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Archived - Report on Operations Under the Bretton Woods and Related Agreements Act 2004 : 1

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Introduction

The Bretton Woods Institutions—the International Monetary Fund (the IMF or the Fund) and the World Bank (the Bank)^[1]—were founded at a conference held at Bretton Woods, New Hampshire, in 1944. The IMF was established to promote the smooth functioning of the international monetary system, encourage international trade and support high rates of sustainable economic growth. To achieve these goals, it exercises a surveillance function by monitoring members’ economic policies, provides policy advice and technical assistance, and extends short- and medium-term financial assistance to countries faced with balance of payments difficulties.

The World Bank’s goal is to reduce poverty by raising living standards and promoting sustainable development in developing countries. As the premier development institution in the world, it provides a wide range of assistance to developing countries, including economic policy advice and lending and technical assistance for projects that promote sustainable growth and an improved quality of life.

Canada is the eighth largest member of the IMF (as measured by quotas), tied with China, after the six other Group of Seven (G-7) countries and Saudi Arabia. Along with China, Italy, Russia, India and Saudi Arabia, Canada is the sixth largest shareholder of the World Bank. On the Executive Boards of the two institutions, Canada represents Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Ireland, Jamaica, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines. On the Bank’s Executive Board, Canada also represents Guyana. Canada’s formal participation in the two institutions is authorized under the Bretton Woods and Related Agreements Act. Section 13 of the Act states:

The Minister of Finance shall cause to be laid before Parliament, on or before March 31 next following the end of each calendar year or, if Parliament is not then sitting, on any of the first thirty days next thereafter that either House of Parliament is sitting, a report containing a general summary of operations under this Act and details of all those operations that directly affect Canada, including the resources and lending of the World Bank Group, the funds subscribed or contributed by Canada, borrowings in Canada and procurement of Canadian goods and services.

This report has been prepared in accordance with this provision. The sections that follow review the activities and operations of first the IMF and then the Bank for the year 2004. A final section deals with issues common to both institutions. The annexes contain detailed numerical summaries of the year’s activities. The 2004 spring and fall communiqués of the International Monetary and Financial Committee (IMFC) of the Board of Governors of the IMF and the Development Committee (DC) of the Boards of Governors of the World Bank and the IMF are also appended for information. The IMFC and DC are the key policy committees of the IMF and World Bank Boards of Governors, and their communiqués steer the policy direction of the two institutions.

Roles of the International Monetary Fund and World Bank International Monetary Fund Oversees the international monetary system and promotes international monetary cooperation. Identifies financial vulnerabilities and promotes remedies to prevent financial crises. Promotes orderly exchange rate relations among member countries. Provides short- to medium-term financial support to members facing balance of payments difficulties. Provides support for poverty reduction through promotion of economic stability. World Bank Provides support for poverty reduction in developing countries through investments in areas such as health and education. Promotes economic development and structural reform in developing countries. Assists developing countries through long-term financing of development projects and programs. Provides special financial assistance to the poorest developing countries through the International Development Association. Stimulates private enterprise development and private investment in developing countries primarily through its affiliates, the International Finance Corporation and the Multilateral Investment Guarantee Agency. Enhances the flow of capital and technology for productive purposes to developing countries by providing investment insurance against non-commercial risks for investments in developing countries.

International Monetary Fund

Overview

As a major trading nation, Canada benefits from a strong international monetary system that facilitates the free movement of goods, services and capital. The IMF promotes international financial stability and economic growth through the provision of policy advice and financial and technical assistance to countries experiencing unsustainable external imbalances and related economic difficulties.

Benefits of Membership

IMF membership provides a number of specific benefits:

The Minister of Finance is a Governor of the Fund and elects an Executive Director to its 24-member Executive Board. This representation allows Canada to have high-level influence on decisions taken by the IMF on specific country assistance programs and major policy issues affecting the world monetary and financial system.
The IMF, through its regular surveillance of the Canadian economy, provides Canada with an independent source of policy advice on macroeconomic policies and engages in regular dialogue on these policies with Canadian officials at the Department of Finance, other government agencies and the Bank of Canada.
The efforts of the IMF to make sure that countries abide by their obligations, including those under Fund-supported programs, help ensure that they repay Canadian bilateral loans and use our bilateral development assistance effectively.
Canada earns a market rate of return on its financial position in the IMF.
Were Canada to experience severe balance of payments difficulties, it would have the right to draw on IMF financial assistance.

How the IMF Works The IMF works like a credit union. It has a large pool of liquid assets, or resources, comprising convertible national currencies, special drawing rights,^[2] and other widely used international currencies provided by its members, which it makes available to help members finance temporary balance of payments problems. Members provide resources to the IMF in amounts determined by "quotas" reflecting each country’s relative importance in the world economy. A country’s quota in turn helps determine the amount of Fund resources that it may use should it experience economic difficulties. At the end of 2004 the total quota for the Fund’s 184 members was SDR 212.8 billion. A member country uses the general resources of the IMF by purchasing (drawing) other members’ currencies with an equivalent amount of its own currency. A member repurchases (repays) its own currency from the IMF with other members’ currencies over a specified period of time, with interest. In this way, a member country receives credit from other members. Members seeking financial assistance can draw on four "credit tranches," each amounting to 25 per cent of their quota. For access to resources beyond the first credit tranche, the member and the IMF have to reach an agreement on a set of economic measures and reforms aimed at removing the source of the country’s balance of payments difficulty and creating the conditions necessary for sustainable non-inflationary growth. Depending on the prospective duration of the problem, these measures are agreed to as part of a Stand-By Arrangement, which typically lasts one to two years, or an Extended Fund Facility, which generally runs for three years. Short-term financing for balance of payments difficulties related to crises of market confidence is also available through the Supplemental Reserve Facility, created in December 1997. Members can also use financial facilities created for specific purposes, including the Compensatory Financing Facility, which provides financial support to members experiencing temporary export shortfalls or other unforeseen adverse external shocks. Concessional financing to low-income developing countries under the Poverty Reduction and Growth Facility (formerly the Enhanced Structural Adjustment Facility) is made available in the form of low-interest loans with extended maturity periods.

Canada’s Priorities at the IMF

Global Economic and Financial Stability

With the globalization of economic activity, shifts in demographics, the increased interdependence of economies, and the growth and stronger dependence on capital markets, the world economy has changed significantly since the Fund was founded 60 years ago. For this reason, the IMF has been engaged over the past several years in a process of reform aimed at making the Fund more effective in promoting greater financial stability and helping countries benefit from the opportunities of global economic integration.

In cooperation with its international partners, Canada has played an active role in identifying areas where reforms are required and taking steps to implement those reforms. To enhance the Fund’s effectiveness, reforms have focused on six main areas:

improving transparency, accountability and openness;
strengthening surveillance and crisis prevention;
enhancing crisis resolution;
improving the effectiveness of IMF lending;
safeguarding the IMF’s cooperative nature; and
strengthening support for low-income countries.

In response, the Fund has adapted its key instruments—surveillance, lending and technical assistance. Despite the progress achieved, the IMF’s new Managing Director, Rodrigo de Rato, has initiated discussions on the strategic directions of the Fund to help shape the evolution of its role in the international economic system over the longer term. While the Fund’s core mandate remains relevant, it is useful to assess whether its way of doing business needs to change to deal effectively with the new challenges posed by changes in the global economy and financial markets.

Looking forward, a key objective for Canada is to ensure that the Fund has the tools to promote international financial stability. To meet this objective, Canada supports:

strengthening surveillance to prevent crises through greater attention to financial vulnerabilities and increased transparency of information;
improving the institutional capacity of countries to support strong macroeconomic frameworks and more resilient financial systems;
enhancing crisis resolution;
improving IMF lending to promote economic reform; and
strengthening governance and accountability of the IMF and its members.

Canada continues to place a high priority on strengthening support for low-income countries. The IMF plays a crucial role in supporting macroeconomic stability as a key tool for poverty reduction in the poorest countries and is integrating its efforts with those of the World Bank.

The Fund’s involvement in the key areas outlined above, and Canada’s priorities related to these efforts, are described in more detail in the section entitled "Efforts to Promote International Financial Stability," which follows the next section.

Economic and Financial Developments in Emerging Markets

Financial conditions in most emerging markets continued to improve in 2004. JP Morgan’s Emerging Market Bond Index, which measures the yield spread between emerging market debt and comparable US Treasuries, narrowed steadily over the year, reaching historical lows by the end of the year. This significantly reduced external debt-service costs for many emerging market economies and enabled some to regain access to external sources of finance. Nevertheless, much remains to be done to reduce public debt levels to more sustainable levels and restore fiscal discipline in emerging markets. The IMF has outlined a number of structural rigidities in emerging market public finances, notably the earmarking of public funds, poor tax administration and a culture of tax evasion. A sudden reversal of private capital flows to some emerging market countries, which could be triggered by a faster-than-expected increase in US interest rates, could give rise to liquidity or solvency problems in countries with heavier financing requirements.

At 26 per cent of total credit outstanding, Brazil is the IMF’s largest borrower. Brazil’s economic prospects improved drastically in 2004: real gross domestic product (GDP) growth rose 6.1 per cent in the third quarter of 2004, the fastest growth in eight years, and is expected to have been 5 per cent for the year as a whole. Brazil’s 2004 growth was broadly based, with investment rising an expected 11.5 per cent and the current account surplus rising to 2 per cent of GDP. Faster growth and the strengthening of its currency improved Brazil’s debt dynamics and reduced vulnerabilities. In 2004 the government ran a primary surplus of 4.5 per cent of GDP and the public debt fell to 51 per cent (from 57 per cent in 2003); Brazil accumulated US$3.6 billion in reserves and reduced its external debt to 35.5 per cent of GDP (from 46.5 per cent in 2003). Inflation remains a concern, however, as the central bank has had to hike interest rates to combat rising inflation expectations.

Economic and financial developments in Turkey, the IMF’s second largest borrower with 25 per cent of total credit outstanding, continued to improve in 2004. Real GDP growth is estimated to have reached 9.0 per cent on the year, almost doubling the original 5-per-cent target set out in Turkey's IMF program. Inflation reduction has also been a major success of the 2002–2005 program, as inflation targets have been significantly undershot for the past three years. Turkey’s year-end inflation declined to 9.3 per cent in 2004, its lowest level since 1975 and substantially below the initial 12-per-cent year-end IMF-backed target. However, a by-product of Turkey's strong economic growth has been a widening of the current account deficit, which is estimated to have reached some 5 per cent of GDP in 2004, and is expected to narrow only marginally in 2005. These deficits are being financed by sizeable short-term and partly speculative flows that leave the balance of payments exposed to shocks and possible rises in global interest rates.

Economic expansion in Argentina, the IMF’s third largest borrower with 14.5 per cent of total outstanding credit, also continued in 2004. Real GDP growth is expected to have been 8.5 per cent, down slightly from 8.8 per cent in 2003. On the demand side, strong fixed investment has been the lynchpin of growth. Strong real GDP growth has also enabled the government to boost its tax revenues significantly and increase the primary surplus to 4.4 per cent of GDP. Argentina’s strong performance, however, is in part due to the fact that it has not been servicing its defaulted external debt and US$20 billion in interest has accumulated since December 2001. Indeed, Argentina’s recovery may be vulnerable: Argentina’s banking system needs to be recapitalized and the defaulted debt must be restructured to put Argentina’s total debt onto a sustainable path. The IMF program is on hiatus and will not be restarted until the restructuring is complete and Argentina meets the "prior conditions" (i.e. fiscal reform and banking sector compensation) required by the IMF to pass the Third Review.

IMF Programs for Emerging Economies


	Brazil	Turkey	Argentina

Total amount of credit outstanding to the IMF (as of December 31, 2004)
(US$ billions)	24.5	21.1	13.8
(% of quota)	531%	1,437%	429%

Efforts to Promote International Financial Stability:
Strengthening Surveillance and Crisis Prevention

Making Surveillance More Effective

Through its surveillance role, the IMF monitors economic and financial developments and policies in member countries and at the global level. Fund surveillance is critical, as it can identify emerging problems and policy imbalances before they become crises. Improved surveillance at the IMF—leading to better information for sound economic analysis, including better pricing of risk, which leads to more stable capital flows—is central to crisis prevention.

The Fund has made considerable progress in strengthening its surveillance operations, especially by promoting enhanced transparency in member countries and improving its analytical tools for the early identification of a country’s vulnerability to crisis. However, the surveillance function needs to continue to evolve in light of changes in the world economy. In April 2004, the International Monetary and Financial Committee of the IMF’s Board of Governors called for further efforts to enhance the focus, quality, persuasiveness, impact and overall effectiveness of surveillance.

With this in mind, the Fund’s 2004 biennial review of the implementation of surveillance focused on how to make surveillance more effective across the whole membership. Canada endorsed the key conclusions of the review: the need for a sharper focus on the Fund’s core areas of expertise, clearer and more candid treatment of exchange rate issues, enhanced financial sector coverage and better regional assessments. As well, the Fund’s debt sustainability assessments would be enhanced if they were conducted independently of regular country analysis.

Improving Transparency, Accountability and Openness

Canada supports measures to enhance the transparency and accountability of the Fund’s own operations. This reflects the view that the IMF’s effectiveness depends in part on its ability to be transparent and fair in the provision of policy advice to its members, accountable for its advice and lending decisions, and open to external input and dialogue.

The publication rate for country staff reports is now more than 75 per cent and almost all Fund policy papers are now released. A policy of presumed publication for all Article IV staff reports took effect in July 2004. A review of the Fund’s transparency policy is planned for mid-2005.

IMF Transparency The IMF has adopted a series of measures in recent years to improve transparency, including guidelines under which the Fund now publishes most of its own policy papers as well as detailed information about its operations and finances. The key initiatives and recent developments include the following: Publishing more information about IMF surveillance of members, including Public Information Notices (PINs), which provide background information on a member country’s economy and the IMF’s assessment of the country’s policies and prospects. PINs are issued at the country’s request following the conclusion of the Fund’s regular Article IV consultations. Over 80 per cent of IMF member countries have agreed to the publication of PINs. The Fund has also adopted a policy establishing a presumption of publication of Article IV reports. Canada’s most recent PIN and Article IV report can be found on the IMF Web site at www.imf.org/external/country/can/index.htm. Encouraging countries to publish the "mission statements" that are prepared at the time of the IMF’s annual Article IV consultations with member countries. Prior to the preparation of the staff’s report to the Executive Board, the IMF mission often provides a country’s authorities with a statement of its preliminary findings at the conclusion of its bilateral discussions. A number of countries, including Canada, now release these statements. Canada’s most recent mission statement can be found on the IMF Web site at www.imf.org/external/country/can/index.htm. Releasing more information about countries’ IMF-supported programs and the Executive Board reviews of these programs. The Fund has adopted a policy establishing a presumption of publication of Letters of Intent and other documents that underpin Fund-supported programs. Nearly all policy intention documents of countries requesting Fund financial assistance are published, and three-quarters of staff reports on Article IV consultations and reports on the use of Fund resources are published. The publication of staff reports on the use of Fund resources in exceptional access cases would generally be a precondition for management to recommend approval or augmentation of a financing arrangement or completion of a review by the Executive Board. Publishing staff papers on key policy issues and issuing PINs of the Board discussions of these papers. In addition, the Fund is increasingly posting draft papers on important policy issues on its Web site so that the views of civil society can be taken into account. As well, more financial information is being released about the IMF, including the sources of its financing for its lending (the quarterly financial transactions plan). Providing the public with substantially expanded access to the Fund’s archival material.

The Fund is also working to deepen its understanding of international capital markets and financial flows. In 2001 it established the International Capital Markets Department in order to enhance its ability to identify crises early enough to address them effectively. This department is also strengthening the Fund’s ability to help countries gain access to international capital markets, an important step in helping the poorest countries make a breakthrough in poverty reduction. The department’s research is summarized quarterly in a new publication, the Global Financial Stability Report. In addition, the Capital Markets Consultative Group was established to promote a better dialogue between member countries and private investors and creditors.

With respect to accountability and openness, the IMF established the Independent Evaluation Office (IEO) in 2001 to undertake objective assessments of the IMF’s operations, policies and programs. The IEO operates independently of IMF management and at arm’s length from the Fund’s Executive Board.

The IEO’s work program is developed following extensive consultations with government authorities, non-governmental organizations (NGOs), members of the academic community and representatives of the financial sector, as well as the staff, management and Executive Board of the IMF.
The IEO consults extensively with external stakeholders in deriving the detailed terms of reference for each study and provides further opportunities to comment when the completed evaluation reports are made public.
Since it was established, the IEO has played a key role in providing independent assessments of Fund surveillance, program design and lending operations. The IEO completed two more evaluations in 2004: (i) experience with Poverty Reduction Strategy Papers and the Poverty Reduction and Growth Facility and (ii) the IMF’s role in Argentina, 1991–2001. The Executive Board discussed the two reports in July 2004. These reports have provided management, staff and the Executive Board with ways to strengthen the Fund’s crisis prevention and poverty reduction efforts. The IEO’s evaluation of IMF technical assistance will be completed and presented to the Executive Board in early 2005.
The IEO released its second annual report in December 2004, which reviews its recent reports and discusses the status of ongoing evaluations (available on its Web site at www.imf.org/ieo). In 2005 the IEO will undertake evaluations of the Fund’s financial sector work, its approach to capital account liberalization, and the role of multilateral surveillance.

IEO Evaluation of Poverty Reduction Strategy Papers (PRSPs) and the Poverty Reduction and Growth Facility (PRGF) In 1999, the IMF and the World Bank adopted a new approach to supporting low-income countries to strengthen country ownership and enhance the poverty focus of programs. The IEO report found that while the initiative has resulted in improvements, its implementation has fallen short of its potential. The report identified a need to shift incentives more towards improving underlying domestic policy-making processes and institutions and away from the production of documents. In reviewing the report, the Fund’s Executive Board agreed that the PRSP approach has yielded benefits, but observed that it was perceived to be externally driven and that participation has sometimes been narrow, especially in the formulation of the macroeconomic framework underlying PRSPs. The report found that while PRGF-supported programs are increasingly being aligned with PRSPs and the design of PRGF programs has improved, major challenges remain, such as basing Fund-supported programs on a full understanding of micro-macro linkages that are crucial to understanding sources of growth. The Executive Board thought more should be done to integrate the results of poverty and social impact analysis into program design. Work is underway at the Fund to follow up on the report’s recommendations.

Strengthening Institutional Capacity

The Fund is also working with other members of the international community on initiatives designed to improve the institutional capacity of countries to support strong macroeconomic frameworks and more resilient financial systems. These initiatives, which complement the Fund’s surveillance framework, include work on standards and codes, data provision, strengthening financial sectors, and technical assistance.

Implementation and Assessment of International Codes and Standards To help improve economic policy-making and strengthen the international financial system, the international community has called upon the IMF and other standard-setting agencies to develop standards and codes covering a wide range of economic and financial areas. In this effort, the Fund is responsible for its core areas of expertise. To date the Fund has adopted a data dissemination standard, a code on fiscal transparency and a similar code with respect to monetary and financial policies. Implementation is being encouraged in part through the provision of targeted technical assistance in accordance with countries’ domestic priorities and circumstances. The IMF has a key coordinating role in assessing observance of codes and standards through its Reports on the Observance of Standards and Codes (ROSCs), as well as through the joint IMF–World Bank Financial Sector Assessment Program (FSAP). Additional developments regarding FSAPs are covered in the following section, "Strengthening Financial Sectors." The Fund has developed a modular approach to ROSCs whereby comprehensive assessments of members’ adherence to a range of internationally recognized standards can be built up over time, standard by standard. ROSCs summarize the extent to which countries observe these standards, focusing primarily on the areas of direct operational concern to the IMF, such as data dissemination and fiscal transparency. ROSC modules for the financial sector are now being derived as a by-product of the FSAP process. Canada was the first country to publicly release as a ROSC the assessment of compliance with international standards conducted during its FSAP. Canada has undertaken ROSCs in the areas of banking and insurance supervision, fiscal policy transparency, monetary and financial policy transparency, payments systems and securities regulation. Additionally, Canada completed a data ROSC in October 2003. Canada’s ROSCs can be found on the IMF Web site at www.imf.org/external/np/rosc/rosc.asp#c. Overall, over two-thirds of the IMF’s 184 member countries have completed or committed to at least one ROSC module. After a review of the experience with the FSAP, the IMF and World Bank agreed to extend the FSAP and expand the coverage to up to 24 countries per year. Over 100 of the IMF’s 184 members have either participated in the FSAP or have volunteered to do so in the near future. Joint Fund-Bank reviews of the ROSC and the FSAP are scheduled for the spring of 2005. Also, the IEO is scheduled to conduct an evaluation of the FSAP in late 2005.

Strengthening Financial Sectors

In addition to its work on financial sectors noted above, the IMF is involved in international efforts on financial abuses that threaten the integrity and stability of the international financial system. In particular, the Fund has:

expanded its anti-money laundering work, including through FSAPs, to cover legal and institutional frameworks;
extended its involvement beyond anti-money laundering to efforts aimed at countering terrorist financing;
accelerated its program of offshore financial centres (OFCs) and undertaken onshore assessments in the context of the FSAP;
enhanced its collaboration with the Financial Action Task Force (FATF) to develop a mutually acceptable global standard on anti-money laundering; and
intensified its provision of technical assistance to enable members to implement the agreed-upon international standards and extended it to include help for the creation of financial intelligence units.

In November 2002 the Fund:

added the FATF recommendations on anti-money laundering and combatting the financing of terrorism to the list of standards and codes for which ROSCs are undertaken in the context of the IMF-World Bank FSAP framework;
approved a 12-month pilot project of anti-money laundering and terrorist financing assessments and accompanying ROSCs to be undertaken by the IMF, World Bank and other bodies; and
adopted a comprehensive assessment methodology developed in collaboration with the World Bank and the FATF.

In April 2004 the Fund reviewed the 12-month pilot program of anti-money laundering/combatting the financing of terrorism assessments and adopted proposals to make such assessments a permanent part of the IMF’s surveillance activities in the context of FSAPs and OFC assessments. The Fund also endorsed the revised FATF recommendations as the new standard for ROSCs and a revised methodology to assess that standard. Under the revised standard, 30 to 40 assessments are expected to be conducted annually, of which the IMF and World Bank will conduct about half and the FATF and other bodies the remainder.

OFC assessments for 40 jurisdictions have been conducted or are underway. Updates will be conducted within four to five years, with interim risk-focused assessments as needed. To help provide technical assistance in the Caribbean region, the Fund, in close collaboration with Canada, established the Caribbean Regional Technical Assistance Centre (CARTAC), which became operational in September 2001. Canada is the largest single donor to CARTAC, which is designed to strengthen the region’s technical capability in financial sector regulation and supervision, tax administration and other areas.

Technical Assistance

In addition to its policy advice and financing, the IMF provides technical assistance to member countries in its areas of expertise—including macroeconomic policy, monetary and foreign exchange policy and systems, fiscal policy management, external debt and macroeconomic statistics. It has been agreed that technical assistance should play a central role in supporting the work of the IMF in crisis prevention and management, debt relief and poverty reduction, and capacity building in low-income and transition countries.

Since the demand for IMF technical assistance normally exceeds the resources available, the IMF takes a number of considerations into account in setting priorities for country requests. Under guidelines approved in 2001, priorities for technical assistance are set in accordance with the IMF’s core areas of specialization, its main program areas and its key policy initiatives, which enables a more systematic alignment of resource commitments with institutional priorities. At a March 2004 review the Fund’s Executive Board emphasized the essential contribution of IMF technical assistance in helping low-income countries and countries emerging from conflict situations, in particular in laying the capacity, institutional and governance foundations for sustained growth and poverty reduction.

In recent years the IMF has adopted a regional approach to the delivery of technical assistance and training. The IMF opened a fifth regional technical assistance centre, the Middle East Technical Assistance Center (METAC), in Beirut, Lebanon, in October 2004. This centre complements those already in place in Africa (East and West), the Pacific and the Caribbean. Canada is a major financial contributor to both the Caribbean technical assistance (CARTAC) and African technical assistance (AFRITAC) programs.

In Afghanistan, the role of the IMF has been to provide policy advice and technical assistance in establishing a sound foundation for macroeconomic management and stability. The Fund has provided specialized assistance in areas such as customs administration, tax policy and administration, anti-money laundering and fiscal revenue legislation, and the strengthening of statistical capacity.

In Iraq, the Fund has been providing technical expertise to help create a stable macroeconomic environment and rebuild Iraq’s economic and financial infrastructure. The Fund worked with Iraqi officials and the Coalition Provisional Authority to prepare an external debt sustainability analysis (DSA). This DSA informed negotiations among the Paris Club of creditors (of which Canada is a member) to provide Iraq with debt forgiveness.

The Fund has also established a donor-sponsored technical assistance (TA) subaccount, and is a member of the International Advisory and Monitoring Board, which oversees the work of the auditors of the Development Fund for Iraq. Canada is a key donor in the IMF’s TA subaccount for Iraq, which is focused on rebuilding the institutional macroeconomic capacity in the country. The IMF’s TA program, which is being implemented through seminars outside Iraq because of security concerns, includes training in the areas of public expenditure management, tax policy and administration; central bank organization, accounting procedures and financial reporting, banking supervision, support for the banknote exchange program, and payments system reform; joint training on macroeconomic policies by the IMF Institute and the Arab Monetary Fund; and a series of statistics missions.

Finally, the IMF also plays a coordinating role in the TA efforts of other providers (at their request) in macroeconomic policy areas, in particular with the World Bank, U.S. Department of the Treasury, U.S. Agency for International Development (USAID), UK Department for International Development, and the Bank of England.

Enhancing Crisis Resolution

One of the IMF’s primary goals is to reduce the frequency and severity of international financial crises. Despite its crisis prevention efforts, however, financial crises will still occur. The IMF is therefore engaged in the search for possible reforms to improve its capacity to manage and resolve financial crises. Canada welcomes ongoing efforts to advance crisis resolution initiatives, as these efforts will ultimately promote a stronger, more stable and more efficient international financial system.

Implementing the New Access Policy Framework

In 2002 the Fund established clearer rules and procedures for determining exceptional access to its resources (i.e. loans that are larger than what would be normally allowed under IMF lending rules) for countries that face financial crises. Canada supports strict adherence to these criteria to help shape the expectations of members and markets alike, to provide a benchmark for decisions regarding program design and access, to safeguard the integrity of the IMF’s resources and to ensure uniform treatment of members. In addition, the procedures for consideration of exceptional access requests should be further strengthened by taking alternative forecasts into account and by giving timely and careful consideration to the financial implications that these exceptional access decisions will have for the Fund.

Exceptional Access Policy Criteria and Procedures In September 2002 the IMF’s Executive Board endorsed the following criteria that, at a minimum, would need to be met to justify exceptional access to IMF resources for member countries facing a capital account crisis: the member is experiencing exceptional balance of payments pressures on the capital account resulting in a need for Fund financing that cannot be met within normal limits; a rigorous analysis indicates a high probability that the debt will remain sustainable; the member has good prospects of regaining access to private capital markets within the time Fund resources would be outstanding, so that IMF financing would provide a bridge; and the policy program of the member country provides a reasonably strong prospect of success, based on both the member’s adjustment plans and its institutional and political capacity to implement that program. The Board also expressed support for strengthening procedures for decision making on exceptional access proposals, including: increasing the burden of proof required in program documents by requiring more extensive justification of the level of access, a rigorous analysis of debt sustainability, and an assessment of the risks to the IMF arising from the exposure and the effect on the IMF’s liquidity position; formalizing early Executive Board consultation on the status of negotiations in exceptional access cases; and requiring ex post evaluation of programs of exceptional access.

Promoting the Adoption of Collective Action Clauses

One of the impediments to successful restructurings of sovereign debt in emerging market financial crises has been the sheer number of creditors involved and the difficulties they face in coordinating and communicating amongst themselves. Collective action clauses are an effective crisis prevention and resolution mechanism, as they facilitate more timely and orderly restructurings of sovereign debt. They do so by providing for a mechanism for creditors as a whole to delegate negotiations to a sub-group of lenders, with voting on the restructuring offer in such a way that the majority decision is binding on all creditors. The IMF is continuing to promote the inclusion of collective action clauses in international sovereign bond contracts in jurisdictions where they are not yet market standard by holding an active dialogue with emerging market issuers and private sector participants. Significant progress has been made in this area, with a number of emerging market borrowers, such as Mexico, Korea and Uruguay, adopting collective action clauses in their recent bond issues. The widespread adoption of collective action clauses in sovereign bond contracts is an important development in promoting the orderly resolution of financial crises, but further work is required on aggregation, creditor coordination and other issues related to sovereign debt restructurings.

Assessing the Possible Role of a Voluntary Code of Conduct

The private sector and a group of emerging market economies have drafted a voluntary code of conduct to guide sovereign debtors and their creditors in the restructuring of sovereign debt. While refinements will likely be made to this draft code over time, it does provide a broad framework for improving the international community’s crisis management efforts and should help guide overall relations between sovereign debtors and their private sector creditors. The IMF is also continuing to look for ways to improve its crisis resolution efforts by maintaining an active dialogue with private market participants and debt managers and reviewing the implementation of its lending into arrears policy.

Improving IMF Lending

A major focus recently has been to examine how resources can be used more efficiently to meet the needs of member countries in promoting economic reform. To that end, the IMF has adopted new guidelines on the conditions attached to its loans and streamlined the structure of its lending facilities.

Focusing Conditionality and Fostering Ownership

An important feature of IMF arrangements is the "conditionality" that borrowing countries undertake to correct their underlying balance of payments problems and restore their ability to repay the Fund. Over time conditionality had broadened in scope and become more complex, leading to concerns about its impact and effectiveness. In the fall of 2002 the IMF approved new guidelines on the design and implementation of conditionality in Fund-supported programs.

The new guidelines are aimed at streamlining and focusing conditionality in areas of IMF core competencies in order to enhance the effectiveness of Fund-supported programs and promote national ownership of reforms. They emphasize the need to focus conditionality on policies that are critical to achieving the macroeconomic objectives of programs. The guidelines are based on several interrelated principles, including national ownership of reform programs, parsimony in the application of program-related conditions, effective coordination with other multilateral institutions, and clarity in the specification of program conditions.

Conditions will normally consist of macroeconomic and structural measures that are within the Fund’s core areas of responsibility. Where structural reforms that are critical to a program’s success lie outside the Fund’s core areas, the Fund should work with the World Bank and other international financial institutions, which have a comparative advantage in the design and monitoring of these measures. A key aspect is that the country should take primary responsibility for its own policies and that conditionality, if well designed and established through a mutually acceptable process led by the member, can strengthen and promote ownership. The IMF has observed that implementation of the new guidelines is leading to changes in the scope and design of Fund programs—structural conditionality is more focused on the Fund’s core areas of competence and the average number of structural conditions has declined.

In 2005 the Fund will review the experience with the design and effectiveness of Fund-supported programs and the application of the 2002 conditionality guidelines.

Trade and Development

In October the International Monetary and Financial Committee supported the IMF’s continued role in advocating trade liberalization, including through a successful conclusion of the Doha Round trade negotiations. Earlier in the year, the Fund introduced the Trade Integration Mechanism (TIM) to help member countries meet balance of payments shortfalls that might result from multilateral trade liberalization. The TIM is a policy designed to increase the predictability of resources that are available under existing facilities. Bangladesh was the first country to benefit from assistance in accordance with the TIM, through augmentation of access to IMF resources under its Poverty Reduction and Growth Facility arrangement.

Signalling Mechanisms

The IMF has had preliminary discussions on whether there are gaps in the Fund’s range of instruments and policies. For some IMF members it would be useful if the Fund could provide high-frequency policy monitoring and signalling outside of formal Fund financial arrangements. Canada is of the view that there is a role for a mechanism that demonstrates the strength of a country’s economic policies either for domestic purposes or as a signal to creditors and donors, but where there is no need or desire for Fund financing. Canada has advocated the creation of a country-led, surveillance-intensified mechanism, and in the fall of 2004 IMF staff proposed a Policy Monitoring Arrangement that stresses many of the same features. The Fund’s Executive Board will continue its discussions of signalling issues and report to the International Monetary and Financial Committee in the spring of 2005.

Safeguarding the IMF’s Cooperative Nature

The IMF’s cooperative nature is reflected in its resource base, which is derived primarily from the quota subscriptions of member countries, and the consensus-based nature of its decision-making process. If the Fund is to promote international financial stability effectively, it must have adequate resources and ensure that its quota structure and governance arrangements are representative of the membership.

Quota Resources

Quota reviews are held every five years to assess the adequacy of IMF resources. The Twelfth Quota Review was concluded in January 2003, but the broad support necessary for a quota increase did not emerge. It was agreed during the Thirteenth Quota Review period (January 2003–January 2008) to monitor closely and assess the adequacy of Fund resources, to consider measures to achieve a distribution of quotas that reflects developments in the world economy, and to consider measures to strengthen the governance of the Fund. The International Monetary and Financial Committee noted in October 2004 that the Fund’s liquidity position was adequate to meet the near-term projected needs of members. The Committee encouraged the Fund to continue its consideration of issues of voice, quotas and participation, while noting that progress would require broad consensus among the shareholders. World Bank/IMF measures to enhance developing country voice are covered more extensively in the "Joint Issues" section.

IMF Lending Capacity

Better information on the activities of the IMF enhances the transparency and accountability of the institution. To provide a clearer understanding of the amount of its regular financing resources that is available for new lending, in December 2002 the IMF adopted a new method of measuring its liquidity. The new measure—the one-year forward commitment capacity—indicates the amount of quota-based and non-concessional resources available for lending to member countries.

The one-year forward capacity reflects the IMF’s stock of usable resources minus undrawn balances for current lending arrangements, plus projected repayments by IMF borrowers over the coming 12 months. A prudential balance—to safeguard the liquidity of creditors’ claims and to take account of a potential erosion of the resource base—is also deducted to arrive at the final forward commitment amount. At the end of 2004 the IMF’s one-year forward commitment capacity amounted to SDR 72 billion (US$112 billion).

Management Practices

To keep pace with a changing global economy, the Fund requires a structure that is accountable with a modern management focus to help it deliver effective results supportive of its role. Canada supports efforts by the Fund to strengthen the linkage between strategies and budgets. In this respect, the Fund is reforming its budgetary framework. The Executive Board has endorsed a new approach to enhance the budget’s strategic focus and support prioritization. For new initiatives, the Fund will seek the required resources through reprioritization or from efficiency savings. A new medium-term budget framework will set out the overall resource envelope and allocation of resources to specified outputs. Annual budgets will be prepared in terms of outputs, and performance indicators will be developed and incorporated. A review of the Fund’s employment structure, compensation and benefits has also been initiated and is expected to be completed by the end of 2005.

How to Access Information at the IMF A vast array of Fund information—including fact sheets, press releases, speeches, the IMF Survey, annual reports, world economic outlooks, staff country reports and working papers—is available on the Fund’s Web site at www.imf.org. In addition, the IMF’s Publications Services provides a wide variety of Fund documents on the policies and operations of the IMF, as well as world financial and economic developments: IMF annual reports World Economic Outlook Global Financial Stability Report IMF staff country reports International Financial Statistics Annual Report on Exchange Arrangements and Exchange Restrictions press releases IMF Survey publications of the Independent Evaluation Office Publications Services is located at 700 – 19th Street N.W., Washington, DC 20431, USA. Phone: (202) 623-7430; fax: (202) 623-7201. Internet e-mail address: publications@imf.org.

Strengthening Support for Low-Income Countries

The IMF is fully committed to supporting low-income members in advancing towards the United Nations Millennium Development Goals through its poverty reduction and debt relief efforts. Canada places a high priority on reducing poverty and ensuring that debt relief goes to the poorest, most heavily indebted countries committed to good governance. Although the World Bank is the central institution for poverty reduction, the IMF plays a role in promoting macroeconomic stability—a key condition for achieving poverty reduction and growth. Direct anti-poverty measures are playing a central role in programs supported by the IMF through its Poverty Reduction and Growth Facility (PRGF). These programs are consistent with a comprehensive, nationally owned Poverty Reduction Strategy Paper prepared by the borrowing country, and are based on a process involving the participation of civil society, NGOs, donors and international institutions.

In September 2004 the International Monetary and Financial Committee reiterated the important role of the IMF in supporting the efforts of low-income countries to achieve the macroeconomic stability and high growth needed to make progress towards the Millennium Development Goals. The Fund will continue its work on the financing and modalities of the IMF’s engagement with low-income countries, including the financing of the PRGF after 2006 to maintain adequate capacity to meet future needs, instruments to help members face shocks, and ways to improve monitoring and signalling. The Committee supported continued efforts to strengthen the poverty reduction strategy approach and IMF support for low-income countries under the PRGF. The Committee looked forward to the work on improving the role of the Fund in the poverty reduction strategy process and on the design of policy programs supported by the PRGF. It called for increased incorporation of poverty and social impact analysis into PRGF-supported programs. Joint IMF/World Bank preparation of the debt relief initiative for heavily indebted poor countries and joint work on a new long-term debt sustainability framework for low-income countries are examined in the "Joint Issues" section.

The IMF reacted quickly to the Asian tsunami disaster of December 2004. Drawing on its expertise, the IMF provided advice and technical assistance to assess the macroeconomic impact and budgetary and balance of payments needs related to the disaster. To support recovery, the Fund will also provide financial assistance, primarily through its emergency assistance facility, which can quickly make available sizeable funds without an IMF program. The IMF estimated that its financing could be in the order of US$1 billion for the most affected countries. In January 2005 the Executive Board approved modifications to the emergency assistance facility to allow for funds to be provided under this facility to low-income countries at a subsidized interest rate, with the subsidy element financed through donor resources.

Lending Developments in 2004

A core activity of the Fund is to provide short- and medium-term financial assistance to members faced with balance of payments difficulties. The objective is to enable countries facing such difficulties to correct temporary payments imbalances with a minimum of disruption to the international monetary system. The provision of financing from the IMF, as well as the additional financing that an arrangement with the Fund often attracts from other sources, enables countries to undertake smoother economic adjustment.

At the end of 2004 the IMF had lending arrangements worth SDR 58.7 billion in place for 47 member countries (see Annex 1). Drawings under lending commitments decreased significantly in 2004 from the very high levels of 2003 to SDR 5.0 billion. As repayments exceeded disbursements, non-concessional credit outstanding declined to SDR 55.4 billion in 2004. The bulk of the non-concessional lending took place under Stand-By Arrangements, with Argentina and Turkey receiving the largest disbursements. The IMF approved 6 new Stand-By Arrangements in 2004. Of the current 14 Stand-By Arrangements, 7 are being treated as precautionary, with borrowers having indicated that they do not intend to draw on the funds committed to them.

The IMF also provides emergency assistance to help member countries with urgent balance of payments financing needs in the wake of natural disasters or armed conflicts. In 2004 SDR 306 million in emergency assistance loans was provided to countries in post-conflict situations and for natural disaster relief. For post-conflict low-income countries, the interest rate on IMF loans is subsidized down to 0.5 per cent per year, with the interest subsidies financed by grant contributions from bilateral donors. Canada is the third largest contributor of post-conflict subsidies.

Table 1
IMF Resource Flows


	2003	2004

	(in SDR billions)
Total purchases	21.1	5.0
Of which:
Stand-By Arrangements	18.7	3.7
Post-Conflict/Natural Disaster	–	0.3
Extended Fund Facility	1.6	0.2
Poverty Reduction and Growth Facility	0.8	0.8
Total repurchases	19.7	14.7
Net purchases	1.4	- 9.7

Lending decreased under the IMF’s concessional facility, the Poverty Reduction and Growth Facility (PRGF). About 40 per cent of PRGF-eligible countries had PRGF arrangements in 2004, with seven new arrangements approved during the year.

Managing Canada’s Interests at the IMF

The Minister of Finance is Canada’s Governor at the IMF and is responsible for the management of Canadian interests at the Fund. The Minister exercises influence on IMF issues through Canada’s Executive Director at the Fund’s Executive Board, interventions at the spring and fall meetings of the International Monetary and Financial Committee, his plenary speech at the IMF and World Bank annual meetings, and periodic meetings with the Managing Director of the Fund (the Minister’s speeches are available on the Department of Finance Web site at www.fin.gc.ca). The Governor of the Bank of Canada is Canada’s Alternate Governor of the IMF. The Governor also attends the Fund’s spring and fall meetings.

The management of Canada’s interests in the ongoing work of the IMF is the responsibility of the Executive Director, Kevin G. Lynch, Canada’s representative on the Executive Board. Elected in October 2004 by constituency Governors, he is one of 24 Executive Directors. In addition to Canada, he represents 11 other countries (Ireland and 10 Caribbean countries), which form a constituency at the Executive Board. Of the 24 members of the current Executive Board, 12 are from developing or transition countries and 12 are from industrialized countries. As the main decision-making body of the Fund, the Board normally meets three times a week.

The Department of Finance coordinates Canadian policy advice on IMF issues and Canada’s operational interests in the IMF. The Bank of Canada also provides advice on IMF issues to Canada’s Executive Director. Other involved government organizations include Foreign Affairs Canada and the Canadian International Development Agency. Within the Department of Finance, the International Trade and Finance Branch is responsible for conducting analyses and preparing advice on the policy issues and specific country programs that are brought before the Executive Board. The Department and Canada’s Executive Director’s office also work closely with Canada’s World Bank Executive Director’s office and meet regularly with Canadian NGOs.

Parliament is informed of the activities and operations of the Bretton Woods Institutions through the tabling of an annual report on their operations and through appearances of the Canadian Executive Directors and departmental officials before parliamentary committees.

Canada’s Voting Record Since most decisions at the Fund are taken on a consensus basis, formal votes by Governors and the Executive Board are rare. Canada attempts to influence the development of Fund policy proposals before they are brought to the Board (often through the circulation of memoranda outlining Canadian positions) or to influence other members in the course of Board discussions. But in 2004 Canada abstained on increases in the remuneration of IMF Executive Directors and the salary of the IMF Managing Director.

Canadian Executive Director’s Office at the IMF

In addition to the Executive Director, Canada’s office is staffed by two Canadian senior advisors and two advisors, one of whom rotates with other members of the constituency. Ireland staffs the Alternate Executive Director’s position and the Caribbean countries staff a third senior advisor’s position.

The primary responsibility of the Executive Director’s Office is to represent the interests of Canada and the other members of the constituency at the Fund’s Executive Board. The office participates in the Board’s discussions on a wide variety of policy, operational and administrative matters, including surveillance issues and country assistance requests and reviews.


Members of the Executive Director’s Office

Executive Director	Kevin G. Lynch (Canada)
Alternate Executive Director	Charles O’Loghlin (Ireland)
Senior Advisor	Paul Jenkins (Canada)
Senior Advisor	Richard Campbell (Caribbean)
Senior Advisor	Mark Kruger (Canada)
Advisor	Chris Faircloth (Canada)
Advisor	Charleen Adam Gust (Canada)
Administrative Assistant	Catherine Byrne (Ireland)
Administrative Assistant	Liz Craib (Canada)
Phone/fax	(202) 623-7778/(202) 623-4712
Address	11-112, 700 – 19th Street N.W., Washington, DC 20431, USA klynch@imf.org cbyrne@imf.org

Canada’s Financial Participation

Canada’s financial participation in the IMF consists primarily of its quota subscription. Canada’s quota is SDR 6,369.2 million, or about 3 per cent of total quotas. Canada’s quota subscription is a government asset, which is made available to the Fund partly in Canadian dollars and partly in reserve currencies, such as US dollars or SDRs. These latter non-Canadian dollar amounts continue to be part of Canada’s foreign exchange reserves. As an asset, Canada’s quota subscription is recorded as a non-budgetary expenditure in the budget of the Canadian government.

Only a very small portion of the Canadian dollar part of Canada’s subscription is actually held in cash by the IMF. The balance is held by the Bank of Canada in the form of demand notes, which are available to the Fund in the event it needs to draw upon additional resources. Canada earns interest on its quota subscription when the Canadian dollar is used in Fund lending operations, i.e. is drawn by other member countries. In 2004 Canada received SDR 34.8 million on its net creditor position in the IMF. The net income from Canada’s net creditor position with the Fund is paid into the Government of Canada’s Exchange Fund Account, adding to the foreign exchange reserves.

Table 2
Canada’s Financial Position in the IMF


	December 31, 2004	December 31, 2003

	(in SDR millions)
Quota	6,369.2	6,369.2
Fund holdings of Canadian dollars	4,219.6*	3,780.3*
Reserve position in the Fund	2,149.6**	2,588.9**

* In accordance with Fund regulations, at least 0.25 per cent of Canada’s quota is held by the IMF in a Canadian dollar cash deposit at the Bank of Canada. The Fund’s remaining Canadian dollar holdings are in the form of non-interest-bearing demand notes, also kept by the Bank of Canada. ** This is the amount Canada is entitled to draw on demand from the IMF for balance of payments purposes. Canada’s reserve position in the Fund is the result of the portion of Canada’s quota subscription made available to the Fund over time in reserve currencies, the use of the Canadian dollar in Fund financial transactions with other members, and loans to the IMF under borrowing arrangements such as the General Arrangements to Borrow and New Arrangements to Borrow. As the name suggests, Canada’s reserve position in the Fund is a part of Canada’s official foreign exchange reserves.

At the end of 2004 Canada’s holdings of SDRs amounted to SDR 595.2 million, or 76.4 per cent of Canada’s cumulative allocation of SDRs. In 2004 Canada held SDRs in an amount below its allocation, and so paid net interest of SDR 3.5 million.^[3]

In 2004, in line with earlier commitments, Canada made further contributions to the IMF’s Poverty Reduction and Growth Facility. The facility provides financial support on concessional terms to low-income countries facing protracted balance of payments problems. Canada’s total commitment to the Poverty Reduction and Growth Facility is a loan of SDR 700 million and a grant of approximately SDR 190 million. At the end of 2004 loan payments under these arrangements totalled SDR 648.5 million of the SDR 700 million, and subsidy contributions equalled SDR 186.1 million of the SDR 190 million. In 2004 Canada received SDR 9.1 million in interest earned on loans to the Poverty Reduction and Growth Facility.

Further, Canada is a participant in a financing arrangement established to supplement the Fund’s regular resources in the event of financial crises, the New Arrangements to Borrow (NAB), which was not activated in 2004. Canada is also a participant in the General Arrangements to Borrow (GAB), an earlier credit arrangement established by the Group of Ten (G-10). Canada’s GAB commitment is the equivalent of SDR 892.5 million. This line of credit was not used in 2004.

New Arrangements to Borrow (NAB) The following are the main features of the NAB, which came into force in 1998: Participating countries will make loans to the IMF when supplementary resources are needed to forestall or cope with an impairment of the international monetary system, or deal with an exceptional situation that poses a threat to the stability of the system. Twenty-five countries have agreed to lend up to SDR 34 billion (about C$65 billion) to the Fund in case of financial emergencies. Canada’s share in the arrangement is 4.1 per cent, in the form of a commitment to provide non-budgetary loans to the IMF from its international reserves. The NAB does not replace the GAB, which remains in force. However, the NAB would be the first and principal recourse of the IMF if supplementary resources were needed.

Challenges Ahead

A key challenge for the Fund is to ensure that it meets the needs of an increasingly integrated global economic system. The evolution of the Fund’s place in the international financial system must continue to reflect changes in the world economy. In particular, there is a need to assess the role of the Fund in a world of large-scale private capital flows. To meet these challenges:

The Fund should complete its discussions on its strategic directions to help shape its role in the international economic system over the medium and longer term, and work to ensure that its management practices support its objectives and that it has the necessary tools to fulfil its mandate.
The Fund needs to clarify its role in middle-income countries, especially with respect to preventing and resolving capital account crises.
The Fund should complete the review of its role in supporting low-income countries over the medium term, including its instruments and level of financing and how best countries might exit from reliance on Fund concessional resources.

World Bank

Benefits of Membership to Canada

Membership in the World Bank (the Bank) affords Canada an important voice on key development issues in the world’s premier multilateral development institution. With 184 members, and loans and credits outstanding to 140 developing and transition member countries at the end of fiscal year (FY) 2004^[4] totalling US$225.4 billion, the Bank has a far-reaching impact on global development and poverty reduction. It provides policy advice and financial support crucial to improving borrowing members’ longer-term development and poverty reduction prospects. It also assists members by providing concessional assistance and improved access to world financial markets for development purposes.

Canada’s capital share of 2.85 per cent gives it a seat on the Bank’s Executive Board and on the Development Committee of the Boards of Governors of the Bank and the IMF. Canada has the opportunity at the Executive Board, in dialogue with Bank staff, and at the annual meetings of the Board of Governors (and the Development Committee) to provide direct input into the formulation of Bank policies and operational decisions. Canada and other shareholders help to guide the Bank in improving developing countries’ economic, social and environmental performance. Through its engagement with the Bank, Canada’s influence in developing countries can be leveraged beyond what can be achieved through bilateral programs. For example, Canada has played a leading role in the Bank’s discussion of the implementation of the heavily indebted poor country debt relief initiative, in shaping the institution’s response to post-conflict countries, and in its efforts to assist developing countries to combat terrorist financing and money laundering.

Bank membership also provides the Canadian government with access to the institution’s research and policy work, which enriches our own understanding of international development. The Canadian International Development Agency (CIDA), for example, is able to draw on Bank analytic and technical expertise in order to gain a more comprehensive understanding of the social and economic policy environments that are conducive to effective aid delivery. CIDA is also able to leverage its own resources with those of the Bank through participation in a growing number of partnerships with, and in global programs led by, the Bank. Finally, Canada’s membership allows Canadian companies and individuals substantial procurement opportunities—in fiscal year 2004 they provided goods and services worth US$71 million under Bank-financed contracts associated with investment lending.

Overview of Operations in 2004

In FY 2004 the Bank committed loans and credits of US$20.1 billion to 91 developing and transition countries (see Annex 2). The International Bank for Reconstruction and Development (IBRD) committed US$11.0 billion in new loans in FY 2004, or roughly US$200 million less than in FY 2003. The Bank provided concessional lending through the International Development Association (IDA) valued at US$9.0 billion in FY 2004, up substantially from the US$7.3 billion recorded in FY 2003.

Geographic and Sectoral Focus of Lending

Reflecting significant adjustment lending to large South American emerging market borrowers, new IBRD lending commitments in FY 2004 were highest in the Latin America and Caribbean region, which accounted for 45 per cent of all IBRD lending. The Europe and Central Asia region saw the next highest lending share at 27 per cent, followed by the East Asia and Pacific region at 15 per cent, the Middle East and North Africa region at 9 per cent and the South Asian region at 4 per cent. Given its non-concessional lending terms, the IBRD is not a major lender to African countries.

In FY 2004, at 46 per cent, Africa accounted for the largest share of IDA lending although this was below IDA’s indicative 50-per-cent target for the region. South Asia accounted for 33 per cent of IDA commitments and the East Asia/Pacific region and Europe/Central Asia region accounted for 10 per cent and 6 per cent respectively.

The Bank’s strong commitment to investing in people is reflected in the sectoral breakdown of both IBRD and IDA lending operations. Support for social sector investments, in particular, remains a high priority. The areas of social protection, social development and human development accounted for 31 per cent of total World Bank commitments in FY 2004. Approximately 27 per cent of IBRD commitments and 37 per cent of IDA commitments supported investments in education, health and other social services, and water, sanitation and flood protection sectors.

Non-Lending Operations

In FY 2004 the Bank continued its strong focus on non-lending services in order to enhance the developmental effectiveness of its operations. The Bank provides a wide range of advisory, analytical, training and knowledge-related services in support of building domestic capacities. Through its non-lending activities, the Bank provides valuable policy advice that can bolster the effectiveness of its investment and adjustment lending.

How the World Bank Group Works The World Bank Group is made up of four complementary but distinct entities: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA) and the International Finance Corporation (IFC). The IBRD and IDA (together commonly known as the World Bank) provide funding for investment projects and for adjustment—or economic and sector reform—operations. The IBRD lends on non-concessional terms (charging an interest rate that is slightly above its own borrowing costs) to better-off borrowing members, while IDA provides 35- and 40-year interest-free credits to the poorest borrowers. Since July 2002 IDA also provides grants for certain specific purposes. IDA is the largest source of development finance for the world’s poorest countries. The IBRD raises its funds primarily on international markets on the strength of its triple-A credit rating. In effect, the IBRD on-lends to borrowing countries at a rate of interest much lower than the rate they could secure on their own borrowings. IDA, on the other hand, receives grant funding from donors, loan repayments and annual allocations from IBRD net income. As of June 2004 outstanding IBRD loans and IDA credits amounted to US$109.6 billion and US$115.7 billion respectively. The IFC supplements the activities of the IBRD and IDA by undertaking investments on commercial terms in productive private sector enterprises. The IFC provides such services as direct private sector loans, equity investments, resource mobilization and technical assistance. As of June 2004, the total committed loan and equity portfolio was equivalent to US$17.9 billion. MIGA’s mandate complements that of the IFC: it promotes private foreign direct investment in developing countries, primarily by providing insurance against non-commercial risk, such as the risk of currency inconvertibility during civil conflict. MIGA’s outstanding portfolio as of June 2004 amounted to US$5.2 billion. Each of the 184 shareholders has a seat on the Board of Governors of the World Bank. Most decisions on policy, operational and administrative issues, however, have been delegated to the 24-member Executive Board. Membership on the Executive Board is evenly split between developed and developing countries.

Strengthening the World Bank’s Poverty Reduction Focus

Focusing Operations on the Millennium Development Goals

The recognition that the Millennium Development Goals (MDGs) can be achieved only through empowerment of the poor underpins the Bank’s approaches to countries and sectors. The MDGs now form the cornerstone of the Bank’s strategic planning and operational priority setting. The Bank is also working closely with the United Nations system and the Organisation for Economic Co-operation and Development in strengthening international monitoring of the progress being made towards achieving the MDGs.

A key task for the Bank in this exercise is to develop a framework for benchmarking performance among both developing countries and donor agencies. The Bank, together with the IMF and the UN system, is strengthening its country and thematic databases. Publicly available data will be posted on the Development Gateway (www.developmentgateway.org). As national capacity in gathering and assessing statistics is critical to efforts for monitoring progress towards the MDGs, in 2004 the Bank developed and began to implement the Statistical Capacity Building Program to help developing countries strengthen statistical systems, institutional capacity and planning.

Millennium Development Goals At the Millennium Summit in September 2000, world leaders adopted specific development goals that can be monitored. Subsequently, the United Nations published eight Millennium Development Goals in the September 6, 2001, report of the UN Secretary General on the road map towards implementing the UN Millennium Declaration. The eight goals are: to halve, between 1990 and 2015, the proportion of people living on less than one US dollar a day; and to halve, between 1990 and 2015, the proportion of people suffering from hunger; to ensure that, by 2015, all children can complete primary schooling; to eliminate gender disparity in primary and secondary education, preferably by 2005, and at all education levels no later than 2015; to reduce by two-thirds, between 1990 and 2015, the mortality rate for children under 5 years old; to reduce by three-quarters, between 1990 and 2015, the maternal-mortality ratio; to have halted and begun to reverse, by 2015, the spread of HIV/AIDS; and to have halted and begun to reverse, by 2015, the incidence of malaria and other major diseases; to integrate the principles of sustainable development into country policies and programs and to reverse the loss of environmental resources; and to halve, by 2015, the proportion of people without sustainable access to safe drinking water; and to develop a global partnership for development including through trade openness and debt relief.

At the request of the Development Committee, the World Bank is working closely with the UN, which has the lead responsibility for tracking progress towards the MDGs, to develop a framework to monitor the implementation of policies that are necessary to promote the attainment of the MDGs and to produce the annual Global Monitoring Report. The Global Monitoring Report underpins the Development Committee’s regular monitoring of progress on the policy agenda and reinforces the accountabilities of the key actors—developing and developed countries, as well as multilateral institutions. The first report was discussed by the Development Committee in April 2004 and was released in July 2004 to disseminate its findings and messages more broadly to policy-makers and the international development community. Given the shared responsibility and mutual accountability for both developing and developed countries for working towards the MDGs, the Bank’s monitoring framework assesses economic and governance policies of developing countries as well as the official development assistance, trade and economic policies of developed countries.

The Bank is also working in partnership with developing countries, other aid agencies and civil society more directly to design and implement initiatives to support developing countries in their efforts to reach specific MDGs. These efforts include "fast-track" initiatives that will target Bank and donor resources on countries demonstrating strong commitment to improving social sector programs.

Economic Prospects for Developing Countries

Real gross domestic product (GDP) in developing countries is estimated to have grown by 6.6 per cent in 2004, up from 5.4 per cent in 2003. Growth is expected to decrease in 2005 given expected increases in US real interest rates. Economic prospects, however, vary substantially both across and within regions.

While growth is still low relative to other areas of the developing world, Latin America will bolster its 2003 recovery. Real GDP growth throughout the region is estimated at 5.5 per cent in 2004, up from a 2.0-per-cent increase in 2003. Brazil and Argentina remain the key sources of growth in the region.

Latin America continued to be a major focus of World Bank operations in FY 2004. The World Bank committed US$1.3 billion in loans to the Brazilian government to support its social protection and sustainable and equitable growth programs. Argentina received US$1.6 billion in FY 2004 for maternal and child health, economic recovery and national highways management.

East Asia remained the world’s fastest-growing region for the year as a whole. Growth in the region was largely boosted by real GDP growth of 9.2 per cent in China. The World Bank provided substantial financing to China in FY 2004, with loans totalling US$1.2 billion on nine different projects. In South Asia, prospects remain solid, but India and Pakistan will likely experience a tailing off in growth compared to 2003. India’s GDP growth in 2004 is estimated at around 6.2 per cent. As of June 2004, India was the largest single cumulative recipient of World Bank assistance, with lending totalling US$61.5 billion. In FY 2004 the World Bank committed US$1.4 billion for seven different projects to support poverty reduction efforts in India. In response to the Asian tsunami disaster, the World Bank pledged to make available US$250 million as its initial contribution for emergency reconstruction in the affected countries for the first half of 2005 with more to come following a more comprehensive needs assessment.

In Africa, subdued global economic growth, together with recurring civil strife, drought and the HIV/AIDS pandemic, continued to hamper real growth in 2004. Nonetheless, the region is estimated to have enjoyed a 0.5-percentage-point higher level of growth than the 3.8-per-cent growth recorded in 2003. This continues to be lower than the 7-per-cent annual growth estimated to be needed to achieve the MDGs. The World Bank committed more than US$4.1 billion in 29 African countries in FY 2004. The main priorities of the World Bank’s work in Africa are to tackle the HIV/AIDS pandemic, spur private sector development, help countries recover from conflict, and help create and share knowledge.

Stronger Focus on Country Ownership

The Bank continues to base its operations on the principles of country ownership. "Homegrown" Poverty Reduction Strategy Papers (PRSPs)^[5] are being developed by an increasing number of poor countries as the driver of their national development plans and poverty reduction policies. Increasingly, PRSPs are also driving operations of the Bank and Fund in the poorest countries.

PRSPs are a continuous and evolving process, and many developing country governments have relied on extensive Bank support in this initial stage of design and implementation.

In early 2002 the World Bank and IMF undertook a comprehensive review of the PRSP process. Results show that PRSPs are becoming a valuable tool for enhancing development outcomes. However, it is also clear that more attention needs to be paid to implementation challenges and to addressing bottlenecks in the process. These challenges include enhancing stakeholder participation; improving the link between PRSPs and national budgets and policy-making processes; and improving the coordination and harmonization of donor support.

In FY 2004 the Bank undertook a review of its Comprehensive Development Framework (CDF),^[6] which concluded that to achieve the benefits of this approach, countries need to put disciplined budget processes in place. Donors need to support capacity building, especially in the area of budgeting, and to align their assistance with PRSPs, and all multilateral and bilateral development partners need to work together to develop better mechanisms for designing and implementing cross-sectoral programs.

Development Policy Lending

One of the consequences of the shift in Bank operations to support country-owned development and poverty reduction strategies has been a high level of adjustment lending in overall Bank financing. In mid-2004, in a major overhaul of its operational policies, the World Bank replaced adjustment lending by the new development policy lending framework and removed the notional level of 25 per cent for the share of adjustment lending in overall Bank lending. The new framework unifies policy that applies to a whole range of adjustment lending instruments, including sectoral adjustment loans, structural adjustment loans and Poverty Reduction Support Credits. In addition, it deals with core issues of design, fiduciary arrangements, financing options, and dissemination and disclosure. Development policy loans are used to support sector-wide reforms and restructuring. In years when the Bank has been active in supporting major borrowers that are experiencing severe financial difficulties, development policy lending is especially high. Development policy operations accounted for 31 per cent of overall World Bank lending in FY 2004, compared to 33 per cent in FY 2003.

Poverty Reduction Support Credits (PRSCs), introduced in May 2001, represent one type of development policy lending operation that provides budgetary financing in support of the implementation of PRSPs. PRSCs ease administrative burdens on borrowers and encourage harmonization of donor practices. PRSCs are used in cases where clients have transparent budgetary and fiduciary processes and strong PRSPs in place. PRSCs have been approved for a number of developing countries.

Development policy lending is also often used to provide support to middle-income and emerging market economies that are experiencing acute financial problems. In FY 2004 the region encompassing Latin America and the Caribbean received 49 per cent of total development policy lending commitments, the largest regional share by a significant margin. Development policy lending has been higher in the case of the IBRD than of IDA. In FY 2004, 40 per cent of IBRD commitments were in the form of development policy loans, compared to 19 per cent for IDA.

Monitoring and Evaluation

The Bank continues to adjust its system of project monitoring and evaluation. Many of the problems stem from both limited borrower capacity and a lack of incentives and guidelines for Bank staff. At Development Committee and other international meetings, Ministers have highlighted the importance of an enhanced focus on results in helping both developing countries and donors design and implement poverty reduction strategies. In response, Bank management has embarked on a process of developing a more comprehensive approach to measuring and monitoring development results. The Bank’s approach is focused both on tying its own performance benchmarks more closely with the development priorities of individual PRSPs and on increasing Bank support for statistical and public sector institutional capacity within developing countries. By the end of 2003, the Bank had launched a number of "results-based" Country Assistance Strategy (CAS) pilots. An assessment of the lessons learned from these pilots is underway and the results will inform how to mainstream results into all future CASs going forward. Going forward, the Bank will monitor the poorest countries’ progress towards reaching the Millennium Development Goals and its own contribution to this progress.

Assessing Poverty

To ensure that poverty reduction remains at the heart of the institution’s operations, the Bank’s Poverty Reduction and Economic Management Network (PREM) undertakes country-specific poverty assessments and advises Bank country teams on the poverty reduction impacts of emerging policies, programs and individual projects. PREM has concluded country poverty assessments that cover a large majority of the world’s poor. The quality of poverty data, however, is uneven, and PREM continues to work to improve the consistency of its assessments.

The World Bank’s Response to the HIV/AIDS Pandemic HIV/AIDS is not just a public health issue; it is a development crisis. Of the approximately 40 million people around the globe who are living with HIV/AIDS, 95 per cent are in developing countries. The high infection rates in developing countries are killing or incapacitating many of the most productive individuals and threaten economic and social stability. About half of new infections in developing countries are in the 15–24 age bracket. AIDS is now the leading cause of death in Sub-Saharan Africa and among males in the Caribbean. In the hardest-hit countries, HIV/AIDS threatens to reverse the development gains achieved over the past 30 years. Most of the Bank’s HIV/AIDS programming is delivered through IDA, which has mainstreamed HIV/AIDS into its work. In September 2000 the Bank launched a Multi-Country HIV/AIDS Program (MAP) for Africa that has made more than US$1 billion available to African governments to scale up national efforts to combat HIV/AIDS. The overall development objective of the MAP is to dramatically increase access to HIV/AIDS prevention, care and treatment programs. The MAP places a special emphasis on vulnerable groups such as youth and women of childbearing age and provides support to community organizations, NGOs and the private sector for local HIV/AIDS initiatives. The Bank has also commited an additional US$155 million for HIV/AIDS projects in the Caribbean region. The Bank is heavily involved in international efforts to combat the disease. The Bank is one of eight co-sponsors of UNAIDS (which spearheads the UN’s response to the crisis). The Bank is also fostering private-public partnerships designed to accelerate the development of an HIV/AIDS vaccine for use in developing countries. The Bank is an active partner in the Global Fund to Fight AIDS, Tuberculosis and Malaria that was launched at the G-8 Summit in Genoa. The Bank, along with UNAIDS and the World Health Organization, holds ex-officio (non-voting) seats on the Board of the Global Fund. The Bank is also the Trustee of the Global Fund, with responsibility for the collection, investment and management of funds, disbursement of funds to countries and programs, and financial reporting. In April 2004, the Bank entered into a partnership with the Global Fund, UNICEF and the Clinton Foundation to make it possible for developing countries to purchase high-quality AIDS medicines at low prices.

The IDA14 Replenishment—Working Together to Achieve the Millennium Development Goals

Negotiations on the volume of financing and operational priorities for the 14th replenishment of IDA began in February 2004. In early 2005, 40 donor governments, with strong participation from borrower representatives, concluded negotiations on the 14th replenishment of the International Development Association (IDA14), subject to final approval by their own governments and Bank Governors. The IDA14 period runs from July 2005 to June 2008. The IDA Deputies’ Report, which serves as the IDA14 policy framework, is expected to be approved by Bank Governors by May 2005 and will be made available on the Bank’s Web site.^[7]

Subject to final approval from their respective governments, donors are expected to substantially increase funding for IDA to ensure its strong participation in the international effort to scale up poverty reduction efforts to reach the Millennium Development Goals. Canada is expected to maintain its 3.75-per-cent donor share during the IDA14 period.

In terms of operational priorities, IDA donors and Bank management agreed that IDA will link its operations more closely to country-owned poverty reduction strategies. Within the framework of support for PRSPs, donors have stressed the need for IDA to invest in people, especially through education, health and basic infrastructure, to promote growth through private sector development, and to monitor measurable results. They reiterated the IDA12 and IDA13 objective of having Africa account for half of IDA allocations.

During the IDA13 period, IDA for the first time is able to provide substantial grants, as opposed to interest-free loans, for certain specific purposes. Recognizing the debt vulnerability of many low-income countries, in IDA14, donors agreed to link the provision of grants to debt distress. More specifically, IDA will establish thresholds for a number of indicators of debt sustainability. These thresholds will be a function of the quality of governance in the country. Well-governed countries would be assumed to be able to manage higher levels of debt and more of their assistance would be in the form of loans. Poorly governed countries are more debt-vulnerable and would receive less assistance; all of it, however, would be in the form of grants and for specific projects and programs that are likely to reduce poverty.

IDA donors also urged IDA to be more selective in its operations and to work closely with other development partners, on the basis of comparative advantage. They reaffirmed the importance of IDA’s performance-based allocation mechanism, and especially the high weight it assigns to governance. At the same time, they recommended that IDA show greater flexibility with respect to allocations to post-conflict countries where there has been little opportunity to establish policy track records and to vulnerable countries such as Haiti.

IDA—Focused on the World’s Poorest Established in 1960, IDA is the single most important source of external development support for the world’s poorest countries. IDA provides US$6 billion to US$9 billion annually in highly concessional long-term financing to 81 countries, home to 2.5 billion people, of whom 68 per cent live on less than US$2 a day and 28 per cent survive on less than US$1 a day. IDA provides primarily concessional loans in support of poverty reduction programs. These IDA credits carry no interest and offer a much longer grace period and maturity than other forms of financing. IDA’s standard concessional loan (called a "credit") does not require principal repayments until 10 years after it is signed, with a final maturity of 40 years. Therefore, a country effectively repays only about 40 per cent of a regular IDA credit, after applying a discount rate to convert credit repayments over 40 years into today's prices. From July 2002 IDA has been able to provide a significant portion of its financing to the poorest IDA-eligible countries on a grants basis. Eligibility for IDA concessional lending is based primarily on an assessment of an individual country’s per capita income. The operational cut-off for IDA eligibility is US$895 per capita. A number of small island states with per capita incomes above this threshold are also eligible for IDA concessional financing given their limited capacity and high vulnerability to external shocks. IDA helps provide access to improved social services such as schools, hospitals and clinics, and clean water and sanitation services. IDA also supports investments aimed at improving productivity and creating employment. To ensure that its resources are used effectively, IDA allocations to clients are governed by performance criteria that are heavily focused on good governance.

Canada’s Financial Participation in the IBRD and IDA

IBRD


As a shareholder of the IBRD, Canada has a capital share of 2.85 per cent and a voting share of 2.78 per cent. A relatively small proportion of this capital is required to be "paid-in"—about 6 per cent overall, but just 3 per cent in the last capital subscription. The remainder is "callable" in the unlikely event that the IBRD needs it from member countries. Callable capital represents a contingent liability for shareholders. The IBRD leverages paid-in capital to raise financing in international capital markets for its lending program. The IBRD’s capital adequacy is regularly reviewed and the institution’s capital is replenished through occasional general capital increases. The last general capital increase was in 1988.

Canada’s Total IBRD Subscriptions and Contributions Committed
(in millions of US dollars)	Of which paid-in	Of which callable
5,403.8	334.9	5,068.9

In August 2004, Canada agreed to convert the bulk of its national currency paid-in capital into US dollars in order to continue to provide the World Bank with usable capital for poverty reduction purposes. With the World Bank’s decision to retire its currency pool loans, the World Bank could no longer use Canada’s national currency paid-in capital for lending purposes. Since the amount of US dollars received from the conversion was less than the US dollar value of Canada’s original subscription, Canada will issue a special repurchase US dollar note to settle the difference to maintain the value of Canada’s shares in the institution.

IDA As IDA concessional financing does not generate a financial return, its operations are financed entirely from donor contributions, loan fees and repayments of principal on its outstanding loans, as well as allocations from IBRD net income. To meet Canada’s $690.4-million obligation under IDA13, the Government issued demand notes in fiscal years 2002–03, 2003–04 and 2004–05, each valued at $230.1 million. The notes for 2002–03 and 2003-04 are fully encashed. The note for 2004–05 will be encashed in April 2005.

Canada’s Contribution to IDA13 (July 2002–June 2005)	Canada’s IDA13 Donor share	Canada’s IDA13 Voting Share
(in millions of Canadian dollars)	(per cent)	(per cent)
690.4	3.75	2.96

Canada’s Priorities at the World Bank

Canada’s positions are based on our international development goals and foreign policy priorities and on our strong interest in maintaining the financial integrity of the World Bank.

Poverty Reduction and Human Development

Canada has long been a key player in international efforts to assist the poorest and strongly supports poverty reduction as the overarching objective of the World Bank. As such, Canada endorses the Poverty Reduction Strategy Paper process, under which developing country governments develop and implement broad-based poverty reduction strategies in partnership with the donor community. The Bank has increasingly recognized that poverty reduction cannot be addressed in isolation. Private sector development, good governance, strengthening public expenditure management and the monitoring of non-productive expenditures (especially military), external debt and environmental sustainability are just a few of the factors that need to be considered in designing strategies to help improve the living standards of the poor. In the case of small states, the Bank has to take into account additional factors of economic and physical vulnerability and limited capacity.

Canada strongly supports the Bank’s efforts to increase the prominence of social sector issues in macroeconomic stabilization programs. Good macroeconomic policy is key to boosting growth and reducing poverty. At the same time, adequate attention to social issues must be an essential part of macroeconomic stabilization and sustainable development goals.

In July 2003 the Bank’ s Executive Board approved an Infrastructure Action Plan to revitalize the Bank’s work in this area. Infrastructure is about providing basic services that people need for everyday life—water, sanitation, modern energy, roads and other aspects of transport, and access to modern information communications technology. The overarching premise of the World Bank’s Action Plan is to ensure efficient, affordable and sustainable delivery of infrastructure services by leveraging funds from the entire spectrum of public and private sources, supported by IBRD, IDA, IFC and MIGA products.

In less than two years, significant progress has been made in responding to increased demand for infrastructure, rebuilding the country-level diagnostic work and strengthening the World Bank’s instruments and approaches. In FY 2004, the World Bank delivered about 70 knowledge products, including some 10 diagnostic reports called Recent Economic Developments in Infrastructure (REDI). The World Bank also committed close to US$6.5 billion in new infrastructure lending in FY 2004, representing an increase of US$1.1 billion over FY 2003. The IFC’s total commitments in infrastructure for FY 2004 were US$983 million, a significant increase over FY 2003 (US$649 million). MIGA’s guarantees for infrastructure, however, fell from US$793 million in FY 2003 to US$391 million in FY 2004, but it expects demand for guarantees to increase again in FY 2005.

Poverty Reduction and Sub-Saharan Africa Canada has long been a leading advocate for poverty reduction and development in Africa, home to some of the poorest countries in the world. In 2004, Canada built on its regular support through CIDA and at the IMF and World Bank with three key initiatives: Commission for Africa: Building on Canada’s leadership on Africa at the 2002 G-8 Kananaskis Summit, Finance Minister Ralph Goodale was invited to be one of 17 Commissioners on the UK’s Commission for Africa. The goal of the Commission is to renew the emphasis on Africa, the only continent that has grown poorer over the past four decades. In its report due in March 2005, the Commission will put forward initiatives and recommendations in support of African development, for consideration by the G-8, other donors, private actors, and African countries themselves. Canada has already announced an additional C$42 million to help support polio eradication, a crippling disease with over 86 per cent of cases in Africa. In February 2005, Canada also announced additional debt relief on low-income countries’ debt-service obligations to IDA and the African Development Fund as well as possibly the IMF. This Canadian initiative will significantly benefit African countries, as 36 of the 56 potentially eligible countries are in Africa. IDA14 negotiations: Canada and key donors successfully pressed management to again earmark half of IDA resources to support African development under IDA14, as was done under IDA12 and IDA13. Recognizing the fragile debt sustainability situation of many poor countries on the continent, most of which are benefiting under the Heavily Indebted Poor Countries Debt Initiative, Canada supported the provision of grant financing to countries experiencing debt distress. CIDA initiatives: A new visionary plan offers hope for Africa to break the cycle of poverty and fully participate in the global economy. The New Partnership for Africa’s Development (NEPAD) places Africa’s future in African hands. In an effort to boost trade and investment on the continent, Canada has led the international community with a C$500-million contribution to support this initiative. In addition, Budget 2003 committed the Government to double international assistance by 2010, ensuring that 50 per cent of all increases are directed to Africa. Canada and other G-8 members have welcomed NEPAD as a cornerstone on which to build the Africa Action Plan, an international effort to reduce poverty and create sustainable economic growth on the continent.

Canada’s Voting Record World Bank Executive Board decisions are traditionally taken on a consensus basis, without resorting to a formal vote. On occasion, however, individual Executive Directors have been unable to join the Board consensus. In 2004 the Canadian Executive Director opposed an IFC investment in LNM Holdings N.V., which finances steel projects around the world, in view of concerns about global over-capacity in the steel market. He also abstained from voting on an IDA credit to Yemen for a Basic Education Development Project because of concerns about the Government of Yemen’s adherence to contract law, and on an IDA credit and grant to Nepal for a Financial Sector Restructuring Project because of project-related concerns, including the excessive voluntary separation package. In July 2004 the Honourable Ralph Goodale, as Governor representing Canada on the World Bank Board of Governors, did not support a proposed 4.1-per-cent increase in remuneration for World Bank Executive Directors as it was above the rate of inflation for the Washington area. In September 2004, the Honourable Ralph Goodale did not support a 9.2-per-cent increase in the remuneration of the World Bank President.

Education

Canada considers education to be a critical factor in development and strongly supports recent efforts by the Bank to increase support to this sector. Commitments to education in FY 2004 amounted to US$1.7 billion. The Bank also provides important non-lending support for education through its analytic and policy advisory work. The Bank has also focused heavily on girls’ education. Canada has worked in collaboration with the Bank and other agencies in support of the Education for All (EFA) Initiative. Canada strongly supports the Bank’s efforts to develop a Fast Track Initiative (FTI) to assist countries with good education strategies. The FTI was developed by the Bank in close cooperation with a special G-8 Education Task Force, and it was endorsed by Development Committee members in April 2002. To date, Canada has pledged C$135 million from 2003–2008 for FTI proposals from Tanzania, Mozambique and Honduras, over and above current commitments.

Looking ahead, the World Bank’s work will be guided by the following three principles:

increases in education supply must go hand-in-hand with improvements in quality. The World Bank is reviewing its own education strategy update to ensure that supply and quality are given equal importance;
EFA objectives and financing requirements must be integrated within a country’s broader education sector strategy and budget frameworks; and
the FTI should be scaled up as a demonstrated effective instrument.

On funding, aid resources for basic education in low-income countries have not been increasing fast enough. The Bank estimates that only about 3 per cent of official development assistance (ODA) goes to basic education within low-income countries—of the US$61.8 billion in ODA in 2002, only US$6.5 billion went for education, of which about US$2 billion was for basic education in low-income countries. With all low-income countries now eligible for the FTI, another 25 countries could become eligible for the FTI in 2005 (including 14 Sub-Saharan African countries) and another 13 in 2006, each having developed sound plans for scaled-up investment in basic education consistent with the agreed-upon FTI framework and criteria. The World Bank estimates that additional aid resource needs for basic education in 2005 will be US$1.4 billion, increasing to US$2.2 billion in 2006.

Development Effectiveness

Ensuring the effectiveness of the Bank’s operations has long been a key Canadian objective. This entails more than just reducing costs and saving money. Effectiveness requires selectivity, clear priority-setting and efficient service delivery. The Bank needs to operate in those areas where its assistance can be productively used and where it has a clear comparative advantage. The Bank is exercising greater selectivity by focusing on reforming states and good performers. In the case of IDA credits, allocations are based on performance criteria. In order to monitor country performances in a meaningful manner, the Bank is focusing on incorporating poverty-related outcome indicators to measure real results, including such indicators as child malnutrition and child and maternal mortality.

The Bank continues to strengthen its efforts to improve development effectiveness through a renewed emphasis on the quality of its project portfolio. More vigilance is now exercised at the project preparation and supervision stages, and this has led to an improvement in the number of projects that are meeting their development objectives. For FY 2003 the Operations Evaluation Department estimated that 83 per cent of Bank projects had satisfactory ratings in terms of meeting their development objectives. This represents a steady increase since 1997, when only 73 per cent of projects were rated satisfactory.

In FY 2004 the World Bank engaged in the nine-month Global Learning Process, which culminated in a high-level working conference in Shanghai in May 2004 jointly hosted by the World Bank and the Government of China. The primary objective of the learning process was to support the achievement of the Millennium Development Goals, especially the poverty reduction goal, through the identification of large-scale solutions that can be widely reproduced. The Global Learning Process, especially the conference, allowed key development actors from developing and developed countries to share their experiences and policy lessons learned from poverty reduction initiatives around the world.

Coordination and harmonization of programs is another critical element of effective development assistance. The World Bank, together with other multilateral development banks and the Organisation for Economic Co-operation and Development/Development Assistance Committee, co-sponsored an international forum on harmonization in Rome in February 2003. The bulk of the international donor community, as well as 30 developing nations, participated in the forum to produce the Rome Declaration on Harmonization. The Declaration sets out an ambitious program of activities to ensure that harmonization efforts are adapted to the country context and that donor assistance is aligned with the recipient’s priorities. The Declaration also promotes country-led efforts to streamline donor procedures and practices, and urges the adoption of policies, procedures and practices to ease harmonization. The harmonization focus has now shifted to in-country implementation.

The World Bank is firmly committed to the donor harmonization efforts as a key institutional priority. The Bank sees itself as a participant, facilitator and leader in these efforts. The Bank is continuing a major internal reform and modernization of its operational policy framework for which one key objective is easier harmonization and alignment. The reforms include provisions for pooling resources under Sector-Wide Approaches (2002); aligning CASs with PRSPs (2002); adapting the Bank audit policy to international auditing standards and increasingly relying on country audit processes (2003); updating the Bank’s procurement guidelines in line with good practice recommendations prepared by the Multilateral Development Bank Heads of Procurement Working Group (2003); modernizing eligible expenditure requirements to better align its assistance around country objectives (2004); and replacing structural adjustment lending by development policy lending that takes account inter alia of country ownership and is coordinated with other development partners. In September 2004 the Bank’s Executive Directors endorsed in principle a greater reliance on country systems in projects supported by the Bank, including the possibility of country pilots to test the implications of the approach in environmental and social safeguards and international competitive bidding.

The Bank continues to modernize the operational policies governing its investment operations. Policy modifications slated for adoption in the near future will enable the expeditious scaling-up of successful projects without a protracted internal review process. Shareholder oversight of these actions is assured as the Bank’s Board must approve these additional financing efforts. The Bank is in the midst of reforming its budgetary processes and modifying its organizational structure to better align staff with client country needs. These efforts will contribute to greater client focus, heightened transparency of internal redeployments, and greater overall effectiveness.

In March 2005 the World Bank, partner countries, bilateral aid agencies and multilateral institutions will review progress made since the Rome Conference. While planning for this Second High-Level Forum on Harmonization is ongoing, it is expected that the priorities could include (i) reinforcing the need to align strategies and financing with poverty reduction strategy priorities; (ii) committing to work towards use of country systems; (iii) streamlining the delivery of aid through more delegated cooperation and silent partnerships; and (iv) developing indicators.

Gender Issues

Canada actively promotes gender issues as a priority for World Bank operations. World Bank lending in almost all sectors includes activities that specifically benefit women and girls. Following a review of its gender strategy, management committed to integrate gender issues into Bank Country Assistance Strategies and to work with developing countries and external partners to identify appropriate strategies to promote gender equality. In 2001 the Bank published a major policy research report, Engendering Development—Through Gender Equality in Rights, Resources, and Voice. The report, which informs the Bank’s gender strategy, concluded that there is strong empirical evidence that gender inequalities tend to slow development, while gender equality helps to lower infant mortality, improve nutrition, and lower fertility and HIV/AIDS transmission rates. CIDA continues to work closely with the Bank to improve the Bank’s capacity in gender equity issues. To expand the exchange of knowledge with its development partners, the Bank provides a number of statistical indicators on gender on its Web site.

Private Sector Development

The private sector plays an important role in virtually all development challenges, from protecting the environment to assisting in privatization in transition economies. Canada has maintained that the Bank Group’s fundamental priority for private sector development is to create an enabling environment for investment and sound regulatory frameworks for the private sector to develop in a sustainable fashion. In 2001 the Bank Group began consultations with governments, the private sector, NGOs and multilateral agencies on a private sector development strategy. Based on this consultative process, the Bank Group’s Private Sector Development Strategy was formally endorsed by Executive Directors in February 2002. The strategy relates to two broad themes: extending the reach of markets and improving the delivery of basic services. The key elements of the strategy include fostering a sound investment climate; providing direct support for private firms; supporting private participation in infrastructure; increasing the role of the private sector in assisting public sector efforts to achieve universal and affordable access to social services; and creating a new approach to more effectively target subsidies to the poor to improve service delivery. Canada has encouraged this increasingly coordinated approach to private sector development.

In 2004 the Bank, building on the success of its inaugural Doing Business in 2004 report on regulatory environments in its member countries, published its Doing Business in 2005 report on removing obstacles to growth. Like the inaugural report, the new report presented indicators in five main topics: starting a business, hiring and firing workers, enforcing contracts, getting credit and closing a business. It also adds another two sets: registering property and protecting investors. The indicators are used to analyze economic and social outcomes such as productivity, investment, informality, corruption, unemployment and poverty, and identify what reforms have worked, where and why.

The Doing Business project itself aims to motivate reforms through country benchmarking. The World Bank reports that this practice has been a powerful motivator for mobilizing society to demand improved public services, enhance political accountability and encourage better economic policy. In addition, this report has the objective of informing the design of reforms. For example, in Ethiopia, the report revealed that a requirement to publish an enterprise’s articles of association in local papers added inordinately to costs while serving little public value. Confronted with the evidence, the Ethiopian government scrapped the regulation. The total cost of registration declined in one year from 422 per cent of per capita national income to 78 per cent, while 12 days were pared from total registration time. Incidentally, this report rates Canada very favourably, in all categories, as a place to establish and conduct a business. The results of the World Bank’s Doing Business project and its work on private sector development informed the influential World Development Report 2005, which focused on investment climate issues.

World Development Report 2005: A Better Investment Climate For Everyone The World Bank’s annual World Development Report (WDR), prepared in consultation with stakeholders, provides in-depth analysis of a specific aspect of development. Past reports have considered such topics as the role of the state, transition economies, labour, infrastructure, health, the environment and poverty. The reports are the Bank’s best-known contribution to thinking about development. The 2005 WDR focuses on what governments can do to improve the investment climates of their societies in order to increase growth and reduce poverty. A key message of the 2005 WDR is that accelerating growth and poverty reduction requires governments to reduce the policy risks, costs and barriers to competition facing firms of all types—from farmers and micro-entrepreneurs to local manufacturing companies and multinationals. The report draws on surveys of over 30,000 firms in 53 developing countries, the Bank’s Doing Business database, country case studies and other new research, and usefully highlights opportunities for governments to improve their investment climates by expanding the opportunities and incentives for firms of all types to invest productively, create jobs and expand. The 2005 WDR is available online at www.worldbank.org.

In FY 2004 the IBRD and IDA together committed US$4,176.6 million in lending in support of financial and private sector development. An important example of the private sector’s role in development is the growing impact of microfinance operations (relatively small loans made to the poor by grassroots organizations). With a small investment, these organizations have been successful in improving the living conditions of the poor—particularly women—in developing countries. Evidence from these operations is compelling; it shows that the poor can be very good entrepreneurs as well as very good credit risks. In 2004 the IFC and the World Bank launched a new initiative to support innovative businesses that create sustainable economic opportunities for very poor and marginalized people. The grassroots business organizations are socially driven ventures, whether for-profit or not-for-profit, that reach out to those at the "base of the pyramid" as partners, suppliers, consumers and/or beneficiaries. These businesses provide income, employment and training for disadvantaged people, bridging the gap to the global marketplace. The initiative has helped Hagar, a Cambodian charity engaging destitute women in soy milk production, and Honey Care Africa, which helps rural farmers in Kenya to augment their income by providing them with the skills and training needed to enter beekeeping, then buys their honey at a guaranteed price and sells it commercially, to expand their operations and help more people.

In November 2004 the United Nations launched the International Year of Microcredit 2005 in an effort to build support for making financial services more accessible to poor and low-income people, raise public awareness about microcredit and microfinance, and promote innovative partnerships among governments, donors, international organizations, NGOs, the private sector, academia and microfinance clients. The Year's overarching goal is to provide greater access to credit, savings, insurance, transfer remittances and other financial services for poor and low-income households so they can move towards more secure livelihoods and prosperous futures.

The Consultative Group to Assist the Poorest (CGAP) is expected to play a critical role in the International Year of Microcredit. CGAP, a consortium that includes the Bank, Canada, 30 other multilateral and bilateral donors, and two private organizations, was established in 1995 to support the development and expansion of sustainable institutions that provide microfinancing services to the poor. In December 2004 CGAP welcomed the IFC as the newest member in order to bring mutual benefits and support an increase in the IFC’s microfinance activities. In September 2002 CGAP members renewed the Group’s mandate for a third term (from 2003 to 2008). In 2004 it developed and endorsed the key principles of microfinance, which were further endorsed by its membership and the Group of Eight leaders at their June 2004 Summit. CGAP will contribute further to the success of the International Year of Microcredit through the promotion of transparent and inclusive financial sectors and institutions, new research and donor conferences.

Microfinance: The Consultative Group to Assist the Poorest Microfinance is an important development instrument in the world’s poorest countries. In FY 2004 CGAP committed US$13.7 million in new grants and initiatives to expand microfinance operations in the world’s poorest countries. Canada strongly supports CGAP efforts to expand microfinance and provides C$500,000 in annual contributions. CGAP moved into its third five-year phase in July 2003. CGAP’s third phase centres on the following four strategic priorities: fostering a diversity of financial institutions that serve the poor; facilitating the poor’s access to a wide range of flexible, convenient financial services; improving the availability and quality of information on the performance of microfinance institutions; and promoting a sound policy and legal framework for microfinance. CGAP works in each of these four strategic areas by providing technical assistance; developing and setting standards; advancing knowledge and information sharing; and offering training and capacity-building services together with other actors. More information on CGAP is available on the Web at www.cgap.org.

Good Governance and Anti-Corruption

Canada is an advocate of strong Bank support for improved public and corporate sector governance. Over the past decade governance has been mainstreamed into the Bank’s adjustment and investment lending, and more recently into its country analytical work.

The Bank’s governance strategy, Reforming Public Institutions and Strengthening Governance, stresses the need for the Bank to strengthen its tools for evaluating the quality of a country’s institutions and for assessing a country’s readiness to initiate specific governance reforms. The Bank routinely produces a set of core diagnostic reports that focus on poverty, analyze the effectiveness and efficiency of public expenditures, assess public finance accountability, review procurement practices, and generally provide an analytic framework for prioritizing development activities—the information that is needed as the basis for the lending program in all countries, regardless of their other characteristics. Core diagnostic reports include poverty assessments, country economic memoranda, public expenditure reviews, country procurement assessment reviews and country financial accountability assessments. In FY 2004 the Bank produced 734 "knowledge" products, including 122 core diagnostic reports.

Since 1997 anti-corruption activities have been integral components of the Bank’s public sector management portfolio. The Bank has mainstreamed anti-corruption issues into its Country Assistance Strategies. The Bank has amended its procurement guidelines to strengthen the procedures for disqualifying bidders, temporarily or permanently, from future Bank-financed projects if it finds evidence of fraud or corruption. In July 2004 the World Bank adopted the new Strategic Directions and Business Plan, as well as the new External Communications Strategy related to investigations and sanctions with disclosure policy amendments, for the Department of Institutional Integrity. In six years the Bank has debarred over 300 firms and individuals from receiving Bank contracts because of their involvement in corruption or the misuse of Bank funds and obtained 25 criminal convictions in multiple jurisdictions. At the start of 2005, 267 companies or individuals were ineligible from benefiting from contracts under World Bank-financed projects. In addition, the Bank issued 10 letters of reprimand to companies or individuals doing business under Bank-financed contracts.

For many of the world’s poorest countries, where governance problems remain endemic, bilateral development cooperation agencies have been reducing aid flows. Moreover, IDA’s performance-based allocations also reduce World Bank concessional financing to these countries. Many of these countries, increasingly referred to as low-income countries under stress (LICUS), are becoming marginalized from development assistance programming. Recognizing that engagement with the international community can promote reform, following a review of the Bank’s LICUS strategy, Executive Directors approved the establishment of a special LICUS Implementation Trust Fund in January 2004 that will be used to finance small demonstration projects aimed at improving governance and at strengthening institutional capacity. In March 2004 World Bank Governors approved the transfer of US$25 million from the Bank’s surplus account to the LICUS Implementation Trust Fund. In cases where LICUS government structures are particularly weak, Trust Fund financing will be delivered through NGOs.

The World Bank’s approach to LICUS and post-conflict countries is constantly evolving. These countries often lack adequate governance structures and capacity. The World Bank is increasingly called upon to work closely with the United Nations, other international financial institutions and bilateral donors on needs assessments, to act as facilitator by designing, implementing and administering trust funds, and to help build governance structures in countries such as Haiti and Afghanistan.

In its efforts to promote better governance practices, the World Bank Institute has established close working relations with the Parliamentary Centre of Canada and with international organizations. The IMF and World Bank as a whole continue to support the work of the Toronto Centre to build capacity in the areas of financial sector supervision.

The Toronto Centre Recognizing the need to strengthen financial sector regulation and supervision internationally, in 1997 the Government of Canada, the World Bank and the Schulich School of Business at York University established the Toronto International Leadership Centre for Financial Sector Supervision. The Toronto Centre provides experience-based training for senior bank and insurance supervisors and securities market regulators, putting them in a stronger position to fulfill their responsibilities and thereby reducing the severity and frequency of financial crises. It focuses on the leadership dimension of the supervisory function, offering pragmatic programs based on the premise that experience is the best teacher. The Toronto Centre has trained close to 1,500 senior public servants from more than 120 countries. The Toronto Centre works with a number of partners to deliver programs in various parts of the world. Joint programs are delivered with the Financial Stability Institute in Basel and with a number of regional organizations in Asia, Latin America, Southern Africa, and Central and Eastern Europe. In addition, the Centre has expanded its offering of special programs for senior supervisory managers by partnering with individual countries, and with the IMF, the International Organization of Securities Commissions and the Organisation for Economic Co-operation and Development. In short, the Toronto Centre now delivers 3 leadership programs in Toronto and 10 to 12 regional, country, joint and special programs around the world. In 2004, recognizing the importance of cross-sectoral debate and discussion of common issues amongst senior executives of supervisory agencies, the Centre embarked on an initiative to bring together the most senior executives from banking and insurance supervision and securities markets regulation. The Executive Forum enabled leading experts in the fields of regulation and supervision to help the participating executives to understand some of the key issues they are facing and the capacity of their agencies to deal with them. As a result of their attendance at the program, four supervisory leaders have asked the Toronto Centre to develop and customize programs for each of their countries. The World Bank provided US$1.25 million in funding to the Toronto Centre from 1998 through 2000. The IMF has contributed US$1.7 million since 2000 and also provides support in kind. The Bank for International Settlements provided US$500,000 over the 2000–2002 period. Canadian funding for the Toronto Centre has been provided by CIDA and amounts to C$6.2 million to date. As well, the Canadian Imperial Bank of Commerce, The Bank of Nova Scotia, the Royal Bank of Canada and TD Canada Trust contributed to the initial round of funding. In addition, support for individual projects has been received from USAID, the Government of Singapore, the Financial Technology Transfer Agency Luxembourg, the Inter-American Development Bank, and the multi-donor Financial Sector Reform and Strengthening Initiative. The Office of the Superintendent of Financial Institutions has provided support from the beginning and it remains a major contributor to the work of the Toronto Centre. The Ontario Securities Commission has become a contributor to the Centre’s efforts in the area of capital markets regulation. The Toronto Centre can be reached through its Web site at www.torontocentre.org.

In 2003 and 2004 the Canadian Executive Director and his colleagues on the Committee on Governance and Executive Directors’ Administrative Matters developed measures to enhance the efficiency and effectiveness of Board meetings and other operations. They also recommended important corporate governance initiatives, including financial disclosure for Board officials and an ethics committee to provide guidance to Executive Directors and their senior staff as well as to the President of the World Bank. The Executive Board adopted and implemented these measures in 2004.

Environmentally Sustainable Development

The Canadian government, alongside Canadian civil society, has long been a vocal advocate of the need for the Bank to better integrate environmental considerations into its operations. Along with gender, this is an area that could be more strongly emphasized in Country Assistance Strategies and World Bank assessments of PRSPs. The Bank has estimated the economic costs of environmental degradation in many developing countries to be, on average, in the range of 4 to 8 per cent of GDP. Under its environmental strategy, the Bank is moving to improve its environmental safeguard system and to mainstream environmental policies and issues into its loan and policy dialogue work. The Bank also works closely with clients to help them introduce and implement their own environmental safeguard systems to help them manage their resources more sustainably.

While the Bank is mainstreaming environmental considerations into the broad range of its operations, the number of direct environmental investments it supports varies from year to year. In FY 2004 the share of overall Bank lending directed to environmental and natural resource management remained unchanged at 6 per cent.

The Bank has been particularly active in the area of climate change. As an implementing agency of the Montreal Protocol’s Multilateral Fund, the Bank has helped to phase out about 140,000 tons of ozone-depleting potential substances at a cost of US$650 million and to complete over 416 projects by the end of FY 2004. In FY 2004, 28 new subprojects were approved with funding amounting to US$66.2 million.

Many developing countries face daunting water resource challenges as the needs for water supply, irrigation and hydroelectricity grow. As a consequence, there is a high and increasing demand for World Bank engagement. Accordingly, the Bank articulated its strategic directions for the water sector in a paper published in February 2003. As a result of this strategy, Bank investment in the Water, Sanitation and Flood Protection sector more than doubled in FY 2003 to 7 per cent of overall lending from 3 per cent in 2002 and increased further to 8 per cent in FY 2004. Together with the United Nations Development Programme and United Nations Environment Programme, the Bank is an implementing agency of the Global Environment Facility (GEF). Through the GEF, the Bank supports projects in four key areas: climate change, biodiversity conservation, phase-out of ozone-depleting substances and protection of international waters. Since the inception of the GEF, the World Bank Group has mobilized nearly US$12 billion in public and private funds to support action in the four key areas. In FY 2004, 41 new GEF projects were approved for US$219 million in GEF financing and additional Bank financing of US$738 million.

More recently the World Bank has expanded its carbon finance business. These activities include the Prototype Carbon Fund, Community Development Carbon Fund and the BioCarbon Fund. The Prototype Carbon Fund, operational as a partnership between 17 companies and six governments (including Canada) since April 2000, pioneered the market for project-based greenhouse gas emission reductions while promoting sustainable development and offering a learning-by-doing opportunity to its stakeholders. The Community Development Carbon Fund, operational since July 2003, is a public/private initiative with a target size of US$100 million that provides carbon finance to small-scale projects in the poorer rural areas of the developing world. The BioCarbon Fund, a public/private initiative administered by the World Bank and operational since May 2004, has capital of US$33.3 million. Through investments in demonstration projects that sequester or conserve carbon in forest and agro-ecosystems, the BioCarbon Fund aims to deliver cost-effective emission reductions, while promoting biodiversity conservation and poverty alleviation. In December 2004 the World Bank and European Investment Bank agreed to cooperate in the development of a Pan-European Carbon Fund.

The World Bank continues to strengthen its approach to ensuring sustainable development. Safeguard policies are a subset of World Bank operational policies that require that potentially adverse environmental and social impacts of Bank investment projects be identified, avoided or minimized where feasible, and mitigated and monitored. Bank management first articulated the concept of safeguard policies in 1997 to stress the importance of this specific set of operational policies for achieving its environmental and social objectives and enhancing the quality of its operations. In 2003 there was a strengthening in the implementation of safeguard polices. In addition, disclosure of safeguard documents has increased now that the application of the Policy on Disclosure of Information is fully mainstreamed. The higher number of projects subject to environmental scrutiny, and the larger number of documents disclosed, reflect the increased mainstreaming of environmental and social concerns in the Bank’s lending portfolio.

Over the course of 2004 the World Bank Group discussed at length the report of the independent stakeholder process led by Dr. Emil Salim, as part of the Group’s Extractive Industries Review. The process was launched in 2000 in response to concerns expressed by a variety of stakeholders, primarily environmental and human rights organizations. Throughout 2004 Canada underscored the need for meaningful consultations and pressed World Bank management, under both its translation and disclosure policies, to release translated versions of key Bank documents as soon as possible to inform public debate on this critical issue.

The Executive Board’s consideration in August 2004 of the Salim report, the World Bank Group Management Response to the Extractive Industries Review and related reports, was the culmination of a wide-ranging process that included multiple in-depth, independent technical reviews, project site visits, and a series of conferences around the globe to solicit the views of stakeholders in government, industry, civil society and local communities.

In its proposal to the Board, the World Bank Group indicated that it would continue investments in oil, gas and mining projects, as these remain an essential part of the development of many poor nations. The World Bank Group also noted that, as countries develop their resources, the Group’s capital and expertise can help ensure that such projects meet high environmental, social and governance standards, and that revenue from the projects is used transparently and effectively.

The central message of the reviews was that while extractive industry investments can contribute to sustainable development, the World Bank Group should further enhance its efforts in several areas: more explicitly identifying and tracking poverty reduction associated with its projects, the overall quality of governance in host countries, broader inclusion of local stakeholders, transparency of revenue management and project documents, and the promotion of renewable energy and cleaner fuel alternatives. In the area of renewable energy, the World Bank Group will seek to scale up its activities: management has set an initial target to increase its renewable energy and energy efficiency portfolios by 20 per cent annually over the next five years, which will increase the level of investments in this sector to more than US$400 million per year. This target will be reviewed on a regular basis.

Trade and Development

Canada recognizes that the capacity of small nations, emerging economies and other developing countries to participate effectively in the global trading system is an important component of a comprehensive approach to growth and poverty reduction. Canada has stressed the need to incorporate trade sector capacity building in Bank Country Assistance Strategies and nationally developed Poverty Reduction Strategy Papers.

The objectives of the Bank’s work in the trade area cover three distinct but complementary areas:

at the global level, promotion of change in the world trading system to support development, including activities to promote a pro-development Doha outcome and work with bilateral agencies and NGOs to promote the trade and development agenda;
at the regional level, promotion of effective cooperation, through both analytical work and active support for cross-cutting issues such as standards and trade liberalization; and
at the national level, promotion of trade issues in country strategies, including targeted country analysis and technical support.

Doha participants reached agreement in July 2004 on a work program containing frameworks and agreements designed to allow the negotiations to move forward. Much work remains before Trade Ministers meet again in Hong Kong in December 2005. To support the process, the World Bank continues to aid developing countries to increase their capacity to participate in world trade. Such assistance finances government trade reform programs, including income maintenance, worker retraining, investments in ports and roads, and reform of trade-related institutions. As the Doha agreement begins to take shape, the Bank will work with countries to quantify ways they might be affected individually and will help tailor reform programs to their needs if requested.

The Bank will also continue to play a strong advocacy role for developing countries on trade issues. On November 16, 2004, the World Bank launched its annual report—Global Economic Prospects 2005: Trade, Regionalism and Development 2005 —to shed light on the new bilateral and regional preferential trading arrangements mushrooming all over the globe. Over the last 20 years the number of such agreements, including the North American Free Trade Agreement, has increased sixfold to some 200. The surge in regional trading arrangements prompts many questions that Global Economic Prospects 2005 takes up:

What types of regional and bilateral arrangements are most beneficial—and which types stifle development?
Do these arrangements inspire deeper integration that multilateral trade agreements cannot?
Do these arrangements contribute to—or detract from—incentives for countries to engage in the multilateral Doha trade talks?

The report concludes that, broadly speaking, regional trade agreements offer benefits to developing countries provided that these trade agreements do not occur behind a wall of protection or behind an increased role of protection. It also encourages countries negotiating regional trade agreements to make them as open as possible with respect to third parties and to use them to pursue broader trade liberalization rather than to avoid such policies and such an evolution.

In addition, the Bank is working with five other institutions in the context of the Integrated Framework for Trade-Related Technical Assistance (IF).^[8] The IF has evolved into an important vehicle for mainstreaming trade issues into least developed country development strategies in a coordinated fashion, with the World Bank playing the role of lead institution. The Bank’s intellectual and financial commitment to this project is critical to the success of the IF in both the short and long term. Canada is a strong supporter of the IF and, in addition to providing policy advice, contributed US$1.33 million to the IF Trust Fund. Canada is also one of two donor representatives on the IF Working Group and as such is a full partner with the six agencies in setting future directions for the IF.

Transparency and Accountability

Recognizing that transparency and accountability are fundamental to ensuring the longer-term sustainability of the Bank Group’s operations and that the "demonstration effect" of the Bank’s own policies is important for developing country governments, Canada has been a major proponent of increased openness at the Bank. Canada and other donors have pushed the Bank and borrowing countries to improve consultations with local people—civil society organizations (CSOs) and non-governmental organizations (NGOs)—in borrowing countries, not only in the design and implementation of projects but also in the preparation of key policy documents, such as Country Assistance Strategies. The Bank has responded to concerns from shareholders by making public a growing number of documents. Following extensive Bank consultations with governments, civil society, the private sector and the media, the Bank’s revised disclosure policy came into effect in January 2002.

Under this policy, the Bank now discloses the following to the public:

documentation outlining key actions supported by a Poverty Reduction Support Credit following loan approval by Executive Directors;
program documents for other adjustment loans, with the consent of the borrower, following Executive Board approval of the operation;
a broad range of Operations Evaluation Department reports after they have been released to Executive Directors;
environmental safeguard assessments for all projects before project appraisal begins;
concluding remarks of the Executive Board chair on Country Assistance Strategies (CASs), Transitional Support Strategies and CAS Progress Reports that are themselves disclosed;
concluding remarks on policy and strategy papers on a case-by-case basis; and
archived documents after 20 years (or 5 years for types of documents now routinely disclosed).

Substantial headway was made during the 13th IDA replenishment negotiations in expanding transparency and policy dialogue with borrowers and civil society. For the first time six representatives of IDA borrowers participated in formal discussions of the IDA policy framework. IDA donors also decided to release all of their background policy discussion papers to the public in draft form and took the unprecedented step of seeking public comment on their draft report, which defines the IDA13 policy framework.

More progress was made during the IDA14 replenishment meetings in 2004 and early 2005. Borrower participation and publication of IDA14 documents continued. In September 2004 the World Bank agreed to the publication of individual country ratings under the annual IDA Country Policy and Institutional Assessment (CPIA) exercise to assess economic, social and governance indicators of IDA countries, starting in IDA14. This will provide client countries and other stakeholders with transparent information about CPIA methodology, findings and ratings for all IDA countries, which, in turn, should enhance the quality and robustness of the ratings, as well as public confidence in IDA’s performance assessment.

Transparency also requires better consultation with those affected by projects that the Bank supports. Under President James Wolfensohn, the Bank was the first multilateral organization to establish an independent panel to consider outside complaints. Any group that may be affected by a Bank-supported project has the right to request that the Inspection Panel investigate whether the Bank has abided by its policies and procedures. Canada has been one of the major supporters of the work of the Inspection Panel. In FY 2004 the Panel received six new requests for inspection involving Bank projects in the Philippines (Manila Second Sewerage Project), Cameroon (Petroleum Development and Pipeline Project), Mexico (Indigenous and Community Biodiversity Project), Colombia (Cartagena Water Supply, Sewerage and Environmental Management Project), and India (Mumbai Urban Transport Project, two requests). Requests for inspection, Panel recommendations, reports and management recommendations can all be accessed at www.worldbank.org/inspectionpanel.

The Bank engages with civil society across a broad range of activities, including providing input for poverty assessments, national environmental action plans and other key Bank analytical tools. Particular emphasis has been placed on expanding partnerships with outside groups as more Bank operations are framed in the context of Poverty Reduction Strategy Papers, which embody participatory approaches at the macro level. CSO and NGO representatives from developing countries are now consulted regularly in the preparation of Bank Country Assistance Strategies. Information on the participation of CSOs and NGOs is now included in Bank project appraisal documents.

With the phasing out of the World Bank–NGO Committee in late 2000, the World Bank’s Civil Society Team has been working with a number of prominent CSO networks to establish new venues for dialogue on policy and process at the global level. These mechanisms include the Joint Facilitation Committee; more structured and earlier consultations around the Bank’s policy research; strategic policy workshops on emerging controversial issues; global video-dialogues; and thematic forums. The Bank is also engaged in the Bridge Initiative, which is an effort to promote more informed and constructive public debate among global policy-makers and leaders in the global social justice movements, such as the organizers of the World Social Forum.

Within Canada NGOs have participated in a regular series of government meetings and conferences on such issues as multilateral debt, the environment, IDA and Africa. The Canadian government has benefited greatly from the expertise and advice offered by Canadian NGOs on a broad range of development issues. Through this collaborative process, the views of Canadian NGOs have helped shape Canada’s position in Bank project and policy discussions.

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Archived - Report on Operations Under the Bretton Woods and Related Agreements Act 2004 : 1

Introduction

Roles of the International Monetary Fund and World Bank

International Monetary Fund

World Bank

International Monetary Fund

Overview

Benefits of Membership

How the IMF Works

Canada’s Priorities at the IMF

Global Economic and Financial Stability

Economic and Financial Developments in Emerging Markets

Efforts to Promote International Financial Stability: Strengthening Surveillance and Crisis Prevention

Making Surveillance More Effective

Improving Transparency, Accountability and Openness

IMF Transparency

IEO Evaluation of Poverty Reduction Strategy Papers (PRSPs) and the Poverty Reduction and Growth Facility (PRGF)

Strengthening Institutional Capacity

Implementation and Assessment of International Codes and Standards

Strengthening Financial Sectors

Technical Assistance

Enhancing Crisis Resolution

Implementing the New Access Policy Framework

Exceptional Access Policy Criteria and Procedures

Promoting the Adoption of Collective Action Clauses

Assessing the Possible Role of a Voluntary Code of Conduct

Improving IMF Lending

Focusing Conditionality and Fostering Ownership

Trade and Development

Signalling Mechanisms

Safeguarding the IMF’s Cooperative Nature

Quota Resources

IMF Lending Capacity

Management Practices

How to Access Information at the IMF

Strengthening Support for Low-Income Countries

Lending Developments in 2004

Managing Canada’s Interests at the IMF

Canada’s Voting Record

Canadian Executive Director’s Office at the IMF

Canada’s Financial Participation

New Arrangements to Borrow (NAB)

Challenges Ahead

World Bank

Benefits of Membership to Canada

Overview of Operations in 2004

Geographic and Sectoral Focus of Lending

Non-Lending Operations

How the World Bank Group Works

Strengthening the World Bank’s Poverty Reduction Focus

Focusing Operations on the Millennium Development Goals

Millennium Development Goals

Economic Prospects for Developing Countries

Stronger Focus on Country Ownership

Development Policy Lending

Monitoring and Evaluation

Assessing Poverty

The World Bank’s Response to the HIV/AIDS Pandemic

The IDA14 Replenishment—Working Together to Achieve the Millennium Development Goals

IDA—Focused on the World’s Poorest

Canada’s Priorities at the World Bank

Poverty Reduction and Human Development

Poverty Reduction and Sub-Saharan Africa

Canada’s Voting Record

Education

Development Effectiveness

Gender Issues

Private Sector Development

World Development Report 2005: A Better Investment Climate For Everyone

Microfinance: The Consultative Group to Assist the Poorest

Good Governance and Anti-Corruption

The Toronto Centre

Environmentally Sustainable Development

Trade and Development

Transparency and Accountability

Efforts to Promote International Financial Stability:
Strengthening Surveillance and Crisis Prevention

World Development Report 2005:
A Better Investment Climate For Everyone