Chapter

Discussion of Policy at Fourth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1994
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Statement by the Governor of the Bank for South Africa—Christo Ferro Liebenberg

I stand here today as a very proud South African. Although South Africa was a founding member of the Bretton Woods institutions, it is significant that, in the golden anniversary year of these institutions, my country for the first time represents all its people at the Annual Meetings. We would like to thank the Fund and the Bank and the broader international community for the support and understanding provided to South Africa during the period of political transition. In particular, we express our deep appreciation for the financial assistance provided under the compensatory and contingency financing facility. Policy advice and technical assistance on matters pertaining to taxation, exchange arrangements, and customs administration have also been most useful.

South Africa now has full access to the facilities of the World Bank Group. The International Finance Corporation (IFC) has already approved two projects for investment in South Africa, while the Multilateral Investment Guarantee Agency (MIGA) is about to issue its first guarantee. With regard to the International Bank for Reconstruction and Development (IBRD), South Africa has benefited from policy advice on a broad range of areas including land reform, trade policy, education, urbanization, coordination of development assistance, and support for small and medium-size enterprises. The Government will undertake a full review of the resources available, with the intention of jointly agreeing with the IBRD on how assistance can be optimized to achieve the objectives of our Reconstruction and Development Program. South Africa has not, as yet, finalized negotiations regarding the joining of a constituency on the Executive Boards of the Fund and the Bank. We hope to participate in the next election of Executive Directors.

We highly appreciate the goodwill and very warm welcome we have received on our reappearance in the international arena. But we are also mindful of the challenges and responsibilities this places before all of us:

  • First, our responsibility to address the inherited social distortions in our own country. To do this requires vision and clarity of purpose; bold, decisive action executed with both passion and compassion. The new Government has set very clear economic priorities and objectives to address the socioeconomic problems of job creation, poverty, health, and education affecting millions of South Africans.

  • Second, our responsibility as one of the leading economies in our region and on our continent. In our accession to the Southern African Development Conference and our prospective membership in the African Development Bank Group, we recognize that the success of South Africa, the region, and Africa are inextricably linked. Although we welcome the efforts already under way to adapt and extend financial instruments to meet the changing needs of their memberships, we call on the Bank and the Fund to further extend a hand of cooperation to help us all rebuild the continent.

  • Third, interaction with other countries and multilateral institutions brings concomitant responsibilities. Membership in the Commonwealth of Nations and the Organization of African Unity as well as the renewal and normalization of bilateral relations with the international community are cases in point.

An important prerequisite for success for us remains ensuring sound economic policies, characterized by financial prudence.

Another aspect of which we are very mindful is that in the globalized financial markets, where capital finds its own comfort level, wealth creation requires an investor-friendly environment underpinned by, among other things:

  • stable government

  • sound and credible economic policies

  • outward-oriented economic growth.

Prior to our recent elections, we negotiated our General Agreement on Tariffs and Trade (GATT) offer in the National Economic Forum, which comprises all the major political parties, labor, and business. This process of policy formulation is one that holds many lessons for us, and we hope for others, since it ensured wide-ranging domestic input and the building of local capacity. South Africa is committed to implement our GATT obligations and has already made a start. But to prepare for possible disruptive effects resulting from such trade reforms in many countries, we strongly recommend that the Bretton Woods institutions continue with further policy research on the effect such reforms can have on developing countries, and especially the need for appropriate support mechanisms. In this regard, the challenge before all of us is to constantly evaluate whether the rules and regulations we develop are fairly applied. Agreements between big economic powers should not override efforts to create a level playing field. South Africa’s re-entry as a sovereign borrower in the international capital markets has been facilitated by the country ratings recently announced. This should reassure investors and open up new capital markets for us internationally. Given the objective of steadily reducing our excessively high budget deficit, foreign loan financing will, however, be regarded as a substitute for domestic financing and certainly not be used to shift the budget constraint outward.

The review of the Bank Group’s first fifty years has brought about important policy shifts—to promote and sustain private capital investment in developing countries; to become more responsive to the needs of its members; and to promote efficiency, both within the organization and among member countries. These policy shifts are all welcomed. In a global environment of greater competition for scarce capital, the function of the Fund along the lines so aptly described by Mr. Camdessus in his address to the Board of Governors becomes increasingly important. The support that increased access to Fund facilities can provide to developing countries and countries in transition justifies further study on this important matter. We would support solutions that do not fuel world inflation, while also alleviating the burden of those countries irrevocably committed to appropriate economic restructuring. In conclusion, let me again thank the Chairman for the opportunity to address these fiftieth anniversary meetings and express our heartfelt appreciation to all members for the wonderful reception and spirit of goodwill in which our delegation has been received. A special word of appreciation is also extended to Spain for hosting this event. We humbly accept the responsibility and accountability our newfound status brings.

Statement by the Governor of the Bank for Austria—Ferdinand Lacina

The creation of the Bretton Woods institutions fifty years ago was an act of political and economic wisdom: they were established within the wider political context of institution building to reverse the disastrous isolationist economic policies of the 1930s and to prevent a recurrence of fascism and war. Their mandate has been to promote economic welfare and high employment, mostly through an open trading system, exchange rate stability, and financial assistance. During the first half of the period, the gradual liberalization of trade and payments as well as stable exchange rates allowed unprecedented economic expansion, with rapidly improving living standards and falling unemployment. The World Bank assisted the process through generous infrastructure lending. Austria, for example, received the equivalent of about 2 percent of GDP in the period of reconstruction. International cooperation was so successful that, by the early 1960s, most industrial countries no longer needed World Bank financing. By the mid-1970s, after massive borrowings in the years before, Western Europe no longer needed Fund resources either.

International cooperation has worked less well during the second half of the period. As the Managing Director of the IMF, Mr. Camdessus, has pointed out, since the fixed exchange rate regime collapsed, no political agreement on a global and coherent approach to exchange rate management has been able to be reached. Present arrangements carry painful and avoidable costs in terms of output and employment losses. It is true that new areas of cooperation have been added: recycling oil surpluses in the 1970s; monitoring the debt crisis in the 1980s, with the Fund and the Bank playing a crucial role in the subsequent international debt negotiations; and, finally, supporting the transition process of the former centrally planned economies in the 1990s. At the same time, both institutions have provided financial and technical assistance to developing countries.

Yet the years ahead should be more than a mere continuation of the recent past. The policy environment has dramatically changed: The world economy has become both more integrated and more vulnerable; individual and sometimes even collective policy action has become less effective, in particular with respect to currency intervention. Finally, after two decades of slower growth, most member countries suffer persistent and alarmingly high unemployment as well as severe fiscal imbalances. The loss of exchange rate discipline has certainly been one of the contributing factors to this state of affairs.

What we need most after fifty years is a revival of the spirit of cooperation that carried the architects of the Bretton Woods agreement. As Mr. Camdessus pointed out in his speech yesterday, the Interim Committee should function as the appropriate forum for policy coordination. No doubt if we want to increase the efficiency of its work we need a strong commitment of all members to cooperation and solidarity. In order to make exchange rates more stable and better aligned, Austria supports the idea of strengthening the surveillance process, thus achieving macroeconomic cooperation and greater convergence of policies and performance. It is also obvious that such cooperation will only succeed if countries with basically sound performance are protected from disruptive currency movements. As one of the major creditors to the Fund, Austria also has an obvious interest in a balanced distribution of the cost of running the IMF.

The Bank Group should—as suggested in its Annual Reports— maintain its role as a financier of development while also strengthening its role as a financial catalyst for private and public sources. I would also like to see the Bank provide more funds and advice for infrastructure projects in the countries in transition. As shareholders, we all have great sympathy for making its operations as effective and efficient as possible. However, global expenditure cuts must be complemented by careful priority setting. In closing, I wish to thank the Government and the people of Spain for the warm welcome and kind hospitality we are enjoying in Madrid. I would also like to thank the managements and staffs of the two institutions for the excellent preparation and organization of our meetings.

Statement by the Governor of the Fund for Romania—Mugur Isarescu

It is a great honor for me to address this distinguished gathering. First, I would like to join the previous speakers in thanking the authorities of this beautiful city of Madrid for the welcome and hospitality they have given all of us here. Second, I would like to pay my respects to the people who, fifty years ago at Bretton Woods, laid the foundations of our two institutions, the Fund and the World Bank, which have played such a prominent role in financing the postwar reconstruction and development of their member countries. Third, I would like to welcome the new member, Eritrea.

Like other former communist countries in Eastern and Central Europe, Romania is undergoing the transition toward a market economy. To further this objective, Romania’s authorities are implementing a comprehensive program of economic reform that aims to stabilize the economy and lay the basis for sustainable growth. A stand-by arrangement from the Fund and credits from the World Bank are supporting this program, as is technical assistance from these two institutions. The transition in Romania was confronted with some peculiarities in our export markets. Among these I could mention the bloody nature of the 1989 revolution, the tremendous impact of the collapse of the Council for Mutual Economic Assistance (Comecon), the Gulf crisis, and the embargo on Yugoslavia, as well as the overall magnitude of the adjustment, which has covered virtually all aspects of economic and social life. Given these peculiarities, we have preferred a gradual approach to economic reform, meaning also a price liberalization in several stages. However, the inevitable adjustment in prices has led to a rapid inflation, which in 1993 reached nearly 300 percent.

Nevertheless, during this period Romania did achieve important breakthroughs. Price liberalization was completed in mid-1993; a value-added tax and other fiscal reforms were successfully implemented. In addition, important institutional changes took place, including the development of a two-tier banking system. Adequate measures were taken to provide targeted social support to the most vulnerable groups in the population. As a result of these measures, it became possible after August 1993 to introduce a comprehensive macroeconomic stabilization program. Monetary policy in particular became much tighter, supported by a rigorous fiscal policy that limited the deficit of the consolidated fiscal sector to less than 0.5 percent of GDP in 1993, and has kept the fiscal sector in surplus for most of 1994. These policies have led to a number of encouraging achievements during the first eight months of 1994:

  • First, the average monthly inflation rate has dropped to 4.5 percent, compared with 12.1 percent in 1993. The last available figures for the consumer price index—1.6 percent in July and 1.8 percent in August—sustain the target of 30-40 percent annual inflation for the next sixteen months.

  • Second, interest rates have been restored to positive real levels, leading in turn to a restoration of confidence in the national currency. One consequence has been a more than doubling of nominal personal savings since the end of 1993.

  • Third, despite tight macroeconomic policies, agricultural output increased substantially and industrial production has been maintained at the same level as in 1993, reflecting in part a significant recovery in exports.

  • Fourth, gross international reserves in convertible currencies in the banking system have risen from $850 million at the end of 1993 to more than $1.6 billion currently, which equals almost three months of imports.

  • Fifth, a fully fledged, decentralized, direct-dealing interbank market in foreign exchange has been in operation since August 1, 1994, with technical assistance from the Fund. This innovation, building on earlier liberalization and a full-retention regime, has increased the transparency and fluidity of the foreign exchange system. As a result, foreign and domestic companies operating in Romania now enjoy rapid conversion of currency for current account transactions.

The Government’s medium-term objectives are to control inflation, speed up privatization and structural reform, foster the sustained resumption of economic growth, and restore a viable balance-of-payments position aiming at improving living standards. Once the stabilization phase of this adjustment program is completed, economic growth is expected to rise gradually to 4 percent a year by the second half of this decade, while the annual inflation rate should decline to single-digit levels. Sustained economic growth will require a sizable increase in fixed investment, however. Given external financing constraints and the resulting need to limit our external current account deficit to a sustainable level (2 percent of GDP, which we hope will be reached in 1994). Achieving this increase in investment will require greater mobilization of domestic savings, particularly in the government sector and in majority state-owned companies.

We are confident that, with determined implementation of institutional and structural reform and privatization, with continuing access to western markets, and with financial support from both the IMF and the World Bank, as well as from other international organizations and bilateral donors, foreign investment flows will increase and sound economic growth will be restored. Fostering soundly based economic growth is one of the best ways to provide social protection. Thus, our transition period will be shortened and the resulting benefits for our population will come more quickly. For this reason, a new SDR allocation and additional facilities would help economies in transition like Romania.

To conclude, we in Romania feel that the economic program put in place beginning with the last months of 1993 has made a crucial breakthrough in economic performance. Inflation is down; savings are up; our trade balance and our convertible foreign exchange position have improved markedly; and we have greatly simplified foreign exchange transactions. We are on track with our stand-by arrangement, and in the coming months we expect to see the implementation of important structural measures that will accelerate privatization and bring under control the problems of widespread losses and arrears that have long plagued our state-owned sector. In achieving these results, we want to thank the Fund and the World Bank not only for their financial assistance, but also for their technical expertise and, above all, their persistence in helping us develop a sound and workable adjustment program. We look forward to continuing the close relationship we have developed with both institutions and to working with them to complete the adjustment and reform program we have started.

Statement by the Governor of the Bank for Uzbekistan—Bakhtiar Sultanovich Hamidov

It is a great honor for me to speak on behalf of the Republic of Uzbekistan on this significant occasion, the fiftieth anniversary of the Bretton Woods institutions.

In the three years since Uzbekistan declared its independence, it has worked hard to shape and build a democratic society, reorienting the nation’s mindset toward new values, based on free-market principles and on the creation of an environment attractive to local and foreign businessmen. We have crowded into this period the crucial events in forging the fundamental elements of statehood—the legal foundation, structure, and operating principles of the legislative, executive, and judicial branches, and the foreign policy and foreign economic functions of government.

I can say today that those foundations have been laid. Uzbekistan, accepted by the major international organizations, is becoming a full member of the international community. At the same time, we realize that this is only the beginning of a long and hard road, at the end of which Uzbekistan will have met the requirements of a modern, civilized state and will be a full-fledged participant in the enterprise of international cooperation.

In the management of social processes, even totally correct decisions will not yield prompt results. Each process requires a maturation period and must develop through logical stages. Therefore, having chosen the path of our development, we believe the notions of patience and national and social harmony to be highly significant. It is also important to assess realistically the state of our society, the progress of our efforts, and our skill in managing them. For these purposes, the experience of the world community, especially in economics, is tremendously valuable to us. We study it carefully and put it to use.

Upon achieving independence, Uzbekistan moved firmly toward a market economy. But we sometimes hear that we are not moving fast enough along the path of reform. That may be the way it looks from outside. But if you look at the classification of country risk for 1993 published in the March issue of the magazine Euromoney, you will find its assessment that Uzbekistan has moved up 29 points in a year. This is the greatest progress of any country rated, and we are now in second place among the countries of the former Soviet Union.

It must be borne in mind that the reform process in the Republic began and is continuing, not with a clean slate, but against the background of a crumbling economic and monetary union and a disintegrating territorial unity of the countries of the former Soviet Union. We have had to attack our economic and social problems under conditions of hyperinflation. In this situation, thanks to the balanced policies of our Government, we have succeeded in preserving and strengthening our stability and have made considerable progress along the path of reform.

On the other hand, we make no secret of the fact that we continue to experience economic stresses in the form of budget deficits, balance-of-payments problems, and declining production in certain industries. At the same time, a marked increase in the volume of production in the agricultural, energy, consumer goods, and food sectors has kept our overall GNP at last year’s level.

All in all, the most critical period is already behind us. There are signs that the economic crisis is receding. What grounds do I have for these conclusions? We have slowed the decline in production, significantly curbed the growth of inflation and new credit, and stopped subsidizing loss-making enterprises. As you know, Uzbekistan chose the path of gradual, step-by-step market reform. In the first stage, from 1990 to 1993, the legal basis for reform was established and the system of government was overhauled: the ministries and agencies for various industries were disbanded as out of keeping with market relationships, and legislation was passed to protect the rights of enterprises.

The publication in January 1994 of a decree of I. Karimov, President of the Republic, which deepened the economic reforms and supported business, inaugurated a qualitatively new stage, focusing on large-scale privatization of medium-size and large enterprises. The institutional base required for such privatization is being established. As of today, 49,000 enterprises have been privatized. The economy and pricing have been virtually decontrolled, antimonopoly regulations have been introduced, small enterprises have been privatized, and a mixed economy in a competitive economic setting has been created.

Much has also been accomplished recently to liberalize trade, including a marked reduction of export tariffs. Imports have been entirely liberalized. The Uzbek Government regards the creation of an attractive environment for foreign investment as a major, urgent task. A regulatory base that protects such investment is already in place, and both a national insurance company and, abroad, a joint Uzbek-American insurance company have been established.

Another new stage in the economic reform process began with the introduction of a national currency on July 1. Our main objectives in this stage are to strengthen our national currency, make it internally convertible, conduct an active anti-inflationary financial and credit policy, saturate the market with goods, attract foreign investment and modernize the priority sectors of the economy, boost our export potential, expand privatization, and reduce the budget deficit to 4 percent of GDP.

You know what a tragic time the peoples of former U.S.S.R. countries are now going through. Examples could be drawn from events in several of them. In these conditions, we in Kazakhstan, Kyrgyzstan, and Uzbekistan recognize the importance of strengthening our economic relations and supporting regional stability, as expressed in our trilateral communiqué setting forth the bases of a single economic space and regional union. Customs tariffs are abolished and free trade in goods is established. It is no accident that the Western press considers this agreement “the first solid economic agreement among the countries of the former U.S.S.R.,” while many of the others were, in essence, just “declarations of the parties’ intentions.”

The integration of Uzbekistan into the world economic system is moving vigorously ahead. The world’s business community is showing great interest in us. We are receiving further confirmation of this here in Madrid, where we are meeting with financiers and businessmen who wish to cooperate with Uzbekistan. We are developing close ties with the leading credit and insurance agencies in Germany, the United States, France, the United Kingdom, Japan, and Switzerland.

The most authoritative international financial organizations—the World Bank, the IMF, the European Bank for Reconstruction and Development (EBRD)—are playing a major role in this process. Their highly professional staffs are carrying out a broad program of research in Uzbekistan to develop projects for financing and for technical assistance. They are already implementing a number of projects. The coordinating role of these organizations, opening our country to much of the international financial community and to private capital, stands out.

We in Uzbekistan have great hope that, with the help of these organizations, we will continue our progress toward reform and toward the goals we have set, for which Uzbekistan will need substantial resources. In our view, the assistance of the international financial institutions would also be most helpful in connection with the financing of especially large projects in the areas of agriculture, industry, and development of the infrastructure, and with the attraction of substantial investment and the implementation of large projects in such vital sectors as textiles, tourism, energy, and above all the extraction and refining of oil and the production of gas and gold. There is a vast potential for development and for attracting foreign technology in these areas. I deeply hope that, by joint effort, we will be able to start implementing a number of projects in these industries before this year is out. We also recognize the importance of technical assistance from the organizations to already privatized Uzbek enterprises. Among the Central Asian republics’ coordination efforts, we have assigned a special role to the Aral Sea, to preventing an ecological catastrophe. We would like the international financial organizations also to view the problem of the Aral Sea as one of their top priorities.

As I attend the Annual Meetings, I note with satisfaction that the past year has been quite productive in strengthening our collaboration. We have begun to understand each other better, to trust each other more, and to have a more constructive approach to the solution of our problems. I expect that, by joint effort, we will soon reach a mutually acceptable solution that will enable us to sign agreements under the Structural Transformation Facility and for a rehabilitation loan, which, I am convinced, will become true landmarks along the path of ongoing economic reform in our republic.

Statement by the Governor of the Fund and the Bank for Spain—Pedro Solbes Mira

It is for me a great honor and grounds for great satisfaction to be able to address you on this occasion, in view of the special circumstances that surround it. First, this meeting coincides with the commemoration of the fiftieth anniversary of the creation of the International Monetary Fund and the World Bank and is being held on the eve of the birth of the World Trade Organization, fifty years after a resolution approving its creation was passed by the Bretton Woods Conference. There can be no question but that the Bretton Woods institutions and the General Agreement on Tariffs and Trade (GATT) have been fundamental pillars of the international cooperation scheme in existence since the postwar period and have made a decisive contribution to economic and social progress over the past fifty years. The world economy has changed substantially since then, of course, and the Bretton Woods institutions have had to adapt—and will continue to have to adapt—to meet the challenges of an increasingly interdependent and globalized international economy.

Second, I take great pleasure and pride in your presence here in Madrid on this signal occasion, when Spain is acting for the first time as host to the Fund and Bank Annual Meetings. Spain’s accession to the Bretton Woods institutions thirty-six years ago was a fundamental milestone in its economic history, as it supported and upheld a radical change in its policy stance—a change that laid the foundations for what has become an industrial economy open to foreign trade and fully integrated with Europe and the world.

Third, and to close my historical references, I am especially pleased to address you in an economic context that is appreciably more favorable than at the time of our last meeting in Washington. For the first time in five years, world economic growth forecasts for 1994 and 1995 are optimistic, are being revised upward, and represent the end of a period of low world growth and of one of the industrial world’s most severe recessions in the last fifty years. The economic recovery is gaining strength in practically all the industrial countries. Nevertheless, this context of prudent optimism should not lead us to ignore the important challenges we must face in the near future: to consolidate and generalize the recent economic reactivation and to move forward with the economic policy measures needed to achieve a lasting expansion with high employment and low inflation. The positive effects of some of these measures will not be evident until the medium term, but even so, we must not set them aside or cease insisting on the need for them.

Industrial Countries

The efforts to reduce government deficits in the industrial countries must be continued. The reduction of fiscal deficits remains a fundamental objective of economic policy for the coming years, with a view to reducing real interest rates and generating new investment and more growth. The progress achieved in terms of price stability must also be maintained through appropriate monetary policies and microeconomic measures aimed at reducing market rigidities. We cannot afford the luxury of lowering our guard against inflation and jettisoning the efforts of recent years if we wish to be successful in achieving a period of durable economic expansion. And to sustain a long period of expansion, it is equally pressing to pursue structural reforms in the broadest sense, aiming at more flexible operation of markets and increased domestic and external competition, with the ultimate goal of improving resource allocation and reducing budgetary pressures to some extent. In the European case, a crucial goal is to reduce structural unemployment. We must ensure that the emergence from economic recession is accompanied by a reduction in the existing high rates of structural unemployment, and this may require specific incentives in the areas of hiring practices and other factors affecting labor costs.

Developing Countries

Developing countries as a group have continued to post high growth rates, and their future prospects are more favorable today than a few months ago. This is encouraging, even as we keep in mind that their overall performance hides significant diversity. Nevertheless, even in regions where growth has been relatively weak and living conditions have failed to improve, as in sub-Saharan Africa, we can see positive trends in many cases, not only in terms of growth, but also in the thrust of the macroeconomic and structural policy tools that are the key to achieving sustained economic growth. The entry into force of the Uruguay Round agreement will increase the opportunities for growth in this group of countries by providing increased access to industrial country markets, opening new areas to international trade, and strengthening the multilateral trade system. We must not forget, however, that the principal element driving growth in developing countries will continue to be the persistent application of measured stabilization and structural reform policies designed to ensure that development extends to all of society. The striking increase in private capital flows to some developing countries in recent years, especially in Latin America and Southeast Asia, is largely a response to the progress they have made in their economic reforms. I share the opinion of those who think that these increased capital flows largely reflect investors’ confidence in the future of these economies. Given the sensitivity of capital flows to changes in market confidence, however, it is essential to continue pursuing adequate policies and deepening the reform of the markets.

Nevertheless, private capital flows have been concentrated in a small number of countries. Most low-income developing countries will remain highly dependent on official development aid for some time yet, and this may require further efforts in this area on the part of the richer countries and, in particular, better access to the resources of multilateral organizations. The efforts and commitment of Spain to support developing countries are reflected in its sizable contribution to financing the Fund’s new enhanced structural adjustment facility and its growing participation in the replenishment of the World Bank Group’s International Development Association. We must also strive to obtain an adequate treatment for the official debt of the poorest countries, so as to enable them to solve their debt problems in a lasting fashion.

The countries with economies in transition have continued to make progress toward macroeconomic stability and to lay the foundations for sustained macroeconomic growth. The primary lesson of recent years is that those countries that were able to make the boldest advances along the road of economic reform were able to bring their output declines to a halt. The still large group of countries with economies in transition that continue to experience negative growth rates should persevere in their efforts to attain macroeconomic stability. Reductions in fiscal deficits and inflation are the preconditions for achieving positive rates of growth in coming years. At the same time, it is necessary to insist on structural reforms, including continued trade liberalization measures and stronger social safety nets for the poor, while avoiding the maintenance of unviable jobs and strengthening occupational training and unemployment assistance. Faster transition should also help attract more external financing. To this end, the Fund should be prepared to use all possible means of contributing to the potential acceleration of economic reforms. In this regard, we should congratulate ourselves on having been able to reach agreement on a temporary increase in the access limit to the Fund’s ordinary resources. I hope we will also soon be able to reach a definitive agreement on extending and increasing access to the systemic transformation facility and on a new allocation of SDRs.

Spain

For the first time in recent history, the Spanish economy will be going through an economic recovery at the same time as the industrial countries. We have overcome a profound crisis that has had two serious consequences that will take us some time to deal with, although we are devoting all our efforts to that task: a high number of unemployed, and a public deficit that is becoming increasingly difficult to finance. Although our present prospects are clearly encouraging and we will end the year with a net increase in the number of jobs, our entire economic policy is focused on eliminating obstacles to job creation and on fostering productive economic activities and employment-generating investment. This is the ultimate objective of the steps already taken toward labor market reform, budget consolidation, reduction of public expenditure, and the provision of tax incentives for production. It is also the objective underlying the revision of the Convergence Program, which outlines the framework of action Spain must follow and the commitments it must meet between now and 1997 if it is to form part of the full economic and monetary union from the outset—a task that must be the focus of all our efforts.

A reduction of the government deficit, particularly the structural deficit, and the generation of primary surpluses beginning in 1996, will be the best guarantees of the Government’s commitment to gradually whittling down the volume of public debt, as well as a clear incentive to strive for lower interest rates and exchange rate stability. We must also be genuinely concerned with controlling inflation and reducing it to levels that do not undermine our competitiveness. And we can be no less concerned with effecting structural reforms that enhance the market economy and keep it flexible in a changing world, and that will set out a path for growth and job creation that is not only consistent with the general direction advocated in these discussions, but will also enable us to move firmly and steadily toward an economic level closer to that of the most advanced countries around us. In 1994, we have made a major effort to reduce both our deficit and inflation; we have clearly progressed in liberalizing such key sectors as telecommunications; and we have pressed ahead with our policy of privatization.

The 1995 budget, backed by a sufficiently large parliamentary majority, continues to cut expenditure, reduce the deficit, and control inflation. Of decisive importance in these areas will be wage restraint and the attitudes adopted by the social partners. Further liberalization and new privatizations can be expected in the near future, fully consistent with a determination to strengthen the country’s industrial base, foster the creation of new employment opportunities, and reduce the drain on the budget of activities that do no more than prolong unacceptable instances of privilege. We have persisted in this effort for some time now, and it is no accident that the Spanish economy has gone through so much change and shown so much dynamism in the past and that it promises to continue on the same path in the future. I am confident that at the 1995 Annual Meetings we will be able to report still further advances.

However, despite the obvious progress in the international economy over the last few months, we cannot be complacent. We must double our efforts so that we continue to advance along the road that experience has shown to be the most likely to enable us to face the challenges of the future. But today, more than ever before, we must also double our efforts to improve international cooperation, without forgetting the spirit of solidarity. I would not wish to close without expressing my own and Spain’s recognition and support of the efforts being made by Mr. Camdessus and Mr. Preston to ensure that the Bretton Woods institutions are able to respond to the new challenges of the coming years even more effectively than in the past. Whether they can do so depends on all of us.

Statement by the Governor of the Bank for Colombia—Guillermo Perry Rubio

I am honored to speak on behalf of the Latin American members of the World Bank and on behalf of my own country, Colombia. Our region is proud of its recent accomplishments in areas such as macro-economic policy and structural reforms; we look to the future with optimism as our countries have passed the most difficult years of the adjustment process and have achieved the necessary conditions for rapid and sustained growth. We understand, however, that we have new and even more important challenges for the years to come. In particular, we must develop the lagging social sectors and extend the benefits of growth to the entire population of our countries.

One of the most remarkable facts about last year’s world economy, as Mr. Camdessus pointed out recently,1 has been the strengthening of growth in developing countries. Latin America and the Caribbean countries grew by 3.2 percent during 1993. Together with the rest of the developing countries, they accounted for practically all of the world’s 2.25 percent growth rate. Moreover, developing countries also accounted for the entire growth in world trade. Imports in our region increased by 8 percent, in contrast to a decrease of 0.2 percent in the industrial countries. Among the main factors that help explain these world trends are the differences in trade policies. During 1990-93, developing countries accelerated unilateral trade liberalization, even though they continued to face significant trade barriers to market access in industrial countries. Particularly significant among the developing countries, as has been pointed out by numerous documents of the World Bank and the IMF, has been the progress on trade liberalization made in the Western Hemisphere.

On the other hand, trade policy developments in industrial countries were characterized by limited market opening and an escalation of trade frictions. Unfortunately, the unilateral opening up of the Latin American and the Caribbean economies has not been accompanied by better access for our products in industrial countries but, in some important cases, by more strict and unjustified restrictions. Since we are convinced that the process of economic liberalization will contribute to our economic progress, our region will continue on its reform path. Nevertheless, the struggle for a freer access to the markets of industrial countries must also be continued, and the World Bank as well as other multilateral institutions should play an important role as our ally in this process.

We strongly believe that the best social policies cannot be looked at exogenously, as a way to compensate for the cost of the structural reforms. On the contrary, equity objectives and social policy must be a fundamental and integral part of a coherent model of development based on market forces and democratic participation. At the same time, educated and healthy populations will lead to higher productivity and, therefore, will cope better with the demands of increased international competition. They will also learn to value the rights of others, to protect the environment, and to reach a peaceful, democratic, and sustainable economic and social development. Economic development and social development are just two sides of the same coin. We must design economic policy taking into account social objectives, and we need to introduce economic criteria in the design and execution of social policy.

The priority that we must give to social policies and social development requires an active role by national governments. However, any successful social policy must be accompanied by a significant effort to modernize public institutions and change the composition of government spending. The time has come to introduce good management, decentralization, efficiency, and market criteria in the provision of public goods and social services. We must work at the microeconomic level in the social sectors, in order to increase competition and efficiency in the process of production of social service. We must put in place mechanisms such as private pension funds, health insurance systems, and decentralized and competitive schools and hospitals. Without an overall restructuring of the instruments needed to reach the poor, social policies cannot achieve their goals effectively. The World Bank must play a vital role in this process, both by providing an increasing amount of resources to these sectors and by helping to improve the quality of the social services. Technical assistance from multilateral institutions is needed more than ever in this critical area. Government budgets should also change in composition to reflect the new priorities. To increase social spending and to avoid the high fiscal deficits of the past, governments will have to continue withdrawing from center stage in construction and provision of services derived from physical infrastructure. Therefore, we will have to increase our efforts to promote private participation in such vital areas as public utilities, roads, and ports.

Adequate and timely delivery of public services—among which are those provided by private agents—will remain a basic responsibility of the government. Therefore, the role of the state in matters such as regulation, planning, and control must be greatly strengthened. The expertise that has been acquired by the industrial world in these areas must quickly be transferred to our developing countries. And the most appropriate institution to help in this endeavor is the World Bank. We cannot overestimate the importance of this point: the success of the new development model, which benefits the social sector and encourages private participation in infrastructure, depends very much on the efficiency of the regulatory framework for public services.

On the other hand, our region needs adequate mechanisms to finance and guarantee private investments in infrastructure. These instruments are essential, because of the various risks and the long-term maturities of the required financial operations. In this regard, we welcome the expanding activities of the International Finance Corporation and the Multilateral Investment Guarantee Agency. We welcome also the recent decision by the InterAmerican Development Bank to lend directly to private agents—up to 5 percent of its annual commitments— without government intervention. In the same direction, we commend the World Bank for its recent decision to mainstream guarantees in its portfolio, both for private and public agents, requiring, however, government counter-guarantees.

The road we must travel is, nevertheless, still long. Our emerging markets, and in general the financial centers, cannot yet deliver the necessary amount of funds nor the required maturities that these infrastructure projects need. Hence, further involvement of the multilateral institutions in these areas will be necessary. In particular, they have a role in helping to develop long-term regional capital markets. Obviously, we recognize that governments have the main responsibility in providing investors with a stable political, economic, and regulatory environment. We must reverse recent lending trends with regard to the flow of funds from the World Bank to our hemisphere. During 1990-94, World Bank net transfers to the region were minus $11 billion. Although part of the explanation behind this figure lies in the debt-consolidation process of the region, it is also true that this trend should not continue.

After deep structural reforms in the Latin American and Caribbean countries, which contributed to the end of the debt crisis of the 1980s, these countries now have access to more sources of financing. There will be growing competitive pressure for the multilateral financial institutions, and this fact should lead them to their own structural reforms. Although some steps have been taken in this direction, lending practices of the multilateral agencies are still too rigid. Efforts should be addressed to make the World Bank loans more flexible in terms of the currencies in which they are disbursed and the speed of approval and execution. Also, the Bank should eventually solve the contradiction in terms of promoting privatization, decentralization, and autonomous public enterprises and, at the same time, requiring sovereign guarantees for the loans to the private sector, to local governments, and to parastatals.

Before I finish this presentation, I would like to refer briefly to the current economic situation in my own country. The Colombian economy has been growing at rates above 5 percent in the last two years. For the next years, economic prospects are excellent. Trade liberalization and economic reform have led private investment to a historic peak, as a percentage of GDP. We have achieved a very successful export diversification during the last decade, and the Colombian economy will face an important boom of oil production and foreign exchange earnings during the second half of the 1990s.

Our Government is conscious of both the opportunities to consolidate recent reforms and the Dutch-disease type of risks that lie ahead of us. We are committed to saving a large proportion of the additional earnings, through an oil stabilization fund, which will keep part of the surplus invested outside the country, and to keep a positive fiscal stance during the years to come, in order to avoid inflationary pressures and a sharp real appreciation of the currency. We will further increase the domestic savings rate both through a big push to the financial deepening of the economy and the development of the domestic capital market.

Together with an orthodox macroeconomic policy, the new administration will give high priority to the reallocation of public spending toward investment in human capital. At the same time, we will promote increasing participation of private investment in the construction, maintenance, and operation of infrastructure and public services. We will seek to consolidate our economic integration bonds, within the Andean Group, the Group of Three, and with the Central American and Caribbean countries. At the same time, we will seek to establish new ties with the countries of the Southern Cone Common Market (mercosur) and the North American Free Trade Agreement (NAFTA). Colombia firmly believes that current integration movements within the hemisphere should converge toward a broad continental free trade zone, at the same time that we proceed with worldwide multilateral liberalization of trade and economic cooperation. We hope to be able to construct with all of you a better future for all our people.

Statement by the Governor of the Bank for the Libyan Arab Jamahiriya—Mohamed A. Bait Elmal

On behalf of the Great Jamahiriya, it gives me pleasure to congratulate you, Mr. Chairman, on having been selected to chair the Boards of Governors and to wish you every success in conducting these meetings, which we hope will produce—through members’ pursuit of appropriate economic policies—results of value to people everywhere. I am also pleased to welcome Eritrea as a new member in our two institutions. As we celebrate these days the fiftieth anniversary of the Bretton Woods institutions, it is incumbent upon us to take an introspective look at their experience and to assess their activities, with a view to entering a new era, during which we should be better able to face challenges and meet the needs of all members, particularly those in the developing world. We, in the Great Jamahiriya, highly value the important role played by the Bank and the Fund over the past fifty years in supporting the developing countries and standing by them. Our delegation feels, however, that numerous challenges still lie ahead. Among these are low living standards for millions in Africa and Asia, severe indebtedness, and trade barriers in the face of developing country exports. This calls for a comprehensive assessment of the activities of the Bretton Woods institutions, with a view to achieving equity among members and affording the developing countries a greater opportunity to participate in formulating the policies of the two institutions and to benefit from their financial resources.

My country, the Libyan Jamahiriya, is one of the developing countries yearning for progress and development in the context of an international, cooperative framework. Regrettably, however, my country is still subject to unjust and capricious measures imposed on it by the UN Security Council in the context of what is known as the Lockerbie case. These measures, which include an air embargo and financial sanctions, came on top of the economic siege that has been placed on Libya by a superpower since 1986. These measures have had numerous and extensive adverse effects on the Libyan population, as well as on other Arab and foreign nationals residing in Libya. I do not wish to take too much time to describe those effects. So, let me just refer to the death of many patients in need of treatment abroad or for whom medicine could not be imported with the necessary speed. I would also mention delays and stoppages in project implementation owing to our inability to import the required inputs. The oil industry has been hit hard by the economic siege. As a result of these measures, total losses to the country amount to about $2.7 billion. The air embargo imposed on Libya, together with the financial sanctions and the freeze on assets, which hinder our ability to finance trade and meet obligations, represents a stark violation of international agreements and a violation of the spirit of the IMF’s Articles of Agreement. Since accepting these measures and restrictions amounts to acceptance of impediments to the natural flow of trade and payments, all of us, and the IMF in particular, should reject the measures and restrictions in question and should not acquiesce to them under any guise.

A number of countries and international organizations, including the League of Arab States, the Organization for African Unity, the Organization of the Islamic Conference, and the Group of Nonaligned Countries, have called for a termination of the capricious measures imposed on Libya and have declared their opposition to them. The Fund staff report for the 1994 Article IV consultation with Libya, and interventions at the Executive Board on that occasion, referred to these measures, to their adverse effects on the Libyan economy, and to how they undermine the Jamahiriya’s ability to follow more open policies. Therefore, we in the Great Jamahiriya urge the international community to understand Libya’s position in this regard and to seek to resolve differences through dialogue rather than siege, freeze, or other such means of international terrorism.

Statement by the Governor of the Fund for Côte D’Ivoire—Daniel Kablan Duncan

I am especially pleased to take part in these Annual Meetings of the International Monetary Fund and World Bank. As I see it, our work this year is particularly significant for two reasons. First, these meetings are being held in the year of the fiftieth anniversary of the creation of the Bretton Woods institutions. In this regard, I would like to reiterate my appreciation to the Bretton Woods Commission for calling on me to join in the preparatory work for this commemoration, which made it possible to think in depth about the future of these institutions. Second, for my own country, Cote d’Ivoire, and its partners in the West African Economic and Monetary Union and in the franc area, this year marks the dawn of a new era in their adjustment and development.

It is because of these two events that, while I fully subscribe to the joint statement by the African Governors and the topics discussed by my colleague Mr. El Hadj Camara, Minister of Finance of Guinea, I thought it useful to briefly address this assembly. When I last attended these meetings in September 1993, the world economic outlook was far from bright. Most industrial economies were plunged into a recession that had entailed negative effects for developing economies. The Uruguay Round of Multilateral Trade Negotiations was marking time. And mounting protectionist pressures in industrial countries and the worsening debt burden of developing countries jeopardized the success of the latter’s adjustment efforts.

Since then, I am happy to note, growth forecasts for industrial countries have been revised upward, considerably improving the world economic landscape and strengthening the growth prospects of developing countries. Given the conclusion of the Uruguay Round, the maintenance of a reasonable level of interest rates on international financial markets, the firming of commodity prices, and the moderate growth in capital transfers toward developing countries, overall growth in developing countries is projected at some 5 percent a year in 1995 and 1996. For the first time in a long time, growth in sub-Saharan Africa is estimated to exceed 4 percent over these two years—against less than 1 percent in 1992 and 1993, and not much different from the average I have just cited for developing countries as a whole.

If it is to attain the projected growth rates, sub-Saharan Africa must continue to implement strict macroeconomic policies, with a view to providing a stable macroeconomic framework, and to deepen its structural reforms, in order to strengthen each country’s international competitiveness and take full advantage of the opportunities made available by the Uruguay Round agreement. It is in this context that the franc area countries decided last January 12, in Dakar, to devalue the CFA franc and the Comorian franc by 50 percent and 33 percent, respectively, against the French franc.

At the same time, the franc area countries took a series of budgetary and monetary measures, as well as structural reform measures, aiming respectively at ensuring macroeconomic stability and correcting structural distortions. Like its partners in the franc area, my country intends to pursue strict adjustment while accelerating regional integration in order to promote vigorous and sustained medium-term growth for the prosperity of future generations.

Significant structural measures have been implemented in Côte d’Ivoire. They include price and trade liberalization, streamlining of the tax system, reform of the labor code to introduce more flexibility into this sector, and liberalization of the maritime sector.

The future prosperity of our countries also depends on the volume and quality of the investment made in them. The Ivoirien Government attaches high priority to private investment. Accordingly, it will concentrate public investment mainly on infrastructure, health, and education. We encourage the development of the domestic and foreign private sector, which will be the principal source of development in our countries in coming years.

In this regard, a new investment code to be introduced late in 1994 will substantially increase investment incentives. A new mining code will also be introduced to develop this sector’s real potential to quickly become the second pillar of the country’s economy. Moreover, the Ivoirien Government is actively pursuing a program of public enterprise reform. A significant privatization program has been started, involving some fifty enterprises in all sectors, particularly agro-industry, energy, and telecommunications. Cote d’Ivoire needs the support of its external partners for its broad adjustment effort, so that it can obtain adequate concessional aid until it is able to regain access to capital markets.

Moreover, and despite the debt relief provisions used so far, Cote d’Ivoire is of the opinion that new strategies should be adopted to reduce significantly the stock of debt. As I mentioned repeatedly during our earlier meetings, the so-called Trinidad terms should be implemented rapidly in order to lighten the debt of the most heavily indebted countries, and further steps should be taken when necessary.

* * *

Significant efforts are being made in Africa to reach, as quickly as possible, an acceptable level of economic and social development consistent with its population growth. New institutions are being created to broaden participation in the formulation of political and economic objectives in a number of countries, as witnessed by recent developments in South Africa.

Now more than ever, our countries need the financial support of their multilateral and bilateral partners to bring their reforms to a successful conclusion. The time is right for our Bretton Woods institutions to consolidate the progress made over the last fifty years. Of course, these institutions must adapt to new times and changing circumstances, but international financial cooperation should remain an indispensable element in the collective prosperity of our planet, and the essential tools of such cooperation should be preserved.

As I mentioned during the recent Washington discussions on the occasion of the fiftieth anniversary of the Bretton Woods institutions, these institutions have played and continue to play a unique role in maintaining a stable international monetary system and in the fight against poverty throughout the world. We think that this role should be not only pursued but also strengthened, with due regard for changing economic conditions in individual countries, of course.

In conclusion, I would like to reiterate an appeal I made a little over ten years ago. The international community should mobilize to assist Africa to develop as rapidly as possible. Africa has been cited as the continent with the weakest performance among the world’s regions. Together, the Bretton Woods institutions and the partners in Africa’s development, as well as the African countries themselves, can reflect upon the causes of this weak performance. Indeed, we should, together and in liaison with the Bretton Woods institutions, reflect more deeply in order to come to a better assessment of the effectiveness of aid in Africa and to determine the essential fundamental conditions for placing Africa firmly on the road to economic and social development.

Statement by the Governor of the Bank for Ukraine—Ihor Mitiukov

The recent addition of several new members, including Ukraine, has turned the Bretton Woods institutions into truly global organizations. This is the best fiftieth anniversary gift one could imagine. And in this spirit we welcome our newest member, Eritrea. Over these last fifty years our institutions have played a central role in shaping the contours of the emerging world economic order. There is much to be praised in the activities of these organizations, and it is vital that they be continued. With the recent dramatic changes in the world economy—such as the ever-expanding integration of trade and financial flows, the substantial progress in the development of many countries, and most recently, the start of the transition to the market by former centrally planned economies—it has become necessary to modify the principles and modes of operation of our institutions. In 1944, we were fortunate to have a group of leaders with the global vision to see the importance of establishing new institutions, the Bretton Woods organizations. Today, it will require not only vision, but also diplomacy, ingenuity, patience, and devotion to ensure that these institutions adapt to the new realities of today’s world.

An excellent illustration of past achievements are the IMF’s and World Bank’s roles in the transition economies. There is no universal recipe for the transition, as demonstrated by the case of the countries of the former Soviet Union, in particular Ukraine. But we have seen that the core of reforms basically corresponds with the lessons of stabilization and adjustment arising from fifty years of Fund and Bank experience. My country, Ukraine, is now starting a bold and comprehensive reform effort based on such experiences. Despite the extremely difficult economic situation and ambiguous attitudes toward reform among various political groups within Ukraine, our newly elected President is determined to move forward, confident that the population in general is prepared to bear the considerable and sometimes painful costs of transformation. The key elements in our immediate reform package include:

  • the reduction of our budget deficit to a level of 10 percent of GDP by the end of this year and then to about 5 percent in 1995;

  • the unification of the karbovanets exchange rate, followed quickly by the introduction of the national currency, hryvnia, and abolition of all import subsidies and export restrictions;

  • liberalization of prices with underlying cuts in most subsidies, including those for bread, household utilities, and housing rents;

  • significant rationalization of the social safety net with a targeted support of selected population groups; and

  • substantial changes in the tax structure and taxation levels in compliance with internationally accepted standards.

But our success with economic reforms depends critically on the early availability of external financial assistance and subsequent increased foreign investment. We need considerable financial support from the international community in order to:

  • finance our energy-related liabilities to our international creditors;

  • replenish our depleted foreign currency reserves and establish a stabilization fund for our new currency, hryvnia, to be introduced early next year;

  • soften the impact of economic reforms on society in general; and

  • provide conviction to various political forces in the country as to the feasibility of the radical measures we are going to undertake.

The President of Ukraine and the Government fully realize that the critical condition triggering the mechanisms for disbursing comprehensive technical and financial assistance to Ukraine will be tied to the successful execution of this ambitious program. We are fully aware of and appreciate the important catalytic role the IMF and the World Bank have begun to play in supporting the economic reform process in Ukraine and other newly independent states. As always, however, this multilateral financial support must be complemented by significant bilateral financial aid from donor countries. In Naples, the Group of Seven countries extended their hand to us. In Madrid, with the collaboration of the IMF, we are extending ours—an agreement for a program under the systemic transformation facility. It now remains for all of us to work together diligently to ensure the successful implementation of these bold but necessary actions.

Let me now turn to several important issues on the future role of the IMF and the World Bank. First, I am convinced that the fundamental role of the IMF and the World Bank should be, as it has been in the past five years, to promote the conditions necessary for sustained economic growth. To this end, I see the first goal of the World Bank as ensuring that lagging economies are not left behind in a vicious circle of poverty. The Fund should forcefully continue its dual role of ensuring through its programs financial activity in all countries and of ensuring catalytic mobilization of multilateral and bilateral financing. This financing under programs is the first keystone step in constructing the sequence that gives successful stabilization, then structural adjustment, then a favorable climate for private investors that brings in new capital and, finally, sustained growth. This sequence applies to all of us—industrial, developing, and transition countries. We, in Ukraine, fully recognize that we are not in this regard unique or special—we differ from developing countries not in kind, but at most, and only temporarily, only in the degree of structural changes needed.

Second, we are fully supportive of the proposed considerable increase in the access to both systemic transformation facilities and stand-by arrangements. But this should be a reasonable increase based on self-restraint and a responsible approach from all parties involved. Third, we also support the need for extending by one year—but only one year—the systemic transformation facility. Fourth, we support an increased role for international financial institutions in the transitional processes of the newly independent states. This role should concentrate on solving the short-term balance-of-payments problems of its members, providing long-term infrastructural project finance, and spurring the development of expertise related to the transition to a market economy and new institution building. Fifth, we welcome the call of Mr. Camdessus for in-depth study of the controversial questions of the SDR, which we are sure will demonstrate that the interests of developing countries and transition countries do not differ.

Finally, let me express Ukraine’s confidence that in the fifty years to come, the International Monetary Fund and the World Bank Group will effectively accommodate new economic realities into their policies and become even more effective renewed institutions dealing with new global challenges.

Statement by the Governor of the Fund for Norway—Torstein Moland

I have the honor of addressing this meeting on behalf of the five Nordic countries—Denmark, Finland, Iceland, Norway, and Sweden—on matters relating to the IMF. At the outset, I would like to thank the Spanish Government for the hospitality extended to us here in Madrid and welcome Eritrea as a new member of the Bretton Woods institutions. Anniversaries are a time for reflections on the past and the future. Fifty years ago the Bretton Woods Conference created the framework for international economic relations in the postwar period. The liberal and market-based framework of the system has gradually contributed to a more efficient allocation of resources by facilitating progress toward current account convertibility and a free flow of goods and services. The underlying growth in the world economy in the period as a whole has been high by historical standards. Although the high growth rate in the early postwar period partly reflected the recovery from the disruptions caused by the Second World War, increased trade has had a decisive influence. Rapid growth of foreign trade, direct investment, and enhanced communications have permitted technology transfers and a steady reduction in the technological gap between the most advanced countries, in particular the United States after the war, and other countries. Furthermore, strong growth in trade has contributed to economic specialization.

An adaptable international monetary system has also contributed to strong growth. Combined, these factors have boosted productivity and led to a virtuous circle where economic growth and trade expansion have been mutually reinforcing. Today, I would like to focus on three issues related to the Fund: the international monetary system, the role of the IMF, and growth prospects for the world economy.

First, the international monetary system. At this meeting it would be appropriate to devote particular attention to the international monetary system, by which I mean the institutions and policies that influence the flow of trade and capital across national boundaries, especially those that affect exchange rates. Notwithstanding the demise of the Bretton Woods fixed exchange rate system in the early 1970s, it can be said that the IMF and the international monetary system have functioned well in the face of significant changes in economic conditions such as the oil price shocks in the 1970s, the debt crisis in developing countries in the 1980s, the collapse of centrally planned economies in the early 1990s, and periods of wide differences in cyclical trends in the major industrial countries. The system, represented particularly by the IMF, has also managed to help the countries in transition to become more integrated into the world economy and to adjust to the requirements of international capital markets.

The principal disadvantages of the system are the problems associated with large and protracted misalignments among the major currencies, as we have experienced on several occasions over the past twenty years. As a result, economic agents in tradable sectors have faced uncertainty that may have led to inefficient allocation of investment, lower trade, and slower economic growth. Instability and misalignments may also have contributed to unwanted regionalization of world trade and may reinforce bilateral trade agreements and trade restrictions and lead to capital controls.

Fluctuations in exchange rates between the major currencies present, in particular, challenges for smaller countries, involving frequent changes in the competitive environment for their relatively large external sectors. At the same time, these fluctuations have probably had a relatively small impact on the economies of the three major industrial countries since international trade plays a lesser part in their case. It is, therefore, natural for these countries to adapt monetary policies to domestic economic conditions consistent with price stability. All countries stand to benefit if the major industrial countries are able to achieve noninflationary growth. However, the policy mix chosen to achieve macroeconomic stability is also important to their trading partners and the world economy. One reason for the increased instability in exchange rates is that monetary policy has been overburdened owing to the structural fiscal deficit. Fiscal consolidation would make it possible to achieve domestic policy objectives with a policy mix that is less conducive to fluctuations in exchange rates. It would at the same time lay the foundation for higher saving, lower real interest rates, higher private investment, and higher growth in the countries that are consolidating their fiscal situation.

More stable monetary and exchange rate conditions are thus in the interest of all countries. Unfortunately, there is no easy way to achieve them. The key to more stable exchange rates lies in improvements in national economic policymaking underpinned by international cooperation. This is a challenge the Fund has to address in close cooperation with its members. The Fund has an important role to play, ensuring that the international perspective is taken into account in the formulation of economic policies in the member countries. The Fund could, through strengthened surveillance, contribute to more adequate policy formulation and convergence of economic performance in order to achieve sustained stability in exchange markets. In order to achieve this, it is important to enhance the effectiveness and influence of Fund surveillance. This, however, is dependent both on the quality of Fund analysis and advice and on the willingness of the large countries to let the Fund play such a role as well as on the political will among members to cooperate. The political will could to some extent be enhanced if strengthened surveillance turns out to provide beneficial results to member countries.

Second, the role of the IMF. The members that I represent are in favor of a continuation of the key elements of the Fund’s present role and strategy. The instability in exchange markets illustrates the need to increase the effectiveness of Fund surveillance over economic policies in general, including exchange rate policies. In the World Economic Outlook, the Fund might devote even more attention to the interlinkages of economic policies and repercussions from lack of proper actions. It might also strengthen surveillance of interlinkages issues in various regions of the world.

The IMF should maintain its current focus on macroeconomic stability and the macroeconomic effects of structural adjustment. A stable international monetary system presupposes stability in all groups of the member states of the IMF. If this is to be achieved, it is necessary for the IMF to have borrowing facilities that can be adapted to the financial requirements that the member states, fulfilling appropriate conditionality, may have when making adjustments to restore economic balance.

There should be no need for adjustments of the IMF’s and IBRD’s areas of responsibility after the establishment of the World Trade Organization (WTO). The main aim should be that the three organizations use their comparative advantages to utilize resources in an efficient manner, to avoid duplication, and to ensure that policy recommendations are consistent and in line with the countries’ international obligations. This underlines the need for strong and active mechanisms of collaboration between the Fund and the WTO. Within the guidelines governing its surveillance activities, the Fund should continue to emphasize trade liberalization measures. Moreover, the Fund must, of course, remain responsible for formulating advice on exchange rate policies.

Third, global growth prospects. The world economy has undergone and is set to further undergo fundamental changes. The relative importance of developing countries has increased, and the transition economies are becoming integrated into the world economy. Looking toward the future, it appears that several conditions for a new period of sustained growth in the world economy are in place:

  • Growth is continuing at a high rate in many developing countries, and though the technological gap between industrial and developing countries is still considerable, it can be narrowed through increased investment in human and physical capital in developing countries.

  • After substantial output declines, growth has resumed in several economies in transition, and prospects are good in countries where a stabilization policy has been firmly implemented.

  • The positive effects of trade liberalization are far from being exhausted. The integration of transition economies into the world economy will also stimulate growth in industrial countries.

  • As a result of the liberalization and integration of the global capital market, capital will now tend to flow to those areas yielding the highest returns, adjusted for a risk premium.

  • There is still room for significant efficiency gains worldwide by removing structural rigidities.

Many difficult issues, however, continue to face policymakers and have to be successfully solved in order to secure high and sustained levels of growth in the world economy. It is necessary to increase global savings. The key to positive results is strong commitment to appropriate fiscal consolidation and consistent structural reforms that pave the way for lower real interest rates, higher savings and investments, and a more efficient allocation of the world’s human resources.

It is important that the industrial countries give more liberal market access to other countries to utilize comparative advantages. Policymakers have to resist pressures to use nontariff barriers and distorting subsidies. The divergence in economic performance of countries in transition and developing countries clearly underlines the need most of these countries have for strengthening macroeconomic policy and structural reforms. The efforts of developing countries and countries in transition will be facilitated by adequate financing under appropriate conditionality from the international community. By pursuing a long-term economic policy with an emphasis on macroeconomic stability and well-functioning economies, the foundations will be laid for a stable and robust international monetary system and sustained growth. The IMF has an important role to play in this context in ensuring that efforts are undertaken in a cooperative manner.

Statement by the Governor of the Fund for Armenia—Hrant A. Bagratian

This past year, we had to make some very hard choices. Our scarce energy resources were largely allocated to productive sectors; the budget was cut down drastically; interest rates were substantially increased and credit subsidies nearly eliminated; and the money supply was kept in check. As a result, the dram, our national currency, has been stabilized and inflation is under control. Inflation was brought down from 82.5 percent in January to 9 percent in June and to about 3.7 percent in August. In the first half of this year, GDP increased by 2.7 percent and industrial production increased by 4 percent. All of these developments were achieved under the most difficult conditions of blockade and economic transition.

The structural reforms that we began to design and implement in 1991 have continued and deepened. We now have a national consensus for large-scale privatization and the process is in the advanced stages of implementation. Trade has been further liberalized and today Armenia is one of the most open economies in the world. There are virtually no quantitative restrictions and only minimal tariffs on a few strategic commodities. Financial sector reform is underway and the National Bank is now functioning like a Western central bank. The social programs are being redesigned so as to move from general subsidies to programs targeted to the most vulnerable groups. All of these have been achieved through democratic parliamentary processes. There has also been a breakthrough in the political arena. Through relentless efforts, the regional conflict of Nagorno-Karabakh is on the way to resolution. A negotiation framework has been established and the cease-fire has held up since May of this year.

External assistance during this period of economic transition is critical for maintaining the momentum of reforms and minimizing economic hardship. Therefore, I have directed my economic team and senior technicians to give the highest priority to developing sound programs for stabilization, structural reform, and development with the Bretton Woods institutions. Negotiations are under way with the International Monetary Fund for an arrangement under the systemic transformation facility, and a World Bank mission will visit Yerevan in mid-October for an economic rehabilitation program. We hope that a consultative group meeting will be organized this fall to enhance donor coordination. The above is of the highest priority for Armenia, and I am certain that comprehensive programs will be in place and under implementation before the close of this year. Since debt-service capacity during this transition period is very limited, I appeal to the donor community to provide assistance on soft terms and to the World Bank Group to substantially increase the International Development Association (IDA) allocation for Armenia.

I would like to thank the Fund and the Bank for their assistance to Armenia, particularly for their recent cooperation in developing sound programs for stabilization and structural adjustment. The people of Armenia have endured much hardship during this period of transition and are full of hope for the benefits of the reforms. Your timely assistance will complement the local efforts and help us to realize these hopes. The absence of timely assistance, however, will slow down and delay the benefits to a point where the people will question the wisdom of the reforms and may opt to restore the old order.

Statement by the Governor of the Fund for Poland—Grzegorz W. Kolodko

In the last five years, Poland has played a leading, pioneering role in the political and economic transformation of Central and Eastern European countries. First—in 1989—in reestablishing an elected noncommunist government and first in switching from socialist reform to capitalist restoration, Poland in 1990-93 implemented a program of stabilization and institutional change, which effectively became a paradigm for all the others to follow, in one form or another. First in reaping significant benefits from the transformation, Poland has also borne very high and unexpected costs. In September 1993, Poland was also one of the first countries—preceded by Lithuania and followed by Hungary—where the first postcommunist governments were replaced by left-wing coalitions; it is now first in attempting a new economic strategy for the transition.

This new strategy does not involve any change in target model, or in transition speed, or in fiscal stance. The target remains a modern market economy, though with emphasis on equality and partnership, rather than the previous discrimination and antagonism, between private and public sectors. The speed of transition is, in some respects, accelerated: the new Government is now taking two steps, which could and should have been taken at the onset of the transformation—if not beforehand—but which, despite all the lip service to shock therapy, previously had been postponed indefinitely. These steps are:

  • the commercialization of state enterprises, i.e., their corporatization, the transformation of self-management into partial employee ownership, more diffused ownership—both public and private— and governance by an independent board of directors; and

  • the parallel financial restructuring of these enterprises, through cleaning up balance sheets, clearing payments arrears, canceling bad debts, and recapitalizing enterprises and banks. In other respects, the speed of transition continues to be dictated by the technical delays of effective institution-building.

The overall fiscal stance does not leave much scope for maneuver by any government. Thus Italy’s new conservative coalition is seeking to cut budget deficits and public debt just as much as Sweden’s new Social Democratic government. Both countries are raising taxes and slashing pensions and the welfare state, while in Britain the new Labor leader now stresses that high taxation and deficit spending are not necessary features of social democracy. In all transitional economies, stabilization and price liberalization initially benefit the budget through taxation of the high paper profits of state enterprises and lower expenditure on subsidies and lower real wages only to aggravate the impact of the subsequent fiscal crisis, when the profit tax dries up and welfare costs soar. Sustained fiscal austerity is essential, especially in the presence of a large public debt (although not large by the standards of some European countries such as Belgium or Italy, but harder to finance). There is, however, a great deal of scope for affecting the composition of government revenues and expenditures and for choosing among the exchange rate and interest rate policies compatible with fiscal policy and the management of internal and external public debt. The Polish Government intends to use this maneuvering room, for instance, favoring public and private investment through accelerated depreciation and tax rebates, or broadening the base of the fiscal burden while reducing its intensity.

The Polish Government seeks investment and growth instead of what was euphemistically called “creative destruction” and relies on a tough fiscal stance and sound and comprehensive monetary policy. Consequently, it aims at strengthening the domestic currency with parallel reductions in nominal interest rates and crawl rates, instead of earlier high and unstable real rates and overdevaluations. In the 1990 Polish stabilization program, the combination of nominal anchoring of monetary targets and the underestimation of inflationary trends led to a credit shock, which was unintended but stubbornly sustained by the government of the day, with negative effects on investment and the level of activity. This indiscriminate credit squeeze, regardless of enterprise viability, was no more enlightened than the indiscriminate replenishment of enterprise liquidity typical of the old system.

Trade liberalization, which initially had made zloty overdevaluation necessary, is now desirable only if it is accompanied by reciprocal concessions and by greater integration into the European Union and the world economy. Interest and exchange rates are interdependent policy instruments, not independent targets of their own. Unemployment is contained and reduced through active labor policies and the impact of growth and is not just seen as a sign of a dubious process of capacity restructuring. Money wages are to be contained through consensual incomes policy, not through punitive taxation on excess wages (the notorious “popiwek”), which drives an inflationary wedge between take-home pay and labor costs.

The equality between ownership sectors involves the end of the popiwek and of a capital tax, the so-called dividend, both formerly levied exclusively on state enterprises. It also achieves the gradual absorption of the “grey” or parallel economy into the formal one, thanks also to the strengthening of the security of economic transactions. The surfacing of the informal sector makes possible a reduction of fiscal pressure on the formal sector and an appropriate redistribution of the tax burden. Commercialization of state enterprises—which should be seen as an enhancement of privatization opportunities and not as an alternative to privatization—leads to the creation of a missing institution, the treasury, which in turn gives an opportunity for the parallel transformation of central government entities in charge of the economy.

Current trends in the Polish economy are particularly encouraging: a booming growth of income and industrial production, a near leveling out of unemployment, and a turnover of the trade balance into surplus— which, together with the acceleration of capital inflows, have been raising external reserves to the point of embarrassment, creating new opportunities for strengthening the currency. Budget deficit and inflation are still falling. What is more, investment is now picking up, allowing for an overdue restructuring of production capacity.

Current forecasts for 1994-97 envisage a cumulative growth of GDP by 21.8 percent, of labor productivity by 17.5 percent, of real wages by 10.8 percent, and of real investment by 32 percent. Investment is expected to grow from 20.9 percent of GDP in 1993 to 24.4 percent in 1997, with unemployment peaking at 17.2 percent in 1994 then gradually falling to 14 percent of the active population in 1997. Inflation, exceeding 37 percent in 1993, is expected to fall to 17 percent in 1995 and to one digit by 1997, with the budget deficit—currently at 3.2 percent of GDP—falling to 2.5 percent of GDP by 1997. The ratio of public debt to GDP will be continuously reduced, thus bringing Poland closer to fulfilling the Maastricht conditions for monetary unification.

This is not a plan, a promise, or a hope; it is a coherent, professional macroeconomic forecast, based upon sound macroeconomic policy. We can only hope that Poland, now first in renewing its transition strategy, will also be first in reaping new benefits, and that others might also benefit from its experience.

Statement by the Governor of the Fund for Lithuania—Kazys Ratkevicius

It is a great honor and pleasure for me to be the first representative of independent Lithuania to address this important meeting on behalf of the three Baltic countries. I would like to congratulate the IMF and the World Bank on their fiftieth anniversary and to express the wish that the two esteemed institutions continue to prosper. I would also like to express my appreciation to the Spanish Government for the hospitality extended to us here in Madrid. And I welcome Eritrea as a new member of the Bretton Woods institutions.

Three years is a short period of time in a country’s history. Nevertheless, active cooperation with the International Monetary Fund, the World Bank, and other international institutions has contributed to a rather rapid development of economic reforms, helped us to pass the most complicated period of the economic crisis, and brought us to macroeconomic stability. Macroeconomic stability can now be said to be in place in all the Baltic states. This cooperation with the international institutions and their attention and assistance to the Baltic states have been highly appreciated.

Looking ahead, we see our future within the framework of the European Union. The Baltic states continuously strive to be among those states with transition economies that carry out economic reforms most rapidly and successfully. Sustained financial adjustment coupled with bold liberalization has produced the macroeconomic environment necessary for a turnaround in output. Significant growth rates in all of the Baltic states are expected this year. I will briefly address some of the more recent steps that have been taken and that have contributed to this development. By applying different models, the Baltic states successfully introduced domestic currency systems that function efficiently. The Estonian kroon was introduced under a currency board and fixed to the deutsche mark. Having established the fluctuation of the litas exchange rate against the U.S. dollar, Lithuania introduced the Currency Board as of April 1, 1994 and fixed the litas to the dollar. Since February 1994, the Latvian lats has been stable against the SDR, and the objective of the Bank of Latvia is to maintain this stability. All three Baltic countries have accepted Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement.

The high rate of inflation in the Baltic states at the beginning of price liberalization has come down significantly. This has been achieved through the pursuit of successful exchange rate policies and very tight fiscal policies. In the first half of this year inflation amounted to 27 percent in Estonia, 15 percent in Latvia, and 23 percent in Lithuania. It is forecast that the coming years will bring still lower inflation rates. The governments of all three Baltic states managed to balance their budgets in spite of the fact that during the economic reforms GDP decreased considerably and social problems became more acute.

One of the most important elements of structural reform is privatization. The privatization of housing has been completed in Lithuania, and an active housing market has been developed. Nearly 30 percent of land is privately owned. This year marks the end of the first stage of privatization carried out on the basis of vouchers. Now, both residents and nonresidents will be allowed to participate in the next stage of privatization with cash. In Lithuania, 71 percent of state-owned land and 48 percent of state-owned property, which had been planned to be privatized, have already been privatized. Several major entities have been successfully privatized for foreign exchange in Latvia and Estonia. Both Latvia and Estonia are currently implementing large-scale privatization programs.

Liberal foreign exchange and capital flows regimes that promote interstate trade have been introduced in the Baltic states. They have helped balance foreign trade considerably, and increased the share that falls to countries outside the former Soviet Union. In 1991, about 90 percent of Baltic state trade was with the countries of the former Soviet Union. For the first half of 1994, trade with the countries of the former Soviet Union amounted to 35 percent in Estonia, 36 percent in Latvia, and 52 percent in Lithuania. All Baltic states have received financial assistance from the IMF under stand-by arrangements and the systemic transformation facility. In Lithuania, we are about to sign medium-term memorandums of economic policies, which will be supported by the extended Fund facility.

The World Bank approved its first loans—rehabilitation loans—for each country in 1992. In Lithuania and Latvia these loans are being cofinanced by loans from the Export-Import Bank of Japan. An agricultural development loan for Latvia was approved in January 1994. The World Bank is in the process of preparing lending operations in the energy, social, and enterprise/financial sectors. A power rehabilitation loan was approved for Lithuania in May 1994, and the World Bank is planning to finalize several loan agreements with Lithuania this year with respect to the agricultural, energy, and enterprise/financial sectors. The World Bank is intending to accelerate a possible lending operation for Estonia, focusing on enterprise and financial sector reform, investments promoting energy conservation and efficiency, social safety, health, and agriculture.

Now, to provide for economic growth, substantial acceleration of the privatization process and structural reform in the basic sectors of the Baltic states’ economies are needed. To comply with the targets mentioned, we would need even more cooperation with international institutions and foreign credits, which are a major part of foreign assistance. From our point of view, direct foreign investment, including private investment, would be much more beneficial in facilitating structural changes in our economies. Liberal trade arrangements, absence of restrictions on repatriation of profits, liberal laws for foreign investment, and monetary stability would provide good opportunities for such investors.

We appreciate the IMF’s attention to the Baltic states when treating them in its annual reports as a separate group, and expect in the future to be among other countries of Central and Eastern Europe. After the establishment of liberal regimes for trade and investments in the Baltic states, we might expect to have less restrictive conditions of trade and economic relations with other neighboring states in transition economies. I express my gratitude for the opportunity to participate at this highly respected forum. I hope that international organizations will maintain their interest in the aspirations of the Baltic nations and will help strengthen market economy institutions that could pave the way for a rapid integration.

Statement by the Governor of the Fund for Viet Nam—Cao Sy Kiem

It is indeed a great honor for the delegation from the Socialist Republic of Viet Nam to be present here at these historic Annual Meetings in Madrid, the capital city of beautiful Spain. On the fiftieth anniversary of the Bretton Woods institutions, we would like to express our admiration for the remarkable contributions made by the managements and the staffs of the International Monetary Fund and the World Bank over the past five decades.

Since coming into being fifty years ago, the International Monetary Fund and the World Bank have continuously grown; the present membership of nearly 180 countries represents a fourfold increase in half a century. From its initial responsibility to help manage the international monetary system, the Fund has moved to embrace commitments to market stability, growth, and structural reform. Now it has embarked upon an important mission of assisting many countries in their transition to market-oriented economies. On the other hand, the World Bank has extended its activities from merely assisting the post-World War II European reconstruction to fostering worldwide economic development and poverty alleviation. Its recent effort in tackling the pressing problem of sustaining the world environment is monumental.

As you may recall, in October 1993, Viet Nam normalized its financial relationship with the Fund and the Bank, thereby paving the way for Viet Nam’s integration into the international financial community. The Fund has helped Viet Nam to build a financial and institutional infrastructure, while the Bank has helped to build a physical and educational infrastructure. These two institutions have made important contributions to the success of the donor conference for Viet Nam’s reconstruction, leading to the Paris Club meeting for its external debt relief. Over the past year, the Fund has helped Viet Nam to formulate an economic program for 1993/94 under the stand-by arrangement and the systemic transformation facility (STF), with the actual concessional credit disbursement of SDR 132.96 million. In the meantime, the World Bank has signed with Viet Nam three development credits equivalent to $324.5 million. These constitute practical contributions to the acceleration of our economic renovation.

During 1993, economic developments in Viet Nam were generally favorable. Real GDP grew by 8 percent, and inflation declined to 5.2 percent by the end of the year—from 17 percent at the end of 1992. In the same year, the agricultural sector accounted for 36 percent of GDP, 72 percent of employment, and nearly 39 percent of export earnings. Meanwhile, industrial production made up 21 percent of GDP, 11 percent of employment, and 45 percent of exports. All told, the country’s export earnings in 1993 reached almost $3 billion. During the first half of 1994, economic growth was further stimulated by a good harvest and increased foreign direct investment. Present projections indicate that real GDP may rise by more than 8 percent this year, and export earnings for 1994 are expected to rise to about $3.5 billion. Although we have obtained remarkable successes, innumerable difficulties remain ahead. In addition to the Vietnamese people’s great efforts, we really need valuable assistance and support from the international community to promote our economic development in a more speedy and comprehensive manner. Over the past few months, the staffs of the IMF and the Bank have joined us in discussions and in reaching agreement on a three-year, medium-term economic program under the enhanced structural adjustment facility (ESAF) and the structural adjustment credit (SAC). It is our belief that the managements of these two institutions will soon approve these two programs, thus facilitating Viet Nam’s economic development.

Finally, we would like to join other nations in celebrating the signing of the General Agreement on Tariffs and Trade (GATT) Uruguay Round—after eight years of laborious efforts of so many nations and individuals—and the creation of the World Trade Organization (WTO). These two events were of paramount importance, as they took place at precisely the moment when our country began its integration into the world’s financial and economic community. Therefore, we call upon the world institutions to facilitate our prompt admission to membership in GATT and WTO. We believe that opening the markets can help bring about progress in fostering growth, generating employment, and increasing prosperity for everyone. Allow me to recall with great enthusiasm the Fund Managing Director’s recent statement: “We are now in a universe of globalization where a central role for cooperation and convergence toward stability and prosperity has become more necessary than ever.” In this spirit, may we join with all the honorable representatives here to work diligently toward building a new and strong partnership—a partnership for progress in building universal stability and prosperity.

Statement by the Governor of the Fund for the Islamic State of Afghanistan—Hamidullah Tarzi

Mr. Chairman, on behalf of the delegation of the Islamic State of Afghanistan I would like to join the previous distinguished speakers in extending our delegation’s congratulations on your unanimous nomination as Chairperson of the Annual Meetings of the International Monetary Fund and the World Bank in the beautiful, historic city of Madrid. My delegation has come to these meetings in a spirit of understanding and cooperation and to contribute constructively toward finding solutions to the vital problems in the spheres of money and finance.

On account of the lack of consensus in relation to a unified approach to an SDR allocation, I would like to recommend the following. Participating in the Bretton Woods system implied holding reserves sufficient to finance cyclical and other transitory imbalances and to give time for taking corrective measures. As it evolved, however, the system became increasingly vulnerable to two shortcomings. It did not provide for an orderly growth of reserves, and it did not contain adequate safeguards against crises of confidence associated with the growing use of reserve currencies. Therefore, the decision to create SDRs was the first concerted effort to provide for an orderly growth of reserves by collective decision. Moreover, it is a known fact that the primary objective of an SDR creation is to add to world reserves in accordance with the monetary requirements of the world economy, or what Article XVIII of the IMF’s Articles of Agreement refers to as “long-term global need.” In this context, we are of the opinion that the attainment of that primary purpose does not depend on any particular pattern of distribution of newly created SDRs.

In order to achieve the purely monetary objectives of SDR creation, all that is necessary is that the level and rate of expansion of world reserves, including SDRs, be consistent with the balanced growth of the world economy and free of inflationary or deflationary tendencies. An important consideration would be that an increase in the financial reserves of the developing countries would serve not only the development of those countries but also the international monetary system itself. We are aware that the above objective definitely requires a new approach in relation to an SDR allocation as is currently practiced. One approach would be to change the basis on which SDRs are allocated to countries so that the share of the developing and low-income countries would be above their IMF quotas. Such a technique may be called a redistribution of SDR allocations.

A second approach would be to maintain the distribution of SDRs as at present, on the basis of IMF quotas, but provide for the industrial countries to transfer part of their annual allocations to the development financial institutions.

A third method would be for the development financial institutions to receive a certain quantity of SDRs directly from the IMF; the balance of the allocation would be distributed among Fund participants as at present. It would need to be decided whether allocations of SDRs should be accompanied by a proportional reduction of allocations to all Fund participants or whether the reduction should be applied only to the allocations to industrial countries. We also hope that our other proposals, including SDRs’ built-in progressivity—that is, higher interest rates when held as reserves and a linked share of SDRs according to a formula taking into consideration per capita income, as well as in certain cases population, so that it contains an explicit and substantial progressivity—should be given due consideration.

We are aware that perhaps the international community may have outgrown some of its initial romantic enthusiasm for the idealism of the United Nations, but it should be underlined that this world organization and the two complementary monetary and financial institutions, the IMF and the World Bank, which were established half a century ago, happen to be the only common denominator in their respective spheres between all nations of the world. And as far as our country is concerned, these are our only hope in this our most crucial and exceedingly urgent hour of massive humanitarian and financial need, a need that arose from fourteen years of war that was fought to a victorious conclusion yet had massive human losses and economic and social disarray.

It is said that the greatness of a nation or, for that matter, an international community is not based solely on what it can do for its influential and well-off members but, more important, on what it can achieve for its most destitute and, to quote His Majesty the King of Spain’s inaugural statement, “those in a desperate state of need.”

Statement by the Governor of the Bank for Eritrea—Haile Woldense

First and foremost, please kindly allow me to express the fact that it is a great pleasure for me to make a brief statement, on behalf of the Eritrean Government, to this august assembly. As you are all aware, Eritrea emerged as an independent nation, and, therefore, it goes without saying that it should necessarily join international institutions. In light of this principle, Eritrea has become a member country of the IMF and the World Bank effective July 1994. Consequently, this day marks an historical beginning for Eritrea in formally attending a joint IMF and World Bank meeting to which the Eritrean Government attaches great importance.

I take this opportunity to express my wholehearted appreciation to the IMF and the World Bank for the effective roles they have played in making Eritrea’s membership in these two important institutions a reality. I would also like to take this opportunity to make it known to all member countries of the IMF and the World Bank that Eritrea is committed to applying its core principle of thinking globally and acting individually, thereby associating itself with the interests of the world community as a whole. My country, therefore, wishes that the IMF and the World Bank join hands, as much as they do with other countries, in order to put in place this important principle.

It would be unjust not to emphasize that Eritrea has been encouraged by the degree of collaboration it has been rendered so far by both institutions, and we hope that this trend will hold true in the future as well. Having said this, I express my sincere wishes for the success of this important meeting.

Statement by the Governor of the Fund for Nepal—Hari Shankar Tripathi

It is indeed a great pleasure and privilege for me to address the Fund and the Bank Joint Annual Meetings, as the representative of the Kingdom of Nepal. I take this opportunity to congratulate the managements and staffs of the Bank and the Fund on the occasion of the fiftieth anniversary of the establishment of the Bretton Woods institutions. It gives us great satisfaction to note that these institutions have served their members well over the last fifty years. We are confident that strengthened Bretton Woods institutions could be of tremendous value to all the member countries in the coming years.

Signs of optimism in the global economy have surfaced this year. The recovery, however, still appears fragile. Its sustenance, therefore, needs careful monitoring and additional follow-up policy actions by developed countries. The successful conclusion of the Uruguay Round agreements is an important milestone in the history of global trade. It has offered us an added dimension for economic prosperity. We urge all developed countries to fully implement the accord in the true spirit of global well-being.

Poverty alleviation has been the overriding objective of the developing countries. They have put enormous efforts into creating opportunities for the poor to earn and enhance their capacity to work. Both of these tasks require substantial resources, and many of these countries have put great efforts into raising domestic resources. Nevertheless, the resource availability through domestic sources is quite small compared to their requirements. The need for external support for reducing poverty is, therefore, very important. In this context, official development assistance is needed—particularly in the poorest countries for infrastructure and human resources investments—to help create the institutions and policies required for economic growth. This will help governments create conditions conducive to private sector growth.

International Development Association (IDA) resources should be devoted to the poorest and least-developed countries whose institutional and technical capacity is weakest and who lack ready access to international capital markets. These resources should focus on the environment and other issues that the private sector cannot address. The Bank should expand the activities of the International Finance Corporation (IFC) and the Mulitlateral Investment Guarantee Agency (MIGA) for private sector development.

Turning to the Nepalese economy, the Government has pursued a comprehensive economic policy reform program based on transparency and an outward-looking strategy. In this process, fiscal consolidation, financial sector reform, and liberalization in the external sector have been the primary strategies of the Government. Fundamental tax reform initiated in recent years has shown a positive outcome. Expenditure management and prioritization of development projects have contributed to strengthening our fiscal position. The Government’s comprehensive program of public enterprise reform consists of a medium-and long-term privatization strategy and improving operational efficiency of these enterprises. In this context, financial sector reform has encouraged the establishment of a number of banks and finance and insurance companies. Establishment of a stock exchange in Kathmandu is a testimony to the strengthening of the financial sector in Nepal.

Private sector involvement has been sought through various deregulation measures. The private sector has been entrusted with an active role in manufacturing and trade, services, and employment generation activities, while the Government is mainly concerned with providing infrastructure, basic education, health, and safe drinking water facilities. In the last three years, we have made considerable improvement in managing our economy. GDP grew by 7.75 percent last year. Inflation has been noticeably controlled. Interest rates have come down. Similarly, significant improvement has been made in domestic revenue mobilization. The fiscal deficit has been contained within limits. The reform initiatives have also improved the external sector, and our balance of payments has continued to be in surplus. A considerable increase in foreign exchange reserves has been achieved. Resource flow to the private sector has also improved greatly.

However, the shortage of power is causing serious setbacks to attracting private investment. To mitigate this power shortage problem, the Government has given top priority to implementing the Arun Hydroelectric Project. It is, therefore, an important part of our strategy to enhance and sustain economic growth and to promote tourism as well as the services sector in the economy. I take this opportunity to request the cofinancing donors and institutions to conclude their assistance package to this project at their earliest opportunity. Further delay would mean cost overruns of nearly $25 million a year, in addition to adverse implications for the overall economy.

Nepal is benefiting greatly from the enhanced structural adjustment facility (ESAF) program. It has helped us to soften the pressure exerted by a structurally weak balance of payments position. In this context, I am pleased to inform you that we have accepted the obligations of Article VIII of the IMF Articles of Agreement. Such endeavors would, I believe, lead us toward full convertibility in the capital account in the foreseeable future.

In closing, we would like to express our sincere appreciation to the people and the Government of Spain for extending their warm hospitality in this beautiful city of Madrid. We also extend our sincere admiration to the managements and the staffs of the Fund and the Bank for the excellent arrangements made for these meetings.

Statement by the Governor of the Bank for El Salvador—Ramon Gonzalez Giner

On behalf of the Government of El Salvador, we thank the Spanish Government for its hospitality and its efforts to ensure the success of these Annual Meetings. I also join the speakers who preceded me in giving a warm welcome to Eritrea as a new member of the World Bank Group and the International Monetary Fund. On behalf of the Government of El Salvador, I thank you for this opportunity to give you a brief overview of the progress we have made and the challenges we face as a nation.

Our country is emerging from over twelve years of internal war. In the political area, the democratic process is increasingly consolidated. Last March we held simultaneous elections for president, deputies, and mayors. Today we are truly pleased to see all political currents participating freely, and those who yesterday were enemies are today no more than political adversaries. El Salvador is now a country in peace, of democracy, and firmly on the road to progress and modernity.

We have made substantial progress in the area of justice. We have a Supreme Court that was unanimously appointed by the Legislative Assembly, something that had never before happened in the history of our country. The Government headed by Dr. Armando Calderón Sol, inaugurated on June 1 of this year, has set one central goal: “Achieve social peace and transform El Salvador into a country of opportunity and social mobility.” We hope to meet this challenge by maintaining our economic policy course and placing greater emphasis on the social area.

In the economic area, El Salvador is coming to the end of a period of profound changes aimed at stabilizing and liberalizing the economy. Notable progress has been made, and the rate of economic growth was held above 5 percent a year in each of the last three years. Inflation will remain at roughly 10 percent this year, and we hope to reduce it to a single digit by next year. In the external sector, we have been accumulating reserves since 1989, and they now represent more than four months of imports. Despite the demands imposed by the peace agreements, the fiscal deficit will be roughly 2 percent of GDP in 1994, almost 1.5 percentage point less than originally programmed with the International Monetary Fund.

Looking to the future, the goal of the Government of El Salvador is to transform growth into equitable economic development while maintaining stability and generating confidence in the private sector. To this end, we will strengthen market conditions in order to reward the efficiency of competition. We are also engaged in modernizing the public sector with a view to transforming it into an adjunct of progress, suited to the demands of a modern private sector open to the world economy. Sound economic policy is being used to encourage domestic saving, an area where reforms of the social security system to open the doors to private participation are called upon to play a predominant role. At the same time, we are eliminating a number of remaining roadblocks and facilitating private investment, which has rebounded significantly in recent years.

To this end, El Salvador is now open to foreign investment. We are now engaged in the process of privatizing telecommunications and electricity. At the same time, we are structuring a program to encourage the development of local government, with a view to creating suitable conditions for domestic and foreign investment. Maritime resources and tourism, among other sectors, are open to foreign equity investment, as we have highly attractive natural and human resources. We are a territorially small country, but a country of great options. A new labor code was approved a few months ago with the consensus of workers and the enterprise sector and the backing of the International Labor Organization. This code is a guarantee that stands behind the relations between employees and investors. In the social area, our objective is to create conditions to provide equal opportunity to all persons. To this end, we are implementing programs to provide social support for human enhancement, to allow the most dispossessed to join the productive labor force in the short term. At the same time, we are immersed in profound reforms in the areas of health and education, which are the primary sources for investing in people and moving toward human development.

The reforms we are undertaking, together with increased budgetary allocations for health and education, are expected to yield fruit in the medium term. Our emphasis is on primary health care and preschool and primary education. Our objective as a country is to drastically reduce infant mortality, extend quality education to the entire country, and bring illiteracy down to a minimum by the year 2000. Moreover, we are developing programs in the areas of housing, water and sewers, social welfare, support to women and families, and environmental protection. In this way, the peace all of us Salvadorans are building is enabling us to recover a large part of what was lost during the 1980s. We, as a country, are making great efforts to increase revenue by improving tax administration. We are using fiscal policy to fight firmly the culture of tax evasion and tax fraud, because the progress of our country must be based on our own effort.

Nevertheless, the task of reconstruction and the demands of the peace agreements are enormous. These demands were widely supported by the international community, which offered its help and raised great expectations. Some of these offers have been received and brought great benefits, for which we are deeply thankful. But others remain pending. We are experiencing difficulties as a Government, because the hopes of a people cannot be frustrated. The process of peace in our country has been pointed out as an example by the United Nations, but the international aid already offered is needed for its consolidation. We hope that time will not completely erase these offers, so that we can fully meet the commitments of peace, which are the foundations of a lasting social peace.

El Salvador is a rapidly changing country. Our economic and social programs have the backing of the World Bank, the International Monetary Fund, and other international institutions. We look confidently toward the twenty-first century, and we are open to foreign investment, which is called upon, together with domestic investment, to be the driving force of progress of an El Salvador in peace.

Statement by the Governor of the Fund for Moldova—Leonid Talmaci

Moldova is now at a crucial juncture of its economic reform with successful macroeconomic stabilization in hand and with structural adjustment under way. In November 1993, Moldova introduced its own currency (the Moldovan leu) and since then has been following a tight monetary and credit policy supported by an IMF stand-by arrangement. Under the program, the overall fiscal deficit declined from 23 percent of GDP in 1992 to 8 percent for the first part of 1994 and will be about 5 percent for the whole year. In response to implementing scrupulously and with some pain and hardship the above-mentioned reforms, inflation fell from a monthly average of 20.5 percent in 1993 to 3.4 percent in the second quarter of 1994 and about zero in August. The exchange rate for the leu in this period remained very stable, at about 4 lei to the dollar. Nominal average interest rates set at refinancing auctions have, of course, also decreased from a peak of 377 percent in March to 65 percent in September, being at all times positive in real terms.

We have fought hard and we have reached these achievements in macroeconomic stabilization, even if the external financing taken into account in the design of the stabilization program (almost one year ago) did not come as scheduled at the beginning of the program, from neither the European Union, nor the Japanese Export-Import Bank. We hope that disbursements we will start soon. We think that it is extremely important that, in the future, commitments for external financing of a tough macroeconomic stabilization program be made by donors within realistic time frames. However, we are fully aware that our stabilization, as successful as it looks today, is still fragile and will prove unsustainable in the future unless we start addressing firmly and immediately the problems of the real sector and its structural adjustment to market conditions in a competitive environment that also enforces financial discipline on enterprises.

To this end, privatization is the cornerstone. The structural adjustment is supported by a World Bank rehabilitation loan, cofinanced by the European Union and the Government of Japan, and a World Bank structural adjustment loan to be negotiated soon. I hope that you will not consider that I lack modesty if I say that in mass privatization (as in macrostabilization) “little” Moldova is also a front-runner among the countries of the former Soviet Union. In March 1993, the Moldovan Parliament approved the mass privatization program for 1993-94 under which the population uses patrimonial bonds (vouchers) to buy public assets at auction. In the fall of 1993, Moldova started the privatization of unfinished construction sites and small economic units, and in June 1994, started the privatization of medium-sized and large enterprises. Since then, we have privatized forty-five mediumsized enterprises through auction. We have built a sound infrastructure for our mass privatization program with all the main pillars in place: investment funds, trust companies, citizens’ associations, and a national auction system with fifty-five centers throughout the country. With this infrastructure we hope to achieve substantial progress in the finalization of the 1993-94 privatization program (which comprises 1,000 medium-sized and large enterprises and 555 small units) until the end of the year. Both the World Bank and the U.S. Agency for International Development gave us valuable assistance in the design and implementation of mass privatization.

The Republic of Moldova liberalized completely prices and foreign trade. At present there are no quantitative or qualitative restrictions on exports; import tariffs were decreased and soon they will not exceed an average of 20 percent. It goes without saying that we expect an evenhanded commitment from industrial countries to open their markets for our products. It is also important to mention that the Government of the Republic of Moldova is implementing these economic reforms at a time when harsh natural disasters have struck us. We were faced this year with the most severe drought in the last hundred years, as well as floods and hurricanes that caused destruction amounting to approximately $400 million (or the equivalent of one annual budget of the country). In spite of these natural disasters, we are concentrating now on deepening our economic reform, including the approval by Parliament in November of a new privatization program for 1995-96, strengthening enterprise financial discipline, and creating sound financial intermediaries.

Nevertheless, we think that in our transition to a market economy we still have systemic issues that have not yet been properly addressed, and we would very much appreciate IMF and World Bank support in these areas. Two of the most important tasks are building up a rural finance system in Moldova and addressing urgently the lack of working capital at the enterprise level. The Government of Moldova is firmly and fully committed to continuing economic reforms, which we are confident will bring prosperity to the country, if implemented with the proper sequencing and timing.

Statement by the Governor of the Bank for the Lao People’s Democratic Republic—Khamxay Souphanouvong

The delegation of the Lao People’s Democratic Republic is pleased and very honored to attend the Forty-Ninth Annual Meetings of the International Monetary Fund and the World Bank Group. On behalf of the Government of the Lao People’s Democratic Republic (PDR), we wish to convey warm greetings to the Chairman of these meetings, to the President of the World Bank Group, to the Managing Director of the Fund, and to the Governors and delegates of all member countries. We join fellow Governors in welcoming new members of the two institutions. On this occasion, we would also like to thank the host country for its warm hospitality.

The 1994 Annual Meetings are being held at a time when the current global economic situation slowly gives opportunities to development cooperation, particularly after the successfully concluded Uruguay Round in December 1993. Regional economic integration and trade barriers tend to develop, with adverse effects on the economic renewal of developing countries. Though the economic situation has improved as well as growth in some regions, poverty still remains a problem affecting living conditions and the environment. Our country, Lao PDR, is among the world’s least-developed countries; thus for bare survival, our natural resources are being squandered. In order to solve this problem, more funds are required not only for the purpose of economic development but also for social development and the preservation of the environment. Therefore, as a member of the World Bank, the Government of the Lao PDR supports the increasing of the eleventh replenishment of IDA, and we also urge all donor and member countries to continue their contribution effort to reach the total amount approved in March 1993.

Furthermore, we support the objectives of the World Bank, especially in the areas of poverty alleviation, human resource development, and sustainable natural resource development and environmental preservation. In social and economic development to the year 2000, our Government has first of all enforced development of investment in hydropower, as this is our country’s largest potential source of electricity in the region. At the same time, infrastructure investment needs will be met, such as roads linking countries in the region to enhance trade cooperation. Moreover, our Government will focus on investment in agro-forestry processing in order to exploit natural resources efficiently. Another important concern of our Government is the preservation of the environment, especially the tropical forest, which might have a positive effect on the preservation of wealth of the lower Mekong River basin. Our Government also pays attention to human resource development and social programs to improve the living conditions of the people.

The continued assistance of the World Bank and the Fund constitutes a significant source of funds for our country, and has contributed actively to development and economic reform in the Lao PDR. The implementation of structural and adjustment programs has contributed to the preliminary success of economic reform in our country. The economic situation has been stable and has been maintained at a good level. In 1994, economic growth is 7.6 percent. The inflation rate averages 7 percent, down from the previous year. Foreign exchange rates remain stable and the deficit in the balance of payments was also maintained in a good position, owing to capital flows from external sources for investment in various sectors. Macroeconomic stability depends not only on economic reform, but is also a function of the external environment, such as a favorable world economic climate, external financial support, and the expansion of external trade. We, therefore, call on industrial countries to provide flexible policy on trade toward developing countries and to continue to increase their financial support.

Our Government sincerely thanks all countries, international organizations, nongovernmental organizations, and international financial institutions, including the World Bank and the International Monetary Fund, for their continued and increased assistance in the financing of $779.2 million for project implementation in the Lao PDR, for the period 1994-97, in accordance with its social-economic development program until the year 2000. This program of our Government has recently been presented at a roundtable meeting in Geneva on June 21, 1994 by Deputy Prime Minister Khamphoui Keoboualapha. In line with the consistent policy of expanding foreign economic relations, we believe that international financial institutions, international organizations, nongovernmental organizations, and donor countries should continue to increase their cooperation by providing grant funds, concessional loans, and technical assistance and by promoting private foreign investment in the Lao PDR and creating trade opportunities for our country.

The Lao PDR Government realizes that both the IMF and the World Bank should continue to serve as consultants and funding agencies for further development. Therefore, we support the statements of the Managing Director of the IMF on the occasion of the Annual Meetings of the Board of Governors on October 4-6, 1994. Our delegation wishes this meeting every success.

Statement by the Governor of the Fund for Iraq—Ahmed Hussein

Hammurabi, the Iraqi Babylonian King, in the introduction to his famous Code, said the following: “In my country I spread justice and propriety; to secure prosperity to my people I embraced the people of Sumer and Akad, and protected them with my mind to prevent the strong from exploiting the weak, to restore justice to the oppressed I engraved these valuable words on my stele.” Ancient Iraqis, as you can know, were the first to lay down the principles of justice and the first to issue laws and jurisdictions.

* * *

Mr. Chairman, I begin my statement by congratulating you on your election as Chairman of the 1994 Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank Group. I am pleased to attend these meetings for the first time, and I am happy that they are being held in Madrid, a city rich in heritage and history, where I had the honor to serve my country as Ambassador some years ago. I also wish to avail myself of this opportunity to join my colleagues in expressing our appreciation and gratitude for the excellent arrangements made by the Spanish authorities in hosting this year’s Annual Meetings.

Two years ago, and during the Annual Meetings, the Iraqi delegation stated that one of the most important objectives of the IMF, as set forth in its Articles of Agreement, is to eliminate barriers to trade and international settlements. Today, I repeat what was stated then and add that the Fund, since the historic Bretton Woods Conference, has continued to emphasize the importance of free world trade to economic stability and prosperity. No time is more suitable than today to highlight this principle when we are commemorating the fiftieth anniversary of the Bretton Woods institutions. And no time is more suitable than today to stand and announce that the continued economic blockade and freezing of the foreign assets of Iraq are in conflict with the Fund’s Articles of Agreement and run counter to its philosophy. Iraq attended the Bretton Woods Conference and is, therefore, one of the founding members of the IMF. This gives me the right to demand that the Fund raise its voice in opposition to the continued economic blockade imposed on Iraq and the freezing of its foreign assets, based on the fact that both actions conflict with the Fund’s objectives. The continued economic blockade and freezing of Iraq’s assets for four years have caused severe and unprecedented suffering for the Iraqi people. Below, I briefly state the impact of the blockade on the main sectors in Iraq.

If we consider the health sector, the most recent health statistics indicate that there were 384,022 deaths among different age groups during the period August 1990-March 1994, compared with 28,334 deaths in 1989. Some contagious diseases, which Iraq succeeded in eradicating, are now widespread among children, in particular poliomyelitis and cholera. There was a sharp increase in cases of typhoid, measles, hepatitis, tetanus, and malaria. Hospitals and medical stores suffer greatly from the lack of life-sustaining drugs for the treatment of certain cardiovascular, metabolic, and endocrine diseases. This has been made worse by the lack of intravenous replacement fluids and transfusion instruments. As for food items that are consumed by the ordinary citizen, prices have jumped as a result of the discontinuation of Iraqi imports and the freezing of its assets in foreign banks. Average family expenditure on food has sharply increased since the blockade so that the inflation rate for prices of food items has reached 4,231 percent; for meat, fish, and eggs, 2,933 percent; for vegetables, 1,463 percent; and for fruit, 1,115 percent.

As for the environment, the continuation of the unjust blockade has led to the reduction in the operating capacity of the water purification system, and sewage pumping stations have ceased to operate for lack of spare parts. Drinking water is now 9 million cubic meters a month compared with 45 million cubic meters a month in mid-1990. This has led to the reduction in the average citizen’s daily share of pure water to 128 liters compared with 320 liters prior to August 1990. The economic blockade has adversely affected all other economic sectors, notably industry, services, transportation, and communications because of the inability to import spare parts.

In spite of what we have stated above—and in spite of the sincere cooperation and relentless efforts exerted by Iraq to comply with all the resolutions of the UN Security Council, and in spite of favorable reports of the committee headed by Ambassador Ralf Ekaeus about the good cooperation of the Iraqi authorities, I wish to point out that some states (two only), driven by political motives, insist on the continuation of the sanctions that are actually starving the Iraqi people. These political motives have lately led to the blocking of wheat and rice exports to Iraq, through the use of voting power in the Sanctions Committee, at a time when all the relevant UN Security Council resolutions permitted transactions related to goods, medicines, and other goods and services for humanitarian needs. The suffering of the Iraqi people calls upon the world community, out of purely humanitarian considerations, to speak up in order to redress a deteriorating situation that could lead to a major human disaster unless urgent and swift measures are taken. The first step in this direction is the lifting of the economic blockade and the release of our frozen assets, now that Iraq has fulfilled its obligations under the Security Council resolutions.

Conditions in Iraq are as we stated, and the suffering of the Iraqi people as we described—the people who contributed to building one of the greatest civilizations on earth and the people who in ancient times enriched human heritage with wisdom, philosophy, science, and art. Three thousand years ago, Iraqis under Sumer invented writing, laid down the first principles of city states, and created masterpieces in architecture and sculpture. They were followed by the Acadians, the Babylonians, and the Assyrians in giving the world more science, art, and wisdom that influenced later civilizations greatly, in particular the Greek and Roman. The Hammurabi Code, issued by the Babylonian King who ruled from 1793 to 1751 B.C., is considered the first package of laws known to mankind to regulate society and which preceded the laws of Justinian by almost 2,000 years. From this international forum we emphasize once again that, in accordance with the Articles of Agreement, the International Monetary Fund and the World Bank should call for an end to the economic blockade and demand the release of Iraqi assets in order to put an end to the suffering of an entire people.

Statement by the Governor of the Bank for Fiji—Berenado Vuniobobo

It is an honor to attend the Forty-Ninth Joint Annual Meetings of the International Monetary Fund and the World Bank Group on this historic occasion of the fiftieth birthday of the two Bretton Woods institutions. I should like to take the opportunity on behalf of the delegation from the Republic of Fiji to sincerely thank the Government and the people of Spain for their warm reception and the excellent arrangements. I would also like to join with other Governors in welcoming the new member—Eritrea—of the Fund and the Bank. The better-than-expected world economic outlook has been eloquently analyzed by fellow Governors and in staff documents. We would just like to stress that member countries should avoid the unrestricted fiscal expansion of previous recoveries that led to an explosive debt situation. At the same time, we should, through preemptive financial policies, exploit the opportunity to sustain this growth momentum without inflaming inflation, keeping in mind that the ultimate target remains the reduction in world poverty.

After protracted and difficult negotiations, the successful end to the new Uruguay Round has injected unprecedented potential into this brighter global outlook. The large number of developing countries that participated in the negotiations denoted their genuine efforts to liberalize their domestic trade and exchange arrangements. The major advantage of this new trade order under the leadership of the World Trade Organization (WTO) lies in the strengthening of rules with respect to safeguards, antidumping, and countervailing measures. We, therefore, call for the timely conclusion of the ratification process of the Uruguay Round agreement. But we should keep in mind that the realization of the treaty’s potential will be undermined and even endangered if nontrade issues, such as labor standards and environmental factors, are used as pretexts for nontariff protection. While the potential advantages of the Uruguay Round for the global economy are clear, the Round’s impact on individual developing countries is varied. Under the new agreement, tariff cuts for agricultural commodities and fish will not only be small, they will also be heavily backloaded, while many manufactured products, such as textiles and clothing, will still be subject to tariff peaks. These will result in two things. First, net food importers like Fiji will face higher world prices. Second, the loss in preferential treatment may not be fully offset by new access to the markets of industrial countries.

What can the Bank and the Fund do to alleviate the adverse impact of the Round on individual member countries? The Fund could consider a quick-disbursing facility to help countries overcome these exogenous developments and help set the stage for the necessary medium-term adjustments. Simultaneously, the Bank could respond through its concessional lending window, and the participation of the International Finance Corporation (IFC) could facilitate and quicken private market responses. Coordination and cooperation between the Bretton Woods institutions and the WTO will be equally critical in ameliorating the adverse impact of the Round and in implementing reforms that are needed to exploit the Round’s potential benefits. This moves me to highlight the special needs of the island economies in the South Pacific including Fiji. Although a few of us are classified as middle-income for Fund and Bank purposes, the countries in the region are small in size, both geographically and economically. The people’s livelihood is closely linked to agriculture, which constantly suffers from hurricanes and droughts. Unfortunately, some of us are not eligible for the Fund’s enhanced structural adjustment facility or for credits from the International Development Association. Sometimes, one cannot avoid the perception that our interests are peripheral in the quest to solve the problems of the larger membership even though we are normally the first ones to feel the side effects of world developments.

It is perhaps time to pose the question: What is the appropriate role of the Bretton Woods institutions in the development of the South Pacific island countries? We have read with interest the Bank’s review of its operations in the region, and a similar study by the IMF on appropriate policies will be useful, particularly considering the implications of the establishment of the WTO and the European Union. In our view, our borrowing needs, by world standards, will remain modest and will be mainly for financing the construction of our infrastructure, although we welcome the Bank’s stronger involvement in human resource development. However, the bulk of our needs will continue to be for policy advice and technical assistance, and we are grateful to the Fund and the Bank for their past and ongoing programs. Fiji is glad to host the Financial Technical Assistance Center, and we hope that this can become a permanent feature of the Fund’s assistance to the region. We continue to see many opportunities for IFC’s South Pacific Project Facility in Sydney to become more visible to private entrepreneurs in the islands. For Fiji, privatization and the development of the financial sector and overall policy guidelines are some of the areas where future assistance of the Bank and the Fund will be invaluable. We urge the Bretton Woods institutions not to cut back the expanding role of their technical assistance programs and to avoid the imposition of fees, at least on those that cannot afford to pay. We must also warn of the danger of treating all South Pacific island countries with the same generalities, as there are critical differences in such areas as industries, institutions, and market sophistication. Economic policy advice and programs, including their implementation and sequencing, must, therefore, be country specific.

The South Pacific island countries are extremely vulnerable to export variability arising from supply disruptions and, being a price taker, from adverse movements in the terms of trade. We are, therefore, encouraged by the increase in commodity prices after many years of depression. These increases can be sustained if the economic recovery is maintained, markets are kept open, and no trade distortions are introduced. Volatility in exchange rates is another destabilizing factor, and this is at the core of the current discussion on the Fund’s role and the evolution of the international monetary system. On the latter, we are still not convinced of the feasibility of instituting another pegged exchange rate system. However, we believe that the Fund should strengthen its exchange rate surveillance of the major currencies under the existing flexible arrangement. Through consultations, dialogues, and information sharing, the Fund should pick up the early warning signs of currency misalignments and initiate the necessary corrective action. We agree with the Managing Director that the Interim Committee can be the principal forum for exchange rate surveillance and closer coordination of economic policies.

Fiji is among many countries in the South Pacific that are undertaking structural reforms designed to facilitate export-led growth, where the private sector is the driving force of the economy. These adjustments are not easy, nor are they painless. However, these small island countries, despite limited resource endowments, continue to persevere and, at the same time, honor all their international obligations. They, therefore, deserve the active support of the international community, including the Fund and the Bank. Thus, we call on the two institutions to be innovative in generating flexible solutions to the rather special situations of small island countries in the South Pacific.

Let me conclude by commenting on the SDR issue. In our view, there is a clear case for a new SDR allocation to supplement global liquidity. We also agree with the need to address the equity issue for those members that have not participated in past allocations of SDRs. We would, therefore, like to reiterate our support for the package proposed by the Managing Director of the Fund, which includes both a general and a special allocation of SDRs. A general SDR allocation under the present Articles, in conjunction with increased access to Fund facilities and the extension of the systemic transformation facility, can immediately meet the urgent reserve needs of member countries, particularly those of the countries of the former Soviet Union. However, it may be difficult to secure the required international support for the other ingredients of the Managing Director’s package if there is no consensus on a general allocation of SDRs.

Statement by the Governor of the Bank for Malta—John Dalli

It is certainly an honor for me to address the Annual Meetings of the International Monetary Fund and the World Bank. On behalf of my delegation, I would like to thank the Spanish authorities for their warm hospitality and the excellent arrangements. I would also like to join my colleagues in extending a cordial welcome to Eritrea as a new member of the Bretton Woods institutions. In contrast to recent years, which were characterized by low levels of global economic growth, the international economic outlook today is much more positive as the industrial countries begin to experience relatively high levels of growth. The latest projections in fact indicate that growth will be even higher than originally anticipated and should persist in coming years. IMF forecasts of world output show that overall growth will exceed 3.0 percent in 1994 and 3.5 percent in 1995, both considerably stronger rates than the levels registered in 1992 and 1993.

This augurs well for the developing countries, which as a group have continued to record an impressive rate of growth in recent years. However, it remains a matter of concern that this growth is not evenly spread. Many countries—particularly those of sub-Saharan Africa—are still experiencing very low levels of growth in contrast to other regions, notably South and East Asia. Even in the case of the countries in transition, recovery appears to be patchy, with positive growth in Central and Eastern Europe accompanied by continuing negative growth in the countries of the former Soviet Union. There is no doubt that for the poorest countries there will be a continuing need for bilateral and multilateral concessional assistance to provide support for the development of resources. I am pleased to say that, despite its limited resources, our country provides some financial assistance to low-income countries through its contribution to the IMF’s enhanced structural adjustment facility (ESAF). Early this year, in fact, Malta immediately responded to the request of the Managing Director of the IMF by making a second contribution to the ESAF successor.

The more optimistic outlook for the world economy is to a large extent strengthened by the expected growth in world trade as a result of the successful conclusion of the Uruguay Round. All countries stand to benefit from a more open trading system in goods and services. It is hoped that the ratification of the agreement by member countries of the General Agreement on Tariffs and Trade (GATT) will proceed at a rapid pace to reduce as much as possible any relapse into protectionism. Malta fully supports the GATT agreements and is one of the signatories to the Marrakech Treaty. It also supports the establishment of the World Trade Organization, which, in coordination with other international financial institutions, should play an effective role in ensuring that international trade is conducted in the spirit of the new GATT agreement.

The future role of the Bretton Wood institutions is certainly an issue that concerns us all. The fiftieth anniversary of the setting-up of these institutions may appear a fitting occasion to reflect on their effectiveness and achievements throughout this period. It also presents us with an opportunity to carefully consider how—in a much-changed world from that of the immediate postwar period—the technical and financial resources of these institutions could best be applied to the economic needs of the global community. The report prepared by the Bretton Woods Commission makes constructive recommendations in this regard. On our part, we do believe that certain systemic reforms of these institutions should be undertaken to enable them to face the challenges of the future. While their authority and influence should be enhanced, there may be a need for a review of representation at the decision-making level to ensure the active participation of emerging industrial nations. In the case of the Fund, its role in promoting international cooperation and stable exchange markets should be strengthened, possibly by enhancing its powers to coordinate the macroeconomic polices of the major industrial countries. The role of the World Bank, on the other hand, should also be broadened in matters related to aid coordination and possibly global environmental issues.

We feel that, notwithstanding the problems that have affected the world economy since the breakdown of the fixed exchange system in the early 1970s, the Bretton Woods institutions have been a positive force in maintaining orderly conditions in the international monetary system, while at the same time supporting long-term economic development. While, as I have just stated, we favor institutional reform, we do not advocate any amalgamation of the two institutions since we recognize that they have different roles to fulfill, which complement one another. In reviewing the role of the Bank, we note with satisfaction that while the institution continues to vigorously pursue operations that are aimed at alleviating poverty in many low-income countries, lending to these countries—quite appropriately—is being channeled to human resource development, especially education, health, and nutrition projects. We support such efforts, even though Malta is not eligible for World Bank assistance given the level of its per capita income.

We also support the Bank’s activities in the field of private sector development. In this regard we note with interest the emphasis that is being placed by the International Finance Corporation (IFC) on the implementation of financial sector restructuring programs in many developing countries, particularly those of Central and Eastern Europe. This is a sector of our economy that is undergoing rapid change both at an institutional level and also within the legislative framework. The reforms are aimed at turning Malta into a modern financial center that will provide services to the international business community. Consequently, over the past year we have passed through Parliament important pieces of legislation related to banking, financial services, and the fiscal regime. A notable development in the taxation field will be the introduction of a value-added tax from the beginning of next year. We are also stepping up the pace of privatization with the sale of a number of state-owned enterprises. It is our intention to continue to reduce the role of the state in economic activities, particularly in areas that could best be undertaken by the private sector. Government involvement in the economy is now limited to certain regulatory functions—maintaining a sound capital infrastructure and supplying those basic social services that ensure an adequate standard of living for all of its citizens.

As far as IMF issues are concerned, it is satisfying to note that the Fund’s financial resources appear to be adequate and so in all probability no increase in quotas will be recommended by the committee responsible for the Tenth General Review. However, there is the possibility that, given the substantial requirements of the economies in transition, which are undertaking far-reaching reforms, such resources could be easily depleted, hence causing a crowding-out problem for other developing countries in need of financial assistance. It is important to highlight this matter, although I am sure that the management of the Fund is monitoring the situation closely. For small countries such as Malta, an issue that may be of direct concern is a possible erosion of voting strength, as methods of quota calculation are expected to be revised in the subsequent quota review. On the positive side, there appears to be growing support for an SDR allocation that should supplement the level of international reserves in line with the expected growth in international trade. Malta has always registered its support for such an allocation and hopes that, apart from a special allocation to new members as proposed by many industrial countries, a generalized allocation of adequate size will also be made.

On the issue of more open trade and exchange systems we are aware of the Fund’s efforts in recent years to encourage member countries to accept the obligations of Article VIII. Over the last two years, in fact, more than fifteen countries moved to Article VIII status. I am hoping that by the end of this year Malta too will have moved from the transitional arrangements under Article XIV to acceptance of Article VIII. In the next three years we hope to move even further down the road of exchange control liberalization by removing all major capital controls. In this regard I would certainly support the suggestion by the Managing Director of the Fund that a short-term facility be set up by the Fund to provide financial assistance to member countries, which, though pursuing prudent macroeconomic policies, experience destabilizing speculative pressures following the removal of capital controls. This would certainly encourage members to implement and maintain sound policies in the face of a negative response from international speculators.

I would like to conclude by focusing briefly on Malta’s relations with the Bank and the Fund. Given its level of development and its relatively strong balance of payments position, Malta does not receive any financial assistance from the Bretton Woods institutions. We are, however, grateful for the technical assistance that we do receive from these institutions and also for their helpful advice on matters of mutual concern. I would like to express my gratitude to all concerned, in particular the Directors and Alternates representing Malta on the respective Executive Boards.

October 5, 1994.

Address by Michel Camdessus before the Institute for International Economics, Washington, June 7, 1994.

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