21 April 2002

Multinational Group Launches Financial Sector Reform Initiative

Hopes to contribute to growth, poverty reduction

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- A multinational group has pledged $45 million to help developing countries build or strengthen their financial sectors.

In an April 21 press release, five donor countries and organizations said that through the Financial Sector Reform and Strengthening (FIRST) initiative they hope to contribute to economic growth in financial stability in these nations.

"FIRST recognizes the critical role that the financial sector plays in economic growth and attacking poverty," Clare Short, the chief of the United Kingdom development agency, one of the initiative sponsors, said in the release.

With sound financial systems and institutions in place, the release said, developing countries will be better able to withstand financial shocks, tap domestic savings and attract foreign investment.

The donors said that losses from banking crises in the 1980s and 1990s in developing countries are roughly equal to all the foreign aid provided since 1950, highlighting the need for building or strengthening banking systems in these nations.

Between $2,000,000 and $3,000,000 million in hidden domestic savings in the developing world cannot be invested or used as collateral because of a lack of property rights and adequate financial systems, according to World Bank estimates.

And some of these funds escape abroad for the same reason. During the press briefing on the initiative Short said that 40 percent of domestic savings in Africa leave the continent because they cannot be used effectively. Noting diminishing capital flows to poor countries, Pascal Couchepin, the Economy Minister of Switzerland, another START sponsor, said, "if we don't take the initiative, the situation will get even worse."

The donors said that they want to support financial sector reform through technical assistance for capacity building and policy development in areas such as financial system reform, banking systems, capital markets and accounting and auditing. The release said that funds will be provided in the form of grants.

The donors emphasized that needs in those areas are known because the World Bank and the International Monetary Fund (IMF) conducted assessment of financial sectors in over 60 countries. However, they added, many of these countries do not have resources or expertise to pursue policies recommended by these institutions.

FIRST has been launched by the World Bank, the IMF and development agencies of Canada, Switzerland and the United Kingdom. The release said the sponsors will talk with other donor institutions about expanding initiative's scope.

More information on START can be found on START's Website: http://www.firsinitiative.org/