*EPF316 05/28/2003
Text: IMF to Remain Vigilant Against Sluggish Growth, Crises
(Will work to support Iraq reconstruction, WTO talks, Köhler says) (3610)

The International Monetary Fund (IMF) will remain "vigilant" in monitoring the global economic situation by broadening surveillance and improving its crisis prevention capacity, the IMF managing director says.

In a May 21 prepared statement on the Fund's work program, Horst Köhler said that the issues the IMF executive board plans to examine include the risk of possible deflation and the impact of Severe Acute Respiratory Syndrome (SARS) on the economies of member countries.

Kohler's statement was released to the media on May 28.

He said that the IMF will work to support reconstruction, macroeconomic stability and growth in Iraq, and make "every effort" to contribute to the success of World Trade Organization trade liberalization negotiations.

To strengthen the framework for crisis resolution, Köhler said, the first priority is to encourage the use of collective action clauses (CAC) in international sovereign bonds. CACs limit the ability of dissident creditors to block a widely supported restructuring of an individual bond issue.

In the area of surveillance and crisis prevention, Köhler said, the IMF will explore a number of issues including precautionary arrangements, dollarization of an economy and foreign direct investment. It also plans to review progress on financial soundness indicators and the Fund's transparency policy, he said.

In addition, the IMF work program will focus on the Fund's role in low-income countries, program design and conditionality, and the Fund's quotas, finances and cooperative nature, Köhler said.

Following is the text of Köhler's statement:

(begin text)

International Monetary Fund
May 28, 2003

Statement by Horst Köhler, Managing Director of the International Monetary Fund,
on the Work Program of the Executive Board, May 21, 2003

The Spring meetings of the IMF and the World Bank brought together our 184 members for a clear demonstration of their commitment to economic cooperation at a time of considerable uncertainty. The membership:

-- agreed to remain vigilant in monitoring the global economic situation and underpin the recovery by adjusting policies as necessary and taking determined further action on the structural front, including substantial and concrete progress under the Doha trade round;

-- endorsed the role the Fund is playing in its main areas of competence, and called for sustained implementation of the policy initiatives taken in recent years to reinforce the stability of the international financial system and enhance the prospects for shared global prosperity; and

-- provided guidance for the work of the Executive Board for the period leading up to the 2003 Annual meetings and beyond.

Based on the deliberations of the International Monetary and Financial Committee (IMFC), I believe that our members are asking us to proceed along two interrelated tracks. First, they want to see clear and concrete evidence that the broad range of new policy initiatives that the Board has brought to fruition are being implemented in our day-to-day work and reflected in actual developments in member countries and regions. This includes a wide range of areas, including work on strengthening the framework for, and effectiveness of, surveillance; prioritizing and following up on the Financial Sector Assessment Program (FSAPs) and standards and codes; implementing the guidelines on conditionality agreed last September; applying our guidelines on access to Fund resources; working to encourage the use of collective action clauses in sovereign debt instruments; helping low-income countries by continuing with the Debt Initiative for the Heavily Indebted Poor Countries (HIPC) and working on better aligning the Poverty Reduction and Growth Facility (PRGF) and the Poverty Reduction Strategy Paper (PRSP) process; and keeping under review the adequacy of the financial base of the Fund and working to preserve its cooperative nature.

The Board's work will involve ongoing monitoring of these and other areas. The work of the Independent Evaluation Office (IEO) will also provide an important channel for evaluating the Fund's work and enhancing the Fund's learning culture.

The second track will consist of further discussion and policy development in areas where we obtained guidance from the IMFC's Spring meeting. The work program of the Board, in addition to carrying out the Fund's surveillance activities and considering decisions relating to the use of Fund resources, will accordingly focus on six main areas:

-- The outlook for the global economy and financial markets

-- Strengthening Fund surveillance and crisis prevention

-- Strengthening the framework for crisis resolution

-- The Fund's role in low-income countries

-- Program design and conditionality Quotas, Fund finances, and the Fund's cooperative nature

This work program is ambitious, appropriately so, and we have somewhat less time than usual before the next ministerial meetings. It will therefore be important to continue the effort to streamline Board documentation and Board discussions. I am also asking the Secretary to help ensure that we adhere as closely as possible to the Board's calendar in accordance with the guidance from the discussion of this work program.

The Outlook For The Global Economy And Financial Markets

Surveillance in the advanced economies will be carried out through annual Article IV consultations and our key vehicles for multilateral surveillance. Sessions on World Economic and Market Developments (WEMD) are planned for May and August. They will be held jointly with a Financial Markets Update in May and with the semi-annual World Economic Outlook (WEO) discussion in August. The next semi-annual Global Financial Stability Report (GFSR) is planned for August. Thereafter, WEMD sessions will be held in November, January, and March, together with a Financial Markets Update in November and the next WEO discussion in March. A GFSR discussion is planned for February. The Board will shortly hold a discussion on the policy issues surrounding the risk of possible deflation. We will also closely monitor the impact of the SARS epidemic on member countries.

Drawing on experience gained in other recent post-conflict cases, we will work with the international community to support reconstruction, macroeconomic stability, and growth in Iraq.

As regards trade issues, the IMFC underscored the urgency of progress under the Doha Round for growth and poverty reduction and to enable developing countries to participate more fully in the benefits of globalization. The Fund will make every effort to contribute to meeting trade liberalization objectives. On May 8, the Committee of the Whole on Liaison with the World Trade Organization (CWTO) discussed the status of the WTO negotiations, the Fund's potential contribution to the progress of the talks, and emerging areas of common interest between the Fund and the WTO. I will attend the WTO General Council Meeting on policy coherence on May 13. As part of our efforts to continue to monitor developments closely, the Board will receive background papers on the preparations for, and the outcome of, the critical WTO Ministerial Meeting in Cancún on September 10. The preparations will be discussed in a CWTO meeting this summer.

Strengthening Fund Surveillance and Crisis Prevention

The IMFC supported the continued efforts to make surveillance more comprehensive and effective following the conclusion of the 2002 biennial surveillance review. The planned program of Article IV consultation discussions will provide opportunities to assess the effectiveness of surveillance in encouraging members to adopt policies and institutional reforms that support sustained and balanced growth of their economies; strengthening members' resilience to adverse external developments and financial stresses; integrating insights from cross-country experiences; paying close attention to the systemic effects of the policies of the major economies; and enhancing awareness of political economy factors. The consultations will also provide an important opportunity for a fresh perspective on the policy frameworks of program countries, and a staff paper on progress in this area will be considered by the Board this summer. In this context, we continue to build on the recent candor of analysis and advice included in staff reports generally.

Board discussions in the coming months will cover several aspects of ways to further improve the Fund's crisis prevention capacity. In June, the Board will consider a staff paper on the role of precautionary arrangements in allowing the Fund to achieve the objectives of the Contingent Credit Lines (CCL) by encouraging policies to reduce vulnerability and in responding quickly to the needs of members with sound policies to deal with the challenges of globally integrated capital markets.

A series of discussions on related topics is also planned. On May 30, the Board will review progress on financial soundness indicators, with a focus on the next phase in which the staff will work with national supervisors and statisticians as well as international standard setters. In mid-2003, the Board will have an opportunity to take stock of the experience with the application of the framework for sustainability assessments since its introduction in July 2002, and consider possible methodological refinements. The Board will explore issues relating to dollarization in a seminar in May, on the basis of papers on macroeconomic policy issues in dollarized economies, and on the financial sector implications of dollarization. In June, a discussion on the balance sheet approach will draw on the recently circulated working paper on that subject and focus on how the Fund can incorporate an assessment of financial vulnerabilities. A staff paper for discussion in July will address issues related to foreign direct investment, including data issues, appropriate policies on foreign direct investment, and the results of a survey of private sector views. A review of exchange rate policies in developing countries will be the basis of a seminar in August.

In addition, in the coming months the Board will examine other aspects of surveillance. In June, it will review the progress made in the Fund's transparency policy. Also in June, the Board will consider proposals for strengthening the application of Article VIII, Section 5 as part of the strengthened framework for dealing with misreporting and nonreporting by members. The next periodic review of the Fund's Data Standards Initiative will take place in July. A paper for discussion in August will summarize the results of assessments conducted thus far under the Offshore Financial Centers (OFC) Assessment Program, discuss the potential risks posed by OFC activity, and suggest future Fund work on OFCs.

Work is under way on other aspects of surveillance that could be considered in the period after the 2003 Annual Meetings. A paper on assessments of the Code of Good Practices on Transparency in Monetary and Financial Policies, reviewing experience with the use of the code in FSAPs and suggesting a way forward, is planned for the Fall. Late in the year, a seminar will be held on the implications for the Fund's financial sector work of the new Basel Accord. The paper for the next review of data provision to the Fund will be prepared in December 2003. In 2004 the Board will undertake the next biennial surveillance review. Also in 2004, an assessment of structural changes in the global financial services industry, including consolidation and the potential implications for international capital markets, will be discussed, and the IEO will circulate a report on the Fund's role in Argentina.

Strengthening the Framework for Crisis Resolution

The IMFC agreed that the Fund's recent work had strengthened the framework for crisis resolution and clarified the issues involved. The first priority in the period ahead is to encourage the use of collective action clauses (CACs) in international sovereign bonds. The IMFC also agreed that work should continue on issues raised in the development of a proposal for a statutory sovereign debt restructuring mechanism that are of general relevance to the orderly resolution of financial crises. In September, the Board will discuss a paper that examines issues relating to the aggregation of claims for decision-making by creditors in the context of restructuring. This will follow Board consideration, in July, of a paper suggesting how the main features of the process for debt restructuring (transparency, modalities of dialogue, and coordination) could be improved to contribute to a more predictable and orderly restructuring of debt. This paper will be a contribution to the efforts to design a voluntary code of good conduct for debtors and their creditors, and the Fund will continue to collaborate with others in this area. A progress report to the IMFC on enhancing crisis resolution, including recent developments in the promotion and implementation of CACs and in the formulation of a code of good conduct, will be discussed in September.

A seminar on reaccess to capital markets after debt restructuring will be held in October. The staff paper will examine the conditions under which the sovereign deals with a crisis and the effects that policy actions have on the country's ability to reaccess markets; it will also consider the factors that are beyond a debtor country's control, such as global economic developments or changes in commodities prices. The IMFC welcomed the strengthened framework on exceptional access to Fund resources, and a review of this framework will be scheduled, as agreed, when adequate experience with it has been gained. A paper on financial sector issues in the context of sovereign debt restructuring is also planned for discussion following the Annual Meetings.

The Fund's Role in Low-Income Countries

Over the past year, the international community has adopted a two-pillar strategy for fighting world poverty and achieving the Millennium Development Goals. The country-driven and participatory Poverty Reduction Strategy Paper approach has become widely accepted as the operational framework for implementing this strategy at the country level. While the World Bank has the lead institutional role in the fight against world poverty, the Fund continues to play an active role within its core areas of expertise. We have supported our low-income members through the Poverty Reduction and Growth Facility and are working to align our PRGF-supported programs and members' PRSPs more closely. Our active collaboration with the World Bank is helping us to lay the groundwork for effective poverty and social impact analysis, to strengthen public expenditure management systems and countries' capacity to track poverty-reducing spending, and to support improved governance. In addition, we continue to help the Heavily Indebted Poor Countries address the burden of unsustainable debt through the enhanced HIPC initiative.

PRGF-supported programs are not the only vehicle for our assistance to various lowincome members. The FSAP exercise is helping low-income members develop facilities for microfinance, the financing of state enterprises, and the expansion of long-term credit, as well as advice on strengthening the prudential framework and bank supervision, and on bank restructuring and privatization issues. We are also helping member countries put in place a policy framework for attracting FDI inflows, and to develop better macroeconomic statistics to enable members to participate in the General Data Dissemination System and comply with internationally accepted standards and codes. Progress in these areas will help improve transparency and accountability in public resource management and strengthen the policy dialogue under the PRSP approach and the Article IV consultation and regional surveillance exercises. In addition, through the African Regional Technical Assistance Centers (AFRITAC) and other centers, we are complementing and prioritizing our technical assistance efforts with much-needed field-level support for local capacity building in all our core areas of macroeconomic expertise. Work in these areas should, in my view, continue to be carried out vigorously.

The Board will soon discuss several key topics aimed at clarifying and strengthening the Fund's role in low-income member countries. The broad agenda in this area will be taken up beginning with several meetings in June and July. A paper for Board discussion in July will consider how the Fund's role in low-income member countries should evolve over the medium term so that the institution can be most effective -- including in helping low-income countries graduate from the PRGF -- taking into account the considerable range of circumstances faced by these countries as well as their changing needs, and the mandate and expertise of the Fund. The issues will include how to focus better the Fund's policy advice and financial assistance to low-income members on the impact of exogenous shocks, which will be covered in more depth in a background paper prepared for the meeting. This paper will also serve as input for the required review of the Compensatory Financing Facility. A seminar discussion will examine a framework for assessing debt sustainability in low-income countries. We are also continuing to participate actively, most notably through the Integrated Framework (IF), in efforts to mainstream trade policies into PRSPs and are strengthening trade-related technical assistance. I shall host a meeting of heads of agencies of the IF in July. In the run-up to the Annual Meetings, the Board will consider a progress report to the IMFC on the implementation of the Enhanced HIPC and a progress report to the IMFC on the PRSP approach, including issues raised in the 2002 PRSP Review (both of these will be joint papers with the Bank and will also serve as background to the Development Committee). An IEO report on the Fund's experience with PRSPs and the PRGF is planned for discussion in March 2004.

Program Design and Conditionality

Two Board discussions will examine the Fund's role in recent crises, including both aspects of crisis prevention and the management of crises in the context of Fund-supported programs: a report by the IEO on capital account crises, focusing on the cases of Brazil, Indonesia, and Korea, will be discussed by the Board in May; and a staff paper examining lessons from the crisis in Argentina will be prepared for a Board seminar this summer. Also this summer, the IEO's report on the role of fiscal adjustment in Fund-supported programs will be ready for Board discussion.

For the post-Annual Meetings work program, and as part of the preparation for the 2004 review of conditionality, the staff is working on a number of aspects of the design of Fund-supported programs, including the assessment of program success or failure, the analytical framework for program design, and the nexus of issues involving financing and adjustment, as well as the particular issues involved in program design in capital account crises. A paper reviewing the Fund's trade policy advice and conditionality will examine programs in 34 member countries during the 1990s and assess the incidence, implementation, and impact of trade conditionality, with a view to refining such policy advice. A joint paper reviewing Bank-Fund collaboration in program design and conditionality will follow up on the discussion that took place on this topic by both Boards in September 2002.

Quotas, Fund Finances, and the Fund's Cooperative Nature

Adequate quota-based resources together with an effective voice for all members remain key to safeguarding the cooperative nature of the Fund. Following on the recent opening of the period of the Thirteenth General Review of Quotas, the Board will examine this summer selected technical issues related to the distribution of quotas, including questions raised by Executive Directors previously on the definition of the capital flows variable and the issue of correlation among variables. A status report to the IMFC on quota issues and measures to strengthen Fund governance will be considered in September. Possible further steps to enhance the administrative capacity of chairs to carry out their work effectively will be considered this summer. On the basis of the consideration of voice and governance issues in the Boards of the Fund and the Bank, a progress report will be made to the Development Committee.

In subsequent months, in response to a request from Executive Directors, the Board will consider possible analytical approaches for determining the target level of precautionary balances. The periodic reviews of the Fund's liquidity position will take place in September and April (each by lapse of time). A mid-year review of the Fund's income position will be held in November (lapse of time) with the regular annual discussion to take place next Spring. The next regular review of the Fund's strategy of overdue financial obligations will take place in August.

Other Policy and Administrative Topics

A discussion on promoting staff diversity is planned for May 28.

In July, the Budget Committee will review the FY 2003 Administrative Budget outturn. Further planned budget reforms will be reviewed by the committee in October. In February, the committee will discuss the preparation of the FY 2005 Administrative and Capital Budgets and the medium-term framework, which will be considered by the Board in April. The 2004 review of staff compensation will also take place in April.

The Managing Director's report to the IMFC on the Fund's policy agenda through the period of the Spring 2004 meetings will be discussed by the Board in September.

Technical assistance and training by the Fund play a key role in helping members enhance their capacity to implement sound policies through effective institutions. In addition to traditional delivery modes, regional centers have assumed a growing role in delivering technical assistance. In late 2002, the East AFRITAC began operations in Dar es Salaam, Tanzania, and at end-May the West AFRITAC will reopen and be temporarily relocated in Bamako, Mali, from Abidjan, Côte d'Ivoire. We will wish to ensure that our technical assistance is both tightly prioritized and effective, so that it can make a significant contribution to the institutional reform and private sector development in member countries that are key building blocks for stability and growth. The next periodic review of the Fund's technical assistance policy and developments will take place in November, together with a discussion on revisiting the issue of charging for such assistance.

The Board will discuss in January a report on the results of the 12-month pilot Program of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) assessments and the delivery of AML/CFT technical assistance.

(end text)

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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