IMF-World Bank Annual Meetings Overview

The world’s top finance officials approved a multi-billion-dollar debt cancellation plan for the most heavily indebted poor countries at the IMF-World Bank Annual Meetings on September 24-25. At the same time, they warned that widening global imbalances and high and volatile oil prices posed increased threats to the ongoing global expansion. The finance ministers and central bank governors, meeting in Washington, D.C., also approved new tools for IMF involvement in low-income countries and endorsed a reform strategy for the institution.

Risks to global economy increasing

Although global economic growth is expected to continue in 2006 close to its trend rate seen in 2005, policymakers urged decisive steps to avoid disorderly adjustments in the global economy. “Global imbalances pose serious risks to prosperity,” IMF Managing Director Rodrigo de Rato told the IMF’s Board of Governors. Despite progress in some areas, he said “many countries need to share the work of reducing global imbalances and sustaining growth.” The IMF’s latest World Economic Outlook is predicting growth of 4.3 percent for 2005 and 2006, down from last year’s three-decade high of 5.1 percent. But global payments imbalances, higher oil prices, increased protectionist sentiments, and the possibility of tighter financial market conditions are exacerbating the risk that growth will be weaker than forecast (see page 292).

The International Monetary and Financial Committee (IMFC), the IMF’s policy steering committee, called on oil producers, consumers, and companies to work together to stabilize the oil market (see box, page 284). “Consumer and producer countries alike should consider tax reforms and, especially, reductions in subsidies on oil products,” de Rato underscored, warning that subsidies cause profound social inequalities and economic distortions, often at great cost to the budget. “What is merely bad fiscal policy when oil costs $25 a barrel becomes ruinous fiscal policy when it costs $65 a barrel,” he said.

To tackle global imbalances, the IMFC further urged the United States to increase national savings through fiscal consolidation; emerging Asia to allow greater exchange rate flexibility; and the euro area and Japan to implement further structural reforms. Among the other recommendations are enhancing the investment climate, including in a number of emerging market economies, and, in many countries, strengthening medium-term fiscal positions and measures to make labor and product markets more flexible.

The IMFC stressed that a successful outcome to the Doha Round of trade liberalization is essential for global growth and poverty reduction, and urged action to increase market access, especially for developing countries; reduce trade-distorting domestic support; eliminate all forms of export subsidies in agriculture; and make progress on financial services, in particular, and on issues of intellectual property. “The large economies carry particular responsibility to work for a good agreement, and to head off pressures for protectionism, which would be enormously damaging to the world economy,” de Rato said.

Breakthrough on debt relief

Policymakers also resolved outstanding issues on the Group of Eight (G8) debt relief proposal, paving the way for the cancellation of about $55 billion in debt owed by the heavily indebted poor countries to the IMF, the World Bank, and the African Development Fund (see page 290). IMFC Chair and U.K. Chancellor of the Exchequer Gordon Brown—who spearheaded the G8 effort—said the agreement was a breakthrough in that all the countries of the international community had signed up, leading to “the historic completion of debt relief for these countries.” The IMF and World Bank Executive Boards will quickly fine-tune the details of the debt relief deal. World Bank President Paul Wolfowitz told reporters: “Across Africa and around the world, leaders in 38 countries will no longer have to choose between spending to benefit their people and repaying impossible debts, often the legacy of governments past.”

Governors agreed that the IMF has a critical role in supporting low-income countries through policy advice, capacity building, and financial assistance, and confirmed that the Poverty Reduction and Growth Facility (PRGF)—the IMF’s concessional loan facility—will remain the main instrument for IMF financial support for these countries. The IMFC approved two new instruments to strengthen IMF support for low-income countries. The Policy Support Instrument (PSI) will be available to members that do not want or need IMF financial assistance, but seek IMF assessment and endorsement of their policies. And a new window in the PRGF trust will be available to provide timely financial support to PRGF countries facing exogenous shocks (see page 291).

The IMFC also called on the low-income countries to do their part in the quest to achieve the Millennium Development Goals over the next 10 years. It urged poor countries to strengthen their economic policies through sound frameworks and accountable institutions to help spur private sector growth. In addition, de Rato said “the international community will need to muster additional resources to provide the mix of aid, debt relief, and program assistance needed to reduce poverty and support development.”

Charting the IMF’s future

The IMFC welcomed a report by de Rato on the IMF’s medium-term strategy, agreeing that the IMF needs to deepen its analysis of globalization and continue to develop its strategy for responding to long-term challenges (see page 288). “The Fund needs to be able to advise all our members on dealing effectively with the consequences of increasing integration,” de Rato said. The strategy provides a framework for prioritizing the Fund’s work and increasing its focus, effectiveness, and preparedness to face the future. It proposes specific action to strengthen surveillance, improve technical assistance, and reform the Fund’s organization, structure, and work procedures.

De Rato emphasized the question of whether members’ voting shares and representation are still adequately reflected in the institution. He said the IMF’s legitimacy was at stake if it did not adequately represent countries of growing economic importance, such as emerging-market economies in Asia. He also suggested greater representational power for the IMF’s members in Africa, where the Fund is actively engaged. De Rato, who in paraphrasing Mark Twain had quipped earlier that “reports of the IMF’s death have been greatly exaggerated,” urged the Board of Governors to deal with these imbalances during the current quota review, which needs to be completed by January 2008.

The Development Committee said that it “considers the issue of enhancing the voice of developing and transition countries in our institutions to be of vital importance.” It said it would continue its discussions with a view to building the necessary political consensus, “taking into account progress in the context of the IMF quota review.”

Possible loan for Iraq

During the meetings, de Rato announced that he had discussed with the Iraqi finance minister and the central bank governor the possibility of an IMF loan after the end of the current post-conflict program. He said Iraq needs to make further progress in the quality of its data, central bank transparency, and lower oil subsidies to enable him to ask the Executive Board to approve a loan, hopefully by year’s end.