Two years ago, this briefing took place after the Thai devaluation and the IMF agreement with Thailand, but before the breadth and depth of the Asian crisis had become clear. One year ago, we met in the aftermath of the Russian devaluation and unilateral debt restructuring at a time when it seemed the Asian crisis could become a global crisis. This was before the Long-Term Capital Management episode.
Financial crises are abating
This year, the worst of the crisis seems well behind us, with most of the Asian crisis countries recovering fast, largely in the context of IMF-supported programs. Brazil’s IMF-supported adjustment program is succeeding with more rapid growth than had been expected, and even the Russian economy is doing better than expected, also in the context of an IMF-supported program. But there are still important elements of fragility in individual countries—most obviously in Indonesia—and in the fact that the cost of borrowing for emerging market countries has recently risen again.
Three themes emphasized
The Annual Report is a report on our work program, which consists mainly of surveillance, lending, and technical assistance activities. But in the aftermath of the financial crises, the IMF and the international community have also directed considerable efforts to developing and beginning to implement wide-ranging proposals to reform the international financial system.
Photo Credits: Denio Zara and Padraic Hughes for the IMF.
The fiscal year that ended in April 1999 saw a continuing heavy demand for IMF financing. New disbursements of IMF credits reached a record of $30 billion, and from the end of April through the end of August, we disbursed an additional $4 billion. New loan commitments in fiscal year 1999, ending April 30, 1999, totaled more than $43 billion, and we committed an additional $11 billion from end-April through end-August.
The increase in IMF quotas to $281 billion under the Eleventh Quota Review took effect in January 1999. This led to a sharp increase in the amount of uncommitted usable resources we have—that is, the amount of money we can lend if it becomes necessary—to $77 billion. While our liquid liabilities also grew, the “liquidity ratio” which is the ratio of net uncommitted usable resources to our liquid liabilities, nearly doubled to 89 percent. When the quota increase went into effect, our borrowing capacity under the General Arrangements to Borrow and the associated New Arrangements to Borrow rose to about $46 billion.
The Annual Report is a publication of the Executive Board, which is our decision-making body, rather than of the staff, in the sense that we sit down with the Board in several exhaustive sessions and go through the report line by line until there is agreement on the text. The report is based mainly on summings-up of Board discussions on major policy issues during the financial year, and many of those have been published separately, as part of our successful efforts to enhance our own transparency.
The 1999 report has four parts: an overview; a summary of the Board’s discussions of the global economy—including their discussions of the world economic outlook and the report on international capital markets; a description of IMF activities in 1998-99, notably, our work to help strengthen the global financial architecture, the Board’s surveillance activities, lending, and work on the Enhanced Structural Adjustment Facility (ESAF) and the Heavily Indebted Poor Countries (HIPC) Initiative; and a section on internal issues of IMF staffing, organization, and budget. There are three major themes in this report: financial crises and our response, architecture, and debt relief for the heavily indebted poor countries.
Financial crises and IMF response
On the first topic, the Board has held several meetings to review the lessons from the Asian crisis, particularly from the experiences of the crisis countries—Indonesia, Korea, and Thailand—that have IMF programs (see table, page 293). We have also drawn on the experiences of other countries, including the Philippines, which was in a program but did not go through a crisis of the same dimension, and Malaysia, which had a major crisis but was not in a program.
The lessons are becoming familiar to you: the need to analyze regularly, particularly in the context of our surveillance, the appropriateness of exchange rates and exchange rate regimes; the need to provide to the markets, and the public more generally, full, accurate, and clear financial information not only on the public sector, but also on the private sector; the need to strengthen financial systems, including regulatory and prudential regimes; the need to adapt institutions and regulations in creditor countries to better ensure the appropriate pricing of risk and thereby seek to inhibit bandwagon or herding behavior; and the need to seek to reduce the systemic risk associated with financial market turbulence. What is important is that work is getting under way or is well under way in the IMF to implement the policy conclusions that have been drawn from recent events. The report also provides a chronology of developments, including the IMF’s response to the crises in Russia and Brazil.
We have discussed implications for the design and implementation of our own programs. One important lesson is that we need to help countries strengthen social safety nets to soften the adverse impact of crises and adjustment on the poor—work typically done by the World Bank. It will turn out, and I think it is being seen in Thailand, in particular, and Korea that the social costs of these crises were much less than popular accounts at the time suggested. Nonetheless, everything needs to be done to try to reduce those costs, and the Board has focused on that.
We have also focused on the need to explain to markets and the general public the full content of pro-grams—I think that was done more effectively, say, in the Brazilian case than it had been earlier—and, of course, the need to be flexible in adapting programs to changing circumstances.
Strengthening of financial systems
On the second topic, the proposals that have commanded broad support from the international community are the promotion of transparency and accountability, and the development and dissemination of internationally accepted standards and codes of good practice; the strengthening of financial systems; paying greater attention to how capital markets are liberalized and making sure that it is done in an orderly way; seeking to involve the private sector more fully in forestalling and resolving crises; ensuring that the exchange rate regime is appropriate for the circumstances of the country; ensuring the adequacy of the IMF’s own resources; and providing Contingent Credit Lines from the IMF, and the private sector, as a defense against financial contagion.
We have made a lot of progress in increasing the transparency of our operations and discussions and also in publishing the results of IMF surveillance. We are publishing Public Information Notices (PINs) after most Board discussions of reports on Article IV consultations. We publish summings-up of what the Board says when we make loans to countries. We have released Board documents relating to the debt relief initiative and have asked for public comments. We have published the conclusions of the internal and external evaluations of the ESAF. The Board has commissioned and discussed external evaluations of surveillance and economic research activities. And we publish on the website up-to-date information on our liquidity position and on members’ financial accounts with the IMF.
Most recently, the Board has agreed on the presumption that member countries will release the Letters of Intent, Memorandums of Economic and Financial Policies, and Policy Framework Papers that underlie the programs that we support, and most countries are doing that. That is a major and important change. We are also in the midst of an 18-month pilot project during which member countries can voluntarily release Article IV staff reports. We are publishing PINs after Executive Board discussions of policy papers, and we have substantially liberalized public access to the IMF’s archives.
Finally, the third main topic is the operation and financing of ESAF and implementation of the joint IMF-World Bank HIPC Initiative—which involves all the other multilateral institutions as well—to provide debt-servicing relief to heavily indebted poor countries. We have had Board discussions aimed at improving the effectiveness of both the ESAF and the HIPC Initiative in helping poor countries grow and attain external viability, and particularly in reducing poverty. I think we see the balance among the objectives of the ESAF and the HIPC Initiative moving in the direction of a greater emphasis on poverty reduction.
As of April 1999, the Executive Boards of the IMF and the World Bank had reviewed the eligibility for the HIPC Initiative of 12 heavily indebted poor countries, and work was under way on others. Seven countries had qualified for debt relief and three others were expected to follow. Debt relief totaling $6 billion in nominal terms—$3 billion in 1998 net-present-value terms—had been committed, and assistance for Uganda and Bolivia had been released.
That was the position as of April, but responding to widespread concerns on the part of nongovernmental organizations, the media, and religious groups, as well as governments and international organizations that the HIPC Initiative did not provide enough debt relief for poor countries, the IMF and the World Bank have considered further changes to strengthen it.
In April 1999, to solicit public feedback, the staffs of the IMF and the Bank posted on both our websites estimates of the costs of various proposals from member governments and civil society for amending the HIPC Initiative, together with the summaries of Board discussions and the reports on which they were based. We hope to reach decisions to strengthen the HIPC Initiative and to find a method of financing the ESAF—which is how we finance our participation in the HIPC Initiative—for endorsement by the Annual Meetings in just under three weeks.
|Real GDP at market prices|
|Inflation (consumer price index)|
|(percent of GDP)|
|(billion U.S. dollars; end of period)|