Discussion of Fund Policy at Fifth Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1988
Statement by the Governor of the Bank for Nepal—Bharat Bahadur Pradhan
It is a matter of great pleasure for me and members of my delegation to be here in this historic city of Berlin (West). I extend my sincere thanks to the Government and the people of the Federal Republic of Germany, and the citizens of this city in particular for their kind welcome and gracious hospitality. I extend to them greetings and best wishes of His Majesty’s Government and the people of Nepal. May I join my fellow Governors in expressing our deep gratitude to H.E. Dr. Helmut Kohl, Chancellor of the Federal Republic of Germany, for his inspiring address. I would also like to thank H.E. Eberhard Diepgen, the Governing Mayor of this city, for addressing this meeting.
I consider it a great honor and privilege to participate in and address this meeting of distinguished Governors. My main interest here is to listen to the views of our respected colleagues. I hope they will come up with ideas and actions to alleviate the problems now troubling the world economy in general and the developing countries in particular. The developing world is keenly looking forward to positive developments in this regard.
While the economic outlook of the industrial countries is looking up and some newly industrializing countries are achieving satisfactory progress, some developing countries—the least-developed countries in particular—are making little progress. The slackening in the transfer of resources to the developing world and growing protectionism, among other things, constitute the principal issues of today. Structural weaknesses in the developing countries are no less responsible for the miserable situation facing them. Most of them are thus seriously engaged in structural adjustment programs, difficult and exacting though they are.
Most of the developing countries are taking measures to ensure that the benefits of economic development reach the poor. Nepal, for example, has already launched a program to meet the basic needs of its people by the year 2000. A substantial amount of additional resources will be required if the envisaged targets are to be achieved. There is a growing interest among the donor community in alleviating poverty in the developing world. However, the flow of resources is too limited to tackle this enormous problem.
Alleviation of poverty needs short-term as well as long-term measures. While social projects will provide some temporary relief and are essential, the need for economic infrastructure to improve the productive base is no less important. In our obsession with the poverty-oriented program and the environment problem, we should not minimize the importance of the vital infrastructure now wanted in the developing countries, the least-developed countries in particular. A balanced investment program on a significantly higher level is thus the crying need today.
The subject of adequate transfer of real resources has been discussed several times at various international forums and continues to engage us at different levels of discussion. The volume of resources flowing to these countries is still too little to meet their needs for growth, poverty reduction, and structural reform.
Concessional debt relief measures and increased flows of official development assistance (ODA) are necessary for stability and growth. The recent debt relief measures, including conversion of loans into grants by Japan, are the most welcome development in this regard. On behalf of His Majesty’s Government, I take this opportunity to extend our sincere gratitude to the Government of Japan.
The efforts of the International Monetary Fund and the World Bank in solving the problems of the poorer countries through various programs thus far are commendable. I express our sincere appreciation of the able leadership of Mr. Camdessus of the Fund and Mr. Conable of the World Bank for their commitment to strengthening world economic cooperation and improving the lot of mankind, and in particular the poor in the least-developed countries. . . .
The amount proposed for the enhanced structural adjustment facility has been subscribed satisfactorily, and we are sure that this will help combat various short- and medium-term structural problems faced by many poorer IMF members. In view of the uncertainties in the global economy and the adjustment process adopted by a large number of IMF members, there is a continuing need to enlarge the access policy and to increase the access limits in the coming year. Equally important is the easing of surveillance and conditionality. Sometimes, complex forms of conditionality, such as a devaluation, a freeze on wages, the elimination of subsidies, a credit squeeze, and prolonged measures of austerity can hamper rather than promote the healthy growth of an economy. Since the balance of payments positions in the various countries differ in degree and dimension, the types of conditionality have to be worked out on a case-by-case basis, taking into account the social and political environment of the country concerned.
We are in the process of completing an increase in the IMF quota under the Ninth General Review. Since quotas in the Fund determine a member’s vote, as well as its access to resources and its share in the allocation of SDRs, we favor a judicious and adequate increase in the Fund quota. A doubling of it, in our opinion, will place the Fund in a position to effectively meet the financial challenges of the coming years. As the calculation of the quota is based mainly on the relative economic and financial position of the members, this can erode the relative voting strength of the poorer members. Therefore, there is a need to maintain the voting strength of these countries. A combination of general and selective increases in quotas would also seem to be both equitable and appropriate.
The allocation of SDRs is another important issue where there is a lack of consensus. Despite an agreement in the Articles of the Fund to make SDRs the principal reserve asset, the progress so far has been less than satisfactory in achieving this purpose. In our opinion, since SDRs can constitute the most reliable and stable form of reserves, we are in favor of a fresh allocation of SDRs as soon as possible and we suggest that SDRs be linked with development finance.
I would now like to turn to the recent performance of the Nepalese economy. The structural adjustment program that has been undertaken by His Majesty’s Government since fiscal year 1986/87 has had a positive impact on the Nepalese economy. This adjustment program was designed primarily in a medium-term framework with fiscal year 1990/91 as the target year. Its essential features included: (1) macroeconomic stabilization; (2) resource mobilization; (3) increased investment efficiency; (4) improvement of public enterprises; and (5) activation of the private sector in agriculture, forestry, trade, and industry.
Our economic performance during 1987/88 was generally encouraging: gross domestic product (GDP) in constant prices increased by 7.1 percent; agricultural production increased by 18.3 percent; and nonagricultural production, by 14.5 percent.
On the external side, exports increased by 40 percent and imports, by 25 percent during 1987/88. With the higher rate of increase in exports over imports, the relative proportion of total exports to total imports increased 29 percent, compared with 27 percent in the previous year. Despite the trade gap of NRs 6,431 million, the balance of payments situation of the country has been favorable, amounting to NRs 1,371 million during the first three quarters of 1987/88, compared with NRs 3.5 million during the same period of last year.
Achievements on the fiscal front are also encouraging. A major simplification and rationalization of the tax system was implemented during 1987/88. In that year, revenue as a percentage of GDP increased by 0.5 percentage point to 10.7 percent; the overall budget deficit fell to 6.3 percent; and net domestic borrowing narrowed to 1.6 percent.
What concerns us most at the moment is the rate of inflation. Although this eased somewhat to 10.9 percent in 1987/88 from the rate of 13.3 percent in 1986/87, it is still on the high side and has to be contained further in 1988/89.
Growth with equity and control of inflation are the main economic objectives of the program for 1988/89. To achieve these objectives, various policy measures such as according top priority to basic needs programs, strengthening institutional arrangements, providing gainful employment to the most needy, expanding and improving financial institutions, increasing private sector participation, and adopting appropriate fiscal and monetary measures have been adopted. Accordingly, increased resources have been allocated to the productive and basic sectors such as agriculture, irrigation, industry, health, education, housing, drinking water, and other related activities.
Since a large segment of the Nepalese population lives below the poverty line, activities relating to their gainful employment opportunities, such as small farmers’ development, enhanced opportunities for women, and irrigation, forestry, and training, are being proposed for extensive implementation. Recently, a Lead Bank Scheme was introduced to increase the flow of resources toward the productive and priority sectors that benefit the poor.
As you know, an earthquake with an intensity of 6.7 on the Richter scale recently devastated our eastern region and some of the central region of the country, with a resulting heavy loss in terms of lives and property. More than 66,000 houses either collapsed or were structurally damaged. Infrastructure, such as roads, irrigation, drinking water, schools, and health centers, was badly affected. Relief work started immediately and is now almost complete. Now we have to pay immediate attention to implementing the rehabilitation work on a massive scale. At this time, if we have to divert our current resources for this purpose when we are making a little headway in correcting the macroeconomic imbalances under the structural adjustment program, the structural adjustment process will be jeopardized. It would cause a serious setback and throw Nepal back into the vicious circle of economic stagnation at an extreme poverty level. I would therefore like to request all of our donors—multilateral agencies and bilateral agencies—to extend additional assistance for the rehabilitation and reconstruction work.
In conclusion, on behalf of His Majesty’s Government, I would like to thank all donors once again for their support of our development endeavor.
Statement by the Governor of the Fund and the Bank for Romania—Gheorghe Paraschiv
These meetings of the Boards of Governors are taking place under circumstances in which the world economy is deteriorating owing to the persistence of previously existing relations marked by inequity and inequality, thereby further intensifying underdevelopment and widening the gaps between countries. Protectionism and the discriminatory barriers in world trade have intensified. The developing countries’ access to contemporary scientific and technical progress has been restricted even more. Economic constraints arising from political factors have been imposed. World economic instability has increased.
The external debt burden has grown and is having a greater negative impact on economic growth in the developing countries. The developed countries have continued to use excessively high interest rates, exchange rate volatility (in particular of the main currencies used in international transactions), as well as other inequitable practices, as instruments for casting the difficulties imposed by economic crises onto the shoulders of borrowers. We are now in a paradoxical situation in which capital flows are reversed, moving from the developing to the developed countries—a situation which should be brought to an end.
Instead of extending substantial and effective support to the developing countries, particularly to those facing serious problems with their external debt, the Fund and the World Bank have in many cases aligned themselves with the policy pursued by the commercial banks, especially with regard to lending and repayment practices, including the exchange rate level, at the expense of the developing countries.
All of these are wiping out the developing countries’ efforts aimed at carrying out their programs of economic growth and paying back their external debts, leaving a situation that is virtually beyond their control.
Allow me now to present the statement and proposals on these problems made by Romania’s President Nicolae Ceausescu.
Romania and President Nicolae Ceausescu personally firmly advocate a solution to the problems of underdevelopment and the establishment of a new international economic and financial order that is based on full equality and equity in the relations between countries. Every effort must be made to identify ways and means to solve the external debt crisis of the developing countries and to create conditions conducive to the resumption of the developing countries’ active role in the general process of economic growth, and on this basis, to revive the world economy as a whole.
It has been our country’s view that these problems can be solved only by a global approach. In this framework, it is necessary that the interests of the developing countries be taken into account by turning away from the economic and financial policies of the past.
To this end, President Nicolae Ceausescu has proposed the organization of an international conference under the auspices of the United Nations. All the countries of the world must assume greater responsibility for the world economic situation and commit themselves to real negotiations. In this connection, the President of Romania is proposing the creation of a special United Nations commission whose task it would be to make the best possible arrangements and preparations for such an international conference. The commission, which would be open to all countries, be they rich countries or developing countries, should within not more than six months’ time submit proposals on a global solution to the external debt problem and on a future credit system, which must be equitable and balanced. At the same time, the commission should make proposals regarding reducing interest rates in general and, on the basis of these, proposals regarding the establishment of an interest rate ceiling (of 4 percent to 5 percent) to be applied to international borrowing, irrespective of the interest rates prevailing in various domestic financial markets. The developed countries must extend their support to the poorest countries on an urgent basis by canceling their external debts and by substantially reducing and rescheduling the remaining long-term debt at zero interest or reduced interest for the low-income countries. At the same time, the external debts of the developing countries should be reduced by the amount of the excessively high interest paid to date and by the amount of the unfavorable impact of exchange rate changes.
In this international conference, all countries must participate with equal rights in order that mutually acceptable solutions may be reached. This is necessary because events have proven that a fair and durable solution to the complex problems of international life cannot be achieved without the active and equal participation of all countries, irrespective of their size and social system. If there is a genuine desire to support the economic growth of the developing countries and to ease their debt burden, the developed countries should abandon their current discriminatory policies, their protectionism, their imposition of low prices for the raw materials exported by the developing countries in particular, and their high interest rate practices, which have negative effects on efforts to achieve economic growth in the developing world.
As a member country of the International Monetary Fund and the World Bank, Romania is concerned with the way in which these international organizations participate in the solution of the problems currently affecting the world economy, and first and foremost the economies of the developing countries. These two institutions, created to support the economic growth of the developing countries, have not always succeeded in meeting these require merits. This is evidenced by more and more inequitable and undemocratic practices, by the plundering of the economies of the developing countries, and the subjecting of the supply of credit to conditions through the imposition of programs that effectively constitute interference in the domestic affairs of the developing countries and bring about inflation and declines in living standards, and thus amount to violations of the institutions’ statutory obligations.
In practice, the Fund and the Bank have acted in favor of the rich countries and against the interests of the developing countries. In the opinion of President Nicolae Ceausescu, these institutions must ensure an increase in capital flows on concessional terms to the developing countries without imposing economic and financial conditions and without interfering in their domestic affairs. When these institutions extend credits, they should take into account the requirements of economic and social progress on a global scale and should contribute to better resource utilization and independent economic growth in the developing countries. They should not extend financing to the private sector on a preferential basis and should have no reservations in extending credit to other sectors as well.
The assistance programs of the international financial organizations should match the specific economic and social conditions prevailing in each country and support national development efforts being made on the path freely chosen by each nation, with no foreign interference. To this end, they should improve their methods and reconsider their policies and practices so as to contribute actively to the promotion of a new, equitable, and democratic financial system that is aimed at providing effective and direct support to the developing countries’ efforts toward progress.
Concrete measures are required to democratize these international financial organizations by effectively drawing all member countries into their activities, in particular the developing countries, which must have access to the management and play a greater role in designing measures and in decision making. In this way, no decision could be taken and put into effect without the participation and acceptance of the developing countries. Unfortunately, it is obvious that certain problems of great importance for all countries are discussed by restricted groups thereof, which reach decisions without taking into account the legitimate interests of the great majority of the countries of the world.
In our opinion, the Fund must play a more active role in promoting international cooperation in solving international financial problems. At the same time, it is necessary that measures be taken to simplify work procedures within the Fund and the Bank and the other financial organizations within the United Nations system, as well as to reduce administrative expenditures by cutting staffs by 15-25 percent and by other measures, with the amounts saved to be used for easing the external debt burden of the developing countries.
Bearing in mind the developing countries’ acute needs for resources on concessional terms, Romania supports their proposals for increases in Fund and Bank capital, as well as for a new SDR allocation by the Fund.
We wish to stress that Romania, in its capacity as a member country of the Fund and the Bank and availing itself of its rights under their Articles, will fulfill its obligations and work in favor of an increased role of these international financial organizations in solving the major problems confronting mankind in a spirit of full equity and equality among nations.
Romania, as a developing country, is now engaged in a comprehensive process of economic and social development, of improving the organization and management of society, and of modernizing production on the most advanced technical and scientific basis—all of which should lead to a substantial increase in economic efficiency in all fields of activity and to a better standard of living for its people.
Our country has allocated and will continue to allocate 30 percent of its national income to the development fund, thereby stressing its own effort for our economic and social development.
Convinced of the importance of its active participation in the international division of labor, Romania pays particular attention to its economic and financial relations with all the countries of the world. Our country firmly bases these relations on the principles of full equality, the respect of national independence and sovereignty, noninterference in domestic affairs, mutual advantage, and the right of each people to build its future independently and choose freely its path toward economic and social progress in accordance with its own will and aspirations.
The achievements attained by our country in its economic and social development have allowed us to repay a major part of Romania’s external debt through its own efforts as well as to make sizable prepayments. Future developments will allow us to continue this policy and to repay the remaining external debt in its entirety as soon as possible.
In conclusion, I would like to express my hope that through the joint efforts of the countries of the world, in a spirit of cooperation and mutual understanding, the main problems now confronting mankind could be solved equitably and to the benefit of all our countries.
Statement by the Governor of the Bank for Belgium—Philippe Maystadt
It is both an honor and a privilege for me to address, for the first time, the Annual Meetings of the International Monetary Fund and the World Bank, this year being held in Berlin (West), whose citizens are more sensitive than any to efforts to strengthen international cooperation and who yearn for a greater openness among nations. I wish in particular to thank the authorities of the Federal Republic of Germany for their hospitality.
I would like to focus my remarks on four issues:
(1) The current good behavior of the world economy—and the ensuing euphoria sometimes noted by certain observers and even some decision makers—must not make us lose sight of the need to strengthen the mechanisms for international economic and monetary cooperation and, in particular, to strive for greater discipline as regards exchange rates.
(2) The central role of the Fund in the adjustment process, both in the industrial countries and the developing countries, justifies a substantial increase in Fund quotas and calls for a re-examination of the issue of a new SDR allocation.
(3) The persistent problems of overindebtedness among the developing countries mandates the adoption of a differentiated approach, in which both the Fund and the Bank are called upon to play more important roles in arranging for “controlled reciprocity” between the adjustment efforts of the overindebted countries and financial assistance from all creditors.
(4) The fight against poverty continues to pose a major challenge to our international institutions; the current strategy, based on growth, needs to be complemented and strengthened by measures aimed at overcoming the transitory costs of adjustment and more directly addressing the specific problems of the poorest.
Enhanced International Cooperation
In the past year, world economic developments have been favorable and economic performance has exceeded projections. However, this clean bill of health ought not to be read as a victory statement, in that the objective—namely, to determine how to promote a continuous adjustment process within an environment of noninflationary growth—is ambitious and leaves no room for a slackening of effort.
First, I would like to stress the importance of structural policies. To a great extent, it is the structural policies we have introduced since the early 1980s that have paid off in the form of more dynamic activity on the supply side of our economies. We must carry on with these policies and make them as much the focus of multilateral cooperation and surveillance as demand-side policies currently are. As regards these structural policies, the most important contribution that can be made from this side of the Atlantic is firm pursuit of the completion of the internal European Economic Community (EEC) market, which will benefit the world economy through higher levels of growth and employment.
Second, we must continue the process of coordinating macroeconomic policies and reducing balance of payments disequilibria among the major industrial countries. In pursuit of this objective, the three largest industrial countries have an even more crucial responsibility. Recent trends of economic and financial indicators, which have been evaluated by Fund staff, show there to be a real danger that the process of simultaneous adjustment of the remaining serious payments imbalances may not decrease at all over the next 12 months, and indeed that a reversal may begin. In my view, this may well be the principal risk the industrial world will have to face in 1989.
In order to avoid such a risk, the only possible option is to continue on the path followed for the past three years. During this period, the industrial countries have managed to reach a consensus on basic policy orientations and have recognized the need for international cooperation in implementing them. This consensus has given rise to differentiated demand management in the major industrial countries and to balanced recourse to fiscal, monetary, and structural measures. It is important that this balanced and differentiated approach be strengthened.
This said, it must be noted that the Group of Seven has become the primary venue for cooperative work and decision making by the industrial countries. I trust that in future such concerted work will become even more apparent and more systematic: more apparent through the preference accorded to concerted action rather than to statements that might disrupt markets; more systematic through the increased use of the economic and financial indicators calculated by Fund staff. In this regard, the implementation of the “monitoring zones” suggested by Mr. Baker may represent a valuable enhancement of the coordination process within the Group of Seven.
Monetary developments in recent months suggest the following: in a short-term perspective, the increase in U.S. interest rates sanctioned by the monetary authorities was justified by the need to head off inflationary expectations, even as it made it possible in some European countries to bring a halt to the capital outflows generated by an unwarranted appreciation of the dollar. In a longer-term perspective, however, I fear that these movements may reflect excessive reliance on monetary policy. Should this continue, it would make adjustment more difficult; the United States would be confronted with high interest rates when it should be significantly reducing its fiscal deficit and strengthening its export capacity. The European countries would once again be compelled to go along, despite the fact that the adjustment process would suggest that they pursue growth-oriented policies.
Overall, we would increase the risk that the financial markets would become nervous again, with strong pressures on exchange markets being the most likely outcome. What is more, such a situation would be especially unfortunate for the overindebted developing countries; despite recent successes with exports, the adjustment process in these countries remains highly vulnerable to any deterioration, particularly to any interest rate hike, which could wipe out the progress achieved in recent years.
A widespread increase in international cooperation is needed in order to ward off this danger; clearly, however, much depends on the priority that the next U.S. administration will accord to fiscal problems. Prompt announcement of a credible program, even if it is drawn out, would be extraordinarily beneficial in terms of financial stability and the continuation of noninflationary growth. Once fiscal policy is firmly associated with promoting internal stability, monetary policy could be used more actively to promote external equilibrium and stable exchange rates.
Finally, I would like to stress the notion that the international coordination of economic policies would be considerably strengthened by a more solid “anchoring” of the international monetary system and by the acceptance of greater discipline in exchange rates. In the European countries participating in the exchange rate mechanism of the European Monetary System (EMS), we have noted that when markets are stabilized around a given rate grid, the risk of destabilizing capital flows is reduced; the coordination of economic policies is significantly facilitated, and it becomes ingrained.
Before I turn to the next topic, permit me to add a few words on the economic policy followed by my country. Belgium, whose monetary policy hinges primarily on meeting exchange rate targets within the EMS, has to itself only scant room for maneuver as regards macroeconomic policy. Alongside its establishment of more decentralized institutional structures, the new Government intends forthrightly to pursue its effort to rehabilitate public finances and to reduce the budget deficit. It is also implementing structural reforms involving, inter alia, reductions in the taxation of earned income and a modernization of the financial system.
New SDR Allocation and Increase in Fund Quotas
I am pleased to note that a broadening of the role of the SDR and the possibility of a new SDR allocation have in recent months resurfaced in the discussions of the Fund’s Executive Board.
For many years, Belgium has been calling for another SDR allocation. Recent Board discussions at the Fund would indicate that this question must now be considered in a new context and that a new allocation would strengthen the international adjustment process in three ways. First, an allocation would strengthen the possibility that the industrial countries could finance their exchange market interventions with SDRs held by their central banks, an objective which assumes special prominence now that a growing consensus is emerging among the major industrial countries on the need for more stable exchange rate relationships; a recent example of this potential role for the SDR is the swap arrangement decided by the United States and Japan. Second, an SDR allocation would increase the reserves available to the overindebted developing countries to meet the prerequisites for debt conversion or debt reduction operations. Third, an allocation could help a number of countries pay the share of the next quota increase to be paid in SDRs.
To make it more likely to achieve the first two objectives, it would be necessary again to consider the proposals put forward earlier by Belgium, which would, following an SDR allocation, enable the industrial countries to return the newly created SDRs to the Fund; in turn, the Fund would make them available to other countries subject to certain conditions. This redistribution arrangement would make it possible to cover substantial needs for reserves without requiring a politically unacceptable level for the increase in quotas and for the supplementary SDR allocation that my country advocates. I wish to thank the Fund’s Managing Director, Mr. Camdessus, for the interest he has shown in this proposal, and I hope that it can be studied in greater depth by Fund staff in the months ahead.
As regards the Ninth General Review of Quotas, my country favors their being doubled. Such a sizable increase is justified by the objectives I have just cited, largely for the following two reasons. First, it appears that the debt problem, far from constituting a temporary payments crisis, is structural in nature. In the years ahead, most developing countries will continue to require financing of their structural adjustment, which only a Fund operating with ample capital could provide. Second, the past six years have provided ample evidence of the fact that the commercial banks, in coping with the debt crisis, are increasingly reluctant to play the necessary role in the financing of adjustment programs unless the Fund is involved as well. This assumes greater Fund resources.
Increased Roles for the Fund and the World Bank in the Concerted Debt Strategy
This brings me to the debt problem or, more precisely, the problem of the overindebtedness of a large number of developing countries. In my view, despite a slight improvement in some ratios, the problem remains very serious, especially when it manifests itself in declining or inadequate levels of the physical and human investment on which the future of these countries depends. It is largely because overindebtedness persists that some groups of developing countries have benefited so little from the acceleration of economic growth in the industrial world.
The first conclusion to be drawn from the experience of the past six years is that a differentiated approach is needed. The debt relief measures announced for low-income countries announced at the Toronto summit are an important step in this direction. It is important that the various proposals formulated in this regard be implemented promptly. It would be desirable for other industrial countries also to adopt debt relief formulas that are consistent with their own domestic constraints. In all cases, structural adjustment efforts on the part of the countries that are to benefit will be both the prerequisite and the catalyst for the relief measures. My country is participating actively in Paris Club discussions and will take due account of the recommendations made there for easing the external debt burden of the poorest and most heavily indebted countries.
The same is true of the Fund’s new enhanced structural adjustment facility, designed to permit concessional assistance that is more appropriate for coping with the structural adjustment problems of low-income countries. Belgium has made a major contribution to the subsidy account to help finance this facility. It is vital that this new Fund effort be strengthened by appropriate multilateral coordination of concessional aid. . . .
The problems of overindebtedness of the second group of developing countries, namely, the middle-income countries, call for a different approach, based chiefly on market techniques. Debt-rescheduling operations continue to be essential, as does the search for financial techniques which allow for reducing the amount of external debt outstanding. However, the provision of new money, the amount of which should be determined on a case-by-case basis, remains a key component in the strategy aimed at guaranteeing minimum growth and ensuring the productive investment necessary for repayment of the external debt.
As regards the respective roles which the Fund, the Bank, and the commercial banks should play with respect to these countries, I should like to note the following: As regards the role of the Fund, a significant step forward was made by adapting its intervention modalities. I am particularly pleased by the fact that the Fund, at the instigation of its Managing Director, has developed the contingency facility, which is designed more accurately to take into account the impact of exogenous factors on the implementation of adjustment programs. Similarly, I am fully in agreement with the initiatives taken with a view to increasing the effectiveness of the Fund’s extended facility.
The role of the Bank is no less important in these countries, as in most cases the problems of overindebtedness are associated with the development policies that have been pursued. Bank lending to these countries would be far more likely to achieve its objectives if it were more systematically to be associated with an overall assessment of the development strategies, including structural adjustment measures that are being pursued by these countries within a multiyear framework. Bearing this in mind, I would suggest that the “policy framework paper” approach already being used in the low-income countries could be extended to some of the heavily indebted middle-income countries. This procedure would have two additional advantages: first, it would make it possible to more accurately ensure compatibility between the activities and recommendations of the Fund and the Bank; second, it would augment the catalytic role of the two institutions. A more accurately defined long-term framework and greater clarity with regard to the intentions and future policies of the countries concerned would help make their management more coherent and would increase the confidence of external donors.
A key component in the strengthening of the debt strategy vis-à-vis these countries is increased solidarity among creditors, including the commercial banks. In this respect, the new market techniques, in particular those for debt conversion and debt reduction, freely accepted by all parties concerned, have diversified the possibilities for bank intervention. It is of the utmost importance that we manage, under the auspices of the Fund and the Bank, to more accurately assess and more appropriately channel the efforts of the commercial banks so as to ensure that, in the medium term, those debtor countries which have implemented structural adjustment plans for their economies may be guaranteed sufficient financing. In this connection, one may well wonder whether the commercial banks, taking as a model the contingency facility implemented by the Fund, might not incorporate into their own loans, from the outset, repayment arrangements that take into account the impact of exogenous factors that could threaten the adjustment programs of the debtor countries.
In this coordinated debt strategy, as in all development-related problems, we must not overlook the key role of the private productive sector. . . .
The Fight Against Poverty
The fight against poverty continues to pose a major challenge to our international institutions. Indeed, despite increasing Fund and Bank involvement in the economic policies of the developing countries, the number of persons living in absolute poverty has continued to rise sharply since the early 1980s. The programs of both the Fund and the Bank have been subject to harsh criticism in many countries, where they appear to have solidified if not aggravated long-standing social distortions.
The fact remains, however, that the severe poverty problems brought about by the economic shocks of the past decade can be resolved effectively only within the framework of a broad growth-oriented adjustment strategy. This strategy, however, must be complemented and reinforced by measures designed to take into account the transitory costs of adjustment; the problems of poverty must be met head-on, by incorporating the poverty alleviation component into the advice imparted to governments and the very selection of projects. . . .
I would like to conclude on a high point. Surely, we have an enormous task ahead of us in the four areas to which I have referred.
—We must improve our mechanisms for international economic and monetary cooperation.
—We must work to achieve greater stability in the international monetary system, which in my view could be centered on an enhanced role for the SDR.
—We must, in order to resolve the problem of overindebtedness, do more to arrange for reciprocity between the adjustment efforts of the indebted countries and the financing thereof by all creditors.
—Finally, we must, now more than ever, place the issue of alleviating poverty at the heart of adjustment and development problems.
I am encouraged by the fact that we have sound multilateral institutions, which have demonstrated their ability to adapt and to deal with these four challenges. For its part, my country wishes once again to stress its own support for the Fund and the Bank and its desire to see them play an increasing role in promoting international monetary and financial cooperation.
Statement by the Governor of the Fund and the Bank for Australia—Paul J. Keating
The world economy has weathered last October’s stock market upheaval more effectively than many expected. It is showing an underlying strength, which reflects the fact that the fundamental conditions for growth are now better than they have been for some time.
Lower inflation is one such condition. It has increased confidence and stimulated consumption and investment in many countries, but especially in Japan and some other major industrial countries.
Confidence and economic performance have also been boosted by a greater willingness on the part of governments to set policies in a medium-term framework and to pursue policies designed to sustain growth over the medium term. And there has been an increasing awareness of the need for structural reform, together with some progress in that direction.
We obviously cannot relax our efforts. If we do, latent inflationary pressures, continuing large current account imbalances, and persistent protectionist attitudes would undermine the durability of the expansion.
But at the same time we should be encouraged by our success in achieving six years of respectable rates of economic growth. There is no reason why we cannot further extend that period. We can if we remain positive and adopt appropriate policies. The recent tightening in monetary policy in several countries will help to restrain inflationary pressures. But reliance on monetary policy alone, even for a short period, will have costs, including costs to developing country debtors. Above all, we need continued—and hopefully enhanced—policy dexterity and flexibility.
Japan, in deliberately increasing domestic demand, has played a key role. But in the United States a reweighting of policy away from monetary policy toward fiscal policy is needed. It is not easy, but many countries have done this. In Australia we have shifted from a budget deficit of 4 percent of gross domestic product (GDP) to a surplus of 2 percent of GDP in five years. This has been achieved essentially by cuts in government spending. Given the political will, other countries can make similar shifts.
Our experience illustrates not only that such changes are possible but also that they can be implemented without plunging economies into recession. Indeed, the reverse has been our experience, with the improved policy mix leading to increased private sector confidence and activity, which has offset cutbacks in public sector spending.
International policy coordination can play—and has played—an important role in sustaining economic growth in recent years. The most important requirement here is that coordination be extended beyond crisis management, or central bank interventions, to the coordination of policies that effectively address fundamental problems. There is nothing to be gained from coordinating policies that are themselves indifferent.
The freeing up of international trade is the single most effective means of promoting structural change and improving the medium-term growth prospects for developed and developing countries alike. It is a sad indictment on decades of supposed international cooperation that protection by industrial countries reduces developing country national incomes by almost twice the amount of official development assistance that they currently provide.
The Uruguay Round provides perhaps the last real opportunity this century to make essential advances in trade liberalization. It is time to jettison pious platitudes. At the midterm review in December, Australia will be doing all it can to achieve concrete results in trade in agriculture, manufactures, and services.
In addressing the debt and other problems of developing countries, there is no escaping the policy imperatives that only those countries themselves can implement. Their record of adjustment has been mixed, but stronger adjustment efforts are clearly required by many countries. Those who make the efforts and sacrifices should be supported and encouraged in practical ways, including maintenance of respectable rates of economic growth in the major economies, access to markets, and the transfer of resources.
The Fund and Bank also have critical roles to play in this difficult task of adjustment. They are responding well, in our view, to the challenges confronting them.
In the Fund, for example, the establishment of the enhanced structural adjustment facility, the revitalization of the extended Fund facility, and the creation of the compensatory and contingency financing facility clearly demonstrate the Fund’s preparedness to respond to the changing demands on its resources and to stand behind members who demonstrate a willingness and capacity to implement required adjustment.
Australia supports the broad approach to arrears outlined in the Executive Board report to the Interim Committee. We look forward to the early resolution of this problem in a manner that protects the Fund’s monetary character and the revolving nature of its resources.
Australia also supports the strengthening of the Fund’s facilities and of Fund surveillance. We acknowledge the need for the Fund’s resources to grow with a growing world economy and we support a substantial increase in quotas under the Ninth Review. In the process, we would expect quotas to be more closely aligned with the relative economic weights—and responsibilities—of member countries. This has particular implications, of course, for Japan and Korea. . . .
Strong and effective adjustment programs are essential, with effectiveness being the key word. Relations between the Fund and the Bank in adjustment operations are emerging as a major issue. The potential for a blurring of the roles of the Bretton Woods institutions, and for duplication and conflict, has heightened since the Bank entered the field of adjustment lending almost ten years ago. But some recent developments here are worrying to us.
The Fund and the Bank have separate and distinct mandates. If we confuse these, we do so not only at cost to the institutions themselves, but also at a cost to their general membership. The Fund is a monetary institution, responsible primarily for providing short-term balance of payments support and for safeguarding the effective working of the international monetary system. While the Fund’s operations do impact on the development process, the Fund is not a development institution.
The Bank does have a role in the adjustment process consistent with the terms of its lending. However, this should be confined to long-term structural problems; short-term stabilization is the Fund’s business. Furthermore, we do not believe that the Bank should be lending to any country for long-term structural purposes without a suitable framework of macroeconomic policies for that country. Recent events suggest to us that these principles are coming under strain.
We must avoid a situation in which borrowing countries are able to exploit a duplication of roles, play one institution off against the other, and obtain balance of payments financing from one institution that the other is not willing to provide. Clearly, this would subvert the adjustment process.
There is no easy solution to the problems that beset the world. But the basic policy requirements are in general well known and, within this body, well understood. While the Fund and the Bank can help us meet these challenges, they can only do so if we provide them with adequate funds and allow them to cooperate effectively and within their particular charters.
Statement by the Governor of the Bank for the Socialist People’s Libyan Arab Jamahiriya—Mohamed El Madani Al-Bukhari
Let me begin by saluting you and by wishing you the best in your deliberations. I believe though that a real solution to the acute problems facing the international community, particularly in the Third World, will not materialize so long as the forces of neocolonialism continue to exercise control over the destiny of the peoples of the Third World through various means, among which are the policies and practices of these forces in the international organizations, including the World Bank and the International Monetary Fund.
As I stand before you today to convey to you the point of view of the Libyan Jamahiriya, I cannot but wonder: How can the peoples of the developing world overcome the main hurdles that impede their efforts to achieve economic progress and break away from poverty, underdevelopment, and disease at a time when the policies of the major industrial countries are precipitating a political and economic environment that frustrates these efforts? How can these efforts succeed at a time when, due to the influence of the forces of neocolonialism the Bank and Fund programs are formulated on the basis of principles that are inconsistent with the basic orientation in many developing countries, and in a manner which pays only lip service to the social, economic, and political circumstances of those countries? How can these efforts succeed at a time when the policy coordination among the countries that dominate the Bank and the Fund is primarily motivated by these countries’ desire to preserve and further their interests, without regard for the adverse consequences of the policies pursued in the context of this coordination framework on the Third World, notwithstanding these countries’ hollow declarations to the contrary?
I beg your pardon if the questions I have raised convey a great deal of pessimism concerning the developing countries’ chances to achieve, under the present circumstances, real progress toward the realization of their peoples’ aspirations for economic progress, while maintaining national identity and political independence, and for building an international community on the principles of human brotherhood, mutual respect, as well as purity from exploitation and forced dependency. In my view, however, this pessimism becomes well founded when one considers some of the more important recent economic indicators.
First. Although the global economy continued to grow over the past year, that growth was greatly uneven. While industrial countries’ economic performance exceeded initial expectations, the difficult economic and financial conditions in the developing countries continued to be difficult and they may even have deteriorated further. That the developing countries have not benefited from the growth momentum in the industrial countries is due primarily to the decline in oil prices and to the contractionary policies that many of the developing countries were forced to implement in order to adjust to the unfavorable external environment that was created by the policies of the major industrial countries, and that was reflected, among others, in inadequate external financing and an intensification in protectionist pressures.
Second. Various indicators suggest that inflationary pressures in industrial countries have resurfaced. This has led many to call for according the objective of controlling inflation a high priority in the formulation of policies in major industrial countries. However, as is well known, this policy orientation in these countries will have negative implications for the economic performance of the developing countries, especially if the effort to contain inflation is carried out through excessive reliance on monetary policy. Indeed, instead of correcting its fiscal imbalance to reduce its dependence on the savings of others, the United States has recently adopted a contractionary monetary policy stance that has led to a significant rise in interest rates. This in turn has led other industrial countries to raise their interest rates in order to maintain stability in the exchange rates of their currencies. It thus has become clear that the burden of the fight against inflation in the industrial countries will be borne by the developing countries, as was indeed the case in the early part of this decade because raising interest rates had some negative effects on highly indebted developing countries.
Third. Notwithstanding what is being said about the progress achieved under the current debt strategy, it is my belief that that strategy has at best postponed the crisis. While the debt-to-export ratios declined for the first time in 1987, they still remained substantially higher than they were when the debt crisis broke out in 1982. Also, in spite of the substantial adjustment carried out by the debtor countries, which led to a reduction in their external current account deficits, these countries have not regained their creditworthiness. In addition, this improvement in the current accounts was achieved at the expense of declines in consumption and investment. The negative implications of this situation for poverty in the developing countries are clear and need no elaboration. However, let me just say that there are about 500 million people in Asia, 280 million in sub-Saharan Africa, and 80 million in Latin America who are suffering from abject poverty, which in many cases threatens their very survival. It is indeed ironic that in spite of this grinding poverty and notwithstanding their statements of deep concern about the interests of the developing world, the forces that dominate the Bank and the Fund are calling for tightening the already tight Bank and Fund programs. There is no doubt that should these forces succeed in this endeavor, the adverse poverty implications of these programs will be exacerbated even further. All of this at a time when the most basic rules of human brotherhood dictate a reinforcement of efforts to bridge the deep gap between the world’s rich and poor, not to deepen it further.
Through its hegemony over the policies and practices of the Fund and the Bank, the United States has turned these institutions into instruments of coercion that serve its interventionist policies in the Third World and its economic and political objectives in general. The best example of this hegemony is the Fund’s acquiescence in the arbitrary restrictions imposed by the United States against the Jamahiriya in January 1986 and, in particular, the freezing of its assets, including the assets of Libyan students in the United States. There can be little doubt that the freezing of the assets is inconsistent with the purposes for which the Fund was established, including the need to avoid using payments restrictions as instruments of political pressure. By accepting the United States’ claim that the above-mentioned restrictions were motivated by security considerations, the Fund has shown its subservience to the will of the American government, irrespective of the facts and the Fund’s own Articles of Agreement. Although subsequent developments have proven that the Jamahiriya was in no way responsible for the incidents that were cited by the United States as a reason for its decision to freeze the Jamahiriya’s assets, that decision has not been revoked so far. The Fund’s continued silence and acceptance of this state of affairs, which is clearly inconsistent with its own laws and stated objectives, is indicative of the serious deterioration of the international organizations that fall under the United States’ hegemony.
I raise the issue of the freeze imposed by the United States on the Jamahiriya’s assets not only as a bilateral issue that concerns the relations between two members. The matter entails broad implications for the prestige and credibility of the Fund, its integrity in the discharge of its responsibilities, and the sanctity of its Articles of Agreement, particularly the protection of the interests of its members, both large and small, under those Articles. Actions, such as those taken by the United States against the Jamahiriya, put at risk national reserves and other assets held in other member countries, belittle respect for the obligations of reserve currency countries, shake confidence in the international banking system, and disrupt trade and international financial transactions in general.
It should be noted that the United States has justified its payments restrictions by security considerations more often than any other member. In all, the relevant Fund decision has been invoked 43 times. Out of that, the decision was invoked 26 times by members imposing restrictions involving Rhodesia or South Africa, out of what could be broadly termed reasons of “international or collective security.” Of the remaining 17 cases, the decision has been used as many as 10 times by the United States. It is ironic that it is the largest and most powerful member of the Fund that felt the need, more often than any other member, to claim a threat to its security in imposing payments restrictions against countries, which, in comparison, are very small. The real threat to international security lies in the arrogance of the U.S. policy that does not hesitate in waging economic warfare and economic blockades against small countries and, if that fails, uses its military power, as was the case with the barbaric air raids of the United States on innocent Libyan civilians in April 1986.
In conclusion, I have spoken to you today on behalf of a small country that has always fulfilled its obligations to the Fund and the Bank and has never requested their financial assistance. Our country was surprised at the Fund’s response when we presented to it our just cause, which is the general cause of international cooperation. We are strong believers in the need for cooperation among the peoples and the countries of the world. But, we want this cooperation to be based on justice, equality, and mutual understanding.
Statement by the Governor of the Bank for Portugal—Miguel Cadilhe
It is a great honor to address the Annual Meetings of the International Monetary Fund and the World Bank Group, and it is with deep feeling that I find myself in this historic city of Berlin (West).
Of course, I would have preferred to speak in Portuguese, the common language of expression of almost 200 million people on all continents. I hope it will be possible in the future.
Let me begin with a few words about the current prospects for the world economy and about the roles of the Fund and the World Bank. These meetings take place when we face stronger growth in the world economy than expected some months ago. The growth of activity does not appear to have yet put pressure on world prices, partly because capacity has expanded as a result of the sustained growth of investment in most industrial countries. Nevertheless, policy coordination among these countries remains crucial to the continuation of balanced growth of the world economy. The Fund, in its surveillance activities, can and should, in our view, play an important role in fostering this coordination.
Despite some improvements, the situation of developing countries as a whole remains less than satisfactory, as many continue to experience declines in real income per capita and excessively high rates of inflation. The burden of external debt and its service remain unsustainably high for many of them, despite their adoption of difficult adjustment measures.
While we see no alternatives at the present time to a case-by-case approach to the debt problem, we also see a need to strengthen this strategy. For the lowest-income countries, we consider debt relief essential to support the implementation of determined adjustment policies, and we welcome the steps taken in this respect by the Paris Club and by individual countries. For the middle-income countries, we support the widening of the menu approach to include voluntary debt reductions, in conjunction with the effective adjustment efforts of the indebted countries. We also hope that these adjustment efforts will be supported by the reduction, on the part of industrial countries, of existing trade barriers.
Portugal has a long record of close cooperation with the Fund, which has provided sound policy advice and supported our economy with two successful stand-by programs in 1977–78 and 1983–84, and continues to provide valued policy advice. We are pleased to note that the positive results of the adjustment effort have been so rapid and substantial that Portugal has begun to pay its obligations under the stand-by arrangement ahead of schedule; it has been included repeatedly in the Fund’s Designation Plan and operational budget; and it has recently notified the management of the Fund of its intention to accept shortly the obligations of Article VIII of the Articles of Agreement. . . .
We support the increased emphasis placed both by the Fund and the Bank on moderating the social costs of adjustment programs and on the alleviation of poverty.
Let me now give you some highlights of the Portuguese economy. I think it is a good case to be analyzed by all of us.
In the last three years, the Portuguese economy recorded one of the best overall performances of Fund and Bank member countries. The main macro-economic indicators show a remarkable improvement of economic conditions. Real gross domestic product (GDP) grew at an annual average rate of 4.4 percent. Inflation declined from about 20 percent to 9 percent and is projected to decline further toward the average level of the European Communities (EC). Investment grew at an average real rate of about 14 percent per year. The unemployment rate is now at 6 percent, 5 points below the average EC rate. The current account has recorded a sizable surplus, and the external debt has been halved in relation to GDP. The Public Sector Borrowing Requirement (PSBR) declined from 20 percent of GDP in 1985 to about 10 percent in 1988, together with an improvement in the transparency of public accounts, including a huge settlement of arrears, and with a significant shift in public debt financing toward more market-determined conditions.
This conjunction of GDP and employment growth, declining inflation, and a comfortable situation of external accounts was certainly helped by favorable external conditions. But it has also been recognized by independent analysts—including the Fund and the World Bank staffs—that economic policy was a decisive element in redressing the economy. Today, confidence in the Portuguese economy is at a very high level, as evidenced by the strong capital inflow of the last two years, including a jump in foreign direct investment.
This positive evolution of the Portuguese economy coincided with Portugal’s accession to the EC. The steps of the transitional period are being implemented on schedule and, in some cases, even at an accelerated pace. Thus, since January 1986, we have been progressively reducing capital controls and trade barriers. This requires deep changes in economic behavior and a rapid adaptation to new circumstances. But the response has been satisfactory, and the investment growth gives us confidence that needed structural changes in the productive structure of the economy will take place. Balanced, noninflationary growth in Portugal will need to be supported by a high savings rate. We expect the public sector to contribute significantly to an increase in the national savings rate through a continued decline of the PSBR.
These are the main lines of a medium-term program that the Government approved in March 1987 (Program for the Correction of the External Deficit and Unemployment—PCEDED). In this macroeconomic program, private investment plays a central role. The Government has endeavored to provide a favorable environment to investment not only through its macroeconomic policies but also through the launching of wide-ranging structural reforms, including taxation reform, a new agrarian reform, a liberalization of labor legislation, the enactment of a new legal framework for the capital markets and the progressive liberalization of the capital markets and flows within the EC, the modernization of the financial system, and the beginning of privatization. The response of Portuguese and foreign investors so far has exceeded the most optimistic expectations, and we are confident that it will be maintained in the years ahead.
This is a short account of the Portuguese case. It is my great pleasure to invite you to take a deeper and longer look at the case. The case is how to get more growth, investment, and employment with less inflation, less PSBR, and less external debt. Of course, there are some risks and some devils. Consumption growth is one of them.
Statement by the Governor of the Bank for Afghanistan—Hamidullah Tarzi
I would like to join the other distinguished speakers before me in expressing my delegation’s sincere appreciation and gratitude to the Government of the Federal Republic of Germany, to the Mayor, authorities, and people of the historic and beautiful city of Berlin (West) for the very magnificent and warm hospitality and arrangements.
It is a pleasure and a privilege to address this distinguished gathering. The meeting is indeed fortunate to have the Co-Chairmen to guide its affairs at this session, which takes place at a very crucial time for the world economy.
Mainly as a consequence of the macroeconomic policies of the market economy countries, the 1980s have been a period of uncertainty, instability, and difficult adjustment for the world economy. Developing, and especially least-developed, countries have been vulnerable to the multiple external shocks that occurred toward the end of the 1970s and the beginning of the 1980s—namely falling commodity prices and the ever-worsening terms of trade for exporters of primary products, who are still in the category of price-takers, and not price-makers, because of increasing protectionist measures through both tariff and nontariff measures. The recession of 1980-82 in developed countries and its subsequent negative effects and ramifications on the trade and balance of payments position of the developing, especially the least-developed, countries, together with restrictive trade practices, including discriminatory sanctions in regards to the general system of preferences and the imposition of the MIP by the European Common Market, has resulted, on the one hand, in rendering our handmade products noncompetitive and, on the other hand, in curtailing our major foreign exchange earning exports—namely raisins. There has been an overall rejuvenation and stimulation of economic activity in most of the major industrial nations in the past five or six years, but unfortunately, the very vulnerable and commodity-based economies of the developing countries, especially the least-developed countries, confronted with concomitant political and natural disasters and catastrophes, have yet to recover from the initial shocks.
It has been estimated that the external indebtedness of the developing countries has reached astronomical figures, exceeding $1,000 billion. In this connection, three points are pertinent. First, it is well known that projects undertaken through external financing may exert very serious pressure on the balance of payments position of the developing countries long before they affect the overall capacity of the economy to generate export earnings or import savings. Second, it is also evident that it is not only the size or even the debt service payment that is important, but the proportion and ratio that the external debt absorbs of the scarce foreign exchange available to the developing, and especially least-developed, countries.
Third, the developing countries should have unrestricted access to foreign markets for their exports, so as to enable them to earn the necessary foreign exchange. Failure to realize these pertinent points by the creditor community will result in an ever-increasing reverse flow of scarce hard-earned real resources from the developing to the developed countries, thus chronically aggravating their balance of payments position still further. Based on these facts, we propose that, besides the usual debt relief instruments such as debt rescheduling, restructuring, grace periods, and concessional terms, an ad hoc meeting of debtor countries and the creditor financial community under World Bank or United Nations Conference on Trade and Development (UNCTAD) auspices, with frank and realistic dialogue and analysis of the debt crisis, would prove beneficial. One suggestion for a possible topic of discussion could be the possibility of setting up a debt relief fund for those countries most affected by the debt crisis. Moreover, the need and recognition that debtor and creditor governments, along with the commercial banking community and international financial institutions, will need to work together to frame solutions for their mutual benefit are undeniable. The main objective is to ensure that the debtor countries receive the necessary financial resources so as to extricate themselves from the quagmire of chronic indebtedness. Likewise, regarding the debt problem, due consideration should be given to unforeseen changes in the country’s external payments owing to factors beyond its control. Taking these points into consideration, the philosophy of paying at all costs does not appear justifiable. Likewise, the linkage of the indebtedness of the developing countries to their capacity to pay through export proceeds and available foreign exchange is imperative.
It is an accepted fact that the disparity in overall economic development, not only between the developing and the developed countries, but between the developing and least-developed countries, is increasingly widening. Thus far, as previously mentioned, the Substantial New Program of Action (SNPA) for the least-developed countries appears to be one of the few practical and action-oriented measures adopted in their favor. But, despite certain progress achieved, much remains to be done.
As far as my country is concerned, in the light of the rather unfavorable and rather disappointing outcome of the recent round table talks held in Geneva, in which the major international financial institutions participated, my delegation proposes that the United Nations Development Program (UNDP) and other related United Nations (UN) agencies should explore the possibilities of a more coordinated and integrated approach, including the utilization of more viable and effective modalities to ensure an accelerated and progressive implementation of the SNPA within a specified time limit. However, experience and documented figures amply indicate the rather disappointing performance of the SNPA on the real flow of resources to the developing, especially the least-developed, countries. In this connection, besides the full implementation of various measures, such as the observance of the official development assistance (ODA) commitments by the developed countries, the increase in International Development Association (IDA) resources, and a greater portion of grants to loans for the least-developed countries, we propose the possibility of serious consideration of implementing the concept of a link between development finance and SDRs, which regrettably has been repeatedly rejected in numerous international forums on rather questionable and controversial grounds by major industrial market economy countries.
The important role of money and finance in the context of policies and measures for revitalizing trade and development among nations cannot be denied. Since ODA continues to play an important role for a large number of developing, especially least-developed, countries, we suggest that, in compliance with the recommendations of the Development Committee’s Task Force on Concessional Flows, developed countries should renew and make more effective their efforts to achieve as soon as possible the internationally agreed target of 0.7 percent of gross national product for total ODA and the targets for ODA directed toward the least-developed countries, as adopted in the SNPA and the International Development Strategy.
In connection with financial resources and technical assistance, another disturbing factor is that the already inadequate and limited financial and technical assistance is regrettably responding increasingly to political rather than economic motivation, whereby its mobilization and allocations depend in most cases on the nature and consistency of the historical, political, linguistic, monetary, commercial, and, in certain cases, sentimental links existing between donors and recipients.
The developing and the least-developed countries have been calling for many years for a reform of the existing international monetary system. My delegation reiterates this call and suggests the following changes:
—Increased participation of developing and least-developed countries in the decision-making process of the Fund and the Bank.
—The further strengthening of the Bank as a truly democratic international development institution and the further democratization of the Fund, especially in regards to the relation of voting power to shares.
—An increase in the Fund’s structural adjustment facility and in the lending facilities of the Bank and technical assistance bodies of the UN, especially the UNDP. And here we would also like to add the possibility of a link between the creation of SDRs and development finance. I know that this issue has been repeatedly rejected by the major industrial countries on certain grounds that can be questionable, and I hope that they will perhaps give a second thought to this proposal.
—A review of the Fund’s conditionality, with a view to facilitating adjustment with growth, re-examining the relation between low and high conditionality, and restoring the reserve creation functions of the Fund, together with exemption of credit ceilings.
However, when one is speaking about conditionality, any type of conditionality aid must remain true to its primary objective of alleviating poverty. Therefore, conditionality for aid, especially for the least-developed countries, must be poverty focused, as is accepted in principle by the World Bank and other UN agencies, particularly United Nations Children’s Fund (UNICEF) and the UNDP. . . .
More than 40 years have passed since the historic establishment of the United Nations in San Francisco. During these years, as the saying goes, much water has passed under many international bridges, relations and interrelations between nations have undergone changes, and, more important, powerful and dynamic forces of change that had at one time appeared as a first break of dawn on the horizon of international affairs have evolved and metamorphosed into full reality in the form of a positive two-way interdependence in the world of today.
The former unequal dependence, economic imbalance, and exploitation of the so-called underdeveloped by the developed societies are for the most part relics of a bygone era. Nevertheless, even today, after the political emancipation of great masses of humanity from secondary subservient and servile roles, regrettably in some cases, the inequalities, discriminations, and imbalances still linger on in the economic and related spheres.
On the basis of an overall analysis of the past 40 years of the financial arena, the breakdown of the Bretton Woods monetary system in the early 1970s and the far more important understanding, politically speaking, that peace is a necessary prerequisite for socioeconomic development of all nations could be enumerated as important milestones during this interim. Another important evolution was the further recognition of interdependence. This was vividly underlined by the advent of oil as a strategic commodity in the mid-1970s, which heralded the historic stormy sixth and more pacific seventh special sessions of the UN General Assembly.
The Republic of Afghanistan, young in terms of a republic but very old as a nation, is going through an extremely critical and highly sensitive phase in its long and ancient history. More than ten years have passed since the April Revolution of 1978, whereby the last vestiges of arbitrary monarchism were overthrown and discarded in favor of democratic pluralism.
Since then much has been achieved, but much remains to be done. The policy of national reconciliation, which is an outcome of a new form of political thinking, has, in spite of its being complicated and multidimensional, nevertheless culminated in the Geneva agreements; these agreements, although hindered by internal and external violations and interference, are nevertheless, under the prevailing circumstances, a triumph of political wisdom and foresight.
At present, despite the continuation and escalation of warfare and the destructive activities by extremists, the paramount task before us in the national reconciliation policy consists of reconstruction, rehabilitation, and the resettlement of our hundreds of thousands of compatriots returning to their homeland. The assistance rendered in this by the United Nations High Commissioner (UNHCR) and the International Red Cross Society is appreciable and commendable.
The Republic of Afghanistan has taken the necessary measures to reunify and ameliorate this alarmingly critical socioeconomic disarray. However, the paucity of national real resources, combined with the continuing destructive activities of the extremists and compounded by the unique disadvantages and difficulties of being a least-developed and landlocked country, necessitates more than ever a much greater amount of multilateral assistance, especially by the international financial and monetary institutions, namely, the Fund and the Bank.
While we appreciate the initial steps undertaken by World Health Organization (WHO), UNDP, and UNHCR toward rehabilitating and reconstructing our country, nevertheless, the mobilization and inflow of resources, credits, and grants on a large scale and dimension are absolutely essential for the reconstruction of the large-scale destruction, havoc, and unprecedented human and material losses inflicted upon the country and people of Afghanistan, which was brought about by the senseless, imposed, destructive, and exhaustive fratricidal war.
This is where assistance from the most important and major international financial institutions—the Fund and the Bank—is urgently required, including the provision of special facilities and exemption from certain Fund regulations and limitations, such as the imposition of credit ceilings and certain forms of conditionality.
Based on the undeniable truism that peace is an essential prerequisite to socioeconomic development, the newly formed coalition government of the Republic of Afghanistan is taking all necessary measures toward achieving national reconciliation, based on the Geneva agreements and to which the Republic of Afghanistan, despite the repeatedly flagrant nonobservance of its terms by internal extremists and certain external elements, has faithfully abided.
In the economic arena the Republic of Afghanistan is making every effort to further strengthen the state sector, whose role in the overall socioeconomic development aimed toward promoting public welfare is undeniable. Concurrently, the Government is giving due attention, and attaching great importance, to the further development and active participation of the private sector in the economic development of the country. Besides various incentives—such as tax holidays, custom duty exemptions on raw materials used in the processing of goods, and various facilities, such as ample foreign exchange allocations for business-oriented foreign travel—the newly promulgated Foreign and Domestic Investment Law in itself, which offers many facilities for investors, domestic and foreign alike, indicates the Government’s desire to do all it can to develop and expand further the historic role that private enterprise has and should play in the overall development of the national economy.
At the moment, the role of the private sector in the national economy, despite the various incentives, is limited to the distribution sector. But this, as will be agreed, is a common phenomenon in many developing, and especially least-developed, countries, where the private sector entrepreneurs are usually more inclined toward short-term returns rather than long-term investments. Thus, it is imperative that this problem should be tackled through greater participation of the state sector in promoting the industrial and productive capacity of the economy.
Nevertheless, as things stand, the private sector’s share in the national income exceeds 50 percent. Broadly speaking, the Republic of Afghanistan is following a very liberal trade policy, which is oriented toward increasing and promoting foreign and domestic trade. It should be pointed out that the technical and financial assistance rendered by the International Trade Center in promoting foreign trade has proved valuable.
But, on the whole, during the past ten years, financial assistance from multilateral sources has regrettably gradually diminished to a mere trickle. This fact is very ironic, because Afghanistan has met its financial obligations toward the UN and the international monetary and financial institutions. The fact is that now more than ever our country is in need of all the financial assistance it can obtain. In the socioeconomic sector, aside from the large-scale subsidization of basic food items for the lower-income population, which is based on the realization that development should begin at grass roots, much emphasis is now being given by the Government toward bettering and raising the standard of the rural areas in which 80 percent of our population lives. For the more efficient mobilization of this newly initiated program, a new Ministry for Rehabilitation and Village Development has been added to the Cabinet. We hope that the World Bank will, through its antipoverty program, render the necessary financial and technical assistance to the various poverty-alleviating projects envisaged by the new Department.
In conclusion, the Republic of Afghanistan, as a faithful and long-standing member of the United Nations, the Fund, and the Bank, reiterates its faith and aspirations that in this hour of urgent need for financial assistance, the United Nations and the influential international financial and monetary institutions, namely the Fund and World Bank, will not disappoint its justifiable appeals for very substantial multilateral financial assistance at this very crucial and sensitive period.
Statement by the Governor of the Fund for Kiribati—Teatao Teannaki
Let me first of all convey our gratitude to our hosts, the Governing Mayor of Berlin (West) and the Government of the Federal Republic of Germany, for their gracious hospitality and the very fine and elaborate arrangements made by them for this meeting. I speak here on behalf of my own country of Kiribati and three other small island countries of Solomon Islands, Vanuatu, and Western Samoa. Frankly, it is difficult for us to share the complacency that colored many of the statements made earlier this week. We are not much moved by bland reassurances of stability and coordination among the major economies. These statements seem to be aimed at the stock markets and foreign exchange markets, and we remember how much notice the markets have taken of such assurances in the past. Like last October 19, for example.
Maybe we are looking through the other end of the telescope. Because we live close to nature, in daily contact with the environment God gave us, and we can walk around and meet and talk to our people easily—maybe that is why we are unimpressed by self-congratulation based on financial aggregates. We are more concerned with the realities of trade, investment, jobs, health, and national self-respect.
What we see is that many of our friends in the bigger developing countries are in serious difficulties, and there is a lack of will in the richer countries to help them in the ways that would be most effective—not a lack of ideas, now, but a lack of will to put the ideas into action. We see increasing protectionism in the same countries that urge us to increase our exports, deregulate our economies, and roll out the welcome mat to foreign investors. We see a continued decline in the readiness of rich countries to transfer even a small part of their accumulated wealth to the poorer countries, whose low-priced commodities made industrialization possible. And we see educated and prosperous people closing their eyes to the misery and the danger represented by widespread poverty and hunger. They are full of theories of the marketplace that cannot work except where buyers and sellers have equal access to information, credit, and political power.
We know we have friends, good friends, in the developed countries and in institutions like the Fund and the Bank. But they are prisoners of their own policies and procedures. These Annual Meetings give us as Governors the chance to give a push on the steering oar of the canoe. Like many others, we were impressed on Tuesday by the broad vision and strong conviction shown by Mr. Camdessus and Mr. Conable. The acid test is to turn those sentiments into action. . . .
Turning to the Fund, we are the smallest and poorest members, and we have the smallest quotas. We do not object to being the smallest, but our present quotas are so small that they almost might not exist. Our potential access to Fund resources should be big enough to play a significant part in our consideration of adjustment policies. To achieve that, when the Ninth Review of Quotas takes place, we need a tripling of the small island quotas, or the addition of a flat sum of, say, SDR 10 million to each quota (whatever happens to the total capitalization of the Fund).
Apart from access to the Fund’s money, however, we attach great value to our access to the technical assistance and training available from the Fund—both from the Departments and the IMF Institute. It is almost impossible for us to tap such high-quality resources in any other way. We need more of this form of help, not less. But we know there are pressures to cut it back. Such short-sighted moves should be firmly rejected by the Managing Director. It is entirely in the interests of the Fund and the sound economic growth of our economies that the Fund’s technical assistance and training should not be curtailed.
Last, we want to see collaboration improved between the Fund and the Bank. It is nonsense to have two institutions across the street from each other in Washington, both requesting the same or similar information from our hard-pressed staff at home. We do not want to deal with overlaps or gaps or the resulting confusion. We have enough to do to put our house in order at home. It will help us if Fund and Bank Departments can further develop information exchange, joint missions, and joint reports.
We are small and very far away from each other and from the major markets of the world. But we live among, and to some extent control, the vast resources of the Pacific Ocean, and some of them are still untapped, even unknown. The Fund can help us to develop sound fiscal and monetary strategies. The Bank can help us to plan and finance the development of our economies. We need that help. But it won’t work unless both the Fund and the Bank recognize the strengths and weaknesses of our situation, focus down to our scale, and understand the unique nature of each island state: we are all small, but we are each different from the others. We look forward to working together with both the Fund and the Bank in the years ahead.
Statement by the Governor of the Bank for Fiji—J.N. Kamikamica
I take this opportunity of thanking the people and Government of the Federal Republic of Germany and our hosts of Berlin (West) for the warm hospitality extended to us and for the efficient organization of this meeting of the International Monetary Fund and the World Bank Group. I also take this opportunity of congratulating Managing Director Camdessus and President Conable and their respective staffs for another successful year of operations and their vision for the future directions of the Fund and the Bank.
The statements by fellow Governors and by Mr. Camdessus and Mr. Conable indicate that there is consensus on what we must do to achieve sustained growth of the world economy with equity, to reduce poverty, and to conserve the environment for present and future generations.
Over the past year considerable progress has also been made toward recognition that cooperation at the bilateral and multilateral levels will produce mutually beneficial results. That spirit of cooperation, I believe, underlies the significant contributions by the Fund and the Bank.
I note with appreciation that the coordination of economic policies by the major industrial countries has ensured reasonable exchange rate stability. There has also been a continuation of growth performance among those countries, and that has been a prevalent feature in the last six years. International trade is also expected to grow.
But for some developing countries the growth performance has not been satisfactory. In some of those countries per capita incomes continued to fall again last year.
Apart from the objective of growth with equity, the debt problem is escalating. The solution to this problem, in particular in some developing countries, must be urgently addressed case by case, as the debt burdens in those countries have provided so much of a constraint on their economic growth that government allocation of resources to the needy is not possible.
The role of the Fund and the Bank in ensuring continued economic growth among member countries is of relevance today, as it was when those institutions were created. . . .
Following the political developments in 1987, Fiji is currently undergoing a period of economic and social readjustment. Production of sugar, our main agricultural export, fell from a record 502,000 tons in 1986 to 401,000 tons in 1987. Tourism, our other major foreign revenue earner, likewise, suffered a severe downturn. The overall level of investment declined significantly as business confidence deteriorated. Our foreign reserves came under extreme pressure in mid-1987 and, overall, the Fiji economy declined by 7.8 percent in real terms. This compares with a growth of 8.8 percent in 1986.
Faced with the severe and rapid downturn in our economy, the Fiji authorities did not hesitate to have the necessary adjustment measures put in place. Wages and salaries in most sectors, including government, were reduced; the Fiji dollar was devalued by a total of 33 percent in 1987; and monetary and exchange control policies were tightened. Furthermore, the diversification of the economic base through the establishment of policies designed to promote manufacturing for export and the promotion of other export industries, such as gold, fish and fish products, and timber, and further diversification of the agricultural sector are intended to strengthen Fiji’s trading position in the medium term.
Through these measures, combined with the hard work and support of the people, I am happy to report that the slide in Fiji’s economy has since leveled off. Both the sugar and tourism industries are back on track and improvements are anticipated this year, over 1987, and Fiji’s external reserves have now recovered to a position where it can finance six months of imports.
During the period of adjustment, Fiji has placed great reliance on assistance from the various multilateral organizations, including the Fund and the Bank. The financial and technical assistance that these organizations continue to render to Fiji have been received with our sincere appreciation. A World Bank economic mission to Fiji in July of this year identified areas of the economy that needed to be addressed after consultations with our authorities. We look forward to the final report of this mission and will endeavor to actively pursue the recommendations arising from the report.
As we look into the future, there is no doubt that international cooperation provides the only way toward improvement of the world economy, stability, and peace. The role of the International Monetary Fund in this respect cannot be overemphasized. There has been significant progress in ensuring economic policy coordination among the major industrial countries. I am confident that this will continue further to the extent that such coordination of economic policies also takes into account their impact on developing countries. Economic growth in developing countries can be further improved by enhanced trade access to markets of the developed countries. Trade barriers that limit access must be removed. A further allocation of SDRs should be instigated by the Executive Board of the Fund.
I would support a substantial increase in the Fund’s quota to ensure that the Fund plays the role that Governors expect of it. In the meantime, there are countries that can provide additional resources of the Fund through the special quota increase. I strongly support these special increases. There must be recognition that countries that have continued to show strong growth performance and external account surpluses must be given the opportunity to contribute significantly to the resources of the Fund, and their voting powers should be adjusted accordingly.
The future of the world economy is dependent upon economic and other social measures adopted by various countries. To be effective, political will must be present in no uncertain terms to ensure effective implementation. While there has been significant commitment toward sustained economic growth among the industrial countries, it has also become abundantly clear that policy coordination is an important instrument in this process.
To complement the efforts made by the industrial countries, there must also be strong commitment among developing countries to those relevant policies adopted by them to contribute toward growth and equity, the fight against poverty, and environmental conservation. The multilateral institutions like the Fund and the Bank must be supported to enable them to play the roles they were established to perform in this process through the provision of professional and financial resources.
In conclusion, I would like to wish the Fund and the Bank another successful year.
Statement by the Governor of the Fund and the Bank for the Lao People’s Democratic Republic—Sisavath Sisane
It is a great honor for me to attend these Annual Meetings of the Governors of the International Monetary Fund and the World Bank and to speak on behalf of the Government of the Lao People’s Democratic Republic in this friendly and historic city, Berlin (West). The Lao delegation wishes to thank the city authorities and the federal government for the many arrangements they have made on our behalf and the people of the city for their warm welcome and hospitality.
I should like to begin with a number of general observations on the world economic situation. After that, I shall say a few words about my own country and then close with several comments on the respective roles of the Fund and the Bank.
Despite notable progress over the past few years, the world economic situation remains uncertain. The major industrial nations, the key players in determining the course of the world economy, have experienced sustained but moderate growth, and although they have succeeded in controlling inflation, their governments must keep a close watch on inflationary pressures. Significant external imbalances still exist and are likely to be rectified only slowly. The exchange rate situation continues to cause concern; excessive changes in exchange rates could compromise the growth outlook for the world economy. Such are the conclusions reached by the Group of Seven.
As far as the developing countries are concerned, growth in overall production has slowed, although this general trend conceals a wide variety of situations: relatively steady growth in many countries in East Asia and in Europe, the Middle East, and North Africa; lower growth in gross domestic product (GDP) in South Asia; and declining GDP in sub-Saharan Africa and the heavily indebted middle-income countries. For the most seriously affected developing countries, the story is always the same: heavy external debt, difficulties in meeting debt-service commitments, serious macroeconomic imbalances, great vulnerability in international trade, and rigid markets warped by distortions.
Furthermore, the matter of net resource transfers from the industrial nations to the developing world is cause for concern. The flow of resources to the developing countries must be increased sufficiently to enable them not only to cope with such imperatives as economic growth, environmental protection, structural adjustment, and the struggle against poverty, but also to overcome their debt problems.
If the developing countries are to solve their problems and surmount their difficulties, it is important that the major industrial nations become aware of the international dimensions of their economic, financial, and monetary policies and implement the declarations of the Toronto economic summit.
I should now like to report briefly to the Boards of Governors on the economic and structural adjustment efforts we have undertaken in Laos and on the early results obtained.
Initially focused on improving the management of our public enterprises, our reform movement, now known as the New Economic Management Mechanism, has been extended to the rest of the economy. It consists of economic, financial, and monetary policy measures and structural reform measures designed to foster economic growth through more effective resource utilization, realistic economic and public financial management, and increasing monetization of the economy.
These measures have been introduced gradually since mid-1986. The most important of them are determination of prices by market forces; introduction of a flexible and realistic exchange system; reform of the banking and credit system; deregulation of trade and free circulation of goods; tax reform and rationalization of public finances; granting of financial and administrative autonomy to our public enterprises; recognition of the role of the private sector; and enactment of a liberal and attractive investment code, which we hope will encourage investment in sectors in which the Lao Republic possesses comparative advantages. These economic policy measures go hand in hand with steps we are taking to strengthen our institutions.
Although it is still too early to assess the real impact of these reforms on the economy, we have already begun to see promising results. By comparison with other years, the inflation rate has dropped significantly, our currency exchange rate has been firm, both agricultural and industrial output have increased and diversified, exports have increased, and trade, transportation, and services have expanded considerably.
The measures taken under our New Economic Management Mechanism must be supplemented and further strengthened. In this matter my Government has undertaken a complex and difficult but courageous task, which proves our determination to fight against poverty and do everything possible for the people’s welfare. But to support these economic and structural adjustment efforts we require external multilateral financing, both public and private, as well as technical assistance and training for Lao personnel.
The Lao Republic is classified among the poorest countries in the world. Our need is considerable for financing to develop both economic and social infrastructure and to increase production. This subject leads me to several comments on the role of the Fund and the Bank.
First, I want to compliment the management and staff of both institutions on their achievements over the past year.
Against the background of the uncertain international environment, I believe the Fund has an important role to play in promoting improved growth of the world economy without inflation, untenable external equilibria, or protectionism and in ensuring the stability of the international monetary system. In close collaboration with the Bank, the Fund will have a central role to play in the debt strategy. Though my Government has not yet used the structural adjustment facility, we welcome the Fund’s new concessional lending mechanism—the enhanced structural adjustment facility. We look with favor on any step taken to strengthen the Fund’s ability to act and make the quotas once again the basis of its financing, if this is done for the purpose of assisting the poorest and most indebted countries on concessional terms. . . .
We encourage the Bank to pursue and intensify its efforts to mobilize resources from official bilateral aid agencies and multilateral development institutions and to channel those resources to the poorest countries for the financing of rural development and social infrastructure projects that could not be funded in any other way. We call upon both institutions to reconsider the conditions of access to the Fund’s structural adjustment facilities and to the Bank’s adjustment lending with a view to making them more flexible and more accessible to the poorest countries.
In conclusion, I express my sincere hope for the success of these discussions, and I am firmly convinced that both our institutions will be able to work effectively for the good of all and establish an environment conducive to growth and development.
Statement by the Governor of the Fund and the Bank for Malaysia—Daim Zainuddin
Since we met last year, it is heartening to note that some positive indicators are emerging in the world economic scene pointing to prospects of a better growth performance in major industrial countries and an increase in world trade. But there is no cause for complacency.
There is a need for continued commitment by industrial countries to sustain an adequate momentum of growth, to contain the re-emergence of inflationary pressures, to resist pressures for trade protectionism, and to implement effectively the consensus reached at the recent Toronto summit, particularly in the area of exchange rates, which have caused great uncertainty in the financial outlook of the developing countries.
Developing countries for our part accept the responsibility to enhance efforts to put our economies on a sustainable growth path. These efforts are difficult enough, as they involve not only a complex of policy choices but also delicate social and political issues and must be complemented by a supportive international environment. However, two developments in particular are disquieting: protectionism by industrial countries against exports of developing countries, particularly in the form of nontariff measures, is a dangerously emerging trend; and the much-needed resources, particularly private lending, are also not adequately forthcoming. These developments must be rectified if developing countries are to help themselves.
In all of this, the Fund and the Bank must act as catalysts and provide leadership in promoting sustainable growth, especially in highly indebted developing countries, using to the full their intellectual and financial resources, as well as their experience and commitment. . . .
With regard to the Fund, I believe it should play a greater role in expediting the structural adjustment process in industrial countries. Surveillance by the Fund has been unjustifiably biased toward exerting pressure on developing countries to adjust, simply because of their need for financing. To be more effective and equitable, the industrial countries should now share the responsibility for structural adjustment. The current buoyant world economy provides an excellent opportunity for the industrial countries to remove or reduce those structural rigidities that constrain growth in real output and expansion in world trade. Specifically, the Fund should promote the removal or reduction of rigidities in labor markets and subsidies for agriculture and industries, as well as foster the opening of markets and liberalization of domestic distribution systems.
In addition, the Fund should also ensure that policy coordination among the industrial countries minimizes any adverse impact on developing countries. To cite an example: the Plaza Accord, while promoting a pattern of more realistic exchange rates, has imposed a heavy financial burden on those developing countries with large net external liabilities in yen and deutsche mark. This burden could have been reduced if the adjustment of external imbalances of the largest countries had been undertaken earlier and better supported by fiscal policy, instead of relying primarily on monetary policy. This experience underlines the need for the Fund and the developing countries to cooperate more effectively in the policy coordination exercise on the industrial countries, where policies affect exchange rates, the functioning of the international monetary system, and the debt-servicing capacity of indebted countries.
On the operations of the Fund, we welcome the establishment of the enhanced structural adjustment facility and the compensatory and contingency financing facility, and the revitalization of the extended Fund facility. These facilities should strengthen the effectiveness of the Fund in managing the international monetary system, and in meeting the financing needs of members facing temporary payments difficulties. We believe it is appropriate and timely to double the resources of the Fund under the Ninth General Review of Quotas soon, so as to enhance its lending capacity. In addition, an increase in owned reserves through regular allocations of SDRs would help the international monetary system withstand better any external shock or change in market perceptions of creditworthiness. We regret that no consensus has been reached on SDR allocations.
The developing member countries look to the Fund and the Bank to take the lead and serve as catalysts in generating action for the promotion of sustainable growth. Current efforts by both institutions are commendable, but I feel more can be done. Many of the thoughts regarding additional measures that I and other fellow Governors have expressed at this Annual Meeting are not new; however, this should not minimize their importance or their urgency, and I hope we see progress along these lines in the coming year.
Statement by the Governor of the Fund for Malta—Anthony P. Galdes
It is encouraging to note that the overall performance of the world economy in recent months has been substantially better than was expected after last October’s stock market crash. At the same time, the situation of a large number of developing countries—particularly the low-income countries of sub-Saharan Africa and the highly indebted ones of Latin America—has hardly improved at all, while large imbalances among the major economies continue to pose a threat to sustained recovery. The prospect for the coming year is one of a slowdown in industrial country growth in the face of renewed concerns regarding inflation and rising interest rates—with obvious implications for the rest of the world. Furthermore, despite some positive signs in the international trading environment, including an upturn in world trade growth and higher commodity prices, protectionist pressures continue to increase, giving rise to concern over the sustainability of these favorable trends.
These circumstances underline the timeliness of the establishment of the enhanced structural adjustment facility in the Fund and the approval of the general capital increase for the World Bank last year, as well as that of the decisions taken during the spring meetings to create the external contingency mechanism as part of the Fund’s compensatory and contingency financing facility and to increase access to Fund resources and extend program periods under the extended Fund facility. They also point to the urgency of achieving substantial progress in, and a successful outcome to, the Uruguay Round of multilateral trade negotiations in the General Agreement on Tariffs and Trade (GATT).
While the Managing Director of the Fund and the President of the Bank, together with their staffs, are to be congratulated for their efforts to make their institutions more flexible and more responsive to the evolving needs and circumstances of their member countries, it is essential that both institutions should be provided with adequate resources to meet their obligations. It is significant, for instance, that almost one half of the total resources made available by the Fund over the last 15 years have had to be financed from borrowed funds, which have a higher interest cost and shorter maturities. It is important for the Fund to reduce its reliance on borrowed resources, except in special circumstances. This, however, the Fund can only do if quotas are increased substantially under the Ninth General Review. Indeed, we feel that Fund quotas should at least be doubled, since a smaller increase would mean the Fund would have to continue to use expensive borrowed resources to finance part of its lending. Besides, a doubling of quotas would be consistent with substantial progress toward a return to the quota/world trade ratio obtaining in earlier years.
Another question that needs to be addressed is that of further SDR allocations. For the seventh successive year now, there have been no allocations of SDRs, and some industrial countries remain opposed to these on the grounds that the reserve system as it has evolved was generating adequate global liquidity. Yet, as the Fund’s Managing Director argued last April, the international monetary and financial system was highly vulnerable to the kind of upheaval that shook the stock and exchange markets last autumn. It is therefore important to ensure that adequate liquidity is available, so that prompt and decisive action can be taken should such a dangerous eventuality materialize. Furthermore, the general withdrawal of commercial banks from the heavily indebted countries was threatening these countries’ adjustment efforts with failure, on account of a shortage of reserves at a crucial stage.
Some would argue that existing reserves are adequate for exchange market intervention and that the problems of creditworthiness for particular countries should be addressed through the use of conditional Fund liquidity rather than unconditional SDRs. This view, however, seems to neglect the critical need for contingency planning to reduce the vulnerability of the international financial system and the precarious situation of the indebted countries. We therefore feel the Managing Director’s proposal for a further SDR allocation deserves support.
There are also issues related to the long-term role of the SDR in the international monetary system. These have admittedly been obscured by the development of international capital markets, which, if they continue to evolve as they have recently done, would make it even more difficult to bring about a consensus on long-term global liquidity requirements. Yet there are significant asymmetries associated with the process of liquidity creation as between the reserve centers and other countries and between those countries that have access to capital markets and those that do not have such access. Global stability would seem to require that the scale and pace of liquidity creation and its distribution should not be left wholly to the international capital markets. An urgent and thorough examination of this issue is therefore required with a view to developing appropriate criteria for determining when liquidity can genuinely be considered adequate.
I turn now to something quite different, which is of concern to all developing countries. Over the past few years, with increased willingness on the part of the major industrial countries to cooperate on policymaking, the Fund has striven to improve its supervisory role through strengthened surveillance of these countries’ policies. The Toronto summit rightly welcomed the progress made in refining the use of indicators for this purpose and added commodity prices to the existing indicators. Progress on international cooperation is evidenced by the regular meetings now being held among the Group of Seven finance ministers, with the Fund facilitating this process by helping develop the instruments of coordination. However, the system that has evolved leaves a number of questions about both the analytical and procedural frameworks of the surveillance exercise. A clearer agreement on the analytical framework, including the priority to be attached to the various indicators, would facilitate the process of monitoring and identifying the need for remedial action.
As for the procedure being adopted, the application of peer pressure on countries whose policies were considered to be out of line would appear to be implicit in the present approach. But commitments for action ultimately remain with the individual countries concerned. A further implication is that surveillance of the major industrial countries has effectively shifted to the forums limited to such countries—such as the Group of Seven. While the Fund is represented at these meetings, clearly there is a danger that the discussions will focus on the concerns of the participating industrial countries, with developing country and global concerns finding only a muted expression. The question that arises, therefore, is how to rehabilitate the role of the Executive Board of the Fund, so that it can deal more effectively and directly with the surveillance of industrial country policies, which, in view of their quantitative importance, are of global concern.
Finally, I should like to draw attention to another important function of the Fund—one that, because of other important worries, perhaps attracts less notice than it should. I refer here to the technical assistance that the Fund is able to provide. I would like to take this opportunity to express my appreciation for the technical assistance that the Fund has been extending to my country in recent months. Often, with small countries like Malta, technical expertise that is both unbiased and not motivated by self-interest is scarce and less easy to come by than financial resources. Thus, since Malta joined the Fund in 1968, it has never made demands on its financial resources; on the contrary, it has for many years been in a creditor position with the Fund. But it has called on, and will probably continue to call on, the Fund’s technical know-how to enable us to make the best possible choices within the limits of our scarce resources in order to enhance our economic performance. In this context, I feel I should also commend the technical training provided through the IMF Institute to various government and central bank officials from Malta. As I have said, very often this is the only kind of assistance that small middle-income countries like Malta get from the Fund. But through such assistance they might, hopefully, never have to call on the Fund for financial assistance—or if they do, they should at least be better equipped to deal with their problems.
Statement by the Governor of the Bank for Paraguay—Cesar Romeo Acosta
On behalf of the Government of the Republic of Paraguay, which I have the honor to represent, I am pleased to convey my cordial greetings to the Chairman of the Forty-Third Annual Meetings, to the President and Management of the World Bank and its affiliates, to the Managing Director of the Fund, to the Executive Directors, and to the Governors and delegates of all member countries and the special guests at these joint meetings.
The past financial year, 1987/88, presented a true challenge for international financial administration, in view of the enormous effort required to bring about a revival of the world economy, stabilization of the dollar, and a sustained and progressive increase in gross domestic product (GDP) in the member countries in order to alleviate the dire problem of unemployment and slow the pace of widespread inflation.
However, our growth-oriented programs continue to be seriously threatened by inadequate funding, and the debt problems of the developing countries cannot be resolved in the current situation of negative net financial flows.
These are times of great change and uncertainty for developing and developed countries alike. Hence, by coordinating their corrective measures and application of macroeconomic indicators, the industrial countries can enable the various member countries to reanimate their economies. The persistence of high real interest rates, protectionist policies in the industrial countries, and the continuing deterioration in the terms of trade for primary commodities are therefore matters for concern. . . .
The increase in the access limit to the Fund’s compensatory financing facility from 83 percent to 105 percent will help temper the fluctuations in export commodity prices, contributing very significantly to the efforts of certain countries to protect themselves from falling prices on world markets.
With respect to the SDR, further allocations are needed to improve the international reserves situation and thereby enable countries with large balance of payments deficits to plan their structural adjustments more effectively.
Major Features of and Outlook for the Paraguayan Economy
Following more than a decade of extraordinary growth, the Paraguayan economy cooled in 1982 and 1983, with negative growth rates that were partly offset by a slight recovery in the next two years. Major causes of the slowdown were difficulties stemming from external disequilibria and deteriorating terms of trade, aggravated by adverse weather.
Happily, however, the economy recovered in 1987, when it grew by 4.3 percent following zero growth in 1986. The estimates for 1988 are also encouraging; with agricultural production expected to jump 17.6 percent, the anticipated growth rate for the economy as a whole is 5.9 percent.
The current situation and the outlook for the years ahead require us to devote all available resources to enhancing our development capacity, waging an unremitting battle against the problems stemming from the recessionary trends of the recent past. As part of this policy, and with the object of steering the economy toward the goals of enhanced stability and growth, the Paraguayan Government is instituting a policy of austerity in public administration, accompanied by continuous review and improvement of fiscal policy, particularly with respect to the amount and composition of public expenditure and to increasing income.
The problems of the external sector, in particular, aggravated by the contraction of the economy in the early 1980s, have required that Paraguay reorient its policy mechanisms toward stabilization of the economy in order to promote economic development and improvement of the living standard of the Paraguayan people. As part of that effort, a nonrecessionary adjustment program is currently being implemented that embodies a series of measures that are being applied in stages in recognition of the fact that any crash measures would seriously affect large segments of the population. These measures reflect a strong political commitment and, at the same time, substantial progress in updating the Government’s economic policy.
Turning to central government finances, in 1987 current revenue rose by 41.4 percent over its 1986 level. Tax receipts, supplemented by loan resources, were sufficient to finance normal execution of the programs contained in the general budget. Of total expenditure, 97 percent was financed out of current revenue.
A very important development is that, thanks to good revenue performance, investment doubled in 1987 from its low 1986 level. In 1988, central government revenue during the January-August period was 17 percent above the budget estimates. As a result, the expenditure programs are being amply implemented, particularly infrastructure expansion and socioeconomic development investments. The Paraguayan Government is devoting considerable effort to strengthening and simplifying the tax system and will pursue the task of updating legislation in order to improve the tax structure.
In the financial sphere, the Government’s objective is to strengthen the national financial system through the mobilization of domestic savings. This would consolidate the foundations of our financial system and allow the saving/investment process to go ahead without interruption. Since the interest rate is the key variable in this process, the Government has adjusted the range of rates in Paraguay so as to promote domestic saving on the one hand and, on the other, augment the banks’ financial capacity so that they can adequately meet the credit demand of the various sectors of the economy.
Since 1982, the Paraguayan exchange market has undergone substantial changes. A shrinkage of the supply of foreign exchange on the market led to a rise in the free exchange rate. A system of sliding valuations was therefore introduced as an export incentive. This has produced an exchange average dependent on trade conditions and domestic production costs; in addition, there has been a gradual adjustment of the exchange rates applicable to exports, imports, and external capital flows. At present, a great many transactions take place on the floating free market.
Despite the significant achievements in the economic sphere, many obstacles remain to be overcome. One is the persistent external deficit, which has been accumulating for several years now. In this regard, despite our efforts to broaden our production base to permit greater diversification of our export products, we must reiterate our concern on seeing that despite repeated condemnations of protectionism, far from disappearing it seems only to have become more widespread, aggravating the difficulties of access to the large buyer markets.
The external debt problem continues to be a cause for concern. Very revealing information on this score is to be found in the document submitted by the Economic Commission for Latin America and the Caribbean at its twenty-second Conference in Rio de Janeiro, to the effect that over the period 1960-80, Latin America and the Caribbean together received external resources equivalent to 2 percent of their gross domestic product and that this situation was completely reversed over the period 1982-87, when the region became a net exporter of capital equivalent to 4 percent of its gross domestic product—a fact that in recent years has substantially affected the economic performance of most of the countries of the region.
For Paraguay itself, which is still in the development process, the alternative that presents itself is clear: to continue for some time as a net importer of the capital needed to supplement its domestic savings and achieve growth rates allowing balanced and sustained development. Should the adjustment measures have to be financed exclusively out of domestic resources, there would be a latent danger of reducing the growth rate, lowering living standards, and ushering in declining levels of economic activity.
Paraguay has administered its foreign exchange reserves prudently and is intently seeking new mechanisms that will enable it to make its payments obligations abroad despite the unfavorable external market conditions. Recently, disbursements of loan proceeds to Paraguay by the multinational institutions have been hampered more and more by increasingly exigent application of contractual clauses governing exchange rates. So far, the external resources obtained by Paraguay have been used to lay a firm, stable financial foundation for development by improving the production structure, per capita income, agro-industrial expansion, and export opportunities.
Paraguay is a country open to foreign investment, and as such is constantly exploring policy options through which to introduce new tax incentives to domestic and foreign sector private investment. Preliminary studies on the draft Law on Export Promotion and Financing have been completed, as has amendment of Law No. 550 (Promotion of Economic and Social Development Investment). All these mechanisms aim at greater deregulation and flexibility, the hope being that in the short term they will succeed in attracting an increased flow of capital for channeling into productive and financial activities.
The lack of close cooperation between industrial and nonindustrial countries sets up adverse forces that thwart the intensive development strategies of countries like Paraguay. However, despite its classification as a less-developed country and its lack of access to the sea, Paraguay is very purposefully engaged in works that will have a profound and permanent impact on economic and social development throughout the national territory.
On the domestic scene, by virtue of concerted action by the population and the Government in a setting of full representative democracy and social peace, the essential conditions have been created for political stability, peace, and security, making it possible to push forward with economic and social development programs of unprecedented importance for the future of the nation.
Despite the adverse circumstances enumerated above, we have not relaxed our efforts to improve the quality of life, levels of education and culture, and public health indicators. With regard to agricultural, livestock, and industrial development, we are continuing to create the basic infrastructure essential for progress in these areas. For instance, in the north of the country, on the Paraguay River, the 1,307-meter Concepción-Puerto Militar Bridge is nearing completion. In the western region, work is continuing on construction of the Trans-Chaco road and a number of other roads in the region. In the eastern part of the country, when turbines Nos. 12 and 13 (700,000 kilowatts each) are commissioned next December, Itaipu Dam, the largest hydropower plant in the world, built jointly with the Government of Brazil, will be capable of generating 9.1 million kilowatt-hours. Finally, in the south, the Yacyreta Dam, which is being built in conjunction with the Government of Argentina, is nearing 40 percent completion. Under the same joint arrangement, the 2,600-meter international bridge over the Paraná River, which links the cities of Encarnación in Paraguay and Posadas in Argentina, is in the final stages; this is another project highly important to regional integration and development. With electric power now abundantly available, 289 towns, large and small, have electricity service; in addition to which power is now exported to neighboring countries.
We are convinced that the technical, policy, and coordination efforts the International Monetary Fund and the World Bank Group are making, as described in the Annual Reports and financial statements, which we approve with satisfaction, reflect real challenges that must be met in order to encourage recovery capable of mitigating the serious difficulties faced by the peripheral countries in increasing their output and income, exports, and employment levels, in reducing inflationary pressures, and in achieving balance of payments equilibrium and self-sustaining development. For the enormous effort they have made in those three fields, we wish to congratulate the managements of both institutions, and especially Mr. Barber Conable, the President of the Bank, and Mr. Michel Camdessus, the Managing Director of the Fund, whom we urge to continue fighting for the good of all our countries.
Just prior to these Annual Meetings, the media put out an announcement to the effect that “1988 is a good year for the rich countries but a bad one for the poor.” Paraguay nevertheless continues to be optimistic that a new economic order that is equitable, dynamic, and self-sustaining, combined with unity of will and determined international cooperation, will in the coming years bring economic prosperity to all, without exception.
In conclusion, we should like once again to acknowledge the gracious hospitality extended to us by the Federal Republic of Germany, our host country. We also wish the management of the Fund and the Bank every success in their future endeavors.
September 29, 1988.