Summary Proceedings of the Forty-Second Annual Meetings of the Board of Governors 1987

Discussion of Fund Policy at Fourth Joint Session1

International Monetary Fund. Secretary's Department
Published Date:
November 1987
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Statement by the Governor of the Fund for South Africa—B.J. du Plessis

Mr. Camdessus has already made an important contribution toward the activities of the International Monetary Fund since he became Managing Director at the beginning of this year. We wish him well in his challenging task.

The past year witnessed certain developments in world economic conditions that contributed toward the frustration and the plight of developing countries. These developments can be summarized as follows: the growth in real gross national product of the industrial countries slowed from 3¼ percent in 1985 to 2¾ percent in 1986; real primary commodity prices declined, whereas prices of manufactured products continued to rise. The terms of trade therefore moved against most developing countries; there has been a further unfortunate extension of protectionist and restrictive trade practices in various forms; while beneficial in the long term, the recent realignment of exchange rates among the industrial countries made international trade and financial transactions more complex; and capital flows between the financial markets in the major industrial countries continued to expand, but at the same time the flow of “spontaneous” funds between industrial and developing countries stagnated.

Against this background, the position of developing countries, and especially those with external debt problems, weakened further, as borne out by the following figures: the combined deficit on the current account of the balance of payments of developing countries increased from $24 billion in 1985 to $46 billion in 1986; total private lending to developing countries declined from a peak of $87 billion in 1981 to $19 billion in 1985 and to only $10 billion in 1986; in the case of countries that recently experienced debt-servicing problems, there was a net repayment of $6 billion of private sector credits; and the total dollar value of developing countries’ external debt rose by 9 percent in 1986 to reach $ 1,100 billion at the end of the year.

The problem of servicing the increasing debt of Third World countries has been a major item on the agenda of the Annual Meetings of the World Bank and the Fund since 1982, and only limited progress seems to have been made in the many efforts to find a solution. It is now acknowledged that it will take longer to solve the problem than was hoped for originally, and one can only endorse the often repeated conclusion that there are no quick fixes. We therefore welcome the initiative of the Managing Director in seeking an enhancement of the Fund’s structural adjustment facility.

In this regard, it is indeed disquieting to read in the Annual Report of the Fund that there have been “net repayments to the Fund of some $2 billion for the entire group of developing countries in 1986.” This seems to indicate that the various existing facilities of the Fund in their present form do not appropriately address the prevailing exceptional problems and needs of developing countries. The structural adjustment facility would appear to provide a more appropriate approach if combined with a greater emphasis on medium-term macroeconomic and structural adjustment programs, more active participation in management, greater attention to growth-oriented policies, and project financing through the World Bank Group.

This approach will also be in line with a trend that should at this juncture be accepted as a reality, and that is the fact that the international banking system will remain reluctant to make any important voluntary contribution toward the financing of the development needs of Third World countries in the years ahead. The World Bank and the Fund therefore will have no alternative but to accept greater responsibilities in this regard.

Consequently, the extension of the structural adjustment facility is a move in the right direction but needs careful consideration in its implementation. It is imperative, for example, to provide for the need for management skills and finance in the execution of any restructuring program. It is also imperative that the World Bank and the Fund should, in accepting this greater responsibility, be allowed to remain completely objective in their assessment of needs and requirements and not be subject to purely political influences and considerations in the execution of their duties.

We also regard it as a constructive development, within the context of the “case-by-case approach” of the Fund, to draw a distinction between the “low-income debt-distressed” countries and others that, given the necessary time, have a potential to recover. The former group of countries, many situated in sub-Saharan Africa, have our understanding for the harsh climatic conditions, unfavorable world economic environment, and difficult international financial framework within which they have to seek a solution to an exceptionally daunting problem.

During the past few years South Africa also had to contend with many of these adverse influences and had to cope with its own international debt redemption problem, which arose from a temporary liquidity crunch and not from an overextended debt-servicing commitment.

In the special situation of South Africa in the world context, we had no alternative but to enforce a drastic adjustment upon the domestic economy. During the past two and a half years, we repaid almost $4.5 billion of foreign debt. This included repayments of almost $800 million on Fund facilities. By the end of this year, South Africa will have no outstanding commitment on any Fund facilities and will be in a better position to continue to consolidate its remaining commitments to its private sector creditors.

In this regard, South Africa recently successfully negotiated a multiyear repayment arrangement with its private sector creditors but was criticized for excluding repayments to the Fund and redemptions of certain foreign government guaranteed loans from this arrangement. The private bank creditors insisted on fair and equal treatment for all creditors, including the Fund. Our repayments to the Fund were, however, made despite this criticism.

It was, of course, also not without great economic sacrifice that South Africa could meet all these obligations, both to the Fund and other creditors. The required large surpluses on the current account of the balance of payments could only be generated by severely restricting the domestic absorption of goods and services. After three years of low economic growth, we have now consolidated a situation that at times was extremely challenging. At this stage, however, we are in a position to restimulate growth and to be less concerned about the balance of payments effects of the emerging recovery in domestic demand.

Returning to the economic problems of sub-Saharan Africa, numerous arguments are justifiably being raised at these meetings why this subcontinent needs special aid and assistance. It is ironic, however, that the only South African country that by way of technical and other abilities and resources is most favorably placed to contribute toward alleviating the dire needs of other countries in this region should at the same time be the target of a concerted international effort to depress its own development. As events of the past year have proved, these misguided attempts adversely affect the whole region. The tragic reality is that disinvestment from South Africa has proven also to be a disinvestment from sub-Saharan Africa.

The Lesotho Highland Water Project, which is now in progress, provides a good example of what can be achieved through economic cooperation in the Southern Africa region, to the advantage of different countries and of all the peoples of the region. It also serves to illustrate how the efforts of the World Bank and other international development institutions can be complemented by regionally based institutions, such as the Development Bank of Southern Africa. It is through the achievement of results such as these that my country is convinced that, despite provocative actions from the outside world, we must continue in our unremitting efforts to maintain normal economic relations with all other countries and, at the same time, protect and promote the many diverse and mutually reinforcing trade and developing ties with neighboring states. Within this strategy, South Africa will continue to make its contribution toward the funds of the World Bank, and our commitment to the IDA-VIII Replenishment will be honored, despite the external financial pressures on our economy.

We are also prepared to lend our support to a significant increase in the quotas of the Fund. In the light of the greater role we see for the Bank and the Fund in a world in which the private financial system is retracting itself into the protected environment of the developed financial markets, the Bank and the Fund will have to increase their financial resources by increasing quotas and capital. South Africa supports this enhanced role for these institutions.

In conclusion, I reconfirm South Africa’s commitment to cooperate with the Bank and Fund in their endeavor to achieve their laudable objectives.

Statement by the Governor of the Bank for Peru—Gustavo Saberbein Chevalier

It is an honor for me to address this distinguished assembly in my capacity as Minister of Economy and Finance of Peru and Governor for the World Bank. Allow me first of all to present my compliments to the Chairman of the meetings, H.E. Ibrahim Abdul Karim, whose inaugural address provided us with food for thought. I should also like to acknowledge the presence of Mr. Michel Camdessus, whose concern to enrich the thinking of the Fund is greatly valued by us. Let me not fail to mention Mr. Barber Conable, whose work at the helm of the World Bank is recognized by us all.

In my recent statement to the Development Committee, where I spoke on behalf of six Latin American countries, I felt it necessary to stress several points. Firstly, I referred to the significant impact of the industrial countries on international economic development in a world that is constantly growing more interdependent. I shall therefore reiterate our conviction regarding the need to surmount economic policies that produce slow growth in the industrial countries, that push interest rates to excessively high levels in real terms, and that foster a rise in protectionism in the developed world.

Thus, when I listened to both Mr. Camdessus and Mr. Conable giving their assessments of the international economic situation, I could not fail to note a great similarity with our own position. Mr. Camdessus, for example, spoke of reducing the fiscal deficit in the United States and the impact of this on interest rates, exchange rates, and, most significantly, the allocation of savings throughout the world.

I also pointed out that the policies of the industrial countries had resulted in a substantial reduction in our export earnings, an increase in our external debt service burden, and an erosion of our payment capacity. All this has contributed to the drop in production and per capita income in the developing countries.

But it has also contributed to the drop in investment and employment levels, a fact which places not only the present but also the future in jeopardy. In the case of my country, Peru, the per capita reduction was of 20 years, doubling the decline in Latin America.

Today, however, no one doubts that the economies of the developing countries need to follow a sustained pace of growth. No one doubts the need for a substantial increase in productive investment. For this reason, I should like to stress that the benefits of increasing the supply of external financing to the developing countries will be felt worldwide. Everyone knows that this is essential if we are to boost investment and hence to accomplish the development of our nations.

I should now like to discuss the question of the debt within this context, since the reduction of our borrowing capacity places a constraint on our development. In this connection, I should like to draw attention to certain of the ideas put forward by Mr. Conable and Mr. Camdessus on the subject of the debt and financing: firstly, admission of the principle of shared responsibility for generation of the debt, a principle all the developing countries have maintained ever since the debt crisis erupted; secondly, recognition of the need for urgent access to new financial resources for development. We know that such an increase will also mean a reversal of present financial flows, so that they become positive. Here, it seems to me essential to stress the important role the international financial institutions can play, provided their capital is increased.

Accordingly, we wish to stress that we concur with the diagnoses arrived at and the objectives decided upon, and we hope we shall be able to concur soon with the decisions as to what policies and measures are best suited to meeting the development challenge.

I shall now briefly go over the Peruvian Government’s efforts to restore equilibrium in all markets and above all to pave the way for equitable and just development in the various social sectors, particularly the poorest.

The economic recovery program, applied since July 1985, was based essentially on stabilizing costs and expanding revenue, so that the desired increase in demand would revitalize the economy by putting idle capacity to use. This recovery process has made itself felt in the Peruvian economy in the following fields.

—Most enterprises have increased their sales, diminished the burden of their fixed costs, and strengthened their financial condition and net worth. The result has been a substantive improvement in the health of Peruvian banks as well as of the enterprises themselves.

—The real income of urban workers has recovered after a decade of steady deterioration in their purchasing power, which had reduced the minimum wage to $27 per month.

—National income rose 15 percent in 1986. This increase resulted from an 8½ percent growth in GDP, the recovery in real wages, and a reduction in net payments to external factors. The growth in national income meant a 13 percent increase in per capita income in Peru.

—Despite all this, per capita income is still at the 1974 level.

—Rural workers, who make up a major share of my country’s population, have benefited more than any other segment from our economic policy. The farm workers who live in the mountainous areas, previously ignored in development planning, have substantially improved their incomes. The prices of the goods they sell have risen more than prices as a whole, improving the terms of trade in favor of agriculture.

In addition to these facts, we must note the progress made in our fight against inflation. When the Government I represent took office, inflation exceeded 250 percent at an annual rate. By the end of 1986, it had fallen below 65 percent, though it must be recognized that the rate has increased somewhat in the last few months, but not to the level reached in the first half of 1985.

I must also point out that GDP will grow by some 7 percent in 1987, and employment will increase at a similar rate. Gross fixed investment, which declined from 1982 to 1985, grew significantly in 1986, especially in the private sector, where it rose by more than 20 percent.

My Government recognizes that, despite the economic progress made in these two years, Peru’s problems are far from having been solved. What has been done is only a first step; we have much more to do. And in our efforts we shall rely firmly on our faith in democracy and a deep sense of justice and freedom.

Considering the better understanding that now exists with regard to the debt problem, our Government has now signed concrete agreements with several of its creditors, some of them governments, some banks, and some suppliers. With the commercial banks we have reached certain agreements that can serve as a basis for those we sign in the future with other banking institutions. With two major banks, one European and one American, we have signed agreements that benefit both the creditor and the debtor. They provide for gradual amortization of our debt on terms and conditions different from those originally agreed. Above all, they permit us to stimulate the growth of our manufacturing exports, so important to Peru’s economy. For each dollar of debt paid by the Peruvian Government, we shall export for cash two dollars worth of manufactured goods with a large share of domestically added value.

Through agreements of this type, Peru has begun a process to re-establish relations with certain major creditors, which in turn has promptly made available to us new lines of credit to meet foreign trade requirements. Another result of the agreement is the development of new export activities, which will enable us to service our debts in accordance with our ability to pay and will help us finance our imports. We are negotiating similar agreements with some of our major suppliers to the extent that it is conducive to the restoration of our commercial and financial relations with our principal creditors and to the expansion of our exports.

Today as yesterday, we express to you our desire for a dialogue and our wish to maintain and broaden our links with the international financial community.

Statement by the Governor of the Bank for Thailand—Suthee Singhasaneh

It is an honor and privilege to address the Joint Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund for the first time.

Permit me to take the opportunity to express the appreciation of the Thai Government and the people of the Kingdom of Thailand to the President of the World Bank and the Managing Director of the Fund for their continuing support to Thailand in improving growth prospects in order to enhance the standard and quality of life of the people of Thailand and, indeed, those of the developing world. . . .

The current outlook shows that the world economy is continuing to recover, but the growth rates expected for both the developed and developing countries indicate that the process is a slow one. Although external imbalances are being reduced, the remaining magnitudes still pose a tremendous problem. For the developing countries, sustainability of the recent improvement in our current account depends, crucially, not only on our perseverance with adjustment efforts but also on the world trade environment. However, with the prevailing low prices of commodities, while the already slow growth in world trade is being further inhibited by protectionism, we cannot ignore the possibility of a setback. Therefore, in order for this progress to be maintained, realistic and consistent policies must continue to be pursued by all, so as to foster stability and create an environment conducive to growth in the world economy.

In this regard, we commend the increased efforts of major countries to stabilize their exchange rates and urge further efforts to alleviate the detrimental effect of uncertainties in the international financial system. We fully encourage their commitment toward policy coordination, as well as the role of the Fund to reinforce such action through the use of indicators in surveillance.

A hospitable environment is essential if we are to be able to deal with the overwhelming debt problem, which remains a tremendous obstacle. To support the continuity of adjustment efforts of debtor countries, the prerequisite of a real solution remains in their abilities to earn foreign exchange through competitive exports. In the interest of all nations, therefore, we urge that protectionism and the use of restrictive measures be halted before they cause further damage, both to the fair trade system and to the stability of the international financial system.

The possibility of sustainable growth on a global basis depends, moreover, not only on the stability of the international financial system but also on its efficient working. Adequate funds on appropriate terms from the international capital market, the official sources, as well as from the Fund, are of crucial importance. In this regard, the structural adjustment facility is a welcome element, and further efforts to triple this facility deserve support. In view of the Ninth General Review of Quotas not being due for the immediate future, to ensure the timely fulfillment of financing needs, we urge that access limits under the enlarged access policy be at least maintained for the meantime. As for the special facilities, it has to be emphasized that these are viewed as particularly important by the developing countries. And in the light of uncertainties with respect to the world trade environment and terms of trade, it is strongly urged that the compensatory financing facility be strengthened to provide the necessary assistance and that the conditions be kept reasonable. For the longer term, a new allocation of SDRs would also be of benefit, and members’ quotas under the Ninth Review should be increased to realistic and meaningful levels.

In concluding, may I express the appreciation of the Thai Government and the people of the Kingdom of Thailand to all Governors, the President of the Bank, and the Managing Director of the Fund for accepting our invitation to host the Joint Annual Meetings of the World Bank and International Monetary Fund in Bangkok, Thailand, in 1991.

We wish to assure fellow Governors and participants of our warmest welcome.

Statement by the Governor of the Fund for Israel—Moshe Nissim

This is my first opportunity to take part in the Annual Meetings of the World Bank and the International Monetary Fund. I would like to commend the President of the World Bank and the Managing Director of the Fund for the effort and thought they and their staffs are investing in resolving the economic and financial problems of the world. They rightly emphasize the problems that disturb us all, and, in particular, disturb the developing countries and the countries laboring under a heavy burden of servicing an external debt.

In 1986 and 1987, there were some encouraging developments in a number of less developed countries, such as the renewal of growth and the lowering of inflation rates. The slowdown in growth and demand for imports in some industrial countries and the debt service burden of many developing countries have, however, cast a shadow over the positive developments. Postponement in finding a solution for these problems can only perpetuate the situation. Lack of solutions may only aggravate such a process. This, therefore, is the main issue facing the international banking institutions and the banking system in the industrial world.

The long-term solution for the problems of balance of payments, external debt, and living standards is, first and foremost, the formation of conditions that will ensure continuous and sustainable growth. Growth requires structural changes, mainly through the increase of exporting industries. Export-led growth, however, can only succeed if the demand for imports on the part of industrial countries grows.

Increasing demand for the products of developing countries depends, among other things, on the removal of obstacles to international trade in all countries. Progress in this area in recent years leaves little room for satisfaction. In the long term, the economic stability of industrial countries, as well as the political stability of the whole world, depends on finding solutions for the problems of the developing world.

Growth needs investment. The problem is that in some developing countries living standards are so low that an adequate level of savings to provide the necessary investment cannot be attained. Thus, the only solution for the problems of these countries necessitates the import of capital. However, import of capital will not solve their problems unless a structural change takes place.

We in Israel have learned that problems of balance of payments and inflation cannot be solved without the introduction of a comprehensive and consistent policy which may also be painful.

In the first half of 1985, our inflation and balance of payments deteriorated. Inflation accelerated to a monthly rate of 20 percent, combined with depletion of our foreign currency reserves. In order to turn around these trends, Israel adopted in July 1985 a comprehensive policy which included a whole range of fiscal, monetary, wage policy, and exchange rate measures. Temporary use was made during the transition period of administrative price controls.

To date, this policy has had positive results. Inflation is down to 1.5 percent a month. This is still high by international standards, and we hope to bring it down yet further. In order to achieve this, we are restraining expenditures and have taken special measures to improve tax collection.

The main nominal anchor during the period of stabilization was a fixed exchange rate. At the beginning of the process we fixed the exchange rate to the U.S. dollar, allowing our currency to devalue relative to our basket of foreign currencies. Later on, we fixed the exchange rate to the basket of currencies. Ten months ago, we managed to devalue our currency by 10 percent without any noticeable effect on the rate of inflation.

We have also adopted a restraining monetary policy, resulting in high real interest rates which helped to support the stable exchange rate. These rates started to decline at the end of 1986.

Stabilization of the economy and the improvement of our financial situation have enabled us to focus our attention on finding long-term solutions and thus laying the foundation for renewed growth.

In order to create a suitable climate for growth, income tax as well as capital market reforms were introduced. We believe that the income tax reform, which brought the maximum marginal tax rate down from 60 percent to 48 percent, and the corporate tax from 61 percent to 45 percent, will encourage motivation to work and invest.

The noteworthy reduction in the budgetary deficit in 1986 permitted us to make a considerable reduction in government involvement in the capital market. In the past, the business sector was crowded out by the Government. Now, business has room to raise money in the capital market.

There are clear indications that we have passed the low point of economic activity. Gross domestic product this year is expected to be 4–5 percent higher, and the product of the business sector will increase by 5–6 percent. The composition of this year’s anticipated growth is well balanced. Particularly encouraging is the significant growth of investments in fixed assets.

The recovery in economic activity is also expressed in a decline of unemployment rates from 7.5 percent to approximately 5.5 percent. The rate of savings, which declined last year, is expected to rise again. The real increase in imports over the last two years was mainly caused by a growth in the import of inputs for manufacturing and fixed asset investments.

One of the main factors for the success of the economic policy is the public trust in this policy. Despite—or perhaps because of—the unpopular steps we have adopted, we have come to realize that one can win public and political popularity by courageously taking the right steps, however difficult they may be.

We realize that, despite these achievements, we are only halfway down the road in the process of economic recovery.

I often ponder how similar are the problems of a small-scale economy such as ours to those with which large countries struggle. The requisite solutions are also similar. Our experience in the last two years has served to strengthen our conviction and belief that, when the correct steps are taken, positive results can be achieved. Our message to other countries that are in the situation in which we found ourselves two years ago is that a stabilization program can work. We will be glad to share our experience with all countries.

These days the Jewish people celebrate their High Holidays. In our prayers during these days we say: “Our Lord in Heaven: Grant peace unto thy land. Give prosperity to the world.” What more can we all ask for, if not to live in a better world where peace and prosperity reign.

Let us hope that these prayers will be fulfilled in our days.

Statement by the Governor of the Bank for Iceland—Jon Sigurdsson

I have the honor of addressing this distinguished gathering on behalf of the five Nordic countries, Denmark, Finland, Iceland, Norway, and Sweden. On their behalf, I would like to join my fellow Governors in warmly welcoming the new Managing Director of the Fund, Mr. Camdessus. He has already made a strong impression with his leadership, and we expect much from him in the years to come, continuing the outstanding work of his predecessor, Jacques de Larosière.

Although certain positive developments have recently been noted, the performance of the world economy has fallen short of expectations in the year that has passed since our last meeting. Economic growth in the industrial countries has slowed down in each of the last three years, and the growth of world trade is expected to be significantly less this year than last. Unemployment is still unacceptably high in most of the industrial countries, and structural rigidities continue to hamper their growth. Growth in the developing countries has also slowed down this year, although the performance of individual countries varies a great deal. The debt problem that has plagued a number of countries in recent years gives cause for concern and continues to demand attention.

These familiar aspects of the world economic situation have been well covered by many previous speakers. Rather than belabor them further, I would like instead to draw attention to a few broad issues of policy.

Economic imbalances in and among the major industrial countries have unfortunately been an important feature of the international economic scene in recent years. We have, on the one hand, fiscal imbalance to a varying degree and, on the other, the current account imbalances. These twin imbalances are the root cause of exchange rate instability, which in turn has raised questions about the effectiveness of the floating exchange rate system.

The Plaza agreement among the finance ministers of the Group of Five in September 1985 had a strong impact on exchange rates. Since then, there has been a major change in the relative values of important currencies, which is a prerequisite for a reduction in current account imbalances.

However, despite these significant exchange rate adjustments, current account balances have not shifted accordingly. But evidence is now coming to light indicating that trade flows have begun to respond to changes in the relative values of currencies. It appears that the lags of adjustment are longer than had been expected, and considerable correction seems now to be in the offing.

The Plaza agreement and the Louvre accord of February of this year, as confirmed at the Venice summit, have shown that orderly adjustment, leading to greater exchange rate stability, can take place under the present system. Although exchange rates have fluctuated a great deal since the beginning of floating, exchange rate adjustments of the last two to three years and the response of trade flows have been relatively orderly. The volatility and perceived inappropriateness of exchange rates in recent years are a reflection of deficient macroeconomic policies. It is primarily these policies that need to be changed in order to restore balance to the international economy. By the same token, the recent tendency of interest rates to creep upward is probably mostly due to a lack of confidence in the resolve of major country governments to deal effectively with the lack of balance in their economies.

Consequently, the main task of international economic cooperation should be to strive for compatibility of economic policies in the industrial countries in order to bring stability to the exchange markets and, more importantly, to pave the way for sustained, noninflationary growth. The most important step toward better balance in the global economy is coordinated fiscal action in the three major industrial countries, the United States, Japan, and the Federal Republic of Germany. Japan and the Federal Republic of Germany have already announced measures to introduce fiscal stimulus to their economies. These measures are indeed welcome, although we would have liked to see earlier action of this kind. The countries I represent have repeatedly called for such action in the surplus countries over the past few years.

This year we have seen an important reduction in the U.S. federal budget deficit. However, this improvement seems to a significant extent to be based on transient factors with little evidence indicating lasting fiscal consolidation. The recent decision of the U.S. Congress to reaffirm the policy of medium-term deficit reduction is all the more welcome. It is difficult to foresee an orderly reduction in international current account imbalances without fiscal consolidation in the United States. If the deficit reduction policy in the United States fails, we would face either mounting protectionism or a further decline—perhaps a substantial fall—in the exchange rate of the dollar, possibly accompanied by rising interest rates and inflation. It is a choice between two evils which we want to avoid.

I have so far focused on the fiscal policy of the three major industrial countries. This, of course, reflects their overriding importance in the global economy. Economic policy in the smaller industrial countries and the newly industrializing countries is obviously also important for the international economic environment when these countries are taken together. All countries large and small should be conscious of the international implications of their domestic policies and contribute to the process of adjustment.

We welcome the steps taken by the major industrial countries to strengthen the coordination of economic policy, as evidenced by their recent joint declarations. We support the efforts undertaken by the Fund to monitor economic developments through a comprehensive set of economic indicators as a part of effective multilateral surveillance of its members’ policies. The systematic monitoring of economic indicators is a useful addition to the surveillance procedure and is likely to improve the symmetry of the surveillance process and make the Fund more effective in performing its central role in the international monetary system.

Effective surveillance provides a basis for coordinated action by sovereign governments that realize that solutions to interdependent problems must be sought jointly by all. In the final analysis, the actual results are dependent upon political commitment. The surveillance procedures must be such that they bring this out clearly and encourage that commitment.

As I mentioned earlier, the economic situation of the developing countries varies a great deal. The newly industrializing countries of Asia are doing quite well, while the situation of many commodity-exporting countries is precarious. Many of these countries are in sub-Saharan Africa. It is alarming to note that for Africa as a whole, per capita real GDP has fallen in every one of the years from 1981 to 1987. These have indeed been seven lean years for Africa. The question is: How can the next seven years be made better?

The problems many of these countries face are so deep-rooted that the Fund’s ability to deal with them through its ordinary credit facilities will always be limited. We have been impressed by the efforts undertaken at the initiative of the Managing Director of the Fund to enhance the resources of the structural adjustment facility to assist these countries, and we endorse that initiative. I would like, however, to emphasize that in our view the structural adjustment facility alone cannot provide the solutions to structural economic problems. Its financial role will of necessity always be limited. Its catalytic role can, on the other hand, be very useful. The main burden of alleviating the financial difficulties of the low-income countries will continue to be borne by multilateral development banks and official development agencies. Last, but not least, the developing countries themselves need to implement comprehensive adjustment policies. In this context, I would like to welcome the recommendation of the Interim Committee to maintain unchanged access limits in the coming year. I also want to register once again our support for a substantial quota increase under the Ninth General Review of Quotas, so that the Fund’s regular lending activity may once again be based primarily on its ordinary resources.

Before concluding, I would like to comment briefly on the international liquidity situation. The Fund’s effort in this area has, in recent years, mostly been devoted to regular consideration of SDR allocations. Plainly speaking, these discussions have been on a dead-end street for a long time. In our view, a study of the overall international liquidity situation might now be warranted. We may already have spent far too much time—without success—on just one very small reserve component, namely the SDR. We need a wider approach. For the record, I want to reiterate that the Nordic countries continue to be in favor of a moderate allocation of SDRs.

Many formidable challenges face the world economy today. To meet them successfully, we need a commitment to international cooperation. This commitment has long been the hallmark of the International Monetary Fund. May it continue to be so.

Statement by the Governor of the Bank for Belgium—Mark Eyskens

I believe that we can and must say that during the past year the international institutions, and particularly the World Bank and the International Monetary Fund, have spared no effort to master the problem of the indebtedness of a large number of developing countries. The managements of the Fund and of the World Bank have conducted their efforts with great insight, dexterity, and imagination, and with manifest courage. I would like to commend President Conable and Mr. Camdessus, the Managing Director of the IMF.

Nonetheless, the debt problem continues to cast a very threatening shadow over the future of the affected countries, over the world economy in an epoch of insufficient economic growth, and over the continued operation of certain financial mechanisms and the normal functioning of the financial markets.

I am of the opinion that the effective management of indebtedness, or more precisely of overindebtedness, requires us to draw a fine distinction between the past and the future, that is to say, between how to treat the presently existing debt, on the one hand, and how to place at the disposal of the developing countries the additional financial flows which will permit them to achieve a normal economic development, on the other.

Let us first attempt a convergence of our viewpoints concerning the management of existing debt.

It is self-evident that any management of the existing debt of the countries afflicted with overindebtedness must take place within a framework of multilateral consultation on a case-by-case basis. A policy of restructuring and economic adjustment is, for the majority of the indebted countries, the sine qua non for disarming, and dismantling, the time bomb of overindebtedness. But we must be vigilant, both as Governors of our institutions and, especially, as the representatives of highly industrialized countries, to ensure that whenever and wherever this policy of restructuring and adjustment of economic, industrial, and financial entities is installed and set in motion, due attention is paid to the limits of political and social tolerance. It is better to take five years and succeed than to fail in one year by forcing adaptation efforts which exceed the adjustment capacity of the body politic.

The foregoing is not a plea for a policy of accommodation. The indebted countries must now and must continue to apply course corrections in numerous areas. At the same time, the vulnerability of the international banking system must be kept in mind. Debt repudiation could set off, among the creditor financial institutions, a chain reaction whose consequences would rapidly pass beyond control.

The management and mastery of the debt of the developing countries, in a framework of international cooperation, must avoid veering either into deflation or into inflation. A radical compression of the external indebtedness of the debtor countries could inflict such an excessively brutal reduction of purchasing power and braking of imports that its deflationary effects could spill beyond their borders; while certain kinds of refinancing on the part of the creditor countries, based on substitutions of an increasingly monetary character, could reawaken the threats of inflation, higher interest rates, macroeconomic imbalances, and finally, the stagnation of the world economy.

In practice, we must negotiate, as often as necessary and through the appropriate agencies, rescheduling agreements for the debt of the developing countries, with particular care for the poorest countries and notably the countries of sub-Saharan Africa. The Paris Club, in which Belgium plays an important role, furnishes a good example of international cooperation. I am very pleased to say that recently the conditions of reschedulings, in terms of repayment periods and grace periods, have become more favorable to the debtor countries.

I would like here to restate the proposal made by Belgium, among other countries, which consists of linking the debt service of the developing countries to fluctuations in the prices of the primary commodities that they produce. This kind of mechanism has been built into a financial package for a major Latin American country. Despite the well-known difficulties of administering it, this approach definitely seems to me quite promising.

It is extremely important for the industrial countries to keep up their official development assistance efforts. The economic crisis of the past decade has somewhat reduced the effort being made. In light of the restored growth potential of the economies of the highly industrialized countries, a larger transfer toward the developing countries seems appropriate, provided that the proceeds are integrated into complementary economic development programs in the countries receiving the assistance.

Another essential factor in alleviating the burdens of overindebtedness is the level of interest rates, especially the lowering of real interest rates. The interest rate behavior is an economic variable largely determined by the restoration of major macroeconomic equilibria in the countries of economic dominance. In the present case, those countries whose economic impact is global need to make greater efforts to correct their budgetary and balance of payments deficits, but without resorting to protectionist measures whose globally harmful effects are no longer to be doubted.

If we wish to avoid a financial cataclysm of global dimensions, followed by a veritable economic implosion, the debt problem must be approached and solved in a framework that recognizes the absolute necessity of solidarity and that provides for negotiated cooperation between creditor and debtor countries. Let the past, as worrisome and pregnant with consequences as it is, be past; we must now courageously face the future and imagine, together, the very best manner of building it better.

As a means to this end, the Baker plan has lost none of its importance. But since its launching, we have been aware of numerous impediments to its realization. The financing of the commercial needs and normal investments of the developing countries by the normal financial intermediaries and market mechanisms will remain difficult as long as the snowballing of debt and its gradual absorption have not found a more concrete set of solutions. It would be easy, but demagogic, to insist that the banks have but to grant credit at high risk and a low return. That is why I wonder if we should not examine the possibility of putting in place an agency of multilateral guarantees under the aegis of the World Bank and the International Monetary Fund. General and unlimited guarantees are obviously out of the question. But in certain cases and under certain conditions, I think it would be wise to consider a mechanism of multilateral guarantees for new money granted to developing countries.

The idea advanced by the Managing Director for substantially increasing the resources of the structural adjustment facility has Belgium’s total support. We would even favor tripling it, on condition that this was not to be done by budgetary means on the part of those countries working today and tomorrow for the adjustment of their own public finances. This is the case of my country. We propose that the IMF make available to our central banks a credit that would be liquid, and this would be the basis of financing on our part. Last spring, Belgium proposed the sale of a fraction of the Fund’s gold. Since this idea still evokes a number of reservations, we might consider in parallel the possibility that the affected members would renounce a part of the interest accrued on their credit positions in the Fund. In this way, the operation would become truly multilateral, inasmuch as it would include all the industrial countries and certain developing countries with balance of payments surpluses.

It is additionally necessary for the member countries to participate in augmenting the owned funds and the resources requested by the various international agencies. Thus, the Eighth Replenishment of the resources of IDA should make available greater financial resources for supporting the activities of the structural adjustment facility.

Belgium supports the World Bank’s request for a capital increase. This increase should be accomplished without further delay by means of a general increase distributed in proportion to present subscriptions. I am also glad that the Ninth General Review of Quotas has been undertaken by the International Monetary Fund’s Executive Board. I hope this exercise will shortly result in a positive decision.

Last year, on the occasion of our Annual Meetings, I had occasion to underline the importance of the search for a structural solution to the debt problem. For the future, any new accumulation of enormous debt by a number of Third World countries must be avoided in view of the difficulty of resolving the problem of existing debt. One of the structural solutions I then put forward was the replacement of claims with participations in the industrial and economic assets of the indebted countries. But I added that such a debt/equity swap was not conceivable in a bilateral setting, since this would give rise to renewed dependencies between the industrial creditor countries, on the one hand, and the developing debtor countries, on the other, of a kind belonging to a past era of our history.

I proposed that the International Finance Corporation would be the perfect candidate, as a multilateral agency collectively managed by our international community, to organize non-debt-generating flows in the indebted countries and to facilitate, in certain cases, precisely these kinds of debt conversions into equity participations. This is an absolutely essential strategy, and we attach to it the highest value.

Belgium has for many years insisted on the need for a new allocation of SDRs in order to increase the owned reserves of many countries without specifically requiring them to have a positive balance of payments position. In order to facilitate an agreement on a new allocation, Belgium proposed that these SDRs could be endowed with certain conditionality that would ensure their utilization in connection with restructuring programs. . . .

Finally, at the end of our deliberations, I would like to stress the great desirability—if we wish to avoid the worst inevitability—of a patient restructuring of the international monetary system.

I observe in many of those responsible for the conduct of monetary and financial policy all over the world a growing awareness of the need for a more orderly international monetary system, following the sometimes bitter experience with floating exchange rates, which have brought neither stability nor a readjustment of external accounts, though spontaneous readjustment was the decisive argument of the academic salesmen of the theory of floating rates. I discern, ever more clearly, a certain nostalgia for the Bretton Woods agreements, all the while knowing full well that a return to the exact status quo before August 15, 1971 is totally out of the question because of the profound changes which the world economy and, above all, its monetary makeup have undergone since then.

Indeed, it must be admitted that the operations of certain insufficiently controllable mechanisms have given rise to the emergence of a veritable monetary galaxy, floating free, so to speak, above the surface of the earth, and totally unconnected with any normal financial requirements: neither those of industry, nor of international commerce, nor yet of economic growth. This is a structural phenomenon of the first importance, and one which brings in its wake grave dangers of global disequilibrium. This makes the restoration of a certain order to the international monetary system all the more necessary. The point of departure for our consideration of this issue must be a paradox.

In fact, it has become more and more evident that the most thoroughgoing liberalization of exchange rates, which are then allowed to float freely in response to exchange market forces, in time inevitably gives way to state interventionism, covert or overt, which is directed at the control of international trade. It is thus the very deregulation of exchange rates, which, through a paradoxical mechanism of cause and effect, spawns a dangerous and protectionist regulation of the free exchange of goods and capital. It is the unmasking of this paradox that leads us inescapably to conclude that every means at hand must be used to restructure the international monetary system.

I can therefore only rejoice at the Louvre agreement, which has not only the virtue of existing but the surpassing virtue of functioning efficiently. It has helped over the past year to rebuild confidence and to reopen the prospect of economic development in a context of monetary stability. This stability in the rates of the most important currencies is of crucial importance to the European Community in its labor of strengthening its European Monetary System (EMS), as we once more demonstrated at the last meeting of that Community’s Finance Ministers when we set up a supplementary system for the joint support of the currencies composing the EMS.

It goes without saying that greater monetary stability at the international level cannot fail to benefit from the International Monetary Fund’s elaboration and application of a system of economic indicators, which will play the role of beacons marking out a common analytical framework. We favor the strictest possible application of these indicators in the service of a multilateral harmonization, to be enforced by constant surveillance and monitoring of the medium-term behavior of the fundamental variables of the international economy.

Belgium, for its part, has not abandoned the idea of establishing the famous monetary target zones, which, supported by an enhanced multilateral surveillance, would lead to a more coordinated, more objective, and more stable management of the international monetary system and of the world economy.

The industrial countries ought to be more concerned about the prospect of less dynamic economic growth. International cooperation is both easier and more effective in a context of sufficiently high economic growth. To achieve this, the economically dominant countries should follow a double-tracked policy. The first track is that of industrial restructuring and modernization, including the reabsorption of large macroeconomic and budgetary imbalances; the second track is that of supporting and revitalizing demand and consumption by noninflationary means. It is only through the reduction of fiscal and para-fiscal pressures that this can be accomplished. Many countries are following this track, which I believe to be the right one. Belgium, for its part, also intends to reduce considerably fiscal pressure on the revenues of labor.

Thus, after many years of trying to determine which economic doctrine and which economic policy to follow, we can today very opportunely abandon a binary analysis that pits the partisans of a Keynesian policy of demand support against the advocates of supply-side policy.

Truth to tell, in the light of experimentation carried out in many countries, we can conclude that the moment of synthesis is at hand. What is the point of restructuring supply and our industries, of promoting research and development, if demand is to be swamped by policies of austerity?

By the same token, what use is it constantly to stimulate demand if the supply is obsolete, rigid, unprofitable, uncompetitive, and squashed flat by the expenses of the welfare state? It is, then, the finely tuned synthesis of a double-tracked policy that supports demand under certain conditions and restructures supply under other conditions that is increasingly interposing itself. For the sake of brevity, I would characterize such a synthesis of economic policy and such a policy of synthesis as a Keynesian supply-side policy. And so it turns out once more that the truth, as so often happens, is to be found midway between extremes.

Statement by the Governor of the Bank for the Netherlands—H.O. Ruding

I welcome the new Managing Director, Mr. Camdessus, and wish him all success in his new function.

The international recovery is now entering its fifth consecutive year and is expected to continue. Although this gives cause for satisfaction, major problems remain: unemployment in many industrial countries is still too high, international payments imbalances remain large, real interest rates continue to be high in industrial countries, protectionist pressures have not abated, and the external debt problems persist in many developing countries. For a number of the developing countries, these problems have been exacerbated by capital flight due to unrealistic interest rates and exchange rates and, more generally, by a lack of confidence in their economic or political climate.

In order to tackle these various problems, the industrial countries should reinforce their strategy of noninflationary and durable economic growth. Monetary and fiscal policies should be aimed consistently at stability and balance of the economy, which is also the only path toward lowering both nominal and real interest rates in the medium term. A more vigorous implementation of structural adjustment measures is called for. Of paramount importance is the reduction of trade protection. A removal of barriers to trade in goods and services would significantly enhance the prospects for economic growth in both industrial and developing countries. Against this background, intensified international policy coordination is called for. We welcome the increased awareness of this among major industrial countries, as well as their acceptance of the need to pursue a greater degree of exchange rate stability. This requires consistency of policies, as well as more attention in national policies to their external repercussions and the willingness to discuss all this in a multilateral framework. The Netherlands, therefore, welcomes the enhanced role of the Fund, both in the discussions among major industrial countries and in Fund surveillance itself.

Last year, the Fund established procedures for the use of a limited set of key economic indicators in its surveillance. As the present document on the world economic outlook shows, these indicators are proving helpful in assessing systematically both the economic policy stances in the major industrial countries and their international consistency. In applying the criteria for coherence and sustainability of policies, the Fund should emphasize exchange rate stability, given the clear desire of the international community to achieve this.

At its latest meeting, the Interim Committee reconfirmed the central role of the Fund in the international debt strategy for the middle-income developing countries, in particular in assisting countries to design adjustment programs and in mobilizing finance. It also rightly welcomed the close cooperation between the Bank and the Fund on these matters, which increases their combined leverage and effectiveness.

Unfortunately, there have been certain cases in which the Fund has approved country programs with insufficient conditionality. Any slippage from packages based on sound economic criteria will, in the longer term, result in unsustainable situations for the borrowing countries concerned, which would be detrimental to all parties involved. I believe that if we allow Fund conditionality to be watered down, the international debt strategy will be jeopardized. We, as Governors for the Bank and the Fund, should be fully aware of these dangers and resist the temptations of political expedience at the expense of objectivity and equal treatment. This would undermine multilateralism and endanger the spirit of international cooperation on which the well-being of the world economy to a large extent depends. At the same time, adjustment programs must pay due attention to the most vulnerable groups in society, in order to help the responsible governments in making these programs socially and politically acceptable.

In view of the desirability of continuing support for sound adjustment programs in debtor countries, a substantial increase in Fund quotas is necessary. The Fund’s reliance on borrowed resources should be reduced, and members’ quotas should provide the basic source of financing for the Fund’s operations. Given that such an increase cannot be realized in the short term in view of the greater urgency of the capital increase of the World Bank, it is acceptable that the current limits under the temporary policy of enlarged access to Fund resources should be maintained in 1988. . . .

It should be stressed that even a strong and active Bank and Fund, including their roles in catalyzing new finance, can meet only part of the total financial needs of debtor countries. From this perspective, it is encouraging that both debtor countries and creditors are increasingly developing new market-oriented instruments adapted to various debt situations, such as exit bonds, debt-equity swaps, and other debt-conversion schemes. These instruments now appear to have the potential of providing more than marginal alleviation of debt problems. The “menu” of options approach should, however, not contain any kind of guarantee by the Bank, the Fund, or national governments to secure commercial bank claims on borrowing countries. Such guarantees would amount to bailing out and would interfere with the refreshing approach to negotiations between debtors and creditors entailed in the menu.

I now turn to the debt problems of the low-income developing countries. I note with satisfaction that we appear to be moving steadily toward a more forceful strategy in this respect. Since the problems of the low-income countries are deeply rooted, it is natural for the World Bank, as a development institution, to take the lead in this area. Therefore I welcome the World Bank’s Special Action Program for heavily indebted, low-income countries in sub-Saharan Africa. . . .

Let me say a few words about the specific tasks of each party. First and foremost, adjustment is essential, and I appreciate the often painful adjustment efforts undertaken by many African countries. Both the World Bank and the Fund cannot only offer invaluable policy advice to these countries, especially in the context of policy frameworks to be set up by the authorities of the countries concerned, but can also catalyze, by their mere involvement, the release of new funds.

As far as the Fund is concerned, it may itself offer enhanced balance of payments assistance to the low-income countries on concessional terms. However, in view of the structural nature of the problems in these countries, the Fund should be cautious in using its ordinary, temporary facilities for this purpose, as this could result in a further increase in arrears and in a de facto locking-in of Fund credit. This would be in nobody’s interest: neither in the interest of the Fund itself, as the revolving character of its resources would be jeopardized, nor in the interest of the debtor countries, as it would not only endanger their eligibility for the use of Fund resources but could also harm their relations with other creditors and donors. Consequently, it would appear sensible to separate the Fund’s normal operations from its structural adjustment facility (SAF) or SAF-related lending. Specific problems of individual donor countries call for flexibility on the part of the Fund if it wishes to maximize new resources for the SAF. Certainly, in view of the special character of this type of lending, combined financing with the World Bank is to be recommended. Also, other modalities require further discussion. In such a setting, the Netherlands strongly supports the initiative to enlarge substantially the size of the SAF, provided of course that there is fair burden-sharing and that adequate conditionality is attached to SAF programs.

As opposed to the Fund’s involvement in balance of payments finance, the need of low-income countries for external long-term development finance should be fulfilled by the World Bank, the regional development banks, and donor countries. . . .

The World Bank’s action program rightly underlines the importance of debt relief measures, and, therefore, I welcome the agreement reached in the Paris Club to lengthen grace and repayment periods in reschedulings of guaranteed or reinsured export credits for low-income countries. In addition, it is worth noting that the Paris Club is considering lowering interest rates. The Netherlands, while recognizing the constructive spirit of this initiative, feels that further study is needed, because the application of concessional rates of interest belongs rather to the field of official aid than of commercial credits. I should like to call upon donors to take debt relief measures for ODA debt, including the conversion of ODA loans into grants, on a case-by-case basis. The Netherlands has already done its part in this respect in assisting low-income countries with adjustment programs in place.

Let me make a general remark about Bank-Fund cooperation. It has been said that closer cooperation between these two institutions in the area of policy formulation would lead to cross-conditionality. In my view, the conditions attached to policy-based, macro-oriented lending of the Bank and the Fund will necessarily partly coincide, because both the Bank and the Fund try to tackle the same economic problems in the same countries, although from different angles, in line with their different character and task. Thus, to some extent, similar conditionality is to be expected, even when programs are formulated independently by the Bank and the Fund. However, this should not be interpreted as cross-conditionality, in which commitments and disbursements under the respective programs of both institutions would formally depend on each other, but rather as a natural coherence that is to be welcomed. . . .

As a final remark, I want to stress once more the importance of the Bretton Woods institutions as independent forums for multilateral cooperation. Both the Bank and the Fund have, by and large, lived up to their respective tasks in tackling the world’s most urgent financial and economic problems so far, and we should enable them to continue to do so. Therefore, we should make rapid progress toward a general capital increase for the Bank and a quota increase for the Fund.

Statement by the Governor of the Fund for Bolivia—Juan Cariaga Osorio

Mr. Chairman, fellow Governors, please allow me in the first place to express the full support of my Government of the very important role of the International Monetary Fund and the World Bank in their initiative for adjustment and development problems. Also, please allow me to welcome Mr. Camdessus in his very important responsibilities at the International Monetary Fund.

It is a great honor for me to address this Board of Governors and to explain how one developing nation is making determined efforts to implement an adjustment program intended to stabilize its economy, launch a process of sustained growth, and possibly provide a solution to its external debt problem.

In the light of results achieved so far, we are convinced that the Baker initiative and the adjustment programs advocated by the International Monetary Fund and the World Bank are what is needed to achieve those objectives. Bolivia has managed to cut its annual inflation rate from 24,000 percent in August 1985 to 10.9 percent for the 12 months ending in August of this year. Gross domestic product, which declined by between 20 and 30 percent over the previous six years, has for the first time shown some growth, estimated at 1 percent, during the first half of 1987. We expect that by the end of the year an annual increase of 2.5 percent will have been achieved. The most important fact is that unemployment, which increased in the course of the previous six years from 6 percent to 20.5 percent, fell by 1.5 percent in the first half of this year. All these results have been achieved through an adjustment program, liberalization and market orientation of the economy, a major tax reform that has increased government revenue, and a single uniform tariff system that is free of restrictions on external trade.

Despite these efforts, which are those of the Bolivians themselves and a reflection of the political will of their leaders, we believe that the conditions under which the country can continue the process of permanently sustained growth are still lacking. Bolivia must go on shouldering the heavy burden of its external debt; the sacrifices made in the attempt to overcome the effects of the crisis thus have not brought us any nearer to our goals. For this reason, and being acutely aware of their responsibilities, the Bolivian financial authorities have negotiated a way out of this problem with the private international banks. Like the majority of economic transactors, banks recognize that despite Bolivia’s valiant efforts, its national debt calls for a creative, imaginative solution. This intense search has now led to an agreement under which the country will be able to buy back its external debt with resources from the donor countries and will have the option of converting it into equity investment.

While we, too, see the external debt problem as complex and multifaceted, we also realize that case-by-case analysis and an individual solution are required for each country. For some of them, the problem is one of obtaining access to new resources. For others, it is a matter of interest rates or maturity periods. In Bolivia’s case, given the adverse nature of the terms of trade, which have virtually destroyed its export economy, there is no other way to deal with the debt than in the fashion agreed upon with the banks, which moreover coincides with the concessional treatment accorded Bolivia by the international institutions. Considering the low standing of Bolivia’s debt in international secondary markets, this can in no way be regarded as a bank bail-out operation.

Nevertheless, if this agreement is to have the desired effects, Bolivia urgently requires grants from friendly countries. Without them, it will prove impossible to solve the problem, given the precise, strict nature of the terms and conditions that apply, which, if not met, will jeopardize this long series of difficult negotiations with the international private banks.

The International Monetary Fund has supported our initiative by accepting the idea of a trust account into which donor countries can pay their contributions, thus vouching for the serious intent behind the operation. The World Bank has also provided support in the form of assistance and expert advice. The only element lacking has been the effective support of the donor countries. And it is to them I wish to appeal now, in the terms used by the President of the United States yesterday when he requested their help in making serious efforts to overcome the crisis and the external debt problem.

The failure to solve Bolivia’s external debt problem stands as a major obstacle to its development; it limits new investment in the country, where financial problems with the external private sector have not been resolved; it paralyzes external trade, without the support of trade financing, which amounts to $300 million for Bolivia; and it keeps the arrears problem in a holding pattern. But the most serious consequence is that the country is not developing, that its attempts to advance are frustrated. In such circumstances, the only inference to be drawn is that the vicious cycle of unemployment, poverty, malnutrition, and infant mortality that has been characteristic of the least-developed countries could very well continue.

Statement by the Alternate Governor of the Fund for Viet Nam—Le Hoang

The Annual Meetings of the World Bank and International Monetary Fund provide the member countries with a true forum for discussion of international economic, financial, and monetary operations. We also find here an annual opportunity to review and evaluate the results obtained since the previous year’s meetings, so that we can draw appropriate, useful conclusions as a basis for further progress. And the Meetings give all of us a chance to pool our valuable experience in the management of our national economies, finances, and currencies.

This year’s Annual Meetings are taking place in an international environment in which economic, financial, and monetary conditions have not undergone the major changes so hoped for by the members. A number of summit meetings have been held in the past year to discuss the coordination of economic activities. And yet the world’s economic growth has slowed since last year and the level of international trade is stationary. The developing countries, struggling with a heavy external debt burden, are compelled despite themselves to apply more rigorous adjustment measures, while the prices of their exports keep falling in world markets. We certainly cannot be pleased that the economic growth rate fell from 3.1 percent in 1985 to 2.9 percent last year, a fall due chiefly to a decline in the growth rate of the industrial countries from 3 percent to 2.5 percent, while that of the developing countries was rising from 4.5 percent to 5.5 percent.

Paradoxically, the growth rate of world trade volume increased from 3.2 percent to 5 percent. On the surface, these developments appear contradictory. They become understandable, however, if we carefully examine export and import patterns by country group. The volume of the developing countries’ exports increased by 8 percent, and even by 12 percent to 13 percent in some cases, while the industrial countries’ exports increased only 3 percent in volume. The imports of the two groups declined by 22 percent and expanded by 9 percent, respectively. This situation was brought about by a deterioration in the developing countries’ terms of trade, with the prices of their exports falling sharply. Clearly, this state of things, far from helping to stabilize the world economic situation, is deepening the contradictions between North and South. As a result, the number of developing countries compelled to strengthen their adjustment effort to cope with a relentless deterioration in the ratio between their export revenue and their external debt payments is steadily increasing. This adjustment process is characterized by rigorous measures to mobilize all possible resources for export while curtailing imports and external debt.

The Bank and the Fund have on a number of occasions devised policies aimed at helping the developing countries carry out adjustment programs focused on development rather than severity. These policies cannot be implemented if the industrial countries do not coordinate their financial and monetary policies, with the aim of improving the terms of trade of the developing countries and gradually resolving their external debt problems.

It will be in the interest of the Bank and the Fund, working together with the debtor countries, to devise effective means of ensuring the coordination of the policies of all member countries with a view to promoting development. Creating new resources for the poor countries will enable them to meet the requirements not only of economic development but also of export growth, thereby improving their balance of payments and their creditworthiness.

Numerous international organizations and conferences have recently adopted stances in favor of debt relief for the developing countries; this was the case in particular for the conference of Heads of State of the French-speaking countries. The participants in that conference, held last September in Quebec, stressed that it is incumbent on the international community to engage in concerted efforts to alleviate, if not terminate, this financial crisis.

In our view, these are positive, realistic steps that will help defuse the time bomb represented by the international debt issue. The external indebtedness of countries, which now amounts to more than a trillion dollars, constitutes a serious threat to the stability and growth of the world economy.

Against this background, we appreciate the efforts recently undertaken by the Fund to increase lending ceilings under the structural adjustment facility and triple its size in the future. These are but the first steps, however. In order to help the developing countries make better use of this facility, the Fund should be more flexible in assisting them with the preparation of their adjustment programs. It would also be desirable for the Fund to move in the direction of a fifth allocation of SDRs as soon as possible, so as to provide additional resources to the poor countries.

Permit me now to present an overview of the economic situation in Viet Nam. Certain improvements have taken place in our economy in the past few years, although it continues to suffer from many problems because of serious economic imbalances that have long existed. There are several reasons for this, both internal and external. Domestically, production capacity is underutilized because of a shortage of materials, capital, and technology. Externally, we have a very large balance of payments deficit and only negligible reserves. As a result, Viet Nam’s national product and per capita income are among the lowest in the world. It is the sincere desire of the Vietnamese Government to honor its external debt obligations, so it can obtain the new loans it needs to carry out its three major economic programs. Unfortunately, our balance of payments situation prevents us from doing so at this time.

In these circumstances, we are compelled to implement the adjustment policies and measures required to boost production, improve the standard of living of our people, and strengthen our balance of payments. The Government of Viet Nam has taken steps to renovate its economic management and reorganize its economy in hopes of changing the situation in fundamental ways. The three major economic programs, relating to the production of food, consumer goods, and export products, are integral parts of the adjustment program under way in Viet Nam.

The implementation of these three programs, however, requires assistance from international organizations, particularly the Bank and the Fund. For almost the entire past decade, economic, monetary, and financial cooperation between Viet Nam and both the Bank and the Fund has unfortunately stagnated. We think it desirable for the Bank and the Fund to reaffirm their position and role vis-à-vis Viet Nam, which means strengthening international cooperation, helping a member meet its obligations, and thus contributing to the prosperity and general stability of the economy.

Statement by the Governor of the Bank for the Islamic Republic of Iran—Seyed Ali Akbar Afjei

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

“ . . . . And We will set up a just balance on the day of resurrection, so no soul shall be dealt with unjustly in the least. . . .”

The Holy Quran, XXI:47

The joint Annual Meetings of the World Bank and the International Monetary Fund provide an appropriate opportunity to review the main economic events of the year and to draw specific conclusions. I join other speakers in offering our sincere appreciation to the organizers for their worthwhile efforts. I welcome Mr. Camdessus as the new Managing Director of the International Monetary Fund. We wish him success in his endeavors.

The global economy, since the 1986 Annual Meetings, has not demonstrated any fundamental turn toward improvement. In many respects, in fact, signs of further deterioration have appeared, while in most areas, the lack of an appropriate global monetary and financial system has prolonged the current problems and has revealed the absence of any coherent and purposeful future direction of the world economy.

The past several years have shown that, contrary to some beliefs, the present economic structure and the so-called free market forces can be easily manipulated so that, if left on their own, they can result in distortions and serious misalignments, as may be seen in some countries.

International trade and payments showed erratic movements in 1986. While trade by industrial countries rose noticeably, exports by the developing countries fell by 7 percent, whereas their imports stagnated, almost wiping out a $45 billion trade surplus in 1985. The share of developing countries in world trade, moreover, fell to some 25 percent, its lowest rate since 1979. Raw material and commodity price indices continued their precipitous decline in 1986, and it is estimated that, in real terms, they reached a trough unprecedented in the past 50 years.

The sharp decline in developing countries’ terms of trade to the tune of 17 percent in 1986 seriously undermined the economies of these countries, with oil exporters, through a 51 percent terms of trade deterioration, suffering most heavily in the process. Such declines in oil and raw material prices, in turn, ensured the strengthening of the industrial country terms of trade by 9 percent in 1986. On this basis, the current accounts of the industrial countries showed noticeable improvement in 1986, ensuring considerable surpluses for these countries.

Industrial countries, it must be noted, show great reluctance in transferring a part of such windfall gains to the developing countries. It may be remembered that after the oil price increase in 1975, the OPEC countries recycled their surplus funds. In addition, despite the falling trend in oil prices in recent years, the OPEC countries have maintained the favorable trend in the flow of credit, grants, investments, and concessionary loans to all countries, especially to the low-income developing nations, which have continued to reap its rewards. In contrast, the flow of funds and international investments, including direct investments and development assistance by industrial countries, has remained disappointing.

It is discouraging to observe that protectionism gained further momentum in 1986. Despite some initial optimism that emerged from the inauguration of the Uruguay Round of multilateral trade negotiations, trade tensions and restrictions imposed by industrial countries, especially the United States, have intensified. In contrast, developing countries greatly eased trade restrictions in 1986.

The global debt problem has increased in intensity and gravity, requiring, more than ever before, a fundamental and all-embracing solution. Notwithstanding the measures taken so far aimed at alleviating the debt burden, the ratio of external debt of the developing countries to their exports rose from 148 percent in 1985 to 169 percent in 1986. A just and lasting solution should be based on the joint willingness and cooperation of all the parties concerned. Within this framework, the debt problem should be tackled on the basis of income levels and the financial ability of the debtor countries. For middle-income debtors, debt service payments should bear a reasonable relationship to such countries’ export earnings. In the case of low-income countries, basic remedies, including the rescheduling of principal and interest, debt write-offs, and other assistance, should be contemplated in appropriate cases.

Instead of charging a predetermined rate, the rate of interest on loans should be basically related to the rate of return on the investments undertaken through such loans, because, in the final analysis, it is the profitable and appropriate investments that the loans are spent upon that eventually determine the favorable return on each dollar of the loan. Thus, creditors and international financial institutions should enter into partnership agreements with debtor countries and jointly share in the outcome of the investments. Such schemes would make all the parties concerned joint partners in development, with each having a stake in the successful outcome of the loan-investment projects. The burden of the huge debts of the developing countries will thus be alleviated.

The plight of the low-income developing countries, especially in sub-Saharan Africa, continues unabated. Their debt burden, together with export shortfalls and problems in the provision of imports, poses a threat to their development. The rich industrial countries have grown less sensitive to the problems of African countries, so that the real value of the official development assistance to the deprived nations of Africa in recent years has shown a declining trend.

With regard to the lack of financial resources to proceed with the appropriate economic development of the Third World, attention must be paid to the increasing trend in armament expenditures. Based on available statistics, global arms expenditures amount to $1 trillion annually, a figure almost equal to the total debt of all developing countries. It should be further added that while the production of arms and weaponry constitutes 5 percent of the total global production of all commodities, the economic and financial assistance to the developing countries does not exceed even one half of one percent of this figure. Arms reduction will raise the standard of living and will accelerate the pace of economic and social development.

Without financial resources on concessional terms, the process of financial adjustment in developing countries will prove arduous and futile. In this connection, it is to be noted that the World Bank and the International Monetary Fund have at last acknowledged the necessity of according priority to the growth factor in economic adjustment and stabilization programs. Notwithstanding the reality that these institutions act as lenders of last resort to the developing countries, it seems that the Bank and the Fund, regretfully, have not shown the necessary flexibility when designing adjustment programs, nor have they shown any sensitivity toward the social consequences of implementing such programs.

The economic performance of our country during the last year has been affected by the unfavorable conditions of the world economy and the oil price decline. In such conditions, backed by the true faith of our people, the Government has not only tackled these unfavorable consequences, but has taken the necessary measures to attain economic self-sufficiency and self-reliance. This has been achieved through designing fundamental economic programs in order to effect basic changes in consumption patterns, to reduce foreign dependence, and to further promote non-oil exports.

The foreign trade of the Islamic Republic of Iran has shown the necessary adjustment in the face of reduced petroleum revenues, so that during the past Iranian calendar year our non-oil exports rose considerably, with this increased trend continuing in the current year.

A special mechanism for foreign exchange allocation has been set up in recent years, through which, on one hand, priority is directed toward essential foreign exchange expenditures, and, on the other hand, continuous supervision is exercised over foreign exchange allocation. This mechanism has proved successful in channeling the foreign exchange proceeds to the priority sectors and in reducing foreign exchange waste and inefficiency.

Such steps have enabled our country to meet its essential needs out of its own domestic resources without resorting to foreign loans. The policy of the Islamic Republic of Iran with regard to foreign payments has always been to honor such commitments on time, and this policy has been pursued without exception. However, some debtor countries that owe debt to Iran—some of which are among the industrial countries—have not honored their commitments.

With respect to economic cooperation with other countries, we believe that such cooperation should be based on mutual respect and understanding and, on this basis, we have paid special attention to expanding our ties with the developing countries and Islamic nations.

The Islamic Republic of Iran has expanded its trade and economic ties with the developing nations so that, since the Islamic Revolution, the value of our trade with the developing countries rose from 4 percent to the present 28 percent of our total trade.

With regard to the development of Islamic banking, I am pleased to inform the distinguished delegates that Islamic banking in our country is now in its fourth year of successful operation. In the three-and-a-half years since the start of interest-free banking operations, the balance sheet has shown a good track record. Since the start of operations, total bank deposits have grown at an average of 13.5 percent per annum. The banks’ credit facilities outstanding to the private sector under Islamic contracts have risen by 11 percent annually. These results clearly underscore public enthusiasm for, and people’s confidence in, Islamic banking. One of the main aims of our monetary and banking policy has been to emphasize agricultural production, promote economic development, and to eventually alleviate deprivation. In this connection, the expansion of interest-free Gharz-ol-hassaneh loans has been a remarkable feature of our banking system, with Gharz-ol-hassaneh loan outlets showing considerable increase in number, and outstanding Gharz-ol-hassaneh loan facilities to the private sector amounting to 321.4 billion rials at the end of 1365 (beginning March 21, 1986). In addition, based on other Islamic modes of finance, especially partnership contracts, our banks succeeded in financing huge development projects last year. I may also add that total private sector deposits with our banks now exceed 8,000 billion rials.

In conclusion, I hope that these Annual Meetings can achieve their expected aims and that we may be able to overcome the adversity, poverty, and inequality present in our world today, through the cooperation of all nations.

Statement by the Governor of the Fund and the Bank for Jamaica—E.P.G. Seaga

Let me congratulate you, Mr. Camdessus, on your appointment as Managing Director of the International Monetary Fund and on the fresh look indicated by your presentation in the opening statement. I wish also to commend you, Mr. Conable, for the comprehensive administrative reform of the World Bank which we expect will improve its ability to deliver and to assist our communities.

This presentation, on behalf of the Caribbean Community Group of Nations (Caricom), will focus specifically on the problems of the international debt crisis in middle-income debtor countries, a problem referred to extensively by both of the leaders of the twin institutions in their opening remarks.

So far, the focus of the international debt problem by both bilateral donors and international commercial banks has been confined to lowest-income countries and to debtor countries with large-scale debt. The desperate economic situation of these lowest-income countries, particularly in sub-Saharan Africa, on the one hand, and threats to the international financial system posed by the debt-servicing difficulties of the larger debtor countries, on the other hand, are more than sufficient justification for this attention.

Little attention has so far been paid to the economically constricting debt-servicing problems of the middle-income debtor countries with high and very high external debt service ratios, a large portion of whose debt service is usually to: (1) international financial institutions, which do not reschedule; and (2) bilateral donors. In addition, some of these middle-income developing countries face imminent severe problems of “bunching” of debt service payments over the next three years or so.

The following outlines a proposal to address the problems of middle-income debtor countries.

The Proposal

The gravity of the international debt crisis is now seen to be structural and not merely a problem of liquidity. The structural nature of the problem is inherently linked to inadequate export earnings arising from the depressed levels of international trade and the sharp fall in commodity prices, as well as to the high fixed levels of debt servicing that rigidly restrict the ability of debtor nations to finance adequate economic growth and service debt at the same time.

The resumption of adequate sustained growth and development must be the fundamental objective of these debt-ridden developing countries if their economies are to eventually reach a point of takeoff to a self-sustaining level of development.

In order to stimulate growth to this level, it is necessary to (1) increase resource flows substantially for investment, based on programs for both export and efficient import substitution; (2) stimulate human resource development, particularly in education and health, so as to enhance the basis for long-term growth, while at the same time minimizing short-term social tensions, which are themselves disruptive of such growth and the consequent ability to service external debt; and (3) service debt and, in the medium term, achieve programmed reduction of debt service ratios to sustainable levels.

Investable resources will be freed by any mechanism that relieves debt service. New borrowings will also add to investable resources. But if new borrowings are to be the mainstay of the investment program, new debt would be incurred, which could be to the eventual detriment of the development process unless such borrowings are on very concessionary terms.

While middle-income debtor nations recognize that the ultimate solution to their debt problem is to grow out of it through judicious and appropriate adjustment policies, they have not been able to do so, because the present mechanisms are woefully uncoordinated and deal only with part of the problem. This is because there are inadequate resource flows on appropriate concessionary terms to support such balanced and sustained adjustment programs, and also because creditor countries and agencies have not been able to put together a coordinated approach that can satisfy both the debtor and creditor participants.

The main mechanisms open to debtor nations are the rescheduling of bilateral obligations through the Paris Club and commercial debt borrowed directly from the commercial banks. There is no mechanism for the rescheduling of multilateral debt, which, for many of the middle-income countries, forms a very important part of their external debt obligations. Moreover, the short-term nature of the International Monetary Fund’s financial accommodation places countries that seek Fund assistance under severe debt-servicing pressure.

An enlightened role for the international financial institutions—that is, the World Bank and regional development banks, as well as the Fund—is central to these proposals. The decision of these institutions not to participate in debt rescheduling arises, understandably, partly from a fear of reduced credit rating and other factors that would limit their own borrowing power, harden the terms of such borrowing, and, in turn, reduce their ability to fund new programs. But there is room for participation of the international financial institutions. Currently, policy-based loans are offered by the World Bank for structural adjustment of the economy, and the Fund has in place arrangements for purchases based on policy-based programs to effect stabilization of troubled financial systems.

It is recognized that these quick-disbursing, policy-based loans for structural adjustment and for stabilization are expected to improve the ability to pay; indeed, in the case of the Fund, the servicing of debt is a conditionality. What these programs do not directly address is the inadequacy of the flows on appropriate terms to meet both economic growth and repayment targets necessary for self-sustaining development. No financing facility so far addresses the use of a reduction of the debt service ratio as a performance indicator in debtor countries.

The existing facilities target reduction of public sector deficits and improvements in the levels of international reserves. It is time that the basic problem of debt servicing be addressed directly. As a consequence, some debtor nations are deciding, unilaterally, to restrict the quantum of resources allocated to debt servicing, so as to maintain, at worst, some modicum of social stability or, at best, some minimum rate of economic growth.

There is room, therefore, for a new type of policy-based lending program that directly addresses the need both to service debt and secure economic growth. This proposed program, funded by international financial institutions, surplus countries, and commercial banks, should offer sufficient disposable resources to achieve targeted economic growth, including programs for the development of human resources, with a reduction in debt service ratios to sustainable levels as a performance indicator.

In the case of the international financial institutions, the program should be made possible by the utilization of World Bank and Fund resources for specific funding of policy-linked loans or purchases in quick-disbursing foreign exchange, based on the explicit recognition of a reduction in the debt service ratio to agreed levels annually over a suitable medium-term period of adjustment. In effect, this new policy-based lending program by international financial institutions would make fresh resources available, equivalent or comparable to the amount required to service debt due to the international financial institutions over the medium term. These new resources would then allow the existing debt payments due in each year to be paid out while establishing an equivalent new obligation to be discharged over a planned and agreed period. The new funding arrangement would, therefore, have the same effect as the rescheduling of debt by shifting to the future the effective repayment period of debt currently due.

Simultaneously, such an arrangement, targeting as it does the reduction of the debt service ratio over the medium term to a sustainable level, should encourage both the Paris Club and commercial banks to reschedule debt on a multiyear rather than on a single year basis, with repayment periods and agreement consistent with those negotiated with the international financial institutions.

Moreover, the highly efficient monitoring systems of the international financial institutions would enable economies of countries to be monitored, particularly in these new financing arrangements. Such monitoring would satisfy the requirement of Paris Club countries and commercial banks that they receive regular reports on performance as a prerequisite for the release of each tranche of the multiyear rescheduling agreement.

Logically, because of the matching arrangements of bilateral and commercial debt rescheduling with the proposed new policy-based international financial institution facility, there should be a three-way consultation on the program period, on debt service targets, and, annually, on performance levels. In this arrangement, the debtor country, in consultation with the international financial institutions, would develop its program, which would have specific objectives, targets, measures, financing requirements, and reductions in debt service ratios within an appropriate time frame. The international financial institutions would carry out the monitoring responsibility of the program in respect of their own lending and would work out reporting arrangements with the Paris Club and commercial banks for monitoring their rescheduling arrangements.

The end result of this arrangement would be that development could be programmed with greater certainty, and increased resources made available to recipients on terms that would schedule future debt service burdens on an affordable and sustainable basis.

Under the proposal, it is essential that each creditor group (that is, international financial institutions, bilateral donors, and commercial banks) seek to effect a net transfer of resources on appropriate terms to the recipient countries. Additionally, all three groups should seek to ease the debt-bunching problems of recipient countries. By coordinating the action of creditor countries and agencies, the proposal would essentially create a practical, workable system that should be mutually satisfactory to debtors and creditors.

The structural problems of debtor nations can only be successfully addressed through a coordinated, comprehensive approach on a timely basis, with resource flows that permit a program of change without chaos. These problems are as much a result of external adjustments in the international trade and payments system as they are of internal imbalances. Of particular significance is the growing stagnation of international trade and the marked upsurge in protectionism by the industrial countries. International trade in this decade is increasing by one half the rate of increase of the 1970s and less than one third the rate of growth of the 1960s, a level which is incapable of sustaining meaningful rates of economic growth.

It is against this background that middle-income countries experience the growing frustration of inadequate export earnings to pay their way and inadequate and uncoordinated debt service relief to release sufficient investable resources for economic growth.

Many middle-income countries find themselves halfway up the ladder of development; having made much of their economic gain at great social cost, they now see their prospects of further advance receding and the prospects of real decline increasing. It is in these circumstances that decisions are taken to limit unilaterally the level of debt servicing affordable. Many middle-income countries have in fact arrived at the halfway stage of self-sustaining growth after experiencing the perils of severe economic adjustment and are now facing the future uncertain whether they will be able to follow through with the social adjustments required for the longer-term development needed to reinforce economic gain. The key to their future is to find solutions to the crisis between debtors and creditors.

What exists now is stalemate and stagnation, against which background debtors and creditors are taking unilateral actions that will further aggravate the crisis to explosive proportions. The stagnation of world trade and reduced levels of export earnings, together with the net transfers from debtor countries to international commercial banks resulting from reduced credit exposure, are creating serious problems in the payments system of debtor nations and engendering an inability on their part to generate sustained growth. This, in turn, reduces the ability to sustain payments. A continuing and self-reinforcing process of economic deterioration sets in.

The solution is through planned economic expansion in the medium term. This expansion would be based on increased financial resources, on appropriate terms and rescheduling arrangements that are consistent with the objectives of economic development and the discharge of debt obligations. Short-term “bailouts” by new lending on a case-by-case basis on commercial terms without a framework to achieve longer-term targets are merely palliatives in many cases and do not meaningfully address the crisis.

The proposal put forward in this statement is designed to bring the significant volume of debt owed to international financial institutions into a practical rescheduling arrangement. At the same time, the Paris Club and various commercial bank creditors should be encouraged to extend their rescheduling arrangements on the basis of a targeted reduction of debt service, consistently monitored for performance. The end result would be the release of more investable resources to secure meaningful and sustainable economic growth in a manner that convinces creditors that good money is not being thrown after bad, but will enable development to win the race with discontent.

September 30, 1987.

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