TREASURY NEWS

FOR IMMEDIATE RELEASE
July 8, 2000
LS-758

Progress to Date

Reduced vulnerability to crisis. Crisis prevention starts at the national level. With this in mind, the international community has engaged in an intensive global effort to help emerging markets reduce their vulnerability to crisis. Results are already evident in a wide range of emerging market economies, where there are:

• Stronger financial sectors, facilitated by concrete progress toward the adoption and implementation of global codes of best practice.
• More resilient exchange rate policies, as countries have moved away from the "soft peg" approach that was at the heard of recent crises.
• Substantial improvements in national balance sheet management, including reduced short-term external debt burdens and substantial increases in reserve cushions.

Increased transparency. Disclosure is the foundation of any well-functioning financial system. The international community has made enhanced disclosure a major priority - resulting in dramatic improvements in the quality of information available to markets.

• Major emerging market countries now make available a much broader array of information about their performance and prospects, including reserves and related liabilities, external debt burdens and overall policy programs.
• International financial institutions both encourage and contribute to the increased flow of information - releasing more details of their own operations, advice to governments, and assessments of compliance with international standards and codes.

More effective crisis response. The institutions at the core of the international financial system are now equipped with instruments to respond quickly and effectively to impending crises in a manner that reduces moral hazard and helps restore the flow of private capital. The IMF and World Bank can now provide large-scale resources, under exceptional circumstances and at a higher rate of interest and shorter maturity, to help crisis-hit countries restore confidence and begin recovery.

Appropriate private sector involvement. Rapid restoration of private capital flows is a crucial ingredient of successful crisis response in today's global economy. The G-7 articulated in Cologne a broad framework to guide official efforts to accomplish this goal. Consistent with the G-7 framework, the international community has applied a series of new approaches - from Korea to Pakistan - for facilitating constructive involvement of private creditors in the resolution of financial crises. Operational guidelines articulated in April will guide efforts going forward.

Reduced systemic risk. New cooperative approaches at the international level are now helping raise standards, reduce systemic risk and create the conditions for stable capital flows. Initiatives are underway to revise the Basle Capital Accord to make it more sensitive to risk and to improve risk management and disclosure in major financial institutions and highly leveraged institutions, as recommended by the Financial Stability Forum.

Enhanced dialogue and consensus building. Emerging market economies are gaining an increasing voice in the international system. The Group of 20 provides new opportunities to participate at the formative stage in the discussion of key economic and financial policy issues.

Equipping the IMF for the future. In Fukuoka, G-7 Finance Ministers laid out specific proposals for change to advance the process of reform underway in the IMF.

• A new structure for IMF lending to provide for a more focused and selective financing role for the institution.

• Medium-term lending through the Extended Facility would be confined to well-defined cases in which medium-term structural reform is of central importance.
• Greater emphasis on prior actions, limitations on access and strengthened post-program monitoring would discourage undue and repeated reliance on Fund resources.
• Once countries are back on a sustainable economic and financial path, they would be encouraged to repay the Fund as quickly as possible.
• A much stronger focus on preventing crises.

• Strengthened safeguards on the use of IMF resources.

• Greater openness and enhanced accountability of the IMF itself.

Re-framing the priorities of the Multilateral Development Banks. Ministers also put forward a framework for concrete change in the MDBs. These proposals are based on their shared view that:

• Economic growth is indispensable for poverty reduction.
• Effective lending depends on clear conditions.
• The MDBs should play a lead role in providing global public goods.
• MDB lending must not supplant private resources.
• The MDBs must stand ready to respond quickly to temporary disruption of access to private capital, in order to accelerate the return to markets and graduation from MDB assistance.

Consistent with this consensus, Ministers agreed to work to operationalize the following key reforms.

• Articulation of multiyear frameworks with clear commitments to increase support for core social investment such as basic health and education, clean water and sanitation.
• Incorporation of clear and measurable performance benchmarks in lending and greater focus on lending to borrowers that demonstrate strong performance.
• A comprehensive review of pricing under the hard-lending windows, including the merits of differentiating pricing based on the type of operation financed.
• Dedication of greater MDB resources to global public goods, such as to fight infectious diseases, support agricultural resources and tackle cross-border environmental problems.
• Increased emphasis on good governance, including systematic support for legal, institutional and regulatory reforms, capacity-building and improved government accountability and the rule of law.
• Greater transparency, public participation and accountability, particularly including release of all country strategies and evaluation reports and increased effectiveness and accessibility of independent inspection panels in all institutions.

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