Minister of Finance of South Africa
Representing Africa Group I Constituency comprising the following countries:
Angola, Botswana, Burundi, The Gambia, Kenya, Ethiopia, Eritrea,
Lesotho, Liberia, Malawi, Mozambique, Namibia, Nigeria, Sierra Leone,
South Africa, Sudan, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe
International Monetary and Financial Committee
of the IMF Board of Governors
Sunday, April 16, 2000
Introduction
It is six months since we last met. In the intervening period, Michel Camdessus, the longest-serving Managing Director of the Fund has retired and a new Managing Director-elect has been selected by the Fund's Executive Board. We wish to record our appreciation for the efforts of Mr. Camdessus during his distinguished term, in particular in seeking to fashion a Fund response to the unique circumstances of the poorest developing countries. We look forward to this challenge being taken up by his successor, Mr. Horst Köhler and we wish the new Managing Director every success - and we pledge every possible support to him - in this enormous endeavour. We hope that he will make it a central objective of his term as Managing Director to address the challenges of African economies. African members hope to engage the new Managing Director at the earliest possible moment, in order to advance the initiatives/agenda for the poorest members of the Fund. At the same time, we take this opportunity to congratulate the management team which has ably steered the Fund during the period of inter-regnum and which has ensured that the vital work on architecture, on HIPC and on poverty reduction, has continued.
World Economic Outlook
The broad indications of significant improvement in global economic conditions since our meeting last September are very encouraging. Economic growth in the last year in most regions turned out much better than earlier forecasts, and the prospects for continued recovery following the economic slowdown in 1997-1998, are now much brighter for the world as a whole.
The recovery of the global economy owes much to the continued strong performance of the U.S. economy, and the strong adjustment and reform efforts that have been implemented by the crisis-affected countries.
The otherwise strong outlook for continued global expansion with low or subdued inflationary pressures, is tempered by risks that are increasingly apparent in the evolution of the current accounts of the U.S. vis-à-vis both Japan and Europe, signs of significant misalignments among the three major currencies relative to medium-term fundamentals, and the inflation in asset prices. These factors pose important challenges for policy makers particularly in the major advanced economies, to ensure that the global recovery remains on track. In the United States, the main challenge clearly is to achieve a correction of the international and external imbalances in a smooth and orderly fashion, particularly given the evolution of US equity prices. While the monetary authorities have already undertaken a series of tightening steps, continued vigilance is required given the continued strength of activity. At the same time, the expansion in Europe requires to stay on course, and the recovery in Japan needs to take hold. This will require particular vigilance in managing macroeconomic policies and the need to speed up key structural reforms, especially in Japan, that could contribute in boosting confidence in the economy.
Several African countries achieved relatively strong growth in 1999 against the backdrop of sustained efforts at implementing broad-based market-friendly economic reforms, prudent macroeconomic policies and the recovery in some commodity prices. However, for the continent as a whole, the growth performance was weaker relative to the earlier forecast, as well as the outcome in 1998. We are however, encouraged by the improved outlook for this year and next. For several years now, many African countries have continued to make significant progress in macroeconomic policy management. Fiscal deficits are on average far lower than they were a decade ago and inflation has been significantly subdued, with this year's WEO highlighting an average inflation rate for sub-Saharan African countries of approximately 6%. Market-friendly investment environments have been established in a far higher proportion of African economies than at any time in the past. In this context, trade liberalisation has progressed strongly and significant progress has already been achieved in several key areas, including in tariff reduction; elimination of non-tariff barriers to trade; and improvements in the regulatory environment for foreign investors. Institutional reforms conducive to improved openness, including qualitative changes in customs management, streamlining of import and export procedures, technology-led improvements in processing times and improved revenue collection continue to characterise the policy performances of a growing proportion of African countries.
With a strengthening in global economic recovery, we would expect a much stronger supply response to the reforms which have been implemented in the last several years and which are ongoing. In this regard, it is instructive to note that African countries are forecast to register a higher rate of growth in 2000 (4.4%) than the average for the world economy for the year, and ahead of population growth in Africa.
Nevertheless, many African countries still continue to face significant institutional and structural impediments to growth. Progress in diversifying production and exports is still limited and many countries continue to be dependent on agriculture and/or single commodity exports which render them highly vulnerable to external shocks. For many countries therefore, there remains a significant agenda of reforms that are necessary to place growth on a path high enough to achieve improved living standards and meaningful reduction in poverty. As I emphasized in my statement at our last meeting, the goal must be to position Africa countries to benefit from globalization in terms of higher export growth, foreign direct investment flows and the general easing of the financial constraints to growth. This means, as I have indicated, pursuing with continued determination, the economic reform process that has been ongoing in many countries for several years. The role of the international community remains crucial as ever, to the outcome of these reform efforts. Critical elements in this regard include the opening of the advanced economics to trade from developing countries, increased, but co-ordinated initiatives to strengthen institutional capacity, and visible efforts to reduce the unsustainable debt burdens of those countries that have already been identified for participation in the HIPC Initiative.
Progress on the HIPC Initiative and Poverty Reduction and Growth Strategies
It is encouraging to note that there is now wider recognition by the international financial community of the imperative of reducing poverty. For the first time the IMF's World Economic Outlook has dedicated a section to poverty issues. For the majority of the world's economies and for the bulk of the world's population, it will be important to continue monitoring progress on poverty reduction, particularly as we have opted to integrate poverty reduction in the design of the PRGF. Further steps to enhance this analysis in the WEO would be appropriate.
Having said this, I am deeply concerned with three elements of the HIPC process, all of which appear to have taken hold since our last meeting, all of which have the capacity to damage the integrity of the HIPC initiative itself and all of which warrant close and prompt attention at our current meeting.
Firstly, I am increasingly concerned at the slow pace of delivery of debt relief in terms of the augmented HIPC framework. At our last meeting we resolved to ensure that debt relief would be deeper, faster and broader. We told ourselves and the international community that many more countries would become eligible for debt relief in the months ahead; that the number reaching their respective decision and completion points would be substantially enhanced; we foresaw several countries achieving their decision and completion points by January this year; and we determined that the principle of linking debt relief to poverty reduction should be strengthened. In this process we urged the potential recipient HIPC countries to step up their poverty reduction efforts. Several of these countries have responded, assigning greater levels of human and financial resources to this new focus. Separately, several of the countries in our constituency resolved to do their part in contributing to the PRGF-HIPC Trust Fund, including Botswana, Nigeria, South Africa and Swaziland, who variously agreed to provide significant contributions either in terms of outright grants, the contribution of their SCA-2 balances, or interest free loans, or some combination of these. These countries made these commitments in the expectation that debt relief would be speeded up. Sadly, this objective seems to be slipping further behind schedule.
Far too few countries are reaching their decision points. Almost a year after the Koln Summit which heralded the widely-acclaimed augmented debt relief initiative, only one of the retroactive HIPC cases has achieved its completion point, despite all of the retroactive cases having already once passed the stringent test for HIPC eligibility and having reached their respective first completion points. For the non-retroactive cases, the objective of three-quarters of HIPC candidates achieving debt relief by end-2000 is fast slipping by and appears at this stage to be almost unreachable. The promise of Jubilee is beginning to look like a broken promise. I urge colleagues to take steps at our current meeting to take two steps in this regard. Firstly, to formally resolve to achieve the objective that three quarters of all HIPC-eligible countries achieve debt relief by end-2000; and secondly, to set a date for the remaining HIPC cases. The HIPC initiative has become a prolonged, exhaustive, resource-intensive and over-complex process. Nearly five years after the first HIPC initiative was launched, few could have predicted the extent to which this single issue would come to dwarf the substantive developmental challenges facing most of the world's economies. It has become in no-one's interest for the issue to be prolonged. We need to resolve to complete this matter and to set a reasonable, but challenging, time frame for doing so.
Secondly, the experience in the last six months with the early Poverty Reduction Strategy Paper (PRSP) cases has shown that the process of consultation and gathering consensus has tended to be slow. The compilation of PRSPs has therefore not been without delays and setbacks. For all those acquainted with the complexities of policymaking (in a severely capacity-constrained and resource-deficient environment), delays of this nature should not be unexpected. Real situations are never perfect and the Fund should show substantially enhanced flexibility in this area. The requirement that HIPC eligible countries implement poverty programs for at least one year before reaching the completion point, an issue to which we raised severe reservations at our last meeting, has now become a significant obstacle to faster debt relief and is damaging the integrity of HIPC. The one-year stipulation was presumably intended to allow time for countries to design their poverty reduction programs ahead of the receipt of debt relief resources. It is a sound approach in theory, but flawed in practice. The capacity necessary to address poverty reduction will take many years, not twelve months, to address. The financial resources to address it are simply not there, which is precisely why HIPC countries have been pressing for early and deeper debt relief. Placing a further one year qualifying period for achievement of debt relief seems, from the perspective of the realities on the ground, very much like putting the cart before the horse. We need to review this requirement urgently and one would have thought that for the retroactive HIPC cases in particular, which must already have shown their determination to and their capacity to address poverty reduction as part of their qualification for the first round of HIPC, the one year further qualifying period should simply be done away with.
Thirdly, pending matters on resource mobilization for HIPC risks delaying further the processing of debt relief eligible cases. In particular, it is both immoral and unjustifiable to request other developing, including poor debt ridden countries to forgive debt of other HIPC cases. We find it proper, as a matter of principle, to exclude debts owed to developing countries from the burden sharing requirement under the HIPC Initiative.
On a more encouraging note, we are pleased that off-market gold transactions are being handled as scheduled and without disruptions to the gold market. Nevertheless, we urge the United States authorities to expedite their internal approval procedures to facilitate the transfer of the remaining five-fourteenths of investments from profits of gold sales to the HIPC-PRGF Trust and avoid an impending shortfall. In addition, we urge bilateral contributors to honor their pledges to ensure that the HIPC Initiative is fully financed and that the Fund's concessional window -the PRGF- continues.
Official Development Assistance & Market Access
The downward trend in development assistance remains a perennial area of concern to the membership of this Chair, as does the increasingly urgent need for the advanced industrialised economies to open their markets more decisively, more extensively and more effectively, to the goods and services of our countries and developing countries in general. Without this, the promise of globalisation will bypass the poorest developing countries and undermine the enormous and tangible reforms which have already taken place in African countries and other developing countries and result in a less-than-optimal outcome for the global economy as a whole. The global trading system needs to be more inclusive than it has been to date.
Reforming the IMF's Role in the Global Economy
Review of Fund Facilities
We welcome the review of Fund facilities which has been undertaken by the Fund's Executive Board. This is a particularly important demonstration of the institutions' quest for reinvigoration and its determination to remain relevant in the international financial system, in which the private sector has become the dominant source of capital for growth. It is also a substantive response to the membership's call to improve the quality and flexibility of financing instruments. The agreement to eliminate four facilities-the Buffer Stock Financing Facility (BFF), the contingent element of the Compensatory and Contingent Financing Facility (CFF), the Currency Stabilization Fund (CSF) and the Debt and Debt Service Reduction (DDSR ) facility-that are not being used or which no longer served members' needs is appropriate.
We encourage the Board to continue its work to streamline the remaining facilities to make them serve the needs of members more effectively. The Fund should above all seek to cater to the needs of its diverse membership. In practice, this will be achieved by balancing the varying needs of different sections of the membership with the need to ensure that there is no undue reliance on Fund resources. This will not be an easily accomplished task. Clearly, in principle, in the long term it would be important to seek to prevent repeated arrangements, particularly where access to capital markets has significantly strengthened. In practice, however, in a purely rules-based approach, the risk of inappropriately limiting a member's access to Fund resources will be high and will need to be avoided, not only to ensure equality of treatment of all members and to avoid the adverse consequences to the member of inappropriately withholding Fund resources, but also to avoid any systemic consequences of such an outcome. We look forward to continued work by the Board in this regard.
For the majority of developing countries, the Fund's role will continue to go beyond the need for short-term balance of payments support and immediate crisis management, to addressing the structural aspects of these economies most closely linked with the Fund's core mandate. In this respect, while stand-by arrangements can be expected to remain the Fund's principal instrument for many members, the long-term character of facilities such as the EFF, as well as the PRGF, will need to be preserved for a broad section of the membership, as the balance of payments needs of such members are expected to be of an extended nature and their structural reform programmes are expected to be both substantial and of a long-term nature. In addition, the Executive Board will require to reconsider the design of the CCL with a view to strengthening its potential contribution to crisis prevention.
Safeguarding Fund Resources
We welcome the initiative to introduce the two-step safeguards assessment process. The new approach has the capacity to improve the integrity of the Fund's operations and to enhance safeguards on the use of Fund resources, particularly in view of the revolving character of its resources. It also offers the ability to benefit members as well, if safeguard assessments are able to lead to the strengthening of the central bank's control, reporting and audit processes and through this process to bring central bank operations to standards of best practice.
In view of the need to involve external experts in the assessment, it will be essential to ensure confidentiality, so as to ensure that the mutual trust that should govern the relationship between the Fund and its members is maintained.
Moreover, in view of the different levels of development among members, the success of the new initiative will hinge on its ability to take account of country-specific circumstances in the conduct of the safeguard assessment. The vast majority of countries in our constituency, for example, will require technical assistance in order to be able to implement, over a reasonable time span, recommendations arising from a safeguard assessment, and it would be important to assure these countries of such technical assistance before requiring their compliance with this new approach. In the absence of such technical assistance, and in the absence of a flexible timeframe for implementation of recommendations, the new initiative will be viewed as the addition of yet another layer of conditionality which cannot be achieved due to lack of technical resources. In implementing the new approach, both the Fund and the membership would be best served if due credit is assigned to good faith efforts by countries to implement recommended institutional strengthening arising from the safeguards assessments.
Finally on this issue, due cognisance will need to be taken of the Fund's own financial and human resource capacity to participate in the safeguards assessments.
Review of Surveillance; Links between Surveillance and Standards/Codes
The Fund continues to make important and decisive strides to improve all facets of its surveillance function. In doing so, the institution has continued to give substance to the overarching effort to strengthen the architecture of the international financial system. For emerging market economies, which were the catalyst and impetus for strengthened surveillance two years ago, several initiatives have been established to respond to the potential advent of crisis, including new standards and codes in monetary, financial and fiscal policies, renewed work on strengthening financial systems, improvements in the required standards for data provision and improved transparency. Fund surveillance in the institutions' core areas has discernibly strengthened since the Asian crisis, in particular in fiscal, monetary, balance of payments, and exchange rate policies. These efforts should continue and should be further strengthened.
The Fund should continue to emphasize surveillance in its core areas of competence. Non-core issues should be taken up only when these are essential for macroeconomic stability and not simply because of their macroeconomic impact. In those exceptional cases, the Fund should seek expertise from other organizations with relevant competence.
Surveillance over exchange arrangements and exchange rate policies still constitute the centerpiece of Fund Article IV consultations and has been strengthened and better focused in recent years. The authorities views in this regard often reflect the extreme sensitivity of these issues. Hence, these issues should be approached with the candor that has characterized staff advice. Coverage of exchange rate policies in emerging, transition and developing countries has increased in the wake of the Asian crisis. This has brought into sharper focus contagion and regional issues that have been significant in these countries.
We endorse the importance of vulnerability analysis, as the inclusion of information on the usability of reserves, short-term debt and market sentiment may be useful in the diagnosis of potential crises. Nevertheless, publication carries significant risks and we are of the strong view that this information should be obtained only on confidential basis.
Effort to conduct in-depth discussion of the composition of capital flows and the regulatory regimes that influence short- or long-term inflows is an important element of a strengthened architecture in the new environment of global capital. However, there should be substantially greater caution in promoting capital account liberalization. Particularly for many developing countries, in which institutions are poorly developed, the focus should continue to be on building the institutional structures which are necessary to prepare and to strengthen the domestic economy, so enabling these countries to benefit from increased globalization and liberalization.
On data standards, the progress made by subscribers in meeting SDDS requirements is significant, especially in view of competing demands, for example in meeting the Y2K challenge. The timetable for monitoring of observance appears reasonable. But flexibility should be exercised to allow subscribers to resolve the remaining difficulties.
Similarly, the efforts being made to develop and strengthen the GDDS is welcome. It provides a useful framework for assessing in the current status of statistical systems and in developing plans for improvements, through in particular, the provision of technical assistance. To the extent possible, it is important to be less prescriptive in order to maintain its attractiveness. Many countries in my constituency have tangibly benefitted from the Fund's efforts to develop the GDDS and continue to do so, particularly through the valuable multi-sector missions of the Fund's Statistics Department and through associated training provided by the IMF Institute. These are proving to be among the highest quality of Fund assistance to developing countries. Their coverage should be expanded significantly. One perennial constraint has been the lack of human and financial resources in the recipient countries to promote this endeavour. I call upon colleagues at this meeting to establish a concessional financing framework, which can finance more systematically the efforts of those member countries that are taking steps to comply with GDDS.
Many of the new surveillance initiatives were originally launched in response to the crisis in some emerging markets nearly three years ago. Nevertheless, they have had implications for the broader membership and have certainly been applied to all members, including the poorest developing countries. The universal application of these new elements of surveillance is fully supported by the members in our constituency as these have already contributed to adaptation of international best practice in some areas and more generally has been raising the quality of policymaking and in turn strengthening the capacity of the poorest economies, particularly in financial sector management. Nevertheless, universal application requires to be implemented with due flexibility. We urge the Fund to take greater cognisance of the different levels of development among members seeking to implement and to comply with the wide new range of elements of strengthened surveillance. Capacity constraints differ widely and a particular revelation among African countries seeking to comply with enhanced surveillance in the last year, has been that some countries simply do not have additional budgetary resources to give effect to compliance. Supplementary financial resources need to be made available by the Fund and by bilateral partners, for these countries, in this important effort.
Private Sector Involvement
Private sector involvement remains an essential element of a reformed architecture of the international financial system. The improvement in the global economy since 1997 has of course been a welcome development, but it has also served to dilute the urgency with which this issue requires to be addressed. There is clearly the need to intensify the effort to find the appropriate modalities for involving the private sector and there should be no room for complacency on this particular component of the new architecture. In this regard, I commend the important progress made by the Executive Board and, in particular, the effort made to articulate a framework for PSI policy.
The latest proposals establish a workable, rules-based, yet albeit fragile framework. Clearly, the new approach is intended to rely on the Funds's catalytic role in cases of moderate financing need, or where the financing requirements are large, but the member has good prospects of rapidly regaining market access on appropriate terms; and which envisages more concerted PSI where financing needs are large and prospects for regaining market access are poor, or where the member's debt burden appears unsustainable in the medium term. I would strongly encourage the Board to find ways of operationalizing the new proposals. Yet in pursuing the new approach, the Fund's Executive Board should be pragmatic and should not unduly seek to downplay the catalytic role of the Fund in a crisis. This role will continue to be important and less susceptible to the risks of moral hazard, as progress is made by countries to strengthen domestic financial systems and to adopt the international standards and codes that are being established. Moreover, we see a useful synergy here with the work the Board is doing on streamlining the Fund's facilities.
Looking forward, it seems clear that on a number of issues, the consensus that has so far been achieved may be fragile and differences of views may re-emerge as work on refining the PSI policy framework continues. These include: (a) how best to establish a clear presumption that the private sector is expected to be involved. For now differences of views have been addressed by making a distinction between private sector involvement as such, and concerted private sector involvement in the wake of crisis; (b) what to do if the Fund's catalytic role is slow to bring about the return to capital market access; and (c) the conditions under which the Fund should lend into arrears to private sector under its established policy in support of adjustment programs.
Moreover, there has been only limited progress in dealing with the institutional constraints to debt restructuring. Areas where there seems to be scope to explore further include the use of ad hoc creditor committees, collective action clauses in bond contracts and temporary and voluntary market-based standstill arrangements.