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Ottawa, October 2, 2004
2004-058
Statement prepared for the International Monetary and
Financial Committee of the International Monetary Fund
The Honourable Ralph Goodale,
Minister of Finance of Canada
Washington, D.C.
Check Against Delivery
Introduction
The global recovery has advanced in most regions since the
last time we met in April 2004. The prospects for strong growth are good in
the short run, but some risks remain. There are vulnerabilities that need to
be addressed to help ensure that the recovery can be sustained over the
medium term. The IMF, under the leadership of its new Managing Director,
Rodrigo de Rato, will continue to play a central role in promoting
international financial stability and facilitating the strong and enduring
growth we seek to achieve.
The Global Economy
The pace of economic activity in the first half of the year
has picked up significantly in Sub-Saharan Africa and most oil-producing
countries, notably Russia and Saudi Arabia. Growth remains robust throughout
most of emerging Asia and central and eastern Europe. Economic conditions in
the euro area have improved somewhat over the first half of the year, but
the expansion is less vigorous than in most other economies. Growth in the
second quarter increased significantly in Canada and the UK, but declined in
the U.S. and Japan.
Against this background, the key policy challenge is to
improve conditions for longer-term prosperity. In particular, it is
important that fiscal policy in many economies be put on a sustainable
track, particularly in those industrial countries that have substantial
deficits and rising debt burdens and face long-term fiscal pressures from
aging populations. Emerging market economies with high public debt burdens
and heavy financing requirements are particularly vulnerable to sudden
shifts in investor sentiment. This will be a concern during the transition
to higher interest rates as the global recovery advances. Two key challenges
for these countries are to implement a credible medium-term fiscal
consolidation plan and to improve debt management to make their economies
less vulnerable to large changes in interest rates and exchange rates. The
current favourable economic and financial conditions provide an excellent
opportunity for industrial and emerging market economies to address these
challenges.
The Canadian economy slowed in 2003 due to a series of
unforeseen shocks, and as a result real gross domestic product (GDP)
expanded only 2 per cent. However, the economy strengthened towards the
latter part of the year. Following solid growth in the fourth quarter of
2003 and in the first quarter of this year, real GDP growth accelerated to
4.3 per cent in the second quarter of 2004. The Bank of
Canada raised its target for the overnight rate by 1/4 percentage point
to 2¼ per cent on September 8, reducing the amount of monetary
stimulus in order to avoid a buildup of inflationary pressures.
Healthy business and consumer confidence, solid job gains
and low inflation should continue to support robust Canadian growth for the
remainder of this year and in 2005. Since the time of the March 2004 budget,
private sector forecasters have revised up slightly their forecast for
growth in 2004 from 2.7 per cent to 3.0 per cent. Private sector forecasters
expect a pickup in growth to 3.4 per cent in 2005.
Canada’s fiscal situation remains strong. The Government
of Canada recorded six consecutive annual budget surpluses from fiscal year
1997–98 to 2002–03, and the 2004 budget projects a balanced budget or
better for 2003–04 and the next two fiscal years. Debt reduction, coupled
with Canada’s strong economic growth, has resulted in a significant
decline in the federal debt-to-GDP ratio, from its peak of 68.4 per cent in
1995–96 to 44.2 per cent in 2002–03. The Government is committed to
keeping the federal debt-to-GDP ratio on a downward track, and in the 2004
budget announced its objective to reduce the federal debt-to-GDP ratio to 25
per cent within 10 years.
I am pleased to report good progress in other countries
which I represent at the IMF. In Ireland, investment and exports have picked
up more rapidly than expected as the year began. Growth should exceed 4 per
cent—supporting stronger-than-forecast employment and revenue gains.
Public expenditure remains on target. As a result, the Irish authorities now
anticipate a marginal fiscal deficit this year and a further reduction in
the country’s already-low debt ratio. Inflation has eased a little faster
than initially forecast, and the more moderate outcome to the latest wage
discussions under Ireland’s social partnership should underpin this
improvement going forward. With the European Union Presidency now passed to
the capable Dutch, the Irish authorities are fully focused on enhancing the
basis for sustained economic advance into the medium term. Their key
priorities are to improve cost-competitiveness; to further develop vital
business infrastructure; to continue refining public regulation; and to keep
on a path of prudent fiscal management set in a longer-term context.
Following a subdued economic performance recently, the
Caribbean countries that I represent have embarked on a modest recovery,
with growth returning in most of the countries in 2003. The recovery, for
the most part, reflected a rebound in the important tourism sector, with
visitor arrivals in some countries returning to pre-9/11 levels. While this
may bode well for the future, the devastating economic and human impact of
the recent hurricanes highlights the vulnerability of these countries and
how quickly fortunes can be reversed. Amid this difficult and tragic
situation, we welcome Managing Director Rodrigo de Rato’s recent statement
of sympathy and support for the affected countries. Canada and Ireland are
providing urgent humanitarian relief to the hardest-hit countries. Since
August, Canada has given $11.5 million to further relief and reconstruction
efforts in the Caribbean countries affected by hurricanes, with Ireland
pledging €450,000. In other areas the Caribbean is moving steadfastly to
address other challenges through the implementation of its reform agenda.
Much of the focus will be on advancing the implementation of the CARICOM
Single Market and Economy initiative and ensuring that its establishment is
on track for the 2005 deadline.
IMF Surveillance and Crisis Prevention
One of the Fund’s primary goals is to reduce the frequency
and severity of international financial crises. Surveillance is one of the
most important instruments in the IMF’s crisis prevention toolkit. The
Fund has made considerable progress in strengthening its surveillance
operations, especially by promoting enhanced transparency in member
countries and improving its analytical tools for the early identification of
a country’s vulnerability to crisis. However, the surveillance function
needs to continue to evolve in light of changes in the world economy. In the
spring the International Monetary and Financial Committee called for further
efforts to enhance the focus, quality, persuasiveness, impact and overall
effectiveness of surveillance.
With this in mind, the Fund’s recent biennial review of
the implementation of surveillance efforts focused on how to make
surveillance more effective across the whole membership. We endorse the key
conclusions of the review: a sharper focus on the Fund’s core areas of
expertise, clearer and more candid treatment of exchange rate issues,
enhanced financial sector coverage and better regional assessments. As well,
in our view, debt sustainability assessments would be enhanced if they were
conducted independently of regular country work.
Despite these efforts, not all financial crises can be
prevented. Two years ago the Fund established clearer rules for determining
exceptional access to its resources for countries that face financial
crises. The new exceptional access framework should be strictly adhered to
going forward, to help shape the expectations of members and markets alike,
provide a benchmark for decisions regarding program design and access,
safeguard the IMF’s resources and ensure uniform treatment of members. In
addition, the procedures for consideration of exceptional access requests
should be strengthened by taking alternative forecasts into account and by
giving timely and careful consideration to the financial implications for
the Fund of granting exceptional access. The widespread adoption of
collective action clauses in sovereign bond contracts is an important
development in promoting the orderly resolution of financial crises, but
further work is required on aggregation and other issues related to
sovereign debt restructurings.
The Role of the IMF in Low-Income Countries
The IMF’s role in low-income countries is changing. Most
users of Poverty Reduction and Growth Facility (PRGF) resources no longer
have a balance of payments need. Most have in the past also been prolonged
users, having had numerous back-to-back programs. I am pleased to note that
many have broken out of this cycle of repeat borrowing. But, as a result,
many have progressed to low-access, almost token, programs needed, not for
balance of payments reasons, but mainly to help signal to donors the Fund’s
assessment of the quality of their economic policies. We believe it is time
to reconsider the nature of the relationship between poor countries and the
IMF, including, in particular, the relationship between IMF concessional
assistance and the surveillance process. Simply put, the Fund and low-income
countries alike need mechanisms other than lending to support strong
surveillance relationships and to help signal donors.
Expanded Use of Intensified Surveillance
This is why, prior to the spring meetings in Washington,
Canada advocated the creation of a country-led intensified surveillance
mechanism. Unlike a formal IMF program, there would be no Fund financing or
IMF developed conditionality attached. Instead, the country would present a
medium-term economic and fiscal plan developed with the benefit of advice
from the Fund staff, but clearly "country-owned" with widespread
internal support among key groups in society. The Fund would be asked to
provide more frequent monitoring than typical surveillance, and the Board
would consider staff assessments of the extent to which the country is
achieving its own economic and financial goals. We believed then, as we do
now, that such a mechanism would fill an important gap in the assistance the
Fund provides to low- and middle-income countries. Most importantly, it has
the potential to strengthen country ownership over the domestic reform
agenda.
Since the spring, this proposal has made progress. Jamaica,
a pioneer in developing the new approach, is now embarked on an intensified
surveillance relationship. Several other countries have indicated their
interest in this instrument. As well, useful discussions have taken place on
the potential of a Policy Monitoring Arrangement (PMA), which has stressed
many of the features that we have supported for intensified surveillance. We
support the PMA with the important caveat that such a mechanism not be
driven by the need for upper credit tranche conditionality.
Moving forward, we should aim for three objectives.
- First, we should support countries requesting intensified
surveillance, especially when it might help them exit from prolonged use
of Fund resources. We should not, however, lose sight of the basics—i.e.,
those embarking on such a program must take the initiative in developing
a country-led program based on clear goals and consistent policies.
- Second, we should work to ensure that the surveillance resulting from
this intensified relationship is of the highest possible quality, so
that the signal sent to donors, creditors and investors is fully
credible. In some cases, this could mean that the commitments undertaken
by the country are as strong as those under a traditional Fund program.
- Finally, more resources for capacity building should be directed to
helping countries define and implement their own programs, with a view
to exiting from reliance on Fund concessional resources.
Achieving Debt Sustainability
The Heavily Indebted Poor Countries (HIPC) Initiative
continues to provide critical debt reduction for the most indebted countries
and is having a major positive impact, in conjunction with the poverty
reduction strategy process. For benefiting countries, debt service-to-export
ratios now average 10 per cent while poverty reducing expenditures have
significantly increased. However, the challenge of meeting debt service
obligations continues to be a major concern for many low-income countries
relative to the extent of poverty that still exists and the challenges of
meeting the Millennium Development Goals. The fact that at least 37 of the
65 International Development Association–only (IDA-only) countries have,
or had, unsustainable debt burdens based on HIPC thresholds, and largely a
result of international financial institution (IFI) lending, indicates a
systemic problem. More action is needed for HIPCs and non-HIPCs:
- IFIs are now the dominant creditors of poor countries. Hence, to
ensure that debt loads do not place heavy burdens on these countries, we
must focus on the role of IFI financing, preventing future crisis and
relieving existing pressures. As we noted in the spring, the proposed
framework for assessing debt sustainability is a step in the right
direction. We must address the issue of increasing the provision of
grants and also turn our attention towards IFI debt service relief.
Moving forward, our efforts should be guided by the principles of
additionality and equity of treatment—to us, these are two key
principles. As well, more collaborative efforts are needed between the
Fund and the World Bank in their debt sustainability assessments in
order to provide a consistent set of measures from which to base policy
decisions.
- Eleven countries, many of which are in conflict, still require time to
advance the peace process and normalize relations with development
partners before benefiting from the HIPC process. We support the
proposed extension of the sunset clause to allow time for these
countries to put in place the necessary reforms. Looking forward, it
will be important to develop a concrete plan to help countries remaining
outside of the HIPC process that have unsustainable debt burdens.
- In pressing ahead, we must maintain the financial integrity of the
Fund while ensuring the necessary resources are available to assist
those countries emerging from conflict and considering the implications
from the related discussions on increasing the provision of grants and
debt sustainability. We should take the steps needed to ensure that the
future lending capacity of the Fund, in particular the self-sustained
PRGF, is not compromised in a way that would jeopardize access by
low-income members to Fund concessional assistance.
The Independent Evaluation Office
All institutions need to learn from experience and adapt to
changes in the environments in which they operate. Since it was established
in 2000, the IMF’s Independent Evaluation Office (IEO) has played a key
role in providing independent assessments of Fund surveillance, program
design and lending operations. In 2004 the IEO’s evaluations of the IMF’s
work in Argentina, and of the Poverty Reduction Strategy Papers and PRGF in
particular, have provided management, staff and the Executive Board with
ways to strengthen the Fund’s crisis prevention and resolution and poverty
reduction efforts. We support the IEO’s 2005 work program and look forward
to the reports planned for next year, including those on the Fund’s
financial sector work and its approach to capital account liberalization.
Conclusion
We are encouraged by the positive outlook for the global
economy but mindful of the risks that remain and the vulnerabilities that
need to be addressed to sustain the recovery. We encourage efforts to meet
these challenges, including through continued adaptation of the Fund’s
policy and surveillance instruments. We support the continuing efforts of
the Fund to strengthen the relationship with its low-income members through
working to meet their changing needs. Further action is required on ensuring
the long-term debt sustainability of many low-income countries and in doing
so, we emphasize the principles of additionality and equity of treatment.
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