PER JACOBSSON LECTURE

World Economy Can Bounce Back Strongly, Says Dervis

IMF Survey online

October 5, 2009

Despite worries that the global economy has been scarred by the financial crisis for many years, it is more likely to bounce back strongly and grow rapidly over the next 10 years because of strong productive capacity and technical innovation, said former Turkish Economy Minister Kemal Dervis during a lecture at the IMF-World Bank Meetings in Istanbul.

“Whether this growth can be realized does, however, depend on demand side management both at the national level, and through improved global macroeconomic policy coordination,” said Dervis, who is a former head of the United Nations Development Program.

Delivering to a packed crowd the Per Jacobsson Lecture, titled “Growth After the Storm,” Dervis said that whereas a year ago, the world was on the edge of a financial and economic abyss, a vigorous policy response by major economies and concerted action by central banks forestalled a much worse disaster.

“What happened on Wall Street in September of 2008 was the financial equivalent of the Cuban missile crisis of 1962. We came very close to a complete meltdown … as the world had come very close to nuclear war in 1962. But the meltdown did not take place,” he said.

Need to stay alert

Dervis, currently Vice-President, Global Economy and Development at the Brookings Institution in Washington and Member of the Board of Overseers of Sabanci University in Istanbul and formerly head of UNDP, said it was important not to make the mistake of thinking that because output indicators are now improving, the policy response was unnecessary, or that, in the years to come, macroeconomic management can be on “some kind of auto-pilot, rather than being responsive to ever changing circumstances.”  It may well be that a continued worsening of income distribution in countries such as the US and China could be as significant a demand-side threat to global growth, than the US and Chinese current accounts deficits and surpluses.

In his address, Dervis focused on the chances that the world could return to the growth levels of 2002-07, which averaged 3.2 percent globally. Some economists have suggested that the world will see below trend growth over the next few years because of longer term damage from the crisis.

But Dervis argued that that the world has the potential for very rapid growth, by historical standards, over the coming decade, because of strong supply side factors.

Supply side drivers

He identified the main drivers of growth in potential output as:

“There are, therefore, powerful factors supportive of growth in potential output in the world economy, and there is no reason for any one of the main elements causing this trend to weaken in the medium term, if we define the medium terms to be about a decade or so,” Dervis said.

For the next decade at least, he said, there would be a large pool of “reserve labor” to be deployed in the higher productivity modern sectors in the developing economies, or indeed through migration, in the advanced economies.

Crisis caused massive output losses

Acknowledging that “macroeconomics is not just about aggregate supply. Supply still does not necessarily create its own demand,” he said the world had recently seen huge output losses because of the crisis. The massive decline in asset prices between the summer of 2008 and the spring of 2009, the huge rise in uncertainty, and the turmoil in the financial sector with accompanying declines in credit, “led to a worldwide fall in private consumption and investment demand and to the emergence of an output gap of a size the world had not experienced in decades.”

Nevertheless, the damage to the system from the crisis should not be overestimated. He described it as “somewhat of an exaggeration” to say that the American consumer has been the “driver” of world growth, in any long run sense.

“It may well be that a continued worsening of income distribution in countries such as the United States and China could be as significant a demand-side threat to global growth, than the U.S. and Chinese current accounts deficits and surpluses,” he added.

But growth promoted by a variety of factors

The real medium term drivers of world growth had been high rates of technical progress, rapid diffusion of technology, high Asian investment rates, the exploitation of economies of scale and the availability of labor and resources.

On the demand side, U.S. private consumption amounted to about 17 percent of total world demand in 2008. It grew at about 3 percent a year in the rapid growth period preceding the crisis.

“Suppose that it will only grow at about 2 percent over the coming five years.  Such a 1 percentage point decline, compared to the pre-crisis years, by itself, and holding everything else constant, would mean a 0.17 percent point decline in the growth of aggregate world demand. If we instead project U.S. consumption to grow at only 1.5 percent a year over the next decade, the immediate decline in total world demand would be about a quarter of a percentage point. This would be significant, but hardly cataclysmic,” he added.

Comments on this article should be sent to imfsurvey@imf.org

GLOBAL ECONOMIC CRISIS

Peace, Economic Stability Interconnected, Says Strauss-Kahn

IMF Survey online

October 23, 2009

The global economic recovery is no accident, but rather the result of bold and coordinated policy action taken by leaders around the world, said IMF Managing Director Dominique Strauss-Kahn, who urged policymakers to focus on economic stability to help underpin world peace.

“It was not just good luck. It came from the bold decisions taken by policymakers the world over, and—just as importantly—from an unprecedented degree of economic policy cooperation. In the face of crisis, countries came together to face common challenges with common solutions, focusing on the global common good. We saw this in fiscal policy, in monetary policy, and in financial sector policy,” he said in a speech in Oslo.

Strauss-Kahn stressed that the crisis is by no means over, and many risks remain. “Economic activity is still dependent on policy support, and a premature withdrawal of this support could kill the recovery. And even as growth recovers, it will take some time for jobs to follow suit. This economic instability will continue to threaten social stability,” he added.

The IMF has said that recovery is expected to be slow, as financial systems remain impaired and support from public policies will gradually have to be withdrawn. Households in economies that suffered asset price busts will continue to rebuild savings while struggling with high unemployment, according to the October World Economic Outlook (WEO), released on October 1.

Sustaining cooperation

The challenge for the post-crisis world was to sustain the spirit of cooperation, he added in his October 23 speech. “In an atmosphere of great fear and uncertainty, cooperation was not so hard to achieve. But with optimism on the rise, and recovery on the horizon, countries may be tempted to go their own way, and to abandon the cooperative approach that served them so well during the crisis.”

But he said recent decisions by the Group of Twenty (G-20) industrialized and emerging market countries gave a strong signal that multilateralism is here to stay.

Preserving international cooperation would be important in maintaining a peaceful world. Both peace and economic stability were intimately intertwined, he said.

“Ultimately, peace and prosperity feed on each other. I believe history teaches us this lesson. We all remember how the Great Depression created fertile ground for a devastating war. More recently, in many parts of the world, economic instability provoked political upheaval, social unrest, and conflict.”

IMF as first responder

The IMF had played its part in the multilateral response to the current crisis, promoting the global public good of economic stability. “When the crisis hit, we were sent out as a first responder, and G-20 leaders boosted our resources substantially. And as the crisis unfolded, we scaled up our emergency financing dramatically, we injected an unprecedented amount of liquidity into the system, we made our lending more flexible, and we supported the international response to the crisis with our forecasts and policy advice.”

“We tried to play our part in calming the waters. And having earlier expressed confidence in us by increasing our resources, G-20 leaders meeting in Pittsburgh extended this confidence to our surveillance, asking us to help with their mutual assessment of policies. Our goal is now to adapt to the needs of the post-crisis world,” Strauss-Kahn added.

To be effective, the IMF must be seen as legitimate. Here, the G-20 had moved the institution forward, pledging to shift quota shares toward dynamic emerging markets and developing countries by at least five percent from over-represented to under-represented countries. “This boosts our legitimacy, and represents a significant down payment on our future effectiveness,” he said.

High stakes for world’s poorest

The stakes were particularly high in the low-income countries. The United Nations and World Bank have estimated that up to 90 million people might be pushed into extreme poverty as a result of this crisis.

“In many areas of the world, what is at stake is not only higher unemployment or lower purchasing power, but life and death itself. Economic marginalization and destitution could lead to social unrest, political instability, a breakdown of democracy, or war,” he stated. “In a sense, our collective efforts to fight the crisis cannot be separated from our efforts guard social stability and to secure peace. This is particularly important in low-income countries.”

Strauss-Kahn said that war might justifiably be called “development in reverse” because it kills people, increases poverty, destroys infrastructure, and weakens institutions. Similarly, a weak economy can make a country more prone to war.

Delivering on concessional finance

The IMF could help by assisting countries in maintaining or consolidating economic stability, particularly by providing financing so that governments do not have to cut social safety nets and essential public services.

“Here, the IMF is delivering—support to low-income countries over the next year or two will be three times what was available before the crisis. And to ease the burden, we will charge zero interest on all concessional lending through 2011,” he added.

IMF lending, he said, has made a difference by creating growth. The IMF was also reforming how it lends to low-income countries, and making this lending more flexible and better tailored to individual country circumstances.

“Our lending programs in these countries always emphasize poverty reduction and protecting the most vulnerable. I am pleased to note that most low-income countries with a program backed by the IMF have budgeted higher social spending and many are making efforts to better target spending toward the poor. This is one of our top priorities,” he said.

“The IMF also places great emphasis on good governance. About 40 percent of the conditions in our low-income country programs focus on improving public resource management and accountability. We also provide advice and technical assistance to resource-rich countries, allowing them to better manage their revenues, again contributing to social stability.”

Comments on this article should be sent to imfsurvey@imf.org

'Istanbul Decisions' to Guide IMF as Countries Shape Post-Crisis World

IMF Survey online

October 6, 2009

IMF Managing Director Dominique Strauss-Kahn told policymakers from 186 countries gathered in Istanbul that global cooperation had saved the world from a far worse crisis and leaders should now seize the opportunity to shape a post-crisis world.

A year ago, people feared the worst. But after concerted action to combat the crisis, the world had pulled back from the brink. “Even if it is much too early to declare victory, we have at least stepped onto the road to recovery.”

Speaking at the IMF-World Bank Annual Meetings being held in Turkey, Strauss-Kahn told the world’s economic and monetary policymakers they have an historic opportunity to create the conditions necessary for “a virtuous cycle of peace and prosperity” if they continue to work together and with the IMF on key policy measures.

Strauss-Kahn noted the “profound change” that formal and informal cooperation among nations had brought, adding that “in the face of crisis, countries came together to face common challenges with common solutions, focusing on the global common good.” The IMF chief pointed to fiscal stimulus amounting to nearly 2 percent of world gross domestic product in the past year as a critical factor in staunching the crisis, and he stated that countries are moving to address key weaknesses in their financial sectors, which will further underpin recovery if they stay the course on these reforms.

‘Istanbul Decisions’—four reform areas

He told delegates that “We have come a long way, but the journey is not over.” Coming out of the October 4 meeting of the International Monetary and Financial Committee (IMFC), the policy-steering committee asked the Fund to address four key reform areas—the IMF’s mandate, its financing role, multilateral surveillance, and governance. These “Istanbul Decisions,” he said, will be a focal point of IMF activities for the coming year.

The committee agreed to maintaining stimulative policies until global economic recovery is assured, and backed moves to reform governance of the Fund to give greater voice to dynamic emerging markets and developing countries.

The four decisions comprise

Defining moment for world economy

“And now, we stand at a defining moment,” he stressed. “We know from history that when the nations of the world come together to address common challenges in a spirit of solidarity, we can attain a virtuous cycle of peace and prosperity, and avoid a vicious cycle of conflict and stagnation.”

The Managing Director urged countries to “seize this opportunity to shape the post-crisis world,” adding that all nations “need to adapt and change” and that the IMF must change too. “In this modern globalized world, it no longer makes sense for global economic policy to be the concern of just a small group of countries. Reflecting this new reality, one of the great changes over the past year has been the ascent of the G-20—a group that includes the dynamic emerging economies.

“It was the leadership of the G-20 that harnessed the immense policy cooperation throughout the world. And recently in Pittsburgh, G-20 leaders emphasized that the global collective interest must always infuse national policy decisions.”

Build on momentum

“We must build on this momentum. The G-20 is more representative than the G-7, but there are still many countries left out, especially in Africa. There are 186 countries in our membership. These countries include the low-income countries, home to billions who still live in poverty, who remain economically marginalized. Their voices too must be heard. They too deserve a stake in the global economy. We need cooperation among all the countries of the world,” he said.

In this context, the IMF is ready to promote and foster deeper global economic cooperation. But the Managing Director urged the finance ministers and central bank governors to step forward with the necessary commitments to enhance the Fund’s legitimacy among its wide membership.

This starts with a review of the IMF’s mandate “to encompass the whole range of macroeconomic and financial sector policies that affect global stability,” noting that “This crisis had very little to do with current accounts and currency movements, the traditional focus of the Fund’s attention. In an era of high-volume and fast-moving capital flows that can extend to every corner of the world, we need a broader mandate.”

Reform implementation lagging

It also involves coming to a firm decisions on the shift in IMF quota shares toward dynamic emerging markets and developing countries by at least 5 percent from over-represented to under-represented countries by January 2011. “This boosts our legitimacy, and represents a significant down payment on our future effectiveness,” he said. “But as we talk about the future, implementation of past reform is lagging—only 36 out of the needed 111 countries have passed the legislation related to the 2008 quota and voice reform. I urge countries to move ahead here as quickly as possible.”

“At the end of the day, the endeavor we have embarked upon together is about peace and stability. It is about the welfare and security of the almost 7 billion people who share our planet. As John Maynard Keynes noted at the founding of the IMF, the hope was that ‘the brotherhood of man will have become more than a phrase’. We have a historic opportunity to reshape our post-crisis world—and to make this phrase a reality,” he concluded.

Comments on this article should be sent to imfsurvey@imf.org

Fund income and expenditure

IMF to Proceed with Limited Sales of Gold

By Glenn Gottselig
IMF Survey online

September 18, 2009

The Executive Board of the International Monetary Fund (IMF) has approved the sale of a limited portion of the institution’s gold holdings, stressing that the Fund will conduct the sales in a manner that does not disrupt the international gold market.

The Board approved the sale of up to 403.3 metric tons, or about one-eighth of the Fund’s total gold holdings. The proceeds will help finance a new income model for the IMF, making the 186-member institution less dependent on its lending revenue to cover expenses, which include surveillance of members’ economic and financial policies and other non-lending activities. Part of the money raised will also help boost financing for concessional lending to low-income countries.

“I am delighted that the Executive Board has given its overwhelming backing to limited gold sales to put the financing of the IMF on a sound long-term footing, and to enable us to step up much-needed concessional lending to the poorest countries,” Managing Director Dominique Strauss-Kahn stated. “These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market.”

Precautions to prevent market disruption

As the third largest official holder of gold after the United States and Germany, the IMF recognizes that it needs to pay close attention to the potential effect of its actions on the gold market. Certainly, unexpected large sales of gold could disrupt the gold market.

The IMF is therefore taking a number of precautions to prevent market disruptions. Importantly, a firm limit on the amount of gold to be sold has been set at 403.3 metric tons, and the gold market has been aware of this amount for some time, as it has not changed since the Executive Board endorsed the new income model in April 2008.

Transparency will play a key role in the gold sales, with the IMF set to inform markets before any sales on the gold markets begin. Prior to any sales on the market, the IMF would be prepared to sell gold directly to central banks or other official sector holders if they expressed interest. These sales to official sector holders would be conducted at market prices, and would shift official gold holdings without changing total official holdings.

Any gold sales on the market would be phased over time, following an approach similar to the one used successfully by the central banks participating in the Central Bank Gold Agreement.

Under this agreement, which was renewed in August, the participants announced ceilings on total sales of 400 tons annually, and 2,000 tons in total during the five years starting on 27 September 2009, and noted that the Fund’s sales can be accommodated under these ceilings.

As a result, on-market gold sales by the IMF will not add to the announced volume of official sales.

Regular external reporting on gold sales will also be provided to assure markets that the gold sales are being conducted in a responsible manner.

Gold sales key to new income model

The new income model is based on the January 2007 recommendations of the Committee of Eminent Persons to Study the Sustainable Long-Term Financing of the IMF that was chaired by Andrew Crockett. In its report the Committee identified a number of ways to redress shortcomings of existing income model.

The new income model aims to diversify the IMF’s income sources and to better align them with the variety of functions performed by the Fund. A key element of the new model is the creation of an endowment with the profits from gold sales.

The endowment would then be invested in a manner consistent with the public nature of the funds to be invested, and would generate income to help cover the Fund’s administrative expenses.

Low-income countries to benefit

Earlier this year, the IMF agreed to mobilize $17 billion through 2014 for lending to low-income countries, mostly in Africa, that have been hard-hit by the global crisis.

A financing package, which includes resources linked to these gold sales, has been agreed to generate the additional new subsidy resources of SDR 1.5 billion needed to help cover the cost of concessional interest rates on increased concessional lending by the Fund.

Comments on this article should be sent to imfsurvey@imf.org

Statement by IMF Managing Director Dominique Strauss-Kahn on the European Union’s Announcement of Additional Financial Support

Press Release No. 09/298
September 4, 2009

The Managing Director of the International Monetary Fund (IMF), Mr. Dominique Strauss-Kahn, made the following statement today regarding the European Union’s announcement of an additional commitment of €50 billion (about US$71 billion) to the Fund’s expanded New Arrangements to Borrow (NAB):

“I welcome the announcement by the European Union of its increased support for the IMF’s lending capacity, bringing the EU’s commitment to a total of €125 billion (about US$178 billion). This is a vital contribution to the goal set by the G-20 and IMFC earlier this year of increasing the Fund’s resources by up to $500 billion. The funds will help underpin the Fund’s lending operations through the current global crisis and in the years to come.

“The European Union, alongside other members who have made funding available, has demonstrated leadership and a commitment to maintaining market and macroeconomic stability through a multilateral approach, helping to ensure the Fund will have sufficient resources to carry out its mandate and meet the requirements of its member countries.”

Useful links:

Agreements bolstering lending capacity:

http://www.imf.org/external/np/exr/faq/contribution.htm

Factsheet on increasing the Fund’s resources:

http://www.imf.org/external/np/exr/facts/imfresources.htm

Press Release 09/82 on European Union financial support for the IMF:

http://www.imf.org/external/np/sec/pr/2009/pr0982.htm

Factsheet on IMF borrowing arrangements:

http://www.imf.org/external/np/exr/facts/gabnab.htm

Press Release 09/143 on expansion of New Arrangements to Borrow:

http://www.imf.org/external/np/sec/pr/2009/pr09143.htm

IMF Signs €11 Billion Borrowing Agreement with France

Press Release No. 09/299
September 4, 2009

The International Monetary Fund (IMF) and France have signed an agreement to provide the Fund with up to the equivalent of €11.06 billion (about US$15.8 billion). The agreement is part of a commitment made by the European Union to contribute up to €75 billion to support the IMF’s lending capacity (See Press Release No. 09/82). This agreement contributes toward an increase in Fund resources that was requested in April 2009 by G-20 leaders and the International Monetary and Financial Committee in order to provide timely and effective balance of payments assistance to its members in the current crisis.

Furthermore, the IMF and France have signed an agreement to provide the PRGF-ESF Trust with an additional SDR 670 million (about US$1.05 billion) in new loan resources. This agreement expands the IMF’s capacity to help low-income countries hit hard by the crisis.

Useful links:

Agreements bolstering lending capacity:

http://www.imf.org/external/np/exr/faq/contribution.htm

Press Release 09/82 on European Union financial support for the IMF:

http://www.imf.org/external/np/sec/pr/2009/pr0982.htm

Factsheet: Where the IMF gets its money (including details on PRGF-ESF Trust Fund)

http://www.imf.org/external/np/exr/facts/finfac.htm

IMFC Communique, April 25, 2009:

http://www.imf.org/external/np/sec/pr/2009/pr09139.htm

April 2009 G-20 London Summit final communique:

http://www.londonsummit.gov.uk/resources/en/news/15766232/communique-020409

The International Monetary Fund (IMF) is planning to inject $250 billion into the global economy to bolster countries’ reserves as part of measures to combat the world economic crisis.

The IMF’s Executive Board on July 20 backed an allocation of Special Drawing Rights (SDRs) —an IMF reserve asset—equivalent to $250 billion to provide liquidity to the global economic system by supplementing the Fund’s 186 member countries’ foreign exchange reserves.

The equivalent of nearly $100 billion of the new allocation will go to emerging markets and developing countries, of which low-income countries will receive over $18 billion. The proposal will now be submitted to the IMF’s Board of Governors for final approval.

Response to global crisis

“The SDR allocation is a key part of the Fund’s response to the global crisis, offering significant support to its members in these difficult times,” IMF Managing Director Dominique Strauss-Kahn said.

The SDR allocation was requested as part of a US$1.1 trillion plan agreed at the Group of Twenty (G-20) summit of industrialized and emerging market countries in London in April and endorsed by the International Monetary and Financial Committee (IMFC) to tackle the global financial and economic crisis by restoring credit, growth, and jobs in the world economy. If approved by the Board of Governors with an 85 percent majority of the total voting power in a vote scheduled to close on August 7, the SDR allocation will be effected on August 28.

“The allocation is a prime example of a cooperative monetary response to the global financial crisis,” Strauss-Kahn said in a statement.

Pulling out of recession

The global economy is beginning to pull out of a recession unprecedented in the post–World War II era, but stabilization is uneven and the recovery is expected to be sluggish. Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

Economic growth during 2009–10 is now projected to be about ½ percentage points higher than projected in the April 2009 World Economic Outlook (WEO), reaching 2.5 percent in 2010.

But despite some positive signs, the global recession is not over, and the recovery is still expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

Trebling of IMF resources

To combat the crisis, the IMF has stepped up lending and is raising additional money. Alongside the SDR allocation, the IMF is in the process of raising new resources for its lending activities in response to an associated G-20 request to treble the Fund’s resources to $750 billion to underpin its lending activities.

The Fund has signed new borrowing arrangements with Japan, Canada, and Norway, enabling it to mobilize more than $100 billion and has created a new framework for issuing notes to interested members, which would allow it to raise further resources as required. These and other additional commitments from members, already totaling more than $400 billion, are intended to be rolled into the New Arrangements to Borrow (NAB), putting the Fund in a stronger position than ever to support members in the present crisis and in future times of need.

Members can sell allocation

The SDR allocation will be made to IMF members that are participants in the Special Drawing Rights Department in proportion to their existing quotas in the Fund, which are based broadly on their relative size in the global economy. The operation will increase each country’s allocation of SDRs by approximately 74 percent of its quota, and Fund members’ total allocation to an amount equivalent to about $283 billion, from about $33 billion (SDR21.4 billion).

SDRs allocated to members will count toward their reserve assets, acting as a low cost liquidity buffer for low-income countries and emerging markets and reducing the need for excessive self-insurance.

Some members may choose to sell part or all of their allocation to other members in exchange for hard currency—for example, to meet balance of payments needs—while other members may choose to buy more SDRs as a means of reallocating their reserves. In supporting the allocation proposal, the Executive Board stressed that it should not weaken the pursuit of prudent macroeconomic policies, and should not substitute for an IMF-supported program or postpone needed policy adjustments.

Comments on this article should be sent to imfsurvey@imf.org

Recession Loosens Grip But Weak Recovery Ahead

IMF Survey online

July 8, 2009

The global economy is beginning to pull out of a recession unprecedented in the post–World War II era, but stabilization is uneven and the recovery is expected to be sluggish, according to the IMF’s latest forecast.

Economic growth during 2009-10 is now projected to be about ½ percentage points higher than forecast by the IMF in April, reaching 2.5 percent in 2010, according to the World Economic Outlook Update, published on July 8. Among the major economies, growth rates have been marked up mainly for the United States and Japan.

“The good news is that the forces pulling the economy down are decreasing in intensity,” IMF Chief Economist Olivier Blanchard told a July 8 press briefing. “The bad news is that the forces pulling the economy up are still weak. The balance is slowly shifting, and this leads us to predict that, while the world economy is still in recession, the recovery is coming. But it is likely to be a weak recovery,” Blanchard said.

The IMF also released a separate update to its Global Financial Stability Report (GFSR). Financial conditions have improved, as forceful policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen. “The unprecedented policy response in both the financial and macroeconomic domains has reduced the risk of systemic collapse and begun to restore market confidence,” José Vinãls, Director of the IMF’s Monetary and Capital Markets Department told the briefing. But many vulnerabilities remain and complacency must be avoided.

Recovery likely to be sluggish

Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow as financial institutions remain weak and credit intermediation impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

The main policy priority remains restoring financial sector health. Macroeconomic policies need to stay supportive, while preparing the ground for an orderly unwinding of extraordinary levels of public intervention. At the same time, given weak internal demand prospects in a number of current account deficit countries, including the United States, policies need to sustain stronger demand in key surplus countries.

Overall contraction in 2009

While the world economy is stabilizing, the report said that advanced economies as a group are still projected not to show a sustained pickup in activity until the second half of 2010.

Accordingly, global activity is forecast to contract by 1.4 percent in 2009 and to expand by 2.5 percent in 2010. The IMF is projecting that GDP in the advanced economies will decline by 3.8 percent in 2009 before growing by 0.6 percent in 2010 (see table).

Although the projections are 0.6 percentage points higher than in the April World Economic Outlook forecast, growth in 2010 would still fall short of potential until late in the year, implying continuing increases in unemployment.

Stabilization uneven, challenges remain

In the United States, high-frequency indicators point to a diminishing rate of deterioration, including in the labor and housing markets. Industrial production may be close to bottoming out, the inventory cycle is turning, and business and consumer confidence has improved. These developments are consistent with stabilization of output during the second half of 2009, with a gradual recovery emerging in 2010.

In Japan, following a dismal first quarter, there are signs that output is stabilizing. Improved consumer confidence, progress in inventory adjustment, aggressive fiscal policies, and strong performance by some other Asian economies are expected to lift growth in the coming quarters.

In the euro area, consumer and business survey indicators have been recovering, but data on real activity show few signs of stabilization and thus activity is projected to strengthen more slowly than elsewhere. Macroeconomic policies are providing support, but much of the adjustment in the labor market still lies ahead. Rising unemployment will weigh on consumption and activity, as will the economy’s heavy dependence on a still-ailing banking sector.

Emerging and developing economies are projected to regain growth momentum during the second half of 2009, albeit with notable regional differences. Low-income countries are facing important challenges because official aid has fallen and these economies are particularly vulnerable to swings in commodity prices.

More work needed to fix banks, markets

In the GFSR Update, the IMF noted that risks to the global financial system have moderated from the extreme levels seen just a few months ago. Unprecedented policy actions undertaken by central banks and governments worldwide have succeeded in stabilizing the financial condition of banks. These interventions have reduced the tail risk of another systemic failure similar to the collapse of Lehman Brothers. Nevertheless, risks remain and complacency must be avoided. Policymakers should continue to push ahead with reforms to strengthen the financial sector to mitigate risks.

The financial sector continues to be dependent on significant public support, resulting in an unparalleled transfer of risk from the private to the public sector. Securitization remains impaired, except where there is official support. Bank credit growth is still slowing and deleveraging continues, which is likely to place a drag on economic recovery. As a result, more public intervention may be needed in the near term.

On the positive side, the easing of macroeconomic risks has helped spur some return of risk appetite and a decline in volatilities, with investors moving into riskier assets and out of safe havens. This has benefited some emerging markets, but not all—vulnerabilities in some countries in emerging Europe persist. And even though perceived credit risk has diminished, as evidenced by narrower spreads and lower projected default rates, it remains high.

To minimize market uncertainty, work should begin on designing strategies to exit from financial, monetary and fiscal support policies. These strategies should be consistent across countries to avoid opportunities for financial and regulatory arbitrage. Medium-term policies should help establish a lasting framework of sound financial regulation, sustainable fiscal balances, and price stability.

“We are at a critical stage in emerging from the crisis. We need to guard against slipping backwards, and be ready to do whatever is needed to address any remaining problems in the financial system. This is an indispensable condition for ensuring a sustained economic recovery,” Vinãls said.

Comments on this article should be sent to imfsurvey@imf.org

IMF Approves Framework for Issuing Notes to the Official Sector

Press Release No. 09/248
July 1, 2009

The Executive Board of the International Monetary Fund (IMF) approved a framework today for the issuance of notes to member countries and their central banks.

“This innovative framework will further strengthen the IMF’s capacity to bring rapid assistance to its members as and when it is needed,” Managing Director Dominique Strauss-Kahn said. “This new financing tool and our other financing initiatives demonstrate the commitment of the Fund and its members to tackling head-on the effects of the global financial and economic crisis. At the same time, the IMF notes offer a secure investment for our members.”

Under the framework, members may sign agreements to purchase IMF notes up to a limit set by the member. Several members have already expressed their interest in buying IMF paper, with China signaling its intention to invest up to US$50 billion, and Brazil and Russia up to US$10 billion each. (See Press Releases 09/204 09/207, and 09/187).

Issuance of notes could begin after the first note purchase agreement has been concluded with a member. The IMF would issue notes at times when loan disbursements are made to members receiving financial assistance from the IMF. Once purchased by member governments, or their central banks, the notes would be tradable within the official sector, which includes all IMF members, their central banks, and 15 multilateral institutions—those which are designated holders of Special Drawing Rights (SDR—See SDR Factsheet).

The principal of the notes will be denominated in SDR, the Fund’s unit of account, which is a currency basket composed of the U.S. dollar, Euro, Japanese Yen, and Pound sterling. Interest payments will be made quarterly, at the official SDR interest rate, which is a weighted average of 3-month interest rates in these currencies.

The notes have a maximum maturity of five years, which is consistent with the maximum maturity of IMF lending under Stand-By Arrangements and Flexible Credit Line arrangements. Commitments under such IMF lending arrangements have increased to more than SDR 100 billion (about US$150 billion) in the past year, as the Fund has responded flexibly to members’ financing needs during the global crisis.

“This framework for issuing the IMF notes marks a significant step forward in our continuing drive to make sure the IMF can respond effectively to member countries’ needs in these challenging and uncertain times,” the Managing Director underscored.

Fully Spend Stimulus Money to Back Crisis Recovery, Says IMF

IMF Survey online

June 26, 2009

The IMF is urging governments to fully implement the spending measures they have announced to combat the global economic crisis and not to relax in supporting an incipient recovery.

“The latest economic news from around the world gives some reason for cautious optimism,” said John Lipsky, the IMF’s First Deputy Managing Director, in a speech in Paris on June 26. “Tentative signs are emerging that the rate of decline in global output is moderating and that financial conditions are improving.”

Speaking at an IMF-organized conference, Lipsky said it was far too early to draw firm conclusions. But he said this news “offers positive reinforcement for the unprecedented efforts under way to resist the unprecedented challenge. After all, the breadth and severity of the financial crisis and economic slowdown are the most serious experienced since the 1930s.”

Nevertheless, he said that ongoing policy support would be crucial in laying down firmer foundations for renewed growth, including the restoration of financial sector health.

Caution warranted

Lipsky said policymakers around the world had responded with flexibility and ingenuity, using all the weaponry available in their arsenal, including large-scale fiscal stimulus, very accommodative monetary policy, plus strong and often innovative support for the financial sector. “The speed and magnitude of the policy response no doubt played a key role in beginning to turn around market sentiment, in slowing the decline in economic activity, and in truncating the downside risks,” he told the conference.

But while clear signs of recovery are visible in some emerging markets, particularly in Asia, the recovery still appears to be struggling to become established in most advanced economies, Lipsky stated.

Countries should not relax their fiscal stimulus measures. “Regarding fiscal policy, the implementation of the announced stimulus measures is an incomplete challenge.”

Actual spending falls short

Lipsky said that although experience varied across countries and programs, actual spending of announced stimulus measures was relatively low in many cases. In the United States, for example, while payroll tax cuts had been implemented relatively quickly, only $46 billion or 11 percent of authorized spending measures, had taken place through mid-May, concentrated in health and human services.

“It is straightforward to conclude that the spending measures already announced must be implemented if they are to support the incipient recovery. Moreover, if the signs of recovery turn out to be a false dawn, consideration may need to be given to providing additional stimulus,” he added.

The IMF, which has forecast an end to the recession later this year, with a recovery in 2010, will give its latest projections for global economic growth on July 7.

Boosting lending

Lipsky said that on the monetary front, despite some normalization of inflation expectations, monetary policy should remain accommodative for the time being, including through “unconventional measures” where needed. Together with budgetary support, low policy interest rates and steeper yield curves help strengthen financial institutions’ earnings and balance sheets, which would hopefully boost lending to the private sector.

“Monetary policy has been relatively successful in normalizing conditions in money markets, but has had less influence over longer term interest rates. Similarly, efforts to stimulate bank lending and restart securitization markets must contend with a more fundamental lack of confidence among creditors,” he added.

Start thinking about exit strategies

Lipsky raised the issue of how to unwind the stimulus measures once they have been effective in reviving growth. “As the danger of a total financial system collapse has ebbed, we need to avoid new vulnerabilities further down the road. We also need to start preparing a clear exit strategy for government intervention in both the fiscal and monetary areas,” he said.

“The deployment of numerous instruments to stimulate demand and support the financial sector, together with the operation of automatic stabilizers—all essential to avoid a much more serious crisis—leave at the same time a legacy of fast growing government liabilities and bring us to uncharted territory,”

Government debt is now projected to grow at a rapid pace for several years, and in the case of several advanced economies, approach the highest level since World War II. Policymakers must navigate skillfully between avoiding a premature withdrawal of fiscal stimulus that would nip the recovery in the bud, and, on the other hand, allowing debt to increase to levels that would cause concerns about fiscal sustainability, Lipsky added.

Comments on this article should be sent to imfsurvey@imf.org

Republic of Kosovo—IMF Staff Visit
Concluding Statement

Pristina, June 24, 2009

1. Only little more than a year after independence, Kosovo is about to become a member of the IMF and other international financial institutions. The country’s rapid accession to these institutions is testimony to the authorities’ tireless efforts and commitment to improving the stability and welfare of this young state. IMF membership provides a unique opportunity to build on hard-won progress and tackle the macro-financial challenges that lie ahead. The mission congratulates the authorities on their achievements and is looking forward to continued close and fruitful collaboration.

Near-Term Outlook—Risks Remain High Despite Benign Growth Performance

2. The recession in Europe has so far had little impact on real growth given that the economy’s export base is small and public expenditures are rising rapidly. A steady slowdown in the growth of remittances, imports, private sector credit, and FDI is underway, all suggesting moderating domestic demand growth. These dampening forces are in part offset by rapid growth in public expenditures that are expected to widen considerably the fiscal deficit this year. Moreover, the impact on GDP growth from the sharp contraction of exports has been muted, given the economy’s very narrow export base. Against this background, the mission projects a moderate deceleration of real growth to 3½ percent in 2009. The small size of the export sector—just as it dampens the negative spillover from this year’s contraction in international trade—will also stifle the impulse from the global recovery that is projected to begin next year. Considering plans for public expenditure restraint, real growth is projected to rise by about 4 percent in 2010.

3. However, risks to the outlook continue to point to the downside. Although Kosovo’s banking sector has remained stable, it is premature to conclude that the risks emanating from the international financial crisis have disappeared. Many European banks have yet to recognize the full extent of their losses. Parent banks’ deteriorating finances thus may still affect their subsidiaries all over Europe and, as a result, weigh on the economic performance of their host countries, including in Kosovo.

Fiscal Sustainability—Undermined by Ad Hoc Expenditure and Financing Policies 4. Fiscal policies are adrift—policy priorities lack clarity and expenditure management is loose. This year’s budget was predicated on the unrealistic assumption of budget neutrality of a substantial loan from the budget to KEK (3¾ percent of GDP), the publicly-owned energy company. Privatization of KEK and repayment of this loan by the new owner was supposed to offset in this year’s budget the capital expenditure associated with the extension of this loan. However, continued privatization delays in all likelihood will result in a pronounced increase in capital expenditures, even though the budgeted amount of the loan may still be reduced. The mission appreciates the importance of energy policy and its implications for the economy and national security. Nevertheless, given the high priority the government assigns to energy policy, it should stand ready to match energy-related expenditure increases with expenditure cuts to safeguard fiscal sustainability. Instead, there are additional unfunded mandates that are inflating this year’s budget expenditures by at least 1½ percent of GDP. As a result, the mission projects government expenditures to grow 39 percent this year, and fiscal risks may cause additional pressures. • Mid-year budget review (MYBR). Contrary to the instructions by the Ministry of Finance and Economy (MoFE), spending ministries requested additional allocations under the MYBR and the government is now considering a further increase in expenditures over 1½ percent of GDP this year. No increases should be granted—they would call into question the government’s overall expenditure policy and set a dangerous precedent for the 2010 budget preparations. • Fiscal risks. The dilapidated state of KEK may result in costly, additional energy imports; the costs and financing of the highway project to Albania considered as part of the MYBR have not been properly assessed and risks committing the government to substantial future outlays; the fiber-optics projects for schools (2 percent of GDP) currently under consideration by PTK, the publicly-owned post and telecom company, if undertaken, provides a public service and, in principle, should be accounted for as public investment; finally, calls for renewed wage hikes ahead of the November local elections should be resisted. 5. Recent legal initiatives may create additional expenditure pressures. Several laws and policy documents are being adopted without due consideration of their combined fiscal costs and consistency with the policy priorities set out in the government’s medium-term expenditure framework. These include the Law on the Rights and Responsibilities of Deputies (members of the Assembly), the Law on Civil Service, and the Law on Salaries of Civil Servants, and the White Paper on Social Policies. While the implementation of these policies is likely to be delayed to next year, these unfunded mandates will add at least about 1 percent of GDP to future expenditures. 6. Without substantial expenditure cuts, ad hoc deficit financing poses considerable risks to macro stability. If all expenditures are executed in full the fiscal deficit is likely to reach nearly 11 percent of GDP this year. While the mission understands that the execution rate of investment projects and some current expenditures may reach about 80 percent, the budget deficit would still reach approximately 8 percent of GDP. There are three major options for deficit financing: (i) drawing down the government’s bank balance at the CBK; (ii) spending a prospective dividend payment from PTK; and (iii) borrowing from financial institutions upon passage of the Law on Public Debt. All three options risk undermining macro stability, and this risk needs to be taken into account when determining expenditure priorities and the level of the deficit. • Bank balance. A reduction in bank balance further limits the scope for the authorities to intervene in the financial sector, in case of need. While the sector has remained stable, prudent policy making requires preparing for the possibility of a liquidity shortage. Left unaddressed, the consequences of such a shortage are undoubtedly serious for macro stability and national security. • PTK dividend. PTK deposits are an important source of funding for the banking sector (17 percent of total deposits at end-May 2009). If a dividend payment is received from PTK, the government intends to deposit these funds with the same commercial banks that are currently reliant on PTK deposits as funding. While a dividend payment on its own would not upset banks’ funding, its possible use as budget financing would. • Public borrowing. The main risk is crowding out of private sector investment given that the growth of private sector credit continues to closely follow that of deposits. Policy Recommendations—Expenditure Prioritization, Credible Fiscal Policy Anchor, and Improvements in Tax Administration 7. First, expenditures priorities need to be reassessed and substantial expenditure cuts are needed to restore fiscal sustainability. Based on year-to-date budget execution, capital expenditure allocations should be reprioritized to identify scope for further expenditure reduction. The extent of these cuts should be determined in order to safeguard an adequate level of the government’s bank balance held at the Central Bank of the Republic of Kosovo (CBK) and, more generally, put deficit financing on a solid footing. 8. Second, a credible anchor is needed to underpin fiscal policies and regain control—once and for all—over expenditures and the deficit. Besides lacking expenditure priorities and the risks from the energy sector, budget policies are subject to major uncertainties over the long term from (i) the forthcoming assumption of Kosovo’s share in the debt of the former Yugoslavia and its impact on Kosovo’s level of external debt; (ii) the level and duration of donor support and its degree of concessionality; and (iii) impending major structural changes affecting the composition of fiscal revenues and expenditures. Given these uncertainties, it is important that budget policies are derived from a consistent medium-term macro framework that ensures fiscal and external sustainability, while also paying due attention to Kosovo’s extensive development needs. The authorities should consider embedding policy targets resulting from such a framework into a simple and transparent fiscal rule; this would prove beneficial in setting and communicating policy. However, the effectiveness of any fiscal rule hinges on its political backing, and backing from the highest political level is necessary for success. The mission stands ready to develop with the cooperation of the authorities a simple fiscal rule consistent with a long-term macro framework during its forthcoming visits. 9. Third, efforts in tax administration need to be stepped up to broaden the tax base. Gains in tax administration may reduce the need for expenditure adjustment, while enhancing fiscal sustainability. The mission is encouraged by the planned introduction of taxpayer identification numbers for new businesses and the intended rollout to existing businesses by year-end. The long-awaited introduction of electronic cash registers is a useful further step. However, the government should only set standards for these registers and leave their provision to the private sector. Moreover, the mission is looking forward to the appointment of a new director of tax administration whose qualifications need to be commensurate with the challenges ahead. Structural Policies—Vital For Fiscal Sustainability 10. The draft of the Law on Public Debt requires further modification to underpin fiscal sustainability. Much progress has been made in revising this important draft text. However, a number of key concerns remain to be addressed. The terms of municipal borrowing, as specified in the draft, should be tightened. In particular, an effective mechanism certifying municipalities’ financial management capacity is needed, as well as a more prudent ceiling on their stock of debt. The role of the CBK as the sole fiscal agent of the government should also be clarified. In addition, the draft’s consistency with other laws needs to be assessed. The IMF staff is ready to continue to work with the MoFE and the CBK to ensure that Kosovo’s public debt law will support financial stability and fiscal sustainability. 11. Last but not least, the single most important and urgent task is moving decidedly forward with reforming the energy sector, as discussed extensively during earlier missions. The annual costs to the budget of the energy sector is at least 3½ percent of GDP and rising. Adopting either one of the two competing energy sector strategies, as proposed by the World Bank and USAID, thus appears superior to inaction. However, the mission urges the authorities to assess carefully the fiscal implications of either strategy and ascertain their feasibility, including by considering the feedback from market tests. Given long implementation lags, substantial further efforts to improve the collection and billing of KEK are needed to curtail quasi-fiscal risks in the interim. Moreover, audits of financial operations, including for energy imports, should be considered to strengthen KEK finances. Financial Sector Stability—Closer Policy Coordination and Tighter Regulation Needed 12. Close coordination between financial sector and fiscal policies is vital to underpin macroeconomic stability. So far the international financial crisis has had only a limited impact on Kosovo’s financial sector. However, the banking sector remains exposed to the risk of potential financial difficulties at foreign parent banks. These may exert pressure in Kosovo and possibly result in a liquidity shortage. Therefore, improved collaboration and close policy coordination between the CBK and the MoFE is needed to mitigate such risks. • Central bank law and policy coordination. Under current legislation, the CBK does not have the authority to provide liquidity to the banking sector. The draft law, drawn up with IMF assistance, provides for limited discretionary authority to the CBK in this regard. The mission, therefore, urges the speedy adoption of this draft. In the interim, the CBK and MoFE should enhance their coordination to address potential difficulties in the banking sector. • Lender of last resort function. While the use of the euro has conferred welcome stability, euroization leaves fiscal policy as the only major macroeconomic instrument. Fiscal policy objectives should be broadened to recognize the responsibility of the fiscal authorities for financial sector stability. In particular, the government’s bank balance needs to be maintained at an adequate level. Moreover, decisions that may weaken the stability of the banking sector—including the possible reliance on PTK dividend payments as budget financing—also need to be avoided. • Tightening of exposure limits. In order to safeguard subsidiaries’ liquidity the CBK should consider placing limits on subsidiaries’ gross exposure to their parent banks, in addition to the existing limits on net exposure. 13. A sharper-than-anticipated economic slowdown raises the possibility of pronounced increases in non-performing loans (NPLs). System-wide NPLs are broadly in line with regional comparator countries, and the CBK should continue to ensure their proper classification. Moreover, the regulator should remain vigilant and maintain its intensified on-and off-site supervisory activities. In the current global financial environment, risks need to be managed proactively in the insurance and banking sectors. ******************** We would like to thank our interlocutors for their hospitality and insightful discussions. IMF

Communiqué at the Conclusion of the Eighth Annual Regional Conference on Central America, Panama, and the Dominican Republic

Press Release No. 09/238
June 26, 2009

The following statement was released today in Antigua, Guatemala, by Mr. Nicolás Eyzaguirre, Director of the International Monetary Fund’s Western Hemisphere Department; Mr. Edwin Araque, President, Central American Monetary Council; Mr. Carlos Cáceres, President, Central American Council of Finance Ministers; Mr. Edgar Barquín, President, Central American Council of Financial Sector Superintendents, and Ms. Maria Antonieta de Bonilla, President, Central Bank of Guatemala, and host of the conference:

“Finance ministers, central bank governors, financial sector superintendents, IMF management and staff, and representatives of other international financial institutions met in Antigua, Guatemala, over the past two days to discuss key policy issues facing the region. The conference focused on the effects of the global crisis on the economies and financial sectors of the region, the policy responses that have been implemented in these countries, and lessons learned to guide future reforms.

“This year’s conference took place against the background of an unprecedented global financial and economic crisis. While the region has not been significantly affected by financial channels, where the crisis originated, economies in the region have been affected as a result of their strong external linkages with the United States and other advanced economies. Conference participants agreed that these shocks pose complex policy challenges, yet stressed that Central America is in a better position to weather the storm today than in the past.

“Participants discussed the impact of the global crisis on the financial systems of the region. While the crisis generated a significant reduction in foreign funding, financial systems in the region have held up well, in part because of a relatively low reliance on external credit and limited exposure to “toxic” assets and also due to the quick response of the authorities.

“Participants noted that the growth outlook in the region will continue to be affected by external developments, and highlighted that the region has adopted appropriate policy measures to mitigate the impact on growth and poverty. In particular, they stressed the increase in conditional cash transfers to vulnerable segments of the population; higher infrastructure spending; and the expansion in funding for health and education programs. Participants also emphasized the beneficial impact on inflation from lower commodity prices, which has allowed greater flexibility to monetary policy in some countries to help mitigate the impact of the crisis on domestic economies. They also welcomed the backing of multilateral lenders in providing increased funding and asked for continued support.

“Participants also emphasized the joint role of central banks, bank supervisors and finance ministries across the region in moving quickly to provide liquidity, adapt prudential requirements and recapitalize public financial institutions in some cases. Participants agreed that financial systems continue to face significant challenges from the regional economic downturn, but noted that reforms undertaken in recent years in prudential regulation, banking supervision, and crisis management frameworks should act as sources of resilience. Participants concurred on the need to continue reinforcing the convergence to international best practices in these areas, including with the support of IMF technical assistance.

“Conference participants analyzed how the global financial crisis might affect financial system supervision and regulation in the region going forward. In particular, they noted the importance of expanding the perimeter of regulation; improving cross-border and cross-functional cooperation; reducing procyclicality; and strengthening information disclosure practices. Also, supervisors in the region agreed on the need for continued IMF technical assistance on consolidated cross-border supervision, as well as advice on how changes in the global regulatory environment could affect the region.

“Participants welcomed the IMF’s partnership in responding to the crisis, particularly the flexibility shown in extending high-access precautionary Stand-By Arrangements. These arrangements helped to bolster confidence in financial systems and served as a potential liquidity buffer in the case of stress. Participants anticipated further close collaboration with the IMF, including through technical assistance, policy advice, and continued availability of IMF resources through lending arrangements, if needed.

“Conference participants welcomed the recent opening of the regional technical assistance center for Central America, Panama, and the Dominican Republic (CAPTAC-DR).

“Conference participants agreed that next year’s annual conference will be held on late June 2010, and thanked Honduras for its offer to host the IX regional conference.”

IMF Executive Board Concludes 2004 Article IV Consultation with Kenya

Public Information Notice (PIN) No. 09/75
June 12, 2009

On December 20, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kenya.¹

Background

During 2003/04, notable progress has been made in reversing the lackluster performance of the previous decade. A moderate rebound in economic growth has begun and the recent sharp growth in domestic debt has been arrested. However, inflationary pressures have increased.

The moderate recovery in economic growth that began in 2003/04 is expected to continue, with the real Gross Domestic Product (GDP) growth projected at 2.7 percent in 2004/05 after an estimated 2.1 percent in the previous year. Both the tourism and construction sectors are projected to register strong growth. Reflecting the adverse effects of the drought on food prices and the recent sharp increase in oil prices, headline consumer price inflation has accelerated sharply in recent months and reached 16.6 percent in October 2004.

Monetary policy has been expansionary since 2003/04 to promote economic growth. This has, however, contributed to the recent rise in inflation, and ex post real interest rates were negative over much of the past year. In response to the significant pick up in both headline and underlying inflation, the Central Bank began to tighten monetary policy in September 2004, and three-month Treasury bill rates have increased from 2.75 percent in September to 7.2 percent in late November 2004.

Recent economic developments may have worsened poverty indicators. With real GDP growth broadly in line with the increase in population and the economy suffering from the effects of major negative shocks—the drought and the oil price increase—the poverty rate may have increased in the recent past. Moreover, progress in poverty alleviation has been hampered by AIDS and delays in initiating major poverty reduction programs.

Overall fiscal performance strengthened during 2003/04 mainly on account of strong revenue collection and the steps taken to control recurrent expenditure. Some capital spending was also curtailed on fears that the resulting large domestic borrowing would raise interest rate pressures. As a result, domestic borrowing was much lower than budgeted and the ratio of domestic debt to GDP fell from 24.3 percent at end-June 2003 to 22.2 percent of GDP at end-June 2004.

The current account balance turned from a surplus of 1.2 percent of GDP in 2002/03 to a deficit of 2.0 percent in 2003/04, reflecting primarily a drop in private savings. Private savings were negatively affected by negative real interest rates, but also by the drought and the increase in oil prices. Export volumes grew by 7 percent in 2003/04, as tea, horticultural, and garment exports performed well. With a strong capital account position, foreign reserves rose by about U.S. $140 million, but declined moderately in percent of imports.

Progress in implementing structural reforms has been mixed. Some progress was made in strengthening governance, and there were some delays in implementing reforms in the public expenditure, financial sector, and parastatal areas. New wage-setting mechanisms for public employees have been developed.

Executive Board Assessment

Executive Directors observed the progress that has been made under the PRGF-supported program, which has contributed to a rebound in economic growth and arrested the rise in domestic debt. However, Directors noted that Kenya faces serious challenges. In particular, growth remains too slow for making inroads into poverty, inflation has picked up, and governance remains a critical concern.

Directors emphasized that Kenya’s medium-term economic prospects depended critically on the prompt and effective implementation of broad-based structural reforms as outlined in the authorities’ Poverty Reduction Strategy Paper (PRSP). They stressed the importance of promoting strong economic growth and ensuring that its benefits are translated into poverty reduction and improved living standards for the rural population. Implementation of strong policies and a faster pace of reforms would help achieve increased donor budgetary support, and Kenya would be in a position to begin to make progress toward the Millennium Development Goals.

Directors recognized the efforts that have been made to strengthen governance. They welcomed efforts to build a more robust public financial management system, the establishment of the Kenya Anti-Corruption Commission, and the ongoing strengthening of prosecutorial capacity. Directors observed, however, that important gaps remained in implementing the governance agenda, and they stressed the need for more determined actions. In this connection, Directors emphasized the importance of adequate funding of key anticorruption agencies; full investigation, disclosure, and punishment of those involved in corruption cases; and improved rules for the management of security procurements. There were also calls for continued efforts in the area of asset declarations by senior officials, including ministers, permanent secretaries, and heads of state bodies.

Directors expressed concern with the recent upturn in inflation. They urged the authorities to maintain firm control over monetary aggregates as several factors, such as high oil prices, the uncertain food supply situation, and exchange rate developments point to a risk of persistent price pressures. Progress in containing wage costs would be important for reducing inflation and, in turn, for promoting financial intermediation. Directors agreed that the current managed floating exchange rate system has served Kenya well in responding to external shocks, and should be maintained. A few Directors saw scope for increased flexibility in this regard.

Directors supported the authorities’ effort to balance their commitment to fiscal consolidation with the need to support the poverty reduction strategy. They welcomed the lower-than-programmed deficit in 2003/04. However, Directors noted that significant fiscal risks remained, as deficits were projected to remain high and the magnitude of donor support uncertain. Some Directors pointed to the fiscal risks associated with weak public enterprises and the costs of addressing HIV/AIDS. In this connection, Directors welcomed the authorities’ efforts to mobilize increased domestic resources through ongoing reforms of tax administration and steps to improve customs services.

Directors also noted that meeting the fiscal objectives will require effective expenditure monitoring and control. They stressed the importance of building a robust public expenditure management (PEM) system. Directors welcomed the authorities’ efforts to modernize the PEM system, including strengthening the links between the medium-term expenditure framework and the annual budget system, with the support of the World Bank and the Fund. They urged the authorities to strengthen further existing institutions and procedures, with a view to enhancing the poverty orientation of public outlays. In addition, Directors recommended close monitoring of the debt situation, and advised against contracting any new nonconcessional debt.

Directors underscored the importance of accelerating the public enterprise restructuring and privatization program. They urged the authorities to make a strong effort to secure parliamentary enactment of the Privatization Bill and to follow up quickly with its implementation. In this context, they welcomed the authorities’ decision to start, in the near future, a detailed assessment of the financial position of key parastatals.

Directors were encouraged by the authorities’ increased attention to improving competitiveness. They supported the authorities’ broad-based strategy that includes streamlining the regulatory framework, upgrading essential infrastructure, reforming the wage-setting system, and liberalizing trade. However, Directors noted the deteriorating trend in total factor productivity in Kenya, and urged stronger efforts to promote private-sector led growth, including through further trade liberalization, regional integration, and improved governance.

Directors welcomed the actions taken by the authorities to strengthen the financial system, including the recent approval of the amendments to the Central Bank of Kenya and Banking Acts, which transfer bank regulatory functions from the Ministry of Finance to the central bank and remove the provisions for official controls of interest rates. Directors looked forward to the removal of government control over bank charges and fees. Directors observed, however, that the financial system remains fragile. While banking soundness indicators have generally improved, the large nonperforming loans (NPLs) remain a problem. They therefore urged the authorities to address the problem of distressed banks, particularly public banks, which held most of the large NPLs, and to move forward promptly with bank privatizations. Directors pointed to the need to move forward with a strengthening of the framework for Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT).

Directors took note of the challenges posed by capacity constraints for policy implementation. They observed that shortages of skilled personnel and weaknesses in public administration, particularly in key ministries, constrained the implementation of essential poverty programs and the absorption of donor-project support. Directors, therefore, welcomed the restructuring efforts that have been initiated to rebuild capacity in the Ministry of Finance and key line ministries. They also welcomed ongoing efforts to restructure the civil service and develop new wage setting mechanisms for public employees, noting that the realization of the poverty reduction objective depended upon improved delivery of public services.

Directors generally welcomed the steps underway to improve the quality of economic and social statistics. They noted that the government has released a revised set of national accounts data, was taking steps to improve the monitoring of fiscal data and intended to develop a framework for the systematic monitoring and evaluation of productivity changes. However, the quality of statistics for surveillance and program monitoring remains weak, and Directors urged further efforts to improve statistics, with the support of the African Technical Assistance Center (AFRITAC), as appropriate.

Kenya: Selected Economic Indicators, 2000/01–2003/04 ¹/     2000/01 2001/02 2002/03 2003/04         Prelim.     (Annual percent change, unless otherwise indicated) Output and prices         GDP volume (factor cost) 0.5 1.2 1.5 2.1 Consumer price index (annual average) 10.0 2.3 6.6 8.2 Nominal effective exchange rate (- depreciation; end of period) 8.3 -5.9 -5.2 -11.1 Real effective exchange rate (- depreciation; end of period) 10.2 -4.7 4.7 -8.2           Money and credit         M3X (M3 plus foreign currency deposits, end of period) 2.1 6.7 10.9 12.9 Reserve money (end of period) -8.5 10.9 11.2 5.5 Interest Rate (90-day Treasury Bill, period average ) 12.1 10.9 7.2 1.6             (In percent of GDP) Central government budget         Total revenue 23.0 21.5 20.5 21.7 Total expenditure and net lending 27.8 24.9 25.9 23.5 Overall balance (commitment basis) excluding grants -4.8 -3.4 -5.4 -1.7 Net domestic borrowing 0.1 4.3 4.6 0.8 Total donor support (grants & loans) 4.5 1.9 2.2 2.4           Balance of payments         Exports goods, f.o.b. (in million of U.S. dollars) 1,870.0 1,962.0 2,322.0 2,491.0 Imports goods, f.o.b. (in million of U.S. dollars) 3,310.0 2,823.0 3,215.0 3,870.0 Current external balance, excluding official transfers -3.7 -0.8 1.2 -2.0 Gross international reserve coverage         in months of next year imports (end of period) 3.5 3.3 3.3 3.0           Public Debt         NPV of central government debt (end of period) 54.0 53.4 51.9 49.6 Domestic debt, net 19.6 22.0 24.3 22.2 External debt 34.4 31.4 27.6 27.4   Sources: Kenyan authorities; staff estimates and projections.  ¹/ Fiscal year period is from July 1 to June 30   1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.

IMF Mission Calls for Fiscal Stimulus in Mozambique

Press Release No. 09/165
May 13, 2009

An International Monetary Fund (IMF) mission visited Mozambique April 28 - May 13, 2009 to conduct the 2009 Article IV Consultation and the fourth review under the Policy Support Instrument (PSI). The mission met with Minister of Finance, Hon. Manuel Chang; the Minister of Plan and Development, Hon. Aiuba Cuereneia, and the Governor of the Central Bank of Mozambique, Hon. Ernesto Gouveia Gove; other senior government officials; private sector representatives; and members of civil society.

Mr. Robert Sharer, Mission Chief for Mozambique, issued the following statement today at the end of the mission:

“After a decade of strong performance, the global financial crisis is posing a severe challenge for Sub-Saharan Africa. Economic growth is expected to reach about 2 percent in 2009, down from 5 percent last year, and the recovery is likely to be gradual in 2010, contingent on decisive measures in advanced economies to stabilize financial systems and bolster demand.

“Mozambique’s record of strong economic growth will be curtailed somewhat. Exports are declining due to sharply lower commodity prices and weaker external demand. Foreign direct investment, which has played an increasingly important role in Mozambique, is affected as some international investors scale back or postpone their investment projects. Foreign borrowing by the private sector is being curtailed by tighter credit conditions. As a result, the mission estimates that economic growth could fall to about 4.3 percent in 2009, down from 6.8 percent last year, with only a gradual recovery beginning in 2010.

“In the short term, given Mozambique’s low level of public debt, the mission sees scope to at least partly offset the impact of the global economic crisis on Mozambique with somewhat more expansionary fiscal and monetary policies. In 2009, relative to the budget approved by Parliament, revenue is expected to fall by 1.3 percent of Gross Domestic Product (GDP). Prudent fiscal policies in recent years provide scope to allow maintain spending at budgeted levels and raise domestic financing by 1.8 percent of GDP, compared with a repayment to the banking system of −1.9 percent last year. The mission also sees some scope for easing monetary policy in the period ahead to limit its contractionary impact on credit to the private sector. Inflation in 2009 is expected to remain low at about 5-6 percent.

“The government of Mozambique has a strong track record of prudent macroeconomic management, and has an on-track PSI. But short-term economic stimulus must not jeopardize medium-term economic stability, which remains critical for Mozambique to resume robust economic growth and make decisive progress in poverty reduction. Over the medium-term, fiscal policy must continue to be guided by a firm commitment to maintain a sustainable level of public debt and reinforce public financial management to ensure the efficiency of public spending.

“In support of these policies, and to help mitigate the exogenous shock stemming from the global economic downturn, Mozambique has requested financial support under the Exogenous Shocks Facility. It is expected that the IMF’s Executive Board will discuss the request, the 2009 Article IV Consultation and the fourth review under the PSI in July.”

IMF Executive Board Concludes 2009 Article IV Consultation with Kuwait

Public Information Notice (PIN) No. 09/56
May 13, 2009

On April 10, 2009 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kuwait.¹

Background

The 2009 consultation discussions were held against the backdrop of the global financial crisis and the ensuing economic slowdown. Kuwait’s economy continued to perform strongly in 2008, although signs of weakness emerged in the second half of the year. The authorities’ key challenge in the near term is to preserve financial stability and cushion the impact of the global slowdown.

Real GDP is estimated to have picked up to 6.4 percent in 2008, up from 2.5 percent in 2007, reflecting both higher oil production and robust non-oil GDP growth. Inflation peaked at 11.6 percent (on a year-on-year basis) in August and started to moderate toward the end of 2008 on weaker domestic demand and lower import prices.

High average oil prices contributed to substantial current account and fiscal surpluses in 2008. Despite rising imports, the estimated current account recorded a surplus of 45 percent of GDP and the budget surplus for 2008/09 is estimated at 26 percent of GDP, notwithstanding a large transfer to recapitalize the pension fund (10.5 percent of GDP).

Broad money and credit growth declined in 2008, owing to the Central Bank of Kuwait’s (CBK) measures to contain credit growth in the first half of 2008 and tight liquidity conditions in the second half of the year. After switching back from a dollar to a basket peg in May 2007, the authorities let the Kuwaiti dinar (KD) appreciate against the US dollar in order to slow inflation. This, along with high inflation, led to a 7 percent appreciation in the real effective exchange rate (REER) in 2008.

The global financial crisis has affected adversely Kuwait’s financial system. Liquidity conditions tightened in the second half of 2008, reflecting capital outflows and rising concerns about counterparty risk. Consequently, the KD interbank rate spiked in October 2008, prompting swift intervention by the authorities through large liquidity injections to stabilize the market. Since the deepening of the global crisis after the fall of Lehman Brothers, the Kuwait Stock Exchange (KSE) index fell by 50 percent. In October 2008, the third largest bank lost $1.4 billion, mostly on derivative transactions, leading the authorities to guarantee customer deposits at local banks and implement a successful recapitalization plan. In December 2008, the largest investment company in Kuwait defaulted on most of its $3 billion debt obligations and has been negotiating a debt restructuring.

The economic outlook for 2009 will be driven largely by the fallout from the global slowdown. Real GDP is projected to contract by 1.2 percent in light of lower oil production and a decline in non-oil growth, reflecting weak activity particularly in the financial and construction sectors. Lower import prices, weaker domestic demand, and a moderation in rents should bring inflation down to 6 percent. The fiscal and current accounts surpluses are projected to decline significantly owing to lower oil revenue.

The medium-term outlook will depend largely on developments in the global oil market and progress in the implementation of structural reforms to promote private investment. The fiscal and current account positions should improve gradually over the medium-term in line with the projected increase in oil prices.

The major risks to the economic outlook are a rapid deterioration in the balance sheet of financial institutions and a prolonged global recession that could maintain oil prices below $50. These risks would affect adversely investor and consumer confidence, limit fiscal space, and worsen the growth outlook.

Executive Board Assessment

Directors commended the Kuwaiti authorities’ prudent macroeconomic policies, which have contributed to robust economic growth, strong fiscal and external positions. Looking ahead, Directors indicated that the key challenge faced by the authorities is to preserve financial stability and support economic activity in the face of the global financial and economic crisis.

While the medium-term outlook remains positive, Directors foresaw important challenges ahead for the Kuwaiti authorities. In the near term, the sharp decline in oil prices would affect adversely the fiscal and external balances, large oil production cuts and weaker activity in the non-oil sector are expected to slow real GDP growth, and the credit squeeze and asset price deflation could pose significant risks to the financial system. In the medium term, a key challenge is to use the oil wealth to diversify the economy and boost non-oil GDP growth through private investment.

Directors welcomed the financial system’s strength and resilience, while observing that risks have emerged because of the global financial crisis. They commended the Kuwaiti authorities’ proactive measures to safeguard financial stability and sustain economic growth, including through the injection of liquidity into the financial system and the adoption of a financial stability law. They stressed that financial sector policies should continue to encourage consolidation and restructuring of financial institutions, upfront recognition of losses, and participation of private investors in the recapitalization of financial institutions.

Directors called for strengthening oversight of risk management practices by ensuring adequate policies and procedures for identifying, monitoring, and controlling systemic risk in the financial system. They emphasized the importance of restructuring the investment companies sector, and welcomed the authorities’ interest in undertaking a Financial Sector Assessment Program update. Directors urged the authorities to speed up reform of money laundering and terrorism financing legislation to make it conform to international standards.

Directors commended the authorities’ commitment to fiscal prudence and medium-term fiscal sustainability. A number of Directors encouraged a fiscal stimulus to complement the financial stability package, given the expected slowdown in economic activity, Kuwait’s strong fiscal position, and the positive effect of a stimulus on investor confidence and private investment. A number of Directors, however, noted the authorities’ concerns regarding a fiscal stimulus, including Kuwait’s limited absorptive capacity, uncertainty regarding future oil prices, and the possible limited effectiveness of a stimulus due to significant leakages through remittances and imports.

Directors saw a continued need for medium-term fiscal reform aimed at reducing dependence on oil revenue and rationalizing fiscal spending. They encouraged accelerated introduction of a value added tax in coordination with other Gulf Cooperation Council (GCC) countries. They supported the authorities’ intention to maintain capital spending while containing current spending, including by curbing large subsidies and transfers, reforming the pension system, and moving to merit-based public sector salaries and benefits.

Directors stressed the importance of expediting the structural reforms that are vital to boosting private sector investment, including enactment of key laws the capital markets, companies, competition, public-private partnership, and privatization laws; streamlining of business registration and other administrative barriers to investment; and enhancement of access to land by private businesses and individuals.

Directors concurred that the pegged exchange rate regime remains appropriate for Kuwait in the run up to the GCC monetary union, and that the recent move to a basket peg may have been helpful in containing inflation. They noted the staff’s finding that the Kuwaiti dinar is broadly in line with economic fundamentals. In light of weakening inflationary pressures and the downside risks to economic growth, Directors supported the recent easing of monetary policy.

Directors welcomed the authorities’ intention to improve economic statistics, and encouraged them to adopt a program toward subscription to Special Data Dissemination Standard. To address some data weaknesses, Directors advised conducting a comprehensive review of the role and resources of the General Statistical Office.

Directors commended the authorities for their generous substantial development foreign assistance to low-income countries in and outside the region and their active support for the Heavily Indebted Poor Countries (HIPC) Initiative, and urged the authorities to continue providing debt relief to all eligible-HIPC countries.

Kuwait: Selected Economic Indicators, 2004–09           Est. Proj.   2004 2005 2006 2007 2008 2009   Oil and gas sector             Total oil and gas exports (in billions of U.S. dollars) 27.8 44.1 55.7 60.1 84.1 35.2 Average oil export price (in U.S. dollars/barrel) 34.1 49.1 60.2 67.8 92.4 40.0 Crude oil production (in millions of barrels/day) 2.29 2.57 2.64 2.58 2.68 2.56   (Annual percentage change, unless otherwise indicated) National accounts and prices             Nominal GDP (market prices, in billions of Kuwaiti dinar) 17.5 23.6 29.5 31.8 42.5 28.1 Nominal GDP (market prices, in billions of U.S. dollars) 59.4 80.8 101.6 111.8 158.1 99.2 Real GDP (at factor cost) 10.2 10.7 5.2 2.5 6.4 -1.2 Real oil GDP 8.1 11.4 2.9 -2.3 4.2 -4.5 Real non-oil GDP 12.1 10.6 8.3 7.8 7.3 1.0 CPI inflation (average) 1.3 4.1 3.1 5.5 10.5 6.0 Unemployment rate (Kuwaiti nationals) 3.9 3.8 4.0 ... ... ...   (In percent of GDP at market prices) Investment and savings             Investment 18.2 16.4 16.2 19.4 17.6 14.7 Public 3.7 3.0 2.8 3.4 3.1 5.2 Private 1/ 14.5 13.5 13.4 15.8 14.5 9.5 Gross national savings 48.7 58.9 66.1 64.2 62.2 33.9 Public 36.2 56.2 60.8 57.0 46.3 39.6 Private 1/ 12.5 2.7 5.3 7.1 15.9 -5.7 Savings/investment balance 30.6 42.5 49.8 44.7 44.7 19.2   (In percent of GDP at market prices) Budgetary operations 2/             Revenue 53.8 75.6 67.0 67.8 65.5 48.1 Oil 42.9 51.7 48.3 51.5 52.4 36.8 Non-oil, of which: 10.9 23.9 18.7 16.3 13.1 11.4 Investment income 7.5 21.4 15.8 13.0 10.0 7.1 Expenditures and net lending 32.8 27.2 34.2 27.9 39.7 39.2 Current 3/ 28.6 23.6 30.1 23.8 35.7 33.3 Capital 4.2 3.6 4.1 4.1 4.0 5.8 Balance 21.0 48.5 32.8 39.9 25.8 9.0 Domestic financing -5.7 -1.2 -2.8 -3.1 -4.4 -0.8 External financing -15.4 -47.3 -30.1 -36.8 -21.4 -8.2 Non-oil balance (in percent of non-oil GDP) 4/ -60.3 -57.0 -58.9 -58.9 -61.0 -58.1 Total gross debt (calendar year-end) 17.3 11.8 8.3 6.9 5.3 8.0   (Changes in percent of beginning broad money stock) Money and credit             Net foreign assets 5/ 10.3 3.2 12.5 1.1 10.0 1.2 Net domestic assets 1.8 9.1 9.1 18.2 5.6 7.2 Claims on government (net) -10.4 -2.6 -6.4 -6.8 -9.0 -1.1 Claims on nongovernment sector 14.5 17.6 24.5 35.6 19.2 6.4 Broad money 12.1 12.3 21.7 19.3 15.6 8.4 Kuwaiti dinar 3-month deposit rate (year average; in percent) 1.6 2.9 5.0 5.2 3.3 1.6 Stock market unweighted index (annual percent change) 6/ 33.8 78.6 -12.0 23.6 -37.5 -11   (In billions of U.S. dollars, unless otherwise indicated) External sector             Exports of goods 30.1 47.0 58.9 63.7 88.2 40.0 Of which: non-oil exports 2.3 2.9 3.3 3.6 4.1 4.7 Annual percentage change 4.6 23.0 14.5 10.3 13.0 16.0 Imports of goods -11.7 -14.2 -15.4 -18.5 -21.2 -19.7 Annual percentage change 18.1 22.1 8.3 20.0 14.4 -7.1 Current account 18.2 34.3 50.6 50.0 70.6 19.0 In percent of GDP 30.6 42.5 49.8 44.7 44.7 19.2 External debt including private sector 12.1 16.5 26.4 26.3 26.7 ... of which External public and publicly guaranteed debt 0.7 1.8 ... ... ... ... International reserve assets 7.3 8.1 11.8 15.9 17.8 16.9 In months of imports of goods and services 4.6 4.3 5.5 5.7 6.0 6.0   (Percentage change; unless otherwise noted) Memorandum items:             Exchange rate (U.S. dollar per KD, period average) 3.39 3.42 3.45 3.52 3.72 ... Nominal effective exchange rate (NEER) -3.9 0.4 0.5 -2.2 0.3 ... Real effective exchange rate (REER) -5.1 2.0 0.9 0.4 7.2 ... Sovereign rating (S&P) A+ A+ A+ AA- AA- ...   Sources: Data provided by the authorities; and IMF staff estimates and projections. 1/ Also includes government entities. 2/ Kuwaiti fiscal year ending March 31, e.g. 2007 refers to fiscal year 2007/2008. 3/ In 2006/07 KD 2 billion was transferred to partly cover the actuarial deficit of the Public Pension Fund in 2008/09 , KD 5.5 billions are budgeted. 4/ Excluding investment income and pension recapitalization. 5/ Excludes SDRs and IMF reserve position. 6/ Change in the KSE as of February 5, 2009 for 2009. 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. I

Ethiopia: Selected Economic and Financial Indicators, 2004/05-2009/10¹     2005/06 2005/06 2006/07 2007/08 Est. 2008/09 Proj. 2009/10 Proj.     (Annual percentage change) National income and prices             GDP at constant prices (at factor cost) 12.6 11.5 11.5 11.6 6.5 7.0 Consumer prices (period average) 6.8 12.3 15.8 25.3 42.2 13.3 Consumer prices (end period) 13.0 11.6 15.1 55.3 15.7 12.1 External sector             Exports (In U.S. dollars, f.o.b.) 41.1 18.1 18.8 23.3 10.6 8.9 Imports (In U.S. dollars, c.i.f.)² 40.4 29.5 12.5 33.2 3.4 8.1 Export volume 21.1 5.1 11.5 1.0 12.1 9.2 Import volume² 28.6 21.2 3.5 13.8 10.8 11.1 Terms of trade (deterioration - ) 7.3 4.4 -1.6 2.5 6.3 2.8   (Percent of beginning-period stock of broad money, unless otherwise indicated) Money and credit             Net foreign assets -0.3 -1.6 1.4 -3.1 10.6 11.2 Net domestic assets (including other items) 19.9 19.0 18.3 25.8 7.7 7.6 Net claims on the government (net) 9.3 7.1 9.0 6.8 0.0 1.5 Claims on public enterprises 11.3 4.9 6.1 19.0 9.3 5.3 Claims on private sector 8.9 8.8 9.2 7.9 4.3 6.1 Broad money 19.6 17.4 19.7 22.7 18.3 18.8 Velocity (GDP/broad money) 2.63 2.77 3.01 3.52 4.40 4.51   (In percent of GDP, unless otherwise indicated) Financial balances             Gross domestic saving 3.0 3.7 5.6 3.2 1.8 0.8 Government saving 2.4 2.7 1.4 1.5 2.8 2.7 Private saving 0.6 0.9 4.2 1.7 -0.9 -1.8 Gross domestic investment 23.0 24.2 25.0 21.2 19.9 16.7 Government investment 14.7 16.7 18.2 15.3 14.5 12.8 Private investment 8.3 7.6 6.7 5.9 5.4 4.0 Resource gap -20.0 -20.6 -19.3 -18.0 -18.1 -15.9 External current account balance, including official transfers -6.3 -9.1 -4.5 -5.6 -5.8 -5.2 Government finances             Revenue 14.6 14.8 12.7 12.1 12.6 12.4 External grants 4.3 3.6 4.4 4.0 3.9 3.1 Expenditure and net lending 23.3 22.3 20.7 19.1 17.9 16.8 Fiscal balance, excluding grants (cash basis) -8.7 -7.4 -8.0 -7.0 -5.4 -4.5 Fiscal balance, including grants (cash basis) -4.4 -3.9 -3.6 -2.9 -1.5 -1.4 Total financing (including residual) 4.4 3.9 3.6 2.9 1.5 1.4 External financing 2.2 1.1 1.1 1.0 1.3 1.1 Domestic financing (not including privatization) 3.3 2.1 3.6 2.7 0.0 0.3 Public debt 79.6 68.1 40.7 35.9 31.4 31.7 Domestic debt³ 30.7 30.9 28.9 24.0 17.0 14.1 External debt (including to Fund) 48.9 37.3 11.8 11.9 14.5 17.6 Net present value (NPV) of external debt-to-exports ratio (including to Fund)4 n.a. n.a. 48.5 57.3 94.2 128.3 External debt-service ratio5 4.0 3.7 3.7 1.2 3.0 6.1 Overall balance of payments (in millions of U.S. dollars) -102 -316 21 -174 416 544 Gross official reserves (in millions of U.S. dollars)6 1,555 1,158 1,326 906 1,372 1,916 (in months of imports of goods and nonfactor services of following year) 3.4 2.2 1.9 1.2 1.8 2.3 GDP at current market prices (in billions of birr) 106.5 131.7 170.9 245.6 363.0 441.8   Sources: Ethiopian authorities; and IMF staff estimates and projections. 1. Except for data on external sector which is based on July 1-June 30, data pertain to the period July 8-July 7. 2. Excluding aircraft and telecom purchases. 3. Whole series was revised. 4. Including debt of major public enterprises. 5. After enhanced HIPC and MDRI relief. 6. From 2005/06, data is on end-June basis.

IMF Spells Out Need for Global Fiscal Stimulus

By Camilla Andersen
IMF Survey online

December 29, 2008

As the world struggles to contain the continued fallout from the financial crisis, attention has shifted from rescuing failing financial institutions to supporting domestic demand, which has fallen off sharply almost everywhere.

In November, the IMF cut its forecast for global growth by ¾ percentage point to 2.2 percent for 2009. But, with the crisis spreading rapidly, IMF First Deputy Managing Director John Lipsky has said that the Fund is likely to make further downward revisions in the new global forecast it will announce in January 2009.

In this interview, Olivier Blanchard, Economic Counsellor, and Carlo Cottarelli, Director of the Fiscal Affairs Department, flesh out the call for a global fiscal stimulus, first proposed by IMF Managing Director Dominique Strauss-Kahn in the context of the November 15 emergency summit called by the leaders of the Group of 20 (G-20) industrialized and emerging market economies.

IMF Survey online: Almost every day, we hear about companies cutting back on production or going out of business because people have stopped consuming. Why are we witnessing such a dramatic fall in demand almost everywhere in the world?

Blanchard: The financial crisis has now evolved into a broader economic crisis, triggered by a freeze of the credit market, large wealth losses, and a loss of confidence. The result is a sharp fall in private demand. There are indications that the contraction in demand could exceed anything seen since the Great Depression in the 1930s. So this is a crisis of historical proportions.

IMF Survey online: The IMF has spoken of the need for a large fiscal stimulus totaling 2 percent of global GDP. What can a fiscal stimulus achieve that cuts in interest rates or bank restructuring hasn't been able to fix?

Blanchard: The question is not what policy, but what set of policies, to pursue. Three types of measures are needed, and they need to be implemented in parallel.

First, we need to repair the financial system by recapitalizing banks and isolating bad assets. Frameworks have been put in place, but execution is complex and will take time. Only when this is achieved can we hope for a sustained flow of credit and a lasting recovery.

Second, we should use monetary policy to increase demand. Here, the room for further monetary easing—at least in a traditional sense—is shrinking: in some countries, policy interest rates are approaching zero. Moreover, the effect of lower interest rates on demand is weakened by the disruption in credit markets.

This point to a central role for the third set of measures, fiscal stimulus. In the short run, such a stimulus, if designed right, can limit the decline in demand as well as output. Our article talks about what "designed right'' means in the current circumstances.

IMF Survey online: Some people are questioning the wisdom of taking on new debt when the effect of past stimulus packages has been uneven at best. Aren't countries running a big risk of saddling future generations with massive new debt at the very time when the effects of population aging will hit many developed countries?

Blanchard: In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times, and the balance of risks today is very different.

If no fiscal stimulus is implemented, then demand may continue to fall. And with it, we may see some of the vicious cycles we have seen in the past: deflation and liquidity traps, expectations becoming more and more pessimistic and, as a result, a deeper and deeper recession. If, instead, a fiscal stimulus is implemented but proves unnecessary, the risk is that the economy recovers too fast. Surely, this risk is easier to control than the risk of an ever deepening recession.

I would put it even more starkly. What is needed is not only a fiscal stimulus now but a commitment by governments that they will follow whatever policies it takes to avoid a repeat of a Great Depression scenario. If they do so, the fear that people and firms have today will fade, and demand will pick up.

Cottarelli: That said, it is critical that this fiscal stimulus isn't seen by markets as undermining medium-term fiscal sustainability. That would be counterproductive, including in its effects on demand today. Indeed, we've said that not all countries can afford a fiscal expansion.

How the stimulus package is designed is also key: fiscal measures should be reversible, and governments may want to precommit to unwinding some of the policies. Also, any stimulus should be formulated within a robust medium-term fiscal framework, which could be made more credible by strengthening independent oversight of fiscal policy.

"Fiscal measures should be reversible, and governments may want to precommit to unwinding some of the policies."

Also, don't forget that the main threat to the long-term viability of public finances in advanced countries comes from publicly funded pension and health entitlements. In net present value terms, the magnitude of these future fiscal costs far exceeds any fiscal stimulus package. A credible commitment to address these long-term fiscal pressures can help reassure markets about fiscal sustainability.

Finally, structural reforms to boost potential growth can also help strengthen medium-term fiscal sustainability: indeed, many countries have succeeded in reducing their public debt ratios through growth.

IMF Survey online: What policies should governments adopt, then?

Cottarelli: I would make two points here. Given the complexity of this crisis, policymakers have to recognize that there is an unusual degree of uncertainty about the impact of specific policies. Thus, they should not put all their fiscal eggs in just one basket, and the right package probably includes a mix of different policies.

As for the balance between spending increases and tax cuts, we think that there are two arguments why spending increases should be part of the package, probably more so than in the past.

"Consumers who are credit constrained are likely to spend any extra money derived from a lower tax bill."

First, the decline in private sector demand is likely to be prolonged. This implies that fiscal policy can rely more than in the past on spending measures, including investment in infrastructure, because we don't need to worry so much about implementation lags.

Second, we believe that, in the current circumstances, the marginal propensity of consumers to spend tax cuts or transfers may be low, leading to low multipliers. That said, selectivity is needed in raising spending: direct purchases of goods by the government—investment spending in particular—has a direct effect on demand and will also have positive supply-side effects. In contrast, increasing public sector wages is unlikely to help and may be difficult to reverse.

IMF Survey online: If countries want to target consumers directly, to rebuild confidence and get people to spend again, what should they do?

Blanchard: To answer that question it is important to understand why consumer spending has fallen so sharply. We believe this reflects three key factors. Households are feeling poorer because of the steep declines in housing prices, the stock market and, increasingly, their disposable income. Credit conditions have tightened as banks have reduced credit lines or increased interest rates. And high uncertainty is leading many consumers to take a wait-and-see attitude, for example, waiting to buy a car until they have a better sense of how bad the recession is likely to be.

This gets me back to the issue of tax cuts: Consumers who are credit constrained are likely to spend any extra money derived from a lower tax bill. But wait-and-see consumers are more likely to save any extra cash.

Cottarelli: That's why tax cuts and transfers targeted to the most cash-strapped consumers would probably work best. Some examples of policies we think would work better include extending unemployment benefits, increasing earned income tax credit or equivalent tax cuts targeted to households that are likely to be credit constrained, and expanding social safety nets. In come countries, governments may want to support homeowners facing foreclosures.

IMF Survey online: There is a lot of debate right now on whether governments should step in to help firms that are in trouble. The U.S. car industry is a case in point. What would be your advice to countries?

Blanchard: One argument for helping firms is that the crisis has made financial markets dysfunctional so that many firms have no access to reasonably priced credit. So the state may need to step in to provide credit guarantees for firms undergoing credible restructuring. That said, generalized support to sectors would create an uneven playing field with respect to foreign companies, which could trigger retaliation and possibly trade wars.

IMF Survey online: You propose that the public sector offer insurance against extreme recessions. What would be the benefits and how would it work?

Blanchard: We've been brainstorming about alternative measures that governments could consider. One idea is that governments could offer insurance against extreme recessions. For example, governments could offer a contract with payments contingent on GDP growth falling below some threshold level, and banks may condition loan approvals on firms having purchased such insurance. In principle, this would work a bit like the flood insurance many mortgage holders are required to take out.

IMF Survey online: Finally, isn't there a risk that some countries will enjoy a free ride at the expense of taxpayers in other countries? What role can the IMF play in helping coordinate a global fiscal response?

Blanchard: When economies are linked by a high degree of trade openness, fiscal expansion in one country translates in part into an increase in demand for the goods of other countries, and so may result in a larger trade deficit. Thus, each country is, rightly, reluctant to embark on a fiscal expansion on its own.

The best solution is for all countries to act jointly. But this requires some form of commitment or coordination. This is why the IMF has been closely engaged in discussions with member countries on how to design an appropriate fiscal response. Given our global membership, we are uniquely placed to do so.

Comments on this article should be sent to imfsurvey@imf.org

Statement by IMF Staff Mission to the Democratic Republic of the Congo

Press Release No. 08/346
December 23, 2008

Mr. Brian Ames, head of an International Monetary Fund (IMF) mission to the Democratic Republic of Congo (DRC), issued the following statement on December 20, 2008 in Kinshasa:

"An IMF mission visited Kinshasa from December 10-20, 2008. The mission assessed the impact of the international financial crisis on the domestic economy, reviewed progress under the authorities' 2008 staff-monitored economic program, analyzed the draft 2009 budget, and discussed possible financial assistance under the Rapid Access Component of the IMF's Exogenous Shocks Facility. It met with Prime Minister Adolphe Muzito, Minister of Finance Athanase Matenda, Minister of Budget Michel Lokola, Central Bank Governor Jean-Claude Masangu, and other key ministers and senior government officials. It also met with the President of the Senate Léon Kengo, the President of the National Assembly Vital Kamarhe, and members of the Economic and Financial Commissions of both chambers.

"The DRC economy has been buffeted by two major shocks in recent months—the onset of the international financial crisis and the escalation of the conflict in the eastern provinces. The decline in key commodity export prices (notably copper and cobalt) has taken its toll on economic activity and employment, particularly in the mining sector. Lower revenues and higher security spending have led to a deterioration of the fiscal position, a decline in international reserves, and pressures on the exchange rate.

"Although performance under the 2008 staff monitored program was broadly on track at end-September, the economic situation deteriorated during the fourth quarter. Economic growth in 2008 is now projected to be about 8 percent, down from the earlier-projected 10 percent. However, inflation has eased from 30 percent to 24 percent, reflecting the decline in world petroleum product and food prices. International reserves have reached a five-year low.

"The economic situation in 2009 will likely be even more difficult. Lower mining exports and the associated indirect spillover effects will significantly reduce economic activity, raise unemployment, and weaken the balance of payments. Policies in 2009 will need to respond to the difficult environment while maintaining macroeconomic stability. On the fiscal front, with revenues expected to decline sharply, the onus will be on the government to improve the composition of public spending and target labor-intensive activities. At the same time, increased donor support will be essential to create adequate fiscal space while mitigating undue pressures on inflation and the exchange rate. A proactive monetary policy that anticipates and mops up excess liquidity will also be critical to maintaining macroeconomic stability and easing the adjustment to the new economic conditions.

"The IMF stands ready to assist the DRC through this difficult period. The mission discussed the possibility of the authorities accessing financial assistance through the Rapid-Access Component of the IMF's Exogenous Shock Facility in an amount up to twenty-five percent of quota (about US$200 million). Access would be subject to IMF management and Executive Board approval and be contingent, among other things, on the authorities continuing with an appropriate policy response to the commodity price shocks and demonstrating good public financial management and a commitment to external debt sustainability. Other development partners are also considering providing additional emergency financial support. Together, this could help facilitate the adjustment process while mitigating socio-economic disruptions induced by the exogenous shocks.

"Discussions on a new three-year arrangement under the IMF's Poverty Reduction and Growth Facility (PRGF) will continue. In this regard, it will be important that the authorities demonstrate a track record on continued policy and structural reform implementation, including in the area of public financial management. The Sino-Congolese cooperation agreement will also need to be made compatible with debt sustainability.

"The mission would like to thank the authorities for their warm hospitality and excellent cooperation during the visit."

IMF Executive Board Concludes the 2008 Article IV Consultation with Comoros

Public Information Notice (PIN) No. 08/149
December 24, 2008

On December 15, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Union of the Comoros.¹

Background

The Union of Comoros' economic performance has weakened since 2006, due to a precarious political environment, and against a backdrop of tensions in the global economy. In 2007, real GDP grew a scanty 0.5 percent, compared with an annual average of 2.5 percent during 1999-2006. Business activities, especially imports, were hard hit by political tensions with the island of Anjouan and limited credit availability—as the country's sole commercial bank curtailed operations in the wake of a disputed lawsuit. Economic activity remained subdued in the first half of 2008, and real GDP growth is likely to stagnate at 0.5 percent in 2008. In addition to a further decline in the terms of trade, growth is held back by a difficult energy crisis. Inflation rose sharply to an average of 4.5 percent in 2007 and is projected to accelerate to 6 percent at the end-2008, driven by higher food and fuel prices early in the year.

Fiscal performance has deteriorated further in 2007-08, although corrective measures are being taken for 2009 and the medium term. The domestic primary fiscal deficit increased to 2.2 percent of GDP in 2007. Third-quarter revenue and current spending outturns for 2008, including for wages, appear to be as targeted under the revised 2008 budget, suggesting that the domestic primary fiscal deficit will rise to 2.7 percent of GDP in 2008. In the absence of adequate aid disbursements, new domestic and external payment arrears are being accumulated as sizable external debt service obligations fall due.

Monetary policy remains prudent. Money supply increased by a modest 1.1 percent in 2007, with declining domestic credit offsetting gains in net foreign assets. Reflecting increased financial intermediation, broad money growth is to accelerate to around 7 percent in 2008, matching that of nominal GDP.

In the face of steady real appreciation of the euro-pegged Comoros franc, and with the terms-of-trade declining by an annual average of 16 percent in the last three years, the external current account deficit rose to the equivalent of 6.7 percent of GDP in 2007, up from 6.1 percent in 2006. The deficit is projected to widen further to 8.7 percent of GDP in 2008—mostly on account of higher energy and food prices in the initial months of the year. The external debt, projected at 236 percent of exports in net present value terms at end-2008, is judged to be unsustainable. Addressing this problem will require comprehensive debt relief under the enhanced Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives (MDRI).

Growth is likely to remain relatively subdued over the medium term in the absence of major investment in agriculture, which represents over 50 percent of total value added, and despite some revival of activity in tourism and donor-funded public works. As pressures on food and fuel prices ease up, inflation is projected to decline to a trend 3-percent annual average, anchored by the exchange rate peg.

In the next several years, the external current account deficit is projected to widen to 10-11 percent of GDP, reflecting limited export volume gains and relatively strong worker remittances-funded imports, following the end of the political conflict. Foreign direct investment (FDI) is expected to increase in line with identified investment projects in banking and tourism, including major revamping of some vacation resorts on the island of Ngazidja. Consistent with these developments, external reserves are projected to decline to 5-6  months of imports.

As a result of heightened prudence in fiscal policy, the deficit on the domestic primary budget balance is projected to gradually decline to about 1 percent of GDP by 2011 (2.2 percent in 2007), reflecting improved revenue performance and better control over spending, with a focus on the wage bill. This will be key to accommodating some higher pro-growth and pro-poor expenditures.

In the structural area, key medium-term challenges for the authorities are to (i) maintain and strengthen interisland cooperation, (ii) address structural impediments to medium-term expenditure viability, and (iii) begin removing core economic distortions. The authorities have introduced and will maintain a flexible pricing mechanism for fuel prices over the medium term. They are seeking World Bank assistance in assessing the financial health of state-owned enterprises to inform a reform strategy for the sector. Other structural reforms are aimed at enhancing the efficiency of public administration. These include the adoption of organic frameworks that set the appropriate structure and optimal level of staffing for the civil service and, more generally, a comprehensive civil service reform to improve public service delivery while reducing staffing to levels compatible with medium-term budget viability.

The full Poverty Reduction Strategy Paper (PRSP) is expected to be completed by end-March 2009. Comoros' Interim PRSP (I-PRSP, 2006-09) was considered by the Boards of the IMF and World Bank in May 2006.

Executive Board Assessment

Executive Directors noted that after a long period of political instability, that had taken a severe toll on various economic and social indicators, the return to political stability is allowing the authorities to address deep-rooted macroeconomic distortions and structural rigidities. In addition, the economy has been confronted with the impact of recent food and fuel price shocks. Directors welcomed therefore the authorities' intention to implement a broad-ranging macroeconomic and structural reform program aimed at achieving fiscal sustainability, while improving the investment climate and strengthening institutions and governance.

Directors considered the authorities' fiscal consolidation efforts to be properly focused on restoring inter-island cooperation, mobilizing revenue, containing the wage bill, and refocusing spending on pro-growth and poverty-reducing programs. They welcomed the introduction of measures to improve customs and tax administration, refocus civil service recruitment policies, and streamline government ministerial portfolios. Directors recognized that Comoros' fiscal prospects remain difficult as illustrated by sizeable financing requirements for 2009 and beyond and by unsustainable public debt levels. They urged additional donor financing to support the authorities' efforts, while encouraging prudent public debt management.

They noted that the exchange rate peg continues to anchor macroeconomic stability, and the staff's assessment that the real effective exchange rate is in line with economic fundamentals. Recognizing nonetheless the erosion of external competitiveness and narrow export base, they supported the authorities' plans to bolster the export sector and diversify the economy.

Executive Directors encouraged the authorities to vigorously implement their structural reform agenda in order to place the Comoros economy on a more rapid growth path. Accordingly, they welcomed the recent upward revisions of petroleum products prices and electricity tariffs, following several years of a freeze, and the establishment of a flexible-pricing mechanism for fuel products; these actions should make power supply more reliable, easing a key constraint on growth. Directors endorsed the authorities' plans to reform public enterprises and improve the business environment, particularly in the agricultural sector, by streamlining business licensing requirements and strengthening investor protection and the legal system. They emphasized that an early completion of the PRSP would help set clearer priorities for the structural reforms and identify needs for technical and financial assistance.

Directors underscored the importance of enhancing financial intermediation to facilitate private sector growth and development. They welcomed the recent decision to allow entry of additional foreign commercial banks. Directors also stressed the importance of enhancing financial sector supervision. A few Directors called for a strengthening of the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework and in this context, they welcomed the recent parliamentary approval of AML/CFT legislation. Directors supported the ongoing reforms of the central bank's statutes aimed at enhancing its independence, and encouraged the authorities to address all areas identified in the 2007 safeguards assessment.

Successful implementation of the EPCA-supported program would in the view of Directors permit a follow on the Poverty Reduction and Growth Facility (PRGF) arrangement and progress toward HIPC and MDRI debt relief, which would be essential to restore public debt sustainability and would contribute importantly to creating fiscal space for poverty-reducing expenditures.

Comoros: Selected Economic Indicators, 2005-08     2005 2006 2007 2008     (Annual changes in percent) Income and prices         Real GDP 4.2 1.2 0.5 0.5 Consumer prices (average) 3.0 3.4 4.5 5.9 Real effective exchange rate 0.4 1.3 -3.7 ... Terms of trade -47.3 -6.9 -20.3 -21.2   (Annual change in percent of beginning-of-period broad money) Money and credit         Net foreign assets 1.1 7.7 6.2 1.1 Broad money 3.1 4.3 1.1 7.1 Credit to the nongovernment sector 0.0 -2.8 1.3 -0.3 Net credit to central government 4.3 7.2 0.0 5.5   (In percent of GDP, unless otherwise indicated) Investment and saving         Gross domestic investment 9.3 9.2 10.4 10.5 Gross national saving 2.1 3.2 3.7 1.8 External sector         Current account balance -7.2 -6.1 -6.7 -8.7 Overall balance of payments -2.1 -1.2 -2.1 -1.2 NPV of debt to export of goods and nonfactor services ... 390 249 236 Central government finance         Central government revenue 15.7 13.6 12.7 12.4 Total expenditure and net lending 19.9 21.2 22.3 21.7 Primary fiscal balance 1.1 -1.2 -2.2 -2.7 Overall fiscal balance -0.5 -1.7 -3.4 0.0   Sources: Comorian authorities; and IMF staff calculation and estimates 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the 12/15/2008 Executive Board discussion based on the staff report.

IMF Executive Board Completes First Review under PRGF Arrangement for Mali and Approves US$7.5 Million Disbursement

Press Release No. 08/317
December 11, 2008

The Executive Board of the International Monetary Fund (IMF) has completed the first review of Mali's performance under a program supported by a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the review allows for the disbursement of SDR 5 million (about US$7.5 million), which would bring total disbursements under the arrangement to SDR 17.99 million (about US$26.8 million).

The Executive Board also approved the authorities' request for waivers of nonobservance of two structural performance criteria concerning taxation of oil products and the call for tenders for the sale of the state telecommunications company.

The PRGF arrangement with Mali was approved on May 28, 2008 (see Press Release No. 08/126) for an amount of SDR 27.99 million (about US$41.7 million).

Following the Executive Board's discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:

"Economic developments in Mali in the first half of 2008 were dominated by an inflationary surge, now abating, from rising food and fuel prices. Against this difficult backdrop, the Malian authorities are to be commended for implementing sound macroeconomic policies and structural reforms.

"With the likelihood of an increasingly difficult international environment in the coming period, it will be especially important that Mali be able to respond to shocks. Continued reliance on grants, highly concessional financing, and privatization receipts limits the risk of debt distress. A continuing challenge will be to design carefully-targeted schemes to protect the most vulnerable and difficult-to-reach population groups from external shocks.

"With elevated downside risks, added caution and flexibility may be needed in fiscal policy implementation. While the fiscal program has been adjusted to make room for additional growth-enhancing public investment in agriculture and regional infrastructure, fiscal consolidation will continue to be pursued. This will be achieved through increasing government revenue through an improvement in tax administration and policy and a strengthening of public expenditure management.

"The international financial turmoil and the risk of a global recession pose a substantial challenge to maintaining Mali's macroeconomic stability and growth over the medium term, underlining the need for the authorities to pursue their structural reform agenda. In particular, the government should continue to disengage from commercial activities, including in the cotton, banking, and telecommunications sectors, thereby reducing the fiscal burden of money-losing state enterprises in those sectors. In this context, the Fund welcomes the authorities' renewed resolve to restructure the housing bank, strengthen the financial operations and expansion prospects of the cotton ginning and energy companies, and complete the privatization of the national telecommunications provider," Mr. Portugal said.

Statement by IMF Managing Director Dominique Strauss-Kahn at the Conclusion of his Visit to Costa Rica

Press Release No. 08/318
December 11, 2008

Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement today in San José at the conclusion of his visit to Costa Rica:

"It has been a pleasure to visit Costa Rica during my first official tour to Central America. This visit takes place in the context of extremely difficult global conditions which will have an important impact on the economies of the region. The IMF has been actively engaged in promoting a comprehensive policy and in adapting Fund operations to meet the needs of all members."

"During my stay in Costa Rica, I had the privilege of meeting with President Oscar Arias, Central Bank President Francisco de Paula Gutiérrez, Minister of Finance Guillermo Zúñiga, and representatives from academia and the private sector.

"Our discussions focused on the challenging external environment and how macroeconomic policies should respond to the evolving economic realities. Costa Rica is now feeling the impact of the U.S. slowdown: export demand is weakening, liquidity conditions have tightened, and some indicators of real activity show a marked slowdown.

"There was broad agreement on the need to respond to the expected pressures with a mix of domestic adjustment and external financing to help cushion the impact of the downturn on the economy and the people of Costa Rica. In this regard, the country can confront the challenging global environment from a position of relative strength. The prudent fiscal stance of recent years provides the authorities with some room for maneuver. Monetary policy will have to be vigilant to achieve a smooth adjustment in domestic demand and the current account deficit, maintain the attractiveness of local currency assets, and ensure that inflation expectations converge toward the central bank's inflation target.

"The authorities have taken a number of welcome steps to increase the resilience of the economy and the financial sector, including securing new official financing, strengthening central bank instruments and the liquidity support framework, and taking steps to recapitalize public banks.

"The IMF remains committed to assist Costa Rica and the other countries in the region to manage the challenges posed by the current global environment."

PREVENTING FUTURE CRISES

Financial Crisis: Priorities for Regulatory Reform

IMF Survey online

December 8, 2008

Finding a better way to assess systemic risk and prevent its buildup in good times is a key to improving regulation following the financial market crisis, an article says in December's IMF quarterly magazine Finance and Development.

Other priorities are improving transparency and disclosure of risks being taken by various market participants; expanding the cross-institutional and cross-border scope of regulation while safeguarding constructive diversity; and putting in place mechanisms for more effective and coordinated actions, writes Noel Sacasa, author of the article "Preventing Future Crises."

Other articles in the December F&D, which explores the theme "Cracks in the System: World Economy under Stress," highlight—among other topics—how the world got into the financial crisis and what to do about it, the case for modernizing the multilateral framework, and the impact of the crisis on growth.

Cracks in the System: Repairing the Damaged Global Economy
Olivier Blanchard
The global economy is facing its worst crisis in 60 years, triggering fears of a long, deep recession. The task ahead is to design new rules and institutions to reduce systemic risks without stifling innovation.

A Crisis to Remember
Mohamed A. El-Erian
The financial system will not reset to what it looked like just a year ago, and the longer-term impact will change the fundamentals of the world economy. All this accentuates the need for urgent and bold modernization of the multilateral framework.

The Crisis through the Lens of History
Charles Collyns
The most important lesson from every financial crisis since the Great Depression is to act early, to act aggressively, and to act comprehensively to deal with financial strains. The priority must be to quench the fire, even if unorthodox measures are needed.

Stockholm Solutions
Stefan Ingves and Göran Lind
Sweden and other Nordic countries went through systemic financial crises in the early 1990s. A crucial lesson from the Nordic experience is the need for prominent state involvement in crisis resolution through restructuring and asset value protection.

The Road to Recovery: A View from Japan
Kenneth Kang and Murtaza Syed
Japan's financial crisis a decade and a half ago evokes an unmistakable sense of déjà vu amid the current turmoil. Japan's story shows that here is nothing like a crisis to bring to light—and build popular support for—much-needed reforms.

When Crises Collide
Stijn Claessens, M. Ayhan Kose, and Marco E. Terrones
Earlier episodes of recessions, crunches, and busts are sobering, suggesting that recessions following the current financial crisis may be more costly because they are likely to take place alongside simultaneous credit crunches and asset price busts.

Global Financial Turmoil Tests Asia
Kenneth Kang and Jacques Miniane
Any hope that Asia would escape the global financial crisis has by now evaporated. How Asia withstands the shock of both slower world growth and a spreading financial crisis is critical not only for the region, but for the world as a whole.

The Catch-Up Game
Michael Spence and Mahmoud Mohieldin served on a panel of policymakers and academics that looked at what it takes to generate sustained high economic growth. Archana Kumar asked them what makes countries grow, in good times and bad.

People in Economics
From Visionary to Innovator
Paolo Mauro
In some of his best-selling books, economist Robert Shiller—known for identifying speculative bubbles at an early stage—has made the case for creating new financial markets in which individuals would be able to diversify away the most important risks affecting them.

Comments on this article should be sent to imfsurvey@imf.org