In 1994–98, Algeria was successful in restoring macroeconomic stability and implementing structural reforms. The fiscal position deteriorated in the first part of 1999, owing to low oil prices. Executive Directors supported the reform program introduced in early 2000, and welcomed its emphasis on accelerating reform of the banking and public sector companies but stressed the need for detailed implementation plans. The economic environment should be improved to promote private economic activity, including domestic and foreign investment. The authorities are urged to accelerate trade liberalization.
International Monetary Fund. External Relations Dept.
IMF Managing Director Michel Camdessus reported to the IMF Executive Board on December 6 on the status of Russia’s economic program. (The full text of News Brief 99/81, issued on December 7, is available on the IMF’s website: http://www.imf.org.)
Unlike most nonfinancial corporations, in a market-based economy, banks are subject to a special regime of licensing, regulation, and supervision (hereinafter also “prudential regulation”). In a market-based economy, the function of banks differs from that of other enterprises, calling for special treatment of banks by the state.
Switzerland, through a long tradition of banking and finance, has developed into a major center for international financial transactions. In recent years, however, significant institutional changes in most large capital centers have challenged Switzerland’s traditional role as a financial center. Deregulation of domestic banking in other countries has reduced its comparative advantage of having a universal banking system. The creation of new offshore banking facilities and the repeal of the withholding tax on interest income of nonresidents in the Federal Republic of Germany, France, and the United States in 1984 have changed the competitive environment. In addition, capital controls have been relaxed in several countries, including France and Japan, while Germany and the Netherlands have taken measures to strengthen the international competitiveness of their financial markets.
Switzerland has a long tradition of capital exports. As domestic savings exceeded domestic spending, Swiss financiers and governments were already actively engaged in international finance in the eighteenth century. Net capital exports continued into the twentieth century, except during periods of the nineteenth century, when domestic credit demand increased with industrialization and the building of railroads, and for a time after World War I. The excess of domestic savings was largely a result of financially sound governments in the cantons and towns and was in marked contrast to the large financing needs of many other European governments, which resulted from continuous engagements in war. The financial performance of both the Swiss governments and the private sector was based on several factors. First, the country maintained political neutrality and thereby did not incur large war expenses. Neutrality was a consequence of the multiconfessional and multilingual character of the Confederation, the strategic location in the center of Europe, and the small size of the country.2 Second, Switzerland was able to maintain trade with the belligerent countries and also benefited, on a large scale, from income earned from Swiss military service abroad, through treaties concluded with foreign sovereigns. Finally, in the early stage of industrialization, Swiss exports of cotton and silk products prospered because of little competition from abroad.
Banks require a strong legal framework providing certainty concerning their rights and obligations under the law and permitting them to enforce their financial claims expeditiously and effectively against counterparties in default. Conversely, weaknesses in the legal system that create uncertainties concerning the existence and enforceability of property rights increase the risk that, as debtors hiding behind such weaknesses default on their obligations, banks will not be able to collect on their claims. Inefficiencies in the judicial processing of financial claims by banks may inhibit the marketing of financial assets and reduce their value; this often results in unhealthy accumulations of nonperforming assets on banks’ balance sheets, weakening the banking system as a whole. Meanwhile, banks will cover these risks and market inefficiencies in the form of higher charges, creating upward pressure on transaction costs throughout the economy.
Regulatory intervention includes all action taken by the bank regulator with respect to a bank in response to continuing violations of prudential law (banking law, implementing regulations, etc.) on the part of that bank. Thereby, the bank regulator intervenes directly or indirectly in the bank’s management and operations.
The Swiss banking system is characterized by the coexistence of privately and publicly owned banks. The publicly owned banks include the cantonal banks, owned by the cantons, and local savings banks, run with the capital of the municipalities. These public institutions accounted for about 16 percent of the total assets of Swiss banks at the end of 1984. The private banks are organized mainly as joint-stock corporations or as cooperatives. Although Swiss banks are organized as universal banks, their historical development has led to some specialization. Cantonal banks, regional banks, and savings and loan associations have specialized in savings deposits and long-term mortgage lending, while the so-called “big banks”8 have concentrated on company finance and international finance. During the last two decades, however, there has been a tendency for banks to engage in a broader field of transactions; the big banks have engaged more actively in mortgage lending through proliferation of their domestic bank network, while the cantonal and regional banks have participated increasingly in portfolio management.9
The natural disasters that hit the country recently caused human losses and had a negative impact on the economy; however, they did not deviate the economic recovery path. Currently, growth in exports and imports is accelerating, remittances are recovering, and international reserves are well above end-2009 levels. The authorities have recently adopted regulations on liquidity and foreign currency credit risk management and have made further progress toward full provisioning of nonperforming loans. Finally, the IMF-supported program has also contributed to the achievement of their economic program goals.
The Guatemalan economy is recovering faster than anticipated during the previous program review. The economic outlook has improved since the second program review. The fiscal deficit in 2010 will decline somewhat. There was agreement that a comprehensive tax reform remains the key medium-term challenge. There was agreement that monetary policy should remain vigilant. There has been progress in advancing financial sector reforms, but key elements of the reform agenda are pending. The near-term outlook has improved since the second program review, and downside risks have declined further.