Not on the agenda of the meetings, but much discussed on the sidelines, was financial help for Iraq. On September 29, the IMF approved $436.3 million in emergency postconflict assistance as a sign of support for reconstruction efforts through 2005 and to help catalyze additional international aid, including debt relief. The IMF loan was made possible by Iraq’s having settled its $81 million in arrears to the IMF a week earlier. In addition, the bulk of Iraq’s official bilateral creditors have reaffirmed their recognition of the IMF’s preferred creditor status and indicated their willingness not only to make their best efforts to provide timely debt relief but also to defer Iraq’s obligations falling due to them during the period of the program supported by the emergency postconflict assistance, which goes through 2005. Debt relief negotiations are expected to start soon under the aegis of the Paris Club. Several of Iraq’s non–Paris Club creditors have indicated that they will follow the lead of the Paris Club regarding debt relief for Iraq.
For the economic policymakers, the top agenda item was sustaining the global economic recovery. IMF Managing Director Rodrigo de Rato—attending the Annual Meetings for the first time as IMF chief—told delegates that over the past year, the recovery has become increasingly well established, with global GDP growth in 2004, at 5 percent, expected to be the highest in nearly three decades (see page 280). The IMF is forecasting that global growth will moderate to 4.3 percent next year, partly reflecting the effects of higher oil prices (see World Economic Outlook, page 295). He also noted that financial markets have generally responded well to the start of the transition to higher interest rates. “In short, the world economy has mounted a vigorous recovery from the slowdown of 2001,” he said, adding that “this is a remarkable performance in the face of the shocks experienced in the past few years.”
Even so, de Rato cautioned, this is no time for complacency, with the risks to the forecast on the downside. To sustain recovery, policymakers need to monitor carefully the near-term effects of higher oil prices on their economies, ensure an orderly transition to higher interest rates, and tackle current account imbalances. On the last point, he urged the United States to reduce more energetically its hefty fiscal deficit, Europe to implement structural reforms, Japan to strengthen its financial and corporate sectors, and emerging market countries in Asia to adopt greater exchange rate flexibility.
Looking further ahead, de Rato counseled delegates to use this time of cyclical recovery to address structural challenges to continued global growth—including high public debt-to-GDP ratios and the imbalance between energy supplies and demand. He encouraged oil-producing countries in the Middle East—and in Africa, Latin America, and the Commonwealth of Independent States—to save current windfall revenues for bad times and be more transparent about the use of revenues from natural resource sectors. And he urged a greater political commitment to a successful conclusion of the Doha Round trade talks.
These remarks came on the heels of a call by the Group of Seven (G-7) finance ministers and central bank governors on October 1 for oil producers to provide adequate supplies to ensure that prices moderate, for consumer nations to boost efficiency, and for the International Energy Agency to improve oil data transparency. They also underscored the need for major countries or economic areas to pursue greater exchange flexibility “to promote smooth and widespread adjustments in the international financial system, based on market mechanisms” (see statement on page 289). For the first time, the G-7 ministers and central bank governors met informally with China’s finance minister and central bank governor and exchanged views on, among other things, the economic impact of oil prices, macroeconomic policies in the G-7 countries, the Asian economic outlook, and exchange rate flexibility. There were further calls at the weekend’s meetings, including from Managing Director de Rato and U.S. Treasury Secretary John Snow, for China to move toward greater flexibility for the exchange rate for the yuan—pegged at about 8.3 per dollar since 1995.
The Group of 24 developing countries, also meeting on October 1, expressed concern that “the growing U.S. external imbalance and the diversion of a substantial portion of world savings from developing countries to the largest and highly capitalized economy constitute a misallocation of resources and pose a serious short- and medium-term challenge for the international economy” (see communiqué on page 291). They called for a cooperative multilateral approach, specifically asking the IMF to undertake a more proactive role in this area and to enhance the effectiveness of its surveillance of major economies. In addition, they cautioned that “in the absence of appropriate crisis prevention mechanisms, developing countries must rely on excessive reserve accumulation as a form of insurance against crises.”
Debt relief extended under HIPC Initiative
The World Bank and IMF Executive Boards agreed in September to continue providing debt relief under the Initiative for Heavily Indebted Poor Countries (HIPCs) by extending the Initiative’s “sunset clause” for another two years to end-2006.
The HIPC Initiative, established in 1996, includes a sunset clause to avoid the adverse incentives of a permanent facility, minimize moral hazard, and encourage early adoption of reform programs. The Initiative is currently set to expire December 31, 2004. Members of the IMFC have recognized, however, that the end-2004 expiry of the clause—which has already been extended three times—would leave several eligible countries with unsustainable debt. This further extension is intended to give these countries more time to put in place the reform programs needed to establish their eligibility for debt relief under the HIPC Initiative. It also effectively closes the list of potential HIPCs by ring-fencing eligible countries, using income and indebtedness criteria based on end-2004 data.
The decision to extend the sunset clause was endorsed by the World Bank and the IMF Boards following a review of the most recent progress report on the HIPC Initiative.
Greater debt relief
A second key issue at the meetings was the need for greater debt relief for the poorest countries, most of which are in sub-Saharan Africa. In the end, the meetings led to agreement on the need to step up debt relief efforts, but not on how to do so—other than extending for two years the period in which qualifying countries can seek debt relief under the Heavily Indebted Poor Countries Initiative (see box, page 278). The International Monetary and Financial Committee (IMFC) communiqué simply stated that “it looks forward to further consideration of outstanding issues in the proposed framework for debt sustainability, before it is made fully operational, and of further debt relief, including its financing.”
Nonetheless, Gordon Brown, U.K. Chancellor of the Exchequer and Chair of the IMFC—the IMF’s ministerial steering committee—told reporters that he was encouraged because there was a growing consensus that multilateral debt relief had to be dealt with as soon as possible, and the G-7 had committed itself to preparing a progress report on debt relief and grant financing by the end of the year (see IMFC press conference, page 285).
In recent weeks, the United Kingdom—which will hold the presidency of the G-7 in 2005 and of the European Union in the second half of the year—has called for a revaluation or off-market sale of IMF gold to fund the IMF’s share of further multilateral debt relief and for additional donor resources to fund relief on debt owed by low-income countries to the World Bank and African Development Bank. In 1999, $2.6 billion of cash for debt relief was realized through off-market gold transactions. Under Brown’s proposal, which he referred to as an attempt to “lead by example,” the United Kingdom has pledged to pay its share (10 percent) of the debt service owed by the world’s poorest countries to the World Bank and the African Development Bank. The United States, meanwhile, has also called for up to 100 percent relief of low-income countries’ debts to the multilateral institutions, financed by the resources supporting the current lending facilities rather than new money.
On the broader issue of aid flows to developing countries, the joint IMF–World Bank Development Committee stressed the need for improved aid effectiveness, increased aid and other financial flows, and coherent policies to achieve development results (see communiqué on page 287). At stake is whether the global community can achieve the UN Millennium Development Goals—which include dramatic cuts in income poverty and achieving universal primary education, better health care, and lower child mortality—by 2015. Brown told reporters that at the current rate of progress, some of these goals would not be met for 150 years.
World Bank President James Wolfensohn chided world leaders for failing to make good on their commitments to the poor and for holding regular meetings that yielded little more than praise and blame. He told delegates that in today’s world, every one of us is not only a national citizen but also a global citizen, adding that “without greater visible engagement by global leadership, we will not make the breakthroughs we need to ensure real security and peace.”
A stronger voice
The top financial officials did not make any decisions about giving emerging market and developing countries a stronger voice in the governance of the two institutions, but the issue continued to percolate throughout the weekend. Reflecting mounting frustration with the pace of reform of governance in the Bretton Woods institutions, the Group of 24 ministers stated that “the current underrepresentation of developing countries in the decision-making processes undermines the credibility and legitimacy of the Bretton Woods institutions, and puts their relevance into question.”
Development Committee chair Trevor Manuel, South Africa’s minister of finance, told reporters that “we recognize that this matter has still not been resolved, and we are mindful of the fact that it’s a political decision. But you can look at the numbers from any angle, and you come back to the fact that what we have isn’t equitable.” De Rato told delegates that “we must continue to find ways to guarantee that the voices of all our member governments are heard,” and he stressed that many members wanted deeper progress on issues of voice and participation that would reflect the evolution of the world economy. “But changes in quota and voting shares,” he noted, “will require a political consensus among our members that is not yet evident.”