2001 IMFC Statements
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IMFC Meeting April 29, 2001

Statement by James D. Wolfensohn
President of the World Bank

It is striking how broad the agenda now is on which the World Bank and IMF are cooperating to help countries strengthen growth and reduce poverty. We are making progress in implementing the enhanced partnership between our two institutions that Horst Köhler and I set out last September, and this is key to making both our institutions more effective.

But there is much more to be done. This is clear not only from the items on the IMFC agenda, but also from the related issues we will be discussing at the joint meeting of the IMFC and Development Committee, and at the Development Committee. I want to stress my continued strong commitment to implementing our shared vision for an enhanced Bank-Fund partnership as an operational reality.

This statement focuses on the three issues on the IMFC agenda where this strong partnership is crucial. But let me first give you a brief comment on the short-term prospects for developing countries.

Prospects for Developing Countries

The world economy has slowed markedly since the Prague meetings, so that growth of world output in 2001 is expected to be at about the same level as during the trough of the East Asian crisis in 1998. This time, however, the slowdown is concentrated in industrial rather than in developing countries. Indeed, growth in developing countries may play some role in helping to support world output.

Nevertheless, there will be spillover effects for developing countries from the current slowdown. World trade growth has already decelerated sharply and is expected to fall further in the coming year. Weakening global demand and continued high rates of production are depressing non-oil commodity prices so that they will fall for the fourth consecutive year. Oil prices have fallen from their peak last Fall, and will be affected by conflicting factors such as low inventories of gasoline, rising non-OPEC production and OPEC cutbacks.

Capital flows to developing countries have fallen sharply in the first quarter because of the slowdown in industrial countries, and weakness in investor confidence. In contrast to these trends, the fall in interest rates has provided some relief to developing countries heavily reliant on private debt markets.

The impact on developing countries so far has not been as adverse as in previous downturns, in large part due to strengthening of policies. Developing country growth is expected to remain in the 4-5 percent range provided there is an early rebound in the US and no adverse developments in financial markets.

Conditionality and Ownership

The proposals for streamlining IMF conditionality, and focusing it more on measures critical to macroeconomic objectives are well aligned with the lessons of experience about how best to provide and coordinate external support for country development. They rightly emphasize the importance of selectivity and prioritization in what countries do, of ownership of country reform programs, and of close partnership between those who provide external support for such programs. They represent an important step in implementing our vision for Bank-Fund collaboration.

It may be helpful for members of the Committee to set out how this continuing review of IMF conditionality fits with proposals we are developing in the Bank. It is closely related to the proposals to strengthen World Bank support for Middle-Income countries, to be discussed on 30 April in the Development Committee.

Taken together with the evolving PRSP based arrangements for low-income countries, they constitute an enhanced framework for country owned programs and related conditionality—from both the Bank and Fund—that will help us deliver combined support for growth and poverty reduction in a way that I believe will add up to more than the sum of the two parts.

For Low-Income countries the PRSP process that we are developing together requires the Bank and Fund to take coordinated approach to conditionality.

• It is founded in reform programs owned and designed by the countries themselves, and set out in the PRSP. Working together with the Fund and the Bank, countries identify their key reform priorities, setting them in a coherent and comprehensive policy framework.

• In supporting and monitoring these reforms we are evolving a clear delineation of responsibilities between the Bank and Fund. The Bank takes the lead in the dialogue on social and structural policies, and conditions in those areas. The Fund takes the lead in macroeconomic policy and closely related issues.

• We are strengthening the Bank's integrative diagnostic work to underpin this and making it more systematic. For each country, we are looking across the range of social, structural and sectoral policies, helping countries set out their priorities and decide what are the key conditions for success. We will be setting this analysis out in a structured way as a key element of our Country Assistance Strategy.

• We are developing the Poverty Reduction Support Credit (PRSC) as a credit facility to parallel the PRGF (but providing longer term finance) as a vehicle for setting, supporting and monitoring structural and social policy conditions and benchmarks.

For Middle-Income countries we often in practice work with the Fund in a very similar way. Conditions, whether set out in Fund programs or for Bank adjustment loans, or both, are frequently jointly discussed with the country, and agreed upon, with the Bank taking the lead in designing structural and social conditionality. We are also now doing some key elements of the diagnostic work on a formal joint basis—in the joint Financial Sector Assessment Program (FSAP) and Reports on Observance of Standards and Codes (ROSCs).

The proposals for strengthening World Bank support for Middle-Income countries, to be discussed by the Development Committee, will provide a good basis for more systematic collaboration between the Fund and Bank in our joint dialogue with and support for this group of countries.

• We begin with the recognition that Bank and Fund support should start from a country owned program. We recognize that countries will set their programs out in a variety of ways, but hope that each country will provide an appropriate statement of its development vision, as the point of departure for the World Bank's Country Assistance Strategy and other external assistance

• We recognize that in the Bank we need to strengthen and systematize our diagnostic work—particularly our crosscutting analysis of countries' structural and social policy priorities, and fiduciary assessments—for this group of countries as for low-income countries. We will do so.

• We also intend to respond to country needs by making more systematic use of programmatic adjustment lending as a Bank vehicle for supporting policies and setting and monitoring conditionality. This is important if we are to be able to fully play our role of complementing Fund support and conditions, which could then progressively focus on measures critical to macroeconomic objectives, with the Bank leading on structural, social and sectoral issues. We agree that such lending must be grounded in country commitment to required policy and institutional reforms, and underpinned by an assessment of fiduciary systems, and where needed, assistance to help countries strengthen their financial management. This is a subject of common interest not only to the Bank and Fund, but also to all other multilateral lenders.

So I hope Ministers will see and support all these developments as an interrelated and coherent set of initiatives: the streamlining of IMF conditionality; the development of Bank-Fund co-operation in low-income countries, which will be discussed at the joint IMFC-DC meeting; and the proposals for Bank support for Middle-Income countries, to be discussed at the Development Committee.

Each builds on the proposals for cooperation that Horst Köhler and I set out last September. Taken together they will provide a structure for enhanced cooperation between the Fund and Bank—with clearer delineation of which institution is in the lead in which area, and with close collaboration to make sure that it all adds up to good country reform programs. If we can agree on these different initiatives and implement them with skill and commitment, we have a real opportunity both to cut out unnecessary duplication, and together to provide more effective support for country development and poverty reduction.

Progress on International Financial Architecture

The Bank has continued to contribute to a broad range of activities on strengthening the international financial architecture, in close collaboration with the IMF.

The joint Bank-Fund Financial Sector Assessment Program (FSAP) is now well established. 24 assessments are to be carried out or launched this fiscal year compared to 12 in the pilot period. At its last review in January, the World Bank's Executive Board approved a modest scaling up of the program, while ensuring that a continued effort is made to cover a set of countries that is varied in terms of region, size and complexity of their financial systems, especially systemically important countries.

The World Bank's Executive Board also reviewed the experience in assessing the implementation of standards and codes in the context of the collaborative initiative with the IMF on Reports on the Observance of Standards and Codes (ROSCs). The review confirmed that the current modalities for undertaking assessments and producing ROSCs are working well and should be continued.

In addition to the ROSCs that are prepared as part of the FSAPs, the World Bank is expecting to launch 30–35 additional assessments this coming year in the areas of corporate governance, accounting and auditing, and insolvency and creditor rights.

Over the last 18 months, the World Bank has convened a coalition of international organizations and insolvency experts to develop Principles and Guidelines for Effective Insolvency and Creditor Rights Systems. The resulting principles were presented to the Bank's Executive Board on April 10, and a summary has been circulated to Ministers. The World Bank will seek additional feedback on the current version of the Principles and Guidelines, especially from developing countries.

The second phase of the work on the Principles and Guidelines including principles related to bank restructuring and systemic insolvency is expected to be completed by early 2002. In addition, the Bank will begin a program of experimental assessments on insolvency and creditor rights using a diagnostic template based on the principles.

As part of the broader effort to strengthen risk management and governance in the public sector and help governments reduce their external vulnerability, the World Bank and the IMF have prepared Guidelines for Public Debt Management, which were first presented to the Executive Boards in July 2000.

Based on feedback by the Executive Boards and a series of follow-up meetings involving some 300 representatives from 122 countries and territories and 19 institutions, the Guidelines were revised and again presented to the Executive Boards of the World Bank and the IMF in March 2001.

The Guidelines and the Handbook will be used as a central reference for World Bank and IMF technical assistance in the area of sovereign debt management and debt market development.

Combating Money Laundering

At the request of the IMFC, the IMF and the World Bank have prepared a joint Policy Paper on Enhancing Contributions to Combating Money Laundering, which was discussed by the Executive Boards of the World Bank and the IMF on April 13, 2001.

There is broad based consensus that money laundering is a problem of global concern, which affects major financial markets and smaller ones, and which has development costs even though they may be difficult to measure. Combating it requires broad based international cooperation, both because money laundering occurs predominantly across borders and because it spans financial supervisory as well as criminal/legal enforcement concerns.

The primary lead rests with countries themselves, and with the specialized institutions that have the mandate and expertise in this area. The Bank can play a supportive role in partnership with others, especially the Fund, but this role must be anchored in its development mandate.

The principal contribution that the Bank can make, and where it has stepped up its efforts, is to help countries address the root causes of financial abuse by helping strengthen their economic, financial governance and legal foundations.

In close collaboration with the IMF, the Bank proposes to support global efforts to combat money laundering by: (a) close collaboration with relevant anti-money laundering bodies; (b) giving attention to anti-money laundering issues in our diagnostic work, particularly FSAPs and ROSCs; and (c) providing technical assistance and support for capacity building in the areas of the Bank's domain and within the framework of our country assistance strategies.