Istanbul, Turkey, October 4, 2009
Archived - Statement Prepared for the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund
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The Honourable Jim Flaherty, Minister of Finance for Canada,
on behalf of Antigua and Barbuda, the Bahamas, Barbados, Belize, Canada, Dominica, Grenada, Ireland, Jamaica, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines
I thank our Turkish hosts for creating a very welcoming venue for the 2009 International Monetary Fund (IMF) and World Bank Annual Meetings.
This past year has been very challenging for us all. Confronted with the biggest threat to the global economy in 70 years, many countries took extraordinary measures to protect both their economies and citizens from economic collapse. The "green shoots" of stabilization and recovery that we are now seeing are the result of the collective policy response that individual countries have implemented in a spirit of cooperation. As we emerge from a crisis atmosphere, we cannot reduce our efforts to deal with the many, shared global challenges:
- Despite encouraging signs of stabilization and indications of modest growth in the second half of 2009, the global outlook remains weak and a private-sector led recovery has yet to be established. Moreover, mounting unemployment rates have yet to stabilize and will remain a challenge in many countries in 2010. As such, it is essential that stimulus measures continue through 2010 and are fully implemented.
- Looking forward to the post-crisis period, attention must shift to fiscal consolidation and medium-term debt sustainability. The goal should be to maintain confidence and create the fiscal space needed to meet long-term challenges such as climate change and aging populations.
- As well, all financial sector regulatory reform elements that were agreed within the Group of Twenty (G20) need to be implemented.
- Finally, as the global recovery takes hold, unbalanced patterns of global growth will also need to be addressed. While global imbalances have eased in the wake of the global financial crisis, the improvement may prove temporary unless the factors underlying their emergence are resolved. We need to facilitate timely, orderly adjustment in the global economy.
Given its core mandate of promoting international monetary and economic cooperation, the Fund has a central role in helping us—its members—face these challenges and facilitate orderly adjustments to an evolving global economy.
In Canada, the rate of decline in real gross domestic product (GDP) eased to -3.4 per cent in the second quarter of 2009 after dropping by 6.1 per cent in the first quarter of 2009. However, Canada has fared much better than most other major advanced economies over the last year. Canada was the last major advanced country to enter recession, and the fall in output in Canada has been among the lowest of all Group of Seven (G7) countries since the start of the global recession. Current indicators suggest that the Canadian economy will recover in the second half of 2009 and gain momentum through 2010. To ensure that the economic recovery is secured, the Government will complete the implementation of Canada's Economic Action Plan so that growth takes hold and jobs are created and maintained. Canada's fiscal stimulus package of 4 per cent of GDP over the next two years, including leverage from other levels of government, is tied with Japan as the largest in the G7 and is among the highest in the G20. In line with an expected sustained recovery, the IMF expects a rebound in growth of 2.1 per cent in 2010, the strongest performance of any G7 economy.
Irish and Caribbean Developments
The Irish economy is undergoing a very substantial adjustment. Output last year declined by 3 per cent, and is projected to fall by a further 7.75 per cent this year. With a further decline expected next year, activity is projected to fall by a cumulative 15 per cent in the three years to 2010. For a number of years, activity had been artificially boosted by excess production of residential housing. The resulting increase in living standards was consequently unsustainable. The most recently published data do provide tentative grounds for some optimism. While activity continues to decline, it is doing so at a slower pace, helped in part by demand for exports. The deterioration in the economic environment, especially the downturn in tax-rich sectors, has had severe implications for the public finances. To limit the deterioration, measures amounting to 5 per cent of GDP this year have been adopted. Employment has fallen significantly, and despite outward migration, unemployment has risen to its highest rate in over a decade. On a harmonized basis, prices in Ireland are falling at the fastest rate in the euro area (-2.4 per cent year-on-year in August), in part due to excess economic capacity.
The past year has also been a difficult one for the Irish financial system. A cleansed and reformed banking system is fundamental to underpin economic recovery and the Irish Government has taken a number of decisive actions in this regard. Most recently, the Irish Government has published legislation to establish a National Asset Management Agency, to remove certain portfolios of risky property-related assets from the balance sheets of relevant banks. This will remove the systemic threat posed by these assets and allow Irish banks to focus on their core function, lending to the real economy to support businesses and ordinary people.
As a result of the global crisis, output in the Caribbean is projected to contract in 2009, with only a very mild recovery likely during 2010. Countries experienced declines in tourism, foreign investments, mining sector exports and remittance inflows. This has placed increased negative pressures on net international reserves. However, the financial sectors remained relatively stable as a result of enhanced regulatory and supervisory frameworks and prompt actions to contain spillover risks. With governments already facing serious resource constraints, the need to mitigate the impact of the crisis has contributed to significantly increased deficits. Outcomes could have been worse if the authorities had not pursued prudent policies before the crisis. Nevertheless, there is a serious risk of eroding the recent gains made in improving social indicators. The need for access to concessional financing from international financial institutions is therefore important, as governments commit to medium-term structural reforms to reduce debt levels. Support is also vital as authorities explore medium-term strategies to strengthen economic activities and reduce vulnerabilities.
Financial sector activities are a significant part of some Caribbean economies. Regional authorities remain concerned that the changes contemplated to regulations in advanced countries could have negative unintended consequences on these activities. There is still a risk that transparent well-regulated jurisdictions could be harmed by the measures taken against non-cooperative jurisdictions, including tax havens. Again, countries that comply with international standards should be protected from such measures.
Our response to the recent crisis has put into sharp focus the critical role the IMF has to play in supporting our collective efforts. The Fund faced criticism in recent times as it tried to deal with 21st century crises stemming from volatile international capital flows, but using tools aimed at combating 20th century current account problems. Since last year, the Fund has moved swiftly to adapt its operations to help members weather the economic and financial turmoil—we should applaud their efforts over the last year. While the IMF and its membership acted decisively to address shortcomings, we need to take advantage of this momentum to push for further progress on strengthening the Fund and preparing it to fulfil its role of promoting global stability. This includes the need for members to provide clearer direction on the role we want the IMF to play in surveillance and lending.
We need the IMF to meet three tests in order to be ready for the challenges going forward. The IMF needs to be legitimate, credible and effective:
- A legitimate Fund requires that voice and representation reflect the economic realities of the 21st century.
- A credible IMF requires the necessary resources and instruments to achieve its agreed mandate, but also the trust of its members.
- Finally, an effective Fund requires a strategic and accountable governance structure, as well as members committed to carrying out their responsibilities to the institution and to each other.
These three characteristics are interrelated, and unless we make progress on all three fronts, we will have missed an historic opportunity.
In terms of legitimacy, a key challenge is to ensure that the Fund reflects the changing economic weight of members in the global economy, while also safeguarding the voice of the Fund's poorest low-income members. In this respect, I hope all IMF members will support the historic agreement among G20 Leaders in Pittsburgh:
- to a shift in quota share to dynamic emerging market and developing countries of at least 5 per cent from over-represented to under-represented countries using the current IMF quota formula as the basis to work from; and
- to protect the voting share of the poorest in the IMF.
Legitimacy, however, is not just about quota. It is also reflected in an open, transparent and merit-based selection process for the Managing Director and senior management that does not reserve a place for select countries. The best candidate for the job needs to be selected, irrespective of nationality, based on their qualifications and factoring in the need for diversity.
By the 2010 Spring Meetings, the Executive Board should present to Governors a process for Managing Director and senior management appointments that fulfills these criteria. We as Governors should endorse that process through a Governors' vote and implement it for all future competitions. This effort at the IMF needs to be matched by the World Bank and the regional development banks, as endorsed by G20 Leaders in Pittsburgh.
The second pillar that we need to continue to make concrete progress on is IMF credibility, which means two things. First, the IMF needs sufficient resources and the right tools to do the job. I am encouraged here because much has been achieved in the last year to bolster Fund resources and reform its lending facilities. Indeed, its credibility as global firefighter has been re-established through innovations like the Flexible Credit Line and low-income country facility reforms, the Special Drawing Right allocation, New Arrangements to Borrow expansion efforts, and the upcoming increase in IMF quotas. We now need to take time to see how these important reforms will work out in practice before we look to implement further changes.
But, as we look ahead, it is important that we collectively give greater consideration to the future role of the IMF in promoting international economic stability. While the traditional role of the Fund—to promote international monetary cooperation and economic stability by supporting a judicious balance of financing and adjustment—will continue to remain relevant, we must also face the reality that our economies now operate in an environment where private capital flows dwarf those from the official sector. Indeed, the international financial crises of the past 15 years have demonstrated the need to deal effectively with volatile cross-border flows of capital in a way that does not impose an unsustainable burden on members on the one hand, or undermine the efficient allocation of capital on the other.
This points to the need to strengthen the Fund's mandate of macrofinancial stability in all its dimensions—financial sector, domestic macroeconomic policies, and currency arrangements. Credibility demands that the Fund's mandate remain relevant and up-to-date.
To this end, I am very pleased that the Chairman of the International Monetary and Financial Committee (IMFC) is hosting a meeting dedicated solely to the question of the IMF's mandate. It will be important that we all work together to articulate a common vision of the Fund's role in the global architecture, one that reinforces that macrofinancial stability is at the core of the Fund's mandate. Our first task in Istanbul must be to define a venue to continue this productive discussion, so that this important review may begin.
The second front on IMF credibility is gaining the trust of members, which—while the situation has definitely improved—in some cases remains a challenge for the IMF. In practice, this means the Fund must give its members analytically strong, candid, even-handed policy advice. Even-handed means similar circumstances yield similar advice, while reflecting relevant national circumstances. But the membership must also be receptive to critical advice. We cannot compromise on the Fund's role as a tough truth teller.
The third pillar of IMF reform is effectiveness, and it means two things. First, the IMF needs a modern, accountable governance structure. Governors need an effective venue to set the strategic direction for the Fund and Bank, which argues for seeking improvements to the IMFC. I applaud our Chair for taking initiative in this regard. The format of this meeting is an improvement over the past, and we should continue to seek improvements in the deputies' and communiqué development processes.
In turn, the Managing Director needs to implement the strategic direction set by Governors. That means giving the Managing Director the leeway to operate, but Governors and the Executive Board in turn must hold the Managing Director and senior management to account for their performance. The Executive Board needs to focus on strategic policies, streamline its workload and promote institutional accountability.
In short, we need to make progress on corporate governance issues if the Fund is to reach its full potential. This reform effort should maintain an effective forum for Governors to provide strategic direction to the Fund, and engage capitals in holding the IMF to account for its lending and surveillance decisions. Article IV reviews and the governance arrangements for IMF lending should encourage efficiency and accountability. Management and staff must have the independence they need to speak truth to power, but must be constrained by clearly defined responsibilities, performance standards, and reporting mechanisms. The Manuel Committee report and the recommendations of the IMF's Independent Evaluation Office will be very useful in this exercise.
While I believe these reforms are needed, they are not enough. The IMF is a member-based institution, and if members do not take their responsibilities seriously, it does not matter if the IMF is legitimate or credible. It still will not be effective. The Fund membership needs to improve its record of responding to and implementing IMF policy advice.
As mentioned, this latest crisis has demonstrated the interconnectedness of the global economy. We all face immense challenges that will only be tackled through collective action and we need to avoid policies that have negative spillover effects for each other. Thus, transparency amongst governments and with markets is critical. Article IV and Financial Sector Assessment Program (FSAP) reports have a key role—IMFC members should publish their reports as a symbol that we are taking our responsibilities seriously. Systemically important countries should also commit to regular, published FSAP updates.
Beyond transparency, real cooperation is needed between IMF members and with the Fund. This is why I fully support G20 efforts to institute a new peer review mechanism under the G20 Framework for Strong, Sustainable, and Balanced Growth, announced in Pittsburgh last week. While the modalities for this exercise must be set, I see a strong role for the IMF in this process as a trusted advisor and tough truth teller.
In closing, we have made significant progress on IMF reform since last year. We now need to finish the job to ensure the institution is legitimate, credible and effective. We all need to show flexibility, look beyond narrow self-interests and invest political capital in making this happen, because we need a strong IMF to help sustain the cooperation we need to succeed over the coming years. I hope the roadmap that I have laid out here will help in this regard.