at the International Monetary and Financial Committee Meeting
on April 16, 2000
| The International Monetary and Financial Committee member for the constituency consisting of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, Sweden. |
The global economy has recovered from the slowdown that originated from the Asian crisis. Low interest rates and low inflation have contributed to the strengthening of domestic demand, which has been especially strong in the United States. Output growth in the crisis economies has played a part in the revival of international trade. Sustained economic growth in the United States, and the recovery of the Asian countries, along with strong consumer confidence, have bolstered the recovery in Europe. Therefore, in general, the prospects for the global economy look favourable. However, it is important to recognise the existing risks. The corrective economic policy measures needed in major economic regions have to be well balanced. That is a necessary precondition for globally sustainable growth.
Given the fact that - at least for the time being - the gloomy prospects for the world economy have been replaced by rather upbeat forecasts, this would seem to be an opportune moment to intensify the discussion on reforms of the IMF. However, in this discussion we should bear in mind that the Fund is a global institution with member countries at different stages of development. The Fund's lending facilities and surveillance procedures must be designed with this in mind.
I. Key international financial issuesThe central role of the IMF
The Fund's main objective is, and should remain, to promote stability of the international monetary system. A broad mandate in this area is what distinguishes the IMF from other international institutions. Consequently, the IMF should be the central forum for discussion and decision-making on issues closely related to the international financial system.
The IMF, as well as other international financial institutions, should focus on its core competences. Fostering stability is the major task. Hence, the linking of credible macroeconomic policies with country-specific structural reforms should remain a core activity in the Fund's work. Co-operation with other international organisations, utilising their relative strengths, should continue to be stressed in the formulation and implementation of Fund programmes.
The main instrument for the Fund's preventive activity is surveillance. Policy recommendations and analyses delivered through surveillance should aim at influencing members to implement sound policies. To this end, developing instruments to detect vulnerabilities is important. The Fund should also promote transparency and the acceptance of internationally recognised standards and codes. The selection of standards and codes, and the topics covered by surveillance, should reflect the objectives of the Fund.
Another important function of the Fund is to provide technical assistance within its areas of competence, and also, in this work to include assistance with respect to the implementation of agreed international codes and standards.
Financial assistance should function as a catalyst for other sources of finance, and primarily be short term. The Fund's resources must be revolving, and proper private sector involvement should be a part of Fund packages, and Fund programmes should promote credibility and reliability. To address imbalances related to structural problems, the Fund should also be able to provide medium term financial assistance. Fund conditionality should be effective in order to safeguard the resources of the Fund. Conditionality is also a means to influence countries to implement sound policies.
Review of financing procedures/Pruning and simplifying the Fund's facilities
Public authorities, including the IFIs, do not have sufficient resources to guarantee financial stability unsupported by private investors. The private sector must play its part in preventing and resolving financial crises. The Fund must, therefore, act as a catalyst where access limits are respected. A successful return to a realistic catalytic role for the Fund would allow for smaller Fund packages with shorter duration. Even in emergency situations, where financial involvement by the Fund is appropriate, it must be on a more limited scale than what has recently been the case. Due to moral hazard considerations, the Nordic and Baltic countries are not willing to give the Fund a mandate to perform the role of lender of last resort. Limited access and conditionality, including proper private sector involvement, must be the characteristic features of Fund financing.
The Fund should primarily focus on short term balance of payments lending. Therefore, stand-by arrangements should be the core lending mechanism. However, member countries will continue to face medium term balance of payments needs due to structural problems. The EFF should be the main facility for such countries. Recent developments have tended to blur the difference between the two facilities. Therefore, a clearer delineation is needed.
In cases of intense financial distress, and where the financing needs exceed normal access limits, the SRF should be the main instrument. The CCL has not been used yet, and needs to be re-examined. The IMF needs effective preventive instruments. In this respect, the implementation of standards and codes is essential.
Transparency, standards and codes of conduct, new measures of safeguards on the use of Fund resources
The basis for more stable private funding is improved transparency practices and procedures for adequate provision of data. Considerable progress has been made in promoting good policies: data standards, codes of conduct and measures to strengthen financial systems. The Fund needs to continue to be involved in this work. It should develop procedures and incentives that promote adherence to codes and standards. It should assume a role in disseminating and monitoring rather than in developing standards itself.
Furthermore, it is very important that the Fund tightens policy and safeguards on the use of Fund resources so that countries misreporting information are aware that this could exclude them from receiving assistance from the Fund and that this will become public. Circumvention of conditionality through devious practices and misreporting is something that can not and will not be tolerated.
Private sector involvement (PSI)
The Fund can promote stronger involvement of the private sector in the prevention and resolution of financial crises primarily by having countries adopt credible and effective policies, as well as through stringent lending policies. The main objective of the Fund's mobilisation of private sector involvement is to avoid moral hazard and other distortions in the functioning of the international financial markets, and to facilitate more orderly adjustments in case of crisis. Building a framework for involving the private sector in crisis prevention and resolution has progressed relatively slowly. At the same time, the need to clarify how principles for PSI are to be implemented in the Fund's policies takes on increased urgency.
We believe that private sector involvement should become a regular feature in filling large financing gaps. Furthermore, any IMF programme should also include an assessment about a possible debt restructuring. In addition to this, there is a need to establish clear procedures for actively involving the private sector in the Fund's financial programming. Papers on the use of Fund resources should contain a section explaining the extent and the modalities of the involvement of the private sector. Countries should be made aware of the consequences of failing to secure the needed contributions from private creditors. These could, for instance, include a revision of the program.
The IMF should not be directly involved in bilateral negotiations between the debtor country and its creditors. But we have, on previous occasions, supported the idea that countries working co-operatively and in good faith with creditors, and meeting other program requirements, should be able to benefit from the Fund's "lending into arrears" policies. We also wish to give further consideration to the complicated and difficult issue of giving the IMF a mandate to order a temporary stay on litigation to allow more time for negotiations to proceed.
IMF and poverty reduction
In carrying out its work within the PRGF and the HIPC Initiative, the Fund should explicitly take into account the programme's effect on poverty. A clear division of labour between the World Bank and the Fund is needed to avoid overlap. Therefore, we find it important that both the Fund and the World Bank concentrate on their areas of expertise; the Fund should focus on macroeconomic policies and the Bank should take the lead in poverty issues.
National ownership of poverty reduction strategy policies is important to ensure efficient implementation of agreed policies. Under the current framework, it is assumed that a HIPC eligible country has a PRSP in place at the decision point. The aims of providing timely debt relief and, at the same time, allowing ample time for preparing Poverty Reduction Strategies may be conflicting. A solution could be that an Interim PRSP trigger HIPC debt relief, combined with a credible commitment from the member country to prepare a fully-fledged PRSP within a reasonable time frame. This calls for flexibility when determining the link between the completion point and the PRSP process.
II. Global economic developments and prospectsUSA
The boom in the domestic economy of the USA is continuing. Domestic demand is still strong, fuelled by wealth effects of the rise in asset prices, and private sector indebtedness is growing. As a result, current account imbalances have further aggravated. On this background, further tightening of monetary policy in the USA appears to be called for. An important challenge will be to manage monetary policy in a way that minimises risks of excessive reactions in capital markets, thereby promoting a soft landing of the US economy. The path of future fiscal policy should be directed at also ensuring fiscal stability in the medium term. A gradual and stable reduction in the US current account deficit is warranted and should be achieved by measures to increase US private savings, at the same time as measures should be taken to secure the confidence of foreign investors and ensure more stable sources of external finance.
JapanEconomic recovery in Japan remains uncertain. Fiscal stimulus has boosted economic growth, but an improvement in the private sector is still to come. Indeed, a sustainable recovery has been hampered by weak private sector confidence. Speedy implementation of structural reforms, especially in the area of the financial sector, is necessary, and would be an encouraging sign to the public of the authorities' determination to improve medium term economic prospects. In addition, counter-cyclical fiscal policy measures have led to a worrisome deterioration in public finances, which raises doubts about the sustainability of the current situation. The authorities should pay increasing attention to medium term public debt problems by gradually approaching a more neutral stance in fiscal policies. There is also a need to explore the scope for further easing of monetary policy.
EuropeThe economic activity in most parts of Europe is now picking up. The recovery seems to be broadly based. Strong economic performance in the USA, as well as the recovery in South East Asia and Latin America, has boosted exports. Consumer confidence has improved with continued employment creation. The Baltic States suffered from the Russian crisis, but activity is now improving. Their economies are preparing for EU membership.
Improved cyclical conditions have generated unexpectedly strong budgetary revenue growth in most European countries. However, further fiscal consolidation is needed in many countries in order to provide the necessary scope for automatic stabilisers to work. In addition, future expenditure pressures related to aging populations reinforce the case for stronger fiscal positions.
Emerging marketsIn the emerging markets of Asia and Latin America, recovery is under way, especially in countries which have undertaken significant reforms under IMF/World Bank programmes. Although progress has been made, there remain worries that the restructuring of some emerging economies may be delayed or implemented too slowly.
It is important that emerging market economies now recovering persist in their efforts to increase transparency and to strengthen their financial systems, as well as to upgrade governance in the corporate sector.
RussiaThe Russian economy has recovered during the past year. The improvement, however, is mainly due to transitory factors such as the strong devaluation of the rouble and the very high oil prices. This recovery is unlikely to be sustainable without further measures because little has been done to address the major structural problems of the economy. Strengthening of law enforcement and legal stability is needed in order to create confidence and make Russia an attractive destination for investment. Fiscal policies must aim at sustainable public finances, and a clarification of fiscal relations between the central government and the regions is needed. Renewed debt rescheduling discussions with official bilateral creditors are envisaged by the end of this year. It is important that a new IMF program is negotiated before these discussions.