Archived - Report on Operations Under the Bretton Woods and Related Agreements Act 2006 : 2
Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.
Managing Canada’s Priorities at the Bretton Woods Institutions
Governance and Accountability
Canada is the eighth largest member of the IMF and the sixth largest shareholder at the World Bank. Membership in the two institutions gives Canada an important voice in the two leading international institutions devoted to promoting international financial stability and poverty reduction. Voting power at both institutions is mainly a function of the relative economic strength of individual members (which reflects their ability to contribute resources to the institutions). A small share of a member’s voting power is also determined by "basic votes," which are distributed equally among all members in recognition of the equality of states. Canada’s voting power is 2.9 per cent at the IMF and 2.78 per cent at the World Bank.
The IMF and World Bank are owned by their member countries, with their managements accountable to the membership. The Board of Governors, on which all member countries are represented, is the highest authority governing these institutions. The Minister of Finance is Canada’s representative on the Board of Governors of both of these institutions. The Minister exercises influence at these institutions through his statements at the spring and fall meetings of the International Monetary and Financial Committee of the Board of Governors of the IMF, and Development Committee of the Boards of Governors of the World Bank and IMF; his plenary statement at the IMF and World Bank Annual Meetings; votes on various policy and administrative issues; and periodic meetings with the heads of the institutions.
Governors delegate decision making for a wide variety of day-to-day operations, policy and administrative matters to the 24-member Executive Board of each institution. Given that these Boards represent all of the institutions’ 184 members, countries typically group themselves into constituencies, often with several countries represented by one Executive Director. On the Executive Boards of the two institutions, Canada is a member of a constituency that also includes 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 World Bank’s Executive Board, Canada’s constituency mirrors that of the IMF, but also includes Guyana. Governors representing the countries sharing our constituencies at these institutions elect Executive Directors every two years, usually based on a nomination made by the Canadian Governor. Mr. Jonathan Fried was elected to represent our constituency at the IMF in April 2006. Mr. Samy Watson was elected to represent our constituency at the World Bank in September 2006. The Minister of Finance and senior officials from the Department of Finance consult regularly with the Executive Directors on a range of IMF and World Bank issues.
In October 2006, the Minister of Finance met with civil society representatives to discuss their views on key issues involving the Bretton Woods institutions. As well, officials from the Department of Finance met with parliamentarians in October 2006 to brief them on Canada’s relationship with the Caribbean within our constituencies at the Bretton Woods institutions. Officials also consulted with civil society on a broad range of issues, including the format and content of this report.
Over the course of a year, Canada’s Executive Directors at the IMF and World Bank meet with a variety of stakeholders, including governmental and non-governmental organizations and those pursuing business opportunities at the respective institutions, who wish to discuss issues falling within the mandates of the institutions, or to exchange views on developments in member countries.
In 2006, visitors to the IMF Executive Director’s Office, in addition to routine visits by government officials of Canada’s constituency, included: individuals from the Global Organization of Parliamentarians Against Corruption to discuss the Fund’s role in countering corruption; a number of non-governmental organizations, including Results-Résultats Canada, Trocaire (Ireland) and ActionAid (United States and United Kingdom) to discuss aid flows in low-income countries with Fund programs; and the Advisory Committee for the "Taking Responsibility" project—a Jamaican non-governmental organization established to discuss the economic development of Jamaica. In addition, the Executive Director’s Office undertook a program of outreach to educational institutions, including presentations on the IMF to students from Queen’s University and the National Defence Staff College.
In 2006, the World Bank Executive Director’s Office met with members of the House of Commons Committee on Foreign Affairs and International Development, as well as representatives from Canadian and international civil society, including Results-Résultats Canada, Oxfam Canada, ActionAid International, the Halifax Initiative, Inclusion International, Gender Action, the Social Justice Committee of Montreal, the Bank Information Center, Environmental Defense, the Micronutrient Initiative and DATA, to discuss a variety of development policy issues. Representatives from Queen’s University and the Commonwealth Secretariat also met with the Canadian Executive Director.
The Department of Finance coordinates Canadian policy advice on Fund and Bank policy issues and Canada’s operational interests at these institutions. It consults closely with other government departments and agencies, particularly the Bank of Canada, the Canadian International Development Agency (CIDA) and the Department of Foreign Affairs and International Trade, which play a critical role. Bank of Canada Governor David Dodge is Canada’s Alternate Governor at the IMF; and CIDA President Robert Greenhill is Canada’s Alternate Governor at the World Bank. Finance officials testify before relevant committees of the Parliament of Canada and meet with representatives of Canadian non-governmental organizations on a regular basis.
Within the Department of Finance, the International Trade and Finance Branch is responsible for conducting analysis and preparing advice on the policy issues and specific country programs that are brought before the Executive Boards.
|Members of the Executive Director’s Office|
|Executive Director||Jonathan Fried (Canada)|
|Alternate Executive Director||Peter Charleton (Ireland)|
|Senior Advisor||Paul Jenkins (Canada)|
|Senior Advisor||Murna Morgan (Caribbean)|
|Senior Advisor||Jean-François Perrault (Canada)|
|Advisor||Shawn Ladd (Canada)|
|Advisor||Yvette Alvarez (Caribbean)|
|Administrative Assistant||Catherine Byrne (Ireland)|
|Administrative Assistant||Liz Craib (Canada)|
|Address||11-112, 700 – 19th Street N.W.,
Washington, DC 20431, USA
|Executive Director||Samy Watson (Canada)|
|Alternate Executive Director||Ishmael Lightbourne (Caribbean)|
|Senior Advisor||Terry Winsor (Canada)|
|Senior Advisor||François Pagé (Canada)|
|Senior Advisor||Brendan Ryan (Ireland)|
|Senior Advisor||Cal MacWilliam (Canada)|
|Advisor||Sharmila Prakash Khare (Canada)|
|Advisor||Timothy Antoine (Caribbean)|
|Executive Assistant||Monique Piette|
|Program Assistant||Monica Morris|
|Team Assistant||Danielle Pierre|
|Address||MC-12-175, 1818 H Street N.W.
Washington, DC 20433, USA
As a major trading nation, Canada benefits from a strong and stable global economy and 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. As these demands are constantly shifting with the evolution of the international economy, Canada makes a difference by having a strong voice in the development of the international financial architecture. In particular, Canada influences how the Fund approaches crisis prevention and resolution, particularly through its surveillance activities and the design of its lending and poverty reduction facilities.
In turn, the IMF, through its 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, the Bank of Canada and other government departments and agencies. If Canada were to experience severe balance of payments difficulties, it would have the right to draw on IMF financial assistance.
The 2006 annual Article IV consultations between the IMF and Canadian officials concluded in May, with the IMF staff and Executive Board concluding that Canada’s strong macroeconomic framework supported another year of strong economic performance. Staff noted that the May 2006 budget contained welcome commitments to reduce public debt, contain expenditure growth and lower the tax burden, including through a number of tax cuts aimed at boosting incentives to work, save and invest. Consultations for the 2007 Article IV exercise concluded in January 2007, following the release of The Economic and Fiscal Update, and staff welcomed the Update’s emphasis on fiscal prudence.
Preliminary Conclusions of the IMF Staff Assessment of the Canadian Economy and the Government of Canada’s Economic Policies
1. The strong performance of the Canadian economy appears likely to continue, notwithstanding some recent slowing in growth. Over the last year the economy has remained close to potential, as robust domestic demand has offset weakness in net exports from past currency appreciation, and the unemployment rate dipped to a 31-year low. Looking forward, resilient domestic demand and a diminution in the drag from the external sector—even in the face of the recent U.S. slowdown—will likely generate a recovery in growth to around 23/4 percent by mid-2007, broadly in line with potential, with inflation staying at about 2 percent.
2. External factors and the questions that surround productivity growth tilt risks to activity to the downside, while those related to inflation are smaller and more balanced. Although strong household and corporate balance sheets suggest that domestic demand could surprise on the upside, a larger-than-anticipated slowing of activity in the United States, especially in the auto sector that has particularly significant spillovers for Canada, represents a key downside risk to growth.
3. The Bank of Canada has adroitly balanced these competing risks, and has appropriately left rates on hold since May. While much will depend on incoming data, the current stance appears apposite given projections that headline and core inflation will remain around the middle of the target range, broadly symmetric inflation risks, approximately neutral real short-term interest rates, well-anchored inflation expectations, and moderate wage pressures. Given its success, we welcome the recent decision to leave the inflation targeting framework unchanged, albeit with somewhat greater flexibility regarding the inflation horizon, while at the same time continuing to explore the possibility of future improvements.
4. The financial sector is well positioned to cope with a turning of the global credit cycle. Bank profitability and capital are high by historical (and, for the latter, international) standards and risks from the housing market are more limited than in other cyclically-advanced countries. At the same time, against a backdrop of a rapidly transforming global financial industry, there could be scope to improve financial sector efficiency and innovation by reducing regulatory thresholds to bank restructuring, as well as by moving toward establishing a national securities regulator.
5. We welcome the Fiscal Update’s focus on fiscal prudence. This includes planned debt reduction of C$3 billion a year, the intention to allocate unanticipated surpluses to further lower the debt burden, and the advancement of the commitment for reducing the federal debt ratio to 25 percent of GDP by a year to FY 2012–13. Given spending pressures that will begin to build from population aging, long-term fiscal sustainability requires a steady and significant decline in debt in coming decades, as well as further steps to contain the growth of public health spending. The new objective to eliminate general government net debt by 2021 appropriately highlights the joint role of public pension plans and provincial—territorial governments in achieving a sustainable fiscal position, and could be usefully complemented by publishing a regular assessment of the long-term fiscal outlook.
6. The government’s intention to lower the tax burden is appropriate. The modest fiscal space after planned debt reduction would most usefully be used for growth enhancing cuts in personal and (in particular) corporate marginal effective tax rates. We welcome the government’s commitment to using interest savings from debt reduction to lower personal income taxes and its objective of achieving the lowest marginal effective tax rate on new investment in the G-7. Marginal income tax rates are high by international standards, suggesting that reductions in this area would provide larger efficiency gains than further cuts to the Goods and Services Tax (GST). Indeed, with population aging implying a steady lowering in the ratio of workers to the overall population, there is a case for increasing the role of consumption taxes in the overall revenue effort.
7. The reforms suggested by the O’Brien panel would appropriately make the equalization system more predictable. With differences in provincial fiscal capacity having widened as a result of the boom in world commodity prices, there is increasing urgency to return the program to a rules-based system and to avoid ad hoc bilateral arrangements. In particular, the suggestion to include resource revenues from all provinces in the standard for the calculation of equalization transfers is welcome.
8. With sound frameworks delivering macroeconomic stability, we welcome the focus on enhancing prosperity. The theme of Advantage Canada is timely given modest investment by businesses in machinery and equipment and R&D, as well as a continuing productivity gap with the United States. We would particularly emphasize the value of initiatives to enhance the business environment. In addition to cutting high marginal effective tax rates on capital (including by promoting the harmonization of provincial sales taxes with the GST) and improving financial market intermediation, priorities could include phasing out restrictions to foreign direct investment, reducing the regulatory burden on firms, eliminating interprovincial barriers to trade in goods and labor mobility, and adapting the immigration system more fully to the needs of the economy.
Source: 2007 Article IV Consultation with Canada—Preliminary Conclusions of the IMF Mission. Canada’s full Article IV report and the Executive Board’s assessment can be found at www.imf.org.
Likewise, membership in the World Bank Group affords Canada an important voice on key development issues in one of the world’s premiere multilateral development institutions. Through its engagement in the Bank, Canada’s influence in developing countries can be leveraged beyond what can be achieved through bilateral programs. The Canadian International Development Agency leverages 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. 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. Finally, the Bank provides significant procurement opportunities for Canadian companies and individuals.
Canadian Companies Benefit From World Bank Procurement
In FY2006, Canadian firms were awarded contracts worth more than US$38 million under Bank-financed contracts associated with investment lending. The experiences of two Canadian companies highlight the benefit this relationship with the World Bank can yield.
CPCS Transcom is a Canadian company that specializes in international transportation commercialization and privatization projects. It has completed over 700 projects in more than 60 countries. Clients include national governments, public transit authorities, private and state-owned transportation organizations, and mining companies. The company also assists the World Bank, the Canadian International Development Agency, the African, Asian, Caribbean and the Inter-American Development Banks, the International Civil Aviation Organization and the United Nations Development Programme. Current projects being financed by the World Bank Group include:
Développement international Desjardins (DID) is a Canadian company that specializes in providing technical support and investment for the community finance sector in developing and emerging countries. DID currently provides substantial support to many cooperative and government partners in some 20 countries in Africa, Latin America, the Antilles, Asia, and Central and Eastern Europe. Two examples of World Bank-financed projects include:
Table 3 summarizes Canada’s quota at the IMF. Table 4 illustrates Canada’s capital subscriptions and voting share at the IBRD, IFC and MIGA. It also highlights Canada’s cumulative donor contributions to IDA.
Canada’s Financial Position at the IMF as of December 31, 2006
|Fund holdings of Canadian dollars1||5,815.8||5388.9|
|Reserve position in the Fund2||553.4||980.3|
|1 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.
2 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 part of Canada’s official foreign exchange reserves.
Canada’s Financial Position at the World Bank Group as of June 30, 2006
|Amount paid in||334.9||6,220.04||81.3||10.7|
|Subscription share (%)||2.85||4.44||3.44||3.00|
|Voting power (%)||2.78||2.82||3.39||2.51|
|1 The World Bank Annual Report 2006.
2 IFC 2006 annual report, Increasing Impact—The Year in Review 2006.
3 MIGA, 2006 Annual Report.
4 This number represents Canada’s cumulative contributions to IDA.
In addition to the resources provided through our membership at the IMF and World Bank, Canada is an important provider of donor funding for these institutions.
- In 2006, Canada contributed SDR 14.3 million to the IMF’s Exogenous Shocks Facility (ESF). This facility was established in 2005 to provide timely concessional support to low-income members facing exogenous shocks. To date, no low-income member has requested support under the ESF.
- In 2006, Canada paid $16.6 million to the IMF in fulfillment of our obligations under the Multilateral Debt Relief Initiative (MDRI). Our first payments to IDA ($35.3 million) and the African Development Bank ($10.4 million) in support of the MDRI were made early in 2007.
- Canada provides core financial support to IDA. Donors pledge new funds to IDA as part of replenishment discussions that happen every three years. The fourteenth replenishment of IDA (IDA14) concluded in February 2005. In 2006, Canada made its second of three equal payments to IDA14 for $318 million.
- In addition to our traditional transfers to IDA, Canada also makes use of World Bank-administered Multi-Donor Trust Funds (MDTFs). MDTFs have been established in a number of post-conflict situations in order to mobilize resources and coordinate reconstruction efforts. Examples of Canadian contributions to World Bank-administered MDTFs in 2006 include $78.5 million to Afghanistan and $40 million to Sudan. In 2006, Canada provided a total of $146 million to World Bank Trust Funds.
World Bank Group Transactions in Canada or in Canadian Currency
The World Bank Group undertook one C$12–million bond issuance in Canada in 2006.
Despite a very successful year in which progress was made on a variety of Canadian policy priorities, challenges remain. This section presents the key areas where the Canadian government will be looking for progress over the coming year.
As mentioned in the section "Canadian Policy Priorities at the Bretton Woods Institutions," the IMF faces a number of challenges due to the changing international economy (e.g. changes in the nature of capital markets and in the relative positions of national economies) that threaten its legitimacy and effectiveness. Over the next two years, IMF management and membership will focus on finding innovative and workable solutions to improve member representation, strengthen surveillance and ensure its lending instruments are best tailored to member needs, especially those of emerging market economies. Given the divergent interests, balancing the views of members will be very difficult.
Quotas, Voice and Representation
Recognizing the fundamental importance of an agreement on an IMF reform package to the legitimacy and future effectiveness of the IMF, in the second stage of IMF reform, Canada will work closely with its partners in the IMF and with the G7 and G20 Finance Ministers to ensure the IMF’s governance structure reflects the relative economic weight of the institution’s membership. We anticipate that quota reform will form an important element of a wider package of second-stage reforms that will also include adjustments to the level of basic votes and the possible introduction of a new lending instrument. We cannot underestimate this challenge given differing member perspectives. Any move to increase basic votes at the Fund, which would benefit the poor and small members, would likely be replicated at the World Bank.
Canada supports reforms to surveillance that focus Fund scrutiny on situations where members are pursuing policies with negative spillover effects on the world economy. The Fund must also have a surveillance framework that promotes objective and even-handed assessments of member policies, allows the Fund to be a trusted advisor and promotes a high level of public transparency. The Fund is studying options to update the legal underpinnings (guidance and accountability frameworks) of surveillance, including the revision of its 1977 Decision on Surveillance over Exchange Rate Policies, to ensure they are more closely aligned with evolving practice in the global economy. It is also considering the possible implementation of a surveillance remit process that would provide better member guidance concerning surveillance priorities.
The Fund must act to prevent crises, but be ready to step in with appropriate financing facilities when they occur. Emerging market economies have unprecedented access to financing in private international capital markets. However, stability risks remain, and the Fund has been studying ways to mitigate them. The answer may be a high-access precautionary lending instrument that emerging market members with sound policy frameworks can count on as a backstop for their international reserves. Canada supports reforms to Fund lending facilities that promote effective crisis prevention and resolution. However, given past difficulties in implementing facilities like the Contingent Credit Lines, it will be challenging to design a facility that provides reliable access to Fund resources while ensuring that Fund resources are protected. Moreover, the Fund will have to ensure that positive signals are sent to markets when members utilize or cancel high-access precautionary lending instruments.
Canada will be assessing the report by the Committee of Eminent Persons on the sustainable long-term financing of the Fund that was released in January 2007, and will work with its partners at the IMF and in other fora to ensure the IMF has a sustainable and equitable financing model going forward. While not part of the committee’s mandate, work will obviously have to include an analysis of, and possible further cuts in, the Fund’s expenditures.
The fifteenth replenishment of IDA (IDA15) will begin in March 2007. In preparation for the replenishment cycle, Canada has flagged three key areas where we expect progress to be made.
1. Results Management and Development Effectiveness
We strongly believe that a continued emphasis on aid effectiveness and results management is necessary in order to maintain strong donor support for IDA. Clearly, the work that IDA has done to date in the development of a results measurement framework has the potential to become a very useful tool to evaluate aid effectiveness. Canadians want accountability for their aid spending to ensure that it is put to effective use. We are not alone in this respect. Many donors are under increasing pressure to demonstrate that aid dollars are being put to good use. In part, this will require a stronger focus on both qualitative and quantitative measures.
We strongly support IDA’s efforts to monitor statistical capacity–building activities undertaken in IDA countries on an annual basis, and encourage further work in this area, including increased reporting on the quality and coverage of social sector statistics in all IDA countries. This kind of work will help all donors assess statistical needs and set out action plans to build and improve statistical capacity so that ultimately, countries can plan for and measure their own development results.
2. Failed and Fragile States
Canada is committed to addressing the problems of failed and fragile states. The top three beneficiaries of Canadian bilateral assistance (Afghanistan, Sudan and Haiti) fall in this category. Our efforts are supported by a growing international focus on how failed and fragile states can be reintegrated successfully into the global economy. Both the IMF and World Bank are important partners in working with these countries. However, we would like to see more analysis on the role that IDA can play in helping fragile states transition to a more stable position. In particular, we believe that the IDA15 replenishment process provides an opportunity to revisit IDA's assistance to these states, as well as how IDA can work with other development partners (the United Nations, regional development banks, donors and the countries themselves) to improve collaboration and the effectiveness of aid.
3. Debt Sustainability
Debt sustainability is an issue that warrants continued attention, particularly the importance of enhancing the debt management capacity of many IDA countries. Building debt management capacity and improving the quality of debt data will enable debtor countries to make informed decisions regarding the acquisition of new debt and their current and future ability to service such debt without undermining their long-term development goals. The World Bank, and the IMF can play a significant role in building debt management capacity in heavily indebted poor countries (HIPCs). This will be an important theme during the IDA15 replenishment.
Ending the "Lend-and-Forgive" Cycle
On December 31, 2006, the HIPC Initiative sunset clause took effect, which ensures that the remaining 10 eligible countries yet to enter the HIPC process can do so at their own pace. Before a country enters the HIPC process, its arrears to IDA, the IMF and the African Development Bank must be cleared. This will require substantial financial resources, both from the debtor and the donor community, and is a priority area of discussion. Liberia is of particular importance as it is likely to meet the conditions to clear its arrears soon.
Despite the significant reduction in beneficiary country debt stocks after the provision of HIPC and Multilateral Debt Relief Initiative (MDRI) debt relief, there is a risk that new lending and borrowing can lead to a rapid re-accumulation of unsustainable debt. The increased fiscal space of HIPCs in the post-MDRI environment, together with the growing financial presence of new creditors, heightens the need to ensure that new borrowing is conducted at a sustainable pace and does not undermine the long-term benefits of debt relief. To do so, Canada, along with other G7 leaders, are encouraging both creditors and debtors to adhere to the Debt Sustainability Framework, which lays out guidelines for acceptable and sustainable lending practices.
For more information on the IMF/World Bank
A vast array of IMF information—including fact sheets, international financial statistics, press releases, speeches, the IMF Survey, annual reports, world economic outlooks, staff country reports and working papers—is available on the Fund’s website at www.imf.org.
Alternatively, requests for information can be addressed to:
International Monetary Fund
700 – 19th Street N.W.
Washington DC 20431, USA
The World Bank releases considerable information on its various activities, including data and statistics (e.g. international trends, country-specific information), research materials (e.g. development policy, trends and issues), special reports (e.g. World Development Report 2006: Equity and Development, Doing Business in 2006: Creating Jobs, World Development Indicators 2006), press releases and annual reports by World Bank Group association and region. Information is available on the Bank’s website at www.worldbank.org.
Alternatively, requests for information can be addressed to:
World Bank InfoShop
The World Bank
701 – 18th Street N.W.
Washington DC 20433, USA