World Economic Outlook

1. While the global economy continues to record positive growth and remains resilient, the global recovery is weaker than earlier anticipated due to geopolitical uncertainties, the decline in equity prices, weaker consumer and investor confidence and the slow progress in structural reform in Japan and the Euro zone area. Against the background of the pronounced geopolitical uncertainties and rapidly changing economic and financial conditions, the global recovery remains fragile and subject to significant downside risks. The global recovery remains heavily dependent on the performance of the United States economy as well as Europe and Japan. Recent forward looking indicators in the US point toward slower growth, reflecting weakening consumer confidence and spending. The fragility in the equity market and the structural fiscal and current account imbalances pose additional risks to economic recovery and stability of international financial markets. The economic performance in Japan and the Euro area remained subdued and their economic outlook remains hesitant due mainly to structural rigidities in product and labour markets in the Euro area and in Japan, the added problems in the banking sector.

2. We are concerned with the hesitant and uneven global recovery as well as the risks for disorderly adjustment to global current account imbalances that have led to the misalignment of major currencies. As emerging economies remain vulnerable to developments in major economies, the uneven global recovery and structural imbalances would pose a threat to economic and financial stability in the emerging economies. Equity markets in major economies remain fragile with severe implications for the financial and real sectors. In view of these developments, structural reforms should be pursued vigorously to address the imbalances and further improve growth prospects. The Euro area economies still needs structural reforms in labour and product markets while the structural reforms in the banking and corporate sectors are required in Japan. The US needs to reestablish a sound fiscal and current account position over the medium term.

3. Despite the weak global economy, the Asian economies continue to perform well in 2002, boosted by strong domestic demand and recovery in exports. Countries in my constituency including Indonesia, Malaysia and Thailand experienced growth of 3.7%, 4.2% and 5.2% respectively in 2002. Fiji and Vietnam registered higher growth while Singapore's economy turned around to register a growth of 2.2%, as against a decline of 2% in the previous year. The other countries in the constituency recorded either slower or unchanged growth in 2002. The short-term outlook, however, remains mixed as economic performance is still very much tied to that of the advanced countries. Although Asian exports are still dependent on the demand from developed countries, significant support from domestic demand has fuelled a significant rise in the intra-regional trade.

4. The geopolitical uncertainties in the Middle East in particular and the absence of strong recovery weigh down heavily on growth prospects. In addition, external shocks such as a sustained high oil price and a fall in tourist arrivals, would also pose a threat to the prospects for sustaining growth in the medium term. Although accommodative macroeconomic policies and financial reforms have helped stimulate spending, domestic demand, in particular investment, is heavily influenced by export earnings. Given this scenario, the Asian region will still have to continue to depend on a global recovery, in particular the US and the major industrial countries, for its own continued growth in the near term. While pursuing initiatives for self-help are important for the countries in the region and developing countries in general, the major industrial countries should take into consideration their policy implications for the rest of the world. With the global recovery remaining heavily dependent on developments in the advanced countries, economic reforms in these countries are needed to push the recovery momentum further. Closer policy coordination and surveillance among the major industrial countries would contribute toward minimizing the possibility of abrupt and disorderly adjustments. As for the emerging economies, including Asian countries, efforts toward shifting away from externally-driven to domestically-driven sources of growth will continue to be pursued, paving the transition for reducing their vulnerability to external developments.

5. On the financial front, the influence of the external financial environment continued to dominate, dampening the performance of the equity market in the emerging economies despite their relatively strong fundamentals and improved corporate profitability. Indeed, the emerging economies, including the smaller countries in our constituency, have undertaken various structural reforms and measures that have resulted in strengthened fundamentals and greater resilience of their economies to adverse global developments. Greater uncertainties in major financial centers however heighten investors' risk aversion, which in turn would affect cost and access to funding from capital markets. In such a difficult environment, the Fund plays a crucial role in promoting a stable international financial market, including the provision of the necessary assistance to mitigate the negative effects arising from the regional and global systemic risks particularly for the smaller economies. It is important that a global recession be avoided. Timely action on the part of the Fund will also help to prevent a full-blown crisis from occurring and minimize potential contagion effects. In addition, strong confidence-building measures are needed in addressing the volatility of the capital flows that lead to volatility in exchange rates, in order to avoid negative impacts on global growth prospects.

Strengthening Crisis Prevention

6. We welcome the Fund's efforts in enhancing the surveillance process as surveillance is a key to reducing the risk of future crises as well as to promote financial and macroeconomic stability. Since late 1990s, the Financial Sector Assessment Program (FSAP) and Reports on the Observance of Standards and Codes (ROSCs) are being used to strengthen the Fund's surveillance process. While we support these programs as they will promote financial stability, these should remain voluntary and tailored to individual countries' circumstances and stages of development. In addition, the authorities' priorities and capacity constraints should also be taken into account. The recent bunching of assessments of a number of countries with complex financial systems and the increase in the number of international standards and codes that are assessed in detail have put severe constraints on Fund resources. In view of these developments, we support the proposal to make the surveillance program more efficient and effective through streamlining and prioritizing. At the same time, technical assistance is essential to developing countries to participate in the program as well as to implement the recommendations of the program. As part of improving efficiency and effectiveness of surveillance, collaboration with World Bank, donors and other relevant standard setting bodies should be intensified.

7. The FSAP and ROSCs assessments should not be included as part of IMF conditionality in any IMF programmes. Similarly, the publication of these reports and the Article IV report should remain voluntary to encourage open dialogue and candid discussion that are critical to the effectiveness of the surveillance process. It is also equally important that discussion with the authorities should be conducted in a spirit of consultation, based on mutual trust and confidence. In addition, Fund staff should be prepared to consider alternative policy options that could deliver similar overall macroeconomic results more efficiently and at lower cost while taking into consideration the special circumstances of developing economies. The Fund staff should not rely solely on international standards and codes, and economic and financial indicators in their assessment and policy recommendations, but should also take into account the social and political structures and realities in order to enhance ownership and accountability of the policy and program.

8. We believe that the Contingent Credit Line (CCL) is an important instrument for preventing crisis. It was created to help member countries with strong policies confront the challenges of more integrated financial markets by providing assurance of Fund support in the event of financial market pressures due to contagion, and to provide incentives for implementing sound policies. However, due to its stringent eligibility criteria as well as entry and exit problems, there is no demand for the facility so far. Given the greater integration of financial markets and with higher vulnerabilities to contagion, we believe that further work on the eligibility criteria is required. Access to the CCL should not be used as a measure of a country's economic and financial soundness. Rather, the CCL should just be maintained as one of the IMF's financing facilities, one with the main purpose of crisis prevention and access to short-term liquidity among Fund members.

9. The Fund has also the responsibility to preserve stability in financial markets and the international monetary system. One area where progress is limited is the management of the capital flows, in particular inflows to the developing countries. After the Asian crisis, there were numerous international and working groups examining issues related to capital flows. However, the outcomes still do not fully address modalities to mitigate the risks of capital flows to the developing countries. Greater attention should be channeled to this area given that the challenges of increased globalisation, financial liberalization and enhanced links between domestic and international markets continue to pose a threat to stability of emerging market economies.

Improving the Capacity to Resolve Financial Crisis

10. The continuous efforts towards developing a more orderly and predictable crisis resolution and debt restructuring process is commendable. However, of importance is the guidance to countries to deal with debt in an orderly and less damaging manner and hence, strengthen the international financial architecture. In this regard, international financial institutions should put in place a work-out mechanism, whether through statutory or market mechanisms, to share the risks between borrowers and creditors and to facilitate orderly restructuring of debt. This is important so that developing economies can avert economic collapse and continue sustaining viable economic activities. Although the Fund has put forward the proposal on Sovereign Debt Restructuring, further work and refinements on the proposal are still needed, taking into account the evolving realities including the recent welcome developments on the issue of collective action clauses.

Implementing Initiatives to Support Low-Income Countries

11. For many developing countries, poverty reduction remains a priority and main agenda of economic development. It is encouraging to note that many countries have benefited from the Fund's program such as PRGF and HIPC which have played an important role in assisting member countries in alleviating poverty. A more concerted efforts towards poverty reduction is required to raise the prospect for sustained economic growth in the poorest countries. In this regard, further enhancement of these poverty reduction programs is needed.

12. On the PRGF, an important precondition for economic growth and poverty alleviation is the removal of unsustainable debt levels. As such, there is an urgent need to resolve the debt burden of these poor countries so that funds could be allocated to more productive purposes such as for building schools, health facilities and the provision of other basic amenities. In this regard, we urge for the speedier implementation of the HIPC Initiatives. Having said that, while the PRGF has benefited countries in our constituency, our experience shows that some of the conditions were too stringent and has affected the implementation of the program. It would therefore be necessary to simplify some of the procedures, and in cases where skills and systems capacity constraints limit the country's ability to comply with the conditionality, the Fund should exercise greater flexibility and understanding in its demand on compliance and provide technical assistance when needed. At the same time, the broad and equitable participation by all creditors in the implementation of the HIPC initiative are crucial and should be encouraged. In addition, the industrial countries should open up more their markets to exports of these countries.

IMF Quotas

13. An initiative to support the developing and emerging market economies, in particular those in our constituency, is through strengthening the voice and participation of developing countries in decision-making of the IMF and the World Bank. An increase in the share of basic vote which has been significantly eroded, would contribute toward achieving this objective. However, there was no consensus towards any of these decisions during the 12^th General Review of Quotas. Given the experiences during the last review, we would call for an early start of the 13^th General Review of Quotas, which should begin with a re-look at the concept of the roles of IMF quotas. In this regard, a distinction should be made between the different roles of IMF quotas, namely in ensuring the adequacy of resources for the Fund, and in promoting better global governance, whereby quotas should reflect a wider range of economic variables of IMF members. Even if there is no consensus on the need for a quota increase to enhance IMF resources, the next review is still necessary to address the governance issue. Perhaps, a starting point for the 13^th Review should then be to give serious consideration to the issue of quota increases to achieve a better balance in the voting structure in the IMF.

Conclusion

14. The environment of uncertainties calls for more collaborative approach between the Fund and its members to strengthen the prospects of global recovery. While it is crucial for emerging economies to undertake further reforms to enhance the resilience of their economies, the industrial countries should continuously address global imbalances through enhanced structural reforms and deliver on their promise on trade aid and the strengthening of the international financial architecture. On the Fund side, complementing these efforts is even more crucial to improve the governance of the Fund via the quota review process to achieve the varied objectives of adequacy of resources, and fairer distribution of the quotas that better reflect the latest developments in the world economy, in particular those of the developing countries including those in my constituency.