1. In light of the existing level of uncertainty surrounding the global economic outlook and the difficult moment of the world economy, there is a greater need for member countries to be united in fostering good policies domestically and increased economic and financial cooperation internationally. The Fund must be ready to continue supporting members with good policies, responding in a flexible and timely fashion. Today's meeting is an opportunity for a display of international cohesion and cooperation in financial and economic affairs, and for sending a clear message of preparedness to act to international markets.

Global Economic Outlook and Policy Responses

2. It is unfortunate that not much has been accomplished by the main industrial countries over the last few years in terms of correcting major global imbalances. The global economy is in a softer position today and the scope for fiscal and monetary policy responses in the major currency areas to face existing downside risks has diminished.

3. The prospects for the world economy are partly being shaped by war-related uncertainties. But the current weakness of the global economy precedes these geopolitical concerns, and the balance of risks to the world economic outlook is principally on the downside. Sluggish growth could persist even with what now appears to be a rapid resolution of the war. The heavy dependence of the world economy on the United States and the possibility of further declines in mature equity markets highlight these downside risks.

4. The economic recovery in the United States is still modest and erratic, as the continued weakness of financial markets has prevented investment from recovering, and seems to have somewhat eroded the resilience of consumption. Large U.S. banks are in a strong position, but some investment banks have been hard hit, and sizable funding gaps have emerged in some private sector defined benefit pension funds. The situation is no brighter in the other two major currency areas. Growth continues to be anemic in the Euro area, where in some countries banks and the insurance sector face a difficult situation, as a result of the bursting of the equity markets bubble. Japan continues to slide into deflation and to face its long-standing corporate and financial sector problems.

5. Macroeconomic policies in industrial countries need to remain supportive of economic recovery, and further monetary easing may be necessary if downside risks to growth materialize, although the scope for easing is becoming increasingly limited.

The continuation of ongoing efforts to improve corporate governance in advanced countries also remains a high priority in order to recover investors' confidence. A more decisive approach to structural reforms is also needed to reduce rigidities in product and labor markets and to solve the long-standing corporate and financial weaknesses that affect some major advanced economies.

6. In addition to the responses in macroeconomic, financial and structural policies, moving decisively against rising protectionism and acting to reduce distortionary subsidies is a major international responsibility of all, but especially of industrial countries. The apparent lack of political support to move ahead the Doha negotiations according to schedule is disappointing.

7. A large number of developing countries, including members of my constituency, have made substantial progress in opening up their economies. But unfortunately, their most competitive exports, such as agricultural products, textiles, footwear, and steel, continue to face heavy barriers in the United States, Europe, and Japan. I support the WTO's efforts and the role that the Fund is playing in its enlightened advocacy of the benefits of increased global trade integration and liberalization.

8. One of the positive aspects of the global outlook since last September's meeting has been the improvement in the situation of emerging markets. While given their size they do not have sufficient strength to support a stronger global recovery, emerging markets offer some ground for optimism. I wish, in particular, to report on the situation of Brazil and other countries in our constituency, which saw improvement since the last Annual Meetings.

Developments in Brazil and Colombia

9. Last year the Brazilian economy withstood a major shock resulting among other factors from the heightened risk aversion towards emerging markets and the weak global environment. This shock manifested itself by a sudden halt in international capital flows and undesirable portfolio shifts that made management of the domestic public debt more challenging.

10. The exchange rate bore a substantial portion of the adjustment through a sharp depreciation, and the economy responded swiftly and flexibly with a major external adjustment represented by a reduction of 3 percentage points of GDP in the current account deficit. The economy was still able to expand by 1.5 percent, but the magnitude of the exchange rate depreciation led to a surge in inflation and inflationary expectations in the fourth quarter, which has been the major cost inherited from last year's crisis. The financial sector proved once more its resilience and remains on a solid footing. There was some corporate sector distress, but this was resolved in a decentralized way, with debt restructurings, debt-equity conversions, and early repayments conducted by the private debtors themselves without government's intervention and without posing any systemic risk.

11. The new Brazilian administration is doing its part to respond to the worsened external environment. President Luiz Inácio Lula da Silva has moved expeditiously and resolutely to confirm his pre-electoral commitment with fiscal discipline and low inflation, as necessary conditions to implement the strong popular mandate he received from the Brazilian people to speed up economic growth and improve social equity.

12. To shed concerns regarding debt sustainability, Brazil announced a half a percentage point of GDP increase in the primary surplus for 2003, bringing it to 4.25 percent. It reaffirmed its commitment to generate primary surpluses necessary to ensure a steady decline of the debt-to-GDP ratio over the medium term by maintaining a primary surplus target of 4.25 percent of GDP for 2004 and similar indicative target for 2005 and 2006. The primary surplus in the first two months of 2003 reached over R$16 billion, already meeting the target for end-March, a fiscal development that augurs well for the feasibility of the adjusted primary surplus target.

13. Demonstrating a firm resolve to fight inflation, the Central Bank announced an ambitious operational inflation target of 8.5 percent for this year, 4 percentage points below the actual 2002 inflation, and further tightened monetary conditions accordingly. In tandem with these policy adjustments and with improved market sentiment, inflation is already beginning to decline.

14. In addition to strengthening fiscal and monetary policies, the new administration moved quickly to build political support for much needed structural reforms in the pension system of civil servants and in the tax system. In a demonstration of unprecedented political consensus, the governors of all 27 states signed last February a landmark agreement on the guiding principles for the tax and pension reforms. These reforms are now in the process of being detailed and will be presented to congress during the first half of this year.

15. Markets have responded positively to these initiatives. Spreads on Brazilian bonds have been cut from 2,400 to around 900 basis points, and there is still scope for further decline. The nominal exchange rate has appreciated some 20 percent in relation to last year's low. The rollover rate of domestic debt has returned to 100 percent and maturities are being lengthened. Foreign markets reopened to Brazilian private banks and companies, which have placed nearly US$5 billion of debt abroad so far this year. In light of the substantial external adjustment occurred last year and the strengthening of macroeconomic policies implemented this year, Brazil is now in a stronger position than before. The financing conditions of the balance of payments in 2003 seem adequate, and there is a clear opportunity for upside risks to further materialize given the present undervaluation of Brazilian assets and the positive and still not fully realized repercussions on markets of the strong fiscal and current account flows.

16. With regard to Colombia, in late 2002, the new administration was able to obtain congressional approval of an austere budget for 2003, a comprehensive tax reform, a reform to the general pension system, and a reform to the labor code. Colombia was able to regain access to international capital markets. Spreads over U.S. Treasury bonds, which briefly surpassed 1000 basis points, are now around 500 basis points. In spite of global uncertainties, GDP growth in 2003 is expected to surpass 2 percent, inflation to remain comfortably in the single-digit range, and the fiscal deficit to decline to 2.5 percent of GDP.

IMF Quotas and Governance

17. The Fund has been able to combine universal membership, weighted voting, a constituency representation system, and a culture of deciding by consensus - characteristics that have endowed it with operational agility and efficacy while, at the same time, preserving broad legitimacy of its decision-making process.

18. There is a need, however, to update the Fund's voting structure to better reflect the increased importance of developing countries, especially emerging markets, in the global economy, as well as the increased Fund's role in these countries.

19. The Fund's decisions affect the lives and destinies of hundreds of millions of people in the developing world. This simple but powerful reality, together with a growing trend towards democratization of decision-making processes worldwide, do require an increase of the influence of developing countries in the decision-making process of the Bretton Woods Institutions. The path forward seems to be a combined approach involving a change in the quota formulas, simplifying and reducing the number of formulas and giving more weight to GDP and to international reserves, and a restoration of the importance of basic votes. I look forward, with expectation and hope, to an in-depth discussion of the report to be presented on these issues in the next Annual Meetings.

Enhancing Surveillance, Crisis Prevention and Crisis Resolution

20. Surveillance of member countries and of the global economy are core functions of the Fund. Enhancing the effectiveness of surveillance needs to be a permanent concern of the institution. Since the Asian crisis, there has been a major strengthening of Fund's surveillance of emerging market countries. This has produced many positive results, helping these countries to strengthen their policy frameworks and to significantly reduce vulnerabilities. These efforts should be continued. But they should be complemented with a similar emphasis and focus on a greater effectiveness of surveillance of industrial countries, especially those that are systemically and regionally important, and by greater attention to the volatility of international private capital flows.

21. I support strengthening positive incentives for countries to adopt sound policies. Positive incentives would function better than an approach of formally and explicitly rating or evaluating countries' policies in relation to a pre-defined set of standards, which would transform the Fund into a de facto rating agency. The existence of a special facility for strong performers, with demanding pre-qualifying criteria and faster and more automatic access to significant financial resources, could motivate countries to strengthen their policy frameworks in order to qualify, emulating good policies. These are the objectives of the existent but never used Contingent Credit Line facility. I strongly believe that the Fund should not let this facility expire next November. It should rather try to correct some of its design problems to increase the CCL's attractiveness.

22. I wish to thank Fund management and staff for their efforts to discuss the Sovereign Debt Restructuring Mechanism (SDRM) as requested by the Committee. These discussions have increased the awareness of market participants of their responsibilities toward collective action problems.

23. While I share the objective of minimizing the costs of unavoidable sovereign debt restructuring, the position of the Brazilian government on the SDRM continues to be the same, namely we believe that its costs may be higher than its potential benefits.

24. The collective action problems and disruptive behavior by holdout creditors that the SDRM would address did not seem to have been so severe and intractable in past bond restructurings so as to justify such major modifications of international contract law.

25. On the other hand, despite all the Fund's outreach efforts, the idea has not garnered support from private creditors. This indicates that the concerns about the potential costs of the SDRM are quite real. The creation of the SDRM could reduce the volume of capital flows to developing countries and increase their borrowing costs.

26. However, the SDRM discussions yielded positive results in terms of creating a positive climate for more market friendly solutions to collective action problems, as demonstrated by Mexico's recent movement in extending the use of collective action clauses to the New York market.

27. A more extensive use of existing collective action clauses in new international bond issues, to be decided voluntarily by the debtors and creditors themselves, may offer greater prospects for dealing with collective action problems than a statutory approach. The statutory and the contractual approach are seen by some as complementary. But in fact, a greater use of collective action clauses, in addition to a good market moment, will require a positive disposition by creditors. In order to foster such a positive climate in the private sector, and recognizing that there is not enough support to approve an amendment of the Articles of Agreement, it seems that the Fund should not undertake additional work on the SDRM.

Other Issues

Early this year, the Executive Board decided to discontinue the use of staff-monitored programs (SMPs) as a signaling mechanism, given that Fund surveillance and precautionary arrangements are adequate to serve as signaling devices. While we supported that decision, we do not find consistency between such decision and a more recent position according to which countries that remain under a precautionary arrangement for a long period of time are considered to be prolonged users of Fund resources. To be labeled as a prolonged user, a country should have actually to draw on resources from the Fund.