From the Office of Public Affairs for the U.S. Treasury
April 15, 2000Statement of G-7 Finance Ministers and Central Bank Governors
Washington, DC
We, the Finance Ministers of the G-7 countries, the Central Bank Governors of Canada, Japan, the United States, and the United Kingdom, the Euro-11 Presidency, and the President of the European Central Bank, met today with the Acting Managing Director of the International Monetary Fund to review recent developments in the world economy. We, the Finance Ministers and Central Bank Governors of the G-7 countries, discussed reform of international financial institutions and reviewed progress made on follow-up work on strengthening the international financial architecture, including financial regulatory policy issues. They also reviewed current work on money laundering and financial crime and implementation of the HIPC Initiative.
We welcomed the selection of Horst Köhler to be the new Managing Director of the International Monetary Fund and expressed confidence in his ability to lead the institution forward. We also expressed our gratitude to Stanley Fischer for his excellent work as Acting Managing Director.
Developments in the World Economy
Prospects for expansion in industrial countries and the world economy more generally continue to brighten. The underlying fundamentals of the expansion of the major economic areas have strengthened since our last meeting. Nonetheless, continued vigilance and further action are needed to promote a more balanced and therefore more sustainable pattern of growth among our economies. We agreed on the continued importance of directing both macroeconomic and structural policies in all our countries at this objective, with emphasis on taking full advantage of the investment opportunities created by new technologies to raise potential growth rates.
We re-emphasized our commitment to maintain or create conditions for strong, sustainable growth in each of our countries. In this context, we stressed the importance of continued cooperation among the G-7 countries. With respect to individual economies:
- In the United States and Canada, growth remains very strong, unemployment low, and inflation well contained. For this to be maintained, fiscal surplus policies should not be relaxed, monetary policy should continue to be prudent, and in the United States, national saving should increase.
- In the United Kingdom, growth has strengthened, employment gains remain solid, and inflation is low supported by fiscal policy. Monetary policy should continue to be aimed at meeting the inflation target while sustaining growth and employment.
- In the euro area, growth accelerated in the second half of 1999 and inflation is low. Going forward, sound macroeconomic policies and reforms directed at expanding investment, employment, and productive potential remain important so as to foster growth.
- The Japanese economy has not yet achieved a secure recovery in private demand, although there have been some positive signs. It is important that macroeconomic policies support sustainable domestic demand-led growth. The Japanese authorities decided to continue, in the context of their zero interest rate policy, to provide ample liquidity to ensure that deflationary concerns are dispelled. Structural reform should be continued to promote an increase in productive potential and financial sector restructuring.
We welcomed the initiation of WTO negotiations in agriculture and services and support efforts to build a consensus for the early launch of a new round of multilateral trade negotiations designed to bring benefit to all countries, including the poorest. We urge the IMF and World Bank to work with the WTO and other relevant institutions to improve the effectiveness of trade-related technical assistance, and to more fully incorporate policies promoting international trade and capacity building into Fund programs and Bank operations.
Exchange Rates
We discussed developments in our exchange and financial markets. In this context, we emphasized our view that exchange rates among major currencies should reflect economic fundamentals. We will continue to monitor developments in exchange markets and cooperate as appropriate.
Emerging Market Economies
Emerging market economies continue to strengthen and investor sentiment has further improved. However, it will be critical for countries to maintain the momentum of reform and continue to work to address potential underlying vulnerabilities. We welcome the stronger than expected economic recoveries in many Asian economies but note the importance of further progress in corporate and financial restructuring. In some cases, taking advantage of exchange rate flexibility could help in managing the policy challenges posed by shifts in capital flows. For the strengthening economic recoveries in Latin America to be sustained, policies must be directed at reducing vulnerabilities, in particular by improving underlying fiscal positions and debt structures.
Russia
We look forward to the articulation of economic reform proposals and objectives by the new President's government. The Russian economy has strengthened during the past year, offering a unique opportunity to move forward with reform by utilizing its high economic potential. However, fundamental economic reforms will be essential if this positive trend is to be sustained. In this context, we urged the Russian authorities to take action on critical economic challenges, such as establishing an impartial rule of law, including secure property rights and contract enforcement, as well as implementing structural reforms to spur competition and restructuring. These reforms are necessary to create an attractive environment for domestic and foreign investment. Multilateral and bilateral support should increasingly be focused on these areas. We expect Russia also to work closely with the IMF to implement an economic program focused on macroeconomic stability, with associated supporting structural reforms, including in the banking system, and further reducing the role of barter in the economy. We also highlighted the need to intensify the fight against corruption and money laundering, and urged the Russian authorities to follow through on commitments to seek passage of a strong anti-money laundering law in line with international standards. We will be supportive of action to address these challenges by the new government through policies supported by the Russian population.
Architecture Issues, including IFI Reform, Private Sector Involvement, and Financial Regulatory Policy
We exchanged views on the role and functioning of the international financial institutions (IFIs). In the context of the changing global financial landscape, in particular the increasing importance of private global capital markets, it is appropriate for the international community to continue to examine the role and functioning of the international financial institutions. In this context:
- We underscored the central role of the IMF in advancing macroeconomic stability as an important precondition for sustainable global growth and emphasized the need for the IMF to continue to evolve to meet the challenges of the future. Our discussions of IMF reform highlighted a number of key principles and measures taken to date, as well as our aspirations going forward. In particular, we agreed that: the IMF is a universal institution and must be transparent to the public and accountable to its members. It must work in partnership with all its member countries, based on their shared interests, to promote financial stability and growth. Crisis prevention and response should be at the core of the IMF's work, with IMF surveillance strengthened so as to foster strong policies, reduce countries' financial vulnerability to crisis, and encourage the implementation of internationally agreed codes and standards. IMF financial operations should be adapted to reflect better the realities of global capital markets - encouraging countries to take preventive measures to reduce vulnerabilities and providing temporary and appropriately conditioned support for balance of payments adjustment and medium-term finance in defined circumstances in support of structural reform, while avoiding prolonged use. The IMF should take appropriate steps to involve the private sector both in forestalling and resolving crises, which should help promote responsible behavior by private creditors. The IMF must continue to provide concessional assistance for the poorest countries, to foster macroeconomic and financial stability with the aim of reducing poverty. Our work in developing these themes is detailed in the annex to this statement.
- We reaffirmed the critical role of the World Bank and regional development banks in carrying out their core mission of promoting development in developing and emerging market economies. Moving forward, we believe it is important to pursue reform of these institutions further to focus their activities on the following core objectives: supporting sound and comprehensive poverty reduction efforts and improving the effectiveness of development assistance; actively participating in the HIPC initiative with the aim of reducing poverty and promoting growth in the poorest countries; enhancing their role in provision of global public goods, particularly by the World Bank; focusing their efforts more tightly in emerging market economies on the key systemic and structural constraints to poverty reduction, including investing in human capital, leveraging private capital, helping to cushion the effects of exceptional shocks on the poorest and most vulnerable groups, and institution building, including in the financial sector. We recognize that a large number of the world's poor still live in these emerging economies and that Bank assistance in poverty reduction will continue to be critical to raising their standard of living. Achieving these objectives will require strong ownership of recipient countries based on the principles of good governance, effective coordination and cooperation with other bilateral and multilateral donors as well as the IMF, and an enabling international environment. We asked our Deputies to identify proposals for implementing these objectives in the World Bank and regional development banks.
We agreed to continue to work together and with the wider membership of the institutions on these core issues and look forward to exploring this agenda further.
We also agreed to continue our work to implement fully the wide range of measures to strengthen the international financial architecture endorsed at the Cologne summit, including promoting appropriate private sector involvement. Private external creditors, including bond holders, have contributed to the financing of several recent programs of policy reform and recovery. This has confirmed the importance of making operational the framework Ministers laid out in their report to Heads in Cologne, which provides for flexibility to address diverse cases within a framework of principles and tools. In this context, we agreed that the IMF should consider whether private sector involvement is appropriate in programs, using the operational guidelines described in the annex. The IMF should play a central role in deciding if private creditors should contribute to any program financing, while taking duly into account the specific circumstances of individual cases. The IMF should also review the results of the country's efforts to secure financing from private creditors. We agreed on the further steps to put this approach into operation, as described in the attached annex.
We welcomed the reports of the Financial Stability Forum Working Groups on Highly-Leveraged Institutions, Capital Flows, and Offshore Financial Centers, as well as the Task Force on the Implementation of Standards, and agreed to promote progress in their implementation. We supported the recommendations for better risk management by HLIs and their counterparties, better disclosure practices among financial institutions, including enhanced disclosure requirements for HLIs and their creditors, improved oversight of creditor institutions, and enhanced national surveillance of financial market activity in view of concerns about systemic risk and market dynamics caused by HLIs' activities. We will review these measures and their implementation to determine whether additional steps are necessary. We also welcomed recognition of the importance of managing country risks, and in this regard, urged prompt development of guidelines for public debt and reserve management, with special attention to the risk created by short-term foreign currency liabilities, and taking account of countries' vulnerability to capital account crises, including those vulnerabilities arising from the liabilities of the private sector. We also welcome the work on the potential threats posed to the international financial system by those offshore centers which do not adequately meet international standards. We support the identification of priority jurisdictions and the focus on improvements in transparency and international cooperation. We call on the IMF to play its part in implementing the various recommendations of the FSF Working Groups. Finally, we look forward to additional work by the Forum on promoting regulatory and market incentives for implementation of standards, as well as further development of guidance on deposit insurance schemes.
Money Laundering and Financial Crime
We note the broad support among G-7 countries to address money laundering and financial crimes as part of the on-going international effort to counter risks to the international financial system. A number of G-7 countries have taken significant policy and legislative initiatives on money laundering and financial crime. Along with several multilateral initiatives well underway, we believe this sets the stage in the period ahead for accelerated and sustained progress in our fight against money laundering and financial crimes. In this context, we look forward to the Financial Action Task Force (FATF) report on non-cooperative countries and territories due in June.
We strongly support the work being done by the OECD's Forum on Harmful Tax Practices to curb harmful tax competition through preferential tax regimes and tax havens. We welcome the report by the OECD's Committee on Fiscal Affairs on access to bank information for tax purposes, and call on all countries, using the report as a starting point, to work rapidly towards a position where they can permit access to and exchange bank information for all tax administration purposes.
Enhanced HIPC Initiative
We note the progress achieved in the implementation of the Cologne Debt Initiative, and reaffirm the importance we attach to bringing countries quickly to the point where they can benefit from debt relief. We strongly support the efforts of HIPC countries to develop Poverty Reduction Strategy Papers (PRSPs), in the context of a sound policy framework. We look forward to further work to strengthen these strategies, so that the resources freed up by HIPC relief are used effectively to reduce poverty and boost economic growth. We urge the IMF, the World Bank, and eligible countries to cooperate closely to secure the implementation of the HIPC Initiative with the aim that the eligible countries reach their decision point by the end of 2000, in line with the Cologne target. It is critical to secure over time the needed financing for the enhanced HIPC initiative. We welcome the progress that has been made in this respect, and note that some bilateral contributions to the HIPC initiative have been made, including to the HIPC Trust Fund, but some require legislative approval. We call upon those IFIs which have not yet finalized the basis for their participation to do so quickly, including the maximum use of their own resources. We urge all bilateral creditors which have not yet done so to take action to deliver their share of debt relief under the Initiative as participation of all creditors is key to its success. We reiterate our willingness to actively contribute to the success of the enhanced HIPC initiative and its more general goal of reducing poverty. To this end, we have committed ourselves to grant, on a bilateral basis, additional debt relief on top of that provided for under the HIPC Initiative by increasing to 100% the debt reduction on commercial claims eligible for treatment in the framework of the Paris Club. We urge other creditors to follow the same route.
Annex I - IMF Reform
- We are committed to a universal IMF that, to promote policies that foster a stable and open global financial system in which all member nations can prosper, works in partnership with all its member countries based on shared interests.
- To be effective, the IMF and its activities must be transparent to the public, accountable to its members and responsive to the lessons of experience and outside evaluation.
- Preventing crises and supporting the establishment of a solid foundation for sustainable growth are at the core of the IMF's work. Surveillance of economic and financial conditions and policies in member countries and the implementation of internationally agreed codes and standards are the primary tools for accomplishing these aims.
- IMF financing conditioned on economic reform measures continues to be an important tool for protecting financial stability and promoting growth in the world economy. At the same time, IMF lending should not distort the assessment of risk and return in international investment. Involvement of the private sector in crises is also a crucial element of effective prevention by making private investors more responsible in their lending decisions.
- While the World Bank is the central institution for poverty reduction, macroeconomic stability - a key tool for the achievement of poverty reduction and growth - is the responsibility of the IMF. The IMF has a crucial role in supporting macroeconomic stability in the poorest countries through the Poverty Reduction and Growth Facility, integrating its efforts with those of the World Bank in working with countries on poverty reduction strategies.
Strong surveillance must be at the center of the IMF's efforts to strengthen the world economy and the architecture of the international financial system. In this light, we underscored the importance of a substantial qualitative shift in the nature and scope of the Fund's surveillance needed in light of globalization, large scale private capital flows, and the emerging framework of internationally agreed codes and standards.
- Put strong emphasis on medium-term financial sustainability, with the IMF determining the appropriate degree of economic adjustment required by the country and the IMF and the country agreeing on a financing plan compatible with a sustainable medium-term payments profile.
- Strike an appropriate balance between the contributions of the private external creditors and the official external creditors, in light of financing provided by IFIs. In cases where a contribution from official bilateral creditors (primarily the Paris Club) is needed, the IMF financing plan would need to provide for broad comparability between the contributions of official bilateral creditors and private external creditors. The Paris Club, if involved, should of course continue to assess the comparability desired and achieved between its agreement and those to be reached with other creditors.
- Aim for fairness in treatment of different classes of private creditors and for involvement of all classes of material creditors. The IMF should review the country's efforts to secure needed contributions from private creditors in light of these considerations, as well as medium-term sustainability.
- Place responsibilities for negotiation with creditors squarely with debtor countries. The international official community should not micromanage the details of any debt restructuring or debt reduction negotiations.
- Provide greater clarity to countries at the start of the process about the possible consequences for their programs, including in terms of official financing, of any failure to secure the necessary contribution from private creditors on terms consistent with a sustainable medium-term payments profile. Such consequences could include the need for a program revision to provide for additional adjustment by the country concerned or the option of reduced official financing, or, conversely, a decision by the IMF to lend into arrears if a country has suspended payments while seeking to work cooperatively and in good faith with its private creditors and is meeting other program requirements.
- When all relevant decisions have been taken, the Fund should set out publicly how and what certain policy approaches have been adopted, in line with the Cologne framework.
We confirmed the IMF's leading role in promoting adherence to international standards and codes and called on the Fund to pursue its work on assessments of countries' observance of international codes and standards through Reports on Observance of Standards and Codes (ROSCs), which should continue to be published. We also welcomed the recent decisions by the IMF/World Bank boards to expand the Financial Sector Assessment Program.
We urged the IMF, in conducting its surveillance work, to continue to sharpen its focus on macroeconomic policy, capital flows and structural issues which have an impact on macroeconomic stability, in particular in the financial sector, and on exchange rates with a view toward encouraging countries to avoid unsustainable regimes. We also proposed that the Fund develop and make systematic use of indicators of vulnerability and national liquidity and balance sheet risks as a key part of the surveillance process.
We agreed that the IMF also has an important role to play in promoting transparency and the flow of information. In order to promote the use of available information by the markets, we welcomed the IMF's decision to highlight in a quarterly publication countries' efforts to publish a full range of high-quality data in a timely manner in compliance with the IMF's Special Data Dissemination Standard (SDDS).
We agreed that the IMF's financial operations should continue to adapt to the globalization of capital markets, while preserving the flexibility to support all member countries, as appropriate, including those with no immediate prospects of market access, in light of their specific circumstances. Against this background we welcomed the preliminary review of facilities undertaken in the IMF and agreed on the importance of streamlining the IMF's non-concessional facilities. We welcomed the Executive Board's actions in recent months to simplify the array of IMF facilities (eliminating four obsolete facilities - the External Contingency Mechanism, the Buffer Stock Financing Facility, Debt and Debt Service Reduction and Currency Stabilization Fund - and scaling back the Fund's compensatory financing).
Going forward, we attach priority to the creation of a streamlined structure for IMF lending consistent with this approach that would: (i) provide clear incentives for countries to put in place strong ex ante policies to prevent crises, to observe internationally agreed standards and best practices, and to maintain good relations with private creditors; (ii) address short-run balance of payment imbalances and, where appropriate, support reforms with a medium-term horizon, while at the same time encouraging countries to move toward sustainable access to private capital; (iii) allow the IMF to respond rapidly and on an appropriate scale to crises of capital market confidence, with appropriate terms to mitigate moral hazard and encourage rapid repayment; and (iv) maintain a strong, focused role for the IMF in supporting sound macroeconomic policies in the poorest countries, integrating its efforts with those of the World Bank given the latter's responsibility for promoting poverty reduction and growth-oriented programs.
We look forward to early progress in the IMF in achieving such a simplified, incentives-based approach to its lending activities, that will encourage countries to develop in a progressive manner sustained, stable access to private capital markets and to adopt preventive measures against contagion. This could be achieved by adapting the maturity, pricing structure, and other terms of the existing system of facilities, in particular with a view to enhancing the effectiveness of the CCL without compromising the initial eligibility criteria, and by avoiding prolonged use of the SBA and EFF and to strengthen post-program monitoring.
We highlighted in particular the importance of work underway to strengthen safeguards on the use of the Fund's resources. We agreed that IMF Board's decision to adopt a new framework for the conduct of safeguard assessments, strengthened measures to discourage misreporting and a requirement that countries making use of Fund resources publish annual financial statements independently audited by external auditors in accordance with internationally accepted standards should be applied vigorously - as this is critical to buttressing the integrity of the IMF's financial operations.
We continue to place high priority on further steps to increase the transparency and accountability of the IMF. We welcome in this context the transformation of the Interim Committee into the permanent International Monetary and Financial Committee. We welcomed the recent decision to publish quarterly the financial transactions plan (formerly known as the "operational budget") and encouraged the Fund to take further steps to make its financial accounts and statements more understandable. We also welcomed progress made toward establishing a permanent Independent Evaluation Office inside the Fund, and urged that steps be taken to bring this office into operation as soon as possible.
Annex II - Private Sector Involvement in Crisis Prevention and Resolution: Operational Guidelines
More attention needs to be devoted to crisis prevention. Emerging market economies participating in international capital markets and their private creditors should seek in normal times to establish a strong, continuous dialogue. The IMF should also encourage the use of appropriate measures, including collective action clauses, to facilitate more orderly crisis resolution. We agree to facilitate the use of collective action clauses in international bonds issued by emerging market economies in our own financial markets. We urge the World Bank and other Multilateral Development Banks to work to have such clauses used in international sovereign bonds or loans for which they provide a guarantee.
With regard to crisis resolution, we agreed that the approach adopted by the international community should be based on the IMF's assessment of a country's underlying payment capacity and prospects of regaining market access, informed by the country's economic fundamentals, payment profile, history of market access, and the market spreads on its debts. All programs will need to include analysis of the country's medium-term debt and balance of payments profile, including a section explaining the assumptions taken about the sources of private finance.
In some cases, the combination of catalytic official financing and policy adjustment should allow the country to regain full market access quickly. In some cases, emphasis should be placed on encouraging voluntary approaches as needed to overcome creditor coordination problems. In other cases, the early restoration of full market access on terms consistent with medium-term external sustainability may be judged to be unrealistic, and a broader spectrum of actions by private creditors, including comprehensive debt restructuring, may be warranted to provide for an adequately financed program and a viable medium-term payments profile.
In those cases where debt restructuring or debt reduction may be necessary, we agreed that IMF programs should be based on the following operational guidelines: