The International Monetary and Financial Committee held its sixteenth meeting in Washington, D.C., on October 20, 2007, under the chairmanship of Mr. Tommaso Padoa-Schioppa, the Minister of Economy and Finance of Italy The Committee welcomes Mr. Padoa-Schioppa, the new IMFC Chairman; it expresses its deep gratitude to Mr. Gordon Brown for his invaluable contributions to the work of the Committee and the Fund throughout the eight years of his chairmanship of the Committee, and extends its best wishes.
The Global Economy and Financial Markets—Outlook, Risks, and Policy Responses
The Committee welcomes the strong global growth in the first half of 2007. It notes that the global economy continues to be underpinned by strong fundamentals and the robust growth of emerging market and other developing economies. Recent disturbances in financial markets in advanced economies are expected to have a moderating effect on growth in the near term, and downside risks to the outlook have increased. The Committee underscores the importance of sound macroeconomic policies in the medium term and continued vigilance to maintain well-functioning financial markets and to strengthen the foundations for sustained high growth. The Committee notes with satisfaction the resilience of emerging market and other developing economies in the face of recent financial market turbulence.
Central banks in advanced economies have been playing a critical role in ensuring the smooth functioning of money markets by providing necessary liquidity while remaining watchful that financial markets continue to operate effectively. At the same time, monetary policy should focus on achieving price stability while continuing to assess carefully the inflation outlook, taking into account both the inflationary pressures stemming from tight commodity markets and rising oil and food prices, and downside risks to growth.
Ministers and central bank governors had a useful discussion on the lessons emerging from the current episode of financial market turbulence, and are committed to continuing to work together, including multilaterally, to analyze the nature of the disturbances and consider lessons to be learned and actions needed to prevent further turbulence. The Committee agrees that financial innovation and securitization, while having contributed to enhanced risk diversification and improved market efficiency, have also created some new challenges that need to be properly addressed.
The Committee stresses that national authorities, standard-setting bodies, the Financial Stability Forum, the Bank for International Settlements, and the IMF, working together in line with their respective mandates, have complementary roles to play in analyzing financial stability issues, helping to identify and address information gaps, and providing fora for discussions and actions. Areas to be addressed include: risk management practices related to complex structured products; valuation and accounting for off-balance-sheet instruments, especially in times of stress; clarifying the treatment of complex products by ratings agencies; addressing basic principles of prudential oversight for regulated financial entities; and liquidity management. The Committee will take stock of the work undertaken at its next meeting.
The Committee welcomes the progress being made in prioritizing financial sector issues in the IMF’s work. It calls for continued efforts to broaden and deepen the IMF’s financial expertise to identify future issues, and to better integrate the findings of the IMF’s multilateral surveillance in its regional and bilateral surveillance. The Committee also notes the growing importance of sovereign wealth funds in international financial markets. While recognizing their positive role in enhancing market liquidity and financial resource allocation, the Committee welcomes the work by the IMF to analyze issues for investors and recipients of such flows, including a dialogue on identifying best practices. It stresses the importance of resisting protectionism and maintaining an open global financial system.
The Committee underlines the importance of further action to strengthen the foundations for sustained high growth over the medium term. Many countries need to pursue ambitious medium-term fiscal consolidation plans to address pressures on social spending arising from population aging. Structural reforms to take full advantage of the opportunities provided by globalization and technological advances should include further liberalization of service sectors in advanced economies, as well as further actions to improve infrastructure and the business environment and develop a sound financial sector in emerging market and other developing countries. To address growing income disparities, the Committee stresses the importance of strengthening education, creating jobs in the most dynamic sectors, pursuing well-designed tax policies, and providing adequate safety nets. Further trade opening, improved access to markets, and fulfillment of aid commitments by donors will be key to sustaining their robust growth performance.
The Committee calls for sustained implementation of the policy plans reaffirmed at the spring 2007 IMFC meeting by the participants in the Multilateral Consultation on global imbalances. It reiterates that an orderly unwinding of global imbalances, while sustaining global growth, is a shared responsibility involving: steps to boost national saving in the United States, including continued fiscal consolidation; further progress on growth-enhancing reforms in Europe; further structural reforms and fiscal consolidation in Japan; reforms to boost domestic demand in emerging Asia, together with greater exchange rate flexibility in a number of surplus countries; and increased spending consistent with absorptive capacity and macroeconomic stability in oil-producing countries.
The Committee expresses concern with the continued lack of progress with the Doha multilateral trade round, and urges WTO members to work toward a prompt and ambitious conclusion of the Doha Round trade negotiations launched in 2001 as a development round.
Implementation of the IMF’s Medium-Term Strategy: Priorities Ahead
The Committee stresses the critical importance of the implementation of the program of quota and voice reforms adopted by the Board of Governors in Singapore. The Committee welcomes the report of the Executive Board to the Board of Governors, takes note of the progress made on several elements of the program, and urges the Executive Board to continue working to achieve an agreement within the timetable and objectives set forth in the Singapore Resolution. In particular, the Committee supports the inclusion of GDP in the new formula as the most important variable. It also considers that PPP-GDP should play a role, along with a compression factor. The Committee stresses that the total quota increase should be of the order of 10 percent, with at least a doubling of basic votes. The Committee reiterates that the reform should enhance the representation of dynamic economies, many of which are emerging market economies, whose weight and role in the global economy have increased. An outcome of the second round of reforms should be a further increase in the voting share of emerging market and developing economies as a whole. The Committee also stresses the importance of enhancing the voice and representation of low-income countries. The Committee encourages the Executive Board to continue its work in order to allow agreement on all the elements of the package by spring 2008.
The Committee recognizes the need for more predictable and stable sources of Fund income to finance its diverse activities. It welcomes the progress made in developing operational guidelines to implement the recommendations of the Committee of Eminent Persons chaired by Mr. Andrew Crockett. The Committee notes that both income and expenditure will need to contribute to putting the Fund’s finances on a sustainable footing. While welcoming the Fund’s ongoing efforts to reduce administrative expenditures, the Committee sees the need for greater efficiency and saving through Fund-wide priority setting. This should be achieved within a new medium-term budget envelope, while preserving the effectiveness of the Fund in fulfilling its core mandate. The Committee therefore calls on the Executive Board to develop specific proposals on the new income model and the new expenditure framework by the time of the 2008 Spring Meeting, and to agree on a new and detailed medium-term budgetary envelope for the FY 2009 budget that is consistent with the emerging income and expenditure framework.
The Committee welcomes the progress on strengthening IMF surveillance, including: the adoption of the Bilateral Surveillance Decision in June 2007; the agreement in principle on the adoption by the Executive Board of a statement of surveillance priorities in the context of the 2008 Triennial Surveillance Review, to guide the Fund’s surveillance work and enhance accountability; and the ongoing integration of financial sector issues into macroeconomic analysis and bilateral surveillance. Evenhanded implementation of the new Decision is an essential element of the Medium-Term Strategy. The Committee looks forward to review the progress and experiences in these areas, as well as the upcoming review of experience with streamlined Article IV consultations.
The Committee supports the priority being given in the Fund’s policy advice to emerging market economies in working with them on the timely identification of vulnerabilities, the strengthening of debt management practices and deepening of local capital markets, and the design of policy responses in the face of large capital inflows. The Committee notes the work undertaken in designing a new liquidity instrument to help countries’ crisis prevention efforts, while providing adequate safeguards to Fund resources. While there has been support on key elements of such an instrument, concerns regarding potential demand for it and important design features still need to be resolved. The Committee calls on the Executive Board to continue its work on the instrument’s design, paying due regard to the interaction with existing IMF facilities and to the views of potential users. The Committee looks forward to the follow-up on the review of charges and maturities for Fund financial assistance, and to the review of the Fund’s policy on lending into arrears.
The Committee welcomes the progress on clarifying the role of the Fund in low-income countries. This includes well-designed financial and policy support in the context of surveillance, Fund arrangements, and technical assistance. The Committee looks forward to a comprehensive operational framework, which will draw together the various strands of the Fund’s work in low-income countries with a view to enhancing the focus and effectiveness of the Fund’s engagement with these countries. The Committee stresses the importance of delivering aid for trade commitments and encourages ongoing initiatives by the WTO and other institutions to enhance aid for trade and improve its coordination and delivery. The Committee attaches high priority to helping countries reap the benefits of higher aid and debt relief, while avoiding a new build-up of unsustainable debt. The Committee welcomes recent initiatives to help low-income countries build on the debt sustainability framework to design medium-term debt strategies, as well as efforts to foster sustainable lending. It calls on all creditors and borrowers to use the framework as a key tool for adhering to responsible and transparent lending practices. The Committee urges full participation by all official bilateral and commercial creditors in the HIPC Initiative; it expresses concern about growing litigation against HIPCs, which presents a major challenge to the implementation of the Initiative. The Committee looks forward to urgent progress on financing assurances by member countries to allow Liberia to benefit from debt relief. The IMF is prepared to consider other similar cases in due course.
The Committee welcomes the Joint Management Action Plan on Bank-Fund collaboration, which will foster closer and more efficient cooperation and clear delineation of responsibilities between the Bank and the Fund, including in their work on low-income countries.
The Committee recommends members’ acceptance of the Fourth Amendment of the Articles of Agreement for a special one-time allocation of SDRs.
The Committee values highly the contribution of the IEO to the learning culture of the IMF and to facilitating oversight and governance. It welcomes that the enhanced framework for implementing the IEO recommendations endorsed by the Executive Board is now fully operational.
The Committee pays tribute to Mr. Rodrigo de Rato for his skillful and strategic leadership as Managing Director of the International Monetary Fund. As architect of the Fund’s Medium-Term Strategy, he has positioned the Fund well to meet the challenges of a rapidly evolving global economy. Mr. de Rato deepened the integration of financial sector issues in the Fund’s work and launched a bold reform to strengthen the voice and representation of low-income and emerging market countries in the Fund. He brought clarity to the role of the Fund in its bilateral surveillance and successfully introduced the new multilateral consultation instrument. Mr. de Rato’s persuasiveness in convincing the membership of the need for a new income model for the Fund has been instrumental in launching a strategic reflection on the Fund’s income and expenditure that will help ensure the Fund’s financial sustainability in the new international environment. The Committee wishes to express its thanks to Mr. de Rato for his dedication and vision, which have helped set the Fund on a strong and positive path to the future.
The Committee warmly welcomes the appointment of Mr. Dominique Strauss-Kahn as the new Managing Director, and looks forward to working closely with him in meeting the challenges ahead.
The next meeting of the IMFC will be held in Washington, D.C., on April 12, 2008.