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Palermo meeting: Group of Seven financial leaders assess growth prospects in light of slowdown in U.S. economy

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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Against a background of a slowing U.S. economy and continuing weakness in the Japanese economy, the finance ministers and central bank governors of the Group of Seven industrial countries met in Palermo, Italy, on February 17 to discuss recent developments in the world economy. IMF Managing Director Horst Köhler, European Central Bank President Willem F. Duisenberg, and Eurogroup President Romano Prodi of Italy also participated in the discussions. In addition to the global implications of the slowdown in the United States, financial leaders discussed progress made toward strengthening the international financial architecture, implementing the Heavily Indebted Poor Countries (HIPC) Initiative, and finding ways of proceeding beyond debt relief. The ministers and governors also met with the finance minister and central bank governor of Russia and with representatives of the European Commission to discuss recent economic developments in Russia. Below are edited excerpts of the statement issued at the end of the meeting. (The full text is available on the University of Toronto’s G-7 website at (www.g7.utoronto.ca/.)

Developments in the world economy

Although global growth this year is likely to be somewhat slower than we expected when we last met, the basic factors that have supported sustained growth in many of the major industrial economies remain in place.

We agreed on the need for both macroeconomic and structural policies in all our countries to support growth. In this context, lower energy prices and stable oil markets are important.

We reemphasized our commitment to foster conditions for sustainable growth worldwide. We stressed the importance of continued cooperation among the Group of Seven countries. More specifically:

• In the United States, economic growth has slowed, though economic fundamentals remain strong. Monetary and fiscal policies should aim at supporting sustained growth, while reserving budgetary restraint and price stability and increasing national saving over the medium term.

• In the United Kingdom and Canada, growth remains healthy and unemployment is low, with some signs of a temporary slowing in economic growth. Policies should continue to sustain growth and employment over the medium term, while meeting inflation targets.

• In the euro area, growth prospects remain favorable, thanks to strong domestic demand. Policies should be directed at enhancing growth potential, through continued coordinated reform efforts aimed at increasing product and labor market efficiency. Tax reforms are being implemented while fiscal consolidation is pursued. In view of Europe’s aging population, budgets and social security systems need to be further strengthened.

• In Japan, while a modest recovery is expected, prices continue to decline and downside risks remain. In this context, monetary policy should continue to ensure that liquidity is provided on ample terms. Efforts to strengthen the financial sector should be enhanced.

Emerging market economies

After two years of strong recovery, the outlook for emerging market economies has become more mixed. We welcome the substantial progress achieved in emerging Asia to reduce vulnerabilities, including the improvement of the external debt structure in the crisis-affected countries and the adoption of more sustainable exchange rate regimes. To secure future growth, it is important to pursue necessary reforms of the financial and corporate sectors. In Latin America, sound macroeconomic and structural policies are needed to help reduce vulnerabilities. In all emerging market economies, we stress the importance of further intensifying efforts to implement internationally agreed standards and codes. The pace of reforms should not be relaxed.

Russia

We welcome the recent improvements in the macro-economic and balance of payments situation of the Russian economy. We strongly urge the Russian authorities to step up the process of economic reforms and meet in full their financial obligations in order to restore promptly normal relations with the international financial community. While some elements of the comprehensive tax reform package have been adopted, critical challenges remain, such as enforcing the rule of law, attacking nonpayments and barter, strengthening the banking system, improving corporate governance, and fighting money laundering. On the latter, we urge the Russian authorities to move quickly to remedy the deficiencies identified by the FATF [Financial Action Task Force on Money Laundering] in June 2000. We call upon the Russian authorities, as they address the difficult and complex process of economic transition, to implement a credible program of reform and create the essential market institutions and infrastructure for sound growth. In this context, we encourage the Russian authorities to continue to work with the IMF and the World Bank.

HIPC and development beyond debt relief

We noted with satisfaction that the implementation of the enhanced HIPC Initiative has already enabled 22 countries to reach the decision point. These countries are now receiving significant debt relief. We are committed to helping them implement their poverty reduction strategies and thereby reach their completion points.

This will lead to $34 billion of debt relief under the initiative, reducing the debt of these countries on average by two-thirds. Most eligible countries that have not yet reached the decision point are currently in, or just emerging from, conflict. We call on these countries to reach a peaceful resolution of their problems, and we intend to help them in their reconstruction efforts.

We urge all creditors to participate fully in providing on a timely basis their share of debt reduction under the enhanced HIPC Initiative. The Group of Seven governments have gone beyond the HIPC targets and agreed to commit to provide 100 percent debt reduction on official development assistance and eligible commercial credits for countries qualifying for HIPC debt reduction. We urge other bilateral creditors to take similar action.

We consider that debt reduction is only one element of a broader, more ambitious strategy for poverty reduction, based on three pillars. First, action is needed to launch a new multilateral trade round and to open further markets to exports from the poorest countries. Second, a more favorable environment for attracting private investment needs to be created in the poorest countries. Third, within country-owned poverty reduction strategies, resources need to be channeled, in a more efficient and coordinated way, to the social sector, as we work toward the objectives contained in the 2015 International Development Goals.

Strengthening financial architecture

We noted the progress made to reinforce the international financial system. We look forward to further progress on prioritization of IMF conditionality, implementation of the internationally agreed codes and standards, crisis prevention, private sector involvement, and financial liberalization. We note the need for further discussion on quotas at the IMF Board.

We also discussed the main features of the reform of the multilateral development banks. These institutions have made considerable progress on internal and policy reforms in recent years, but more can be done to focus their action on poverty reduction. Key principles of the reform are using greater selectivity in setting priorities, focusing on the needs of the poorest, fostering effective and transparent internal governance, and improving development impact.

Selectivity in setting priorities and improving development impact require particular attention to appropriate provision of global public goods, good governance, private sector development in lower income countries, and financial sector development, including fighting financial abuse. We look forward to intensifying our dialogue with the multilateral development banks and to reviewing progress at the Spring Meetings.

Abuses of global financial system

Following our report to the Okinawa Summit [in July 2000; see IMF Survey, July 31,2000, page 241] and the recommendations of the heads of state of the Group of Seven, we note the positive evolution of the dialogue with the countries involved. The FATF has recently reported the significant progress made by most of the 15 noncooperative countries and territories listed in June 2000. Seven countries have already enacted most, if not all, of the legislation needed to fight money laundering effectively. We encourage those jurisdictions to demonstrate their willingness and ability to implement these reforms, so that they can be delisted at the earliest possible time. To this end, we remain committed to continuing dialogue with the identified countries and to providing technical assistance where possible. However, we reaffirm our commitment, where dialogue has failed to generate adequate progress, to implement coordinated countermeasures that may be recommended by the FATF at its meeting in June 2001. We urge the international financial institutions, in particular the IMF and the World Bank, to help noncooperative countries and territories implement the relevant international anti-money laundering standards, as appropriate, through technical assistance, program design, and policy dialogue.

We welcome the intent of certain offshore financial centers to improve supervisory, regulatory, cooperation, and information exchange policies and practices and encourage offshore financial centers to disclose assessment findings, including those done by the IMF, as a means of demonstrating compliance with and progress in meeting international standards in these areas. We ask the Financial Stability Forum to monitor the implementation of its recommendations and to consider means of recognizing progress being made by certain offshore financial centers and recommend any future action, if necessary.

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