Seðlabanki

Ræða Geirs Haarde, fjármálaráðherra, á fundi alþjóðafjárhagsnefndarinnar

Statement by Mr. Geir H. Haarde, Minister of Finance, Iceland, on behalf of the Nordic and Baltic countries to the IMFC-meeting in Washington, April 20, 2002

Introductory remarks
I have the honour to submit this statement on behalf of the Nordic and Baltic countries.  At the outset I would like to take the opportunity to welcome the outcome of the Monterrey conference. Globalization provides numerous opportunities for growth and poverty reduction while also posing some challenges especially in the area of finance. The strategy outlined in Monterrey is a welcome answer to the challenge of integrating the poorest countries into the world economy. It provides an appropriate balance between the need for a sound domestic framework coupled with poverty reduction oriented policies and a well functioning international environment that promotes effective development assistance. The Monterrey Consensus demonstrates that the international community is in basic agreement on the means to fight poverty and the challenge is now to transform this consensus into concrete action. The Fund has an important role to play in implementing the Monterrey Consensus.

Let me now comment on the global economic outlook and address issues concerning the Fund and its policies. I will then return to more detailed discussion on poverty reduction and the Fund's role in that area.

The Global Outlook

Developments and Prospects
World economic growth fell significantly in 2001 from the levels experienced in the last decade.  One feature of the slowdown is the rapid synchronized decline in economic activity across the globe, resulting from increased economic integration obtained through freer movement of goods, services and capital. In the future we can expect waves of disturbance to travel faster than before while waves of innovation and technical progress will also travel faster to the benefit of all nations.

Economic forecasts are increasingly optimistic and there are growing signs that the tide has turned.  Prospects for economic growth, especially in the United States, appear to be brighter and several emerging markets are showing signs of recovery.  Contagion effects from the Argentine crisis have been limited so far, assisted by increasing differentiation in the risk assessment of investors.  This underlines a greater resilience of the international financial system.  World trade is also expected to recover and continue to grow faster than production, reflecting increased integration of world markets.

The recovery in the United States is likely to prove durable and will help to promote a broader global upturn. Consumer demand remains relatively strong and the remarkable growth in productivity has set the stage for a rebound in profits and suggests a gradual recovery in investment spending. However, there are some less favourable signs such as high consumer and corporate debt and possibly reduced confidence in the financial system. In view of excess capacity, recovery in the United States economy hinges on the continued resilience of private consumption and an upturn in business investment. Strong consumption in the United States has moderated the impact of a contraction in investment and industrial production that normally would be associated with a substantial contraction in GDP growth. The timely easing of monetary policy in the United States along with fiscal stimulus has played a significant role in facilitating this development. The large current account deficit, however, remains a cause for concern, especially in the medium term. Care should be taken to keep public finances on a prudent course, thus addressing concerns related to low private savings and the current account deficit.

Japan is experiencing its third recession in a decade and provides the only case of deflation in an industrial country since World War II. Measures to fight deflation and increase consumption are warranted. The 'zero interest rate policy' should be continued along with other measures to further reduce deflationary pressures. The case for fiscal stimulus seems to be weakening due to the exceptionally high level of public debt, but there is scope for improving the quality of public spending. Structural reforms in the financial and corporate sectors are essential to boost confidence. A postponement of tackling the bad debt problem of the banking sector will only make it more difficult to resolve.

The full realization of Economic and Monetary Union in Europe at the beginning of this year was a historic event and marks a further step towards greater economic integration in Europe, which will be beneficial for Europe and the world economy. The EMU has made it possible to weather events which previously would most likely have created turbulence and uncertainty in exchange markets.  Structural reforms are, however, important if the euro area is to obtain a higher sustainable economic growth rate.  One of the most important reforms would be measures to reduce rigidities in the labour market which will enhance labour mobility and increase participation rates.

The European Union accession countries have weathered the global slow-down better than expected.   The European Union accession process and its timetable have been a major factor in keeping the economic policies of these countries credible along with continued economic growth, structural reforms and sustainable debt levels.  It is important that enlargement by up to 10 countries, be agreed by the EU at the European Council meeting in Copenhagen in December 2002.

Risks in the Global Economy
The high level of indebtedness in many countries is a cause for concern.  The economies of Argentina and to a lesser extent Turkey have been especially exposed and vulnerable. Sound macroeconomic policies, especially prudent fiscal policies are essential in restoring confidence and directing these countries to a sustainable growth path.  Among short-term risks in the present situation is the uncertain outlook for oil prices, stemming largely from non-economic factors.

Voluntary risk-taking is a driving force for innovation and growth. However, recent events in the United States point to a certain lack of transparency and increasing difficulties in managing, assessing and monitoring risks, especially, risks associated with some of the more complex forms of financial instruments. To ensure the proper working of equity and bond markets, prudent risk management rules and transparency have to be strictly adhered to. The Fund has an important role to play in promoting the use of best practices in global financial markets.

A key ingredient for economic progress, besides investment in human and physical capital, is free trade.  As freer trade is promoted in the world economy, it is necessary that all participants respect the rules that prevail in the world trading system, which are the result of decades of hard work at the negotiating tables.  Therefore, the increase in tariffs on steel imports that the United States administration introduced recently is misguided. This action might induce retaliation by other players and consequently opens the door for a more widespread trade dispute. At this sensitive juncture, such a disturbance in the trading system could have adverse effects on the globalization process.

The Fund and Future Challenges

Crisis Prevention
We welcome the Fund's increased focus on crisis prevention.  It serves to enhance confidence in the international capital markets, which is a vital precondition for increased investments and capital flows inter alia to emerging markets and developing countries.

Surveillance and Standards 
Fund surveillance plays a major role in crisis prevention.  Article IV surveillance provides a broad perspective of the state of economy in member countries, as well as independent policy recommendations. In the case of many small developing countries, Article IV surveillance is the only means they have to obtain an independent and professional assessment of their economy. We strongly support an active surveillance role of the Fund as an important precondition for the success of other activities. Surveillance has evolved and adapted to a changing economic environment. Growing interdependencies between economies including the rapid growth of international capital flows make it all the more necessary to give surveillance a broader perspective. At the same time, surveillance should remain focused to preserve its effectiveness.  The Financial Sector Assessment Program has proved to be an important addition to the Fund's surveillance activities and we support efforts to cover the membership as a whole within the timeframe initially envisaged.

The implementation of coherent, internationally accepted standards and codes is also a key factor in crisis prevention. The Fund has played a leading role in promoting and monitoring standards. The quality of data is more important than frequent dissemination and the presentation must be clear and accessibility easy. Furthermore, statistical standards have to be kept unchanged for some time so that countries will have sufficient time to adapt them. It is important to provide technical and financing assistance to countries striving to implement the 12 key standards, in coordination with other international organizations and national authorities. The Fund should continue to encourage more members to subscribe to these standards.

Conditionality and Ownership
Focused and effective conditionality is imperative to strengthen the implementation of sound economic policies.  Experience has shown that country ownership is of utmost importance for the successful implementation of Fund programs. Every means must be sought to ensure that the policies adopted by the borrowing country are fully recognized as its own. Conditionality has to be adaptable to country specific circumstances and be critical to the success of the program.

Combating Money Laundering and Financing of Terrorism
We appreciate the Fund's contribution in the fight against money laundering and the financing of terrorism. We believe that the Fund should primarily focus on financial supervisory and regulatory aspects while national authorities should carry the responsibility of law enforcement aspects. The best way forward is an appropriate division of labour. Efficient coordination procedures should be established between the Fund, the World Bank, the FATF and other relevant organizations, according to the mandates and comparative advantages of each organization.

Crisis Resolution
Successful crisis resolution is essential to safeguard stability in the world economy. As a result of recent events, the Fund has become exceptionally exposed to few emerging economies. As official lending is limited, the Fund must not fall into the trap of becoming perceived as a lender of last resort.

Access limits
In recent years, access limits, based on Fund policies, have been exceeded on numerous occasions with exceptional funding provided to Fund members. When the Fund repeatedly exceeds the access limits it becomes overly exposed and puts its resources at risk. The credibility of the Fund will eventually suffer if its policies are not consistent. In addition, large Fund financing reduces the incentives of the private sector to participate in the resolution of crises. Access beyond the normal limits should, therefore, only be granted in the most exceptional cases.   It is striking that three largest borrowers obtained 96 percent of new financial commitments by the Fund in 2001. This, along with the overstep in access limits, raises concerns with respect to equal treatment of Fund members. Lastly, we are concerned whether the difference between Stand-by Arrangements and the Supplemental Reserve Facility is becoming blurred in some cases. Replacing one facility by another for debt sustainability reasons, risks to undermine the rational behind the use of different financing facilities in different cases.

Private Sector Involvement and a Sovereign Debt Restructuring Mechanism
The implementation of the Prague framework for Private Sector Involvement has not been successful in the recent cases of Turkey and Argentina. There are various instruments available for strengthening the involvement of the private sector, for instance bond restructuring, debt rollovers and more drastic means such as standstills. However, the incentives for using them appear to be lacking. We find it important to develop a more effective framework for the involvement of the private sector in crisis resolution, which inter alia entails the possibility to activate certain predefined procedures when a crisis is impending.

We, therefore, support further analysis of a Sovereign Debt Restructuring Mechanism and believe that it could facilitate an orderly and rapid restructuring of unsustainable debt. There are clear advantages to this formal approach, especially if it leads to a reduction in the cost of debt restructuring and creates a more predictable environment for both debtors and creditors. However, such a mechanism is a long way from being operational. In the meantime it is important to achieve progress with respect to implementing the Prague framework for Private Sector Involvement and on issues such as lending into arrears, determining debt sustainability and access limits. The Fund should also examine ways to support the inclusion of collective action clauses in sovereign bond contracts.

Quotas
Alternative quota formulas require further discussion. A new quota formula should capture the relative economic strength of member countries and their ability to contribute to Fund resources as well as promote incentives for sound economic policies. We advocate the inclusion of an openness variable in a new quota formula and believe that it would be beneficial for member countries and reflect the purpose of the Fund.

The adequate size of the Fund, i.e. the total amount of quotas, is difficult to determine.  While we recognize that even in good times, variability is to be expected in the need for Fund resources, strengthened Fund surveillance and the increased discrimination by creditors between different country risks reduce the potential need for Fund resources.

Poverty Reduction and Fund Policy
We are encouraged by the progress in implementing the enhanced HIPC Initiative as well as the poverty reducing measures outlined in the Poverty Reduction Strategy Paper approach.  Clear gains have been made as regards debt reduction for poor countries and the PRSP approach is working well, not least because it is country led, comprehensive in its approach and based on broad consultations. We acknowledge that the fight against poverty can only be successful if the poor countries themselves lead the way, but with the Fund there to support them.

We repeat that we fully concur with the Monterrey Consensus that was arrived at last month.  The attendance in Monterrey of an impressive number of the world's leading statesmen gives a clear indication of the importance the international community attaches to reaching the Millennium Development Goals.  We support the notion that any development finance strategy is dependent on both a sound domestic framework and a well functioning international environment. Increased and more effective development assistance, including progress towards the 0.7 percent of GNP target for official development assistance is needed.  An inherent strength in the joint efforts towards achieving the Millennium Development Goals is that different international institutions have different operational competencies. We encourage increased cooperation, while respecting different mandates to maximize the impact of the efforts of individual institutions.

We welcome the World Trade Organization's decision achieved in Doha to put the needs and interests of developing countries at the heart of the WTO Work Program by emphasizing further liberalization of trade in agricultural products and textiles. In this context, it is important that the industrial countries substantially reduce their producer subsidies in order to facilitate more trade in agricultural products between the industrial and developing countries. In addition, developing countries need to work towards free trade and increased trade volumes in their own regions.

Developing and emerging economies need to pursue sound economic policies in order to secure access to international financial markets. A prerequisite for sustainable growth and market access is good governance and the implementation of strong and credible economic policies while taking into account the social dimensions. This is even more important now because of the rapid transmission of financial disturbances.

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Let me conclude by emphasizing again the importance of globalization and how vital it is to integrate developing countries further into the global markets. The gap between the poorest and the richest nations remains wide. We all have a shared responsibility to bridge this gap.