Minister of Finance of Switzerland
International Monetary and Financial Committee
of the IMF Board of Governors
Sunday, April 16, 2000
| The International Monetary and Financial Committee member for the constituency consisting of Azerbaijan, Kyrgyz Republic, Poland, Switzerland, Tajikistan, Turkmenistan, and Uzbekistan. |
Introduction
At the outset, I would like to congratulate Mr. Horst Köhler on behalf of all the countries in our constituency for his nomination as Managing Director of the International Monetary Fund. I also take this opportunity to thank Mr. Michel Camdessus for the many years of dedicated leadership he provided to this institution.
I am very pleased that this first meeting of the International Monetary and Financial Committee (IMFC) can take place on the background of such a positive global economic outlook. Growth performance last year was higher than any of us would have dared to hope just one year ago. With global output growth for this year forecast to reach its pre-crisis level, the economic downturn following the severe financial crises in 1997 and 1998 was surprisingly brief. Appropriate macroeconomic policy stances in most member countries and strong progress in reducing longstanding structural weaknesses contributed significantly to this rapid resumption of global growth.
I think we should also clearly recognize the important contribution of the International Monetary Fund (IMF) to this positive development. The IMF played a crucial role in containing and managing the aftermath of the financial crises. Of course, in many areas the Fund was moving into uncharted waters and was proceeding by the learning-by-doing approach. This initiated an avalanche of harsh criticisms that continues to date, some more justified than others. I am convinced that the initiatives we have been taken in various areas, based both on the lessons learned over the last years and on the frank and transparent dialog with the civil society, have strengthened the Fund in the role it has to play in an environment of globalized markets. We must remain vigilant so as not to allow the rosy current global economic situation to slow down our efforts in further strengthening the international financial architecture.
Developments in the World Economy
The continuing strong performance of the U.S. economy remains a cornerstone of the positive global environment. Notwithstanding the fact that some of the transitional factors stimulating the U.S. economy have faded and pressures on the supply side are increasing, private domestic demand remains very buoyant and output is growing at rates judged unsustainable by many. So far, also the successive interest rate hikes by the Federal Reserve have done little to slow down economic growth. Moreover, the tight labor market and rising commodity prices do not appear to have increased inflationary pressures. While I welcome the positive impulse for global growth stemming from the U.S. economy, this development has also further increased existing imbalances. The size of the current account deficit, the level of private indebtedness, and the valuation of equity and real estate markets are all at historical highs and the exchange rate of the U.S. dollar remains high.
Under these circumstances, the main challenge remains, more than ever, to achieve a "soft landing". While I agree that an orderly slowdown of U.S. growth is a likely scenario, a large uncertainty remains as to the path of the corrections in the equity markets should a shift in market perceptions occur. Given the problems in determining the driving forces behind equity prices in general and particularly in the context of major technological innovations, assessing the sustainability of the current equity market valuations is extremely difficult. While I have no doubt that the new technologies contain a significant potential to increase productivity in many sectors, I fear that recent developments in equity prices of some industries are based to a large extent on illusions.
Growth performance in Europe has also improved faster than expected, and there are clear signs for a sustained and above-average growth in the coming years. While core inflation in the euro countries has remained subdued despite the picking up of economic activity, the ECB has appropriately tightened the monetary conditions to prevent the build up of inflationary pressures. Given the low level of real short-term interest rates, the ample liquidity, and the weakening of the euro, this tightening should not pose a threat to the economic recovery in the euro area. However, the main challenges for euro countries remain in the area of medium-term fiscal consolidation and reforms of labor and product markets. The recently updated fiscal stability programs appear to indicate a loss of momentum in the consolidation efforts. It is important for euro countries not to miss this period of robust growth to ensure durable improvements of the fiscal positions. In the product and labor markets, further efforts are necessary to expand the scope of the ongoing reform efforts. This will be crucial to help reduce the still high unemployment rate and increase the growth potential of the region.
The Japanese economy is still fighting to reach a self-sustained growth path, notwithstanding the zero-interest rate policy and several fiscal impulse programs over the last years. Clearly, the effectiveness of both policy instruments has become severely constrained. This is particularly true for fiscal policy. With the general government deficit approaching 10 percent of GDP and the forthcoming huge fiscal challenge stemming from demographic changes, the authorities will have to make very difficult choices. In my view, the fiscal position has deteriorated to a point at which further support through fiscal impulses should be avoided. I sincerely hope that the expansive budget for FY2000 will be sufficient to put the Japanese economy on a sustainable recovery path. In addition, monetary policy must continue to be supportive in order to prevent a revival of deflationary pressures and to counter the appreciation of the yen. Macroeconomic policy actions should, of course, be accompanied by structural reforms that are necessary to stimulate domestic demand.
The recovery in the crisis-hit Asian countries has been impressive. I commend the authorities for their firm commitment in implementing the ambitious structural reform programs that were launched following the financial crises. Sustaining high growth rates in the coming years will be difficult and will depend on the progress of these reforms. Since in several crucial areas, such as the restructuring of the financial and corporate sectors, reforms are far from concluded, complacency must be avoided. In my view, in several areas the litmus test will be, if the new institutional frameworks that have been put in place will also effectively be used and enforced. In this context, transparency and good governance will be crucial. The crisis-hit countries will also face important challenges in the fiscal area, given the necessity to withdraw macroeconomic stimulus in the near future. Fiscal policy should bear most of the adjustment to allow interest rates to remain low and thereby facilitate banking and corporate restructuring. Moreover, fiscal consolidation will also be necessary to stabilize the level of public debt.
I was very encouraged by the faster-than-expected recovery that is projected for emerging market economies in Latin America. Growth performance should become more balanced in the coming years, since the external environment will continue to be beneficial for the region and investor confidence is bolstered by the fact that many countries are successfully implementing sound macroeconomic and structural policies. In contrast to the past, most emerging market economies of the region pursued prudent macroeconomic policies despite the recessionary environment and many have taken serious measures to reduce their fiscal deficits to more sustainable levels. Notwithstanding these positive developments, the enormous external financing requirements of these countries constitute an important vulnerability for the region, since Latin America's economic development depends to a high degree on capital inflows. Measures to improve international competitiveness, to open up the economies, and to expand non-commodity exports more forcefully will be crucial to reduce the traditionally high current account deficits existing in many of the countries.
The pick up in Russia and the CIS after the Russian crises has been stronger than expected. It is important to note, however, that an important part of the recovery is due to exogenous factors rather than policy measures. There remains a strong demand for structural and fiscal reforms to insure that the recovery continues on a sustainable basis. The merits of speedy reforms have been demonstrated in the economies of Central Europe and the Baltics. Furthermore, being on the EU accession track provides additional momentum and incentives to push reforms. Besides that there are mainly two factors that will contribute to a better performance. First, the stronger recovery in Western Europe, which favors export activities, and second the overall improved confidence, which stimulates investment.
Review of Fund Facilities
I welcome that the Executive Board has had an opportunity to have a first general discussion regarding the Fund facilities as a whole. The IMF has continuously adapted its financial instruments to take into account developments in the international financial system by adding new facilities. This has naturally led to a very complex framework of various facilities, in which undesirable interactions, overlaps, and inconsistencies can easily arise. The time has come to streamline the existing framework and, more importantly, to assess if the facilities are still appropriate in the current international environment. I welcome the decision to eliminate four redundant facilities and the simplification of the Compensatory Financing Facility (CFF).
In my view, the Fund's core facilities, namely the stand by arrangements (SBA) and the Extended Fund Facility (EFF), continue to remain appropriate for dealing with traditional balance of payments problems. However, we must take into account the globalization of private capital markets and the growing access of Fund members to these markets by better focusing the use of these facilities. Clearly, every member has the right to access Fund resources in the case of balance of payments imbalances. For countries with access to private capital markets, it is very difficult to argue for providing official financing at very favorable rates. To avoid undue recourse to Fund financing, we should aim at a wider use of precautionary stand-by arrangements for countries with market access. Such arrangements would suffice to signal the Fund's "seal of approval" of a country's economic policy and help catalyze private capital flows on more favorable terms. Furthermore, we should consider raising the rate of charge for SBAs so as to promote the use of private capital and to keep Fund resources available for countries depending solely on official finance.
As regards the EFF, the problem lies in bringing back its use in line with the original purpose. This longer-term facility should be applied only in cases, in which deep and widespread structural distortions justify an extended repayment schedule, for instance with transition economies. In the past, EFFs tended to be treated as an alternative to SBAs in cases, in which short-term debt service profiles constituted a problem. This must be avoided in the future. I strongly support keeping EFFs in the Fund's toolbox, if they are appropriately targeted. This facility should become the instrument of choice to assist members that have graduated from PRGF eligibility and that typically do not have access to capital markets. Obviously, many transition countries would fall into this category.
I am convinced that the "over-use" of SBAs and EFFs can be limited by better defining the target groups, by applying conditionality strictly, and by using restraint in access policy. Furthermore, in cases of repeated requests for use of resources, conditionality must be strengthened and appropriately front-loaded. Nevertheless, besides raising the rate of charge for SBAs, we might also want to graduate the rate of charge for the EFF in order to provide an incentive to repurchase early.
I think the Fund has played an important role in cases of balance of payments crises characterized by large short-term capital outflows. In my view, the Supplemental Reserve Facility (SRF) that was created in 1997 has served its members well. By providing rapid access to financing well above normal limits, albeit at higher interest rates and with shorter repayment periods, the Fund has been successful in assisting countries facing sudden loss of market confidence. However, I am less convinced by the usefulness of the Contingent Credit Lines (CCL). The idea of creating a facility that assists members in their efforts to prevent financial crises instead of helping in their resolution is certainly laudable and we have to continue in this direction. However, the protracted discussions at the time of the establishment of the CCL and the lack of use so far have underscored the problems of putting the idea into practice. Based on the feed back from potential CCL users, the fundamental obstacle of this facility appears not to be its price, but rather the ambiguous signals that such an engagement could send to the markets. If this is the case, it is difficult to see how modifications in the modalities of the CCL could promote its use, since this inherent phenomenon would remain. I look forward to the Fund's further reflections on this issue.
Safeguarding Fund Resources
I strongly welcome the steps that have been taken to bolster the safeguards on the use of Fund resources. Credibility is one of our institution's most valuable assets, and we should spare no effort to protect it. Recent cases of misreporting and misuse of Fund resources, although few in number, have cast shadows on the institution's reputation and have to be taken very seriously. While no system will be able to completely eliminate the possibility of misuse, I think the proposed two-stage approach to safeguards assessments is an important step in strengthening the current framework. It sends a clear signal to the public and to members that the Fund is tackling this very sensitive issue.
I also attribute great importance to strengthening the ex post handling of cases of misreporting. While extending the existing guidelines on misreporting is important, as always, the effectiveness of these guidelines will depend on their application. The Fund should make more frequent and systematic use of the remedies that already exist. In this context, we should also consider the role of the lack of administrative capacity in misreporting cases. Building up sufficient capacities with the help of Fund technical assistance will be crucial to avoid unintentional misreporting. In terms of sanctions, publicizing each case of misreporting is the single most effective instrument, and I strongly support this measure.
Surveillance - Review and Integration of Standards and Codes
The Fund's surveillance activities have evolved dramatically over the last years. Our strong push for increased transparency with regard to economic and financial data and policy stances has led to a significant broadening of the Fund's surveillance mandate. While many of the important initiatives that were launched over the past years are now fully operational, several pilot programs are still ongoing. What came out clearly in the Biennial Review of Fund surveillance for the period 1997-99 is that these initiatives will have a significant impact on surveillance activities. An important element of future surveillance will be to assess and monitor developments in the broad range of issues covered by the various codes and standards. The Article IV consultations present an ideal framework for this exercise.
Of course, the broadening of the Fund's surveillance mandate comes at a cost. On the one hand, staff resources have had to be increased significantly. On the other hand, the risk of loosing focus and thereby compromising the quality of surveillance is not negligible. Since I continue to believe that high quality surveillance and widespread transparency are the most effective measures to strengthen crisis prevention, we should take these issues seriously. Therefore, we have supported the substantial increase of staff resources. These resources should allow the Fund to perform the additional tasks with which it has been entrusted. However, to maintain the quality of current surveillance work clear prioritization between core and non-core issues will be required. The focus of the Fund's surveillance must remain in the areas of its primary responsibility. In all other areas, the Fund will have to rely more on the relevant international organizations. I warmly welcome the progress that has been made in collaborating with other organizations and hope these ties can be further strengthened.
Private Sector Involvement
Progress in this important area continues to be slow. While this can partly be attributed to the relative calm of financial markets, the main reason remains the difficulty in reaching a consensus on the potentially far-reaching measures. We must persevere with our efforts to build on the principles laid out in the report by G-7 Finance Ministers last summer. In this context, I welcome the Executive Board's first steps toward defining an operational framework for securing private sector involvement. Moving away from the current case-by-case approach will allow the Fund to convey the message to markets more clearly, namely that under certain circumstances official financing will be contingent on adequate private sector involvement.
The experience with recent cases appear to indicate that market participants are not reacting as negatively to their involvement in the resolution of financial crises as this was expected last year. This is very encouraging, but should not lead us to complacency. I am convinced that in clarifying our strategy by providing a more operational framework, we will further increase the understanding of market participants for our endeavor. I urge the Executive Board to continue its discussions on the numerous issues that were raised in the context of the proposed framework. The aim must be to define, in an operational fashion, in which cases the Fund can rely on its traditional catalytic role to ensure private sector involvement, and in which cases more concerted forms will be necessary. In my view, one situation in which the latter applies is when a member has a financing requirement in excess of access limits.
To ensure orderly procedures to secure private sector involvement, efforts to improve the institutional framework must continue. In this area, we should promote an ongoing dialog between the debtors and major creditors. Better communication in good times can be crucial to arrive at mutually agreeable solutions in times of crisis. Furthermore, our efforts to include collective action clauses in international bond issues should be strengthened. In this respect, I welcome the steps taken by the United Kingdom and Germany to promote the use of such clauses.
HIPC-Initiative and Poverty Reduction and Growth Strategies
I welcome the progress achieved under the enhanced HIPC-Initiative. Several countries have already reached the decision point under the new framework and will be able to benefit from increased debt relief in the near future. However, to arrive at a durable reduction of unsustainable debt burdens, reaching the completion point under the Initiative will not be enough. It is crucial that countries maintain sound macroeconomic policies. Therefore, our main objective should not be to rapidly push as many countries as possible through the Initiative. We must ensure that HIPC assistance is granted to countries that continue to demonstrate a strong commitment to sound policies and that have elaborated convincing poverty reduction strategies.
In this context, the new Poverty Reduction Strategy Papers (PRSP) are an important element. Well-designed PRSPs can help ensure that the additional resources freed up through debt relief are effectively channeled to priority sectors. Given the importance of this document in ensuring the ultimate goal of the enhanced HIPC-Initiative, namely to alleviate poverty, the submission of a PRSP to the Boards of the Fund and the World Bank should be a condition for reaching the completion point.
I also welcome the progress made in mobilizing the financing of the Fund's participation in the enhanced HIPC-Initiative. The amount targeted through pledges of member countries has been achieved and the off-market gold sales have been completed successfully. With respect to the profits from gold sales, I sincerely hope that the U.S. Congress can soon provide the legislative basis so the U.S. can accept the full use of the related investment income. As to the overall financing of the enhanced HIPC-Initiative, I note that substantial problems remain regarding the full financial coverage of the participation of the other multilateral financial institutions. Finally, the problem regarding the inclusion of non-Paris Club creditors remains unsolved. While recognizing that many of these countries themselves have severe payments problems, we must find ways for them to participate in our collective action to reduce the debt burden of the poorest members of the Fund.