My report contains a comprehensive survey of the progress in strengthening the international financial system. I would like to suggest some priorities for the period ahead. Some can be implemented by the Board, some by national authorities, and some by the broader international community.
Substantial progress has been made in containing and resolving the crises that unfolded over the past two years; also, the international community, acting in a variety of forums, has forged a consensus on the important lessons from this experience. On a number of issues, those lessons have led to action:
In the areas of transparency, standards, and IMF surveillance, much has already been accomplished. The Special Data Dissemination Standard (SDDS) has been strengthened, the Code of Good Practices on Fiscal Transparency has been adopted, and other codes and standards substantially agreed, while information about the IMF and countries’ policies has been greatly expanded.
On financial sector strengthening, the process of IMF-Bank collaboration has been enhanced, the Basle Core Principles are being used actively to assess banking systems, and numerous recommendations for better supervision have been made.
On private sector involvement in forestalling and resolving crises, much experience has been gained in effectively involving the private sector in a number of country cases and in better identifying the sources of risk in country exposure and the key aspects of preventive and ex ante measures to be followed up. IMF surveillance is being strengthened in these areas both globally and in the context of individual country activities.
On other issues, general conclusions have been drawn but remain to be translated into specific reforms. It also remains to ensure that a problem we were wrestling with before this crisis—namely, the successful integration of a larger number of developing countries into the global financial system—be pursued with vigor. This will require successful application of the lessons from the crisis as well as action to improve the policy performance of these countries and to remove, where needed, the overhang of debt that impedes better integration and inhibits growth.
In determining the priorities for follow-up action, I suggest that we have in mind
the need to involve the private sector more effectively and more imaginatively in efforts to forestall and resolve financial crises and in initiatives to increase transparency and promulgate the use of internationally accepted standards;
the need to maintain the momentum of initiatives in the areas of standard setting and monitoring, including the role of IMF surveillance in fostering this process;
the opportunities presented by new arrangements in international cooperation—including the Financial Stability Forum—to catalyze proposals that have been endorsed, but not acted upon, and to better define and deal with the gaps remaining in the system;
the need to consider further some of the systemic implications of the recent crises, such as the appropriate exchange rate arrangements;
the imperative of correcting unstable and unsustainable debt structures of the poorer countries, including through further strengthening the HIPC [Heavily Indebted Poor Countries] Initiative and funding the ESAF [Enhanced Structural Adjustment Facility];
the need to adapt the global institutions to the new challenges posed by globalization. This includes the need to revisit the governing structure of the IMF to ensure a comprehensive approach to the problems we face and strong support and a closer involvement of national authorities.
I would propose that attention during the upcoming meetings and over the months ahead be concentrated on the following actions.
Transparency, standards, and IMF surveillance
National authorities should indicate their willingness to participate in the pilot program for release of Article IV staff reports.
Countries should move toward observing the voluntary standards developed in the IMF’s core areas: existing subscribers need to adhere to the initial SDDS as soon as possible and to implement the strengthened standard on reserves; and countries should implement the Code of Good Practices on Fiscal Transparency, and, once finalized, adopt the code ofgood practices on transparency in monetary and financial policies.
The Executive Board should consider, in the context of further pilot studies, whether the IMF should produce transparency reports and, in that context, address the optimum combination of self-assessment and IMF assessment; the monitoring of standards beyond the IMF’s core areas; and the ways in which to bring other standard-setting bodies or other institutions, including the World Bank, into the process.
National authorities and international institutions should encourage the development, adoption, and implementation of relevant internationally recognized standards applied at the level of the private sector (for example, standards on accounting, auditing, and corporate governance) as well as the promotion and implementation of others, including core labor standards.
Strengthening financial systems
The IMF and the Bank should press ahead with joint financial sector assessments.
National authorities should intensify their assessments of financial systems, helped by the IMF and others, and align national practices with international principles, including with the Basle Core Principles.
Examine, in the appropriate forums, possible sources of vulnerability that might arise from the insurance sector and from the activities of offshore centers, as well as highly leveraged institutions.
Develop proposals for the disclosure of private sector information, building on the output of various working groups based in Basle.
Capital account issues
The membership needs to adopt the appropriate amendment of the Articles of the IMF to promote liberalization of capital movements.
Differences of view remain on the use and effectiveness of capital controls in different circumstances. In light of the Interim Committee’s discussion, the Executive Board should move to draw conclusions, based on further country cases, on the use and effectiveness of specific controls and on the best way for the IMF to assist countries in their efforts to liberalize capital movements, as well as on the possible gradual acceptance of liberalization obligations.
Involving the private sector in forestalling and resolving crises
Introduce new clauses in international bond contracts. While there is a general consensus on their desirability, what is needed now is that workable models be adopted by the relevant international bodies and by national authorities and be implemented.
Revise the Basle capital standards by reducing the bias toward short-term interbank lending.
Intensify national authorities’ efforts at crisis prevention, including through maintaining an appropriate debt structure. Establish or strengthen high-frequency monitoring systems and intensify surveillance over debt structures and financial derivatives, with IMF assistance.
Explore possibilities for private contingent credit lines or other instruments to provide additional liquidity or reduce debt-service burdens in periods of severe payments difficulties.
Explore possibilities for establishing effective communication between private capital markets and the international financial institutions, as well as between borrowing countries and creditors.
Explore further the processes that could assist with orderly workouts, including a possible role of Article VIII Section 2(b).
The Executive Board should continue to examine the implications of recent crises for the appropriate exchange rate regimes for both industrial and developing countries.
The Executive Board should finalize the modalities of an IMF-financed contingent credit line.
We all need to work to secure full financing for the ESAF and the IMF’s participation in the HIPC Initiative.