Opening Address by the Co-Chairman of the Boards of Governors, the Governor of the Bank for Sweden 1, Kjell-Olof Feldt

International Monetary Fund. Secretary's Department
Published Date:
November 1988
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It is a great honor for me to welcome you all to the Forty-Third Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank Group.

At the outset I wish to convey my heartfelt thanks to the Government of the Federal Republic of Germany and to the Senate of Berlin for inviting us to these meetings and for undertaking to arrange this giant gathering in this beautiful and friendly city.

I greatly appreciate the honor extended to my country, Sweden, in electing me Co-Chairman of these meetings. Sweden considers itself an active member of the Fund and the Bank and strives to strengthen their roles in the international financial system.

In fact, Sweden—its Government and its people—is a firm believer in international economic cooperation. Our own economy is a small and open one. It has been a major beneficiary of the open trade and payments system. And that system is based on multilateral rules and disciplines that are upheld only through active cooperation at the international level.

With concern, we observe that this system has come under increasing strain. Exchange rate instability and growing payments imbalances have served as powerful incentives to protectionism. Debt problems sometimes prove so difficult that abandonment of discipline as well as unilateral action become tempting options. Increased bilateralism in trading relations threatens to do permanent damage to the development of world trade.

These Annual Meetings give us an opportunity to counter this development. We can manifest our continued faith in cooperative action and multilateralism. It is my conviction that the challenges of the decade ahead will be effectively addressed only if international cooperation is strengthened. Only thus can we hope to reduce imbalances, to resolve debt problems, to foster growth and stability.

The current situation of the world economy does have important positive features. Growth has gained further momentum in the first half of 1988. We are experiencing the sixth consecutive year of expansion in the world economy. Policy coordination has strengthened among the major industrial countries since the Louvre accord in early 1987. We have witnessed some contraction in the U.S. fiscal deficit and increased domestic demand in surplus countries. Many developing countries have experienced export growth in both 1987 and 1988 as a result of improved commodity prices and important adjustment efforts.

Nevertheless, fiscal and current account imbalances among major industrial countries remain unsustainably large. They continue to fuel uncertainty in financial and exchange markets. Unemployment is unacceptably high in many industrial countries. The debt situation remains difficult. For the poorest countries, output growth remains below the rate of population growth.

Some inflationary pressures have emerged recently and these pressures have pushed up interest rates. Regrettably, these interest rate increases are transmitted to countries where a monetary tightening seems unwarranted. And they add to the burden of the indebted countries.

A delayed adjustment of external imbalances will increase the risk of renewed turbulence in exchange markets. It will also delay policies to reduce trade restrictions. Trade liberalization at the multilateral level should instead be stepped up, and individual countries should undertake domestic reforms toward the same end. In this context, the importance of a successful outcome of the Uruguay Round is evident. All efforts must now be made to ensure substantive results at the midterm review in Montreal later this year.

In the developing countries, the ratio of debt to exports started to decline in 1987 and will fall further this year. Nevertheless, economic growth is still weak as a whole, but with large differences among individual countries.

For many heavily indebted middle-income countries the outlook remains worrying. They experience serious difficulties in servicing their external debt and in generating the investment necessary for sustainable growth. “Adjustment fatigue” may increase if there is a risk of prolonged delays in the recovery of per capita income.

Many countries have embarked on the difficult—but necessary—process of macroeconomic adjustment and structural reform in order to stimulate growth, encourage the return of flight capital, and attract investment flows. These adjustment efforts depend for their success on a healthy global environment, an open trading system, and adequate financial flows.

The international community must strengthen its support of medium-term adjustment programs in these countries. The Fund and the World Bank have taken important steps in this direction, but I want to stress that the involvement of commercial banks is indispensable. Flexibility and ingenuity will be needed in order to find market-based financing techniques that can be accepted by the banks as well as the debtors. The role of the authorities in the creditor countries should remain one of facilitating such voluntary arrangements.

The debt strategy based on the concept of growth-oriented adjustment and case-by-case treatment remains valid. Yet within its framework, the poorest debtor countries need special attention.

The debt burden of these countries continues to mount in spite of repeated reschedulings. Increased concessional resources are necessary to enable them to resume economic growth, alleviate poverty, and undertake necessary structural adjustment. I therefore welcome the agreement that has been reached on the implementation of concessionality in official debt rescheduling by the Paris Club.

Before commenting on the present activities of the Fund and the Bank, I would like to make some general observations concerning our responsibilities as members.

Our institutions must have the complete backing of the membership in order to perform their tasks. Unflagging support is particularly important in times of tensions in the international economy. Lately, there have been a number of disquieting signs of a change in attitude among members. I am thinking primarily of those countries that let their arrears to the Fund and the Bank increase although they are able to fulfill their obligations.

I am also referring to the hands-off attitude that is sometimes found among debtors as well as creditors. According to this view, the two institutions have created their own problems by extending financial support to unsatisfactory programs or projects and will have to sort out those problems on their own.

This view seems to imply that the Fund and the Bank are comparable with other financial institutions. I strongly disagree. We—debtors and creditors alike—have agreed that the Fund and the Bank must have special status. We will then have to live up to that commitment and treat them as preferred creditors. Otherwise, their central roles cannot be maintained.

But there are other and perhaps still more dangerous threats to the integrity and independent status of the Bretton Woods institutions. In many heavily indebted countries, the situation remains extremely fragile. This tends to strengthen the arguments for compromises with reference to political realities. But we cannot compromise when it comes to the fundamental principle that adjustment programs must lead to balance of payments viability. Indeed, lending arrangements with weak or unclear commitments are more of a hindrance than a help to the borrowing country.

Obviously, due respect must be paid to the economic and social circumstances of each country. Economic adjustment is often a painful process that involves hardships and sacrifices for the populations concerned, and the poor are often severely affected. While the Fund and the Bank must encourage the process of economic policy reform, they must remain sensitive to these realities. Adjustment itself is likely to be frustrated unless its burdens are shared by all.

I will now turn to the activities of the Fund.

The Fund has a key responsibility in surveillance. Its role in the international coordination of economic policies is central to an effective functioning of the international monetary system. A main objective of surveillance is to encourage national authorities to take into account the international consequences of their domestic actions.

Progress has been made in strengthening policy coordination within a cooperative strategy. And the Fund has played, and must continue to play, a central role in ensuring the effectiveness of the debt strategy.

The Fund must be able to respond flexibly to the changing needs of its members. The recent adaptations in its lending instruments and facilities have my full support.

The enhanced structural adjustment facility has now become operational. Additional resources are made available on concessional terms to those among the Fund’s poorest members that are taking forceful action to adjust their economies. The extended Fund facility has been amended to allow for lengthened arrangements with the Fund and to make more financing available. The establishment of contingency financing through a new facility is another positive development. It should set an example for other creditors, particularly commercial banks. Stable resource flows and contingency support will hopefully prevent the derailment of members’ adjustment efforts.

The increase in payments arrears to the Fund is a matter of deep concern. Countries with overdue obligations soon become ineligible for further borrowing from the Fund. This aggravates their position and disrupts their adjustment efforts. Arrears also mean a loss of revenues for the organization, and they put a greater financial burden on other borrowers and on creditors. Strong preventive action and intensified international collaboration to initiate basic policy adjustment are needed to cope with these problems. For those cases where necessary adjustment is shunned, the Fund must protect itself through effective measures.

In the years ahead it is crucial that the Fund be in a position to meet members’ needs for balance of payments financing on appropriate terms. Work on the Ninth General Review of Quotas must therefore be completed by the spring of 1989. The Fund needs substantially expanded resources to play its role in the evolving international monetary system in the 1990s.

Let me now turn to the World Bank.

The general capital increase and IDA-8 have markedly strengthened the Bank. Its Special Program for Africa has generated considerable resources for that region. Donors have contributed on a bilateral basis and by increasing cofinancing with the Bank. It is now essential that subscriptions to the general capital increase be made as early as possible.

The scope of the activities of the Bank is widening. In the case of the heavily indebted middle-income countries, it increasingly takes the form of program lending and policy advice. The Bank’s support of the adjustment process should continue to have three dimensions. It should engage in direct lending. It should facilitate negotiated settlements between creditors and debtor countries. And it should catalyze new external financing. The Bank should continue its efforts in furthering a broadened menu approach, while safeguarding its capital.

The Bank Group has endeavored to assist low-income countries through a variety of means in support of adjustment and to promote growth and poverty alleviation. Continuing close collaboration with the Fund and the donor community has been of particular importance in those efforts. It is also encouraging that additional resources will be made available for adjustment credits to poor countries with outstanding IBRD loans.

In addition to the strengthening of the Bank’s resources, I particularly welcome the increased attention given to environmental concerns in the Bank’s activities. The protection and restoration of the environment must be fully integrated into the investment programs of the Bank.

I also note with satisfaction new and reinforced activities within the World Bank Group. The Multilateral Investment Guarantee Agency has been launched and should be able to play an important role in encouraging new transfers of resources to developing countries. With an expanded capital base and new instruments for lending and services, the International Finance Corporation has been able to broaden its activities, not least in sub-Saharan Africa.

The Fund and the Bank should be encouraged to continue their efforts to coordinate their work while maintaining their distinctive functions. The close cooperation in preparing policy frameworks for individual debtor countries is welcome and should be expanded.

It is obvious that the economic situation of many countries calls for far-reaching medium-term adjustment and development. This is where the World Bank has special competence to assist its members. But sustained development can only be achieved within a stable macroeconomic framework. This is one of the main objectives of the Fund.

We have reason to be proud of our institutions, the Fund and the Bank. They have served us well, and they have shown the necessary flexibility to cope with the difficult and constantly changing economic environment while maintaining their integrity. The challenges ahead will be no less demanding. I am confident that under their competent leadership our institutions will successfully meet these challenges.

Delivered at the Opening Joint Session, September 27, 1988.

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