Thomas A. Bernes, a Canadian national, accepted the IMF Executive Board’s offer to head the Independent Evaluation Office (IEO) starting on June 6. The IEO, established by the Executive Board in July 2001, operates autonomously from IMF management and is designed to provide objective and independent assessments of various aspects of the IMF’s work. Its reports have taken up a wide range of topics, including capital account crises, technical assistance, and fiscal adjustment in IMF-supported programs.
Bernes, who succeeds Montek Singh Ahluwalia of India, currently is Executive Secretary of the joint IMF—World Bank Development Committee, a forum to facilitate consensus-building among member country governments on development issues. In 1996–2001, prior to his appointment to the Development Committee Secretariat, Bernes served as IMF Executive Director of the constituency representing Canada, Ireland, and the Caribbean. From 1992 to 1996, he was Assistant Deputy Minister of Finance in Canada, which included representing Canada at high-level international meetings, such as those of the Group of Seven, the Organization for Economic Cooperation and Development (OECD), and the Asia Pacific Economic Cooperation Forum. In addition to holding various senior finance, foreign affairs, and trade policy positions within the Canadian government, Bernes served as head of the OECD’s General Trade Policy Division in the mid-1980s.
As head of the IEO, Bernes’ first task will be to help carry out the office’s work program for FY2005–06, which includes evaluations of the financial sector assessment program and financial sector stability assessments; the IMF’s approach to capital account liberalization; the role of multilateral surveillance; and a country case study.
In Europe, de Rato urges policy action to stem downside risks
Although the global economic recovery has not fully recaptured the stamina lost late last year, activity could regain momentum later this year, IMF Managing Director Rodrigo de Rato said in Paris May 3, where he met with French President Jacques Chirac and attended the Ministerial Meeting of the Organization for Economic Cooperation and Development. De Rato said downside risks have increased for the global economy and urged the international community to address global imbalances. “But there is reason to believe that growth momentum could be recovered in the second half of this year,” he told the press.
For the euro area, which has suffered from slow growth, de Rato did not rule out interest rate cuts given low inflationary pressures and inflation expectations, although the key to achieving lasting and strong growth in Europe is structural reform. He acknowledged that past reforms have made Europe’s labor markets more robust and resilient but added that structural unemployment was still too high. In addition to structural reforms and long-term growth, de Rato said the euro area countries need more ambitious fiscal policies to meet the challenge of population aging.
France’s economic growth continues to outperform the euro area as a whole, but not enough jobs are being created and the labor participation rate remains low. Although France’s fiscal position improved last year, de Rato recommended stepping up the pace of fiscal adjustment to achieve structural balance over the medium term.
New deal with Turkey
Before Paris, de Rato visited Turkey on April 28–29 to meet with Prime Minister Tayyip Erdogan and attend the Investment Advisory Council. In welcoming Turkey’s new loan with the IMF, he said “Turkey and the IMF are entering an important new stage in their relationship.” He said with the right policies in place, Turkey’s economic prospects, including foreign direct investment, looked promising. The IMF Executive Board is expected to discuss Turkey’s new arrangement on May 11.
Israel’s economy emerges from lengthy recession
After a prolonged recession, Israel recorded strong economic growth in 2004, helped by prudent policies, a favorable external environment, and a better security situation, the IMF said in its annual economic review. The recovery is expected to continue in 2005, although at a slightly slower pace. The IMF Executive Board commended the authorities for improving policies and encouraged them to further strengthen the fiscal position, reduce the high level of public debt, and implement key structural reforms.
The government is committed to maintain future deficits below 3 percent of GDP and limit public expenditure growth. To that end, the Board urged the authorities to adopt a multi-year budgetary framework and a detailed spending plan to enhance credibility, ease political pressures, and reflect long-term priorities.
During 2004, monetary policy was loosened as inflationary pressures continued to ease. Subdued inflation amid sheqel appreciation against the U.S. dollar during the second half of the year prompted the Bank of Israel gradually to reduce interest rates. The Board commended the central bank for its policy course and encouraged the authorities to update the Bank of Israel law to reinforce the central bank’s independence and enhance its transparency and accountability.
The authorities’ structural reforms seek to boost competition and efficiency, including through privatization in key sectors and further labor market initiatives. The welfare reform has started to bear fruit, as declining unemployment and rising labor force participation rates attest. The Board welcomed the recent strengthening of existing active labor market programs and new pilot initiatives, but noted the scope for more targeted spending in this area. Most financial soundness indicators for the banking system have improved marginally, and the quality of bank loan portfolios is expected to improve further as the recovery takes hold.
|(percent of labor force)|
|(percent of GDP)|
|General government balance||-4.1||-4.5||-6.4||-4.3||-3.6|
|General government debt||96.4||104.9||107.4||104.8||103.8|
Panama’s strong growth drives down unemployment
Panama maintained strong economic growth and low inflation in recent years, which helped to lower unemployment, and made progress in reducing extreme poverty, the IMF said in its annual economic review. However, growth is expected to slow in 2005 as activity in the construction and export-oriented service sectors decelerates slightly. The IMF Executive Board commended the authorities for their achievements and encouraged them to continue developing a well-targeted program to reduce rural poverty and achieve the Millennium Development Goals.
When Panama’s nonfinancial public sector deficit increased slightly in 2004, the new administration took revenue and expenditure measures to contain the deficit. The Board concurred that reducing the fiscal deficit and improving public debt dynamics are key to sustaining economic growth and lowering poverty. The authorities’ fiscal commitment is reflected in the budget for 2005 and the recently adopted fiscal reform. The main challenges are strengthening government finances and restoring the long-term viability of the public pension system, while enhancing the competitiveness of the private sector.
Panama remains focused on concluding free trade agreements to further integrate with the regional and global economy. The government’s strategy to strengthen competitiveness, particularly in the export-oriented service sector, includes improving the business climate, streamlining business procedures, and enhancing the quality of human capital through sustained investment in education. The Board encouraged the authorities to foster a more efficient labor market by extending flexible employment practices from the special economic zones to other sectors.
Panama’s banking system experienced a second year of recovery, and the financial system remains sound. Liquidity remains ample despite pressure on the National Bank of Panama resulting from increased credit to the government and reduced deposits from the social security fund.
|Real GDP (1996 prices)||0.6||2.2||4.3||6.2||3.5|
|(percent of labor force)|
|(percent of GDP)|
|Nonfinancial public sector balance,|
|excluding Canal Authority||-2.3||-3.3||-4.7||-5.0||-3.6|
|including Canal Authority||-1.8||-2.7||-3.8||-3.3||-2.1|
Yemen faces long-term challenges as oil production declines
Economic growth in the Republic of Yemen slowed in 2004 because of a sharp decline in oil production, posing serious long-term challenges, the IMF said in its annual economic assessment. Oil output fell by 5.9 percent, reflecting diminishing recovery from aging large oil fields and the absence of significant new discoveries. With Yemen’s economy at a crucial crossroads, the IMF Executive Board welcomed the authorities’ plans to develop a comprehensive strategy for promoting growth and diversifying the productive base, and to include reform measures in the 2005 budget.
The 2004 fiscal deficit was larger than expected because of higher development spending and a larger petroleum subsidy. The Board warned that without policy adjustments, the long-term fiscal and external positions would be unsustainable and urged the government to strengthen fiscal consolidation, deepen structural reforms, and build up the non-oil sector. It expressed concern about the 2004 surge in prices—largely resulting from expansionary fiscal and monetary policies—and called for a tightening of monetary policy. The Board emphasized that any supplementary budget be subject to stringent discipline and designed to respond only to unforeseen developments or external shocks.
The Board recommended the immediate implementation of critical measures, such as the revised General Sales Tax, the elimination of the petroleum subsidy, and the reduction in the wage bill through retrenchment rather than a wage freeze.It encouraged improvements in public expenditure management and tax and customs administration, and advised strengthening social protection mechanisms to mitigate the effects of policy adjustments on the poor.
Despite some progress, the pace of structural reforms has been slow. The business environment needs to improve, including by lowering costs for business startups, streamlining procedures to encourage private sector investment, and addressing governance issues and corruption.
|Real oil GDP||9.4||1.3||0.4||-1.8||-5.9|
|(percent of GDP)|
|Primary non-oil fiscal balance||-17.6||-20.5||-21.5||-26.9||-27.5|
Lithuania continues remarkable growth on way to euro adoption
Lithuania’s economy extended its impressive expansion in 2004, driven by vigorous private consumption and investment growth, the IMF said in its annual economic review. Lithuania acceded to the European Union (EU) in May 2004 and in June entered the Exchange Rate Mechanism II in preparation for possible euro adoption in 2007. The IMF Executive Board said that the authorities’ sound macroeconomic policies and structural reforms contributed to rapid growth and low inflation, and that Lithuania is broadly on track to meet the Maastricht criteria.
Average inflation remained low in 2004, but higher excise taxes and energy prices, coupled with strong demand, caused inflation to accelerate later in the year. The current account deficit widened, owing to a deterioration of the trade balance. The budget deficit widened in 2004, representing an expansionary fiscal stance. With indicators suggesting that output will remain above potential in 2005, the Board warned that a lax fiscal stance could add to inflationary pressures and the current account deficit. The authorities should allow the automatic stabilizers to operate and build a safety margin to be used in the event of a slowdown. The Board supported the staff’s proposal for enacting a Fiscal Responsibility Act, which together with the currency board and the convergence program, would provide a comprehensive fiscal policy framework for all levels of government.
|(percent of labor force)|
|(percent of GDP)|
|General government |
Credit expanded rapidly in 2004. The Board stressed that the trend growth in consumer borrowing and the significant foreign currency exposure of the private sector require close monitoring of credit quality. Structural reforms continued in 2004, but deeper reforms will be necessary to keep Lithuania on a real convergence path with the EU.