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Summary Proceedings of the Forty-Second Annual Meetings of the Board of Governors 1987
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Opening Address by the Chairman of the Boards of Governors, the Governor of the Fund and the Bank for Bahrain1

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1987
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Author(s)
Ibrahim Abdul Karim

In The Name of God Most Gracious, Most Merciful:

It is my honor and privilege to welcome you all to these Forty-Second Annual Meetings of the Boards of Governors of the World Bank and its affiliates and the International Monetary Fund. I am confident that our deliberations at these meetings will assist us in making further progress toward the common goal of restoring a sound, expanding world economy.

As Chairman, and on behalf of all of you, I would like to express our thanks to President Reagan and to the people of the United States for their hospitality. May I also take this opportunity to welcome Mr. Michel Camdessus, the new Managing Director of the International Monetary Fund who succeeds Mr. Jacques de Larosière. I wish him all success in his task. I am quite confident Mr. Camdessus’ experience and distinguished career will enhance the role of the Fund in the world economy.

It is indeed a great honor for my country, Bahrain, and for me personally to be elected Chairman of the meetings of the Boards of Governors of the Bank and the Fund. Within these two institutions we endeavor to focus on international cooperation and give special attention to joint efforts in promoting the welfare of mankind, regardless of race, color, or creed.

Bahrain’s contacts with the rest of the world, since the early days of history and its continuous interaction with neighboring countries, have instilled in us a strong belief in the importance of international cooperation and have led us to be early advocates of this cause. Bahrain has always been recognized as a trading center, maintaining relations with other civilizations. Recent archaeological discoveries in Bahrain of templates and ancient seals dating back to the Dilmun civilization, which existed some 4,000 years ago, illustrate that even then Bahraini traders used letters of credit for trading with merchants of Sumer, Babylonia, and the Indus Valley. Such letters of credit were probably the first ever to be used in the world.

Bahrain cannot be detached from the Arab world, being part of the distinguished and ancient Arab heritage which has contributed for several centuries toward the progress of knowledge and enriched the growth of other civilizations. Bahrain is also part of the spiritual heritage of the region from which the three Divine religions evolved: Judaism, Christianity, and Islam, all of which have called for peace and justice toward mankind. The following verse from the Holy Koran is an explicit example:

  • Let there arise out of you,

  • A band of people

  • Inviting to all that is good,

  • Enjoining what is right,

  • And forbidding what is wrong,

  • They are the ones

  • To attain felicity.

Bahrain’s characteristics have been enhanced throughout history, and it has evolved as a major financial and banking center in the Middle East, providing facilities for channeling the flow of development credits to the rest of the world and, in particular, the developing countries.

Bahrain’s achievements over the last 20 years have resulted in a diversification of economic activities, creating features common to both the developed and developing countries. The rate of economic growth has been substantial, and our standard of living is at present as high as that of some of the industrial countries. At the same time, Bahrain is endeavoring to diversify further and expand its infrastructure in order to maintain its growth. Due to fluctuations in the world economy, we also encounter adjustment problems similar to those in developing countries.

Addressing these Annual Meetings allows one to look at world economic problems and to consider practical solutions. The growth of world output in 1986 and 1987 has been weaker than we expected at the time of last year’s Annual Meetings; some progress has, however, been made toward resolving a few of the problems confronting the international system. Output growth has been relatively rapid in some non-oil exporting developing countries, the major industrial countries have made efforts to strengthen the coordination of their economic policies, key exchange rate relationships have come better into line with underlying economic conditions, and inflation has remained low.

These encouraging developments, however, have been overshadowed by a number of negative trends. Output growth in the industrial countries slowed between 1985 and 1986 and shows little sign of having picked up in 1987. Also, the persistence of substantial current account imbalances among the three largest industrial economies has contributed to a marked intensification of protectionist pressures and to a worrying increase in trade barriers.

The prolonged weakness of commodity prices has severely affected the terms of trade of many developing countries, with the oil exporting developing countries being particularly hard hit. These difficulties were exacerbated by the fall in bank lending to developing countries and the persistence of historically high real interest rates. Living standards have continued to deteriorate in many developing countries, and as these countries have had to divert a substantial portion of their limited resources to correcting external imbalances, per capita consumption has remained low and often has declined. The structural imbalances in the world economy have multiplied and the gap between economic and social conditions in industrial and developing countries has widened, henceforth making it even more difficult to achieve our goal of a balanced international economic growth.

The world debt crisis is becoming more acute, and many indebted developing countries encounter difficult economic conditions which constrain their ability to service their large debts. Therefore, it will be difficult for such countries to make progress under the prevailing conditions. There is the risk of additional economic and political instability. The debt is accelerating in relation to the growth rate of the debtors’ economies.

Net commercial bank lending to all developing countries has fallen abruptly, hampering the efforts of countries undertaking adjustment programs and discouraging others from adopting needed corrective policies. This is a very serious development, which has also hampered normal access to international capital markets by countries not experiencing debt-servicing difficulties. Indeed, the failure to deal effectively with the debt problem ultimately could jeopardize peace and stability in the world.

We must pause here to question the most feasible method of tackling these problems, in order to reduce their impact on the borrowers and lenders alike. I am confident that the pool of financial and technical resources available to the Bank and the Fund can be mobilized in this operation. I am also hopeful that the global economic environment and the availability of external financing will be more conducive in the period ahead to the success of the debt strategy as envisaged by the U.S. Secretary of the Treasury in October 1985.

The major responsibility for promoting a favorable economic environment lies with the industrial countries. Our institutions’ largest members will need to follow through on their commitments, to cooperate closely to foster stable exchange rates, and to reduce existing imbalances. It is imperative that the deficit countries give priority to reducing their domestic imbalances and external deficits. Simultaneously, the surplus countries must pursue policies designed to remove structural impediments to growth and strengthen domestic demand.

I believe the industrial countries have the ability to perform the major role in containing the crisis due to their impact on the growth of the world economy. Steady growth rates in the industrial countries could be a basis for recovery of the world economy, improving the flow of international trade, and encouraging the demand for primary commodities, which are the main exports of developing countries. This, in itself, would help developing countries to execute adjustment programs. The industrial countries are the main consumers of oil and have considerably benefited from the reduced oil prices as well as low prices for other primary commodities. It is my wish that they will utilize this advantage in such a way as to alleviate the overall negative impact on developing countries. I would draw your attention in this context to the experience of the Arab oil producing countries in the 1970s when they recycled their financial surpluses to assist investment and lending opportunities on concessionary terms to the developing countries. I believe it is now time for similar reciprocal action to be taken by the major oil consumers.

The developing countries, for their part, must create the conditions for attracting sustainable financing flows. Structural policies must be directed toward removing economic distortions and ensuring efficient resource use. Realistic prices, interest rates, and flexible exchange rates can be important mechanisms for achieving these objectives. Appropriate macroeconomic policies can help increase public sector savings, thereby freeing resources for investment. The efficient use of these increased savings is essential to strengthen growth prospects in these countries, for economic recovery depends not only on an increase in investment but also on the quality of that investment. The precise mix of policies must, of course, be tailored to the particular circumstances of each country. Furthermore, the social costs of adjustment in fragile societies must be taken into account.

The major obstacle to economic growth over the last 15 years has been the persistence of fluctuating economic conditions. Major economic indicators such as exchange rates, inflation rates, and interest rates have varied extensively in industrial countries. This has made for considerable uncertainties that have adversely affected investors’ confidence and thus have hindered the growth and progress of the world economy. It also has forced the developing countries to focus on short-term adjustment measures, with consequent neglect of longer-term developmental objectives. One appreciates that attempts have been made in the last few years to contain the severity of these fluctuations, as more countries are awakening to the urgent need for cooperation and coordination of their economic policies. These signs are indeed positive, but practical steps should follow in order to minimize the adverse effects of such fluctuations in economic conditions.

Under these unstable conditions, my concern is that the adoption of protectionist policies by some countries will restrict the flow of trade and accentuate the crisis. Protectionist policies will have destructive consequences for the developing countries with debt problems, limiting their potential to export primary products and retarding their growth and productivity. Protectionism not only works against the interests of those countries most in need of a strong recovery in foreign earnings, it also acts to the detriment of the very countries that resort to trade restrictions. The perceived short-term benefits pale against its costs. I believe we all agree on the importance of rising to the challenge of removing the obstacles and protectionist barriers that inhibit the flow of international trade.

I now turn specifically to the role of the World Bank. The past year has seen the Bank continue to play its role as the central global institution supporting the development process. The reorganization of the Bank, with all its attendant difficulties, is now virtually completed and we expect the Bank to move vigorously in addressing the increasingly complex challenges that lie ahead.

While we expect the Bank to play an expanded role in meeting future challenges, we must also recognize that the Bank could be seriously constrained by a lack of financial resources. For years we have been discussing the possibility of a general capital increase for the Bank. The need for a general capital increase has been clearly demonstrated. I am pleased to note that there is also a general agreement among member countries to proceed expeditiously with the general capital increase.

Over the past year, Bank-financed projects in agriculture, education, health, and other critical sectors have reinforced the Bank’s commitment to its primary purposes: economic development and the alleviation of poverty. While projects remain the mainstay of the Bank’s lending program, it is important that the Bank should continue to play an active role in implementing the adjustment with growth strategy. In this process, more attention must be paid to the possible social costs of adjustment. Also, it is essential that the IFC should continue its important role in supporting direct private investment.

The agreement reached earlier this year on IDA’s replenishment of $412.4 billion was a positive sign. IDA’s concessional flows are essential to support adjustment, growth, and poverty alleviation in the low-income countries, particularly in sub-Saharan Africa, where 50 percent of IDA’s resources are projected to be committed.

The Fund, for its part, has a central role to play in the effort to promote international cooperation and ease the return to an expanding world economy. The Fund first must be encouraged to strengthen its surveillance role, primarily by supporting the initiative under way among the major industrial countries to improve the coordination of their economic policies. The procedures developed by the Fund for monitoring economic indicators should be aimed at enhancing policy dialogue and policy coordination. One should note, however, that the effectiveness of this process will depend on the willingness of the industrial countries to accept the responsibilities that are incumbent upon them and to abide by the principles of surveillance. As part of this effort, the Fund should attach importance to trade and structural issues and to the effect of industrial countries’ policies on the rest of the world.

With regard to the developing countries and the debt problem, the Fund has a twofold responsibility: to assist, together with the Bank, in the formulation of programs conducive to adjustment with growth, and to mobilize the resources, both its own and those from other sources, necessary to support countries’ adjustment efforts.

The increased emphasis being placed on growth-oriented adjustment programs and on intensified Bank-Fund collaboration in the design and financing of these programs is a welcome development. Programs must be tailored to the specific circumstances of members, paying due regard to domestic political and social objectives, for adjustment programs can succeed only if they are technically sound and enjoy the full support of the member concerned.

The initiative to enhance the resources available under the structural adjustment facility is a welcome and timely response to the exceptionally difficult problems faced by the least developed countries, and I would hope that an enhanced SAF could be in place in the not too distant future. It is also important that the Fund maintain adequate access to its resources and implement its access policy flexibly. Additionally, there is a need for a substantial increase in quotas in order to bring the size of the Fund back into more appropriate balance with the world economy.

A resumption of SDR allocations would represent an appropriate response to countries experiencing serious balance of payments difficulties, as it could help to relieve the risks of relying heavily on borrowed reserves. I therefore urge those members that have been opposed to a renewed SDR allocation to reconsider their position.

The risks and uncertainties that I have outlined threaten to undermine the spirit of cooperation that has been built up over the years. Each of us has an important role to play in bringing about sustainable, noninflationary growth in the world economy. Our efforts will be successful only if pursued in the framework of close cooperation. There is no more suitable forum in which to agree on such intensified cooperation than these important World Bank and Fund meetings.

Finally, may I take this opportunity to thank all those working behind the scenes to make these meetings a valuable venue for important decisions on the world economy. As the result of my experience in these meetings, I must express my thanks and appreciation to all concerned. In particular, I thank the Secretaries of the Bank and the Fund, their assistants, and the staff of the Joint Secretariat of the Annual Meetings for their efforts in the preparation of this meeting and in providing assistance to all participants.

May God’s Peace Be Upon You All.

Delivered at the Opening Joint Session, September 29, 1987.

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