Financial Daily from THE HINDU group of publications
Friday, Apr 26, 2002
IMF - World Bank commniques: Platitudes for developing countries
FINANCE ministers at the Spring Meetings of the IMF and the World Bank in Washington were satisfied that collective actions averted a deepening of the recession in 2001 and ensured the orderly functioning of the financial market in the wake of the September 11 terrorist attacks.
They are convinced that economic recovery has begun, with the US overcoming the slowdown and reporting signs of demand revival. So much so that the International Monetary and Financial Committee (IMFC) has called for reversal of the "aggressive easing" of monetary policy, with inflation in advanced economies moving down to a record low of 1.3 per cent in 2002, as recovery advances. While this may mainly apply to the US, the Federal Reserve Chairman, Mr Alan Greenspan, notes that the strength of recovery is "unclear" and firming oil prices needed to be watched. An early tightening of monetary policy by Fed, which slashed the prime rate five percentage points during 2001, thus, appears to be ruled out.
IMFC has broadly gone with the latest IMF assessment of the world economic outlook with an estimated growth of 2.8 per cent in 2002 and scaling up to 4 per cent in 2003 and also taken into account the downside risks, the Fund has underlined. Global recovery is clearly linked to the American economy set to register a 2.3 per cent this year, up from 1.2 per cent in 2001, a year of "mild" recession, and rising to 3.4 per cent, according to IMF estimates.
Growth will be 1.5 and 2.9 per cent in the EU for these two years while the second largest economy, Japan, is likely to contract one per cent, making it the third recession in a decade. Having ceased to be an engine of growth for the Asian region in recent years, the IMF has emphasised the indispensability of bank and corporate restructuring by Japan and the rapid disposal of non-performing loans. Equally necessary is monetary easing by Tokyo to help end the deflation.
The risk factors in the IMF's World Economic Outlook include the international security situation, especially the Arab-Israeli conflict, an oil price upsurge, record levels of household and corporate debt in the US and other advanced countries, uneven growth in the European Union, recession and deflation in Japan, as well as the enlarged US current account deficits. But the US Treasury officials reacted sharply to suggestions that their current account was leading to global imbalances and pointed to recession and deflation in Japan and Europe's slow reform as potential risks.
The Fund's concern was over any corrective actions on the current account position in the US, leading to exchange rate realignments with their impact on the financial market. However, the IMFC communique expects the US to focus on the need to preserve fiscal balance over the medium term, as US budgets have once again begun to move into deficit in the aftermath of the President, Mr George Bush's tax cuts and increased security expenditures in combating terrorism.
Oil price uncertainties remain a major source of concern for both the developed and developing countries, more for the latter, and the volatile situation in West Asia, with no settlement a near-term prospect, could drive up or keep prices at present levels, which are seven dollars per barrel higher than at the end of 2001.
PEC says the rise is due to factors beyond its control and has nothing to do with any supply shortage. All that the finance ministers could do was to stress the importance of stability in oil markets at prices "reasonable for consumers and producers".
IMF work on bankruptcy procedures for countries in sovereign debt distress, ideas on which were initially elaborated by the first Managing Director, Ms Anne Krueger, has now been backed by the IMFC which wants the Fund to examine legal, institutional and procedural aspects of both a statutory and contractual approach for the international workout mechanism.
The statutory approach would enable the sovereign debtor and a super-majority of creditors to reach an agreement on restructuring, while the contractual approach would provide for incorporating restructuring clauses in debt instruments.
This, as well as other key issues relating to a new international financial architecture, would be taken up at the Fund-Bank annual meetings in September next.
Developing countries have had little decisive say in the policies, conditionalities and standards and codes evolved and approved at the Fund's Executive Board. Major nations do not give serious attention to many proposals put forward by the G-24 developing countries from time to time. The Finance Minister, Mr Yashwant Sinha, told IMFC that industrial nations should adopt coherent policies to promote growth as well as development through higher levels of official assistance and market access, along with phasing out of agricultural subsidies, which would extend benefits of globalisation to developing countries.
A more forthright call for an international political and economic order that is "fair and rational" came from Mr Dai Xianglong, Governor of the People's Bank of China, who said the world economy needed to be "multi-polarised" for harmonious and balanced development and that the new quotas of the Fund to be worked out should reflect objectively the changing status and needs of developing countries. Given the vulnerabilities in recession-hit Japan, the Chinese Governor specially urged the need for yen's stabilisation to create conditions for steady course of the Asian economy. China has so far maintained a stable exchange rate vis-à-vis the dollar, despite the round of depreciations in neighbouring countries.
Developing countries are projected to grow 4.3 per cent this year and 5.5 per cent in 2003. Apart from China, the IMF says economic growth is expected to remain buoyant in India and Pakistan this year and the next. India's GDP is likely to grow 5.5 per cent in 2002 and 5.8 per cent in 2003.
What developing countries expected from the Fund-Bank Ministerial meetings was a strong reaffirmation of the commitments by developed nations at the UN Summit on Financing of Development at Monterrey, Mexico, to increase development assistance and trade liberalisation by lowering subsidies and other trade-distorting measures. The Washington Communique has welcomed the "recent announcements of increased and more effect aid" and urged further progress.
The IMF and the World Bank had been actively involved both in the preparations for the Monterrey Summit as well as in following up on the outcome of what they call the `New Partnership Contract".
The European Union committed itself at the Summit to increase its development aid to 0.39 per cent of GDP by 2006 while Mr George Bush, giving up the `aid does not work' attitude, announced that the US would extend $5 billion over the next three years. These are far too inadequate to help developing countries reach the Millennium Summit Social Goals for 2015, including reduction by half of people living in extreme poverty.
The World Bank President, Mr James Wolfensohn, has been urging that developed countries must increase the current level of ODA of $50 billion a year by $30-40 billion more, instead of spending $340 billion on agricultural subsidies every year effectively barring access for agricultural products of developing countries. The UK Chancellor of Exchequer, Mr Gordon Brown, who has been at the forefront in arguing for doubling the present ODA, said in Washington there must be commitment by all developed country members of IMF that they would make additional resources available.
The US and other developed nations have now made it clear that assistance would only go to countries with development strategies of their own, embodying sound policies, good governance and commitment to trade liberalisation.
More than aid, trade is important and must become the vehicle of growth and industrial countries must not detract from the commitments in Monterrey to provide greater trade opportunities for low-income countries, according to Mr Horst Kohler, Managing Director, IMF.
The Fund-Bank communiqués have largely remained platitudes, so far as developing countries are concerned. Again, as before, IMFC sidestepped the G-24 renewed demand for a general SDR allocation to increase liquidity.
The latter also urged that developed countries should donate their share of SDR to a fund which would be used to assist low-income countries.
Both the IMFC and the Development Committees have acknowledged the need for more flexible assistance under the IMF/World Bank HIPC (highly indebted poor countries) Initiative as several sub-Saharan African countries have been unable to make progress on their programmes of poverty reduction because of global economic slowdown and steep fall in commodity prices.
Mr Wolfensohn described the situation in Africa as `alarming' and given the present limitations in resource flows, he feared the number of poor living on one dollar a day would increase 45 million to 345 million by 2015. Even in South Asia, the reduction in poverty will only be from 490 million in l999 to 279 million, according to the Bank's estimate, well below the 2015 target.
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