Chapter

Discussion of Policy at Fifth Joint Session1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1994
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Statement by the Governor of the Fund for Croatia—Pero Jurkovic

It is my great pleasure and true privilege to be able to address the joint Annual Meetings of the International Monetary Fund and the World Bank Group in such a beautiful city as Madrid. First of all, I would like to congratulate you on the fiftieth anniversary of the successful work of the Bretton Woods institutions. It is a respectable time span in the work of any international organization.

In this period, both the IMF and the World Bank Group have managed to achieve most of the goals for which they were founded, such as promoting international monetary cooperation, stabilizing exchange rates, improving the multilateral payments system, assisting countries with balance-of-payments problems, providing long-term financing of economic development especially in poorer countries, and promoting economic and social progress.

We consider that Article IV consultations with the Fund have an important role in formulating macroeconomic policies in member countries. The Fund’s new emphasis on social policy, labor markets, and ecology deserves special attention. The same is true for the adoption of a multilateral payments system for current account transactions between member countries. Croatia has fulfilled all the requirements of Article VIII of the Fund’s Articles of Agreement and will soon be the ninety-fourth country to assume all the obligations under this Article.

The IMF and the World Bank Group, as universal institutions, have helped in the achievement of stable economic growth in their member countries. Their role and support in the process of market reforms in transitional economies are of special importance. Accordingly, Croatia advocates the growth-oriented adjustment approach of the IMF. Structural adjustment necessarily implies further cooperation between these two institutions.

It has to be pointed out that adopting the cooperative medium-term strategy formulated by the Interim Committee of the Fund in April 1994 is of great importance to us. Within this framework we would like to place particular emphasis on the recommendation that strong transformation policies deserve adequate financial support.

These institutions’ technical assistance is vital for countries engaged in comprehensive reforms. Croatia has the privilege to receive technical assistance in the fiscal and monetary areas, the payments system, bank rehabilitation, and national accounts statistics.

Where does Croatia stand right now? We can conclude with pride that in three years of independence a lot has been achieved. The Government has adopted a comprehensive stabilization and reform program, which is projected to proceed in three overlapping phases. The first one aims at achieving rapid disinflation. The second phase comprises structural changes in the economy, including the speeding-up of the privatization process, the demonopolization of the economy, the restructuring of loss-making industries such as shipbuilding, and the rehabilitation of the banking sector. The last phase should encompass the building of sound foundations for the reconstruction of the Croatian economy and the start on the path of sustained economic growth.

Rapid disinflation relied mostly on the following (in addition to reducing inflationary expectations): restrictive monetary policy; restrictive fiscal policy; and incomes policy and structural measures (such as introducing internal convertibility of the domestic currency and lifting previously numerous foreign exchange controls). This was conceived as a heterodox type of anti-inflationary policy (or “shock program”). From November 1993 to the end of August 1994, Croatia experienced deflation of 3 percent measured in consumer prices (cumulatively) and 12 percent in industrial producer prices, indicating that the first phase has been very successful. Fiscal reform and restrictive incomes policies (“deindexation schemes”) helped to achieve rapid disinflation.

Up to now the costs of stabilization have been low. Unemployment has remained stable, industrial production is now affected by disinflation, exchange rate changes have not had a significant effect on foreign trade, and the number of bankruptcies has not increased significantly. The main negative effects of the stabilization program are high real interest rates and a rapid increase in interenterprise arrears, which are still manageable and amount to about 30 percent of nominal monthly GDP.

The Croatian central bank—National Bank of Croatia (NBC)—was instrumental in achieving changes in monetary policy. The central bank has a high degree of legal autonomy and a clear mandate to maintain the stability of the currency. Its policy is coordinated with the Government but is not subordinate to it.

Since monetary independence, the main changes in monetary policy are the following. First, at the beginning of 1992, the refinancing window for commercial banks was limited. At the beginning of 1993, the selective refinancing credits were completely phased out and general refinancing quotas (the refinancing facility not earmarked for selective purposes) to commercial banks were slowly phased out and formally abolished by the end of July 1994. Second, domestic credit from the NBC to the Central Government was legally restricted to 5 percent of budgetary revenues.

Thus, the Government can take only short-term (so-called bridging) loans that have to be repaid by the end of the fiscal year. Third, financial discipline of commercial banks has been increased. Fourth, the NBC is engaged in developing financial markets and it has introduced new securities, the so-called NBC bills. Their main aim is to achieve sterilized intervention in the foreign exchange markets. Over several months, the amount of NBC bills outstanding has increased from zero to 8 percent of the money supply. Fifth, during the past two years, NBC interventions in the foreign exchange markets were the main instrument of monetary base creation. Throughout 1992 and 1993, one of the strategic aims of monetary policy was the building-up of international reserves. At the end of August 1994, gross international reserves reached about $1,100 million (compared with zero at the end of 1991). Sixth, to alleviate monthly variations in commercial banks’ liquidity, repurchase agreements (foreign exchange swaps) were introduced in the spring of 1994. Seventh, at the end of September 1994, inherited automatic credit facilities for the daily liquidity management of commercial banks at the NBC were abolished.

The overall fiscal system has been profoundly transformed as well. At the beginning of 1994, new income and profit taxes were introduced. The profit tax rate is 25 percent, and the regular income tax rate is 25 percent with the highest marginal rate of 35 percent. It is envisaged that a value-added tax will be introduced in 1996. In general, the tax base has been broadened and tax rates simplified and lowered to increase the allocational neutrality of the tax system. Much more emphasis is being placed on control of tax payments. Central budget revenues for 1994 are estimated at about 27 percent of GDP, and the deficit for that year should not exceed 0.3 percent of GDP. It is envisaged that the Parliament will pass an integral budget law by the end of 1994. The Government will introduce the single treasury account system by March 1995.

In addition to numerous domestic reforms, a stand-by arrangement and an arrangement under the systemic transformation facility with the Fund and the adoption of a financing assurances principle will enable Croatia to normalize its relations with all foreign creditors. This is especially true for bilateral creditors within the Paris Club. Croatia has already asked for a meeting to consider a request for Paris Club rescheduling. The normalization of relations with all foreign creditors will create an environment for greater financial support of a comprehensive program of structural adjustment in Croatia. The already approved emergency loan from the World Bank in the amount of $128 million and a $22 million loan from the European Bank for Reconstruction and Development are clear signals that other international institutions will be more engaged in Croatia in the near future.

With all these developments in mind, it is expected that inflation in 1995 will be no more than 3–5 percent. But additional steps must be taken to ensure the sustainability of present reforms and to lay a stable foundation for speedier economic growth. However, without growth and an increase in the living standard of the population, there will be no increase in welfare, and reforms could collapse. Further changes, aimed at altering the behavior in the economy by imposing hard budget constraints and optimizing resource allocation, especially in large loss-making still state-controlled enterprises, are urgent. To achieve this, we have already organized an efficient payments system and are applying modern accounting principles. Bank rehabilitation within the framework of the future World Bank financial sector adjustment loan, and the widening and deepening of financial markets, through, for example, the introduction of marketable government securities, will be speeded up.

Finally, I can assure you that Croatia will never give up carrying out strong comprehensive reforms on its way to a viable, market-oriented, democratic, and open economy.

Statement by the Governor of the Bank for Cambodia—Sam Rainsy

It is a great pleasure and an honor for me to speak on behalf of the Cambodian delegation at the Forty-Ninth Annual Meetings of the International Monetary Fund and the World Bank, here in Madrid. A year ago in Washington, we spoke about Cambodia’s return to the international arena after a lengthy absence. We have had a year of significant political and economic achievement. Cambodia became a constitutional monarchy and our elected National Assembly created the Royal Government of Cambodia. This was also a year in which the world economy performed more strongly. East Asia again grew faster than the world average.

With the increased prospect of growth, many countries are more watchful of inflationary pressures. A number of countries have already raised interest rates and they are, therefore, likely to rise further. However, for debtor countries struggling to keep budget deficits under control, the news is not as good. Incidentally, Spain’s Minister of Economy and Finance, Mr. Pedro Solbes, reported that his Government’s draft budget for 1995 is both rigorous and austere with spending only slightly above the inflation forecast.

In 1993, despite the uncertainties that had surrounded the run-up to the election, Cambodia’s economy grew by 5.7 percent. A donor support group headed by Japan and France cleared our arrears to the Fund, and in October 1993 Cambodia was able to borrow from the Fund under the systemic transformation facility.

In May of this year the IMF Executive Board approved an enhanced structural adjustment facility (ESAF) loan of SDR 84 million after the Board of Governors approved an ad hoc quota increase in March. The International Development Association (IDA) granted an important emergency rehabilitation credit and we are expecting more World Bank assistance in 1995. Total donor commitments exceed $1 billion.

The rate of disbursement has been uneven and slow. There were some problems with our absorptive capacity but also problems with the donor countries’ ability to convert pledges into actual disbursements. We prefer aid mechanisms that provide cash or that convert commodity aid into immediate cash for budget support. We commend the IDA method, which releases cash against documentary evidence of imports. In order to merit the assistance of the international community, we have to put our own house in order. We shall continue to implement the necessary economic and fiscal reforms to finally eliminate our present reliance on external budgetary support. In the long run, budget support is contrary to sound economic and financial policies. We shall try to abide by the international standards of good governance, namely, transparency, accountability, and the rule of law.

Cambodia’s needs are pressing. An annual growth rate of 7–8 percent will not satisfy these needs for some time to come. Health, education, communication, water and power supply, and rural development remain high priorities. This year, Cambodia faces some uncertainties affecting investment and tourism that will keep output growth slightly below the projected 7–8 percent. There are additional pressures on prices after flood-related damage to the rice crop. The rainy season is not yet over and river levels have risen dramatically. In August 1994 the consumer price index stood 21 percent higher than in January 1994, although this was only 2 percent higher than the level in August 1993. Nevertheless, macroeconomic stability was strengthened in the first half of 1994 with a strong balance-of-payments performance and achievement of the bank financing target by a wide margin. We have increased the stability of the riel’s external value. The National Bank’s foreign exchange auction, which had its first anniversary a week ago, has certainly contributed to this more stable riel.

There is less uncertainty in the legal framework. The National Assembly enacted the Liberal Investment Law in August this year and the first sections of our commercial code are also about to be passed by the legislature. The 1994 Budget and Organic Law represented a major step forward. Government revenues have been centralized. There will be new laws to guarantee the central bank’s independence, as well as a liberal foreign exchange management law and an improved law for the supervision of the financial sector together with measures to combat money laundering.

I wish to seize this unique opportunity to address the issue of developing country debt. In August this year, representatives from twenty-six countries of the Nonaligned Movement met in Jakarta, Indonesia. They adopted the following principles as a contribution to solving the debt crisis:

  • a once-and-for-all debt settlement instead of a year-by-year arrangement.

  • a substantial reduction of debt instead of a rescheduling, as was agreed at the G-7 Summit in Naples.

  • a nondiscriminatory settlement, that is a settlement that covers all categories of debt—commercial, official, bilateral, and multilateral.

I thank the staff members of the Fund and the Bank who have worked with me and my colleagues in Cambodia to produce the Memorandum on Economic and Financial Policies that supported Cambodia’s ESAF loan request. Cambodia is interested in seeing a significant general SDR allocation. We hope that an acceptable solution will be found.

I welcome Eritrea as a new member of the Fund and the Bank. I congratulate the Government of Spain on the quality of the arrangements made for the delegates, on the excellence of this modern conference center, and on the warmth of the traditional reception from the Spanish people.

I conclude with the sincere good wishes of the Cambodian delegation for the success of these Annual Meetings under your wise stewardship. We hope that a continued revival in world economic growth will ensure sustained future growth for Cambodia and all other developing countries.

Statement by the Governor of the Bank for the Solomon Islands—Andrew G.H. Nori

I am greatly honored to have the opportunity of addressing the Forty-Ninth Annual Meetings of the Boards of Governors of the Fund and the Bank on behalf of the Western Pacific constituency.

Our constituency may be small in terms of both population and land area, but it is great in its diversity of geography and cultures and, perhaps most important, in the context of development prospects, in the extent and availability of natural resources for sustainable development.

For the island states of the Pacific, the achievement of sustainable development requires a fine balance between exploiting our limited resources to meet the ever-increasing demands of today against the need to protect our heritage and environment. At the same time, we need to secure the diversification and strengthening of our economies to provide for our future generations.

In making effective use of our marine and forest resources, collectively our two major resources, we are often at odds with international operators who have less concern for the longer term and who are not prepared to abide by agreements ensuring sustainable harvesting. In tackling these issues, many of us have benefited from support and assistance from both the Fund and the Bank in the formulation of adjustment programs and in devising measures to protect our environment and manage our resources in a sustainable manner.

There is now an urgent need for us to diversify our economies and to explore alternatives to the traditional primary commodities, which have, in the past, dominated our export sector. We must promote value-added processing of our national resources and encourage investment in new activities where we can demonstrate some comparative advantage. This challenge is not easy, but the successful conclusion of the General Agreement on Tariffs and Trade (GATT) has opened immense possibilities for these opportunities.

For those of us who are embarking on adjustment programs, the expansion of trade and the diversification of our economies will be critical to the success of the adjustment measures in strengthening our economies. Trade and economic diversification lead to more jobs and better utilization of human resources and act as a stimulus to further investment for growth.

In studying the Fund’s World Economic Outlook, I was encouraged that there is now a greater confidence that the end of the global recession has finally occurred. The end of the recession has been predicted for the past three years, but the signs of renewed growth are at last appearing. We must hope that this time the predictions are correct; however, it may indeed still be too early for overconfidence. In the last few months, interest rates have begun to rise again, and there has been concern at the prospect of renewed inflation.

The Bank’s regional economic surveys of the Pacific have highlighted the fact that the island nations have few comparative advantages. Their land areas are small and fragmented, and their populations are widely scattered. Moreover, transport and communications, both internal and external, are difficult and costly, and the countries themselves are located far from major markets. The island countries, which have very open economies and are highly dependent on external trade, are also especially vulnerable to international market fluctuations and the adverse climatic conditions that inflict damage on their economies. Therefore, macroeconomic management is easily affected by adverse exogenous factors that are often beyond their control.

We are also faced with difficult choices between, on the one hand, the exhortations of the international community to conserve our environment, our marine resources, and our tropical forests, and, on the other hand, our need to take advantage of our limited opportunities for greater utilization of our resources in order to bring employment and economic development to our people. The most critical of these are human resource development and the provision of infrastructure. These will obviously require considerable investments, which would have to come in part from the prudent and sustainable use of our resources.

In the Solomon Islands, for example, we have exploitable mineral deposits and possibly offshore oil. Investment in and development of these potentials have been constrained by international economics, the global recession, falling demand, and low international commodity prices. With the global economy now beginning to show signs of growth, there will be those in the industrial countries who will actively try to discourage us from developing these potentials because of the perceived environmental impact. In spite of the heavy dependence of our small island countries on external capital for investment, we recognize the importance of raising skills and savings levels to augment the use of such external resources and to continue to consolidate our efforts in this respect.

All of our fortunes are interlinked in the global economy. As small developing island states, we rely on, and indeed expect, that our larger industrial neighbors will create the proverbial level playing field so that we are able to take advantage of growth in world trade in a fair and unrestricted manner. For our own part, we are endeavoring to fine-tune our policies and strengthen our institutions in the area of trade, in spite of the many constraints that geography, population growth, and limited resource endowment have placed in our path to development. We appreciate all the assistance that has been provided by the Fund and the Bank as well as our many other development partners, both bilateral and multilateral. With your continued support, we can all expect to move forward positively in the coming years.

Indeed, as small island economies, we rely on and expect that our larger industrial neighbors should see the need to create conditions that will allow us to achieve those goals and to survive in what has now become a very competitive world.

Statement by the Governor of the Bank for Rwanda—Marc Rugenera

Allow me, on behalf of the Rwandese Government, to express my sincere thanks for the opportunity to address the international community today with a portrayal of the catastrophic experiences that our country has endured and an outline of the political, economic, and social options of the Government that has been in office since last July and is working to restore hope to our people.

For those of you who have not followed the recent course of events in Rwanda, this country was, from October 1990 to July of this year, the scene of an armed conflict whose toll in terms of human lives is estimated at close to 1 million innocent civilians, or 15 percent of the population. Half the surviving population left their property behind and took refuge in neighboring countries or sought safety in the camps for displaced persons set up in parts of the country where the fighting did not penetrate. This was very likely the worst human disaster of the modern world. The Government of National Union, installed on July 19, 1994, started work in impossible conditions. Extremist politicians from the old regime, unwilling to accept the establishment of the institutions whose creation was negotiated with difficulty at Arusha, plunged the country into a disaster of unprecedented proportions. Hundreds of thousands of innocent people have been massacred. The war has left in its wake a country that is both economically devastated and socially traumatized. Rwanda has never seen so many of its citizens widowed or mutilated, so many orphans, so many families torn apart.

Within this context, it is easy to understand the magnitude of the challenges facing Rwanda’s new government. The first challenge is a political one: to identify a scenario to help the Rwandese people achieve true national reconciliation following a war that has taken so many human lives. This political scenario should include the successful repatriation of all Rwandese refugees, as well as restoration of the property of all displaced persons. This will be a preliminary to the achievement of other major political objectives, such as building a society in which human rights are respected, establishing a safe and secure environment for citizens and their property, and promoting a system of government in which everyone is free to express his opinions and to develop as an individual.

The urgent actions envisaged by the Rwandese Government to achieve these objectives aim at restoring a safe and peaceful environment for the return of all displaced persons and refugees. However, it is a tragic fact that there are many obstacles in the way of their rapid return:

  • First, the refugees find themselves victims of threats and violence on the part of extremists, who take them hostage in order to maintain a certain base without which they would have no clout at all.

  • Second, there are the human reactions to the genocide that took place in our country; individual vengeance, for instance, is difficult to eradicate in the absence of an organized court system, which has also been decimated. The delay in establishing an international tribunal to punish the guilty and absolve the innocent does not encourage people to come back.

  • Third, the difficulties faced by the Government in reestablishing an effective central and local administrative structure that will guarantee the safety and security of individuals and of their property by restoring each person’s individual rights, primarily the right to private property.

  • And last, the rehabilitation of basic infrastructure facilities, such as water and electricity supply, communications, and markets, is essential if economic activity is to be restored to a level sufficient to motivate those who fear that if they return they will not be able to find work.

The Government cannot remove these obstacles without substantial support from the international community.

The second challenge facing the new Rwandese Government is an economic one: to reactivate a production apparatus whose factor shortages have been exacerbated by the impact of the war at all levels. The massacres perpetrated in Rwanda and the self-imposed exile of part of the surviving population have significantly reduced both the quality and quantity of available labor. Production facilities and economic infrastructures were largely destroyed by the war and the accompanying vandalism. The war economy has completely exhausted the country’s exchange reserves, and while the domestic financial system is not facing potential bankruptcy today, it will be hard-pressed to meet the financial requirements for a recovery of economic activity.

Despite this harsh reality, economic activities are gradually recovering in Rwanda, and certain industrialists are expressing a desire to get back into business. I am now pleased to give you the broad outlines of the economic strategy that the new Government of Rwanda intends to implement in order to encourage and boost this process of recovery.

In today’s context, more than in the past, our Government is committed to creating a macroeconomic environment that will rapidly reestablish confidence in the domestic and external private sector. Our action plan in this area comprises five priorities that we consider essential to ensure the program’s overall consistency:

  • First, the Government intends to reopen financial sector activities as a basis for a recovery of economic activity within the formal sector. In addition to the urgent need to remove the uncertainties concerning the levels to be assigned to the sector’s basic operating parameters, namely the exchange rate and the interest rate, the system needs a minimum injection of liquidity to enable it to get moving. Another of the Government’s major concerns is to reestablish the soundness of the financial sector. Measures to rehabilitate financial institutions on the brink of potential bankruptcy will be high on the list of our reconstruction priorities.

  • The second line of action of our economic program reflects the Government’s determination to build on the achievements made in the area of economic liberalization under our three-year-old structural adjustment program. We intend to continue along this path by removing all regulatory obstacles to liberalization of the goods, labor, and capital markets. The Government wishes to reiterate its resolve to implement the action program adopted in Kampala in July 1993 by countries agreeing to participate in the subregional initiative designed to promote cross-border trade, payments, and investment in eastern and southern Africa. We intend to renew our links in the coming days with the agencies cosponsoring that initiative with a view to making it a practical reality in Rwanda.

  • Third, as another plank in its policy of working for much broader economic liberalization, and to enable the private sector to play its role fully in this transformation process, the Government intends to expedite the divestiture of state-owned enterprises in the productive and commercial sectors. Thus, we do not intend to commit public resources to the rehabilitation of productive or commercial public enterprises that can be transferred readily to the private sector. The recently drafted general privatization strategy and action plan will be reviewed to factor in this new approach.

  • Fourth, the actions to be taken in the three preceding areas will certainly improve the employment situation in the private sector, but the extent of their contribution to Rwanda’s accelerated economic recovery will remain limited as long as the economic distortions linked to the large volume of arrears accumulated by the Treasury over the past few years are not cleared. This accumulation of arrears is the major symptom of Rwanda’s enormous budget deficit, which we consider one of the major economic problems that must be addressed without delay. The keystone of the Government’s strategy in this area is the adoption of budget expenditure controls, along with strengthening of tax administration to expedite the resumption of revenue collection. The Government is presently targeting two categories of expenditure: the civil service wage bill and military spending. Both of these represent major economic distortions that must be corrected over the next few years. This will involve redefining the mandates of the different ministerial departments, defining civil service jobs, and making significant cuts in the numbers of military personnel now that the war is over.

  • Fifth, to complement these actions, whose ultimate goal is to lay a foundation for viable economic growth over the medium and long term and a transparent regulatory framework for the private sector, the Government proposes to improve economic policy coordination among government agencies, in order to establish an effective framework for consultation with economic agents and avoid sometimes conflicting messages. The Government is also concerned to improve its coordination in the management of external aid. The allocation of external resources intended for technical cooperation and public investment in Rwanda is still extremely disorganized, and the Government’s priorities are often bypassed.

To remedy these deficiencies, the Government will soon be publishing guidelines for Rwandese authorities and donors, to ensure a minimum consensus in the allocation of development aid. The success of this reform, however, depends on the capacity of the Planning and Finance departments to monitor effectively the preparation of public expenditure programs to ensure that they reflect our national priorities. We have already pointed out the serious gaps in this area, and we have been in contact with some of our donors, who have expressed their willingness to provide technical support for the purpose. The first programming exercise to which our new coordination mechanism will shortly be applied is the ongoing review of the public investment program, designed to reallocate available resources to the immediate demands of economic recovery and to the medium-term priorities for national reconstruction. As part of this review, the sectoral priorities of the Government’s postwar action plan will be defined, to supplement the macroeconomic program whose broad outline I have just described.

The third challenge—and probably the hardest to confront, given the harshness of the problems now facing us—is the social crisis produced by the devastating human tragedy that recently befell Rwanda. Rwanda’s social problems were already extremely serious even before the war, but the bitter conflict we have experienced has only rendered the situation more precarious. The first dimension of this crisis is the new surge of refugees who recently left the country and the return of earlier refugees, for which we are ill prepared. Along with the serious social problems attendant upon any mass exodus of population, Rwanda is experiencing a situation in which a large segment of its work force is in exile, which is visibly hampering recovery in the various branches of the economy. This exodus of the country’s manpower is compounded by the widespread destruction of its social infrastructure and of the network of small and medium enterprises that formerly constituted its non-farm employment base.

In brief, the clear priorities for the country’s social rehabilitation program include rapid repatriation of nearly two million Rwandese who recently left for neighboring countries; organization of arrangements for the return of former refugees coming back to the country en masse; reactivation of agriculture; rebuilding of social infrastructure; and rehabilitation of the country’s small and medium enterprises, to deal with the clearly more serious unemployment situation.

The Government is aware that the traditional channels for state intervention are unsuited to the implementation of such a program at the pace and with the effectiveness desired. A new approach is called for, and we intend to promote social funds to be managed by non governmental organizations, which are better able to relate to the needs expressed by grass-roots communities.

This is the new Rwandese Government’s view of the country’s urgent needs and of the strategies to be formulated to meet those needs. However, rapid action on our priorities demands the deployment of human and financial resources that we sadly lack in this postwar period. We, therefore, appeal to the international community to help Rwanda regain its footing on the road to development and growth.

The aid we are seeking today takes many forms. First, there is the quest for humanitarian aid to provide continued succor to a population that has lost everything and will need months before it can get back on its feet. Allow me here to pay tribute to the international community for its splendid mobilization to allay the sufferings of the millions of Rwandese in abject despair in the refugee camps. Vast sums were mobilized under the banner of humanitarian assistance.

Our particular thanks go to the President and Executive Directors of the World Bank, who waived their rules in order to provide humanitarian organizations with $20 million to enable them to come to the aid of our people. And now our habitual cooperation programs have resumed in a spirit of flexibility, so that available resources can be reallocated to the salient priorities of the moment. To summarize the scale of our current priorities in the fewest words, the injection of a minimum of liquidity into the economy via balance-of-payments support seems essential to the launching of the recovery. Such balance-of-payments support would be paralleled by special lines of credit on particularly favorable terms to finance the urgent rebuilding of economic infrastructure, the refurbishing of enterprises damaged by the war, and the working capital requirements of such enterprises. In the social arena, we favor, as mentioned above, the financing of social funds to subsidize the needs of grass-roots communities for rehabilitation of social infrastructure and reactivation of rural production. Our needs are certainly immense, but we have to start somewhere.

Statement by the Governor of the Bank for Lesotho—M. P. Senaoana

My delegation is delighted to be in this historic and beautiful city of Madrid to attend these Annual Meetings of the International Monetary Fund and the World Bank Group, which also celebrate the fiftieth anniversary of their founding. In this context, I want to thank the Government and people of Spain for the excellent facilities they have provided for these meetings and for the warm reception extended to us since our arrival. I also wish to congratulate you, Mr. Chairman, on being selected to chair these meetings. I am sure that under your guidance they will achieve complete success. I would like to offer a warm welcome to Eritrea, our newest member, which has come out of a long political struggle but now faces the daunting challenge of development. This is a common challenge to all the African countries, whether new members or otherwise. I hope that, in common partnership with the Bretton Woods institutions and the international community, we can make progress to accelerate economic growth, reduce poverty, and create jobs for our people.

The purpose of my brief statement is twofold. One, to underscore the issues raised by the African Governors in their joint statement; and, two, to inform the international community that the recent constitutional crisis in Lesotho has been settled. My Government appreciates the international support extended to us during the crisis, especially the mediation efforts of Botswana, South Africa, and Zimbabwe, which have undertaken to remain engaged during the implementation of the accords and subsequent stages. With the implementation of the agreements that have been signed, firm foundations are being laid for long-term peace and stability and good governance, which are prerequisites for effective development and the encouragement of private sector investment—both domestic and foreign.

Lesotho needs international support and assistance in building the capacities of institutions for efficient public sector management, including economic policy analysis. We need to strengthen the capacity of our judiciary and to streamline the process for investment approvals and licensing. We recognize that competition for external resources is keen and that investors will not bring their funds where the rules are neither transparent nor predictable and where approvals take a long time. The Government of Lesotho recognizes the challenge of creating employment for the many young people now entering the labor force and for absorbing the large numbers of migrant workers returning from South Africa. We plan to tackle this challenge by embarking on road rehabilitation and maintenance using labor-intensive techniques that have been developed from projects previously supported by the World Bank. We plan to reform and improve the efficiency of our parastatal units and to invite the private sector to participate in these reforms. Without an efficient and well-trained public service, no government programs can be properly designed or implemented. This is our greatest need, and we hope the World Bank, the United Nations Development Program (UNDP), and others will assist us quickly in designing and implementing a project for public service reform with a view to streamlining public service procedures and training.

The African Governors have called for assistance in implementing regional integration. In southern Africa, a framework exists in the Southern African Development Community (SADC). For Lesotho and South Africa, we are already implementing a major $1.2 billion Highlands Water Project where, through a series of dams and tunnels in the mountains of Lesotho, water is transferred to the major industrial and population centers of South Africa. This cooperation can be extended to dealing with the problems of employment and migration. Unless industrial activity is spread throughout this region, there is a danger of heavy immigration to the major centers of economic activity in the area. Finally, my Government hopes to continue and intensify its dialogue with its development partners through the roundtable, which will be held later this year in Switzerland. We believe that only through dialogue between donors and recipients can mechanisms be put in place for enhancing aid effectiveness.

Statement by the Governor of the Bank for Papua New Guinea—Christopher Haiveta

I am very proud to be here today representing Papua New Guinea in my first meeting as Governor of the Bank. I would like to take this opportunity to congratulate both the International Monetary Fund and the World Bank on their fiftieth anniversary and to extend my compliments to both institutions for the efficient manner in which the meetings have been organized. On behalf of the Government and people of Papua New Guinea, I would like to extend a warm welcome to our new member, Eritrea. The Papua New Guinea delegation also extends its sincere thanks to the people and leaders of Madrid and Spain for the wonderful welcome and hospitality they have provided.

In late August this year on the floor of Parliament, Papua New Guinea underwent a change of government. As with all previous changes of government since independence, this one was peaceful and in complete accord with our laws and constitution. It will usher in a period of political stability because no more changes will take place during the remainder of the term of this Parliament—that is, until 1997—as provided for under the constitution.

Our new Prime Minister is Sir Julius Chan, who is leader of the People’s Progress Party. Sir Julius will be well known to many at the Fund and the Bank, having served many times as our Finance and Planning Minister and having been Papua New Guinea’s first Governor of the Fund and the Bank following our independence in 1975. Sir Julius’s People’s Progress Party has formed a coalition with the Pangu Pati, of which I am the leader, as well as with a number of smaller parties. The Pangu Pati is the oldest, largest, and best-known political party in Papua New Guinea, having been at the forefront of the push for independence in the 1960s and 1970s. Pangu provided Papua New Guinea’s first postindependence Prime Minister, Sir Michael Somare.

My own party, initially under Sir Michael Somare and more recently in the late 1980s and early 1990s under another Pangu Prime Minister, the Honorable Rabbie Namaliu, has a long and proud tradition of working in close cooperation with the multilateral agencies, particularly the Bank and the Fund.

Prime Minister Namaliu was instrumental in putting together an international package of financial support that helped to stabilize our economy following the extreme shocks Papua New Guinea experienced after the forced closure in 1989 of our major copper and gold project, Bougainville Copper Limited. The people of Papua New Guinea remain most grateful for the role played by the Bank, the Fund, and major bilateral donors in assisting us to stabilize the economy during this period of our most significant economic crisis since independence. On the subject of Bougainville, I am pleased to inform you that after many years of bitter conflict, real prospects for a negotiated and lasting peace have emerged. A formal cease-fire has recently come into effect, and a peace conference will be convened on October 10 in Bougainville. The conference is being supported by a regional peacekeeping force made up of Vanuatu, Fiji, the Solomon Islands, and Tonga, with logistical support from Australia and New Zealand. Last week, I had an opportunity to address the UN General Assembly and to meet and discuss with the UN Secretary-General the new Government’s peace initiatives. His acknowledgment of these initiatives and those of the other UN agencies, combined with the support we have received from our Pacific neighbors, give me confidence that peace will be achieved. We are hopeful that the attainment of real peace will provide economic benefits, initially from reduced expenditures on defense to be followed by increased agricultural production from what was once our most bounteous agricultural export region. The question of resumption of mining in the province is not an immediate priority and is likely to take longer to resolve in a manner that is both socially acceptable and sustainable.

Recent economic performance in Papua New Guinea has been mixed. The economy grew by 10.4 percent in 1991,11.8 percent in 1992, and 16.5 percent in 1993, spurred by the onset of a major gold project at Porgera and the commencement of oil production at Kutubu in 1992. In recent years, our agricultural sector has grown at around the member-country average for the Asian Development Bank region, while our forestry and manufacturing sectors have grown at among the highest rates in the region for the past three years. Continued strong growth is occurring in the nonmining sectors of the economy in 1994, spurred in part by an improvement in many of our key commodity prices following many years of depressed levels.

For 1994, we are projecting growth of 7.2 percent in the agriculture, forestry, and fisheries sectors; 3.2 percent growth in manufacturing; and 10.2 percent growth in construction. Mining and petroleum production is expected to be steady, and the new Government has announced its intention to give high priority to undertaking major new operations, which will be significant by international standards. I refer to the Lihir Gold Project, which we hope to see under construction by the beginning of next year, and the South East Gobe Petroleum Project, which should commence construction during the course of 1995.

Other major resource projects that are also on the drawing board should allow us to sustain our recent high growth record over the medium term, although there will be some growth volatility from year to year, depending on project timing trends. It remains of fundamental importance for the new Government that resources flowing from our mining and petroleum wealth be used efficiently and equitably to create economic and social opportunities in nonmining sectors of the economy, particularly in rural areas.

Monetary and price stability has been satisfactorily maintained, with consumer price inflation of 4.3 percent in 1992 and 4.9 percent in 1993. After negative readings in the first two quarters of 1994, the consumer price index on June 30, 1994 was only 1.6 percent higher than a year earlier.

A commonly stated concern for the Papua New Guinea economy in recent years has been whether booming mining and petroleum activities would lead to a form of Dutch disease, characterized by an outbreak of inflation, high wage pressures, and an appreciation of the real exchange rate. Although the country has run a current account surplus of about 10 percent of GDP a year for over two years, the feared inflationary and wage pressures have not yet emerged. Price stability has been maintained mainly through a conservative monetary policy and a stable exchange rate setting mechanism. Real wages have actually continued to decline sharply, in most sectors of the economy, assisted by strong leadership on public sector wage setting and by a very flexible policy framework for wage adjustments in the private sector.

While some of the anticipated problems have been averted, others have emerged. The most difficult problem inherited by the new Government was an excessively open fiscal policy. After many years of very conservative fiscal policies, fiscal deficits in 1991, 1992, and 1993 have averaged around 5 percent of GDP. Without strong intervention by the new Government, an even higher deficit level was in the cards for 1994. These recent deficit levels have frankly been excessive and unsustainable and have been the main reason for our inability to build higher international reserves during a period of high current account surpluses. The emergence of fiscal problems in a period of very high economic growth relates, in part, to the extremely limited nature of our mining and petroleum ventures, whose effects spread slowly to the domestic economy. These problems are intensified by a back-ended mining and petroleum fiscal regime that is very generous to developers in the early years of production and has, as a result, provided bitterly disappointing levels of economic rents to the state and people of Papua New Guinea.

It also needs to be conceded that the previous Government pursued excessively open policies on both the revenue and expenditure sides of the budget. Too much reliance was placed on anticipated flows from mining and petroleum ventures. These flows have not materialized, and, at the same time, Australian budget aid has fallen away sharply. The need for fiscal adjustment is very clear.

While many of our problems have been of our own making, they have been exacerbated by recent adverse trends in external financing by the state. These include recent movements to negative financing flows from the Bank and other major multilateral institutions, such as the Asian Development Bank.

Current projections suggest that the state budget will experience negative net external financing flows of around $100 million in both 1994 and 1995, including moderately negative net contributions from concessional sources. Papua New Guinea is looking for support not only to increase the flow of new concessional drawdowns but also to put in place a program that will permit a more orderly structuring of our external commitments in the coming years, in light of the current excessive bunching of our commitments.

Apart from the usual round of fiscal problems, Papua New Guinea has had the particular misfortune to be beset by a bewildering number of natural disasters in recent years, all of which have imposed major human and financial costs on the economy. These disasters, all of which have been major, have included floods and landslides in the Southern Highlands Province, floods in the Gulf Province, earthquakes and landslides in Madang Province, earthquakes, landslides, and floods in the Morobe Province, and, most recently, two major volcanic eruptions at Rabaul and the Gazelle Peninsula of East New Britain Province. These natural disasters, which require hundreds of millions of dollars simply to restore preexisting conditions, are placing enormous strains on the resources of Papua New Guinea.

I intend to use the opportunity of these meetings to initiate discussions on particular forms of project financing and assistance with the World Bank and bilateral donors to help address at least some of our natural disaster problems. A further extraneous factor that, as I have already mentioned, has worsened our fiscal situation has been the very costly exercise of addressing the conflict on Bougainville. With all our other difficulties, we simply cannot afford to continue running a wartime economy at this stage of our development.

Particularly to address the fiscal and external economic challenges confronting us, I introduced a package of economic reforms in early September, within days of taking office. The major elements of the reform package are:

  • an immediate devaluation of the kina by 12 percent;

  • very tight control over new government expenditure commitments for the remainder of 1994, such that all government expenditures and activities are now being held in check;

  • freezes on public sector recruiting and public sector wage increases, at least until the end of 1995;

  • introduction of a more market-oriented and flexible monetary policy, particularly with regard to interest rate setting;

  • a firm commitment to make the hard decisions necessary to introduce a balanced budget for 1995; and

  • a desire to marshal international support behind the reform package to encourage a greater contribution from external financing sources.

I am using the occasion of these meetings to undertake a dialogue with the Fund and the Bank as to ways they might be able to support the new Government’s economic reforms.

While our initial reforms do contain elements of stabilizing the economy in the short term, we are also anxious to move beyond this to pursue meaningful structural reform over the medium term.

Our commitment to structural reform has already been demonstrated by our decisions to devalue, to take a tough line to prevent flow-on effects to public sector wages, and to pursue a more flexible approach to setting interest rates. These initial moves have now been followed by the recent adjustments to the exchange rate by the floating of the kina, the tightening of monetary policy by an upward adjustment in the liquid-asset ratio, restrictive use of the discount window, and allowing market forces to determine interest rates.

Further demonstration of our commitment will be provided when the 1995 budget is presented. We are serious about presenting a balanced budget while at the same time pursuing reform of the composition of expenditures. I want to see significantly increased investment expenditure through redirecting resources away from recurrent expenditures. Public expenditures will be restructured so that they contribute directly to economic growth and human resource development, in particular, to infrastructure, agriculture, health, and education.

Budgetary management in the current fiscal year has not been easy and has given us very useful lessons. I am now committed to ensuring that in 1995, expenditure is governed by sustainable revenue.

I thank you for this opportunity for Papua New Guinea to frankly outline its current circumstances and proposals for reform. In our view, the Bank and the Fund remain very important institutions for fostering stability, investment, and development in our region of the world. It is for this reason that we want to improve our relationships and to increase resource flows coming not only to Papua New Guinea but also to other parts of the South Pacific. Papua New Guinea appreciates the efforts made by both the Fund and the Group of Seven countries to raise sufficient SDR resources to assist member countries of the developing world and the countries of the former Soviet Union and the Central and Eastern European economies in transition.

We are, however, concerned by proposals to sell the Fund’s gold reserves as one of the measures to raise additional capital. This move, in my view, may jeopardize the Fund’s sound financial position, which has been zealously guarded since its inception. Moreover, sales of such magnitude could seriously destabilize the price of gold, thus severely affecting the economies of the gold-producing countries such as Papua New Guinea and other economies currently in transition.

While the United States is in arrears in its contributions to various UN programs, it was pleasing to note that President Clinton made a commitment to contribute $1.2 billion toward peacekeeping efforts globally. Resources should also be directed toward economic and social development, particularly by the industrial countries. The effective transfer of resources from the industrial to the developing countries is essential.

Let me repeat that Papua New Guinea remains fully committed to continuing the development of its relations with the Fund and the Bank.

I would like to conclude by expressing particular thanks to all those many nations and their citizens who have provided much-appreciated assistance following our many natural disasters of recent times. I would also like to record special thanks at this international meeting to those nations providing peacekeeping support to our Bougainville Peace Conference, namely the Solomon Islands, Fiji, Tonga, Vanuatu, New Zealand, and Australia. I again congratulate the organizers of the meetings and compliment all other Governors on the effective presentations they have made. I trust that all our contributions will eventually provide tangible benefits for the developing nations of the world.

Statement by the Governor of the Bank for Bulgaria—Stoyan Iliev Alexandrov

The Bulgarian delegation is pleased to attend the Forty-Ninth Joint Annual Meetings of the Board of Governors of the IMF and the World Bank. Bulgaria became a member of these institutions in 1990, and our cooperation has developed over a period in which our country started a major reform program for transition toward a market-oriented economy. The conditions under which we initiated the reforms were extremely difficult. In 1990 Bulgaria entered a debt crisis after excessive borrowing in the second half of the 1980s. Over the following years, we faced consecutive external shocks with significant impact on the economy: dissolution of the former Council for Mutual Economic Assistance trade relations, the impact of UN sanctions on Iraq, and, recently, on the Federal Republic of Yugoslavia. Against this background and following the beginning of the process of democratization, Bulgaria initiated comprehensive economic reform oriented at establishing a market economy based on private entrepreneurship.

Since the beginning of the reforms, Bulgaria has taken several important steps toward economic liberalization and restructuring. Price liberalization was complemented by introduction of a liberal foreign exchange and trade regime. These important steps were followed by the establishment of a liberal legal framework for foreign direct investment. The steps toward liberalization were supported by restructuring policies. The privatization process was initiated in 1992 with an important feature of land and urban property restitution. By now the process of restitution is well advanced, with the settling of more than 90 percent of the claims on urban property and 75 percent of the claims on arable land. The process of market privatization is advancing, though at a slow pace, and 200 state-owned enterprises have been privatized. In order to speed up the privatization process, a mass privatization scheme is to be implemented soon. Active policies have been pursued as well with respect to the creation of a sound banking sector, and the groundwork has now been laid.

The transition toward a market economy proved to be an uneasy one for the man on the street. Since the beginning of the reforms, real incomes have fallen by two-thirds and the unemployment rate is above 15 percent. Despite the social safety net programs designed to help the poorest and neediest, the sharp decline in the living standards of the majority of the population is an important aspect of the transition. This fosters the need for a continuation of sound and well-balanced economic policies. Drawing on our experience, we attach high priority to the following issues of the policy of economic transition:

  • speeding up the privatization process as a main road toward a market economy based on private ownership;

  • implementing of sound macroeconomic policies with a proper balance of stabilization and restructuring measures; and

  • addressing the social issues in a sustainable manner from the point of view of the aims for transition and growth of the economy.

Obviously, transition and establishing sustainable economic growth in the economy require continuing efforts in the implementation of the economic reforms. At the same time, we believe that this process deserves continuous attention and support on the part of the international financial institutions and the international community as well.

Bulgaria attaches high importance to the debt and debt-service rescheduling deal which was concluded in July in this year. It places our country in a better position to regain access to the international financial markets. However, the problems and constraints we are facing are not yet behind us, and that is why Bulgaria needs further support from the international financial institutions. We believe that the majority of the countries in transition are facing similar constraints, that they also would appreciate the contribution of the international financial institutions, and that they would encourage not only the direct support of these institutions, but also the role they play in mobilizing the support of the international community for the transition process.

October 6, 1994.

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