Discussion of Fund Policy at Fifth Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1990
Statement by the Governor of the Bank for Chile—Alejandro Foxley Rioseco
I would like to thank the Governors of the International Monetary Fund and the World Bank for my selection as Chairman of the Development Committee. I consider that selection an honor and a privilege.
I hold the unshakable belief that the new world that is being forged day by day before our eyes affords an opportunity for developing and industrializing countries to join a virtuous circle of better integration into the world economy, macroeconomic stability, and better employment and welfare opportunities for those entering the labor force.
Economic globalization can be an efficient instrument for generating that virtuous circle, if countries support the process by investing heavily in their human capital, their people. This is the way to overcome at the root the dilemma between growth and redistribution. Investment in people is a prerequisite for successful integration into the international economy.
I accept the Chairmanship of the Development Committee with a message of optimism, an assertive message: Our countries can—as the countries of southern Europe have demonstrated earlier—strengthen their democracies and their economies through this process of opening up to an expanded economic field and an international economic system, which offers unthought of opportunities if only we do things well.
I represent a country that after a long period has regained democracy—a country proud of its freedoms, of the civilized manner in which it resolves its conflicts, and of the enthusiasm with which it looks toward the future. Chile’s economy is a market economy, open as few others are to international trade. It today exports 30 percent of its GDP. In 1995 Chilean exports will account for 35 percent of the national product, a degree of economic openness equivalent to that now found in the economies of the Scandinavian countries.
There are no subsidies or exemptions in Chile’s economy. We have a balanced budget, with a deficit equal to zero. Public spending goes heavily for investment in human capital, investment in people. We are proud to say that the budget that the Government will send to Congress for approval in early October calls for expenditures in the social sectors—such as education, health, housing, and social security—equivalent to 65 percent of total public outlays. We thus have an economy that is open internationally and an economy that is increasingly shared.
The economic policies of President Ay 1 win are based on three principles: first, an unshakable commitment to macroeconomic stability as the best way to achieve sustained growth; second, efforts to internationalize the economy, both commercially and financially; and third, increasing social efforts in the areas of health, housing, and education, duly placed within a framework of balanced public expenditure.
Maintaining Macroeconomic Equilibria
All of us here today know the intensity with which inflation and balance of payments crises have affected Latin America in recent years. Chile also fell victim to that experience, having experienced hyperinflation in the early 1970s and major recessions in 1975-76 and 1982-83. In the past five years, and at high cost to many Chileans, Chile has corrected many of the imbalances experienced at the start of the decade. Since 1985 output has recovered, rising significantly, while inflation has remained among the lowest in the region. Between 1985 and 1988, growing trade surpluses made it possible to make punctual external debt payments.
These trends partially reversed in 1988 and 1989 when expansionary policies, especially in the monetary area, heated up the economy again, threatening to undermine stability. Domestic spending increased alarmingly, reaching growth rates of 12.7 percent in 1989 and 22.8 percent for 1988-89. As a result, imports rose by 35 percent in 1989, and inflationary pressures mounted. Annual inflation in the last quarter of 1989 was 30 percent and rising.
We have had to support an adjustment process, a basic requirement on the road to sustained growth and moderate inflation. Using primarily a contractionary monetary policy, rooted in absolutely unchanged public spending in real terms during the first seven months of 1990, we sought to lower growth in domestic spending, hold back growth in imports, and curb inflation.
The results of these measures can be seen today. Adjustment has cooled down the economy, leading to an annual GDP growth rate of 2.6 percent during the first half of the year. The inflationary trend has been slowed, and we hope to finish the last quarter of the year with an annualized rate lower than the annual rate of 30 percent inherited from the previous government, despite the negative impact of the rise in petroleum prices in a country that imports 85 percent of its oil needs.
For 1990 we expect the overall situation in the balance of payments to be sound. The boom in direct foreign investment this year should be reflected in net inflows of some $1.2 billion, which is substantially higher than in 1989. The climate of confidence enjoyed by the economy has prompted a major inflow of financial capital, which in the first half of the year helped increase the Central Bank’s international reserves by over $1.2 billion. This situation is projected to persist for the year as a whole.
Once the adjustment of 1990 is completed, we may expect the Chilean economy to resume sound economic growth. Adjustment has not compromised the foundations of growth. Investment this year will be the largest in the last twenty years, exceeding 20 percent of GDP.
The Government has set sensible targets that can be reached without future costs. This is why we expect the economy to start growing again during the last quarter of 1990 and to attain a growth rate of 4-5 percent in 1991. In the longer term, and in light of investment trends, it may be said conservatively that Chile is ready for sustained growth at an annual rate of 5 percent.
The Internationalization Strategy
Over recent years Chile has achieved a high rate of growth in its trade, based on the creation of a climate of enterprise and sound export activity, particularly in mining, agriculture, fisheries, and forestry. Nontraditional exports are the most dynamic; comparing the first half of 1989 and 1990, we note that total non-copper exports increased by 17 percent. Maintaining and improving this performance will require persisting with policies to ensure a competitive, stable real exchange rate within a climate conducive to international trade.
If trade is to be a significant source of growth for Chile, Chilean exports like those of all developing countries must enjoy broad access to foreign markets. Protectionism is especially dangerous for small, open nations. This is why we are actively participating in the Enterprise for the Americas Initiative proposed by President Bush, and next week we will sign a basic trade and investment agreement with the United States, which we hope will open the U.S. market even further to our products. Chile is also engaged in trade negotiations with several Latin American countries, including Venezuela, Argentina, and Brazil, with a view to establishing reciprocal zero tariff arrangements within five years. In the case of Mexico, our president will sign a commitment next week that will lead to a broad economic complementation agreement within four months.
Foreign investment is a further central component of the internationalization strategy for our economy. Chile has flexible foreign investment laws, a stable economy, and a legitimate popular government. This situation is already yielding fruit. Foreign investment fund placements on the Santiago mercantile exchange have grown and prospered. These and other approaches, in conjunction with other, more traditional forms of direct investment, have led to a remarkable surge in foreign investment in Chile.
The Social Effort
The third link in the chain of policies is the emphasis placed on social aspects. The observation that economic growth by itself does not necessarily bring greater welfare to all groups, especially the poorest ones, is almost an axiom in development theory. This axiom has been confirmed in Chile in the last few years. High rates of growth have coexisted with a deterioration in the quantity and quality of public services and serious problems in housing, education, and especially health.
The World Bank’s World Development Report 1990 has the following proposition as its central theme: in all recent cases of successful development, sustained growth has been accompanied by a strong component of investment in people, provision of services, and accumulation of human capital. Something of this kind is what we are trying to do in Chile today. President Aylwin’s program envisages a significant increase in social expenditure and the creation of new technical education and labor training programs. Just in this last area, we hope to train 160,000 young people in the next three years.
Our social expenditure policy contrasts with the populist policies—with unsustainable fiscal deficits or excessive external indebtedness—that are traditional in our countries and ultimately cause inevitable damage to the very sectors they proposed to help. Six months after the inauguration of President Aylwin’s administration, Chile has a balanced budget—an achievement we will maintain in coming years. This means that no additional social outlays can be made until the resources to finance them have been collected in a noninflationary manner.
This rule was implemented in a recently approved tax reform that moderately increased the value-added tax and raised corporate taxes. Not until this reform was approved by Congress—by a vast majority that included most opposition congressmen—did we propose a supplementary budget allocating nearly $500 million in additional resources to health, education, housing, and other social headings. These resources have meant that real social outlays this year have been the highest ever in Chilean history to yield new revenues over the next four years for use to finance our social program.
A Valuable Experience
We are modestly moving forward in Chile with economic policies that democratically join fiscal prudence with a greater social effort as they seek to move us into a new stage of our export development. Results so far are promising, but a long road still remains ahead.
Along this path, we have received cooperation from the international financial community. We have an ever broader and deeper relationship with the World Bank and the Inter-American Development Bank, and we hope that it will be reflected in over $4 billion in project financing in coming years. We are completing a sucessful stand-by arrangement with the International Monetary Fund, all of whose targets have been strictly complied with. We are currently studying ways to adapt our relationship with the Fund gradually in line with developments in the Chilean economy.
We have also recently concluded a voluntary collaborative agreement with international commercial banks, which constitutes a practical confirmation of everything that has been said about our economy in the last few years. Our creditors and the Chilean negotiating team have agreed to a significant extension in the maturity of our entire commercial debt, thereby eliminating all repayments on this debt between 1991 and 1994. We have also agreed to maintain the annualized interest payments system and to make existing contracts more flexible in order to facilitate future debt conversion operations. Finally, a club of international commercial banks has agreed, on the basis of a voluntary arrangement, to purchase a Chilean bond issue for a total of $320 million at a moderate cost in keeping with the country’s financial circumstances. This financing is an important step forward along Chile’s return to the voluntary capital markets from which it had been absent since 1982.
All these are indications of the attractive prospects offered by the Chilean economy. They are also indications of what can be achieved when countries and members of the international community—multilateral organizations, financial entities, investors—try to work together in a cooperative spirit. In the increasingly interdependent world we are entering, such instances of international cooperation will be ever more crucial, especially for countries such as Chile that have decided to adopt the approach of internationalizing their economies.
We are convinced that with this cooperation, but mainly through the efforts of all Chileans, we shall attain a highly productive economy, an economy that responds adequately to the needs of its people.
Statement by the Governor of the Bank for Peru—Juan Carlos Hurtado Miller
I am addressing this meeting at a time when my country, Peru, is involved in a traumatic process of economic and political change. On the outcome depends, perhaps, our survival as a democratic nation.
In August, as a result of the disaster inherited from the previous government, inflation was about 400 percent a month, an unprecedented figure on this continent. Under the stabilization program introduced by the new government, inflation has been reduced in September to around 5 percent. The department that I manage eliminated in a single day the entire public sector cash deficit.
This required drastic adjustments to the prices of controlled products and to public service tariffs. To give but a single example, fuel prices had to rise by more than thirty times, I repeat, more than 3,000 percent, a sacrifice that no government has ever been compelled to demand from its people. But despite all predictions, the men and women of Peru, although distracted by recent rhetorical excesses and threatened by terrorist groups, have not just stoically accepted their portion of this effort, but, as independent public opinion surveys demonstrate, are supporting the government of President Fujimori, which, despite the inevitable pain caused by such a drastic adjustment, has restored hope of a better future.
I hope you will therefore allow me to focus this brief address on the current situation in Peru. When we have brought the effort now begun to a successful conclusion we, the Peruvian authorities, will be able to contribute to the debate on the vital issues that have brought us together here today. However, at the present time our entire effort is concentrated on the enormous challenge facing us: to ensure that we put behind us, and forever, the second longest hyperinflation in world history, and to ensure that we are fighting with the best possible weapons to reduce the poverty of our people.
There are numerous indicators of the disaster that we inherited as a result of the application of mistaken ideas. In recent years the Peruvian state could not maintain order, guarantee public security, or provide basic services, especially to the poorest groups. Per capita incomes fell to levels comparable with those of 30 years ago; real wages are now half what they were 5 years ago, and financial intermediation has fallen by four-fifths. Public investment is only 1 percent of GDP; only 1 kilometer of every 5 kilometers of roads is in good condition; oil production has fallen by 40 percent; our infant mortality rate is 50 percent higher than in neighboring countries, and at the present time only one out of every five Peruvians is properly employed. This year’s World Development Report focuses on the urgent and dramatic issue of poverty. More than half of all Peruvians are currently living in conditions of extreme poverty.
The crisis is reflected not merely in the economic and social indicators referred to above; it has also dramatically affected the moral character and effectiveness of many of our institutions. Peru today needs a cultural transformation if it is to recover the full exercise of the values that are essential for proper civil coexistence; the government of President Fujimori, of which I am honored to be a member, is committed to leading this process. Concepts such as justice, honesty, truth, and social solidarity require a new social and political interpretation so that they can serve as the foundation for the development of an efficient economy and effective state.
The 1980s in Latin America saw a succession of fiscal crises, and the nonperformance of external obligations, for reasons that have been thoroughly discussed at previous meetings. In this new decade the region must rediscover the lost path of growth. To this end, it is essential that the state act honestly, practice austerity, and provide the conditions in which our firms can prosper, develop technology, and generate abundant jobs in a competitive and flexible environment, taking into account the enormous changes now going on in the world.
This means that we must restore macroeconomic stability and ensure that it is sustained over time. It also means that structural reforms must be initiated to generate sufficient confidence so that Peruvians and foreigners begin to invest again in Peru, in projects that owe their competitive advantage not to state incentives, subsidies, or privileges, but to the appropriate exploitation of Peru’s natural resources, the imagination and leadership of its creative spirits, and the efforts and preseverance of its workers.
To stabilize the economy and to reduce inflation from last month’s 400 percent to prevailing international levels, the internal financing of public expenditure has been eliminated. Significant reforms have also been made in custom duties by eliminating all nontariff barriers and retaining only three levels of duty: 15 percent, 25 percent, and 50 percent. These measures will be refined over time in order better to meet our objectives. I would also like to inform these meetings that, because of the bankrupt nature of the tax administration we inherited, we must still have recourse to inefficient emergency taxes. In order to correct this problem, we have requested legislative powers from the congress, already approved by the senate, to alter completely the taxation system. A tax reform will come into effect in January 1991. We are going to simplify the tax system considerably and eliminate preferential treatment in order to obtain larger yields, greater equity, and an appropriate degree of efficiency in combatting tax evasion.
In commercial matters we aim to achieve a uniform customs tariff of 25 percent within two years. It should also be noted that the Government has initiated action with a view to distributing and guaranteeing property titles, simplifying administrative procedures, and reducing the cost of access to the legal system. We shall also undertake a comprehensive reform of the state, which entails restoring the capacity to deal effectively with the scourge of drug traffic and with terrorism. We shall also set in motion a program to rationalize and privatize state enterprises.
I would like to acknowledge the good will shown by the managements and staffs of the World Bank and the International Monetary Fund toward our government. The efforts recently made by the missions sent to Lima by these organizations and by the Inter-American Development Bank demonstrate how technical discussions can enrich proposals for stabilization and structural reforms. We look forward to working closely with the multilateral organizations in the analysis of the reforms contained in our medium-term economic program, the objective of which is, I repeat, to improve the well-being of Peru’s population through policies which, by ensuring fiscal equilibrium and macroeconomic stability, guarantee the growth of GDP per capita, and raise the percentage of the population properly employed, while also increasing the real value of wages and improving the quality of life. Our struggle and our unstinting efforts are aimed at eradicating poverty.
We are especially grateful for the assistance of the Managing Director of the International Monetary Fund and the President of the World Bank in helping us to obtain the resources necessary both to pay off Peru’s arrears to the multilateral organizations and support our medium-term economic program.
On behalf of the Government of Peru, I am pleased to announce to the international financial community that, in light of projections of our fiscal and external resources, Peru will in the second half of October resume prompt payment of its current obligations to the multilateral organizations. We also intend to agree on a reference program with the IMF and the World Bank in order to obtain the external resources needed to support the medium-term reforms. Next January, the Government intends to participate in a meeting of the Paris Club in order to re-establish a dialogue with Peru’s official creditors. Immediately afterward, formal conversations will resume with the Advisory Committee of the commercial banks. I would also like to inform you that some creditor banks that had started legal proceedings against Peru have dropped these actions as a result of a legal agreement between the parties.
As a representative of Peru I bring to this meeting not complaints but news of achievements that, although fragile, represent an historic advance in the attempt to restore the minimal stability in our economy that would enable us to return to the path of growth.
The performance of Peru’s economy in recent years shows the folly of the notion that, on the threshold of the twenty-first century, a country can live by turning its back on the huge changes now occurring in world finance and international trade. The result was a cumulative inflation of 2,000,000 percent from July 1985 to July 1990.
The changes in Peru’s economy over the next five years should show the world what can be done by the effective application of sound policies and by international assistance to a nation currently experiencing what are perhaps some of the most difficult and dramatic moments in its entire history.
The achievements of President Fujimori’s government in a mere 60 days since taking office testify not to the qualities of its members but to the courage and patience of the people of Peru, who have not only understood but endorsed an adjustment of such magnitude that, in the opinion of some analysts, it could risk the very foundations of our future survival as a democratic nation.
Peru today is once again standing up to adversity and has declared war on poverty. Now we need your understanding and support.
* * * * *
The Inherited Situation
The previous government’s use of misguided policies led to a period of hyperinflation that, until the recent stabilization program began, was the second longest in world history. When the new government took over, inflation in the preceding twelve months was running at more than 3,000 percent. Inflation in the last month on an annual basis was over 300,000 percent, and during the previous administration inflation was more than 2,000,000 percent. During that time the price system collapsed as a result of price controls, multiple exchange rates, and tariff, nontariff, and tax policies that were haphazard and complex.
The plunge in tax revenue generated a chronic deficit for the central government beginning in 1986, owing primarily to tax exemptions, the reduction in key taxes and rates, cumulative delays in collection, and a growing lack of control. Tax revenue fell from 14 percent of GDP in 1985 to 4 percent of GDP in the first half of 1990, destroying the financial viability of the public sector. At the same time, the average real interest rate in the first half of 1990 was greater than 100 percent annually.
Spending by the central government was also down sharply, as the government could not provide minimum health and education services. Social expenditure fell from $45 per capita at the beginning of the 1980s to $15 in 1989. Furthermore, the prices and tariffs of the largest public enterprises were subject to political manipulation, and their administration, inefficient in itself, was hampered by a massive increase in employees who were members of the government’s party. Subsidies for these prices and tariffs—gasoline, water, electricity, and telephone—rose to $2.5 billion annually (12.5 percent of GDP). The subsidies had a regressive impact because they primarily benefited those in the high-income brackets. This very damaging situation caused a marked deterioration in income distribution and the quality of public services. The social debt that mounted is now reflected in infant mortality 50 percent higher than in neighboring countries. Real wages fell by half between 1985 and 1990, during which period per capita GDP declined by 12 percent. Social services fell to unprecedented levels. The hospitals did not have medication or food for their patients, and schools lacked basic educational materials. Tuberculosis and illiteracy have increased to record levels. That social debt with the low-income sectors, perpetrated by the previous administration, requires immediate attention and a budget larger than Peru can meet using tax revenue; thus, the urgent need for donations and external assistance for our Emergency Social Program.
Basic infrastructure for transportation, communications, and energy has also suffered terribly. For example, solely to rehabilitate the roads infrastructure existing in 1985 would cost more than $1 billion. The automotive fleet, railways, port infrastructure, and communication systems cannot sustain the level of production they did five years ago and are severely undermining international competitiveness.
Peru has been accumulating arrears in its payments on its external debt since 1983. That year, natural disasters and the economic crisis triggered a 12 percent fall in GDP. In 1985, the government of Alan Garcia publicly declared unilateral withholding of external debt payments. In addition, the previous government withdrew from the negotiating table, a move that caused Peru to be isolated financially, commercially, and diplomatically from the international financial system.
As a result of nonpayments on Peru’s total external debt of approximately $20 billion, arrears of more than $10 billion have accumulated. This makes the position of the new government especially difficult. The arrears affect Peru’s debt both with the international banking system and with suppliers, multilateral agencies, and governments.
In order to recover macroeconomic stability and sustain a growth rate that would permit an improvement in the well-being of its people, Peru needs a substantial reduction and restructuring of its international obligations, as well as structural reforms that enable it to increase efficiency in its productive sectors and the rate of return on future investments. This would enable the country’s economy to return to a long-term horizon that restores hope among its people, especially the poorest.
The Stabilization Program
The stabilization program launched by the government of President Fujimori is the first step in attacking the root causes of the macroeconomic disequilibria that characterized Peru’s economy at the end of July this year. Taxes and the rates charged by state-owned enterprises have been increased to eliminate the public deficit. It is expected that the tax burden will double in the next three months, with the real income of the government having risen by more than 40 percent in the first month following the start of the program, despite tremendous inflation and recession at the outset. The price of gasoline rose more than thirty-fold and most public services more than ten times.
The exchange market was unified and a floating system introduced. The Central Bank accumulated international reserves in the process, and net international reserves rose from less than $105 million at the end of July to $320 million in the third week of September.
Even though wages are low, stringent restrictions have been placed on wage increases in the public sector. The legal minimum wage has been adjusted to reflect projected inflation and economic forecasts.
As regards monetary policy, the decision not to make loans of any type to the public sector has been adhered to faithfully. The only source of new money has been external, a process that the Central Bank has been prudently overseeing. There are already marked signs of remonetization in the economy, and it is hoped that by the end of September liquidity will return to its levels prior to the stabilization program.
Sweeping tariff reform has begun. The many prohibitions and requirements regarding import licenses have been eliminated, along with all duty exemptions. Three duty levels of 15 percent, 25 percent, and 50 percent have been established (with an average actual duty of about 20 percent), in comparison with the almost 50 percent rates that existed before, which meant a maximum duty of 120 percent. Until December 31, 1990, an additional surtax of 10 percent will be charged for fiscal reasons. These measures are the first step toward tariff unification, which will be gradually adopted.
All price controls (with the exception of the legal minimum wage mandated by the Constitution) have been eliminated, and prices are now subject to the free interplay of supply and demand.
Last, an Emergency Social Program has been launched to compensate the lower income for the impact of the difficult social situation inherited from the previous administration and the recessive effects of the stabilization program. The program is being implemented with the active participation of the more than 700 nongovernmental organizations in Peru. And, despite the difficulties inherent in the program’s increase in coverage, it is bearing fruit, although additional resources are needed to meet its basic objectives in full.
The achievements are admittedly fragile. Fiscal equilibrium is based on emergency taxes, and public spending is lower than it has been in the past. The Government’s party does not have a majority in Congress. Fortunately, the Senate has already approved powers so that the Executive Branch can legislate in tax matters before November 30, 1990. However, the technical teams needed for successfully implementing the reforms described below are still insufficient.
The Development Program
In order to consolidate the stabilization program, the Government considers it necessary to begin immediately a development program consisting of both structural reforms and infrastructure rehabilitation. The goal is to ensure a dynamic process of investments in projects that are socially and financially profitable, in the context of an institutional framework that allows Peruvians to look forward to a brighter future.
In the five years of its term, the current government will introduce tax reforms, restructure the public sector, expand external trade, rebuild the financial system and ensure its solvency, make the labor market more flexible, deregulate production, and simplify administrative red tape.
In the fiscal arena, the number of taxes will be reduced, exemption eliminated, rates streamlined, and tax administration improved in order to make collection more transparent, equitable, and efficient. This is expected to result in a tax burden equivalent to 13 percent in 1991, which will be raised gradually to 18 percent in 1994.
Public spending will have to be restructured in order to both strengthen the managerial capacity of its administration and concentrate its functions in providing adequate security, rendering services, and meeting the minimum needs of the poorest.
In order to revitalize external trade, prior to December 1992 duty rates will be unified. At the same time, temporary import arrangements will be strengthened, taxes and subsidies to exports eliminated, and the customs operating system will be restructured and strengthened.
In rebuilding the financial system, the Government will repeal the law on nationalization of the banking system. Likewise, the gradual liberalization of interest rates and cash reserves will continue, together with the strengthening of banking supervision and reform of the deposit guarantee system. The functions of the Development Bank and especially the Agrarian Bank will be concentrated so that they meet only the specific needs of the most depressed sectors.
The labor market will be made more flexible in the context of the mandate by the Constitution. The state will not interfere in the setting of wages in the private sector and will be moderate in determining minimum wages in line with the objective of price stability. Public sector wages and salaries will reflect the payment capacity of the central government.
The Government will increase cooperation with the Liberty and Democracy Institute presided over by Economist Hernando de Soto, in order to affirm the right to land ownership, deregulate production, and simplify administrative procedures.
In the productive sectors, the Government will focus its efforts on the rehabilitation and strengthening of infrastructure projects such as mining, fishing and the creation of markets, energy, potable water and drainage, roads, and storage facilities. Efforts will be made to involve the private sector in the development and administration of the rehabilitation works and the productive sectors and infrastructure. Public investments will be properly planned and assessed so that they produce the expected benefits.
The framework for the role of the state as an entrepreneur will be rethought so as to concentrate state action on works associated with the provision of services and rehabilitation of infrastructure. In this process, enterprises that are not financially viable will be liquidated, and those that do not rightfully belong in the public sector will be privatized. Social security will be reformed to improve health care services and guarantee that pensions maintain their real value over time.
The Emergency Social Program, which provides assistance to the low-income sectors during stabilization, will be gradually converted and integrated over the medium run into stable education, health, nutrition, and housing policies that make it possible to meet the objectives without resorting to direct forms of assistance.
Reintegration into the International Financial System
The Government will seek to rejoin the international financial system by resuming in the second half of October debt-service payments to the World Bank and the Inter-American Development Bank.
The Government hopes to coordinate its program with the IMF, Inter-American Development Bank, and World Bank so that it can be used as a basis for an upcoming meeting in December or January with the Consultative Group of the Paris Club. The Government is counting on substantial support from the multilateral agencies in technical assistance, funds needed for structural adjustment and rehabilitation, the Emergency Social Program, and strengthening of public administration, as well as for the financing of new projects.
From member countries of the Paris Club, the Government will seek the favorable Toronto terms that will both provide relief on the accumulated debt and lead to the granting of new lines of credit for external trade and cofinancing with the multilateral institutions for new investment projects. Likewise, the necessary financial cooperation will be sought for settlement of the unpaid outstanding debt with the multilateral agencies.
With the Advisory Committee of the creditor commercial banks, the Government will begin formal talks in the first quarter of 1991 on finding a mutually acceptable formula for the payment of its obligations.
Statement by the Governor of the Fund for Poland—Leszek Balcerowicz
A year ago I spoke here of Poland’s extreme economic difficulties. The country was besieged by a vicious combination of hyperinflation, declining output, and acute shortages. Decades of central planning had severely distorted the price structure and resulted in an inefficient, state-dominated economic system. It was a dramatic situation that required fast, bold, and imaginative action by the newly elected Solidarity Government.
We accepted the challenge and carried out a thorough diagnosis, with the expert assistance of the IMF and the World Bank, for which we are profoundly thankful. We then embarked on a crash legislative program to form a strong legal foundation for the unprecedented operation of reversing a centrally planned economy to a market economy. That reform program, enormous in both its scope and intensity, was launched on January 1, 1990.
We are very well aware of the high stakes. There are no ready, tested, and proven models to be followed. Everything must be introduced, tested, and corrected while being implemented. These operations require unflinching resolve on the part of the Government and great sacrifices on the part of our society. We have both, but we know that the political tolerance of society may be brittle. We are proud of the strong resolve of the Polish people to put their house in order and to accept the costs of economic reform. But the results must show prospects for a better life.
We are doing our best to continue the bold economic reform program essential to the future of Poland and also important to the global reversal toward a market economy that we all praise. We need strong, unflinching, sustained, and innovative support as well as the cooperation of the international economic community.
The Polish reform program consists of two interrelated parts: a stabilization program designed to stifle hyperinflation and balance the market, and a program of systemic changes designed to produce a modern, competitive, free-market economy. The stabilization strategy, which is being constantly reviewed to ensure that it achieves its objectives, consists of the following basic elements: (a) reduction of the budget deficit, achieved mainly by cutting subsidies; (b) maintenance of a tight monetary policy based on positive real interest rates; and (c) implementation of a tough, tax-based wage restraint policy. At the same time, we initiated a number of important systemic changes:
—We have liberalized prices. The proportion of prices freely determined by the market has risen from 50 percent to 90 percent.
—All administrative rationing of goods and services has been abolished.
—We have reformed the banking system. The Central Bank has been separated from the budget, and a two-tier banking system has been set up. A liberal policy of concessions has allowed for the formation of private banks, and some state banks are being prepared for privatization.
—Competition has been invigorated by a sweeping liberalization of foreign trade, the breaking up of monopolies, and the introduction of a unified and stable exchange rate, as well as convertibility of the zloty for current account transactions. Poland was the first Eastern European country to achieve this.
—Privatization of small companies is progressing. Road transport, which used to be almost totally state-owned, is now 50 percent in private hands. Some 15,000 shops have passed into private ownership, and there are 20,000 more private firms than existed a year ago.
So far, the economic reform program has been progressing encouragingly. The following are just a few positive signs that we are on the road to full recovery. Inflation has dropped from a monthly level of 80 percent in January to 1.8 percent in August. The budget deficit has been reduced from the equivalent of about 8 percent of GDP in 1989 to only 1 percent, and by the end of the year we shall probably have a balanced budget. Massive and widespread shortages that were part of Polish life for decades have been eliminated, and a balanced market is well established. The exchange rate has remained rock-steady for almost nine consecutive months. And, foreign trade has performed well, particularly in hard currency exports that rose by almost 25 percent in the first eight months of this year.
We are most encouraged by the achievements outlined above. Regrettably, there are painful costs to be borne. Polish society is paying a heavy price for the transition to the market economy. The price of stifling inflation has been recession and a substantial fall in production, though I am pleased to add that the preliminary data for August show a welcomed reversal of this trend. There has also been a significant fall in living standards, with average real incomes down by about 30 percent this year. And unemployment has grown to a current level of about 6 percent. The society accepted the hardships with understanding. Poles understand that things must get harder before they get better. However, in our work we have to consider the necessity of maintaining the confidence of society in the reforms and its tolerance for harsh measures.
We are very apprehensive that just as the Polish economy seems to be showing the first faint signs of recovery, unexpected world events have unfavorably influenced our situation. I am referring first to the Gulf crisis. Poland was active in trade with Iraq, and loss of that export market will bear heavily on our economy. We will also be deprived of oil supplies from Iraq, and the increased world oil prices are a severe blow to our recovery. We are also very unfavorably influenced by the decomposition of the CMEA. The sharp decline of Soviet oil supplies to Poland will also deal a severe blow to the Polish recovery and impose a massive new burden on Poland’s foreign exchange. Severe disruptions will also cripple the industries traditionally geared to supply the U.S.S.R. Finally, we welcome the unification of Germany; however, we cannot help but notice the related decline of demand for Polish exports, especially in the engineering industry.
All of these obstacles compound our difficulties now just when Poland is at the crossroads. We are prepared to respond to these new challenges with resolve and determination, but we will need international assistance and understanding, particularly expressed in a lasting and satisfactory solution of the Polish debt burden. We experienced international solidarity in the past, and we sincerely hope this will be the case in the future. The interests of Poland and the world require it.
Statement by the Temporary Alternate Governor of the Fund and Bank for Iraq—Abdul Moneim Othman
I would like to join other speakers in welcoming the new members to the Bretton Wood family and to wish them all the best.
It should be quite obvious that what is going on in our region goes well beyond being a dispute over ordinary economic and border matters. That is partly why it was not originally the intention of the Iraqi delegation to make a statement at these meetings. Of course, ordinary economic and political matters cannot be easily disentangled, and we believe it was entirely appropriate for these meetings to address issues relating to the economic impact of what has become known as the Gulf crisis. Iraq—an original Bretton Woods signatory—indeed welcomes the consideration that is being given by the Fund and the World Bank to the introduction of adaptations in their facilities and lending policies, with a view to ameliorating the impact of the crisis on the economies of a large portion of the membership. Unfortunately, however, some of the references to the recent developments in the Gulf that have been made at these meetings involved, in our view, a great deal of misrepresentation and downright distortion. Iraq has, therefore, found it necessary to have its firmly held views on the Gulf question reiterated.
What has taken place on August 2, 1990 is nothing but a reintegration into Iraq of a dear part of it that had for long been artificially and unlawfully separated from its motherland through deliberate colonial design and manipulation. Let there be no mistake about this. Iraq’s boundaries extend from the town of Zakho in the north to the Gulf in the south, and the Iraqi Government is the only legitimate representative of this land. Indeed, a fair-minded examination of well-documented events since the latter part of the nineteenth century would reveal beyond any doubt that the artificial boundaries that were drawn in southern Iraq, and the tireless and vicious efforts to perpetuate them, were nothing but a manifestation of a wanton desire on the part of the colonial powers to deprive Iraq—a country ancient in its civilization and rich in its heritage—from access to the waters of the Gulf, an access that it had possessed throughout history. A simple look at the map can confirm that.
This is an important sense in which Iraq considers the recent events in the Gulf as more than a dispute over ordinary economic and border matters. There are, no doubt, other senses in which that is so.
For one thing, and this is something that is often conveniently overlooked, Iraq has been, well before the events of August 2, becoming increasingly a target for relentless attacks from quarters well known for their extreme sensitivity to the revival of Arab nationalism.
This, at least in part, explains the reaction to the events of August 2, which to say the least, was disproportionate. Indeed, it is not at all an exaggeration to suggest that it was not the events of August 2 that led to the present crisis, but rather the disproportionate and completely unjustified reaction to those events. Clearly, and given its magnitude, that reaction cannot be explained in terms of apprehension about the security of oil supplies. Although access to Arab oil has become considered de facto by the West as a birthright, apprehension about the steady flow of that oil cannot explain the disproportionate reaction to the events of August 2. That reaction has to be seen for what it really is. And that is a wicked attack aimed at crippling Iraq, a country that is seen as a threat to the so-called new world order, because of the inspiration it stands to provide to countries that are guided in their aspiration to realize their full potential by homegrown values. It is indeed the homegrown “can-do” attitude in the Third World countries that is under attack.
It has been said at this forum that at no point in history has the kind of isolation that is being imposed on Iraq been experienced. To this, let me say that fair-minded people everywhere know very well how the UN sanctions, which are presumed to be a gauge of that isolation, came to pass. Beyond this, let me assure you that Iraq does not feel isolated. For it sees its stance vis-à-vis the present crisis as a genuine reflection of the desire of the vast majority of the Arab people to restore their self-esteem, which the colonial powers have for centuries tried to undermine.
Before closing, let me say that Iraq is fully prepared to do what it can to ameliorate the adverse impact of the present crisis on the economies of the developing world. In this regard, Iraq would reiterate its offer of free oil to developing countries that have been adversely affected by the present crisis. Iraq’s offer of free oil is a serious offer and is one that indeed was made in good faith. And it is indeed most unfortunate that, like other Iraqi initiatives since the onset of the Gulf crisis, this offer has not received the attention it deserves. In fact, it should not come as a surprise that Iraq’s offer is a serious and genuine one. After all, Iraq’s record is well known in extending financial assistance to developing countries both within and outside the region. And it is Iraq’s earnest hope that the present crisis will soon be resolved peacefully so that it can attend to the task of rebuilding its economy and resume its financial assistance to other developing countries.
Finally, a lot is being said these days about the new world order. Let me say that Iraq cannot but support the emergence of a just world order that truly reflects the aspirations of people everywhere. But, it should be emphasized that for the new world order to be really new, the world has to consist, and indeed it has to be perceived as consisting, of true partners and not of masters and obedient surrogates.
Statement by the Governor of the Fund and the Bank for Viet Nam—Cao Si Kiem
On behalf of the Government of the Socialist Republic of Viet Nam, I warmly welcome the admissions of the Czech and Slovak Federal Republic, Bulgaria, and Namibia to the International Monetary Fund and the World Bank.
Since the last Annual Meetings, the world has witnessed many important changes that will have considerable effects on the economies of member countries in the future. Over the past year, the Fund and the Bank have participated in this process through the formulation of stabilization, as well as development, policies. Notably, the Fund has approved a number of programs under the structural adjustment and enhanced structural adjustment facilities. We hope that the Ninth General Review of Quotas will soon be approved so as to provide new resources for the Fund to assist member countries in their efforts to implement economic adjustment and reform programs and to regularize their external debt situation. We are of the view that in the immediate term, the Fund should strengthen its facilities further to help member countries to improve their balance of payments positions and promote sustainable economic growth. We also appreciate the Bank’s efforts in addressing other issues, such as poverty, environmental deterioration, and protection of less-favored social groups. These efforts have brought about encouraging results. Yet, in order to solve these problems successfully, the Bank should take specific measures and solutions on a case-by-case basis. In this connection, we welcome the Ninth IDA Replenishment.
Over the last year, Fund-Bank collaboration has expanded significantly. The main instruments of that collaboration have been the preparation of policy framework papers and joint Fund-Bank missions to deal with problems relating to arrears vis-à-vis international creditors.
Allow me to highlight Viet Nam’s recent developments in the context of these major world changes. The Vietnamese Government has started implementing a comprehensive economic program for almost the past two years. The objective is to shift away from a highly subsidized bureaucratic economy to a market-oriented economy. The major policies and measures are aimed at strengthening the public sector while developing private sector economic activities. In pursuit of these objectives, policies were implemented in the major sectors of the economy. In the agricultural sector, a piecework contract system was introduced to individual farmers, which was accompanied by a reform of the land tenure system. In the industrial sector, budgetary subsidies to state enterprises were eliminated, while they were given complete financial and management autonomy. In the financial sector, the official exchange rate was adjusted to a level more consistent with market forces, and interest rates were increased considerably—to 12 percent a month in April 1989. Considerable efforts were also made to improve both budgetary and monetary policies.
These policies and measures have produced encouraging results. In 1989, agricultural output increased considerably. For the first time, Viet Nam became not only self-sufficient in food, but it also became a major rice exporter. Output in the light industry, construction, and services sectors increased significantly. Inflation decreased from an annualized rate of 14.2 percent a month in 1988 to 2.3 percent a month during the year. The Vietnamese authorities have also managed the official exchange rate in a flexible manner. Exports in convertible currencies doubled those of the previous year, allowing an improvement in the balance of payments position. International reserves increased from the level of one week of imports in 1988 to four weeks at the end of 1989.
At the same time, Viet Nam’s economic relations with the international financial community have improved greatly. In June 1989, the Vietnamese Government signed an agreement on economic, cultural, scientific, and technological cooperation with the French Government. Similar agreements were reached with the Governments of Italy, Sweden, and Finland. Economic and commercial relations between Viet Nam and the members of the Association of Southeast Asian Nations (ASEAN), as well as Southwest Asian countries, have widened.
During 1990, the Vietnamese Government continued its reform effort through promulgation of a number of laws aimed at strengthening the basic economic structure. These included an amendment to the Foreign Investment Law, three tax laws, and several decree-laws, the most important of which are decree-laws on the central bank and commercial banks. We are now preparing a Commercial and Company Law, decree-laws on ownership and bankruptcy, and other regulations aimed at creating a strong legal framework for economic reform and foreign investment in Viet Nam.
As regards relations with the Fund, the Vietnamese Government has strongly responded to the intensified collaborative approach strategy formulated during the September 1988 Annual Meetings in Berlin. We have also discussed with the Fund and agreed on a solution to Viet Nam’s overdue obligations. Viet Nam has carried out many of the Fund’s policy recommendations and has met all its current financial obligations to the Fund. Unfortunately, the Fund has not yet approved the economic adjustment program that Fund missions discussed with Viet Nam. We request the Fund to fulfill its obligations to a member country that has so closely collaborated with the Fund in solving the arrears problem. …
The Vietnamese Government is committed to continue the economic policy reform and will undertake stronger and more comprehensive policies. With this view, we warmly welcome international financial institutions, foreign countries, and investors to cooperate with and invest in Viet Nam under the Foreign Investment Law. The economic reform in Viet Nam, which is continuing and developing in the right direction, is in urgent need of financial assistance from the international community, especially since this reform has already caused considerable social difficulties.
In the context of development in the world, in the region, and domestically, we strongly wish the Fund and the Bank to express its support of Viet Nam’s efforts. Such financial assistance would permit Viet Nam to complete successfully its economic reform, solve its arrears problems, and normalize its relations with the international financial community.
Statement by the Governor of the Fund and Bank for Romania—Theodor Dumitru Stolojan
I welcome the opportunity to address this distinguished gathering and would like to welcome the new members of the Bretton Woods family, the Czech and Slovak Federal Republic, Bulgaria, and Namibia.
Even in the darkest moments of our existence, our membership in the Fund and Bank still left us feeling that we were part of the civilized world. Now, for the first time, we are free to express our gratitude to the staff and management of these two institutions for their support to us. We are firmly resolved to do our best to improve our relations with these two institutions.
In line with this, I am pleased to announce that Romania has just joined the International Finance Corporation. We are expecting substantial technical and financial support from IFC to help develop the emerging private sector of our economy. Also, we come here with hope that our problems and the great challenges that we are now facing will be well recognized and understood.
Romania is currently pursuing its economic reform program with a view to shortening the period of transition to a market-oriented system in the broad framework of a multiparty democracy.
The firm commitment of the Romanian Parliament and Government to a market economy, in the context of a general policy of stability and structural adjustment, is illustrated by the following main measures that have already been taken:
—The totally rigid command system of planning has been abolished. Market institutions and a market-based approach to the distribution of physical and financial resources are also being introduced.
—A framework of incentives has already been created in Romania, allowing for up to 100 percent ownership by foreign investors.
—State enterprises are being converted to commercial companies and, with a view to privatizing these companies, one third of the state’s ownership is being freely given to the people. For the remaining two thirds, shares will be issued and sold to Romanian and foreign investors.
—Reform of the banking and tax system is under way. Starting on September 5, 1990, the National Bank of Romania was split into a central issuing bank and a commercial bank, as a first step toward creation of a two-tier system.
We are now facing the crucial problem of speeding up implementation of the reform program, with emphasis on stability and structural adjustment. To this end, new measures are to be taken in the coming months with a view to the following:
—completion of tax and banking reforms;
—promotion of a tight fiscal and monetary policy;
—introduction of a social security safety net;
—liberalization of prices; and
—preparations to make the national currency convertible.
We are aware that implementation of such comprehensive, market-oriented reform policies is doubly difficult for us for both domestic and external reasons. First of all, we have to change the old mentalities of the people with respect to property, the management of the economy, and incentive mechanisms. Second, the Gulf crisis will deeply affect our external position because of the increases in the price of crude oil, as well as the losses we have to bear in joining the international embargo against Iraq. Apart from this, Romania will suffer another important shock due to the restructuring of Comecon relations and the forthcoming change in the conduct of our economic relations with this group of countries, on a freely convertible currency basis, starting next year.
We are also aware that, even though at the present time Romania has no external debt, this was achieved at huge social and economic cost. The most harmful aspect is the isolation of our economy from technological advances in the rest of the world.
Despite these difficulties, the present Government of Romania is fully committed to the goals of democracy and market economics. There is no turning back. However, we realize that, even if we mobilize all of our domestic resources, economic reform cannot be successfully implemented without technical and financial support from the Fund, the World Bank, and the international financial community at large, because of the far-reaching and comprehensive nature of the changes involved.
Therefore, we expect that the IMF will be prepared to extend financial support to us through a stand-by arrangement in order to sustain our economic reform program, as well as through other facilities as needed to achieve convertibility of our currency. At the same time, we need the support of the World Bank Group to finance our structural adjustment and a number of investment projects.
In presenting this overview of the problems that confront us, I simply wanted to bring to your attention our difficulties and to express the hope that our efforts will benefit fully from international financial support.
In concluding, I should like to make my message as clear as possible: Romania is fully committed to moving toward a market-oriented economy. It depends to some extent on the international financial community as to how short our journey toward this goal can be made.
Statement by the Governor of the Bank for Western Samoa—Tofilau Eti Alesana
On behalf of the countries in our constituency, Kiribati, Solomon Islands, Vanuatu, and my own country, I wish to join previous speakers in welcoming the Czech and Slovak Federal Republic, Bulgaria, and Namibia, and also our special invitees from the U.S.S.R. to the Annual Meetings. I would also like to express our appreciation for the excellent arrangements for these meetings.
Our warmest thanks to the President of the United States, Mr. George Bush, for his welcoming address and to the American people for hosting this year’s Annual Meetings in Washington, D.C.
The pace of world economic activity, which decelerated last year from a very rapid growth in 1988, is projected to taper off further during 1990. World trade, which also fell in 1989 from the high level of the year earlier, is expected to decline further this year. These trends have produced and will continue to produce adverse effects on many developing countries, especially our small island economies.
The small island countries of our constituency are characterized by a limited resource base, a high degree of vulnerability to inclement weather, and weak infrastructure. These countries rely heavily on the export of limited primary products. The international prices of these commodities have been on a downward trend over recent years, and this has contributed to a widening of our external trade deficits. Except for Vanuatu, which was able to offset its trade deficit with a larger surplus from its services account, other countries like my own rely heavily on a net inflow of funds from abroad to meet imbalances in our external accounts. Moreover, the wide fluctuations in international foreign exchange markets since mid-1989 and in early 1990 have made the management of our economies much more difficult. The continued acceleration of interest rates in major industrial countries has tended to raise the cost of funds for development financing that will further hamper our own development efforts.
A further common characteristic of our small island countries is a heavy dependence on imported fuel, which is the major input in our production of electricity. The recent increase in the price of oil and the likelihood of further increases will have significant adverse effects on our island economies, particularly in the areas of tourism, fishing, transportation, and industrial production. In this connection, we would ask for the inclusion of the small island countries in any program of assistance established to counteract the detrimental effects of the oil price increases.
A greater volume of external funds is needed by many developing countries not only for longer-term structural adjustment requirements, but also for meeting balance of payments needs. The transition of countries in Eastern Europe, from centrally planned to open market economies, will raise the external financing needs of those countries. Furthermore, with the impact of monetary and economic unification in Germany, total capital outflows from a unified Germany are likely to decline. The recent decision to move ahead with the process of the Fund’s quota increase is therefore a welcome step. It is important that the Fund continue to take into account the special needs and conditions of the small island countries and, in this regard, we would urge the Fund to be flexible in the application of its conditionality requirements when considering further financial assistance to these countries.
We ask the World Bank Group not to overlook our financial requirements during the coming decade of larger global needs for development finance. Our needs are relatively small, but meeting them could produce large catalytic effects on structural economic adjustments. IDA, in particular, needs to increasingly take into account the prevailing social and economic structure of recipient small island countries when designing financial conditions to be attached to project loans. Greater flexibility within the general framework of varying conditions for different project loans should be more in conformity with the actual situation of those small island countries and would thereby generate greater beneficial results. The IFC initiative of combining its financing measures with technical assistance for project identification and formulation would help meet the needs of those countries, where the level of evaluation of project design is not yet well developed. Our constituency will continue to need help under the technical assistance programs of the Fund and the Bank. We would, therefore, strongly recommend that financial resources earmarked for these programs be either maintained at current levels or increased.
One new development during 1989 is the Fund’s involvement in the Financial Action Task Force on Money Laundering. There is an increasing worldwide concern over the laundering of money derived from drug distribution and other serious crimes. We, in the small island countries, share this concern and are determined that our institutions will not be used for this purpose. However, with the present system of advanced communications, it is difficult for any individual country to state categorically that its banks, nonbank financial institutions, and businesses are never used for laundering drug money. Hence, multilateral efforts to combat the laundering of drug money, such as the 1988 UN Vienna Convention and the 1988 Basle Statement of Principles, are now to be supplemented by the Financial Action Task Force, and we are glad to note the Fund’s recent report on this subject. We would be very grateful for any technical assistance that could be extended to us that would allow for detection of this practice.
I would like to turn now to the issue of the environment, which is one of the major concerns of our constituency. The small island countries, especially the low-lying atolls, are particularly vulnerable to adverse changes in the environment resulting from pollution and global warming. In this regard, we welcome the proposed establishment of the Global Environmental Facility, and we urge the Fund and the Bank to continue to give priority to environmental protection.
In conclusion, I wish to express our appreciation to you, Mr. Chairman, for the admirable way in which you have conducted the Annual Meetings. I also wish to thank Mr. Camdessus and Mr. Conable, as well as the Fund and Bank staffs, for their untiring work over the past twelve months to enhance economic and social development, especially in small island countries.
Statement by the Governor of the Bank for El Salvador—Mima Lievano de Marques
I join those who preceded me here in welcoming the new members of the International Monetary Fund and the World Bank Group, Bulgaria, the Czech and Slovak Federal Republic, and Namibia, and I thank you, on behalf of the Government of El Salvador, for the opportunity to present to this meeting the most significant advances of our Economic and Social Development Program.
When President Cristiani took office in June 1989, El Salvador was deeply mired in the most profound economic and social crisis in its history. Ten years of terrorist aggression, misguided economic policies, adverse terms of trade, and the earthquake of 1986 had plunged one third of the population into extreme poverty, encouraged the emigration of 1 million Salvadorans to other lands, and widened the gaps between social sectors.
In the economic sphere:
—Domestic output stagnated.
—The public sector deficit represented some 4.5 percent of output and was largely financed with resources from the Central Reserve Bank. The Central Government’s domestic arrears amounted to almost $240 million (4.8 percent of GDP).
—Approximately 40 percent of the financial sector’s portfolio, or roughly $520 million, was in arrears.
—The trade deficit approached $620 million (12.5 percent of GDP) in 1989; the Central Bank had no foreign exchange reserves, while the country’s external payments arrears reached $160 million.
The situation was equally critical in the social area:
—One third of the population was in absolute poverty and could not meet its basic food needs. The infant mortality rate stood at 56 per thousand.
—Thirty percent of the adult population was illiterate.
—The average educational level was 4.5 grades for the nation as a whole and only 3.1 grades in rural areas.
In response to this situation, an economic and social program was implemented with a view to eradicating gradually extreme poverty and achieving sustainable economic growth. This program was designed to complement the effort to strengthen democratic institutions, the national judicial system, human rights, and the search for peace through a negotiated solution.
Acknowledging that the living conditions of its citizens could hardly be improved in the absence of economic growth, the Government gave priority in its Economic and Social Program to reducing the grave macroeconomic imbalances in order to lay the foundations for economic revitalization and re-establish El Salvador’s creditworthiness. Accordingly, it set in motion a stabilization program, together with structural reforms aimed at replacing an economic system characterized by privilege, protection, and inefficiency with a competitive, open system.
In addition, the Salvadoran Government recognizes that all citizens must share in the benefits of growth if economic reform is to be successful and domestic peace more attainable. Hence, the design of the economic and social strategies sought to ensure their correspondence and consistency in both approach and implementation.
The Economic Stabilization Program for 1989-90 includes a set of measures in several areas:
Government Finance: Effective budgetary control was established with a view to reducing government expenditure, including spending by public enterprises. Efforts are also being made to change the expenditure structure by increasing social outlays while beginning to cut military expenses, despite the present situation.
A reform of the tax system was also begun to simplify it, reduce evasion, and abolish tax exemptions. It is expected to raise the tax burden from 7.6 percent of GDP in 1989 to 9 percent in 1990 and roughly 12 percent of GDP in 1994. Moreover, electricity, transportation, water and telecommunications tariffs were increased in order to reduce the operating deficit of the state enterprises. These measures are expected to lower the fiscal deficit from 4.8 pecent of GDP in 1989 to 3.5 percent in 1990.
Money and Credit: Central bank credit to the Government was significantly reduced, most special lines of credit and portfolio ceilings were abolished, and interest rates were increased to positive real levels.
Foreign Exchange: The exchange system was decontrolled, exchange markets were unified, and the Exchange House was authorized to operate, thus significantly reducing the marked overvaluation of the colon.
Foreign Trade: Most quantitative restrictions on trade were abolished, and export and import procedures were simplified.
Prices: Price controls were lifted on 230 items.
The stabilization program is being supported by a stand-by arrangement approved by the Fund’s Executive Board in August. In addition, El Salvador renegotiated a portion of its external debt with the Paris Club last week and is engaged in negotiations with other countries to lighten its debt-service burden. The economic stabilization effort has been accompanied by profound structural reforms aimed at creating a more efficient and more competitive economic system.
Trade Reform: The Government has abolished the foreign trade monopolies in coffee, sugar, and cotton and begun a tariff reform, the first stage of which includes a maximum duty of 35 percent and a minimum of 5 percent. The objective is to work together with other Central American countries to establish as uniform a rate as possible, in the 15-20 percent range, by 1994.
Tax Reform: The Government of El Salvador is preparing preliminary studies for introducing a value-added tax in 1992 and is implementing a program to modernize tax administration and budgetary information and control systems with support from the Fund and other agencies.
Financial Sector Reform: Priority has been given to strengthening the Superintendency of the Financial Sector and to rehabilitating banks and savings and loan associations, and the first steps have been taken to privatize these institutions.
Prices: Price range systems are being introduced for essential grains in order to prevent excessive fluctuations and encourage their production. As a result of this policy, maize producer prices increased by more than 11 percent in real terms, while consumer prices remained below the previous year’s levels.
Land Reform: Peasants qualifying for land reform who are organized into cooperatives have been given the option between individual or collective ownership. In either case, the Government will deliver property titles to encourage efficient land use and rural investment.
Institutional Reform: Efforts are under way to privatize state enterprises and functions and to decentralize and debureaucratize the public administration. …
The Government of El Salvador, aware that the process of stabilization and structural adjustment imposes high social costs, particularly on the lower income sectors, has established four Compensatory Social Programs, involving direct subsidies, community works, employment generation, and household income enhancement. Direct subsidy programs include public transportation and basic housing purchase subsidies and special food distribution programs for mothers and infants (through health care stations) and for school children (through school lunches). Community works programs are being carried out through joint efforts in the municipalities and the direct participation of the poorest communities.
Employment generation programs include reconstruction programs using resources available but unused since the 1986 earthquake and food-for-work programs in environmental protection projects, housing construction, and projects in communities of displaced persons are also among the employment generation programs. In addition, in order to offset in part the drastic fall in real wages, the Government exempted wage earners with monthly incomes below $200 from income tax. Also, the minimum salary for civil servants and other workers was raised by 15 percent, on average, during the last months of this year. World Bank support has been instrumental in implementing the structural reforms in social sectors, particularly education and health.
Aware, on the one hand, that the immense needs of the population require immediate solutions and, on the other, that the structural reforms under way in the social area need time to mature and yield the expected results, the Government has been working over recent months on the establishment of the El Salvador Social Investment Fund (FISS), which will channel resources for social projects identified by communities and voluntary private organizations. This project has already obtained financial support from the IDB and the U.S. Agency for International Development and is expected to start operations in October 1990.
To rescue El Salvador from its critical economic and social situation and improve its international credit standing, President Cristiani’s administration has implemented a far-reaching program of stabilization and structural adjustment. The process of stabilization and adjustment, in itself difficult, has had to face unforeseen external developments, such as declining external bilateral aid, falling coffee prices, the FMLN offensive of last November, and, lately, rising petroleum prices. In spite of this, the Government of El Salvador has persevered with the dialogue for peace and the structural adjustment program, whose first results can now be discerned. This domestic effort has been backed by the IMF and the World Bank and other international organizations and friendly countries. The challenges of the future are enormous, and we hope to have your continued support.
Statement by the Governor of the Bank for Fiji—J.N. Kamikamica
I welcome this opportunity to address these Annual Meetings and to thank our hosts for the reception and hospitality. We shall share our views and also listen to and learn from the experiences and observations of fellow Governors as we face some of the most pressing development issues confronting the international community today. I also wish to express, on behalf of the Government of the Republic of Fiji, our greetings to the Czech and Slovak Federal Republic, Bulgaria, and Namibia on having joined the membership of our two Bretton Woods institutions this year. Your statement, and, similarly, those made earlier by the Managing Director of the Fund and the President of the Bank have hit the nail on the head. Your statements have all dealt with the current issues in a forthright, frank, and urgent manner.
At the outset, I should wish to highlight the severe repercussions that we in the developing world, and especially in our case, the economically fragile small island nations, are having to bear as a direct consequence of the recent and regrettable crisis in the Gulf region. The immediate impact of this crisis will only serve to further compound the extreme difficulties that already beset our small economies and, in many instances, jeopardize the economic growth strategies and policies that may have just been adopted and are currently being implemented. It is thus with cautious optimism and much uncertainty that we view our social and economic prospects for the future.
Undoubtedly, a conducive international economic environment is essential if we are to make any headway in dealing capably with the important issues before us today. The past decade, in general, was a most difficult period for many developing countries, including not just those in the sub-Saharan region in Africa and low-income countries in Asia, but, particularly, the many small island economies such as those we find in the South Pacific region. Many countries in the developing world have experienced consistent periods of stagnant or declining per capita GDP growth rates, coupled with rapid increases in inflation, and associated problems of high interest rates and a weakening in their terms of trade. In this regard, we note the recent projections for a slowing down in world economic growth this year, reflecting a moderation of growth in both industrial and developing countries. As we have already noted, prospects for world economic growth in 1991 are very much an uncertainty at this time, although there were, prior to the Gulf crisis, more encouraging signs for a resurgence in growth next year.
In the light of the current turn of events in the Gulf region, it is all the more important that developing countries put in place sound macroeconomic policies in support of structural adjustment programs they may be implementing. The roles played by the Bank and the Fund in their respective support of these adjustment efforts are recognized and appreciated. We would also urge the two institutions to continue their support and, in addition, examine methods of expanding the adjustment operations to other countries, with a view to improving confidence and the prospects for investment flows. We are particularly cognizant of these linkages, for, as I had mentioned last year, our strong economic growth in the past two years has enabled Fiji to institute certain deregulation measures and policies that we will continue to pursue in the foreseeable future. It is our expressed hope that the recent promulgation of our new Constitution will engender further increases in confidence in the economy both at home and abroad and generate further private sector investments. We believe that our membership in the Multilateral Investment Guarantee Agency (MIGA) will indeed support our investment promotion in Fiji.
The problems of severe indebtedness faced by a number of developing member countries continue to thwart their adjustment and growth efforts. While several initiatives for debt and debt-service reductions have been put in place, in which both the Fund and the Bank have had supportive roles to play, we are of the view that much more could be done and that progress in the overall debt strategy is moving somewhat slowly. In this regard, I would like to commend the proposal by the United Kingdom for greater debt relief for poorer countries, as was recently announced in Trinidad and Tobago. It is critical that such initiatives be supported, for while some relief has already been obtained through the Paris Club reschedulings, the prospects of returning to capital market access remain highly uncertain. Similarly, while it is crucial that urgent attention ought to be given to severely indebted countries, we have continually stressed that due recognition should also be given to the several indebted middle-income countries that have not had to resort to a restructuring of their external debt obligations and are duly facing up to their debt problems. It is only proper that the Bank, the Fund, and other development assistance agencies ensure that there is sufficient flow of financial resources to these countries.
I touched earlier on the need for a conducive international economic environment as being a prerequisite for growth in developing countries. Underscoring the urgent need for bringing about such an environment is the need to establish a more open multilateral trading system. We support continuing efforts in that direction.
Strategies for the effective reduction of poverty in the 1990s, which formed the basic theme of this year’s World Development Report, are timely and ones we need to continue to emphasize and remind ourselves of as being the top-most priority in our development endeavors, particularly during this coming decade. The need for environmental enhancement strategies and the promotion of women’s role in development are vital considerations also.
Fiji is fully committed to supporting private sector investment and initiatives that will facilitate the strengthening of this sector. Manufacturing, particularly of garments and other value-added, resource-based products, continues to attract overseas private investors. Progress is also being made in enhancing the sector’s already heavy involvement in the tourism and sugar sectors in the economy. In the public sector, selected enterprises have been identified for a phased program of privatization, and we are particularly appreciative of the role that the Bank has played in strengthening this sector in Fiji, through both technical and financial assistance. …
Last year we expressed concern over the increase in Fund quotas and over a resumption of SDR allocations. We are pleased to note that a consensus was finally reached on the much-needed increase in Fund quotas, although given the international situation we would have preferred a much larger increase than the 50 percent that was agreed upon. Nevertheless, we fully support the increase and are pleased to note that the Tenth General Review of Quotas is due to take place in 1993 as scheduled. I should like to reiterate our view that a resumption of SDR allocations is now overdue, and that unless some action is taken on this front soon, the possibility of the SDR becoming the principal reserve asset of the international monetary system will never be achieved.
In closing, I should like to record our gratitude to the Fund and the Bank for the various kinds of financial and technical assistance that we have received through the provision of experts and the work of various missions. We are encouraged by the new spirit of international cooperation, which has been enhanced by developments in Eastern Europe over the past year, and which augurs well for the future. We recognize that as we enter the decade of the 1990s, the international financial system faces many challenges. Fiji, for its part, will continue to support the various initiatives being developed and pursued by the Bretton Woods institutions to address and seek solutions to these issues now and in the future.
Statement by the Governor of the Bank for Lao People’s Democratic Republic—Sisavath Sisane
It is indeed a great pleasure and honor for me to lead the delegation of the Lao People’s Democratic Republic in attending the Annual Meetings of the International Monetary Fund and the World Bank, which are taking place in Washington, D.C.
May I, first of all, on behalf of the Lao Delegation, express my deep appreciation and sincere thanks to the organizers of the meetings and the host government for the usual smooth arrangements made to ensure the success of our meetings. May I also express sincere congratulations to the staffs of the Fund and the Bank who have worked with me and my colleagues in the Lao People’s Democratic Republic to produce data, initiate projects, and arrange facilities and credits and whose understanding of our problems has furthered our efforts to hasten the pace and direction of change in our economy.
As is well known, the Government of the Lao People’s Democratic Republic has worked out objectives of national economic development aimed at transferring the economy from one of subsistence to a market economy.
The small agriculturalist, the individual entrepreneur, and the larger capitalist shall participate fully in the agricultural, commercial, and industrial life of the country. An end to multiple price practices, more autonomy to business management without surrendering accountability, and a recognition by government of the economic laws that determine our future shall provide further stimulants for sustained economic growth. We shall improve the living conditions of the people without destroying the world around them. The people must abandon the practice of slash-and-burn cultivation that damages our forests and cooperate in our forest resource management program by careful logging and active reforestation. We are restructuring our economy, a process started in mid-1986. I mentioned some of these measures and the early successes in my statement to the Annual Meetings in Berlin (West) in 1988 and again here last year.
We are now in the second year of our Fund- and Bank-supported structural adjustment program. The fundamental macroeconomic objectives of the adjustment process are to:
—achieve an average growth rate of 5 to 6 percent;
—reduce inflation to that prevailing in trading partner countries in the convertible area by the end of 1992; and
—make further progress to balance of payments viability.
There are four principal constraints that hinder our economic development:
—structural obstacles in agriculture and forestry;
—a narrow and weak export base;
—the pitiful state of our roads and the consequent limited access to both domestic and foreign markets; and
—the extreme shortage of skilled labor in the key sectors.
I add a fifth, the weakness of our financial sector, and a sixth, over which we have no control, the weather. Several years of drought pushed up our inflation rate and slowed our growth. The international institutions support our efforts to restructure our economy. Our many donors offer tangible support, as witnessed by the numerous projects under way and in the planning stages. Many donor countries, also members of the United Nations, that support our development and restructuring efforts are not yet members of the Fund and the World Bank.
Our target for growth in 1989 was modest. The actual growth rate was slightly over 9 percent. This remarkable performance is mostly due to the hard work of our farmers, who took full advantage of favorable weather to produce around 1.4 million tons of paddy, almost 40 percent more than in 1988.
Our inflation rate in 1989 was also high—over 50 percent. The Government took a number of measures in the second half of the year to slow the growth of credit. The measures were successful. For a number of months toward the end of the year the consumer price index did not rise. Fears of hyperinflation abated. The good rice harvest had a significant effect on prices.
Seasonal factors pushed the consumer price index upward toward the end of the first quarter of 1990 and again during the second quarter. Lower inflation in the second half of the year will enable us to meet two important economic targets for 1990. One is to experience real growth of around 6 percent and the other is to keep inflation below 25 percent for the year.
The World Bank approved a structural adjustment credit of SDR 30.8 million on June 9, 1989. The initial drawdown took place last year. The Executive Board approved the second tranche in July of this year.
The Fund approved our request for a structural adjustment facility (SAF) on September 18, 1989. The amount of the facility is SDR 20.51 million. It represents 70 percent of quota. SDR 5.86 million was made available immediately, and the balance in two installments (SDR 8.79 million and SDR 5.86 million) in 1990 and 1991. I expect the second release of SAF funds to be approved by the Board in October. As of June 30, the Lao People’s Democratic Republic’s use of Fund facilities was limited to the SAF drawing of SDR 5.86 million. The Lao People’s Democratic Republic shall repay the small remaining balance of its Trust Fund loan this year, in accordance with the repayment schedule.
Last year I spoke of our efforts to restructure our banking, financial, and commercial systems. A key element in our economic adjustment process is the restructuring of our banking system. In the past twelve months, we have made positive progress toward a more responsive system, attuned to the needs of the customer. The State Bank created two commercial banks in 1988 from its Vientiane branches. In November last year, I signed the protocol that gave autonomy to the country’s largest commercial bank, Banque pour le Commerce Extérieur Lao. A joint venture bank between Thai investors and the Government of the Lao People’s Democratic Republic opened its doors to the public in October, and, in December, a Thai bank opened a representative office in Vientiane. The State Bank created an autonomous commercial bank, the Phak Tai Bank, from four of its provincial branches in the South in April this year. Yet another autonomous bank, the Lao May Bank, was created from the provincial branches in Savannakhet and Khammouane shortly before these Annual Meetings. In June, our Supreme People’s Assembly enacted the Bank of the Lao People’s Democratic Republic Act. The Act gives central bank functions to the new bank. Assets and liabilities of the State Bank pass to the Bank of the Lao People’s Democratic Republic. I acknowledge the contribution of the Legal and Central Banking Departments of the Fund to the original draft of the law. Our regional development institution, the Asian Development Bank (AsDB), has continued its technical assistance to the State Bank. An IMF central banking expert is working alongside the AsDB team. Following a financial sector review in the third quarter, we have discussed with AsDB officials the scope and direction of a large financial sector program loan. The loan will give us the opportunity to remedy the deficiencies and correct the weaknesses of the banking sector. The deficiencies are structural and technical. Personnel at all levels lack experience of international markets and modern financial practices.
Before I conclude, let me express my support to strategies of the World Bank and the Fund on poverty reduction, debt, role of women in development, privatization, human resources development funds, and structural adjustment.
In conclusion, I wish that our Annual Meetings be crowned with brilliant success.
Statement by the Governor of the Fund and Bank for Malaysia—Daim Zainuddin
As we take our first strides into the decade of the 1990s, the scenario ahead holds both opportunities and dangers. The liberalization and integration of the Eastern European economies in the world economy, sustained technological change, and economic globalization point to enhanced opportunities for the 1990s. At the same time, however, reduced resource flows, the deepening of poverty, and uncertainties regarding the Uruguay Round are negative developments that require our urgent attention.
More recently the Gulf crisis has imposed an additional burden on the oil importing developing countries as they continue to grapple with the continuing problems of poverty, debt, and reduced resource flows. The crisis may also affect some of the progress achieved by developing countries that had successfully undertaken structural adjustment. In this situation, we welcome the initial steps taken by the IMF and the Bank to mitigate the adverse effects of the oil price increase on developing countries. As the situation develops and more data become available, we hope the Fund and the Bank will work out appropriate special loan and financial arrangements that could give short-term financial support to developing countries as they face this additional economic hardship.
While the Gulf crisis is currently of immediate concern, we should not lose sight of the underlying economic problems that continue to plague the developing countries. The debt problem continues to be a matter of serious concern. While we can note with some satisfaction the continued efforts undertaken by all parties concerned since the last Annual Meetings, and, in particular, welcome the efforts of the Paris Club in rescheduling the official bilateral debts and lengthening repayment periods for debtor countries, we remain concerned about the somewhat slow progress achieved in negotiations on financing packages between a number of middle-income countries and their creditor banks. We, therefore, urge the creditor banks to undertake a more realistic and flexible stance, since the debtor countries would only be able to undertake adjustment efforts successfully if they are less burdened with debts. On the part of the debtor countries, the central element in their efforts should be a reorientation of their economies to attract non-debt-creating flows of funds through the liberalization of domestic regulations to encourage direct foreign investment, privatization, and financial sector reforms. At the same time the developed countries can play a critical role by fostering a more stable and predictable financial and economic environment for the developing countries. The magnitude of the debt problem requires mutually supportive policies on the part of all concerned to ensure a successful resolution.
The issue of resource flows to developing countries is another matter of continuing concern. It is disheartening to note that resource flows from both private and official sources have declined and have remained stagnant over the past few years. It is also appropriate at this point to voice the concern of many developing countries that the financial support and commitment by developed countries to the nations of Eastern Europe can be at their expense. While we naturally applaud this financial support, we would continue to emphasize the need for the developing countries to be assured of a continuous flow of resources.
The inadequacy of resource flows to developing countries may be mitigated through increased trade. The successful conclusion of the Uruguay Round of trade negotiations is therefore all the more important. However, the progress of the negotiation is far from satisfactory. The principal interest of developing countries, including Malaysia, lies in improved market access, as well as a reduction in tariff escalation. Changes in current trade policies of the industrial countries will make important contributions to the international economic environment more conducive to development. In particular, we wish to draw attention to several areas. First, the tariffs applied by the industrial countries to trade with developing countries are on average higher than those on trade between industrial countries. Second, the tariffs are generally higher on processed products than on raw materials, with the result that processing industries in developing countries face high rates of effective protection in industrial countries’ markets. Third, the rapid growth of nontariff barriers over the past two decades has tended to be more pronounced for products exported by developing countries. The incidence of nontariff measures is particularly high in agriculture and textiles, both sectors of major importance to many developing countries, including Malaysia. We share the views of other members of the Cairns Group that export subsidies on agriculture are the most distorting of all trade measures. The developing countries would also like to see progress being made in assimilating the textiles and clothing trade into the GATT from the regulation of the Multifiber Arrangement (MFA). Most of all we believe it is essential that negotiations in all areas proceed at the same pace and give rise to mutually beneficial concessions. In reality, however, we observe that negotiations in areas that are of interest to developed countries have reached a more substantive and advanced stage than the negotiations in areas of interest to developing countries. Although developing countries, being weaker, have more to fear from the failure of the Uruguay Round—as such failure could encourage the search for unilateral and bilateral solutions and contribute to the creation of protectionist blocs—its success is in the long-term interest of all of us. As the deadline for agreement approaches, we urge a renewed commitment on the part of all concerned—particularly the developed countries, whose decisions make a difference—in order to ensure its meaningful completion. …
On the operations of the Fund, we are pleased to note that the Fund has been supportive of member countries’ strong structural adjustment programs, as reflected in the substantial increase in commitments of Fund resources in 1989/90 (to SDR 11.4 billion, compared with SDR 4.6 billion the previous year). We hope the proposed increase in quotas, by 50 percent under the Ninth General Review of Quotas, will enable the Fund to provide more resources in support of growth-oriented balance of payments adjustment and thereby promote stability and growth in the world economy.
In view of the catalytic role of the Fund in the financing of members’ balance of payments needs, we would also like to urge the Board of Governors to conduct a timely Tenth General Review of Quotas to enable the Fund to meet the increased need for resources in the 1990s.
Malaysia supports the Fund’s proposal to increase the flexibility of the use of the compensatory and contingency financing facility (CCFF) and the enhanced structural adjustment facility (ESAF) to mitigate the adverse impact of the oil price increase on oil importing countries. The increased flexibility will provide members with the necessary resources, in a timely manner, to maintain their import capacity.
The decade of the 1990s will see increased concern with the issues affecting the environment and the quality of life. In this connection, it is heartening to note that the Bank has taken action and will continue to integrate environmental considerations in all stages of the project cycle. However, it cannot be denied that the integration of environmental considerations into development projects could result in increased cost. While developing countries are ready to play their role in ensuring a better environment, the additional financial support required to meet the environmental criteria must be made available. The establishment of a fund to compensate developing countries for compliance with the Montreal Protocol is indeed an important first step in the right direction. As we understand it, the Bank and the United Nations have mooted suggestions for setting up financing facilities to cover other areas of environmental concern such as biodiversity, water pollution, and global warming. Such facilities would indeed be welcome, but the success of these funds and other activities to improve the environment requires the commitment especially of the developed countries, since they are financially in a position to provide the necessary support. It must be added that such facilities, if they are to be meaningful, must be made accessible to developing countries without stringent conditionalities.
While we are rightly concerned with environmental issues, and while we seek to encourage and facilitate the role of the private sector, we cannot forget that the objective of all our policies is the reduction, and ultimately the eradication, of poverty. It is sad indeed to note that 1 billion people in the developing countries continue to live in poverty. In this connection, this year’s World Development Report, which focused on poverty and related issues, is a very useful and timely document that could be used as a guide for policy formulation. The report highlights the need to contain the number of poor in Africa and reduce the number elsewhere by almost 400 million by the end of the century. These are targets we believe can be achieved. Additional resources that could become available for development as defense expenditures are reduced; well-conceived and well-implemented policies, a supportive international economic environment, and strong and continuing commitment on the part of all concerned are critical ingredients for success. We trust these will be forthcoming in the current hopeful international climate.
The hopeful, even optimistic, note on which the decade of the 1990s began has been tempered somewhat by the Gulf crisis. The dangers posed by current developments in the Middle East, however, should not blind us to the fundamental issues affecting growth and development, such as debt, resource flows, and trade. If the hopeful signs represented by the liberalization of Eastern Europe, technological change, and economic globalization are to be meaningful to the developing member countries, these issues, which affect them more immediately, require the commitment and support of the international community. It is in the joint interest of us all to provide such support.
Statement by the Governor of the Bank for Malta—George Bonello du Puis
It is a great pleasure and honor for me to address once again the Annual Meetings of the IMF and the World Bank. I would like, first of all, to take this opportunity to extend a warm welcome to the Czech and Slovak Federal Republic, the newest member of the Fund and the Bank, as well as to Namibia and Bulgaria. I am sure that other countries will, in the very near future, accede to the Bretton Woods institutions, as prospects for further global economic integration improve significantly in light of the momentous developments that have taken place in Eastern Europe over the past year, especially following the historical meeting between President Bush and President Gorbachev in Malta last December.
Unfortunately, the dramatic but positive changes in the Central and Eastern European region have been overshadowed recently by the serious crisis in the Gulf area. This has already resulted in a surge in oil prices that is bound to have adverse effects on world economic activity.
Before the recent turmoil in oil markets, current projections were already pointing to some easing in world economic growth after the rapid expansion of recent years. The moderation was expected to be experienced by both industrial and developing countries. Although it may be premature to assess the precise effect of higher oil prices on the world economy, it is certain to have a more severe impact on the non-fuel exporting developing countries. In this regard, it is also relevant to point out that notwithstanding the fact that the decline in the overall level of growth in the developing countries is expected to be moderate, the sharp diversity in regional growth patterns is expected to persist. Thus, while in the newly industrializing economies of Asia, expansion, though decelerating from previous levels, is expected to remain robust, in the indebted countries of the Western Hemisphere and in most of Africa output growth is still expected to stagnate. In the developing countries of Europe, as well, current projections of growth point to a negative outturn, although this is mostly attributable to the performance of Eastern European countries that are undertaking macroeconomic adjustment programs in addition to structural reforms.
The uncertain economic outlook as a result of the latest developments in the Gulf may lead to a worsening of the external environment to the detriment of the developing countries, particularly those that are facing external debt problems. There is a strong possibility that industrial countries may overreact to an intensification of inflationary pressure generated by an upsurge in oil prices by tightening their financial policies further. While it is recognized that an acceleration of inflation in a number of industrial countries has justified the introduction of counterinflationary measures, an overreliance on monetary policy has led to a prolonged rise in international interest rates, which has the potential of undermining the stability of the international financial system and jeopardizing prospects for world economic growth. Higher interest rates compound the already severe problems of developing countries in servicing their debts and have negative consequences for investment.
Fiscal restraints should therefore play a more effective role, especially in certain industrial countries. In this regard, we are glad to note that Fund and Bank studies continue to emphasize the need for industrial countries to raise their savings ratios by fiscal consolidation and by the removal of distortions affecting private saving. Such changes in domestic policies, which contribute positively to a more supportive external environment, can be achieved only by continued policy coordination among the major industrial countries. We therefore continue to urge the Fund to exert more influence in surveillance exercises by the Group of Seven in order to ensure that the policy decisions of the industrial countries do not render the external environment more hostile.
Of course, global economic cooperation is not a one-sided affair, and developing countries have recognized that they too have to play their part in improving the international climate by implementing economic policies that enhance the potential for longer-term noninflationary growth and macroeconomic stability. Notwithstanding adverse economic circumstances, many developing countries have in recent years adopted more cautious financial policies. They have also implemented fundamental reforms to remove structural rigidities from their economies. These measures have been aimed at liberalizing trade, reorganizing public sector enterprises, and deregulating the financial sector. Most of all, there is a growing awareness of the importance of creating a domestic environment that is favorable to private sector activities.
In this regard, I am glad to say that the development strategy pursued by my Government continues to lay emphasis on private sector investment and market-oriented policies. Over the past year, we have continued to adopt legislation and administrative practices that are compatible with private sector development. These have focused on the trade, fiscal, and financial systems. Thus, while we have continued to ease trade restrictions to make the domestic market more accessible to imports, we have stepped up our efforts to promote exports by introducing an export credit guarantee scheme to cover commercial and political risk. We have also introduced a radical tax reform involving a sharp cut in the marginal rate of income tax. Further tax reforms are expected to be introduced in coming years; the ultimate objective is the adoption of a broadly based consumption tax aligned with EC tax systems in anticipation of Malta’s membership in the European Community. In late July, in fact, my Government presented a formal application for membership in the European Community.
In matters pertaining to the financial system, we have taken steps to restructure the longer-term lending institutions. We have also encouraged the commercial banks to strengthen their capital base by the issue of equity for public subscription. Our efforts to involve more private participation in the development of the country are also expected to be boosted by the setting up of a stock exchange, which we hope will come into operation by the end of the year.
Recent World Bank reports highlight the fact that private sector development depends to a large extent on public sector provision of a supportive infrastructure and social services that include investment in human resources. The important role of the public sector in this regard has been recognized by my Government, which has embarked on a vast program to upgrade the country’s infrastructure, particularly in the fields of power and water supplies, telecommunications, and airport facilities. We have also set up an employment and training agency to enable workers to obtain and develop new skills and provide them with employment opportunities. At the same time, we are striving to improve the efficiency of the government civil service by gradually implementing the reforms recommended by a commission set up for this purpose.
In considering the subject of foreign investment flows, we note with some concern that, although net financial flows to developing countries have increased slightly in recent years, they still remain significantly below the levels of the early 1980s. There is now the threat that, given the vast investment requirements of Eastern Europe, official assistance may be diverted from the rest of the developing world. We must, of course, emphasize that we strongly support the political and economic changes that have taken place in Eastern Europe and have demonstrated our readiness to assist, in a small way, in the reintegration of these countries in the global economy by subscribing to the capital of the recently established European Bank for Reconstruction and Development (EBRD). We do hope, however, that the much-needed official assistance to the Eastern European countries will not be forthcoming at the expense of other equally deserving countries.
Developing countries also need increasing access to the markets of the industrial countries. This is a vital prerequisite for further economic progress. It is therefore worrying to note that notwithstanding the determined efforts of developing countries to adopt outward-oriented trade policies, the multilateral trading system continues to be undermined by protectionist tendencies in a number of industrial countries. Nontariff barriers aimed at trade in manufactures have proliferated, and these have negative repercussions for the growth prospects of those developing countries implementing structural adjustment programs. Trade restrictions by industrial countries also prevent smaller developing countries from establishing a strong manufacturing base. A successful outcome to the Uruguay Round negotiations is therefore essential to prevent a renewed drift toward protectionism.
We believe that the Fund and the Bank should continue to play a central role in the debt strategy. We also support the policies involving the use of Fund and Bank resources for debt-reduction and debt-service-reduction mechanisms. However, since the resources of the Fund and the Bank are for the benefit of all member countries, including those that have striven to maintain financial integrity, we believe that availability of such resources should not be jeopardized by the excess allocation of funds to debt-reduction and debt-service-reduction facilities.
The economic plight of the lower-income developing countries, particularly those of sub-Saharan Africa, is also a matter of grave concern to the international community, and this has been most effectively brought out in the World Bank’s World Development Report 1990 entitled “Poverty.” It is obvious that financial assistance to these countries should continue to include a high degree of concessionality combined with additional debt relief based on the arrangements established at the Toronto summit of Western leaders in 1988. The deep structural weaknesses of these countries make it incumbent on the Fund and the Bank to design adjustment programs that focus more on long-term development objectives rather than short-term needs.
We feel that it is the duty of all other countries, including relatively better off developing countries, to contribute to facilities established by the Fund for the specific needs of the poorest developing countries. I am glad to say that despite limited resources and urgent investment needs, my Government has made a contribution to the Fund’s enhanced structural adjustment facility (ESAF). Malta also contributes to Fund resources in the form of interest forgone on the creditor position it has consistently maintained with the Fund over the years. Our support for the poorest countries is also manifested in the fact that we are subscribing to the World Bank’s general capital increase even though our country is not eligible for financial assistance from the Bank. Malta also continues to support calls for the resumption of SDR allocations in view of the continuing fall in the ratio of SDRs to non-gold reserves and in the light of the Fund’s efforts to promote the SDR as the principal reserve asset.
Turning to environmental issues, it is a point of satisfaction to note the active role the World Bank is playing in this area. The Bank’s decision to integrate environmental consideration into its projects should continue to create a new awareness of the need for environmental protection measures in many countries. Its initiative in launching a Mediterranean environmental technical assistance program earlier this year contributes to a solution of environmental problems at the regional level. I am pleased to say that my Government has also continued to participate actively in UN forums on the conservation of the global climate. Malta is a member of the Inter-Governmental Panel of Climate Change. It has also proposed the establishment of a Euro-Mediterranean center to deal with regional aspects of environmental problems.
My Government recognizes that a cooperative effort by both the industrial and the developing countries is required in order to address the essential problem of environmental degradation. However, for this strategy to be successful, developing countries should be assisted in developing environmentally benign technologies. Since both funds and technology are very scarce in the developing countries, in contrast to the position in industrial countries, my Government fully supports the proposal to establish a Global Environmental Facility by the World Bank in collaboration with the UNEP and the UNDP.
At this stage, I would like to express my gratitude to the Fund for its continued cooperation in providing my country with technical missions and experts to advise us on matters pertaining to the fiscal and banking fields. This is the only assistance that Malta has derived over the years of its membership in the Fund. Given my country’s limited resources, technical assistance remains an important contributing factor to its development, and, in coming years, I anticipate that further calls will be made on the Fund for such assistance. We sincerely hope that our requests will continue to receive the prompt attention they have received so far. Training facilities provided by the IMF Institute have also contributed positively to the development of our human resources, and we hope that courses and seminars organized by the Institute will continue to feature prominently in the Fund’s program of activities.
In concluding, I would like to express my Government’s continued support for the Fund and the Bank in their unstinting efforts to establish an external economic environment conducive to growth and development.
Statement by the Governor of the Fund for Namibia—Otto Herrigel
It is my honor and pleasure to address you as my country’s representative on the occasion of our first attendance at the Annual Meetings as a full member of both the International Monetary Fund and the World Bank. But, first of all, I would like to thank you all for the special words of welcome that have been extended to Namibia, and I would also like to express my appreciation to the Fund and Bank staffs, who have made Namibia’s membership possible within a relatively short preparation period.
Namibia brings with it a rather unique experience and a vivid awareness of the necessity and reality of international collaboration. Since the acceptance of Namibia’s Constitution and subsequent independence on March 21, 1990, the policy of national reconciliation has indeed taken ground throughout the country and this demonstrates that the people of Namibia and its Government have realized that economic progress can only be achieved in a democratic and peaceful environment. In a similar spirit, Namibia will also honor its newly acquired responsibility of international cooperation.
We are convinced that, in contemporary times, economic interdependence among member states is a growing necessity. The future economic development and financial strength of our young nation will invariably depend upon the orderly and equitable flow of trade and financial resources between ourselves and our trading partners. While this phenomenon is crucial for Namibia and other developing countries, we firmly believe that it is also in the interest of advanced economies to facilitate and promote such equitable trade and financial arrangements to the mutual advantage of us all.
To break from its isolation and to ensure a smooth transition, Namibia decided to become a signatory of certain regional economic treaties, such as the Southern African Development Coordination Conference, the Southern African Customs Union, and agreements relating to the Common Monetary Area. The Southern African region is undergoing important fundamental changes and Namibia is prepared to play a positive role in the constructive framework of cooperation.
Independence for Namibia has brought forward various prospects and, naturally, also new responsibilities for the Namibian economy. As a sovereign entity, there is increased hope for material foreign capital inflows and for opening up new markets for Namibia’s exports. The lifting of pre-independence trade sanctions has reopened markets that had been blocked for some time. Namibia is now in full command of its natural resources and this could unfold many new opportunities in the country.
In many of the restructuring and adjustment efforts, we recognize that Namibia will require extensive technical expertise and assistance from both the Fund and the World Bank. Thus far, we have received substantial technical aid and hope that this formal acceptance of our membership will afford even greater opportunities in this regard in the future.
The Government is aware that the Namibian economy offers great potential arising from its spare production capacity and vastly untapped resources. The Government, therefore, is anxious to harness these resources in order to create a more conducive climate for economic progress, growth, and employment. To give momentum to this process, private investments locally and from abroad are keenly encouraged. In this regard, we also look forward to collaboration and assistance from the Bank and its associates, IFC and MIGA.
In conclusion, I would like, once again, to express my deep appreciation to you, Mr. Chairman, and all members of the International Monetary Fund and the World Bank for the warm welcome accorded my delegation and myself. Namibia looks forward to a fruitful and productive relationship as a member of these great institutions. I also take this opportunity to welcome and congratulate the Governments and people of Bulgaria and the Czech and Slovak Federal Republic on the occasion of their countries’ membership in the two Bretton Woods institutions. I wish Switzerland and Mongolia well as they complete the membership process.
Statement by the Governor of the Fund for New Zealand—Richard Prebble
It is a pleasure and an honor to be able to address these Annual Meetings.
There are a number of major challenges facing the international economic community. Foremost in our minds must be the recent events in the Middle East. Whatever the outcome of these developments, they are already having an impact on world interest rates and inflation outcomes. The world economy has been subjected to unexpected pressures that may have ramifications for economic growth in the immediate future. The predicted slowing of world economic growth during 1990, coupled with the uncertainty about oil prices, cannot help but cause concern to all countries.
Let us take this opportunity to learn from the experiences of the 1970s. The results of the economic mistakes made at the time of the earlier oil shocks are still with us. Many countries, including New Zealand, which borrowed heavily in an effort to cocoon themselves from higher prices, are still laboring under the resulting debt burden. Those countries that recovered quickly from the shocks were those that implemented policies such as allowing higher prices to flow through to oil users and keeping monetary policy firm. Although the initial effects were painful, these policies led to positive growth in their economies. Dearer oil is not deadly: The failure to respond to it appropriately, however, can be very costly. The world economy cannot afford to ignore the lessons of the past.
The lesson from the oil shock of the 1970s is that higher oil prices need not lead to either inflation or recession. In New Zealand, the oil shock in the 1970s led to double-digit inflation for a decade because the Government loosened monetary policy to accommodate higher fuel prices. The effect of the relaxed inflation targets was that higher oil prices led to higher prices generally. In other countries, such as the Federal Republic of Germany, where monetary policy was not relaxed, higher oil prices did not lead to inflation.
Inflation destroys jobs, industries, exports, and economies. Inflation creates the illusion of growth but, like an addictive drug as the high wears off, the user then feels even worse. It has taken five years of pain to get rid of inflation. The New Zealand Government has learned from the 1970s and is sticking to its inflation target of 0 to 2 percent.
New Zealand notes that there is no country in the OECD that is advocating a relaxation of monetary policy. Such policies are now recognized as irresponsible populism. Any country that deliberately creates inflation is destroying its own people’s jobs, savings, and its own economy and exports.
The latter part of last year saw a number of exciting international developments that were just starting to appear on the world stage at the time of the 1989 Annual Meetings. The imminent union of Germany and the reappraisal of much of the basis of economic management by countries in Eastern Europe are two that come to mind. It is pleasing to see the interest being shown by those Western European countries in reactivating their passive membership in these institutions. We welcome the expressed interest in membership in the International Monetary Fund and the World Bank by the nonmember European countries. In particular, New Zealand was pleased to support the application of the Czech and Slovak Federal Republic for membership in the Fund. New Zealand looks forward to moves that will achieve universal membership in these institutions and the participation of all nations.
In 1942, New Zealand was one of a number of countries participating in a program of separate but interrelated discussions under the Mutual Aid Agreement to consider what could be done about postwar reconstruction efforts, especially in Europe. Included in these discussions was the complex question of postwar monetary and economic policy.
The discussions eventually led, after several years, to the establishment of these two institutions meeting here today, which have played such an important part in the stabilization and development of the world economy throughout the decades since the war. New Zealand is a small country, both geographically and economically, but it remains committed to working for the ideals that these two institutions were established to uphold.
New Zealand is ready to play its part again in international efforts to assist the countries of Eastern Europe in their move from relatively inefficient production and distribution systems based on central planning to more market-oriented ones. The small size of our economy limits our ability to contribute financial assistance. However, we can offer expertise and insights on some of the aspects of the changes needed.
Since 1984, New Zealand has adopted a wide-ranging set of microeconomic reforms. We have spent the last six years removing a large amount of inefficient regulation and establishing more market-based incentives. It has not been an easy task. The process of reform has not been accomplished without painful adjustment by the various sectors involved, as well as by the country as a whole.
During the past six years, New Zealand has moved to abolish import licensing and has substantially reduced tariffs, as well as removed government subsidies. Government assistance to agriculture, which had reached high levels in the early 1980s, was subjected to major reform, resulting in the termination of a number of assistance schemes. The removal of agricultural assistance has inevitably imposed many difficult adjustments on the sector. These have been compounded by last year’s severe drought in many areas of the country, which led to a steady decline in stock numbers. However, there are encouraging signs that the adjustment process is paying off in terms of a stronger and more diversified, and thus more resilient, agricultural sector.
Our manufacturing sector has also faced major policy changes, the most important of which is the reduction in import protection. Import licensing has been removed for almost all products and what licensing still remains is scheduled to go by the end of 1992. At the same time, tariffs have been reduced unilaterally; further reductions will take place on a planned schedule through 1996, when almost all tariffs will be at a level of 10 percent or less. Not surprisingly, the reductions in import protection have reduced the price and improved the range of imported goods available in the domestic market. They have also meant that New Zealand exporters now have access to more competitively priced inputs, which is leading to the development of a more open manufacturing sector with higher levels of both imports and exports.
Since 1984, the financial sector has been completely overhauled. Interest rate controls, credit growth guidelines, government security ratios, and foreign exchange controls were all removed in 1984/85. Other reforms, including the liberalization of bank registration, were also implemented to increase competition and efficiency in the financial system. The stock market collapse in October 1987, which mirrored other international collapses, put added strain on many companies and some have not survived. Nevertheless, as a result of the adjustment process, we now have a far more open and competitive private sector, which will be better placed to respond to developments in the world economy in the future.
New Zealand was fortunate to have an established infrastructure from which to make its changes, but it has been a challenge that protectionism in other countries has made more difficult. Protectionism in the world economy disadvantages those countries whose economies are undergoing structural adjustment. The developing countries rely on their exports to provide the funding basis for their economic growth, but barriers prevent them from obtaining adequate compensation for these exports. There is some evidence of an increasing trend toward protectionist attitudes throughout the world—a trend that greatly concerns New Zealand.
I would like to urge participant countries in the Uruguay Round of the GATT to make every endeavor to bring those negotiations to a positive and satisfactory conclusion. There is still much to be done in the few months remaining to the negotiators. Failure to reach agreement would have significant adverse effects on international trade. Various studies of multilateral trade liberalization indicate that large benefits would result from a successful conclusion to the Uruguay Round. It was recently estimated, for example, that a 50 percent reduction in all tariff and nontariff barriers in the United States, the European Community, and the Asia-Pacific region would raise GDP in these three regions by 5 percent.
It is now recognized that the benefits from free trade include not only the traditional “static” gains from improved allocation of resources. There are also important “dynamic” benefits that flow from increased incentives to innovate and compete.
The benefits from opening trade could be more advantageous for developing countries than many of the assistance programs currently in existence. There are strong arguments for providing favorable conditions for commodity-producing countries to gain wider markets for their goods and, in so doing, to help alleviate their balance of payments problems.
The New Zealand Government welcomes the statement of President Bush at these Annual Meetings. As an agricultural exporting country, we fully endorse the President’s call—“we must let farmers compete with farmers, instead of farmers competing with the deep pockets of government treasuries.” The President’s reminder that the world has but seventy days to conclude a new agreement on trade is timely. Much needs to be done.
The GATT talks are “the last train leaving the station” if the world economy is to grow. If the train is left at the station, it is possible that the world’s trade will be disrupted by a trade war. There is no reason why the 1990s cannot be a decade of growth and prosperity. But there will be no economic growth without growth in trade. There will be no growth in trade until agricultural protectionism is rolled back. So a successful GATT round must be the financial community’s number one priority.
Freer trade will lead to free people. Free trade is the key to world prosperity and, ultimately, world peace.
In two years’ time, the integration of the economies of Western Europe will present further challenges to small economies such as New Zealand’s. The degree to which this integration will include other European countries in the future is open to speculation at the moment, but regardless of the composition of the European Community, it will have an immense impact on the world economy. It will be in the interest of both the Community and the international community as a whole to ensure that the policies of the Community retain an outward-looking orientation.
The international economic community is becoming increasingly aware of the interrelated nature of the problems facing the world. It is encouraging to see that international problems are not being addressed in isolation, but as part of an integrated whole. We must not let national considerations overrule our duty to the rest of the world. I believe that the larger and more prosperous countries can do more to foster greater cooperation in creating a better climate for trade and commerce in which the poorer countries have a better chance. Organizations such as the Fund and the World Bank have a central role in creating greater awareness among us of our obligations and in implementing policies for improvement. We must give them the necessary support to fulfill their responsibilities.
Statement by the Governor of the Bank for Papua New Guinea—Morea Vele
I am greatly honored to have the opportunity to address these Forty-Fifth Annual Meetings of the International Monetary Fund and the World Bank on behalf of the Government and people of Papua New Guinea.
On behalf of my delegation, I would like to take this opportunity to congratulate you, Mr. Chairman, on your appointment to preside over these meetings and also to thank the host country for the warm hospitality extended to my delegation here in Washington.
This year’s Annual Meetings are being held against a background of many significant developments in the global economy. These changes include the ongoing process of European integration, the sweeping economic and political reforms in Eastern Europe and the U.S.S.R., and, more recently, the Middle East crisis.
These changes will affect many of our economies in different ways. It is therefore timely for this year’s Annual Meetings to address the impacts generated by these developments in general, and particularly the effects on those developing countries that already are either struggling to alleviate poverty or are in debt crisis.
While these changes are taking place, various countries have continued to pursue domestic policies to improve their welfare and strengthen their economies within the world community. It is inevitable that some of these efforts will be aggravated by the global developments noted above.
Like other developing country members, Papua New Guinea is highly vulnerable to changes in the international environment and needs to prepare itself to minimize or absorb some of these impacts.
Papua New Guinea is experiencing the most challenging period since attaining independence in 1975. This situation has been caused by severe shocks generated by the closure in May 1989 of the country’s largest copper mine and the sharp and persistent declines in the prices of most of Papua New Guinea’s major export commodities. These shocks have resulted in a fall in both export earnings and gross domestic product, and in increased unemployment.
In addressing the problems, the Government sought assistance from the Fund and the Bank to restore economic stability and internal and external balances. Since the latter part of 1989, the Government has been implementing an economic adjustment program with vigor and determination.
Since this is Papua New Guinea’s first structural adjustment exercise with the Fund and the Bank, there are a few observations we would like to make. Structural adjustment programs are a necessary and imperative course for steering economies toward removal of economic distortions and constraints, improving efficiency in the allocation and utilization of resources for enhanced output performance. In developed countries, structural adjustment programs that have been undertaken include major tax and financial reforms, privatization, and measures to enhance labor market flexibility. These policy reforms have been introduced to adjust to rapid technological development and the need to maintain competitiveness. In developing countries, efforts in structural adjustment are often slow because of the general state of development in these countries in which inherent and prevailing institutional rigidities render considerable resistance to change. The respective roles of the Fund and the Bank in economic adjustment programs are critical and should be supported.
The Fund is a monetary institution that has primary responsibility for providing short-term balance of payments support to those member countries in need, and also for ensuring that the international monetary system works effectively. The Bank, however, is a development institution that is responsible for encouraging capital investment for economic development and addressing long-term structural problems in member countries.
We believe that the two institutions have clearly defined roles that should be recognized and respected to avoid any possibility of undue duplication and competition with each other when dealing with structural adjustment efforts.
We fully endorse the need for implementation of appropriate and suitable macroeconomic policies by the member country concerned as an absolute prerequisite. Because of the close working relationship between the Fund and the Bank in assisting a member country in need, it is absolutely essential to ensure that the requirements of structural adjustment that have long-term implications are not too compressed into the short-term framework of the Fund’s involvement, as this could plunge an economy into recession. The responsibilities and responsiveness of the public and private sectors should be carefully analyzed in the context of the program to ensure that the burden of adjustment is appropriately distributed between these sectors.
Papua New Guinea’s Government supports the rationale and economic necessity for structural reform and recognizes that there is a marked trade-off between short-term social and economic displacements caused by adjustment and the long-term efficiency and productive benefits to be gained by a country.
The two Bretton Woods institutions must be commended for their continued and ongoing assistance to member countries in efforts to improve economic welfare and maintain stability. Indeed, the development of economic adjustment programs provides the opportunity, and makes imperative, the necessary structural changes that are not normally forthcoming under ordinary circumstances. A major concern that arises, however, is that of the social costs of adjustment.
The social costs of adjustment can adversely affect the welfare of the people and may raise concern for wider political ramifications, which, if excessive, would prove counterproductive to the spirit of reform. …
Events in the global economy, which include the process of European integration and economic unification in Eastern Europe as well as reforms within the Soviet bloc, are an encouraging and positive development for greater international cooperation and progress toward more market-oriented systems. This clearly implies the increased importance of trade and aid policies in the world economy, especially from the point of view of developing countries.
On the trade front, it is now more imperative that the existing multilateral trading system be totally open and nondiscriminatory. We support the growing international commitment for a speedy conclusion of outstanding trade issues under GATT and the Uruguay Round. In addition, the interest of developing countries must be given due consideration, especially their continued participation in, and maintenance of, markets and trading partners in light of European integration and the participation of new market-oriented economies in the international economic system.
On the aid front there must be assurances that any rechanneling of funds toward assisting the new democratic countries does not jeopardize development programs undertaken with cooperation from multilateral institutions in developing countries. This is a particular concern in light of recent declines in aid flows from developed to developing countries.
In addition, the debt crisis has been a concern to many developing countries. There has been some progress over the past few years on the global initiatives to absorb the debt issue, and the Brady Plan is a course of action in the right direction. However, the recommendations put forward in that report to alleviate this problem require greater international cooperation.
The more recent Gulf crisis has already seen a significant increase in the price of crude oil. This is a new challenge to the global economy, which, no doubt, will threaten the economic performance of many countries. We commend the urgent response by the international community and in particular the announcement by President Bush on the establishment of the Gulf Crisis Financial Coordination Group to provide timely and effective financial assistance to the three states immediately affected by the Gulf crisis.
While we recognize that the arrangement will cater to the interests of the most immediately affected countries, a similar arrangement, with the cooperation of the Bank and the Fund, should be put in place for countries in the most seriously affected category, in particular the developing island countries such as Papua New Guinea. Similarly, it is now more imperative that the member countries involved in international policy coordination make a concerted effort to ensure that world economic growth continues to be sustained in the face of shocks such as the Gulf crisis.
The success of this initiative and others will require close cooperation of the international community, especially the developed countries and existing multilateral financial institutions.
Finally, my delegation is confident that the appropriate initiatives and measures taken to date in addressing the various difficulties arising from world developments will produce successful results. This would certainly protect those countries that are currently undergoing structural adjustment programs, including Papua New Guinea, from further economic imbalances.
Statement by the Alternate Governor of the Fund for Paraguay—Carlos Alberto Knapps
On behalf of the Government of the Republic of Paraguay, I have the honor to present my most cordial greetings to the President of the joint Annual Meetings and the President and Executive Directors of the World Bank Group, the Managing Director and members of the Executive Board of the International Monetary Fund, as well as the Governors and delegates of the member countries of the participating institutions.
We welcome into our fold the Czech and Slovak Federal Republic, Bulgaria, and Namibia as new members of our two institutions.
Our attendance at this gathering bears witness to our gratitude for international cooperation and solidarity and the renewed hope that the Fund and the Bank will continue to be the main players in overseeing the international financial system and the channeling of sufficient resources to the developing countries.
In grappling with instability and stagnation, the developing countries have made great efforts to take up the challenge of economic adjustment. The results are for the most part modest, and have meant high social costs. Most of the developing countries continue to suffer from inflation or, in seeking to consolidate stabilization, face stagnation or recession, despite the favorable results of efforts in the export arena.
Specifically, economic conditions deteriorated in Latin America in 1989 despite its large trade surplus, owing to generally modest expansion in the value of exports and a contraction of imports in countries where the activity declined. Despite that surplus, the number of countries with arrears in servicing their external debt increased. The scenario of stagnation and high inflation that the region faced was shaped largely by a phenomenon that characterized the decade: the transfer of financial resources abroad.
Beleaguered by external debt service and with limited access to new external financing, most of the regional countries continue to manifest the symptoms of a complex syndrome of structural imbalances, fiscal deficits, and low levels of investment, which are reflected in prolonged stagnation, often accompanied by rapid inflation and a marked erosion of real wages.
This year saw the imminent danger of an international outbreak of hostilities, which seriously threatened the stability of international markets and the possibilities for the developing countries to make greater headway in their recovery efforts.
Under the circumstances, it is vital that international attitudes continue to change and commit further to improving the external economic environment that we borrower countries face, namely, the financial and world development situation. In this respect, we support the initiatives aimed at reducing or eliminating barriers to international trade for products from the developing countries, as well as measures to reduce significantly the burden of external financial commitments on the most vulnerable economies.
The international financial organizations play a key role in supporting the stabilization and economic adjustment programs of the member countries, contributing funds and acting as a catalyst and beacon for other sources of financing, especially commercial.
The stabilization and adjustment programs should provide for longer terms and be based on sufficiently flexible criteria that respond to the structural constraints on the development of each country.
The economic policy changed significantly in February 1989, when the new government took office, with the introduction of corrective measures to combat internal disequilibrium. The exchange and price systems were liberalized. Greater control of public spending was introduced and ceilings placed on public credit, along with an end to exchange subsidies and other trade restrictions.
The establishment of the free exchange system in February 1989 brought transparency to external and fiscal accounts and eliminated the heavy quasi-fiscal deficits. The tariff system was simplified, the result being an improvement in fiscal receipts generated by external trade. Tax increases helped finance the increase in expenditure and resulted in a surplus in the current accounts of the Central Government. Inflation was curbed with a more rigorous monetary policy.
The economy grew in 1989 at the reasonable rate of 5.8 percent, with a substantial expansion in exports. Economic growth occurred in all sectors such as agriculture, the manufacturing industries, trade, and basic services.
Arrears in servicing the external public debt and income from short-term capital prevented a negative transfer of capital. The Central Bank’s international reserves rose significantly, in contrast to the losses experienced during the previous eight years.
The external debt with Brazil was renegotiated on favorable terms, for a period of 20 years with 8 years’ grace, at the LIBOR rate and with a fee of 13/16 of 1 percent a year. A mechanism whereby Brazilian debt instruments are swapped for Paraguayan debt instruments was approved, sparking the possibility of a considerable reduction in the actual amount of the debt, given the quotation for Brazilian paper in the secondary market.
The partial cancellation of the debt with Brazil in 1989 and total cancellation in 1990, via a swap of debt instruments, substantially reduced Paraguay’s debt with that country and at the same time its total public external debt. Nevertheless, arrears mounted significantly with Paris Club creditors. A sharp increase in exports reduced the relative share of income that external debt service represented from sales abroad.
Monetary expansion was affected by gains in international reserves and a larger volume of domestic lending by the Central Bank to the private sector. Rises in the consumer price index were squelched by greater credit and monetary discipline in the second half of 1989. Inflation for the year was 28.5 percent.
In 1989, the Central Bank introduced a system of more realistic interest rates with regard to inflation, liberalizing the borrowing rate on savings deposit certificates, a new instrument in the financial market, and raising the lending rate of the banks to 28 percent.
In 1990 Paraguay’s Central Bank introduced new measures aimed at the gradual reform of the financial system. In order to stimulate domestic savings, all bank borrowing rates were liberalized and the rediscount rate to the banks raised. The liquidity of the banks was raised carefully, using marginal cash reserve requirements on demand and term savings deposits. With a view to exercising greater control of domestic liquidity and making the financial operations of the banks and financial entities more efficient, the issuance of monetary regulation certificates and establishment of a Monetary Board were approved.
The Central Bank is now studying new mechanisms and instruments with a view to the modernization of the financial system and more efficient control of the country’s money market. These would include the liberalization of the lending interest rate. The National Congress has before it a draft law that would authorize the banks to make loans in foreign exchange to finance operations associated with foreign trade.
Closely linked to the financial reforms is a draft law now undergoing final review that would provide the Central Bank with a new charter designed to make its administrative and functional structure more flexible and responsive.
Equally far along is another draft law that would amend the Law on Banks and Financial Entities consistent with the necessary control and supervision that a more competitive market would require.
As for public sector reforms, government authorities and the public in general are considering a proposed tax reform aimed at giving the tax system the necessary elasticity so that it can automatically benefit from the effects of economic growth and the general price level; streamlining the tax system and concentrating collection into a few wide-based taxes; avoiding duplication of taxes on the same tax base time and time again; limiting and defining exemptions and avoiding inequity; redistributing the tax burden; and including sectors now unjustifiably excluded.
This brief report on the measures adopted, progress made, and projects in the works shows the resolve and efforts of the Government of Paraguay to reform its economic system and recover self-sustainable growth, as a necessary ingredient for the embryonic process of democratization in the never-ending pursuit of the country’s well-being and progress.
In concluding these comments, I would hope that the future action taken by the International Monetary Fund and World Bank meets with success.
Statement by the Governor of the Bank for Tonga—James Cecil Cocker
I am honored to represent the Kingdom of Tonga at the Forty-Fifth Annual Meetings of the International Monetary Fund and the World Bank Group. I join other Governors in expressing thanks to the Chairman, Mr. Saitoti, to President Conable, Managing Director Camdessus, the management of the Fund and the Bank, and the Government of the United States for the excellent arrangements under which we meet.
May I take this opportunity to welcome new members, the Czech and Slovak Federal Republic, Bulgaria, and Namibia.
We meet in troubled and uncertain times. The best case scenario projects increasing international interest rates, a slowing of growth in the industrial countries, and increasing inflationary pressures. Tonga, although small and relatively isolated, will not be immune to these developments. We are almost totally reliant on imported energy.
I would now like to make some comments on domestic economic policies in Tonga. In the 1980s, Tonga embarked on a strategy to promote growth of the private sector to broaden the base of the economy. Our 1990/91 budget policies continue to place emphasis on the development of the private sector. The Government has provided additional incentives to farmers and fishermen through income tax exemptions and additional support for the manufacturing sector, as well as ensuring continued lines of credit specifically for development in all sectors in the economy.
Tourism is considered an area with potential for providing employment and foreign exchange earnings in the 1990s; an extension of income tax holidays to 15 years has been implemented for hotel development.
Through the assistance of various bilateral aid donors, as well as multilateral agencies, the Government has been able to improve air transport infrastructure, thus facilitating significant growth in tourist arrivals. The Government intends to improve supporting infrastructure further by extending street lighting to rural areas, upgrading roads, and providing additional incentives to tourist operators to enable them to compete effectively in the international arena.
While placing emphasis on measures to foster economic growth and provide employment, the Government will continue to pursue its social policies of alleviating rural and urban poverty through programs to improve health facilities and to provide access to education and to basic shelter, particularly in the isolated northern islands of the kingdom.
Tonga welcomes the approval of the Ninth General Review of Quotas, although the increase finally agreed falls somewhat below that hoped for, and, given recent developments, may well prove insufficient. It is important, therefore, that the increase in quotas becomes effective in 1991. The flexibility proposed for the use of existing Fund facilities to support adjustment efforts is welcomed as an appropriate response in the current situation.
We await with hope, therefore, a successful conclusion of the Uruguay Round of negotiations under the GATT. The expansion of world trade is critically dependent on this. We urge the Contracting Parties to consider the common good as negotiations proceed, especially in view of the projected decline in aggregate growth rates for low-and middle-income countries. …
Tonga is very conscious of the value of its membership in both the Fund and the Bank. Apart from the obvious benefit of access to Bank resources, the regular consultations and technical missions help us to focus on areas of concern in the economy. We are also grateful for the long-term technical assistance provided by the Fund in the establishment of our central bank; we hope this assistance can be continued until the reorganization of our financial sector has been completed to enable the Bank to play its role in the development of a more market-oriented economy in Tonga.
In conclusion, may I wish the Fund and the Bank success in the coming year in meeting the difficult challenges ahead.
Statement by the Governor of the Bank for Yugoslavia—Branimir Zekan
At the very beginning I wish to welcome Bulgaria, the Czech and Slovak Federal Republic, and Namibia to the International Monetary Fund and the World Bank.
Since our last meeting, economic and political events in the world have taken a dynamic turn, which was sometimes unexpected and dramatic. Countries of Central and Eastern Europe are carrying out political democratization with admirable speed and have already embarked upon, or are preparing, large-scale programs of economic reforms. At the same time, the world is faced with the new Gulf crisis, whose resolution is uncertain and will require much wisdom and the efforts of all the UN member countries. Coupled with the long-standing problem of the poverty of the least-developed countries and a high level of external indebtedness, which in many countries has caused stagnation, it becomes clear that we live in times of change, which require the full participation and effective contribution of all international community members.
The Fund and the World Bank are, therefore, facing obligations that are certainly among the most complex in their history. The nature of the issues is such that new policies and approaches have to be defined as we go along and immediately applied. Hesitancy and the failure to take proper actions are bound to disrupt the initiated positive moves toward market economy and cause great political, economic, and social uncertainties. The two institutions should, therefore, take immediate actions to ensure the following:
—Strong support of the economic program of member countries, especially those whose programs are already yielding positive results.
—Urgent assistance to countries hardest hit by the Gulf crisis, either directly or indirectly.
—The bridging of the gap in the development level between industrial and developing countries, with a special emphasis on measures to reduce poverty in the world.
It is no longer disputable that positive results in the countries that have been facing long-standing economic crisis can be achieved solely by a consistent implementation of stringent programs of stabilization and structural adjustment, whose ultimate aim would be the introduction of an efficient and competitive economic structure. It is also clear that countries that are currently implementing these programs must make efforts to finance the implementation from their own resources, despite their limited possibilities. Full success of the program is not possible, however, without a favorable international environment as well as without financial and technical assistance of the broader international community. I will try to illustrate this by citing the example of Yugoslavia, whose Federal Government began implementing a comprehensive program of economic reforms in December 1989. In the relatively short period since the launching of this program, a number of substantial and encouraging results were achieved:
—Inflation was brought down from 64 percent in December 1989 to 0 percent in April 1990, whereas in August it stood at only 1.9 percent despite the unfreezing of prices of 15 percent of goods and services, which were frozen in the first half of this year, and a certain easing of monetary policy.
—Yugoslav national currency, the dinar, was made convertible and its stability maintained.
—Foreign exchange reserves are larger than ever, totaling more than $10 billion.
—External debt was reduced to about $16 billion.
—The number of agreements on foreign investments increased.
—The rehabilitation of the financial sector was initiated, as well as the change in the economic structure resulting in the setting up of more than 40,000 new small and medium-size private enterprises in seven months alone.
—The reform of the political system runs parallel to the economic reforms. A total of 119 political parties were registered by August 24. Free multiparty elections will be held in the entire country by the end of 1990.
In the elaboration and implementation of the economic reform program, we have enjoyed significant support from the Fund and the World Bank. With the use of a wide range of consultant services, the Fund approved a standby arrangement amounting to SDR 460 million, whereas the World Bank approved a $700 million loan in fiscal 1990, which represents the largest annual loan ever granted to Yugoslavia. Furthermore, the World Bank is already preparing a number of new sectoral loans designed to finance structural adjustment, as well as concrete projects.
Despite encouraging initial results from the implementation of the program of economic reforms, we are aware of the fact that it is now in a critical stage of its implementation, that is, that the achieved results must take hold so as to ensure a solid basis for the more difficult next steps. They encompass the restructuring of banking and enterprises’ sectors, with special focus on the transformation of social ownership and a stronger development of small and medium-size private enterprises, and the completion of the process of providing the necessary infrastructure and mechanisms for realizing the process of restructuring (development of labor and capital markets, strong social programs, improvement of accounting systems, etc.).
In order for these targets to be met, adequate and timely international support, both financial and technical, is needed along with domestic resources and know-how. All countries that are implementing, or are about to begin the implementation of, comprehensive economic, political, and social reforms are faced with identical or similar problems. These countries need wide-ranging international support in which the Fund and the World Bank play a key role. These institutions should, therefore, provide the following:
—A larger volume of balance of payments/structural and project loans under terms and conditions that allow faster disbursement of these loans, without affecting the consistent implementation and targets of the agreed action programs.
—Assistance in providing cofinanciers along with their loans.
—Assistance in attracting foreign capital through direct foreign investments, including the development of the private sector.
—Support in ensuring favorable conditions for debt rescheduling and reduction from both public and private sources.
—Further increase in technical assistance, including the support for grants and concessional funds for these purposes from bilateral sources.
The Gulf crisis, which has already had negative effects, will most certainly affect the economic situation worldwide. The largest portion of the burden will be borne by developing countries, already facing severe economic difficulties, some of which are fighting poverty. Unless the international community undertakes urgent steps to offset the negative effects caused by the crisis by providing urgent economic assistance, developing countries will be facing serious, new impediments in implementing their stabilization and adjustment programs, which may even jeopardize the results they have achieved so far. It is therefore necessary for the Fund and the Bank to urgently prepare special assistance programs to provide assistance proportionate to the extent of the direct and indirect losses suffered. These programs, apart from an increased volume of loans approved by the Fund and the Bank and a greater flexibility in their disbursement, should also contain innovative forms of support that would ensure a greater inflow of “fresh” capital of these institutions to the countries affected. Furthermore, the Fund and the Bank should ensure greater support of other creditors and donors.
It is obvious that the Fund and the Bank should pursue their unrelenting efforts aimed at offering increased concessional funds and grants to the poorest developing countries; develop new models of development support and new modalities of the strategy designed to settle the debt crisis; directly link economies, investments, and trade to narrow the gap between developing countries; further open up the world market and improve the terms of trade for developing countries; improve coordination of macroeconomic policies of developed countries; stop negative net flows in developing countries; and strengthen the role of women in development.
We are living in times fraught with difficulties, but also in times of challenges that demand prudent and constructive actions. These actions must include all of us: developing and developed countries, international, financial, and other organizations. Each one has to identify its own obligations and interests. Developed countries have had stable and inflation-free growth for a number of consecutive years, which they will be able to maintain with greater certainty if they contribute to the efforts aimed at transforming the developing countries into equal partners in the world market by providing adequate support to the well-defined economic programs of developing countries. The Fund and the Bank, apart from providing direct assistance to developing countries, should also act as coordinators in the overall efforts of the international community to create conditions for more humane and better living conditions on the entire planet. These institutions are better prepared financially for this serious and responsible task: the Bank has increased its capital, the Ninth General Review of Quotas of the Fund was adopted, the Ninth Replenishment for IDA was approved, and there is general readiness to increase the IFC’s capital.
September 29, 1990.