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Ottawa, April 28, 1997
1997-038

Statement prepared for the Interim Committee of the International Monetary Fund

The Honourable Paul Martin, Minister of Finance for Canada

Washington, D.C.
April 28, 1997

Delivered text is official version.

The Global Policy Environment

Prospects for a sustained and broadly based global expansion continue to be promising. In the advanced economies, inflation remains moderate, government deficits are falling, and long-term interest rates, despite their recent upturn, remain relatively low. Moreover, with respect to the major exchange rates, the significant misalignment of early 1995 has been corrected. Similarly, in the developing and transition countries, conditions seem favourable for further growth and improvements in living standards. As a result, the medium-term outlook for output, trade and employment growth in the global economy is more encouraging than it has been for a number of years.

This favourable outlook reflects a number of notable policy achievements. The advanced economies have demonstrated a strong commitment to low inflation and fiscal consolidation. Many developing and transition countries have adopted sound macroeconomic policies and outward-oriented, market-based structural reforms.

But there are significant shortcomings in the expansion and risks to its continuance. Difficult policy decisions will need to be taken to ensure the expansion continues and that it translates into improved living standards for our citizens.

Fiscal consolidation must remain a policy priority. High public debt levels and the looming cost pressures associated with ageing populations leave no room for delay. If we are to preserve vital social programs and safeguard the advances we have made in terms of shared prosperity, government finances must be put on a sustainable long-term path.

The primary contribution that monetary policy can make to the continuation of the expansion is to safeguard the excellent inflation performance of the past few years. In the near term, as fiscal policy tightens, there may be scope for some monetary policy accommodation. As the global expansion gathers pace, however, monetary policy will have to guard against the re-emergence of inflation pressures.

We must recognize, however, that perhaps the most important shortcoming in the current expansion is unemployment, which remains at unacceptably high levels in many economies. Much of the unemployment problem facing many economies is, I think, structural in nature and will therefore require structural solutions. Sound macroeconomic policies must be complemented by policies aimed at reducing rigidities and inefficiencies in product and labour markets. It is by now a cliché to say that we live in an era of "globalization" and rapid technological change. In terms of policy, this implies that we must take measures aimed at improving education, training, and innovation to ensure that individuals have the opportunity to respond to changing economic circumstances.

Canada's Policy Approach

The Canadian government has remained committed to adopting economic policies which will lead to sustained economic growth and job creation. Our approach is laid out in the February 1997 budget, which built upon the direction set in the government's previous three budgets.

By the mid-1990s, it was clear that Canada's economic problems -- a hesitant recovery from the severe 1990-1991 recession, high real interest rates, and a large current account deficit -- were closely linked to Canada's high fiscal deficits and growing public debt. Economic policy since then has been aimed at reducing, and eventually eliminating, the deficit and at maintaining low inflation. This has paved the way for lower interest rates and will lead to stronger growth and job creation.

Monetary policy, while supporting the recovery, has maintained inflation within the 1-3 per cent target range that was reaffirmed in December 1993 and extended through 1998.

The federal deficit has been reduced at a measured and orderly pace, based on two-year rolling deficit targets built on prudent planning assumptions. Over the past three fiscal years, the deficit targets have been bettered and measures have already been put into place to ensure that the deficit targets for the next two fiscal years will be met. As a result, in fiscal year 1998-99 the federal government's financial requirements will be in a small surplus position, which means that the government will no longer need to do any net new borrowing in private credit markets. According to international projections, in 1998 Canada will be alone among the G-7 countries in being able to claim this achievement.

To enhance employment prospects over the longer term, the government is also implementing policies to ensure that Canadians undertake the education, training and innovation they will need to compete in the changing world economy. The government is also making a number of near-term investments in jobs and growth to provide a bridge to stronger medium-term growth.

Over the years, Canadians have built a system of social programs of which they can justifiably be proud. At the same time, Canadians recognize that social programs, if they are to be there when needed, must be based upon solid economic fundamentals. As in other countries, Canada has had to address the challenges posed for the public pension system by an ageing population. In the 1996 budget, our government proposed a new Seniors Benefit to come into effect in 2001, which will help make the public pension system more financially sustainable. Recently, an agreement was struck with provincial governments on measures to secure the long-term financing of the Canada Pension Plan. Also, in the 1997 budget, a number of important reforms were announced to secure the high standards in the health, education and other valued programs that Canadians have come to expect.

Canada's Economic Performance

The policies that we have put in place are paying off. Canada's inflation rate is at its lowest sustained level in three decades. Low inflation has helped keep interest rates down. Short-term interest rates are over 5 percentage points lower than they were two years ago, and long-term interest rates are also markedly lower. The success of the government's economic policies is also reflected in recent surveys which show that both consumer and business confidence have improved markedly, with business confidence reaching record levels.

Together these factors are translating into a stronger economy. Real GDP growth strengthened in the latter half of 1996, due to a pick-up in domestic spending, and indications are that this trend has continued into 1997. More importantly, we are seeing the creation of more jobs. Since September of last year, 133,000 jobs have been created (an annual growth rate of 2.2 per cent), almost entirely in the private sector.

Canada's excellent cost performance has led to a dramatic turnaround in the trade balance. Canada recorded current account surpluses in the second and third quarters of 1996, the first surpluses since 1984. The improvement in the trade balance has reduced our reliance on foreign borrowings. As a result, Canada's net foreign debt to GDP ratio has fallen steadily since 1993.

Private sector forecasters and international organisations are very optimistic on Canada's economic prospects. Both the IMF and OECD project that Canada's economic growth will reach about 3½ per cent, among the highest in the G-7 countries. Both of these organisations also expect Canada to lead the G-7 countries in employment growth in 1997.

Developments in Ireland and the Caribbean

The benefits of sound policies are also evident in the recent performances of Ireland and the Caribbean countries that I represent in the Interim Committee.

The exceptional performance of the Irish economy looks set to continue this year. This reflects the ongoing commitment of the authorities to sound public finances, to price stability through a stable exchange rate, and to moderate wage and other cost developments. Gross National Product may increase by some 5 per cent which, with employment expanding by about 3 per cent, promises to boost Irish living standards still closer to those of its European neighbours. Looking further ahead, the successful conclusion a few weeks ago of a new, competitively responsible, three-year compact among Ireland's social partners and the prospective establishment of EMU provide the essential ingredients for sustained, high growth in Ireland into the medium term.

My Caribbean constituents, while making gains in strengthening their fiscal situations, reducing inflation, and liberalising their economies, continue to face a number of challenges in 1997. Success in the fight to contain inflation remains a bright spot, as almost every country experienced record low price increases. Moreover, fiscal discipline coupled with monetary restraint has created a stable macroeconomic environment conducive to the expansion of private sector activity. As a result, confidence remains high and foreign investment appears to be strong in some countries. Concerns remain, however, on issues of unemployment and financial sector stability.

IMF Policy Issues

Turning to the Fund's activities, I think the principle we have to keep in mind is that we have to balance the tasks we ask the Fund to undertake with the resources we give to undertake them.

The Fund has always had a key role in policy surveillance. I am pleased there is agreement to enhance the transparency of IMF surveillance through the voluntary release of "Press Information Notices" at the conclusion of a member's Article IV consultation.

I also welcome the increased attention the Fund is giving to capital account and financial and banking sector issues. The Fund can make an important contribution to further capital account liberalisation and this should be recognized in the Articles of Agreement as an explicit purpose of the Fund. Similarly, the Fund can play an important role in promoting sound banking principles and practices.

What I would urge, however, is that we arrive at an appropriate division of labour among the various international organisations active in the area, and ensure that efforts across international institutions are complimentary. I encourage the Fund to institute open and direct dialogue with relevant international institutions such as the Basle Committee, the Bank for International Settlements, the World Bank, and the World Trade Organisation to avoid unnecessary duplication in pursuing this work.

In my view, one of the main achievements of the annual meetings this past fall was the debt initiative for the heavily indebted poor countries (HIPCs). I am concerned, however, over the length of time it is taking to implement. In my view, two principles should guide us in the implementation. First, comprehensive debt relief is clearly necessary for some countries to put them on a sustainable path to longer-term growth and development. Second, we have to be flexible in implementing it and must give careful consideration to the special circumstances of individual countries.

As I have indicated, the Fund is engaged in and is embarking on important work. To do this, the Fund must have adequate resources. The New Arrangements to Borrow will significantly supplement the Fund's resources in the event of a financial emergency. And, fortunately, the Fund's liquidity position has strengthened significantly in recent months. However, the future demand for Fund resources is always, to some degree, uncertain and the Fund must be well positioned to meet all unexpected developments. I believe, therefore, that a moderate quota increase under the Eleventh General Review is needed to provide the Fund with sufficient resources to meet the demands of its regular operations for the period ahead.

We are close to completing the work on a one-time special allocation of SDRs through an amendment of the Fund's Articles. I am confident that this special allocation will ensure that all members receive an equitable share of cumulative SDR allocations.