Assistant Treasurer of Australia
On behalf of the constituency comprising:
Australia, Kiribati, Korea, Marshall Islands, Federated States of
Micronesia, Mongolia, New Zealand, Palau, Papua New Guinea,
the Philippines, Samoa, Seychelles, Solomon Islands, Vanuatu
International Monetary and Financial Committee
of the IMF Board of Governors
Sunday, April 16, 2000
The Improving Global Economy & the Way Forward
When Ministers last met we were encouraged to observe the improving world economic environment. We are now presented with an assessment even more favorable than that envisaged six months ago. Growth in the United States has proved more resilient, the recovery in emerging markets has been consolidated, and Europe has strengthened moderately. With such a positive outlook forecast, it could be easy for policy makers to become complacent. However, significant policy challenges exist, not only in ensuring a steady transition to sustainable growth rates in many of the major economies, but also in achieving policy coherence between macroeconomic objectives and further progress on structural reforms.
While there has also been little change in the dilemmas facing policy-makers, there are heightened sensitivities and uncertainties surrounding the appropriate stance of policy. While much can be drawn from policy lessons of the past, addressing excess demand and building inflationary pressures, particularly in the US and to a lesser extent in Europe, will pose significant new challenges for policymakers. The uncertain influence of equity markets, and greater question marks surrounding the potential non-inflationary growth rate of the economy, make macroeconomic management all the more difficult. No less of a challenge lies ahead for the effective management of the Japanese recovery, and while the efficacy of traditional macroeconomic measures is being questioned to some extent, we can be confident that ongoing reform efforts will be crucial for sustained growth over the medium term. Effectively addressing these policy challenges will be crucial to sustaining world growth this year and beyond.
In this constituency, the spectacular recovery staged by the Korean economy is expected to moderate to a still robust, but more sustainable pace in 2000. This strong performance will continue to be supported by an ongoing commitment to structural reform, particularly in the corporate and financial sectors.
Recent economic developments in the Philippines lend credence to the view that the economy has recovered and is now gearing up for higher growth. In particular, output has recovered faster than expected and inflationary pressures remain subdued. The authorities' continued commitment to policy reform particularly in the fiscal, corporate and financial sectors is expected to ensure that the recovery is sustainable and the fruits of growth are eventually shared by all.
In Australia, growth is expected to continue to be strong, easing slightly this year, in line with longer-term potential. While there is no evidence of widespread overheating, the recent withdrawal of monetary stimulus responds to strengthening international growth.
The New Zealand recovery continues to strengthen, and along with it the possibility of incipient inflationary pressures. In recognition of this, monetary policy conditions have become less stimulatory in recent months. The new Government has committed itself to responsible and transparent policymaking, including the dual pillars of maintaining price stability and fiscal responsibility.
The Role of the Fund: Refocusing our Direction
In recent years, there has been increasing pressure - often external - for the Fund to expand its role and the result has been a tendency for the Fund to overreach itself. In our view, this expansion has certainly reached its limit and possibly gone too far. However, that is not to say that we should react in a `knee jerk' way by simply advocating a move to the other extreme. We consider that efforts already underway within the Fund are well balanced and a step in the right direction.
The debate on the future role of the Fund rightly centers on what should be its core functions and how this might be operationalized. In our view, the Fund's role should be focussed on surveillance of core macroeconomic issues and crisis prevention and, when the need arises, on crisis management. However, where a crisis is likely to recur without structural adjustment, the Fund needs to work cooperatively with other institutions taking care to avoid duplication. Importantly, for efforts to prevent crises, the role of policy advice (via surveillance) and technical assistance should not be overlooked, nor under-budgeted.
Another important aspect of the issue is the governance of the organization itself. In this regard, we see the distribution of quotas, which does not reflect the changes in the global economy over recent years, as an issue that needs to be resolved. We await with interest the review of quota formulas when it is reported to the Executive Board.
Progress in Strengthening Fund Surveillance, Standards and Codes
Surveillance will continue to be at the heart of the Fund's role. We are supportive of continued efforts to strengthen Fund surveillance and improve transparency, and welcome the progress in this area. A key requirement is that surveillance needs to be flexible, as well as attuned to individual members' circumstances.
While every member is entitled to regular surveillance, fully-fledged annual consultations may not be necessary in some cases. For example, depending upon their economic circumstances, more frequent contact with small states need not necessarily be through full Article IV consultations.
There should also be greater selectivity of content. Surveillance should focus on core macroeconomic issues and an explanation should be provided in the staff report where these are not addressed. Non-core issues should only be addressed where they are of macroeconomic relevance. In these and other areas, the Fund should coordinate its efforts carefully with other multilateral institutions and draw on the expertise of other bodies, especially in considering non-core issues.
We continue to support the development of international standards and codes. Having said that, given the proliferation in the range of new standards, we consider it prudent to have a period of consolidation, with a view to ensuring cohesion and complementarity. It is particularly important that these standards be applied flexibly, taking account of the circumstances of the economy and the structure/nature of the financial system. If we accept that the broad aim is to encourage high quality economic and financial management policy and practice, we should aim to assess standards in the appropriate context. Therefore, the emphasis in this work should be on transparency of the degree of compliance with various codes and standards, the reasons for not fully complying if that is the case, and on the substantive quality of economic and financial policies. This provides a more constructive and insightful approach to standards and codes. Finally, where "incentives" are used to encourage economies to implement standards, they should focus on encouraging the implementation of sound policies appropriate to a country's particular needs.
The SDDS, which has suffered from some of these criticisms in the past, has been made more flexible. In considering expanding the coverage of the SDDS, the Fund should be mindful of the possibility of overload. It should assess the practicality of collecting information and the capability of subscribers to comply with the new requirements on coverage, periodicity, and timeliness. We have some concerns about the direction that the work on macro-prudential indicators may be taking. We agree with the notion that macro-prudential indicators, if analyzed carefully and intelligently, can be useful as part of a process of assessing a country's potential vulnerability to economic shocks. But there is a risk of macro-prudential indicators being applied in an overly simplistic and mechanistic manner, potentially leading to spurious conclusions about a country's economic vulnerability.
Similar arguments can be made in respect of reserve and debt-related indicators of external vulnerability. There are a number of issues which make simple evaluations of vulnerability on the basis of such indicators impractical - principal among them is the varying relevance of such measures across alternative exchange rate arrangements.
Review of Fund Facilities
The complement of the Fund's financial facilities needs to sit squarely with its role in the international financial system. It is therefore timely that these facilities be reviewed with a mind to some streamlining and, possibly, some remodeling, taking account of developments on issues such as the Fund's framework for private sector involvement in crisis prevention and resolution. In this regard, we concur with actions taken by the Board to date.
We can be definitive on two issues: (i) the Stand-by Arrangement should remain the central facility; and (ii) the Supplemental Reserve Facility has been effective in combating large systemic crises, and its terms and maturity structure provide a suitable incentive structure and guard against moral hazard.
The issues beyond this are more difficult and we cannot be precise at this time. We can, however, point to some relevant issues that may help fine tune the consideration of these issues:
- There will continue to be cases where members have intractable structural problems that require longer-term adjustment if they are not to fall into recurring crisis. This establishes the case for retaining the Extended Fund Facility, although we would accept the case for reviewing the repayment term and its pricing to encourage early repayment when possible.
- In respect of the Contingent Credit Line (CCL), there may be a case for trying to identify ways to make it more useable. However, we would be reluctant to see eligibility or conditionality weakened. While there may be a case for lowering cost, a broader review would be desirable. A key question is how to disqualify a member whose policies have deteriorated since pre-qualification.
Safeguarding Fund Resources
Despite the apparently relative infrequency of significant mis-reporting to the Fund, it is a serious event, and should be treated as such. We see it as desirable and essential that some details of deliberate mis-reporting are published, along with details of remedies to ensure it is not repeated. In significant cases where mis-reporting was unintentional, the record should be corrected in a low-key manner, which should not be a problem for the member. We will need, therefore, to reflect further on how we communicate these events in a way that protects the integrity of the Fund while treating members fairly.
All members of the Fund will be concerned that there are adequate safeguards on the use of Fund resources. We are not sure that the proposed safeguards assessment procedures will prove to be a sufficiently well targeted or cost effective response, but we are willing to trial the approach subject to review in 12 to 18 months.
Role of the Private Sector in Forestalling and Resolving Financial Crises
We continue to view greater private sector involvement in forestalling and resolving financial crises as a priority area.
The progress in this area since the last Annual Meetings, particularly on developing a framework, has been pleasing. We have been encouraged, for example, by what seems to be a growing acceptance of the role expected of the private sector, and by recent cases of private sector involvement without litigation. That said, we are looking to further progress on making tools for private sector involvement operational. In this regard, we are encouraged by the leadership shown by the UK and Germany in regard to collective action clauses in sovereign bonds.
We are pleased with the proposed framework resulting from the Executive Board discussion. We would, however, want to proceed carefully and in time reflect on the practical experience gained under the proposed framework - in particular, whether private sector involvement has been sufficiently secured through the Fund's catalytic role in those cases where more concerted private sector involvement is not initially sought. Where there are difficult judgement issues we feel it would be best to err on the side of greater private sector involvement. We would also see it falling to national authorities (with the advice of the Fund) to work out how best to involve the private sector.
We encourage the Fund to offer guidance on how national authorities could develop and implement collective action clauses and better communication between creditors and debtors. We also encourage further progress in promoting appropriate reforms to insolvency law in developing and emerging economies. Implementation of these tools will largely, if not exclusively, fall to national authorities themselves. However, facilitation and leadership is required by the Fund - it should provide guidance and, where appropriate, public comments of support for actions of national authorities to aid the credibility and market acceptance of these tools. In addition, the Fund should be working now on developing a protocol on the use of stand-stills on debt repayments. This would allow it to offer informed advice, if requested by a national authority that, in an extreme situation, is considering the use of a stand-still.
Enhanced HIPC Initiative & Poverty Reduction and Growth Strategies
We welcome the progress in the implementation of the enhanced HIPC Initiative since its adoption in September last year. In this connection, we note that several countries have already initiated the process of preparing Poverty Reduction Strategy Papers; a number of retroactive cases have reached their new decision points thus paving the way for additional assistance, and new cases have been considered under the enhanced Initiative.
The successful implementation of the enhanced HIPC Initiative rests primarily on the full participation of multilateral and bilateral creditors. In this regard, we welcome the increase in bilateral contributions under the Fund's financing of the PRGF-HIPC Initiative. In this constituency, New Zealand has joined the majority of our constituency in pledging to contribute an amount equivalent to its SCA-2 account to the funding of the Initiative. However, to ensure financing of the Fund's commitment to the Initiative, bilateral contributions that are not yet effective as a result of internal procedures and/or the need to complete administrative requirements will need to be received soon. In the same light, an early decision should be reached on the release of the remaining five-fourteenths of investment income from gold profits. We recognize the funding difficulties likely to be faced by other multilateral institutions and encourage them to continue their efforts to mobilize funds internally, realize pledged trust fund contributions from donors and approach potential donors that have not contributed. We consider it equally important to address the issue of burden sharing, particularly for non-Paris Club creditors.
Finally, we urge all involved in implementing the Initiative to redouble their efforts, enabling countries to start receiving debt relief as early as possible. We also encourage the IMF and World Bank to keep members well-informed about the rate of progress of countries through the Initiative.