In his written statement to the IMFC, IMF Managing Director Horst Köhler discussed the critical challenges for international cooperation, in the face of the weakening of world economic activity, and his priorities for further reform of the IMF in the coming months. In particular, he underscored the need for proactive policies to strengthen prospects for global economic growth, especially in the poorest member countries, and the need for the IMF to work harder to put crisis prevention at the heart of its activities.
Recalling the theme of the 2000 Annual Meetings, Köhler noted that the importance of international cooperation had become even clearer “in light of the interdependences and spillovers revealed by the current slowdown in world economic activity.” The deceleration of the U.S. economy had been deeper and faster than expected, and declines in world equity markets and the financial difficulties faced by Argentina and Turkey heightened further the risks in the global outlook. This called for proactive policies in the advanced economies, especially Europe and Japan, and forceful action to open markets and liberalize world trade.
Crisis prevention and management
Reforms implemented by the IMF following the Asian crisis, Köhler said, were helping to make the international financial system more resilient. It was nonetheless clear that “the IMF needed to work even harder to put crisis prevention at the heart of its activities” The IMF’s top priority for the coming months should be further work on early warning systems, to combine quantitative indicators with judgment from the field and the markets and bring this to bear in the IMF’s deliberations and policy advice. He noted that the new International Capital Markets Department and the ongoing dialogue with private sector representatives through the Capital Markets Consultative Group would help improve the IMF’s expertise and judgment on capital market issues and strengthen crisis prevention and management. He also stressed the importance of making the IMF’s Contingent Credit Lines operational, as a way to encourage preemptive policy reforms and help members avoid spillovers from crises in other countries.
Although a stronger focus on crisis prevention would help reduce the frequency and severity of crises, Köhler acknowledged that these could not be avoided altogether. The IMF would continue to play a central role in managing crises, acting on the principle that IMF financing should not relieve debtors or creditors of their responsibility for the risks they take. Köhler noted that this principle also underlay the IMF’s framework for private sector involvement in crisis prevention and resolution. This framework relied as much as possible on working with private creditors toward voluntary solutions, while recognizing that other approaches might be necessary in some cases; the IMF would continue working to define the ground rules for such cases.
Another IMF priority was to strengthen financial systems in member countries and, thereby, the international financial system as a whole. Köhler listed the three elements of the IMF’s approach, which he described as an important contribution to crisis prevention: extending the joint IMF-World Bank Financial Sector Assessment Program to 24 more countries in each of the next two years, engaging in a review of offshore financial centers, and enhancing the IMF’s contribution to international efforts to combat money laundering.
Conditionality and poverty reduction
While emphasizing the importance of conditionally for safeguarding the IMF’s resources, Köhler stressed that IMF-supported programs would succeed only if measures were well suited to a country’s administrative capacity and commanded the broad domestic political support needed for sustained implementation. Thus, he said, the IMF was reviewing its structural conditionality, with a view to focusing it on those measures that are critical to the macroeconomic objectives of country programs. The IMF has solicited input to this review from the public, through its website.
The IMF is working closely with the World Bank to assist their poorest members. It is clear, Köhler said, that an effective strategy to reduce poverty must start with poor countries’ efforts to “improve governance, fight corruption, establish respect for the rule of law, end armed conflict, and provide a good climate for private investment.” The IMF and the World Bank, through the Heavily Indebted Poor Countries Initiative, have brought debt relief to 22 African and Latin American countries and will extend it to other poor countries. However, Köhler stressed that debt relief was not a panacea. Over time, poor countries needed to develop more normal links to international financial markets, and even in the near term they could benefit far more from increased aid and enhanced trading opportunities.
(The full text of the statement is available on the IMF’s website: www.imf.org.)