Summary Proceedings of the Forty Fourth Annual Meeting of the Board of Governors 1989

Discussion of Fund Policy at Fourth Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
November 1989
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Statement by the Governor of the Fund for South Africa—B.J. du Plessis

It affords me much pleasure in associating myself with fellow Governors in welcoming Angola as the one hundred and fifty-second member of the Bank and the Fund. It happens at a time when we are observing with interest the evolution of the respective roles of the Bank and the Fund in grappling with the difficult economic issues of the 1980s. The shift in emphasis, by the Bank from project lending toward more structural and sectoral adjustment lending, and by the Fund from short-term stabilization issues and balance of payments adjustment to structural reform, seems justified.

While these trends have inevitably led to some overlap between the activities of the two institutions, creating the need for coordination and a clearer definition of their respective roles, we regard these developments as a healthy and realistic response to the needs especially of developing countries: short-term stabilization and structural reform are clearly both necessary conditions for improved economic performance of these countries.

World economic developments over the past year give much cause for satisfaction. It is gratifying that a further substantial rise in production in the industrial countries did not significantly contribute to inflation, and that the developing countries as a group also experienced one of the highest growth rates in the past decade. It is noted with concern, however, that large parts of the developing world, and especially many of the poorer countries of Africa, did not share in these positive global conditions.

Sound macroeconomic policies obviously remain a prerequisite for sustained and stable growth in any economy, and the greater emphasis on structural adjustment should not reduce the Fund’s traditional conditionality requirements. At the same time, however, the Fund and the Bank operate in a new environment in which developing countries have to rely, to a much greater extent than in the past, on financial assistance from these international organizations for the financing of their development needs. The supply of loan and investment funds from private markets has for most of these countries dried up. It is therefore necessary to consider strengthening the resources of the Bretton Woods institutions.

Regarding the proposed adjustment of quotas under the Ninth General Review, South Africa strongly supports, as we have in the past, a substantial and appropriate increase in the Fund’s resources. This would give due recognition to the growth of the world economy and to changes in the relative economic position of members and reaffirm the Fund’s role as a catalyst at the center of the international financial system. Increased resources would help the Fund strengthen its international debt strategy and fund the implementation of growth-oriented structural adjustment programs. These programs would embody the necessary preconditions for the reversal of private capital flows back to the Third World and offer the desired escape from the present vicious circle of high indebtedness.

In the light of the worsening economic plight of the less privileged countries, especially in sub-Saharan Africa, South Africa is encouraged by the progress already made in the negotiations for a Ninth Replenishment of the International Development Association’s resources. We trust that these negotiations will soon be concluded, with real resources at least remaining intact, but hopefully increased, so as to address the growing needs of the low-income countries.

It needs to be reiterated that the people of my country identify with the aspirations and development needs of sub-Saharan Africa and within our means we stand ready to actively render support where possible.

Regional cooperation, with a view to optimizing economic growth, is of the utmost importance, since small internal markets and low purchasing power are barriers to international competitiveness in many of the countries in the region. Regional cooperation offers opportunities for the smaller countries to derive substantial benefit from economies of scale, avoiding unnecessary duplication and improving their competitive position. Access to well-developed facilities, such as transport, communications, and financial markets in more fortunately endowed neighboring countries, is likely to contribute to an acceleration of economic progress in individual countries, thus synergistically contributing to enhanced prosperity in a regional context.

Having recognized the importance of structural reform for our own economy and having set ourselves on a course of bringing it about, we are gratified to note the attention given in recent years by the World Bank and by regional institutions such as the African Development Bank and the Economic Commission for Africa, to structural reform issues on our continent. We take note of the experience gained from structural adjustment programs in a number of African countries, and we concur with some of the important conclusions drawn. Structural reform should not stop short at financial adjustment, but should encompass much more widely ranging transformation of the structures of developing economies.

We also agree strongly that the impact of structural reform measures on the poorest sections of the population should be a serious consideration in the design of such programs, which should be aimed at alleviating rather than further worsening the already desperate situation of the poor. To make this possible, we support efforts at easing the debt burden on African economies in ways that can release resources for productive domestic applications and open up renewed access to foreign resources.

In this regard, the greater emphasis now being placed on debt reduction schemes should not divert the attention from the need for a more fundamental and longer-term solution to the debt problem of the developing countries. Forced debt reduction schemes can in the longer term indeed be counterproductive and result in a further inhibition to the international financial institutions to restore the flow of private sector funds to the developing world.

Longer-term planning and structural adjustment programs are therefore also needed for the many countries now experiencing external debt-servicing problems. The encouragement of domestic saving, the more productive utilization of domestic resources, the expansion of international trade, and the strengthening of the current account of the balance of payments for these countries are objectives that must form an integral part of their structural adjustment programs. However, the maintenance and expansion of protectionist policies, in whatever form, negate the desired objectives of these adjustment programs. Furthermore, debt reduction through compulsory write-off schemes without a simultaneous structural adjustment program of this nature will also be an exercise in futility.

For a country to extricate itself from an international debt-servicing problem is, as we have learned first hand, a traumatic and painful adjustment process. The greater involvement of the Fund and the World Bank in providing assistance to these countries should therefore be encouraged. Confidence in the ability of a country with a debt-service problem to absorb new foreign capital will not be restored through debt forgiveness, but rather through the successes achieved with the restructuring of its basic economy.

Successful adjustment programs entail the development not only of infrastructure but also of human resources. In so many respects we are also a developing country, experiencing the typical constraints in creating and supporting an adequate educational system. We understand too the need for basic facilities to be able to utilize the sophisticated educational aids capable of supporting the educational process, both quantitatively and qualitatively.

Broadly based education for all, including technical training, constitutes a powerful and necessary agent for sustained economic growth. It acts, furthermore, as a conduit to establish the principles of the market system and to promote a sound work ethic and entrepreneurship ….

Statement by the Governor of the Fund for Nicaragua—Joaquin Cuadra Chamorro

It is an honor to speak at these Annual Meetings of the International Monetary Fund and the World Bank. On behalf of the Government of Nicaragua, I extend cordial greetings to the Chairman, the Managing Director of the International Monetary Fund, the President of the World Bank, and the Governors and delegates of the member countries and special guests.

Since our last meeting in Berlin, the international economic picture has deteriorated somewhat rather than improved, which will certainly make the recovery of the economies of the developing countries more difficult. International economic activity has lost momentum in the industrial countries, at the same time that inflation is being spurred by the persistent external and government finance imbalances in some of those countries. This has meant higher interest and exchange rates in the international capital markets, which have increased the debt-service burden of the developing countries.

For their part, the developing countries have experienced an even greater slowdown in economic growth and are especially concerned over the disparity between regions and groups of countries.

The situation of the most heavily indebted countries is particularly disturbing. Their growth has fallen to less than half of that in the previous year and inflationary pressures have also increased markedly. This has had a very adverse effect on their external debt position, which will continue to be a major cause of concern to the international community and a serious impediment to growth in the developing countries. In this respect, it is necessary to remember that economic growth is vital to the developing countries so that they can generate the resources with which to repay their external debt and, even more important, improve the standard of living of their populations in order to avoid social upheaval and to consolidate the stabilization and restructuring efforts that virtually all have begun, at high cost.

The multilateral financing institutions have a key role to play in the search for solutions to the problem of debt and growth in the developing world. These institutions must therefore have the necessary resources to meet the needs of the developing countries, both in lightening their debt-service burdens and supporting their economic stabilization and restructuring efforts. We are therefore concerned that the financing flows toward the developing countries have declined instead of increasing, especially those from the multilateral agencies. This trend must not continue if orderly and sustained stabilization and growth are to occur in the developing countries. We would reiterate the need to finalize the International Monetary Fund’s quota review in the near future, and we support a general 100 percent increase in its quotas. The quota increase should be distributed appropriately, better reflecting the relative importance of the member countries in the world economy and the financial needs of the individual countries and regional groups.

In the same vein, the SDR must again play its proper role in the international monetary system and its potential tapped for the stabilization and smooth running of that system. As is known, as a percentage of the monetary reserves of the member countries, SDRs have fallen to very low levels, straying further from their purpose of serving as the principal reserve asset. We therefore urge those who have opposed new SDR allocations at the normally scheduled times to reconsider their positions and make it possible—in the spirit of multilateral cooperation—to reach an agreement in the near future for a new allocation in what remains of the current basic period. Such an SDR allocation would strengthen the reserves of the member countries and bolster the adjustment efforts being made by the developing countries, without requiring them to curtail their economies through drastic cuts in imports. This would also help lighten the debt-service burden and facilitate the implementation of solutions that have been already devised for the debt problem.

The external debt problem continues to be of key importance to both the developing countries and the stability of the international monetary system. External debt is, at this juncture, the most explosive factor in the relations between the developing and industrial countries. The multilateral institutions must play a key role in the search for, and implementation of, effective solutions. Internal and external problems, many of them beyond the control of the developing countries, have exacerbated the debt problem and created a crisis situation. These factors have made debt the primary obstacle to the restructuring and economic development of the developing countries. Progress has been made in that the most recent debt initiatives recognize the need to reduce the principal and debt-service burden. Without concerted efforts by the creditor countries, the debt crisis will unquestionably become even more acute. We therefore welcome these new debt strategy initiatives from the international community, but reiterate our concern at the continuing deterioration of social and economic conditions in the developing countries. Such conditions hamper economic growth and make it very difficult to find appropriate and lasting solutions to the debt problem. The World Bank, the International Monetary Fund, the Paris Club, and creditor countries must make their mechanisms and policies more flexible, permitting debt restructuring, if necessary, under better terms and conditions that allow for debt reduction, longer repayment periods, lower debt service, and increased financing flows, especially to the poorest and most heavily indebted countries that are making sincere adjustment and economic restructuring efforts. The Group of Twenty-Four has submitted specific recommendations in this respect, with which Nicaragua agrees and supports.

By way of example, and in order to share with you what has been done, what has been achieved, what still needs to be done, and the support that has been obtained and that has not been obtained, either from other countries or the multilateral institutions, I will refer to my country. Nicaragua, a small country with a fragile economy vulnerable to external factors, has encountered serious difficulties of different types, which have resulted in major imbalances. In addition to the common problems that the developing countries, and especially those in Central America, have faced in the past decade, Nicaragua has had other problems of a specific nature.

At the beginning of the 1980s, when the country was still just beginning to try to recover from the devastation of the 1972 earthquake, Nicaragua had to fight a war of liberation, which ended with the fall of the Somoza dictatorship. With the revolutionary triumph in 1979 the country began a sweeping transformation of its social and economic structure, designed to achieve democratic ideals and more equitable distribution of the benefits of economic growth. Logically, these phenomena gave rise to changes in the expectations of the economic agents and the population in general.

While this transformation was taking place, the country also faced an imperative need to defend itself against illegal and unjust armed aggression from abroad, which has caused it great material economic damages and, even more important, losses of human life. This unjust war has claimed 58,000 victims and caused direct material damage equivalent to more than two and one half times the national product. In addition, that aggression required heavy defense allocations, which completely distorted productive activities. In 1987, approximately 50 percent of the budget and some 20 percent of the national product were allocated to the national defense effort.

Likewise, since 1982 a boycott has denied Nicaragua access to external financing, including that provided by the international development financing agencies. This has corrupted their multilateral nature, making them into virtual foreign policy instruments of a specific country.

To make matters worse, in 1985 the United States decreed a commercial embargo on Nicaragua, distorting trade by depriving the country of the major market for its exports and the primary source of its imported inputs, spare parts, and capital goods. Last, in 1988 Nicaragua suffered the devastating effects of Hurricane Joan, whose damages were estimated at more than $800 million.

All of this has made economic policy management very difficult in Nicaragua, restricting the Government’s room to maneuver in the appropriate implementation of its policy. The adverse effects mentioned, and the use of compensatory fiscal and monetary policies to mitigate the negative economic impact on the population, gave rise—as was to be expected—to serious distortions in relative prices and resource allocation, significant external and internal imbalances, and, finally, a spiral of hyperinflation which began in late 1988.

My authorities have been aware of these problems and of the fact that an effective solution will take considerable time, substantial amounts of external financing, and, above all, a favorable international economic environment, along with peace within Nicaragua. Peace is essential for investment and economic growth, but peace alone is not enough to achieve these objectives. Also required are a sustained domestic stabilization effort and, with external assistance, the restoration of the foundations for sustained growth.

Nicaragua has striven to achieve peace. Substantial progress has been made in this area through important domestic measures and also international agreements that could result in a stable and lasting peace. The Esquipulas and Tela agreements signed by five Central American Governments constituted a major step forward, and the hostilities have eased considerably. On February 25, 1990, democratic elections that are just, open, and aboveboard will be held in Nicaragua, with the participation by invitation of the Government, from the outset, of observers from the United Nations, the Organization of American States, and the European Economic Community.

Progress on the political front and in the peace process has created the conditions needed for implementation of a rigorous economic stabilization and structural adjustment program. The immediate objective of the program is to curb hyperinflation, stabilize the exchange market, eliminate the major price distortions, once again provide appropriate signals to the different economic agents, and, in the short term, promote the growth of exports and an appropriate allocation of resources, and lay the foundations for sustained growth in the future. Not just a simple stabilization plan but a major structural adjustment program has been undertaken, aimed at making significant changes in the production system and in the country’s decision-making and resource-allocation process.

As the focus of the program, measures have been adopted to reduce public expenditure and scale down the government apparatus, significantly cutting back employment in the Central Government and the number of ministries. To date this year, public expenditure has been reduced by more than 57 percent over the same period last year, affecting more than 13,000 positions in the Central Government and 13,000 defense-related jobs, bringing the fiscal deficit down from 23 percent of gross domestic product last year to 7 percent thus far this year. Equally important is the fact that during the past four months the Central Bank of Nicaragua has not extended credit to the Government, an important change over previous periods.

In the area of exchange, from a multitude of exchange rates and sizable differentials between rates on the official and parallel markets, we have virtually achieved a unified exchange rate and more flexible markets. The active exchange policy applied during the past 18 months has eliminated the overvaluation of our currency, and a flexible adjustment policy is being implemented to avoid any exchange rate erosion. At the present time, the differential between the official and parallel exchange rates has been reduced to less than 10 percent.

To achieve an appropriate allocation of resources, streamline the use of credit, and strengthen domestic savings, a flexible interest rate structure has been introduced, with adjustments being made periodically in order to maintain positive real interest rates. Despite monthly inflation exceeding 100 percent in late 1988, positive real lending and borrowing rates were achieved in early 1989 and have been maintained until now. This policy will be continued in the future, so that the incentive for financial savings may be balanced against the need to avoid stifling production.

The former generalized system of price controls has been replaced by controls on just five essential products and on public utilities. The utility rates are, however, adjusted periodically so as to keep pace with real costs and to avoid subsidies. Almost all subsidies have been eliminated, and a policy aimed at avoiding them in future is being followed. Controls have also been lifted from the country’s system for setting wages so that they can reflect market forces, which will facilitate the transfer of resources needed for an adequate allocation of resources.

The measures adopted have been difficult and have come with a high political and social cost, but significant positive results have already been observed. The monthly inflation rate, which in late 1988 and early 1989 exceeded 100 percent, was reduced to 6.2 percent in August of this year, and we are hoping to reach 1 percent by December. The exchange market has been unified and stabilized, eliminating price distortions and creating a significant bias in favor of exports. This year, exports will increase by about 27 percent over last year. Term bank deposits have risen significantly, and improvements have been made in the liquidity preference structure. Economic decisions have become more flexible and more effective, promoting an adequate allocation of resources, avoiding waste, and improving productivity.

My Government realizes that the achievements made have been significant but that much remains to be done. Stabilization is not an objective in itself, but rather a prerequisite for sustained growth in the future. The cost of the measures adopted has been high, but they were necessary to achieve greater, long-term objectives, relating to a more equitable distribution of the benefits of growth and a marked improvement in the well-being of the population. It might have been possible to mitigate this cost if the country had received the external resources needed to support our effort. In fact, the program was implemented without external financial assistance, bearing witness to the Government’s commitment to achieving its objectives.

In the future, however, it will be impossible to consolidate the program’s achievements and begin sustained growth without the help of external resources and a climate of peace and confidence, both within Nicaragua and abroad. The maintenance of appropriate policies will require bilateral resources from friendly countries and, to a large extent, assistance from the multilateral institutions, especially the international development banks. Nicaragua has made a great effort to earn the confidence of the international community and its assistance. It hopes and wishes that its appeal may meet with a positive response from friendly countries and the multilateral organizations. Despite the fact that we have been excluded from financing in the past for other than economic reasons, we are fully prepared to normalize relations with the multilateral organizations and other similar institutions through a serious, constructive dialogue that will make it possible to prepare a comprehensive support plan. The plan recently adopted by the Nicaraguan Government explicitly includes the decision to normalize relations with the multilateral organizations.

Before closing, my country wishes to acknowledge the support received from friendly countries in a meeting held in Stockholm to examine and support the program being implemented by Nicaragua. At this meeting, a program monitoring committee, made up of renowned independent experts and headed by Professor Albert Fishlow, was created, and it has already begun its work. This committee will report to the group shortly, after its visit to Nicaragua this month. A second meeting is planned for the first quarter of next year, in Rome, and we are inviting the broadest range of countries and international institutions. At this meeting, in addition to analyzing the progress made under the program and the support which could be provided on a bilateral basis by friendly countries, we will also look at the best ways of normalizing relations with the development banks. This should not, however, preclude opening a dialogue with these organizations right now with a view to searching for and formulating possible solutions.

Much progress has been made in consolidating peace and democracy in Nicaragua and in the stabilization and structural adjustment of our economy. This effort can be continued only with the support of the international community. Nicaragua is prepared to persevere and we are hoping for the support of all countries and specialized organizations in achieving the fundamental objective of improving the well-being of the country’s people.

Statement by the Governor of the Fund for Hungary—Ferenc Bartha

It is a great privilege for me to address the Boards of Governors of the World Bank and the International Monetary Fund. I wish to center my remarks on three key issues:

—the current situation and outlook for the world economy;

—the treatment of the international debt problem; and

—cooperation between the developed and the developing countries.

The World Economy

In the past six years we have experienced a long period of positive rates of economic growth in the developed world. The favorable performance of the developed countries reflected an improvement in the process of economic policy coordination among them, which also helped greatly to ease the acute global problems. However, in light of the rate of development of the world economy as a whole, the achievements of this period seem much less satisfying. From 1982 to 1988, the gross national product (GNP) of the developing world grew by an average 2 percent a year. By any measure, this is a strikingly poor outcome in a world which fundamentally needed a much higher growth rate to narrow the gap between the industrial and the developing economies, and to help the developing nations escape the desperate situation of heavy external indebtedness.

We also cannot help seeing, when analyzing the history of recent years, the extremely high cost imposed by the adjustment process in the industrial economies on the less fortunate part of the world. It is clear to all of us that this process was heavily burdened by the great instability of interest rates and exchange markets and by the painful volatility of important export markets and international financial flows. This very hostile environment for the developing economies made their task of growing out of their economic and financial problems extremely difficult. The failure of the governments of the developing countries to materially improve their economic situation in recent years can largely be explained by the shortcomings of this environment.

The present situation and outlook for the world economy are not very encouraging from the standpoint of the global adjustment problem. The GNP growth rates of the industrial countries are expected to stagnate or fall, real interest rates are at excessively high levels, the world market for goods and services remains segmented by protectionism, and the great majority of the developing countries have insufficient access to the financial markets. Though we know that a key element of any adjustment process is the implementation of rational policies by the indebted nations, they will have to receive concerted support for their national adjustment efforts to succeed.

The foregoing conclusions have implications for various aspects of economic policy and coordination. The expansion of the world economy should receive its most important contribution from the developed economies. We urge the industrial countries to implement their own growth-oriented adjustment programs by streamlining their government spending, eliminating structural rigidities from their national economies, and reducing and stabilizing their national interest rates for the long term. Moreover, successful adjustment by the developing countries will require a much more stable international environment than the world economy currently provides. Achievement of this stability and higher GNP growth rates could effectively be reinforced by the establishment by the industrial countries of a more explicit and symmetrical framework for closer monetary cooperation. With this end in view, we support the Belgian proposal for using the SDR mechanism for concerted exchange market interventions, which would support the largest countries’ adjustment process and would also have a stabilizing effect on the present reserve system.

The Debt Problem

Another area where cooperation among member countries should be strengthened is the debt problem. The results of the many efforts made in past years to alleviate the overall debt burden have been less than satisfactory. We believe the indebted countries must undertake strong, comprehensive domestic policy reforms to restructure their economies, and that they must pursue prudent financial policies to restore equilibrium. But these efforts must be accompanied by enough external assistance to alleviate the debt burden and provide fresh capital, enabling the debtor economies to implement reasonable adjustment programs.

Hungary welcomes the new policy initiatives of the Fund and the Bank to provide financial assistance to support debt reduction. Though the modalities and practice of debt reduction programs must be further refined, and though the positive results of such programs have yet to materialize, we judge that strategy to be a useful device for mitigating the enormous external debt burdens of a number of countries. At the same time, we believe that any support provided by the Fund and the Bank for debt reduction should come from resources which are additional to their present resources, to avoid any adverse effect on the availability of resources for borrowers that are not benefiting from debt reduction operations. In this connection, we are concerned by the fact that a part of access to Fund resources is set aside to be used for debt reduction purposes, and that this set-aside implies a reduction in potential access to resources for balance of payments financing. These arrangements are especially distressing for those countries which have been able in the past to maintain their access to the private capital markets but now face heavy debt-service obligations. We believe that these countries, through their efforts to maintain an orderly schedule of debt-service payments, have made a basic contribution to the stability of the international financial system, and we wish to stress the need for enhanced financial assistance to support the countries which are not qualified for officially supported debt relief.

For these reasons, we urge that an early decision be made on the increase of Fund quotas. We believe that a doubling of quotas is needed to maintain a strong, responsive Fund that can meet its systemic responsibilities, which include strengthening monetary cooperation, promotion of the adjustment process, and supporting the debt strategy. We also think it crucial for the quota increase decision to be followed up by a revision of the Fund’s policies concerning individual countries’ access to its financial resources. In addition, there is a need for concerted financing actions with private bank participation for countries which undertake comprehensive macroeconomic and structural adjustment programs. In this area, the expanded cofinancing operations program of the World Bank is potentially a service of significant benefit to its borrowers, especially those who have not restructured their external debt.

Cooperation Between the Developed and Developing Countries

We nowadays face a growing recognition that a comprehensive approach to the process of growth-oriented adjustment should not omit the kinds of support which can be extended by the governments of the developed countries. The assistance provided by the international financial institutions can only be effective if the other elements of the international environment are conducive to the successful solution of the adjustment problem. A crucial element of adjustment solutions is economic cooperation between the developed and the developing countries. By now, the presence or absence of such cooperation has become much more than a question of help extended from one country to another. The real question is how the developed and developing countries can mutually improve and exploit their opportunities for faster growth and healthier economic development. To attain such a goal as this, cooperation by all parties is needed.

We wish to stress that all countries have important responsibilities in the cooperation process. On the one side are the developing countries, which can contribute to world growth by implementing structural reforms, improving their supply performance, expanding and opening up their domestic markets, and avoiding macroeconomic disruptions owing to financial imbalances. On the other side are the developed countries, which should assist the developing countries’ efforts by eliminating trade protectionism, facilitating the transfer of modern technology, encouraging the flow of private direct capital investment, and promoting industrial and trade cooperation. Industrial country governments can also extend guarantees and other incentives to private lenders to facilitate the obtaining of fresh external financing needed for the efficient implementation of adjustment programs by indebted developing economies.

I have summarized some key elements of the philosophy which my Government considers an appropriate basis for handling global economic problems. Hungary is following a path of systemic modernization through a set of policies which we believe will contribute to the practical realization of that philosophy. In recent years, we have implemented a fundamental reform of our domestic financial system and begun the gradual elimination of the market distortions which flow from state intervention. We initiated a process of deregulation combined with establishment of a modern system of internationally compatible economic laws, lifted the barriers to the operation of private and foreign capital, liberalized external trade and travel, took steps to restore a rational system of relative prices, and began a comprehensive reform and streamlining of the public sector. Hungary has opted for the policies of reform and growth and is committed to developing its economic cooperation with other countries.

My Government’s major endeavor is to maintain the financial equilibrium of the national economy. It is widely recognized that the external balance must be a high priority of economic policies if the momentum of the deeply rooted reform is to be sustained. In that respect, an important achievement is the strengthening of a modern monetary and a transparent fiscal system, which offers an opportunity for the conduct of efficient economic policy.

A key factor in the success of Hungary’s ongoing economic reform movement is the historical change of the sociopolitical system. An emerging era of political democracy based on a fundamental political accord reached by different political forces of our society just about a week ago and the upcoming free elections are hoped to provide a level of consensus that is conducive to social and economic progress. The Hungarian nation is fully aware of the importance of that historic opportunity and of the importance of the nation’s success for other regions of the world. The Hungarian Government greatly appreciates the solidarity and support expressed by the distinguished delegates and by both the Fund and the Bank encouraging the developments in Hungary. It is valued especially because, without meaningful international support, the endeavor undertaken by Hungary will not be able to succeed.

It is our hope that these efforts will materially contribute to the solution of the global economic problems, and we also hope that these efforts will receive an appropriate response from the member countries of the World Bank and the International Monetary Fund.

Statement by the Governor of the Fund and the Bank for Ireland—Albert Reynolds

All the nations represented here acknowledge the importance of sustaining a balanced growth in the world economy. This is the key to progress, and it imposes special obligations on the major industrial countries that exercise so much influence on world affairs. While growth was ahead of expectations in 1988, this momentum has not been sustained this year. The continuing threat of inflationary trends led to interest rate increases earlier this year, which have had a dampening effect on economic activity. The effect has been particularly acute in the heavily indebted developing countries. For them, growth has been retarded while debt-servicing costs have risen. The sad reality is that most of these countries are now poorer than they were at the beginning of the decade.

On the positive side, there is continuing pressure to improve the coordination of economic policies among the large industrial countries. Efforts to reduce volatility in currency markets and to curtail the rise in interest rates are making an impact. As a small and open economy, Ireland is very exposed to international trends. It is a source of great concern to us that we may be obliged from time to time to raise interest rates when there are no good domestic reasons for doing so. High interest rates are a severe burden on the smaller and less well-off countries. It is particularly frustrating when they are due to factors entirely outside the control of these countries.

Consistent growth on the scale needed demands that we show greater urgency in removing barriers to trade. Protectionist attitudes are still very strong in the industrial countries. These have a demoralizing effect on developing countries that are trying to increase their exports. They also create great distortions in world trade. We are not living up to our aspirations, and the disadvantaged countries, in particular, are suffering as a consequence. There must be unrelenting pressure to bring down barriers and to open markets, so that world trade can expand steadily and equitably.

Debt Reduction

While the enormous problem of debt remains unresolved, the prospects of stable growth are inevitably diminished. The poor economic performance in the overindebted countries will continue to contrast sharply with growth in industrial countries. In recent months, there have been new initiatives toward a more effective and coordinated approach to this problem in relation to the heavily indebted middle-income countries. The efforts of the major industrial countries, in cooperation with the Fund and the Bank, are welcome.

There is now a widespread perception that debt and debt interest reduction should be an integral part of any potentially successful plan. Already there are some positive developments, and there are indications of a new sense of realism and of urgency. I hope that these efforts to find adequate solutions will be intensified and that those who are in a position to do so will have the vision and the determination to develop strategies that will gradually bring this problem under control.

While on the subject of debt, I would like to appeal for a concerted effort by the United States, the European Community, and Japan to assist those Eastern European countries which are in a stage of transition from centralized economies to market-led economies. These nations have a special claim on our sympathy and understanding at this time. This historic opportunity should not be missed.

I would like to think that, when we assemble again a year from now, there will be demonstrable evidence of significant progress toward economic recovery in the debtor countries. Otherwise, the social tensions that excessive debt brings in its trail will remain.

While the larger industrial countries and the international institutions are promoting initiatives, the debt issue must also remain an immediate preoccupation of the commercial banks. The continuous shifting of the burden of debt financing from private to official creditors, which has been the pattern for several years, must be halted and reversed.

The banks have an essential part to play in promoting more diversified financial support, including new lending, which has to be a necessary element of any package. In turn, it is reasonable that they should ask that we, the authorities, look carefully at practices and procedures which may impede the process of debt and debt-service reduction.

We had expected earlier that the Board of Governors would reach a decision before the end of the year on a quota increase for the Fund. While there is general agreement in principle for an increase, it has not been possible so far to translate this into concrete decisions. This is disappointing. The Fund needs extra resources to help the less well-off countries through the difficult process of adjustment. In recent years, it has extended considerably its range of facilities, and a substantial quota increase is needed to enable it to fulfill a still more constructive role.


The reality of poverty and destitution in many parts of the world remains depressingly familiar despite the best efforts of the Fund and the Bank and its affiliated organizations. The main focus of these institutions is, properly, on stabilization measures and on longer-term structural improvement and development. But there are occasions when the immediate relief of abject poverty must be the priority. There is no merit in advising those who are in profound misery that they will benefit significantly in the longer term from growth in the world economy. In Ireland, we have a proverb which deals with that type of situation—”Live horse and you’ll get grass.” They need more immediate assistance to achieve tolerable living standards, and this is a reality that we cannot put aside. I welcome, therefore, the increased emphasis by the Bank and the Fund on the need for specific measures to protect the poor during the adjustment process.

The challenge of poverty is the greatest challenge facing the world today. It is a subject that invites much rhetoric and emotion. It is our duty as a world community to acknowledge the realities of poverty and to work together in helping to alleviate it. The problem of poverty is neither inevitable nor intractable, but it will continue as long as there is inertia and misallocation of resources combined with low growth and heavy indebtedness.

We can take some encouragement from the emerging signs of economic improvement in some of the poorer countries but, overall, the outlook remains disappointing. In addition to their ongoing problems, it seems to be the destiny of some of these countries to suffer cruelly from time to time from natural disasters which undermine their best efforts to make real progress ….

I think I should make the point that we can now discuss this problem of world poverty in a political atmosphere which has changed dramatically for the better in the past few years. The tensions between East and West are easing perceptibly. The policies of glasnost and perestroika are opening up new possibilities for East-West cooperation in a joint effort to combat world poverty. Such cooperation is surely in the long-term interest of both power blocs. Reconciliation between East and West augurs well for a better future for the developed world. It should, and could, also presage a more hopeful prospect for the deprived millions in the Third World ….


The issue of the environment is gaining increasing prominence in this assembly and in other international platforms. We have all come to realize how fragile the environment is and how essential it is to be vigilant in protecting it. While we in Ireland are vulnerable, we are fortunate to have so far avoided the worst excesses of environmental destruction. This leaves us, nonetheless, conscious of the need to protect the world’s resources and of the urgency of greater cooperation on a global basis in dealing with environmental problems ….

Progress in improving the world economy and in establishing better cooperation is still too hesitant, and the huge imbalances, which stand in the way of a better world, still present an enormous obstacle. The steps that have been implemented so far have brought too little benefit to the highly indebted countries. Our obligation as a community is to work together with a greater solidarity than before to sustain the necessary policies for growth. We have to work toward a more equal distribution of resources and to improve the level and quality of investment in the poorer countries.

We cannot be deterred by seemingly insoluble problems. We must not let national considerations overrule our duty to the rest of the world. I believe that the larger and more prosperous countries can do more to foster greater cooperation in creating a better climate for trade and commerce in which the poorer countries have a better chance. Organizations such as the Fund and the World Bank have a central role in creating a greater awareness among us of our obligations and in implementing policies for improvement. We must give them the necessary support to fulfill their responsibilities.

Statement by the Governor of the Fund for Poland—Leszek Balcerowicz

Poland rejoined the International Monetary Fund and the International Bank for Reconstruction and Development three years ago. We attach special importance to our membership in these two organizations. We highly appreciate the opportunity for policy discussions with the Fund and the Bank on economic and development issues. We also attach great importance to the recommendations from both institutions.

Poland is undertaking a historic transition to a parliamentary democracy and to a market economy. The new Government enjoys widespread public support, which strengthens the chances for fundamental economic reforms. Unfortunately, the reforms must be carried out under extremely adverse economic conditions. The standard of living is lower today than it was ten years ago, and in recent months hyperinflation has broken out. The crisis is exacerbated by a heavy external debt burden. Despite these difficulties, the Government of Poland plans to press ahead rapidly with the creation of a modern market economy with an appropriate ownership structure. We are fully aware that there is no other way of solving our problems.

We are confident that despite the adverse conditions, our reform program will succeed. We know that by limiting the scope of the state sector and by releasing the forces of competition and entrepreneurial spirit, our economy will gain a new vigor. But we must also count upon the goodwill and financial support of the world community as we put our reform program in place. This is why we noted with hope the statement made today in this room by President Bush. We are also encouraged by statements made by the representatives of some other countries, especially the countries of the European Economic Community.

The comprehensive program we are preparing will have two basic elements: macroeconomic stabilization and structural adjustment.

The key steps to be taken in the next few months under the stabilization plan will include:

—a sharp reduction of the budget deficit;

—tight monetary policy;

—the establishment of a realistic, unified exchange rate; and

—abolishing administrative controls over most prices.

The structural adjustment program will involve fundamental institutional changes in the economy, such as:

—eliminating the remaining restrictions that impede the development of private firms;

—launching a major privatization program; and

—hardening budgetary constraints of state enterprises.

In addition, a reform of the tax system will be designed to ensure that entrepreneurial effort is not stifled. The development of a capital market and banking system will be accelerated. Major reform of the budgetary system will be initiated.

We undertake our task with full awareness of its historic importance. The stakes are high, and the risks are great. Foreign financial assistance would lighten the burden of the transition and significantly increase our chances of success.

For this reason, let me conclude by briefly outlining the main kinds of financial assistance that we seek in conjunction with our economic programs:

—a rapid agreement with the Fund on a stand-by arrangement;

—a rapid agreement with the World Bank on a structural adjustment loan;

—a multilateral stabilization loan from the advanced industrial countries to help Poland build international reserves and thereby help to stabilize the value of the currency; and

—relief on debt-service payments for the next year, and future negotiations leading to a permanent reduction of the debt burden with the Paris Club and the commercial banks.

The support that we expect is not a substitute for our own efforts. This support is needed to increase the chances for success of our own decisive actions, and this success will be in the best financial and political interest of the international community.

Statement by the Governor of the Bank for the Islamic Republic of Iran—Mohsen Nourbakhsh

In the name of Allah, the Beneficent, the Merciful.

And if the people of townships were to believe and keep from committing transgressions, surely we would have opened for them blessings from the sky and from the earth.

(Holy Quran, Verse 96, Chapter 7)

I wish to express my appreciation to the organizers of these important Annual Meetings for their careful preparation and sincere efforts. I also welcome Angola to the membership body of the Bretton Woods family of institutions and wish that country success and prosperity. I express my condolences to the Chadian authorities for the unfortunate accident.

This forum provides an appropriate opportunity to review the major economic and financial events of the past 12 months. A bird’s-eye view of the economic and social trends of the world economy during the past 12 months leaves one with mixed feelings. Although 1989 is not going to be a particularly outstanding year in the sense of depicting a more positive movement of the underlying economic variables, nevertheless some hopeful signs, albeit too few in number and intensity, have emerged: slightly lower stock of debt, continuation of economic adjustment by developing countries, and some coordination of macroeconomic policies in industrial countries, among other things, can be singled out. However, the pace of global growth, as well as efforts aimed at sustainability of coordination among major industrial countries, has slowed down, and protectionism in industrial countries has intensified.

The volume of world trade expanded rapidly in 1988. But this increase was accompanied by relatively large fluctuations in the values of major convertible currencies, a decline in the terms of trade of developing countries, and a fall in oil prices. Export revenue uncertainties in the developing countries undermine their budget and development planning. It is therefore essential that real prices be restored in the oil and commodity markets. Essential to accomplishing this task is the return of order and stability to the international currency markets through structural adjustment and greater macroeconomic policy coordination among industrial countries.

With regard to the developing country borrowers, it is now evident that with persistent external financing constraints, domestic economic adjustment alone, although a necessary condition, will not be sufficient to bring about the required turnaround in their economies. Yet these countries continue to experience net financial outflows.

Less well-to-do African countries recently witnessed a cancellation of part of their debt by some creditor countries. This is a positive development, but their remaining debt is too large to allow the effective implementation of adjustment programs.

The evolving global debt strategy, therefore, in addition to addressing the debt overhang, should also seek to ease external constraints—such as protectionism that retards the export growth of developing countries—should enlarge their repayment capacity, and should strive to redirect concessional financial resources toward those heavily indebted countries that have displayed a good adjustment track record.

Despite continued economic adjustment and austerity programs, capital flight from some heavily indebted countries has aggravated the debt burden. The existence of a receptive financial and legal environment in the international financial and offshore centers, by facilitating capital outflow from debtor countries, has complicated their adjustment efforts. In a spirit of international cooperation, industrial countries should consider their joint responsibility in this matter.

Greater financial assistance to developing countries requires a substantial strengthening of the financial resources and lending capacities of the international financial and development institutions; in particular, the Fund’s Ninth General Review of Quotas should be completed as a matter of urgency. With respect to Fund quotas, the Islamic Republic of Iran could not, for one reason or another, participate in the Seventh and Eighth Quota Reviews, but it intends to participate actively in the Ninth Quota Review to recoup, as much as possible, its lost quota share and to re-establish a fair and realistic basis for its present quota, which is now seriously out of line with its economic position. We hope that the distribution method in the Ninth Quota Review can succeed in largely bridging the gap between our current quota and our present economic position. If not, I ask for the understanding and support of my fellow Governors so that the Executive Board of the Fund may sympathetically consider an ad hoc quota increase for the Islamic Republic of Iran.

We appreciate and encourage the International Monetary Fund to continue its research and studies of interest-free banking and finance. The Fund has, for the past several years, undertaken fundamental research into the various aspects of the Islamic financial and banking institutions and is venturing into the realm of Islamic taxation. According to the various scholarly research papers submitted by international experts and institutions, including the Fund itself, the theoretical validity of interest-free banking has been proven conclusively. The Fund should therefore take further steps in this direction by considering how the structural adjustment programs can be adapted to the special requirements of Islamic economics and finance. I urge the two Bretton Woods institutions and especially the World Bank to intensify and broaden the scope of their research into this important field.

Interest-free banking in the Islamic Republic of Iran is now in the sixth year of successful operation. The public confidence in, and acceptance of, interest-free banking is reflected in the growth of private sector deposits and banks’ financial facilities granted to the private sector, all based on Islamic contracts. Although we are encouraged by the results, it is quite evident that much more remains to be done, and we intend to seek further refinement in our practices. In this regard, we welcome suggestions and advice from scholars, experts, and other institutions, so that experiences can be shared and views exchanged to our mutual benefit.

I will now briefly consider the main developments and prospects in our economy during the past 12 months. After acceptance of United Nations Security Council Resolution 598 by the Islamic Republic of Iran last year, we have repeatedly expressed our readiness to implement fully all its provisions, and we patiently await its full implementation for a lasting peace to prevail in the region. Meanwhile, our major reconstruction drive is proceeding rapidly. Many factories and plants have been restarted; oil export capacities have been restored; and reconstruction of war-damaged oil refineries is nearing completion.

In our efforts to redress macroeconomic imbalances emanating from the imposed war years, we intend to move rapidly toward greater flexibility in our trade and payments system and reform of government and public sector finances, with a view to reducing the budget deficit and gradually introducing a greater market mechanism to state enterprises.

Parallel with our short-term reconstruction crusade, we have also embarked on economic adjustment and structural reform based on medium-term planning. Our first postrevolutionary five-year development plan is broadly based, aiming at further diversification of our production and export base, incorporating the needed sectoral adjustment together with sustainable growth rates. Natural resource exploitation, together with strengthening agriculture, continues to receive high priority. Based on this plan, several projects concerning agriculture, as well as those relating to oil, gas, petrochemicals, and other mineral resources, will be selected for implementation.

Fruitful and profitable exploitation of vast strategic resources, such as oil, gas, and minerals, requires huge investments. The Islamic Republic of Iran has the potential and capacity to undertake and support such investments. It is estimated that during the plan period, more than one half of the $90 billion foreign exchange earnings will be set aside and expended on these capital investment projects. The length and adverse effects of the imposed war years, however, underline the enormity of the task of reconstruction, which we do not intend to underestimate. Complete recovery entails hard work and dedication: qualities which our people proved to possess in abundance. The enormity of the task of reconstruction is such that the success and experiences of other countries can be usefully utilized. Therefore, we welcome appropriate technical cooperation and joint ventures, based on the experience and expertise of other countries.

In conclusion, much hope and expectations are pinned on the deliberations and decisions of these Annual Meetings to alleviate the problems that stand in the way of prosperity and well-being. I sincerely wish that we may be able to move toward fulfillment of these expectations.

Statement by the Governor of the Bank for Argentina—Nestor Rapanelli

We are addressing this Annual Meeting of the International Monetary Fund at a particularly important time for our region and for the entire world. International relations are undergoing unprecedented and dramatic changes, of proportions unheard of in the postwar period. Industrial countries are joining together in trading zones the size of continents. Fiscal and external imbalances persist among the major developed countries and are transmitting instability and rigidities to the international monetary system. The incessant and increasing impact of science and technology continues to be the principal source of international economic growth and a source of profound changes in the productive structures of both the industrial countries and developing countries.

A new decade is beginning, and beginning in a world that is quite different—politically, economically, and socially speaking—from the one we now live in and have been living in. Considering these enormous changes, what is there left for a representative of Latin America to say in his annual message here? Where does Latin America fit in the multifaceted development process that is taking shape before our very eyes? Or are we moving toward a world of large, insulated centers of growth and prosperity surrounded by vast, arid expanses marked by abject poverty, living on the edge, and underconsumption?

The answer to these questions is categorical and unequivocal. All people on earth want to be a part of the virtuous circle of economic progress. Everyone, even those governed by doctrines which exalt central planning, now recognizes the virtues of free trade, private initiative, the allocation of resources in a manner consistent with prices freely determined by the market, and, finally, the potential for change that human beings have when freed from overregulation and excessive constraints.

The Latin American countries are also attracted by development and share both the desire to achieve it and an understanding of the effort they will have to make. Their peoples are working with perseverance and courage to streamline their economies, improve productivity, create the security and stability needed to promote domestic and foreign investment, and, by establishing clear rules of the game, to end the problem of capital flight. Finally, and above all, they are working to overcome inflation—our continent’s endemic ill—which is corroding and destroying the very foundations of economic and social well-being.

The fiscal effort being made by our countries to attain this objective is unprecedented in the world. We must not only eliminate the deficit, which comparative statistics show is no easy task anywhere in the world, but also must generate a current account surplus so that we can fight the external debt problem with real resources.

The problem is that, in many countries in our region, export earnings as well as the proceeds from assets held abroad go to the private sector, while the Government bears the burden of the external debt overhang.

In fact, the extreme difficulty of achieving a fiscal surplus has led countries to issue domestic currency with which to purchase the foreign exchange needed to make debt-service payments. This has again and again unleashed high inflation and even hyperinflation in some of our countries.

Many social programs must be put aside, and important functions forgone by the Government, in order to obtain the required surplus.

Just as difficult as achieving a budgetary surplus is attaining a positive trade balance, in that our efforts to export are increasingly impeded by protectionist measures adopted by our potential purchasers. In some cases we must compete with the subsidization of domestic industry in the developed countries; in others, there are tariff and nontariff barriers to imports from our countries.

If we add to the cost of debt service the obstacles to international trade, it is clear that the future is quite problematic, if not to say virtually impossible.

In addition, the high interest rates exacerbated our external liabilities, more than reflecting supply and demand on the international market, and are a reflection of policies implemented by the developed countries to solve their own fiscal and trade macroimbalances. By placing excessive emphasis on the use of monetary instruments, such policies tend to draw attention away from the need for such countries to make fiscal adjustments themselves, even as our adjustments must be effected without any allowance for extenuating circumstances.

The debtor countries thus find themselves obliged to bear the burden of their own adjustment and, through interest rates which swell the external debt, to bear part of the adjustment burden of the industrial countries.

On the subject of the solution to the debt problem, I would just like to emphasize a few basic points: the need in the debtor countries to implement macroeconomic adjustment and structural reform programs that are aimed at achieving sustained economic growth and improving their external accounts; the need for the creditor countries to contribute by modifying domestic regulations so as to promote debt reduction operations and by providing larger financing flows; the need for the multilateral organizations, particularly the World Bank and the Fund, to play an active, leading role, and for them to be provided with the resources they need to take on this important task. I would like to take this opportunity to confirm our support for a substantial increase in Fund quotas. Finally, I would like to emphasize the need for greater cooperation on the part of the commercial banks in financing our programs and in implementing debt and debt-service reduction operations.

All things considered, as President Menem has just said, this is a typical case of “mutual guilt”: we happily and irresponsibly ran up our debt, but real interest rates on these loans also rose unfairly. We must all cry “mea culpa” and assume our share of the responsibility—debtors and creditors and the governments of both. If we do, the solution will be an intelligent response by all to the realities of the situation.

We believe that at this juncture there can be no doubt that approaches toward a definitive solution to the debt problem must inevitably include a substantial and realistic reduction in the level of debt and debt service. Perhaps this is a new name for a new Marshall Plan—from which Latin America never benefited—because the past and present impact of the debt on our people has been every bit as lethal as war.

I would like to underscore the spirit with which our countries, particularly Argentina, are doing their share in solving the crisis.

Our starting point is our awareness of the enormous changes taking place in the world and the basic prerequisites for entry into the international currents of growth, technological progress, and trade.

In the case of Argentina, the point of departure for our Government was a flare-up of hyperinflation resulting from many years of successive and painful adjustments and collapses and from a long period of what could almost be called structural stagnation.

The people of Argentina have understood the need for drastic change. We have undertaken sweeping and definitive fiscal reforms that will bring us in what remains of 1989 and throughout 1990 a surplus compatible with the proper functioning of the economy. All state subsidies have been eliminated, except for minimum allocations to the poorest sectors and those aimed at achieving equal opportunity in the education system. Emergency taxes have been introduced, along with sharp increases in the rates for public services. The domestic public debt has been rescheduled. We are in the process of making the running of the Central Bank independent of the decisions of the executive branch. Last, we are laying the basis for a sound and solvent public sector over the long run. This will once and for all remove the danger of inflation.

We are proposing a production revolution through a new economic system that will operate with the greatest possible freedom and only the necessary minimum of regulation.

A broad-based market economy, combining economic freedom with social justice and personal interest with solidarity, will be the vehicle for promoting competition amid stability and consolidating the conditions for economic takeoff.

This will be achieved through broad privatization of public enterprises; the lifting of restrictions on imports and exports of goods and services; deregulation of the exploitation of natural resources; customs reform that stimulates production, on an equal basis and without subsidies, for both the domestic and export market; tax and labor reform; modernization of the social security system; the dismantling of public and private monopolies; deregulation of the local capital market; and, last, the definitive establishment of equal rights and obligations for domestic and foreign investment.

This is a bold and drastic program, being implemented by a government of the people chosen in free elections, democratically succeeding another government, also freely elected in accordance with our Constitution.

We are thus bearing witness to a qualitative change, a watershed in our history, a true and authentic effort to put the past behind us and face the future resolutely.

The first fruits have already been reaped. Whereas inflation in the month of July was more than 200 percent, the September figure will be a single digit and that projected for 1990 will not exceed 15 percent a year, which makes us once again part of the civilized economic world. Stability is a public good that we shall consolidate.

The firmness of our people’s resolve is in direct proportion to the depth of the crisis. They have lined up behind a disciplined program for revolutionary change.

We have been trapped for too long in a vicious circle of debt, inflation, and stagnation. We know this vicious circle by heart:

—fiscal deficits that bring in their wake inflation, capital flight, falling investment, and declining economic growth, which erodes fiscal revenue and triggers even greater inflation;

—growing external debts with increasingly costly refinancing operations to pay new and higher interest charges on loans secured long ago, perhaps too long ago;

—public services steadily deteriorating under growing disinvestment by the private and public sectors; and

—social alienation, with the poor becoming increasingly poor, watching in a daze as the train of prosperity rushes through their lives without stopping and disappears inexorably into the distance.

The people of Argentina have now cried “Enough.” “We shall speak with deeds and not just with words,” said our President Menem—deeds, daily deeds—large and small—that restore the confidence of local and foreign investors, stem capital flight, and increase investment, growth, and employment; deeds that make it possible for the State to develop a tax base enabling it to finance its operations and achieve its basic purposes; deeds that bring Argentina back into the mainstream of the major trade and technological forces that spur global growth.

We have not remained buried in the crisis. We are not willing to perish as did Lot’s wife in Genesis, transformed into a pillar of salt for having looked back upon a past of ashes, ruin, and death. The people of Argentina wish to become part of the virtuous circle of economic progress and stability, with the unshakable will of a nation that has endured great suffering and whose natural riches have been left idle for too long. We are resolved to mold our own future, to enter fully into the 1990s, turning the page on the past, on inflation, and the specter of debt.

As Minister of the Economy of the Argentine Republic, I ask for your sympathetic understanding in this effort, and for the willingness to open economies so that the large markets receive our products as freely as we will receive theirs. We must work together to resolve the debt problem for which there will be no lasting solution until economic growth, increased commercial and technology exchanges, and the flow of productive investments make our Latin American countries not a bank account that must be paid off as soon as possible, but creditworthy nations to which potential suppliers of funds again compete to lend.

This is the path for Latin America as it leaves the 1980s and enters the 1990s—from the decade of indebtedness to the decade of growth, from a decade of sovereign debt and fiscal bankruptcy to a decade of solid and powerful private initiative as an agent for change, from a decade of failure and stagnation to a decade of competitiveness, technology, and efficiency.

Statement by the Governor of the Fund for St. Lucia—John G.M. Compton

I am honored to speak on this important occasion on behalf of the members of the Caribbean Community and Common Market (Caricom), namely, Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago.

I would first of all like to extend a welcome to the Government of Angola on their accession to the Fund and the Bank.

In the wide range of issues with which the international community is confronted, I would like, on behalf of the Caribbean Community, to bring four of these to the attention of this meeting.

First, the general conditions under which economic growth and development are taking place; second, the vulnerability and fragility of the economies of the region; third, the transfer of resources from developed to developing countries; and fourth, the situation of small states in the global economy.

The general environment under which economic growth and development is currently taking place is not propitious for the great majority of developing countries.

These countries, nevertheless, are taking significant steps to create the correct macroeconomic environment for their development. In cooperation with the Fund and the Bank through the mechanisms of structural adjustment programs and structural adjustment loans, they have implemented appropriate fiscal and monetary policies, removed trade restrictions, reduced or eliminated subsidies, and encouraged the use of the market system for the efficient allocation of resources.

It is incumbent on the developed countries to match the political will and the willingness to undergo these stringent programs being implemented by the poor countries by taking the appropriate measures to ensure noninflationary growth, currency and interest rate stability, as well as access to their goods and financial markets by the developing countries. Without this meshing of policies by both groups of countries the climate would not exist for self-sustaining growth.

A special word should be said about the threat of protectionism. This threat has been identified by both the Managing Director of the Fund and the President of the Bank in their presentations to this meeting. There is a serious and self-defeating asymmetry between trade liberalization as required under Fund and Bank programs implemented in developing countries and the rampant nontariff protectionism that is fast becoming the norm in the industrial countries. This is particularly evident in the areas of steel, textiles, and agricultural products, in which our countries have a particular interest.

In this regard note should be taken of the growing trend toward regionalization as evidenced by the movement toward a Europe without frontiers in 1992 and the North American free trade area between Canada and the United States.

It is hoped that these developments will not interfere with the progress of the Uruguay Round or lead to the growth of barriers to trade with other countries not involved in these arrangements.

There is an urgent need for a speeding up of the progress toward liberalization of global trade. The impediments, of both a tariff and nontariff nature, to international trade must be dismantled if developing countries are to have a chance of sustaining any modicum of growth and development.

As I speak to you the damage caused by Hurricane Hugo is still being assessed in the Eastern Caribbean islands of Antigua and Barbuda, Montserrat, Dominica, St. Kitts and Nevis, Guadeloupe, the Virgin Islands, and Puerto Rico. At our meeting just one year ago we had to confront the destruction caused by Hurricane Gilbert in Jamaica. We are confident that the quick response that characterized the response of the multilateral institutions and the international community on that occasion will again be in evidence in this, our hour of need.

These natural disasters emphasize with stark and frightening reality the vulnerability of the countries of the region. Many of the hard-won gains of economic development can be wiped out in a few hours by an act of nature, and it takes many years for countries to attain their former economic status. The countries of the Caribbean live under the threat of destruction by hurricanes for six months out of every year and it is now urgent that the Fund and the Bank create programs for these and other disaster-prone areas in order to meet their special circumstances.

While there are programs in the Fund that have been used in these circumstances, they need to be more specifically tailored to these needs by being quick disbursing and carrying reasonable terms of repayment. In the case of the International Bank for Reconstruction and Development there is a need for it to rediscover that portion of its name that applied in the immediate postwar period when the institution was created to assist in the reconstruction of Europe after the Second World War. Programs should be developed which can assist in the reconstruction of such disaster-prone areas that have no other recourse but to approach the international community for assistance.

Natural disasters, however, are not the only causes of the vulnerability and fragility of our economies. The external economic environment—in the form of fluctuation in commodity prices and international currencies—can have a damaging effect on monocultural or one-sector economies.

We now come to the critical matter of the transfer of resources from the developed to the developing countries. The conditions under which growth and development have taken place historically have involved a transfer of financial resources in some form, whether portfolio or direct foreign investment, or borrowing by the developing countries. Today’s circumstances militate against the development of the majority of countries in the global system because there is a massive reverse flow of funds from developing to developed countries. In fact, the figures, with respect to the operations of the Bank alone, indicate that the latter half of the 1980s witnessed a sharp decline of net transfers from a positive of about $112 million per year to a negative of about $71 million per year.

In the case of the Caribbean there has been a significant decline in the flow of resources to the region, with all categories—official development assistance, loans, and direct foreign investment—sharing in the fall. Official development assistance declined by some 40 percent between 1981 and 1988 despite the efforts of the Caribbean Group for Cooperation and Economic Development. This has occurred because the physical and social infrastructure vitally necessary for the successful development of the region has not yet been put in place. To compound this problem many of the islands, and in particular those in the Organization of Eastern Caribbean States (OECS), are faced with graduation from the International Development Association (IDA) in circumstances in which they cannot access resources on similar terms from other institutions, and in the face of their vulnerability to regular natural disasters and the external economic environment.

The flow of commercial bank credits has also diminished in the face of the urgent need to access new money for balance of payments purposes and to restart the growth process in many of the countries now involved in structural adjustment programs.

The flow of direct foreign investments has also been curtailed despite significant changes in the posture toward it by the countries of the region. The macroeconomic environment, under the influence of structural adjustment programs, has been significantly altered to create a climate for the proper allocation of resources and the appropriate mix between public and private investments.

The reverse flow of resources is now a fundamental global issue and is both cause and effect of the global debt crisis. We welcome the Brady initiative as an appropriate response to this crisis and propose that its scope be broadened to encompass more countries and varying conditions as is deemed necessary. The crushing debt and debt-servicing burdens of so many countries is not an environment in which growth and development can take place. We would like, therefore, to identify the special circumstances of our region which, because they do not rival the absolute magnitudes of the highly indebted countries of Latin America or the debt-distressed countries of sub-Saharan Africa, have virtually removed our countries from the serious attention they require. For the record, the debt and debt-servicing obligations of some of our member countries are among the highest in the world. In the case of Guyana, the external debt amounts to almost three times its gross domestic product, and for Jamaica the ratio is approximately 150 percent. The problem is compounded by the fact that, in some cases, most of the debt is to multilateral institutions which do not reschedule, and in one particular case, that of Trinidad and Tobago, their commercial debt does not qualify for treatment under the Brady proposals. We therefore urge special consideration and recognition for countries that do not fall under these two major categories.

Special note must be taken of the situation of Guyana and the path-breaking work of the support group led by Canada. The work of this group has led to some ray of hope and has established a basis for nursing countries back to economic health in the face of almost insurmountable difficulties.

The Caribbean is a community of small states that face serious obstacles in their quest for development. Many of these problems derive from their small size and the many diseconomies of scale which flow from this factor. Small states, however, are a fact of life, and the international community must pay special regard to their needs and aspirations.

The Bank must therefore pay particular attention to the investment needs of this part of its membership in order to ensure their viability and effective participation in the international community. In this regard, we welcome the assurances of the Governor for Japan that Japan will become more involved in extending assistance to developing countries and, in particular, we wish to extend our appreciation for the bilateral assistance extended by Japan to some of our member countries.

It is clear that a concerted effort must be made to reverse the flow of resources from poor to rich countries and to create a climate conducive to growth and development. There is need for an international conference on debt and the transfer of resources to parallel the work now being undertaken in the Uruguay Round. The North-South dialogue needs to be restarted, and the trend toward bilateralism reversed, so that a global approach to the issue that can be more self-sustaining and systemic can be launched in the 1990s. We congratulate the Nordic countries on their commitment to the increase of concessional flows to 0.7 percent of gross national product and urge the other developed countries to move in this direction.

In this vein we support a significant increase in quotas for the Fund in order for it to carry out its mandate, and an increase in the allocation of SDRs in order to improve international liquidity. In the case of the Bank, we support a replenishment of IDA-9 that exceeds the Eighth Replenishment in real terms.

In conclusion, as we move toward the twenty-first century, the time is appropriate for a re-examination of the Bretton Woods institutions and the international economic system. The system is clearly in crisis and we owe it to humanity to organize an international system that can not only deal successfully with the arms race and turn our swords into plowshares, but also increase and distribute the benefits of new technologies so that the scourge of poverty will be removed from the planet Earth.

Statement by the Governor of the Fund for China—Li Guixian

Mr. Chairman, first of all, please allow me to congratulate you on your assumption of the chairmanship. It is my belief that your wisdom will contribute to the achievements of this year’s Annual Meetings. I would also like to join previous speakers in extending a warm welcome to the Angolan delegation, which is participating in the Annual Meetings for the first time.

As the world is entering the 1990s, a major task of this year’s Annual Meetings should be to review the developments of the world economy during the past decade and to look to the future with a view to resolving the major problems of the world economy in order to create an environment for sustainable growth during the next decade.

Since the early 1980s, the world economy has undergone seven consecutive years of growth. However, this growth has been unevenly distributed, as most developing countries have not duly benefited from it, particularly the low-income sub-Saharan African countries, whose economies have come to a standstill.

Prompted by the growing interdependence of the world economy, the major industrial countries have strengthened their economic policy coordination and have achieved some positive outcome. Nevertheless, external imbalances remain large due to the limitation of such coordination in resolving their underlying economic problems. Moreover, such coordination so far has not given adequate consideration to the interests of the developing countries. Their large external imbalances have been the root cause of volatile financial markets and intensification of international trade frictions, posing a direct threat to the stability of the world economy. This adverse external environment has aggravated the burden of economic adjustment for the developing countries, and, coupled with protracted debt problems, many of these countries have been entrapped in the vicious circle of low growth and high inflation.

In order to have sustained growth in the world economy, it is essential that both developed and developing countries join together to create a favorable economic environment for growth. In an increasingly interdependent world economy, the sustained growth of the developed countries cannot be ensured without the economic development and financial stability of the developing world. Because of the crucial impact of their economic policies on the world economy and trade, the developed countries—particularly the major industrial countries—should bear primary responsibility for improving the world economic environment. Drawing on past experience, the international community should work out a new and effective code of conduct for further international economic cooperation in the 1990s.

The international community has made new efforts toward reducing the debt burdens of the developing countries since we met last year in Berlin. The Fund and the World Bank have also adopted active measures to assist the heavily indebted countries to implement their debt reduction schemes. We welcome such efforts. It is our hope that the international community will take fully into consideration the varied difficulties of all indebted countries and adopt effective measures to further reduce the debt burdens of the debtor countries. Particular efforts should be made to provide additional funds to help debtor countries restore economic growth while carrying out economic adjustment. We urge the developed countries to increase their financial assistance to the developing countries and to open wider their markets to the developing countries’ exports in order to eradicate the debt problem, maintain the stability of the international monetary system, and promote sustained world economic growth. Moreover, effective measures should be adopted to roll back protectionism and promote international trade to help the debtor countries break the vicious circle and restore economic vitality.

It is our hope that the Fund and the World Bank will play a more important role in the world economy during the 1990s. Therefore, China has consistently held that there should be a substantial increase in the quotas of the Fund. We have noticed that since the Eighth General Review of Quotas, the share in quotas and voting power of the developing member countries has declined. This is inconsistent with the desire of the developing countries to reform the unjust international monetary system. In the Ninth General Review of Quotas, due attention should be given to the developing countries’ requirements, and their position in the Fund should not be weakened further. We maintain that the equiproportional element should be predominant in the overall increase ….

The Fund and the World Bank are international financial institutions whose purposes are to maintain order in the international monetary system and to promote economic development in their member countries. The Articles of Agreement of both institutions provide that they act according to economic, rather than political, considerations. To abide by the provisions of the Articles of Agreement is undoubtedly a solemn international obligation for both member countries and the two institutions. Based on this principle, China has established good cooperative relations with the Fund and the Bank ever since it resumed its seat in the two institutions in 1980. It is our hope that such cooperative relations continue to develop in a normal fashion without outside interference.

In just three days the People’s Republic of China will celebrate its fortieth anniversary. Under the leadership of the Communist Party of China, the Chinese people, through hard work, have brought about tremendous changes in a country that was once backward and riddled with poverty. Particular mention should be made of the past ten years, in which policies of reform and opening to the outside world were implemented. Gross national product growth registered an average annual increase of 9.6 percent during the past ten years, compared with 7.1 percent from 1952 to 1988. During this period, China has enjoyed all-round development, with the fastest growth in economic development, from which the people have benefited the most.

From the past 40 years of experience, the Chinese people have come to realize that the Four Cardinal Principles are the foundations of the country and that reform and opening to the outside world lead to prosperity. The achievements of reform and opening policies during the past ten years have injected vitality and dynamism into the Chinese economy. Of course, it is by no means easy for a complex country like China to implement reform and the opening to the outside world, and at times we will encounter difficulties and setbacks.

At present, the major problems facing the Chinese economy remain the disequilibrium between aggregate demand and supply, as well as the irrational structure of industries and products. To address these problems, the Chinese Government has adopted a policy to rectify the economic order, consolidate the economic environment, and deepen economic reform. The essence of this effort is to reduce the excessive absorption of national income so as to redress the disequilibrium between aggregate demand and aggregate supply and to gradually bring down inflation to a sustainable level. The current austerity program is aimed at creating a favorable environment for furthering reform and opening to the outside world. Consequently, the Chinese economy has improved as a result of the adjustment efforts of the past year. Since the beginning of 1989, the overheating of the economy has been gradually brought down, the much-feared stagflation has not transpired, price hikes have been eased, and agricultural production has enjoyed a marked increase. In general, prospects for the national economy are promising.

Based on past experiences and lessons, economic reform has remained on a healthy path of development. All reform measures that have been promulgated will be continued and improved upon, and all measures that have been implemented on a trial basis will continue in an organized and gradual manner. In addition, a number of new areas of reform are being explored. As a matter of course, there are numerous difficulties to be surmounted. We are in the process of carrying out an adjustment program within three years aimed at creating a socialist commodity mechanism with Chinese characteristics, in which economic planning and market forces are combined so as to enable the Chinese economy to develop in a sustained, stable, and coordinated manner.

We respect all foreign governments and friends who would like to develop relations with us on equal terms, and it is our intention to further develop and expand our friendly relations with them. We have been continuing our efforts to improve the investment climate in order to attract foreign investors to China. We shall continue to utilize external financing in various forms in light of the principles of equality and mutual benefit. The Chinese Government places high priority on creditworthiness and enjoys sufficient capacity to service its debts.

The reform and opening in the past ten years have brought primary prosperity and vitality to China and genuine benefits to the people. Now the policy of reform and opening is popular and deep-rooted among the Chinese people. No matter what setbacks and difficulties may arise on our way forward, the determination of the Chinese Government and its people in continuing the reform and opening policy shall never be altered. We are fully confident that the socialist modernization process in China will be pushed forward. It is our wish to strengthen and develop further the exchange and cooperation with the international community and to play our part in contributing to the promotion of economic prosperity throughout the world.

Statement by the Governor of the Fund and the Bank for the Lao People’s Democratic Republic—Sisavath Sisane

It is both a great honor and a pleasure for me to attend these Annual Meetings of the World Bank and the International Monetary Fund in Washington, D.C., and to represent the Government of the Lao People’s Democratic Republic as a Governor of the Fund and the Bank. On behalf of the Lao delegation, I would like to welcome Angola, and I wish to thank the two institutions and the host Government for the quality of the arrangements made to ensure the success of these meetings and of our own contribution to the proceedings. I take this opportunity to thank the many Bank and Fund staff members who have worked with me and my colleagues in the Lao People’s Democratic Republic to produce data, initiate projects, arrange facilities and credits, and whose understanding of our problems has supported us in our efforts to sustain the pace and direction of change in our economy.

I will return to the subject of the Lao economy later in my statement. In the meantime I wish to comment on the state of the world economy in the near term.

World economic growth was strong in 1988 and the predicted outlook is for a slowdown in economic activity this year and in 1990. This is true of the United States, which I understand anticipates a drop from the 4.4 percent rise of 1988 to a gentler increase of 2.7 percent in 1989. The European Community growth rate of 3.75 percent in 1988 is to slow by about 0.5 percent per annum, declining to 2.75 percent in 1990.

The developing world, which achieved a growth rate of 4.2 percent in 1988, is likely to see a 1 percent decline in 1989 before recovering to 4.0 percent in 1990. A number of factors have led to the slowdown, which is understandably more pronounced in some countries than in others. These factors include weaker nonfuel commodity prices, slower growth in export markets, a worsening of inflation, and inadequate adjustment efforts. We ourselves are experiencing an uncomfortable level of inflation and are making strenuous efforts through our New Economic Thinking to adjust our economy and remedy the mistakes of the past. Asia contains the NICs—newly industrializing countries—which have been enjoying a period of prosperity and sustained growth. Asia too will experience a slowdown in 1989 to 6 percent from a very high 9 percent in 1988.

I turn to my own country. The restructuring of the economy, aimed at the transformation of the economy from one of subsistence to a market economy, demands the replacement of the old mechanisms with new mechanisms designed to bring autonomy to business management. The transformation from a subsistence to a market economy will lead us toward a unified domestic market that is linked firmly to international markets. We are striving to improve the living conditions of the people without destroying the world that they live in. We are discouraging slash and burn cultivation, which was damaging our forests. We are limiting the export of logs and are adopting a forest resource management program.

We are restructuring our economy, a process started in mid-1986. I mentioned some of these measures and the early successes in my statement to the Annual Meetings in Berlin (West) last year.

Our five-year plan, 1986-90, has certain fundamental economic objectives that are similar to those of the first half of the decade. These are to ensure self-sufficiency in food production; reduce the impact of slash and burn cultivation; develop the domestic processing of our agricultural and forest products; improve the balance of payments; improve our communications and transport networks; and strengthen management capacity and remove the constraints that result from a lack of skilled labor.

The principal constraints that hinder our economic development, the theme of the discussions at the Second Round Table Conference in Geneva on April, 1989, are four:

  • Structural obstacles in agriculture and forestry.

  • A narrow and weak export base.

  • The pitiful state of our roads and the consequent limited access to both domestic and foreign markets.

  • The extreme shortage of skilled labor in the key sectors.

The international institutions support our efforts to restructure our economy. Our many donors have expressed their tangible support at Round Table meetings in Geneva. I should perhaps remind members that the long list of countries that have supported our development and restructuring efforts includes a number of United Nations members that are not members of the bodies whose meetings we attend this week. We are also subject to the vagaries of the weather; several years of drought have helped push up our inflation rate.

Our targets for growth are essentially modest: from a low 2.8 percent in 1988, we hope to achieve 3.3 percent in 1989 and look for a more ambitious 5.2 percent in 1990.

The World Bank already approved a structural adjustment credit of SDR 30.8 million on June 9, 1989. The initial drawdown has taken place.

The Fund discussed our request for an arrangement under the structural adjustment facility on September 15. The amount of SDR 20.51 million, to be made available over three years, represents 70 percent of quota, of which 20 percent, or SDR 5.86 million, is to be made available immediately. On June 30, the Fund did not hold any of our currency subject to repurchase. Our Trust Fund loan is to be entirely repaid in 1990. The amount will be only 0.02 percent of quota at the beginning of 1990.

From now on we must hasten to remedy our inadequacies and correct our errors. We must exert all our efforts to restructure our banking, financial, and commercial systems. A key element in our economic adjustment process is the restructuring of our banking system. For some years we have had a monobank that combined both commercial and central banking functions. The New Economic Order demands a more responsive system, attuned to its clients’ needs. Our policy framework for the medium term refers to the separation of central bank and commercial bank functions. Our regional development institution, the Asian Development Bank (AsDB) offered to help the process with generous technical assistance and sought the participation of the Fund, whose own expert is working alongside the AsDB team. Consequently, we are most interested to learn that many developing countries have problems with their financial institutions ….

Our Government wishes to improve the coordination of external aid. It is proposed, inter alia, to organize the data that are essential for the understanding of the impact of externally aided projects and to adopt measures that will facilitate an improvement in our absorptive capacity and coordinating ability.

To conclude, I close with my sincere good wishes for a fruitful outcome to these Annual Meetings.

Statement by the Governor of the Bank for Nepal—Bharat Bahadur Pradhan

It is my pleasure and privilege to address this august gathering of honorable Governors and distinguished delegates.

I would like to put on record our sincere appreciation and gratitude to Mr. George Bush, President of the United States, for gracing our meeting and delivering a very inspiring address this morning.

We have been listening to a series of stimulating and constructive speeches in the Interim and Development Committees and also in this forum over the last few days. It was also enlightening to hear the thought-provoking presentations of Mr. Conable of the World Bank and Mr. Camdessus of the Fund on the world economic situation and its problems.

The interest shown by these institutions in improving the global economic environment and in helping the developing countries is indeed very encouraging. It is gratifying to note that there is a consensus for improving the world economic environment, in general, and the economic condition of the poor, in particular.

Notwithstanding the good growth performance of the world economy in 1988, the world economic situation has not changed significantly since we met in Berlin (West) last year. While growth in the developing countries, particularly in Asia, was generally high and sustained during a number of years in the past, the rate of growth is expected to fall in the coming years. It leaves an uneasy feeling about where this trend is leading us in the next decade.

The world economy is still beset with numerous problems and constraints. A combination of factors, such as the worsening of terms of trade against the developing countries, acceleration of inflation, and growing protectionism, has exacerbated the problems of many developing countries. The indication for 1989 and 1990 is that the pace of economic growth will slow down as the economic expansion in the industrial countries decelerates. Certainly, a great deal can be done in solving these problems by way of mutual cooperation and preparedness to look beyond one’s own interest, in the larger interest of the world community.

Many developing countries are leading the way with economic and institutional adjustment reforms to correct economic imbalances and accelerate growth. The policy mix these countries have adopted comprises macroeconomic management, including fiscal restraint, rationalization of exchange rates, liberalization of trade regimes, and enhanced private sector participation through divestiture and deregulation. These efforts will require an increase in the amount of resources transferred to the developing countries. This has been discussed on numerous occasions and we again reiterate that need. Evidence strongly suggests that the financial flows have been inadequate.

The drive toward structural reform has been greatly facilitated by support from the Fund under the structural adjustment facility and the enhanced structural adjustment facility, and the World Bank through its various instruments of program lending. There is, however, still a great need for an increased flow of concessional resources to the developing countries with reasonable flexibility applied to cross-conditionalities.

Environmental degradation today poses a great challenge to all of mankind, causing various kinds of setbacks to our developmental efforts. The recent initiative of the World Bank toward making both the government and the people conscious of the deteriorating ecology, disappearing valuable species, and destruction of mankind’s common heritage is commendable.

The external debt problem of the developing countries has been a matter of serious concern for about seven years now. Despite an increase in the disbursement of funds to the highly indebted countries, net transfers to these countries continue to be negative. According to the latest United Nations survey, the year 1989 will mark the seventh consecutive year of negative transfers of resources from the developing to the developed countries. As a result of this, the debt burden of the developing countries has held back their efforts to sustain their economies. In this context, the scheme suggested by Mr. Nicholas Brady, the U.S. Treasury Secretary, is commendable. However, the details of how it will actually work and how the banks will be encouraged to accept loan losses still need to be spelled out.

We note with satisfaction that some progress has been made to ease the debt problem, with the Fund and the World Bank playing a crucial role. A comprehensive debt strategy based on growth, development, and shared responsibility is being defined. We believe that this strategy would contribute not only to reducing the growing external debt burden of the developing countries but also to helping meet the growing demands of external capital for their development endeavor.

On the Ninth General Review of Fund Quotas, we continue to share management’s convincing argument and therefore support the doubling of quotas to enable the Fund to play an effective role in the 1990s ….

It is also important that the low-income countries, particularly the least developed countries, which cannot borrow on market terms, should be given preferential treatment with regard to the flow of concessional loans with minimum conditionalities from the multilateral and other agencies.

I would now like to dwell briefly on the recent developments in the Nepalese economy.

The Nepalese economy was experiencing a healthy turnaround following the adoption of the structural adjustment program in 1986/87. Until March 1989, the economy continued to register strong growth and stability. Government revenues continued to rise and the budgetary deficit stayed within reasonable limits. The rate of monetary expansion was restrained and credit flows were shifting in favor of financing private sector activities. International reserves continued to rise and there was a steady inflow of public and private investment capital from abroad.

The encouraging outcome of the structural adjustment program led the Government to move forward with the second phase of the structural adjustment program, for which agreement with the World Bank was recently concluded. In the second phase, we are focusing on financial sector reforms in addition to the macroeconomic and sector activities undertaken earlier during the first phase of the structural adjustment loan. We are also negotiating with the Fund on the third year of the program under the structural adjustment facility, and the policy framework paper is now in the final stage.

While our economy was heading on a path of strong growth with policies and programs in the right direction, the sudden abrogation of trade and transit treaties by India dramatically changed our economic situation and prospects, with reduced transit facilities at only 2 points from the earlier 15 points. Its impact has reverberated throughout the economy, resulting in a considerable slowdown in economic growth.

The trade and transit impasse was followed by the expiry of the agreement to supply petroleum, oil, and lubricants (POL) and coal by Indian corporations to Nepal. The immediate consequence has been an acute shortage of POL products and coal, which caused severe damage and disruption in industrial production, exports, tourism, construction, and services, as well as considerable hardship to the people as domestic transportation was disrupted, essential commodities became scarce, and the price of many commodities surged. Moreover, indications are that development projects will be delayed with attendant cost overruns. This situation is turning our economy into a high-cost one, and bringing the economy back to normal is, indeed, an arduous task.

To mitigate the adversity of the current impasse and to minimize the damage to the economy, the Government has implemented the Twenty-Two Point Economic Program. The main objectives of this program are to normalize the life of the common people to the extent possible by making arrangements for the supply of essential goods and services, and to minimize the negative macroeconomic consequences of the trade and transit deadlock.

The economic prospects for the current year are even more alarming. The lagged effects of the crisis are now evident in the continuing contraction in trade, industry, services, and construction, while the agricultural sector is also likely to suffer. In terms of macroindicators, real growth in gross domestic product is expected to slow further.

Compelled to use our already dwindling forest resources for energy in lieu of gas and kerosene, we are indeed very much worried by its side effects. It is indeed high time for us to develop hydroelectric power by harnessing our abundant water resources to meet the energy requirement. This is the surest means of preserving our forest resources and conserving our environment.

On the trade and industrial front, we are forced to diversify trade, both import and export. Developing new markets and finding new suppliers of essential goods, however, are not easy and, moreover, entail costs to the economy. It takes considerable time and adequate financial resources to adjust to the changed situation.

We are aware that the achievement of the goals that we have set in our Twenty-Two Point Economic Program hinges primarily on the continuation of sound economic policies. Despite the difficult situation, we are determined to implement reform measures that seek to strengthen our economy through various policy instruments which are, among other things, better fiscal programming, including austerity measures in our budget spending, administrative measures in resource mobilization, and better domestic debt management and monetary programming, including the liberalization of interest rates, reserve management, and effective bank supervision.

We are happy to note that we have received good support for our structural adjustment program. With the setback in revenue growth, export earnings, and private capital inflows, we will have to rely on foreign assistance for financing a larger portion of local costs of our development programs. We also require external assistance to adjust the economy to a new situation. That includes, among other things, assistance for rehabilitation and restructuring of industries.

We truly appreciate the donors’ support to Nepal. Generally, this assistance has been in line with our external financing policy for development programs. However, in the future, we would like to receive increased program lending relative to project funding, and to have loans channeled to productive investments, with grants directed to important support activities such as technical assistance for institutional support and development.

Nepal’s current challenges, superimposed on its landlocked and geographically disadvantaged status, demand even more support from the international community. The recent address of His Majesty King Birendra Bir Bikram Shah Dev at the nonaligned movement conference held in Belgrade is very appropriate to reiterate here:

Indeed, the least developed countries, especially the landlocked among them, are poorer today than they were a decade ago, despite the Substantial New Program of Action for the Eighties. Under the circumstances, one wonders if, without meaningful international cooperation on a predictable basis, these countries can sufficiently develop their economy to be able to stand on their own feet and survive. In fact, the small and the weaker nations among us, even in our times, stand still exposed not merely to underdevelopment but also to the threats to security and stability. They are susceptible to many forces beyond their control, be it an onslaught of mass communication or the threat of gunboat diplomacy.

In conclusion, on behalf of His Majesty’s Government, I would like to express our sincere gratitude to all donors once again for their support to our development effort. As always, we look forward to continued and increasing support from all donors in our pursuit of our country’s economic development.

Statement by the Temporary Alternate Governor of the Bank for Romania—Ion Zipis

These Bank-Fund Annual Meetings are a special opportunity for the international community to consider recent developments in the world economy and to review and set priorities related to the various actions and measures to be taken in the future.

In this connection, I would like to present the views and proposals of the Socialist Republic of Romania and President Nicolae Ceausescu for improving the international financial system.

As is well known, the world economic situation continues to worsen, mainly affecting the developing countries. At the same time, protectionist measures are on the rise, most frequently employed by the industrial countries to keep goods produced in the developing world out of their markets. The foreign debt burden has grown, and despite its particular impact on the indebted developing countries, it is severely undermining economic growth in the developing countries as a whole. We are still facing a paradoxical situation in which financial flows have reversed, going from the developing to the developed countries and reflecting an anachronistic situation in which the economies of the poor countries were subordinated to those of the rich countries. Interest rates on the capital markets and those associated with the lending operations of the international financial organizations and banks have reached high levels that directly constrain the ability of the heavily indebted countries to cope with their debt-service burden.

In this situation of economic instability, where external factors play a major role in the economic growth of the developing countries, the Fund and the World Bank would have been expected to play an active role in fostering economic recovery, mainly in the countries facing serious external debt problems. In our opinion this did not occur and, moreover, financial flows reversed, moving from the poor countries to the Fund and the Bank, which in fact negates the efforts to promote economic development and repay external debt.

Because of this critical situation, which has troubled the world economy for many years now, Romania’s President Nicolae Ceausescu has stated on various occasions the country’s position, advocating revolutionary approaches and bold solutions aimed at establishing a new and equitable international financial and economic order. Thus, when debt issues are being discussed, the only realistic and efficient approach is a global political and economic solution based on criteria and principles taking into account the level of development of the debtor countries, their payment capacity, and the efforts they have to make for their economic and social development. Such an approach and solution to the problem are possible, in our view, only with the participation of all countries, both developed and developing, in the framework of an international conference under the auspices of the United Nations, where the necessary measures should be established by consensus. Those measures would include forgiveness of a part of the poorest countries’ debt, cancellation of the debt resulting from excessive interest rates—sometimes running as high as 20 percent—and rescheduling of the remaining debt over the long term. It is the duty of the Fund and the World Bank, as international financial organizations in the United Nations system, to take effective measures that help solve the external debt problems of the developing countries.

Deeply committed to a new approach to improving the international financial system, Romania considers that the International Monetary Fund, the World Bank, and other financial and banking institutions must use fixed interest rates, which should not be higher than 4-5 percent annually, for loans to member countries. However, for current loans as yet not repaid, cancellation of the debt of the heavily indebted countries with low per capita incomes should be considered.

Debt rescheduling arrangements should allow greater flexibility regarding grace periods and maturities. Interest rates should be no higher than 2-3 percent.

As a member of the Bank and the Fund, Romania is concerned over the political trends in those international financial organizations regarding their lending operations in accordance with the Articles of Agreement as well as their relationships with borrower countries. As a member country of those organizations, Romania must state its point of view on current trends in the lending policy, because we feel that the wide range of conditions imposed by the Bank and the Fund on their lending operations is unacceptable neocolonial interference in the internal affairs of the developing countries.

It is especially important for the financial bodies to cease imposing political conditions on their loans, so that they serve as incentives for so-called privatizations in order to develop the private sector. On the contrary, the World Bank and the Fund, as well as other banks, which bring together a large number of developing countries, should support the development and strengthening of public ownership, with people being the real owners of national wealth. Under such circumstances, certain sectors offer better prospects for both economic development and the timely repayment of loans.

At the same time, Romania condemns the practice of lending against the raw materials produced by developing countries or of taking control over the production and sale of such goods. One such practice is control over the beneficiaries of credit. Another is the practice of some creditors that results in both production and sale being handled by the creditor, who ultimately sets the prices. Such practices are throwing the economies of debtor countries into disarray and hampering the development of social ownership and progress in these countries. In this decade their growth has stagnated or even declined.

Some may conclude that the Bank and the Fund have strayed from the purposes for which they were established. As a member of the Bank and the Fund, Romania cannot be party to a policy that in fact means support for the plundering and exploitation by multinational companies and the international financial and banking institutions in their relations with the developing countries.

The Bank and the Fund must therefore fully reconsider their policy and practices and democratize the whole of their activity so that the developing countries play a larger role in adopting measures and decision making within both international financial bodies.

Romania’s concern for improving the international financial system is part of the larger context of the complex world economy. Romania’s President recently emphasized once again that it is necessary to promote a new world economic and financial order that takes into account the interests of all countries—both developing and developed. All peoples of the world should be involved in the establishment of equitable economic relations that will improve the standard of living for more than 4 billion poor persons.

The issues on the agenda of these meetings have special importance for the development of the complex world economy. As such, the international community paid them due attention, but did not concern itself with whose interests—the developing or developed countries—were being served.

We are now witnessing complex and contradictory global changes, which should allow real democratization of international life and result in more just and equitable economic and financial/monetary relationships. Given this ongoing process, Romania feels that the Bank and the Fund should be, through their policies, more responsive to their members’ desires for economic and social progress.

The measures regarding the economic growth of the developing countries must emanate from their own governments, and structural adjustment programs must be the domain of national authorities, consistent with the social and economic requirements of those countries. Such adjustment programs must be bolstered by a favorable international framework, with creditor governments, international financial organizations, and commercial banks assuming greater responsibility in resolving the external debt problems of the developing countries ….

In view of the interest shown at the last meetings by most Fund members in a new quota review and a new SDR allocation, Romania supports the adoption of such actions. But such an allocation must permit the member countries to use cheaper financing than that offered by the commercial banks.

As you are probably aware, at the end of March this year, Romania repaid its external debt, which in 1980 amounted to more than $11 billion. In total, from 1975 until March 1989, we paid off about $21 billion, of which the interest represented more than $7 billion.

At present, our country is owed more than $2.5 billion from loans made to other countries. Without question, repayment of the external debt required great efforts. Romania had to ensure both the maintenance and further increase, in physical and spiritual terms, of its people’s standard of living and the gradual repayment during the period of its entire external debt.

As stated by Romania’s President, when we decided to pay off our entire external debt in this decade, we felt that only in that way would we be able to ensure the country’s full economic and political independence, so that it could steadily carry out its economic and social development programs.

Thus, between 1981 and 1989, more than $200 billion was allocated for development. Consequently, this year compared with 1980, industrial output is 50 percent higher; agricultural production will be one and a half times higher; and the volume of retail sales, in current prices, 40 percent higher. The total wage bill increased in this period by about 60 percent and the average wage by about 50 percent. At the same time, child allowances were raised by about 70 percent, and social expenditure per capita increased by more than 44 percent; more than 1 million housing units were built. We can conclude that only the general development of the production factors, science, and culture through sustained effort enabled us to pay off the external debt and ensure the social and economic development of the country.

The repayment of our entire external debt does not mean that Romania will not cooperate further in different areas with the international financial community or that it will not be an active member of the international financial organizations.

We sincerely wish to cooperate with other countries and the specialized financial organizations in establishing an international financial and monetary system advantageous to all countries and in which prevails a concern for healthy economic development, free of outside hegemony or interference in the sovereign right of every country to make decisions.

As a country which paid off its external debt by its own efforts, Romania cannot accept the continuation of financial practices and mechanisms that exploit other peoples. We would like to see the establishment of an international financial system that protects the indebted countries and ensures they have the means to offset the negative consequences of unstable currencies and interest rates and the policies of the international financial and banking institutions.

Deeply committed to more democratic relationships among countries, Romania, like other countries, assumes the responsibilities incumbent on it in establishing more equitable financial and economic relationships aimed at ending underdevelopment and establishing a new world economic order.

September 27, 1989.

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