistance mainly through its own budget, external financing has recently become an important additional source of support. This financing is contributed as grants under the IMF's Framework Administered Account for Technical Assistance or, in some cases, through cost-sharing arrangements under United Nations Development Program (UNDP) projects implemented by the IMF or through other arrangements with the IMF.

In the IMF's 2001 financial year, which ended April 30, 2001, external financing from bilateral and multilateral donors accounted for more than 20 percent of total IMF technical assistance and training activities. Japan continues to be the largest donor, providing some 70 percent of external financing in FY2001. However, as a result of the IMF's recent efforts, the number of donors has increased to include Australia, Canada, Denmark, France, Italy, Japan, the Netherlands, New Zealand, Switzerland, the United Kingdom, and the United States, as well as the Asian Development Bank, the European Union, the Inter-American Development Bank, the UNDP, and the World Bank.

In the first half of the 2002 financial year (May-October 2001), external donors contributed approximately $24 million to support the following IMF technical assistance initiatives:

Cambodia Technical Cooperation Action Plan (TCAP). This medium-term program is designed to strengthen the government's capacity to formulate and implement sound macroeconomic policies in the fiscal and monetary areas and to manage public finances more effectively. Through resident advisory and short-term expert services, training, and the introduction of automated management information systems, the program aims to strengthen the institutional capacity of the following key departments and agencies: the Budget and Financial Affairs, Tax, and Customs and Excise departments in the Ministry of Economy and Finance, and the National Bank of Cambodia. The Cambodia program was approved in May 2001 with $5.1 million in external funding from the United Kingdom, the Netherlands, the Asian Development Bank, and the UNDP.

Caribbean Technical Assistance Center (CARTAC). This comprises a three-year program designed to assist 20 countries located in the Caribbean region to improve their current practices in core areas of economic and financial management: budget and tax administration; financial sector supervision and regulation, including offshore centers; and the compilation of financial, economic, and social statistics. The CARTAC agreement came into effect in May 2001, with $8.7 million in external funding provided by Canada, the World Bank, the Inter-American Development Bank, the United States, and the UNDP.

Central Asian countries—technical assistance for economic reforms. In 1998, the IMF, with financing from the Swiss State Secretariat for Economic Affairs, began a program of technical assistance to support economic reforms in the five central Asian countries (Azerbaijan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan) that are represented by the Swiss Executive Director at the IMF. In July 2001, Switzerland approved an additional $5 million for the program, which will be used to finance technical assistance projects that build on previous efforts to strengthen budget, fiscal, and debt management in these five countries.

Distance learning for African countries. In September 2001, the United Kingdom's Department for International Development approved $0.9 million for a 15-month project to enable the IMF Institute to deliver its Financial Programming and Policies course to 80 officials from 21 countries in Africa through distance-learning techniques over a 10-week period supplemented with 2 weeks of residential training.

General Data Dissemination System (GDDS) project for anglophone Africa. In September 2001, the U.K. Department for International Development also approved $2.4 million for a two-year project enabling the IMF Statistics Department to assist 14 countries in anglophone Africa to improve their capacity to produce and disseminate reliable and timely macroeconomic and social statistics using the GDDS as a framework.

Technical assistance to improve international standards and codes in Central and Eastern Europe and the Commonwealth of Independent States. In November 2001, Italy became a bilateral donor to the IMF technical assistance program. It established an Italy Technical Assistance Subaccount, contributing approximately $2 million for technical related assistance to international standards and codes for financial, fiscal, and statistical management.

Kawin Wilairat, IMF Office of Technical Assistance Management.