Statement by the Minister of Finance to the IMFC Meeting in Dubai
Statement by Mr. Geir H. Haarde, Minister of Finance of Iceland, on behalf of the Nordic and Baltic countries i.e. Denmark, Finland, Estonia, Iceland, Latvia, Lithuania, Norway, and Sweden, to the IMFC Meeting in Dubai, September 21, 2003.
The outlook for the world economy in 2004 appears to be more buoyant than in recent years, and various positive trends have been emerging that can underpin a recovery. Inflation is low, confidence appears to have improved, and important structural reforms are being undertaken in Europe. However, a number of challenges remain, given the substantial downside risks that still persist. Economic policies should, therefore, continue to be accommodative until a global economic recovery has been consolidated.
Policy makers need to give priority to three main areas in order to put a global recovery on a firmer footing. First, economic growth has to be restored in all regions and structural reforms are essential to increase growth potential in many countries. Second, imbalances in the world economy have been increasing and governments must pursue sustainable policies that contribute to fairer global burden-sharing. Third, greater market access for low-income countries should be ensured and a continued joint effort by the world's nations is needed to reach the Millennium Development Goals (MDGs).
I. Challenges ahead in the World Economy
World economic growth has been below trend in recent years.
The challenge of the moment is to restore growth and increase world trade,
especially since low-income countries depend on growing international trade and
a robust world economy to raise their living standards.
In seeking to accelerate economic growth, the authorities in the United States have implemented expansionary policies both on the fiscal and the monetary fronts. The growth outlook for the near term has promising aspects partly as a result of these policies. Such policies can, however, only stimulate demand in the short term, and once growth picks up, it is necessary to look towards the medium term. A worrying development is the prospect of a continuing large budget deficit. Consequently, policy-makers should aim at putting public finances back to a prudent level for the medium term. Another concern is the growing current account deficit and the possibility of a disorderly correction of it. There is a considerable risk that a persistent twin deficit could slow growth and undermine improvements that need to be made in various fields such as the finances of the health and pension systems. This having been said, we consider, however, that the current account deficit is not just the result of US policies and developments, but also due to weak economic growth elsewhere. Robust and self-sustained economic growth in other parts of the world is also needed to unwind the current account imbalances without major global negative effects. Other regions must, therefore, implement effective structural reforms in order to raise their growth potential.
While economic growth has been disappointing in many countries in Europe, it has been robust among those acceding to the European Union. Progress in Europe is challenged when the largest economies are performing below trend and the outlook remains bleak. Many European countries need to accelerate structural reforms in labor, product, and financial markets so that they can fully reap the benefits of the single market. Reforms are also necessary in order to put the pension systems on a sound longer-term footing due to the aging of the population. It is imperative that decisive measures be taken to consolidate the fiscal position in countries where medium-term sustainability has not been achieved. Earlier commitments to take measures to ensure medium-term sustainability of public finances have to be fulfilled.
The Japanese economy continues to seek economic growth, challenged by deflation. We urge the Japanese authorities to lay out a clear timetable for restructuring the banking system and addressing the overhang of non-performing loans, which is fundamental for reform. We welcome the recent Financial Stability Assessment Program/Financial System Stability Assessment (FSAP/FSSA) of Japan and encourage the Japanese authorities to move decisively forward with financial sector reforms. Other areas where reforms are needed are the labor market and the social welfare system. The authorities should continue to apply expansionary monetary policy and aggressively deregulating the business sector. The global economy needs a healthy Japanese economy to accelerate its recovery.
Growth has been remarkable in other Asian countries, especially in light of the global economic slowdown. It is crucial that the major Asian economic players assess the global imbalances carefully. Surplus as well as deficit countries must play their part in promoting a smooth adjustment of global imbalances, open up their markets and assess exchange rate policies which exacerbate global current account imbalances and lead to a build-up of reserves beyond that which is justified by economic fundamentals.
There is still reason to be concerned about developments in many emerging market economies. In addition to prudent policies, improved governance and increased transparency, sustainable growth depends on good education and modernized health care systems. Increased participation by women in the labor market continues to be an important factor for growth. It is also important that the current benign conditions in international capital markets do not lead to overoptimistic medium-term projections.
II. The International Monetary
Fund and Policy Matters
Enhancing the Fund's Surveillance Framework
In recent years the role and scope of surveillance has increased significantly. The Fund has embarked on a range of initiatives in order to be better placed to identify vulnerabilities in member countries. The Nordic-Baltic Constituency welcomes these initiatives aimed at strengthening surveillance. At this stage, however, we believe that the Fund should focus on both advancing and applying these initiatives more systematically. These initiatives would lead us forward in bringing fresh perspectives into the surveillance work in individual countries. In particular, we would like to emphasize the importance of broader participation in existing initiatives such as the Financial Stability Assessment Programs (FSAP).
The Nordic-Baltic Constituency would like to underline some important areas in relation to enhancing surveillance. First, data provision should always be given special attention since disclosure and quality of important public and financial sector data is still inadequate in many countries where substantial vulnerabilities exist. Adequate data provision is the foundation for all meaningful economic analysis. Also, we hope that the recently introduced initiatives can contribute to more realistic projections for growth in program countries. Second, with regard to greater separation between surveillance and the negotiation and implementation of programs, we support introducing clearer guidelines regarding the role of surveillance and program monitoring. However, we do not think it is necessary to establish an institutional firewall between these two functions of the Fund. Third, we encourage the Fund to continue to be thorough and critical when assessing industrialized economies due to their importance in a more integrated world economy. In this context, we especially welcome the increased emphasis on the industrial countries' trade policies and how they affect low-income countries in Fund surveillance. Fourth, we emphasize the importance of further integrating public and external debt sustainability analysis into Article IV consultations and reports. Finally, we encourage the Fund to continue to develop financial soundness indicators in order to strengthen financial sector surveillance.
In recent years, the Fund has increased its emphasis on transparency and good governance. These two areas are fundamental to economic progress.
The Nordic-Baltic Constituency welcomes the new steps taken to increase the Fund's transparency, especially the policy of moving to presumptive publication of all Article IV reports and the required publication of documents in exceptional access cases. By increasing its transparency, the Fund has set a good precedent for its members. It is now up to the Fund's members to increase transparency where it has been lacking.
Governance issues are of great importance both in the public and the private sector. Numerous advantages derive from applying the principles of good governance. Empirical studies have demonstrated inter alia that it is easier to attract foreign investment for countries that practice good governance than for those who do not. The same principle applies to the corporate world. The Nordic-Baltic Constituency welcomes the increased emphasis the Fund has given to the issue of governance and anti-corruption measures as these are essential components for strengthening institutional capacity.
Crisis Resolution - Next Steps
At this point, we would like to see the debate on crisis resolution generate a series of concrete improvements in the debt restructuring process. It is important to reiterate the commitments made in Prague in 2000 on improving the framework for crisis resolution and to increase private sector involvement.
When countries are faced with an unsustainable debt burden, it is necessary to have ways to address this. The last IMFC meeting concluded that it was not feasible at that time to proceed with the establishment of a Sovereign Debt Restructuring Mechanism (SDRM). Nevertheless the Nordic-Baltic Constituency considers that the momentum for creating an orderly and predictable crisis resolution framework should not be lost. We still see merits in an SDRM to solve problems in relation to uncooperative creditors and to achieve acceptance of debt cancellation agreements across different claims. Work on these and related issues should continue since problems such as those that inspired the introduction of the SDRM proposal still have to be dealt with in an orderly fashion.
The Nordic-Baltic Constituency is pleased to observe the increasing number of countries including Collective Action Clauses (CACs) in their new issues of sovereign debt in foreign jurisdictions and we urge others to follow suit. We believe the development and use of CACs to be positive for the international financial system. However, CACs alone are not enough to secure rapid debt restructuring and we urge Fund members to consider additional efforts to make this process more orderly and fairer. We find it particularly important to address the problem of aggregation in CACs and more studies must be undertaken to assess whether there are lessons to be learned from the recent successful debt exchange in Uruguay. The international community should also aim, based on the G10 recommendations, at achieving a high level of standardization of Collective Action Clauses because this will reduce the uncertainty concerning their implications in international financial markets.
The international community has to continue to address the problems associated with sovereign debt resolution although at this stage there does not appear to be sufficient support for a statutory approach. A Code of Conduct could complement both the SDRM and CACs and should therefore be developed further. The Fund should continue to be actively engaged in these matters as it is uniquely placed to coordinate collaboration between the various parties.
The Nordic-Baltic Constituency acknowledges that some emerging market economies have required exceptional access to Fund resources during their difficult economic times, including, Argentina, Brazil, Uruguay, and Turkey. We urge these countries to fully adhere to their programs and treat all creditors fairly. We are concerned that it has taken Argentina, for example, almost two years to embark on its debt restructuring, causing severe uncertainty for both the debtor and creditors.
We emphasize that the newly established framework for exceptional access should be respected. This framework must be implemented consistently in order to achieve predictability about the Fund's involvement in crisis resolution. Further adherence to this newly established framework will improve the integrity of the Fund's decision-making.
Independent Evaluation Office
The Nordic-Baltic Constituency considers the Independent Evaluation Office to have been successful in its efforts to improve the Fund's work and its observations have already spurred important discussion within the Fund. While the findings of the IEO can in some cases cause controversy, its role is not to find a scapegoat but to initiate objective and independent dialogue on Fund-related issues. There is much to gain from IEO work as it adds to the learning culture at the Fund. We encourage members to continue to be open-minded towards it and are looking forward to upcoming reports, inter alia on Argentina and technical assistance.
Quota Issues and Governance of the
Our constituency believes that the quota system has served the Fund well and that presently the Fund is sufficiently capitalized. The Fund is an international financial institution and the ability to contribute to its resources is decisive for voting power. At this stage, we see no pressing need to modify the calculations of quotas or change the quota distribution except perhaps in the case of a few clearly out-of-line members where ad hoc adjustments could be implemented. However, we support an increase in basic votes as this would enhance the position of most low-income countries in the Fund.
Contingent Credit Lines
The Nordic-Baltic Constituency confirms its previous position that the CCL should expire as scheduled. No member country has applied for the CCL because there is a fear that if a country shows great interest in this facility, it could send a warning signal to the financial markets, resulting in less confidence for the country and reduced access to private funding.
III. Fund's Role in Low-Income Countries
A global consensus has been formed in recent years to promote further growth and accelerate reforms in low-income countries. Despite the numerous initiatives undertaken and those in the pipeline, more has to be done in order to alleviate poverty. To achieve the Millennium Development Goals (MDGs), we encourage those industrialized countries that do not comply with the United Nations recommendations to increase their official development assistance (ODA). However, the MDGs will not be reached unless sound economic policies are pursued, good governance is secured, and well functioning institutions are established.
The Nordic-Baltic Constituency believes that considerable progress has been made under the HIPC Initiative. More countries now have good prospects of reaching their completion point under the Enhanced HIPC Initiative. These countries have seen a significant fall in their debt burden and we find it encouraging to observe that all the twenty-seven countries which have reached decision point are now spending more on social services than debt service.
All the countries in our constituency that have granted official development loans have declared their willingness to cancel 100 percent of such debt to HIPC countries. It is important that this additional relief benefits the country it is designed to, and furthermore, it should not affect burden-sharing among the donors. The Nordic-Baltic Constituency also wants to reiterate the need for a change in the current methodology for calculating debt sustainability at completion point. We welcome recent support in Europe to revisit this issue.
However, we are concerned that debt sustainability after the HIPC Initiative will not be maintained for all the participating countries. This matter needs to be addressed and long-term debt sustainability in low-income countries remains a challenge even beyond the HIPC framework.
The Poverty Reduction Strategy Papers (PRSP) approach is becoming more and more established. This is a complex process which takes time to fully function and there is still room for improvements. The next steps should be to align donors' efforts and the PRSP process better with the national budget processes in order to enhance ownership and strengthen implementation. Many low-income countries have significantly strengthened their macroeconomic policies and implemented important structural reforms. Unfortunately, accurate growth projections for low-income countries have been difficult to accomplish but we call for more realistic assessments and warn against overly optimistic projections. The PRSP approach should continue to emphasize national ownership and broad participation by civil society.
The Nordic-Baltic Constituency welcomes the Fund's work to define more clearly its long-term involvement in the low-income countries. It appears that it will take a longer time than earlier envisaged to correct maladjustments in many of the low-income countries and the Fund should continue to stay engaged in this work.
There are a few points that we believe the Fund should bear in mind in times ahead:
First, the Fund should continue to assist the HIPC countries in reaching the level of sustainable debt but a clearer exit strategy needs to be developed. We, therefore, welcome the development of a framework by the Fund and World Bank that aims at developing guidelines for low-income countries on how to achieve the Millennium Development Goals and prevent the recurrence of their debt problems.
Second, the Fund should promote further institutional reforms and provide technical assistance. Sound institutions are important for economic development and empirical studies have demonstrated that income differences are correlated with indicators of institutional quality. My constituency welcomes the New Partnership for Africa's Development (NEPAD) Initiative and hopes that its efforts to enhance governance among its constituents will be successful. Furthermore, we support the Fund in its endeavours to include measures in its programs designed to address institutional weakness. We, therefore, urge member countries to give more weight to institutional reforms. This is especially important for low-income countries.
Third, the importance of improved market access for low-income countries cannot be emphasized enough. The Fund should continue to use surveillance to promote world trade in general and we welcome the recent initiative taken by it and the World Bank aimed at supporting the Doha round. Further trade liberalization must proceed for the benefit of both low-income and industrialized countries. Even though the onus of freer trade might rest with the industrialized countries, it is important that low-income countries open up their markets in order to facilitate trade amongst themselves as well.
Finally, the Fund should assess further how to refine the instruments now available to low-income countries for accessing its advice, technical assistance, and financing.
IV. Concluding Remarks
The global economy looks set to recover from the slowdown after having been pained by low growth and imbalances in many of the leading economies in recent years. Significant risks nevertheless remain and the Nordic-Baltic Constituency is concerned that too many economies will continue to pursue policies which may not be sustainable in the long run, or that they may be adversely hit when necessary correction takes place. To foster the nascent recovery, it is important that all nations work together in restoring growth by adhering to sustainable policies and by addressing structural rigidities that hamper some economies from regaining strength.
The Nordic-Baltic Constituency is satisfied with the reforms that the Fund has undertaken in recent years on its core functions and its strengthened involvement in the financial sector. Furthermore, we are certain that the emphasis on transparency and good governance will enhance the Fund's work. Nevertheless, there is still scope for improvements and we believe that the Fund should continue its work in the field of crisis resolution and continue to adapt to the ever-changing international environment.
Economic conditions in low-income countries depend both on efforts by the industrialized countries and national initiatives. No opportunity should be lost for improving their economic capacity in order to achieve the Millennium Development Goals. The Nordic-Baltic Constituency is a strong supporter of the HIPC Initiative and the PRSP approach and believes that these programs have been productive. We encourage industrial countries both to fulfil their commitments to reach the MDGs and to use the WTO trade negotiations to provide greater access to their markets for agriculture and textile products from low-income countries. We regret the lack of progress during the recent WTO meeting in Cancun and urge all the countries concerned to continue their efforts towards a prompt and successful conclusion.