Meeting on April 27 in an atmosphere of recovering market confidence, the finance ministers and central bank governors of the Interim Committee noted that even though the risks of a global recession had been reduced, the outlook was for continued sluggish world growth in 1999, with a modest recovery in 2000. To address the downside risks to growth and other policy challenges, the Committee called for priority to be given to macroeconomic and structural measures to restore growth in the crisis-afflicted emerging market economies, policies of financial restructuring and domestic-demand-led growth in Japan, and actions to support domestic demand in Europe (see text of communiqué, page 138).
The Committee welcomed the actions that the IMF had taken to strengthen the international financial architecture; endorsed the IMF Executive Board’s establishment of Contingent Credit Lines (CCL) (see page 133); and welcomed the progress made in the area of internationally recognized standards and greater transparency. It called for a new impetus to reduce the debts of low-income countries undertaking strong adjustment measures.
The Committee also supported the measures being taken to enhance IMF assistance to postconflict countries and endorsed the need for a rapid and substantial international response to the economic consequences of the Kosovo crisis.
During the two-week period leading up to the Interim Committee meeting, the IMF made public an unprecedented volume of documents and other information. In most cases, these releases were supported by comprehensive press briefings. Materials released included the staff paper on involving the private sector in forestalling and resolving financial crises (IMF Survey, April 26, page 113); the progress report by the Managing Director and the President of the World Bank on the HIPC [Heavily Indebted Poor Country] Initiative; material on the CCL (see page 145); perspectives on the current framework and options for change; three experimental case studies on transparency practices (see page 145); the Managing Director’s statement to the board on progress in strengthening the architecture of the international financial system (see page 143); and the preliminary assessment by the staffs of the IMF and the World Bank of the economic consequences of the Kosovo crisis (see page 129). All these papers and the transcripts of associated press briefings are available on the IMF’s website (www.imf.org).
World Economic Outlook
Speaking at a joint press conference with the Managing Director on April 27 following the release of the Committee’s communiqué, Committee Chairman Carlo Azeglio Ciampi, the Italian Treasury Minister, noted that since the last meeting of the Committee in October 1998, the risks of a global recession had declined. He added that policy actions undertaken by both emerging and industrial countries had helped to improve market confidence (see text of joint press conference, page 134).
In its review of the World Economic Outlook, the Interim Committee noted the positive signs of a turn toward recovery in the Asian crisis countries; the stabilization of the situation in Brazil, coupled with the fact that spillovers to financial markets elsewhere in the region had been moderate; continued strong growth in the United States and Canada; and improved investor sentiment toward many emerging market economies. Nonetheless, the Committee was of the view that there were still some downside risks. Short-term prospects in Japan remain uncertain, while growth in Europe has fallen below potential. In Russia, despite some recovery, fiscal and debt imbalances remain unsustainable, the Committee said, and vigorous action is needed to tackle the root causes of the crisis in that country.
The Committee endorsed the broad strategy of the international community in dealing with the Asian financial crisis. It found, however, that serious challenges remain ahead and urged the affected countries to persevere with reforms and to lay the basis for sustainable and high-quality growth to resume.
Regarding exchange rate regimes, the Committee noted that desirable arrangements may vary across countries and that any regime must be supported by disciplined policies and robust financial systems. It observed that recent crises have demonstrated that the requirements of maintaining a pegged rate are demanding, particularly in an environment of increased capital mobility. At the same time, it noted that a number of economies with fixed-rate arrangements, including under currency boards, had successfully maintained exchange rate parities. It asked the IMF Executive Board to consider this issue further, including in the context of large-scale official financing.
International financial architecture
Ciampi said the Committee welcomed the establishment of the CCL as “an important defense against financial contagion” that would “provide strong incentives for the adoption of stronger policies and the constructive development of the private sector.” He added, “We regard this facility as a key component of our crisis-prevention strategy.”
The Committee endorsed the IMF’s work on measures to facilitate the avoidance or orderly resolution of crises. These include such steps as adhering to sound principles of debt management, establishing systems for monitoring private external liabilities, maintaining effective communication with private markets, maintaining adequate foreign exchange liquidity, and supporting proposals that seek to eliminate the current regulatory bias in favor of short-term interbank credit lines.
In welcoming the IMF’s progress in developing, disseminating, and monitoring the implementation of internationally recognized standards, the Committee endorsed
the strengthening of the Special Data Dissemination Standard (SDDS), notably by adopting a template for data on international reserves and related liabilities;
the completion of the manual on fiscal transparency;
the progress in developing a draft code of good practices on transparency in monetary and financial policies, on which the Committee encouraged the Executive Board to complete its work by the time of the 1999 Annual Meetings; and
the progress made by bodies other than the IMF in developing other relevant standards in such areas as accounting, banking supervision, bankruptcy, and corporate governance.
The Committee also underscored the importance of increased transparency in IMF operations and welcomed the progress that had been made, including
the greater use of Public Information Notices (PINs) for IMF policy discussions;
a presumption toward release of Letters of Intent/Memoranda of Economic and Financial Policies and Policy Framework Papers underpinning IMF-supported programs;
the issuance of a Chairman’s statement of the key points of the Board discussion after it has approved or reviewed members’ arrangements;
liberalized access to the IMF’s archives; and
a pilot project for the voluntary release of Article IV reports.
HIPC Initiative and ESAF
The Committee encouraged the Executive Board to develop proposals to strengthen the current framework for debt relief to strengthen incentives for strong programs of adjustment, reform, and good governance. This relief, it noted, “should provide a clear exit from unsustainable debt burdens” and ensure an appropriate burden sharing among creditors.
In light of the increased costs of the proposed modifications to the HIPC Initiative and the financing needs of the interim Enhanced Structural Adjustment Facility (ESAF), the Committee stressed the need “to redouble efforts to secure the full financing of these initiatives.” It urged the Board to adopt as soon as possible the decisions needed to ensure that the initiatives are fully funded.
Responding to a question at the joint press conference, the Managing Director said that “this will certainly entail some sales of [IMF] gold.” He added that the decision to proceed with sales would be taken soon and that, once it had been taken, the IMF would “proceed in an orderly and prudent way; it is certainly not our intention to proceed in a way that could introduce disorderly developments in the gold market”.
In addition to supporting the Board’s measures to enhance IMF assistance to postconflict countries in general, the Committee endorsed the need for a rapid, substantial, and coordinated response to the economic consequences of the Kosovo crisis. “Such a response,” it said, “is urgently needed to ensure that sufficient aid is provided to alleviate the suffering of the refugees from Kosovo and to ensure that countries in the vicinity of the crisis can have access to external financing to support their efforts toward macro-economic stability and structural reform.”.
As a first step in such a coordinated response to the crisis, IMF Managing Director Camdessus and World Bank President James Wolfensohn chaired a meeting, convened by their two institutions on April 27, of representatives of 7 international agencies and 33 countries. The purpose of the meeting was to review the short-term response to the needs of the six most affected countries; exchange views on a medium- to long-term approach for economic reconstruction and recovery; and formulate the next steps to coordinate the international community’s response to the economic and social impact of the crisis (see text of press release, page 129).
The meeting of the Interim Committee was followed, on April 28, by that of the joint IMF-World Bank Development Committee, under the chairmanship of Tarrin Nimmanahaeminda, Finance Minister of Thailand. In its communiqué (see page 149), the Committee expressed strong support for the HIPC Initiative and endorsed options designed to enable debt relief under the initiative to be broader, deeper, and faster. Committee members reiterated the importance of ensuring a clear link between debt relief and the goals of sustainable development and poverty reduction and stressed that HIPC programs should fully reflect social concerns by protecting social expenditures.
Group of Seven
The representatives of the major industrial countries, meeting on April 26 as the Group of Seven, emphasized in the communiqué issued following their meeting their commitment “to a growth strategy based on strengthening domestic demand that contributes to achieving more balanced growth among our countries to reduce external imbalances and to continue to support recovery in emerging market economies”(see text of communiqué, page 146). They reaffirmed their determination to pursue policies to promote sound economic fundamentals and more balanced growth to “help avoid excess volatility and significant misalignments of exchange rates of major economies.”.
Group of 24
The ministers of the Intergovernmental Group of 24 on International Monetary Affairs, representing the developing countries, also met on April 26 and called for additional policy actions to be taken to deal effectively with adverse trends in the world economy (see text of communiqué, page 152). On the HIPC Initiative, the Group of 24 supported proposals to extend debt relief under the initiative and to relax eligibility criteria. They noted that selling a portion of the IMF’s gold holdings would provide only a small portion of the required resources and advocated appropriate burden sharing and alternative financing mechanisms to provide additional relief.
Policy actions undertaken by both emerging and industrial countries had helped to improve market confidence.