In the immediate future, economic policies will need to be framed in an environment of unusually large uncertainty. There are good reasons to expect that the current deterioration of economic conditions may be relatively short-lived, with an upturn commencing in the first half of 2002. These include the improved fundamentals that were already present in the global economy, the policy response that has taken place, and the scope for further policy adjustments, if necessary. But there is also a nonnegligible probability of a worse outcome, involving lower growth and increasing financing difficulties for many countries. In this context, we see the following framework for a coordinated response.
International community acts to curb terrorism
This issue of the IMF Survey contains several articles detailing the international steps that are being taken by governments and international organizations to combat terrorism. On October 5, IMF Managing Director Horst Köhler called for a coordinated response on the part of the international community to deal with the current economic downturn and risks in the outlook (see above). On October 6, representatives of the Group of Seven industrial countries, meeting in Washington, declared their readiness to track down and intercept the assets of terrorists (see page 327) and released their Action Plan to Combat the Financing of Terrorism (see page 328). Similar steps were also taken at the United Nations, where the Security Council adopted a far-reaching antiterrorism resolution binding the UN member states to seek out and prosecute terrorists and halt all funds that support them. In early October, the UN General Assembly also strongly condemned the menace of international terrorism and pledged to take steps to eradicate it (see page 329).
Global outlook and risks
Notwithstanding the uncertainty, a number of developments indicate that a more pronounced than expected economic slowdown is under way across much of the IMF’s membership. Even before the attacks on September 11, the global situation was weak, with a synchronized downturn across all major regions … as noted in the IMF’s latest World Economic Outlook [see IMF Survey, October 8, page 309].
In the aftermath of the attacks, there will be an impact on activity, particularly in the United States, but also elsewhere. The situation of emerging markets and developing countries has become more difficult, with reduced access to global financial markets, and deeper demand and commodity price declines. In addition, security concerns after the attack are translating into higher costs for airline transport (related to security measures), lower tourism owing to safety concerns, and higher prices and higher transportation costs for merchandise. Finally, the impact on oil prices could be substantial in either direction.
There are intensified downside risks to world economic and financial conditions, and we need to keep these in mind in deciding on appropriate policies for the period ahead.
Role of the IMF
The IMF has appropriate tools and flexibility to respond to a weakening world economy. In the context of its overall approach of surveillance and lending, the IMF can take a number of concrete steps. We are closely monitoring the situation, with early and proactive dialogue with member countries. I encourage all members to review their policy frameworks in light of recent developments and to approach the IMF early to discuss the implications of these developments for their economic policies. The appropriate response by the IMF will depend on the member countries involved and the nature of the problems they confront. While the IMF’s existing financial instruments and policies appear adequate, the IMF will be ready to adjust its policies if necessary.
Advanced economies have a key responsibility to ensure that macroeconomic and financial policies support an early return to sustainable growth and financial strength. There has been a significant easing of monetary policy in the United States and most other advanced countries, and its impact should be felt increasingly in the coming months. In Japan, there is still scope for more decisive monetary action. In addition, the restoration of confidence in Japan will clearly require resolute steps on banking sector and corporate restructuring. In the euro area, automatic stabilizers should be allowed to work fully. Monetary policy should be vigilant and, if necessary, use the room for additional easing. In addition, consumer and investor confidence would be enhanced by an acceleration of structural measures to improve growth potential.
Emerging market economies are exposed to shocks to both the current and capital accounts, and the availability of private financial flows is a key vulnerability. Sound economic policies, including early adjustment when needed, are imperative. For its part, the IMF can approach eligible countries to encourage consideration of Contingent Credit Lines to help them face potential contagion effects in capital market conditions; consider new programs supported by the Supplemental Reserve Facility and/or Stand-By Arrangements in those economies where it is deemed appropriate; and, for countries with existing programs, consider augmenting or rephasing access when the policy framework is strong and appropriate for the emerging circumstances.
Developing economies are exposed to current account shocks derived from weaker commodity prices and lower demand for their exports of goods and services. The IMF stands ready to help these countries design appropriate policy responses.
Low-income countries are exposed to shocks similar to those of other developing countries. While the policy response in terms of adjustment may be the same, the terms of additional financing should not. The IMF would stand ready to make available additional concessional resources, using the Poverty Reduction and Growth Facility (PRGF) wherever a three-year program is in place or can be agreed to early on. For members not ready to undertake a three-year structural reform program, Stand-By Arrangements may be considered. We could also encourage countries to seek additional concessional resources where necessary from other official sources and work with creditors to encourage a positive and well-coordinated response, including assistance under the Heavily Indebted Poor Countries (HIPC) Initiative.
Overall, the IMF’s existing financial instruments and policies appear adequate to address the needs of its membership, and the IMF will be ready to adjust its policies quickly if necessary. While the prospective demand for IMF resources is sensitive to the size of the downturn and assumptions about market access for emerging market countries, the IMF has the capacity to respond to the evolving situation in its member countries in the period ahead.
Recent developments have, however, made more urgent the need to complete the financing package for the interim PRGF to enable the IMF to continue assisting low-income countries on appropriate terms. If demand exceeds earlier tightly constrained projections, it may be necessary to mobilize additional PRGF subsidy and loan resources or to accelerate the interim PRGF at the expense of the level of self-sustained PRGF operations. We should not let that eventuality hinder our support for low-income members in the immediate circumstances.
The IMF’s response should be part of a concerted response by the international community. The engagement of a whole spectrum of institutions would be needed, in particular:
Multilateral development banks’ participation will be essential for appropriate sectoral advice and because additional project and program financing and budgetary support may be needed in some countries. For this reason, I have joined with the presidents of the World Bank and the four regional development banks to set out our coordinated response to these events.
Export credit agencies will need to play their role in helping to ensure the continued availability of trade finance.
The Paris Club may need to be involved, as the solution to the external financing needs of some members may entail rescheduling obligations to official creditors.
Reengagement of the private international capital markets will be a key to a more rapid recovery. The Capital Markets Consultative Group, which is scheduled to meet again in mid-October, is an important vehicle for reaching out to the private sector.
To bolster confidence, the launching of a new trade round is of critical importance. It is equally important not to lose momentum on various industrial country initiatives to increase the access of the poorest countries to their markets.
Efforts to vigorously implement global anti-money laundering initiatives should be fully endorsed. In concert with the broader efforts of other institutions, the IMF is further strengthening its role in the anti-money laundering effort. In light of the terrorist attacks, the organization’s management has just established an internal task force of IMF staff, chaired by a Deputy Managing Director, to examine urgently the IMF’s contributions to the worldwide effort against money laundering.
To lead this coordinated approach to the deteriorating world situation, the international community should meet. I therefore support holding an early meeting of the International Monetary and Financial Committee and the Development Committee [see page 326].