Summary Proceedings

of the Fifty-First Annual Meeting of the Board of Governors October 1-3, 1996

International Monetary Fund Washington, D.C

©International Monetary Fund. Not for Redistribution ISSN 0074-7025 • ISBN 1-55775-631-7

©International Monetary Fund. Not for Redistribution CONTENTS

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Introductory Note vii Address by the Vice President of United States, Al Gore 1 Opening Address by the Chairman of the Boards of Governors, and Governor of the Fund and the Bank for Chile, Eduardo Aninat ... 7 Presentation of the Fifty-First Annual Report by the Chairman of the Executive Board and Managing Director of the International Monetary Fund, Michel Camdessus 15 Opening Address by the President of World Bank Group, James D. Wolfensohn 22 Report to the Board of Governors of the International Monetary Fund by the Chairman of the Interim Committee of the Board of Governors of the International Monetary System, Philippe Maystadt 31 Report to the Boards of Governors of the Bank and the Fund by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee), Mohamed Kabbaj ... 33 Statements by the Governors for Armenia . . . 37 Australia . . . 41 Austria ... 44 Bangladesh ...48 Belgium . . . 52 Bosnia and Herzegovina . . . 55 Bosnia and Herzegovina ...59 Cambodia . . . 62 Canada ...64 China ...68 Croatia . . . 72 Denmark* 76

*Speaking on behalf of a group of countries.

iii

©International Monetary Fund. Not for Redistribution iv SUMMARY PROCEEDINGS, 1996

Fiji 80 France 84 Gabon* ..... 88 Germany 94 Greece 99 India 101 Indonesia 105 Iran, Islamic Republic of 107 Iraq 110 Ireland* 112 Israel 120 Italy 124 Japan 130 Korea 135 Lao People's Democratic Republic 138 Latvia* 141 Libyan Arab Jamahiriya 142 Malaysia 146 Malta 149 Micronesia, Federated States of 152 Mongolia 154 Myanmar 156 Nepal 159 Netherlands 162 New Zealand 164 Nicaragua 168 Pakistan 171 Papua New Guinea 175 Philippines 179 Poland 183 Portugal 186 Russian Federation 189 St. Kitts and Nevis 193 Spain 196 Sri Lanka 200 Sweden* 203 Switzerland 206 Thailand 209 Tonga 211 Turkey 213 Ukraine 216 United Kingdom 218

* Speaking on behalf of a group of countries.

©International Monetary Fund. Not for Redistribution CONTENTS V

United States . . 225 Uruguay* . 229 Venezuela 233 Vietnam . 239 Concluding Remarks Statements by The Governor of the Bank for the United Arab Emirates Ahmad Humaid Al-Tayer 242 The Chairman of the Executive Board and Managing Director of the International Monetary Fund, Michel Camdessus . . . . 243 The President of the World Bank Group, James D Wolfensohn 247 The Chairman of the Boards of Governors and Governor of the Fund and the Bank for Chile, Eduardo Aninat . .250

DOCUMENTS AND RESOLUTIONS OF THE BOARD OF GOVERNORS

Schedule of Meetings 255 Provisions Relating to the Conduct of the Meetings 756 Agenda 257 Reports of the Joint Procedures Committee Report I . 258 Annex I to Report I. Regulations for the Conduct of the 1996 Regular Election of Executive Directors, and Statement of Results of Election .260 Annex II to Report I .268 Attachment I. Rules and Regulations Amended Since the 1995 Annual Meeting .270 Report III 270 Resolutions 51-1 Direct Remuneration of Executive Directors and Their Alternates . 272 51-2 Forthcoming Annual Meetings 777 51-3 1996 Regular Election of Executive Directors 273 51-4 Financial Statements, Report on Audit, and Administrative and Capital Budgets 273 51-5 Amendments of the Rules and Regulations 274

* Speaking on behalf of a group of countries.

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Interim Committee of the Board of Governors on the International Monetary System Press Communique (September 29, 1996) 275 Declaration on Partnership for Sustainable Global Growth .... 278 Composition (as of September 29, 1996) 280

Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee) Press Communique (September 30, 1996) 281 Composition (as of September 30, 1996) 284 Attendance Members of Fund Delegations 285 Observers, Representatives of International Organizations, and Special Invitees 315 Executive Directors, Alternates, and Advisors 320 List of Abbreviations 321

©International Monetary Fund. Not for Redistribution INTRODUCTORY NOTE

The Fifty-First Annual Meeting of the Board of Governors of the In- ternational Monetary Fund was held in Washington, D.C. from October 1 through October 3, 1996, jointly with the Annual Meetings of the Board of Governors of the World Bank Group. The Honorable Eduardo Aninat, Governor of the Fund and the Bank for Chile, served as Chairman. These Proceedings include statements presented by Governors during the meetings, resolutions adopted by the Board of Governors of the Fund over the past year, reports, recommendations, or communiques issued by the Committees of the Board of Governors at the time of the meetings, and other documents relating to the meetings. Statements by the Governors are listed in alphabetical order by country on pages iii-v, and a list of abbreviations used in the statements and documents is given on page 321.

LEO VAN HOUTVEN Secretary International Monetary Fund

Washington, D.C. November 1, 1996

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©International Monetary Fund. Not for Redistribution ADDRESS BY THE VICE PRESIDENT OF THE UNITED STATES1

Al Gore

I am honored to be here. I wish to thank Chairman Aninat, Chairman of the Board of Governors; Managing Director Camdessus; and President James Wolfensohn, a longtime friend, for doing an outstanding job with the World Bank. I note that some Members of Congress from my own country may be here. I know that Senator Paul Sarbanes is here, and I want to acknowledge him. But if, in doing so, I have overlooked others, I want to assure you that it is not intentional. If I might, I would like to begin with a brief word of hope for the cause of peace in the Middle East. I know we were all saddened to see violence return to the ancient streets of Israel, Gaza, and the West Bank. It was a great blow not only for the Israeli and Palestinian peoples, but for all who support the peace process. I have just come from a series of meetings at the White House, convened by President Clinton, wherein the regions' leaders have gathered to rejoin the path to peace upon which so much progress has been made in recent years. President Clinton and I are committed to do all we can to work with them to help end the cycle of violence, to restore calm, and to resume in earnest the task of building peace through negotiations. I know I speak on behalf of all of us here when I say that our prayers and our hopes are with these leaders. May they take inspiration from their own recent successes in the name of peace, and may they be guided by other men and women who have, over past decades, also traveled the path to peace in the face of great adversity. A little over a half century ago, in a small town called Bretton Woods, amid the granite hills of New Hampshire, one such group of leaders gathered to give form to an idea as simple as it was powerful. That even the rubble of world war can be used to build a firm foundation for peace and prosperity, when nations summon the will to join in a common cause to solve common challenges. This idea and the institutions born of it endure as monuments of our century, as signposts on our journey toward a world where peace and freedom and the promise of prosperity are the birthright of all people. We join today as friends and partners with renewed conviction and sharper focus

'Delivered at the Second Joint Session, October 1, 1996. 1

©International Monetary Fund. Not for Redistribution 2 SUMMARY PROCEEDINGS, 1996 to advance the task of strengthening and broadening prosperity, maintaining the stability of the international financial system, and investing in the dignity and promise of people throughout our world. It has perhaps become commonplace to speak of pivotal times and great challenges. Yet I firmly believe that today, on the heels of the fiftieth anniversary of the World Bank and the IMF, and as we prepare to cross the bridge to the twenty-first century, that today is such a time. A quick canvass of the revolutionary changes under way more than proves the point. Today, an increasingly integrated global economy, extraordinary technological advances, and, most important, the deepening global commitment to democracy and personal liberty offer us unparalleled opportunities. For many of our nations, these changes have brought impressive growth, high-quality new jobs, and a different—but no less important—role in the world. We appreciate now, more than ever before, that we today are not only living with the challenges, but also reaping the rewards of our ever more open and dynamic international system. Yes, there are those who see only problems. These are the heirs to the same doubting Thomases who questioned President Roosevelt's vision to create an open international financial system some 50 years ago. They were wrong then, and they are wrong now. The Clinton administration stands with those who see promise. We see both promise and achievement in the fact that strong, steady economic growth here in the United States has helped to create 10.5 million new jobs over the last three and a half years. This growth has reduced poverty, slashed our deficit, and produced a combined unemployment and inflation rate that is at a nearly 30-year low. It is a plain fact: growth and openness here at home, coupled with growth and openness abroad, have been good for America and good for the world. Two of the keys to our recent economic success are ones that the Bret- ton Woods institutions have emphasized throughout the world. The first is a commitment to low inflation—and inflation has come down in the United States, as growth has continued on a sustainable basis. The second is open markets—and we have fought very hard to open markets around the world, including our own. A shared determination to grasp the opportunities of this new era is ultimately why we are here today. It is why we have placed such great trust in the Bretton Woods institutions and why we have such high expectations of them. It is fundamentally why these institutions continue to deserve our strong support and why we in the United States will do all in our power to meet our financial commitments to them, including to the International Development Association (IDA), which is so important to developing countries all around the world.

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The World Bank Group and the International Monetary Fund have been major features of the international landscape for many years. So too, tragically, have been deep poverty and human suffering, political and financial crisis, and environmental degradation. This in turn has led some to underestimate what the international financial institutions can do to ame- liorate these terrible problems. For too many, there is a sense of resigna- tion about the human condition and skepticism about the possibility of working cooperatively for real progress. I am here today, as President Clinton was a year ago, to say simply that I reject the complacency and I abhor the indifference. If we have learned anything from the second half of the twentieth century, we have learned this: that we cannot achieve peace and prosperity in isolation or in the absence of a healthy international economic system; that free markets consistently out- perform shackled ones; that poverty can be reduced dramatically; and that good government is the key to equitable and sustainable growth. Neither President Clinton nor I underestimate what the Bank and the Fund can do. They can make a difference, and they must. These are the basic truths that will guide America into the next century. They are the basic truths whose influence has spread so dramatically around the globe in recent years. And they are the basic truths that must unite us as we, the shareholders and Governors of the World Bank and IMF, chart their course for the years immediately ahead. In particular, it is essential for the institutions to focus selectively on areas where they can make a real difference and to ensure that as they evolve they are as modern as the evolving markets they must serve. Let me be crystal clear: if our international financial institutions are to succeed in the new millennium, they must adapt the practices of the past to the demands and realities of the future. This means focusing more attention on giving all people the chance to make the most of their lives. It means investing in education and health care and in programs that attack the precursors of poverty. It means helping to build the private sector and investing in the promise of free markets and free minds, in democracy and in the rule of law. But it also means giving greater attention to two broad issues that I firmly believe must shape and inform everything we do in our quest for equitable and sustainable global prosperity. The first of these is a comrnitment to sustainable development and our environment. We now know with perfect clarity that economic development and growth cannot ignore ecological realities. We know that investments that genuinely reduce poverty in an equitable and enduring way are investments that take their environmental implications fully into account. Not only is such an approach consistent with our development objectives, but it will also be much more cost effective. Win-win situations are not always available, but this is one of them, and it is available. Given their unique capacity to both influence and help finance the development choices being made by the poorer countries, the multilateral

©International Monetary Fund. Not for Redistribution 4 SUMMARY PROCEEDINGS, 1996 development banks have particularly serious responsibilities in this area. I have spoken forcefully about these responsibilities in the past and, speaking frankly, I have been critical of the institutions in the past. So, it is with great personal satisfaction that I view the progress that has been made by the banks in recent years and laud the tremendous hard work that has gone into producing that progress. The banks have committed to taking the environmental and social implications of their project work fully into account, examining all of the alternatives, ensuring that the whole range of costs and benefits is considered, and listening carefully to the views of affected people. This is an ambitious commitment, surely; it is a necessary commitment, absolutely. I therefore welcome—and we all should welcome—the great dis- tance that has been traveled on this front. Jim Wolfensohn and, before him, his late predecessor, Lew Preston, deserve our gratitude for their vision and their commitment. I wish particularly to thank Jim Wolfensohn for his persistence. But the really hard work remains: the challenge now for both the institutions and the borrowers is to translate commitments into action. Today, therefore, I call on the banks and borrowers to meet this challenge head on. I call on you to make sustainable economic development and growth top priorities in planning Bank assistance in coming years. We all share a huge stake in the success of this effort. The banks cannot do it without the borrowers. The borrowers cannot do it without the banks. And neither can do it without the continued strong support and encouragement of the developed countries. Let me assure you that the Clinton administration will be there, and the United States of America will be there. The second key issue I would like to discuss is also an outgrowth of my own personal experience, as well as the lessons all of us have witnessed over the past 50 years. Surely, one of the most pressing development imperatives of all, and the one offering the greatest promise for human dignity, is the challenge of good government. The bottom line is that good government—that is, government that is fully representative, transparent, accountable, and restrained—provides the indispensable foundation for virtually everything that we hope to achieve in meeting the challenge of equitable and sustainable economic development. From my perspective, it has been a great personal honor and privilege to have worked over the last four years with some success toward Presi- dent Clinton's goal of what we call "reinventing government" here in the United States of America. We have studied carefully the management techniques of the best-run corporations in the world and sought to apply those insights to the public sector. This set of new insights and initiatives is based simply on a new understanding of human potential and on a new determination to take full ad-

©International Monetary Fund. Not for Redistribution ADDRESS BY VICE PRESIDENT OF UNITED STATES 5 vantage of the great intellect and creativity that exist in the minds and hearts of all individuals who work within these institutions in our government. I am convinced the same principle applies universally. Here in the United States over the past three and a half years, we have eliminated both excessive management layers and misguided regulatory obstacles to private initiative and efficiency. We have cut over 16,000 pages of regulations. We are in the midst of that task now. We have pared down the federal workforce by a quarter of a million employees. The United States federal government is now smaller than it has been since John Kennedy was President of the United States almost 35 years ago. We have made government here more accessible and more accountable to the people whose lives it most directly affects. The result is stronger growth; more dynamic, innovative, and efficient markets; and a civil society that takes the fullest possible advantage of the opportunities provided by democracy. I believe there are important lessons here: for us, as we continue to reinvent our government in the years ahead; for the poorer countries aspir- ing to greater prosperity; and for the institutions we gather today to support. In far too many cases, the real obstacles to development and prosperity are pervasive legal and regulatory barriers that distort the decisions of small enterprises; poor choices by governments that are not sufficiently accountable for those choices; and a lack of mechanisms to ensure that decisions are fully informed by the views of the people whose lives they affect. Nothing—no specific investment or trade agreement or financing package—would make a greater or more enduring contribution to development than clearing away these obstacles. Ultimate responsibility for taking these bold and difficult steps re- sides, of course, with you, the senior officials in whose hands the hard choices lie. But this assembly is, quite simply, our expression of commitment to help. The international financial institutions are vitally important partners in this effort. We are fully supportive of the concrete steps they have taken to fulfill the challenge of reform posed by the Group of Seven at Halifax. We are very pleased by the important steps Jim Wolfensohn is taking to cut overhead, to streamline management, and to promote efficiency. We also are pleased that Michel Camdessus and the IMF, through their new data disclosure standards, are helping governments around the world to become more transparent and accountable to their citizens and world markets. I believe that these priorities—taking a comprehensive approach to the challenge of sustainable development and good governance—deserve the closest possible attention by the institutions in the years immediately ahead. Though we have much work before us, I am deeply confident that our cause is just, our path is clear, and our resolve is unwavering. Just as Lord Keynes reminded us at the conclusion of the Bretton Woods conference

©International Monetary Fund. Not for Redistribution 6 SUMMARY PROCEEDINGS, 1996 more than two generations ago: "If we continue in a larger task, as we have begun on this limited task, there is hope for the world." I believe in this hope. I believe that the next century will bring a new era of achievement and growth and human fulfillment. I pledge to you here today, on behalf of President Clinton, that the United States of America will do its part, as you do yours, until our job is done.

©International Monetary Fund. Not for Redistribution OPENING ADDRESS BY THE CHAIRMAN OF THE BOARDS OF GOVERNORS AND GOVERNOR OF THE FUND AND THE BANK FOR CHILE1

Eduardo Aninat

Introduction It is with a sense of honor and responsibility that I welcome you to the Fifty-First Annual Meetings of the International Monetary Fund and the World Bank Group. As we set our sights on the world economy, and take stock of emerging challenges and opportunities that lie ahead of us, I would like to take this opportunity to congratulate Mr. Michel Camdessus on his election for an unprecedented third term as Managing Director of the IMF. Under his leadership the Fund has not only held steadfast to its founding charter, but also managed to adapt rapidly to the realities of a fast-changing world. I would also like to welcome Mr. James Wolfensohn, now entering his second year as President of the World Bank Group. His "hands on" approach has been warmly received among the Bank's membership, and has gone a long way in strengthening external partnerships, increasing Bank- wide professional excellence, and achieving better results on the ground. It is a pleasure for me to extend a special welcome to the delegation from Bosnia and Herzegovina, attending these Annual Meetings in the capacity as member for the first time and to the delegation from Brunei Darussalam who joined the Fund and the Bank during the Annual Meet- ings last year.

World Economic Outlook and Agenda for the Next Year To set the stage for our discussions, let me offer my perceptions of the current global economic environment and world economic prospects before highlighting what I regard as the major policy and institutional challenges we will face as we prepare for the new millennium. The global economic environment today is characterized by an important degree of consensus. The combination of democracy and market economy is now widely seen in a virtuous relationship as a necessary basis for economic and human development. There is also a growing awareness of

'Delivered at the Opening Joint Session, October 1, 1996.

©International Monetary Fund. Not for Redistribution 8 SUMMARY PROCEEDINGS, 1996 the strong interrelation between political liberty and economic freedom. This interrelation implies that imperfections in either the political or the economic sphere lessen the impact that the other sphere exerts on the process of economic and social development. As a result, efforts are now increasingly centered on the deepening and reinforcement of market mechanisms and democracy in order to boost the economic system's growth potential and the political system's effectiveness to respond to the needs of people. If we look at the figures, world economic and financial conditions appear quite satisfactory. Global economic growth is expected to continue at a good pace throughout 1997, and over the medium term. The strength of economic activity has been especially impressive in the emerging market economies, particularly those of the Asian region. In the industrial countries, inflation should remain subdued, with further progress needed toward reducing fiscal imbalances and addressing structural rigidities, particularly in labor markets. As a group, the developing countries are expected to sustain their positive growth performance, reflecting their increased resilience to external disturbances and their success in reducing fiscal imbalances substantially over the past decade. In the Latin Ameri- can region, the countries most affected by the Mexican financial crisis are showing encouraging signs of recovery. The adjustment undertaken has proved the irreversibility of market-oriented policies and has strengthened confidence further. Therefore, a solid basis may be set for growth becoming firmly established in the period ahead. In Africa, the perspective has improved in an increasing number of countries after implementation of stronger macroeconomic and structural policies. However, economic conditions remain difficult in some countries where policy improvement is urgently needed. In the Middle East, economic performance has strengthened as a result of further adjustment. The transition countries have achieved remarkable progress toward macroeconomic stabilization and reform with promising growth prospects for 1997. However, remaining fiscal deficits, continuing government intervention on behalf of ailing sectors, and the absence of well-targeted social programs are still a constraint on the sustainability of recent hard- earned reductions in inflation and structural adjustment. The encouraging picture drawn from this brief appraisal of global economic prospects makes clear that progress in implementing the policy strategy outlined in the Madrid Declaration of the Interim Committee two years ago has brought significant results in many areas. We may therefore remain cautiously optimistic about the prospects for growth and continued stability. We have also witnessed an unprecedented expansion of investment and trade, and increasingly rapid dissemination of information and technological innovation in a world where economic progress is bound up with the process of globalization. Our overriding task will be to consolidate the gains achieved so far.

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Policy and Institutional Agenda From the promising outlook for the world economy and the accelerating pace of globalization, a number of issues emerge as natural topics on which I would like to focus our policy and institutional agenda for the coming year. First and foremost in this agenda is macroeconomic stability. Inflation in Latin America has fallen to a level not seen in 25 years, and price stability in the transition countries has markedly increased. Fiscal deficits have also been reduced in many developing countries. The lessons learned from Asia's high-performing economies and the experiences of my own country highlight the importance of macroeconomic stability and public savings as a necessary condition for sustainable growth. A reasonable level of public savings is beneficial not only because of its impact on price stability but also because it supports a high level of domestic investment with sustainable external accounts. This is borne out by the Chilean experience of the past seven years, where average annual fiscal saving—in the order of 4 percent of GDP— went hand in hand with strong growth at an annual average rate of over 7 percent and moderate current account deficits in the order of 3 percent of GDP. However, macroeconomic stability and fiscal health is never a once and for all achievement but a task that requires perseverance with coherent and prudent policies. Therefore, the challenge ahead will be the consolidation of the progress already made and the further deepening of fiscal adjustment. This is a task for both the developing and the industrialized world. The Fund and the Bank are uniquely placed to support domestic policy efforts in this direction. They can provide additional monitoring of macroeconomic performance and sound policy guidelines based on best practices learned from the most successful economic performers. In the context of fiscal adjustment and consolidation, concerns arise about the social impact that reduced spending might have. This brings me to the second point on my list, the urgent need for increased efficiency and better targeting of social spending as an effective means to improve social equity and to reduce poverty. The widely observed elimination of poorly targeted subsidies over the last few years indicates progress in the right direction. However, there is still room to enhance the quality and effectiveness of social investment. The private provision of publicly financed social services is only one example of alternative ways to foster efficiency. For example, Chile is successfully using a voucher system in housing and education to subsidize demand rather than supply. Progress in areas such as opti- mal targeting, decentralization of social policy, and the innovation of instruments and administration are also needed to boost the impact of social investment in development. Special emphasis should be given to human capital development. Ed- ucation has proved to be the single most important factor explaining dif-

©International Monetary Fund. Not for Redistribution 10 SUMMARY PROCEEDINGS, 1996 ferences in long-term growth performance, in poverty reduction, and in social equity across countries and regions. There is also much evidence on the positive externalities of better primary and secondary schooling. These convincing findings clearly justify putting education at the center of modern social policy. The need for reengineering public social security and health care is another task that seems to be urgent in both the developed and the developing world. Too generous benefits, early retirement provisions, demographic aging, and lower productivity growth have driven many public pay-as-you-go pension systems into difficulties, drawing much-needed public resources away from alternative, more efficient uses. In Chile 15 years ago, the near bankruptcy of the public pay-as-you-go scheme was replaced with a fully funded, privately administered mandatory system. Today, after transition, the private system has already accumulated pension savings worth over 40 percent of GDP. Pension reform has clearly contributed to the development and broadening of financial markets at home. The experience depicted serves to underline the importance of finding acceptable transition paths to new sustainable and growth-enhancing social security systems. A similar task of reform applies to public health care where reengineering includes the search for more appropriate incentive structures and the development of proper regulation schemes for the private provision of publicly funded health services. The fourth important item on our agenda for the coming years is the deepening of global economic integration. World trade has grown spectac- ularly over the last few decades, and significant progress has been made in trade liberalization. Multilateral mechanisms to reduce barriers to trade have increasingly been complemented with regional and bilateral agreements in order to accelerate the opening of markets. This process has been particularly impressive in Latin America where protectionist regimes have been significantly liberalized in only a few years. The recognition of the mutual benefits that trade provides to trading partners is the basic rationale behind this liberalization process. But reaping further gains from globalization requires a firm commitment to an even further opening of our economies. In this context, stronger cooperation of our two institutions with the newly created World Trade Organization (WTO) and regional trade entities will be beneficial. Attention should be paid not only to further reduction of tariffs on merchandise goods but also to the liberalization of trade in services and capital flows. Fifth, in the area of international financial integration, sequencing the degree of opening of the capital account will depend on a country's economic structure, existing regulations, and the monitoring capacity of the authorities. This is evidenced by the Chilean experience at the beginning of the 1990s when renewed access to voluntary capital led to an important abrupt surge of short-term inflows, which created heavy local currency ap-

©International Monetary Fund. Not for Redistribution ADDRESS BY CHAIRMAN OF BOARDS OF GOVERNORS 11 preciation and some overheating pressures. In response, a combination of permissive policies for long-term capital inflows and simultaneous deter- rents to disruptive short-term inflows were set in practice. The above phenomenon, combined with a high level of national savings, has encouraged the authorities more recently to further intensify the promotion of Chilean investment abroad. Finally, in the global economy, good governance is paramount to economic success and development. Under conditions of rapid integration, we have to find ways to promote responsible and representative political structures, thereby lending legitimacy to the formulation of global economic strategies. In addition to the possibility of citizen participation, good governance also implies the development of effective administrative structures and transparency in the use of fiscal resources. In the past, state organizations have often failed to focus on the needs of the people. Part of this failure is explained by the lack of adequate standards of accountability at different levels of government. Thus, despite progress in recent years, the modernization of public institutions remains a pending issue in most countries represented in this meeting.

Role of the Fund After having depicted a general agenda of issues for the near future, I would like to focus on the specific role that our two institutions might take in our ongoing efforts to improve global economic conditions. The Fund's central mandate of exercising surveillance over the international monetary system and members' policies is more relevant than ever. The need for heightened surveillance, in a world of potentially desta- bilizing capital flows could not have received more vindication than in the aftermath of the Mexican financial crisis in 1995.1 fully support recent efforts by the Fund to undertake continuous, intensive, and probing surveillance of its members' policies. The effectiveness of Fund surveillance depends critically on the capability of its members to provide timely and high-quality economic data. To that end, I applaud the recent launching of the Special Data Dissemi- nation Standard initiative. This new service created by the Fund will better equip market participants to evaluate the sustainability of financial flows as well as macroeconomic developments in capital market countries. The 36 countries that have subscribed so far include industrial, emerging market, and transition countries, and represent a broad range of membership. I urge other members to consider subscription to this standard as soon as possible. I also urge the Fund staff and management to finalize work on the general data dissemination standard. The Fund's role in providing technical assistance to its members has become increasingly important across a broad range of areas. I view the

©International Monetary Fund. Not for Redistribution 12 SUMMARY PROCEEDINGS ,1996 continuation of that role as critical to the development of sound policy frameworks and to the process of institutional reform. A further core activity of the Fund is to make its resources temporar- ily available to members facing financial problems so that these might be resolved without inflicting undue harm on the country concerned or its trading partners. The Extended Fund Facility has become increasingly important for assisting some of our larger members. In addition, the En- hanced Structural Adjustment Facility (ESAF) has proved to be an invaluable vehicle for lending to the low-income countries. I warmly welcome the understanding reached to ensure a continuation of the ESAF and the Fund's participation in the heavily indebted poor countries (HIPC) initiative. It is worth noting the large number of developing countries that have pledged their financial support to achieve this goal. I am proud to announce today that Chile has the honor of belonging to this group. The basic source of IMF financing is its quota base. The Eleventh General Review of Quotas should be completed as soon as possible. It has become urgent to secure the financial resources the Fund will need to continue supporting members' adjustment efforts. In addition, I welcome the progress made by the Group of Ten and several other countries in establishing the New Arrangements to Borrow that will effectively double the resources available to the Fund under the General Arrangements to Borrow (GAB). I also applaud the consensus reached to reduce disparity among members through a one-time special allocation of SDRs through an amendment of the Fund's Articles of Agreement. The Interim Committee has adopted a new declaration on Partnership for Global Sustainable Growth. I wish to take this opportunity to urge member countries to follow through with the implementation of this strategy. Before turning to issues concerning the Bank, let me take this opportunity to convey to Mr. Van Houtven our appreciation for his service as Secretary of the Board of Governors for the past 20 years.

Role of the Bank For the World Bank Group, this has been a year of challenge. Mr. Wolfensohn has begun a number of very important initiatives. Let me take a few moments to highlight several of the advances made by the World Bank and its affiliates in the last year. Poverty reduction and sustainable development remain central objectives of the Bank Group, and greater emphasis is now being placed on strengthening the effectiveness of the Bank's activities. More attention is being given to the needs of its clients and the results achieved on the ground, as reflected in recent activities such as the creation and replenishment of trust funds for Bosnia Herzegovina and for Gaza and the West Bank and the recent establishment of a joint Africa/World Bank "partner-

©International Monetary Fund. Not for Redistribution ADDRESS BY CHAIRMAN OF BOARDS OF GOVERNORS 13 ship" for capacity building. The Bank has also taken important actions to give a broader choice of products and services to its clients. For example, in response to client demand for broader currency choice, the Bank has undertaken initiatives to provide borrowers with the flexibility to determine the currency composition of their IBRD loans. I applaud the increasing ability of the Bank to respond quickly to the needs of its clients, and I urge further progress in this direction. Within the Bank Group institutions, the International Finance Corpo- ration (IFC) has continued to expand and diversify its investment, mobilization, and advisory activities in response to its clients' needs. I commend the Corporation's new initiative, "Extending IFC's Reach," which will promote private sector investment in countries where IFC's activity has been limited as a result of difficult country conditions. As the Corpo- ration gains experience with this and other innovative programs, we expect its outreach in favor of small- and medium-sized enterprises to be strengthened. The membership of the Multilateral Investment Guarantee Agency (MIGA) has grown to 137 members, and an additional 19 countries, including several in transition, are in the process of fulfilling membership requirements. However, in several countries the operational capacity of MIGA is constrained by its capital base and reserves adequacy. Therefore, MIGA should explore alternatives for solving this problem. I also look forward to seeing new developments around the idea to create a guarantee facility that would issue guarantees against noncommercial risks without re- quiring counter-guarantees from governments of member countries. Regarding the International Development Association (IDA), I urge the richer countries to consider the plight of the poorest countries. Your increased contributions are absolutely necessary so that essential support for economic development programs in those countries can continue. This year the IBRD will be making an unusually large contribution to IDA through a transfer from its net income. Nevertheless, in the long run a well- funded IDA should not be crucially dependent on IBRD resources. In addition, I would also like to strongly commend the substantial efforts and the progress made by the Bank and the Fund to develop a significant debt-reduction scheme for the heavily indebted poor countries. As final details of the initiative are still open I would like to recall the importance of establishing burden-sharing criteria that are commensurate with the preferred creditor status of the institutions. For some years now, the IBRD has been generating significant net income and this trend is expected to continue. In allocating this income, the main goal should be the preservation of the financial position of the Bank through adequate reserve building. The allocation of the significant resid- ual income should be guided by the multilateral spirit of the Bank and therefore take into account the interests of all members. I therefore urge the

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Bank to develop a set of guiding principles for the future that ensures an appropriate balance in the distribution of net income.

Conclusions: Human Dimension of Economic Development Before concluding, I would like to share with my fellow Governors some further ideas concerning the social sphere of the development process. In particular, we need to ask ourselves about the profound meaning of development as it relates to the needs and aspirations of all of our citizens. How is the agenda we have laid out related to human development? We all share the view that rapid economic growth, macroeconomic stability, and the resurgence of free trade and cross-border investments in the context of globalization are key ingredients of the development path in the present scenario. My claim today is that we must never forget that all of the above represent means to an end. The profound agenda of our citizens has to do with human progress, with the pursuit of individual and social happiness. That is the core matter at stake as we approach the change of the century. Among the most precious values cherished by people during this key epoch of mankind is the achievement of social equity. The poor, the worse- off, the vulnerable groups in our societies are in need of key resources for their development. But these groups also have a deeply rooted hunger for voice and for finding an effective way of participating fully in the economic and civic lives of the community. The context of stability and economic progress we are experiencing is a promising sign. But it shall not take profound roots in the history of mankind unless it serves to open up clear opportunities to all of our citizens. Yes, in my view this is at the core of the challenges ahead, as we come to the twenty-first century: will the engine of progress become an instrument of vast integration and social enhancement or merely a vehicle to benefit the few? My fellow Governors, let us not miss the great opportunity we are facing. We have a profound obligation to work decisively and with no hesitation towards the betterment of the quality of lives for all. The characteristics of exclusion, of marginalization, of deprivation, should be left behind as shortcomings of the past. Let us not confuse ourselves. There is one key enhancing task for development: providing clear-cut and down-to-earth opportunities for raising the dignity of each and every one of our fellow countrymen. It is the crucial link between economic and social development and the efforts to dignify mankind that makes our work a truly meaningful task. Thank you. I hereby open the Fifty-First Annual Meetings of the International Monetary Fund and the World Bank Group.

©International Monetary Fund. Not for Redistribution PRESENTATION OF THE FIFTY-FIRST ANNUAL REPORT

BY THE CHAIRMAN OF THE EXECUTIVE BOARD AND MANAGING DIRECTOR OF THE INTERNATIONAL MONETARY FUND1

Michel Camdessus

I am very pleased to welcome you to the 1996 Annual Meetings. I would especially like to welcome the representatives of Bosnia and Herze- govina, the newest member of our institutions. I would also like to congratulate them on the first steps they have taken in their efforts to rebuild a peaceful country. Indeed, we want to support these efforts as much as we can. One last word of preamble—a bit personal. Early next year, I will begin another term at the Fund. Let me take this opportunity to thank you and your governments for your continuing confidence and support. When I see the 181 members of the Fund gathered here in this hall, I am reminded of what has brought us all together: the very purposes of the Fund—the desire for greater economic stability in the world, and the desire for stronger, more sustained, and more broadly shared growth. But we do not have to think back very far to recall major challenges to these goals. Remember! Three years ago, Africa was in the midst of a protracted decline in per capita income, as it had been for more than a decade. Two years ago, we were deeply concerned about hyperinflation in Russia and its risks for Russia and the world. Last year, it was Mexico, its spillover effects, and the unprecedented level of Fund support for that country's adjustment efforts. These were tremendous challenges indeed, but they were met. Who would have dared hope that as early as this year Russia would have strengthened its macroeconomic policy stance to such an extent that it would even achieve one month of zero inflation; or that economic recovery would be sufficiently under way in Mexico that it would begin early repayments to the Fund; or indeed, that Africa would be in its third year of per capita growth, thanks to the rigor of the programs that many countries follow! Well, these are not minor accomplishments. And they do demonstrate that things can change for the better. But we all know that lying just below the surface in all our economies are the powerful trends toward globalization. And we know that the relatively satisfactory results of the last few

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months would be fleeting if at the same time we were not striving to meet these fundamental challenges decisively. As a matter of fact, when I addressed you last year, we were already confronted with them. After commenting on our steps to help stem the Mex- ican crisis, I concluded my remarks by trying to outline what this major crisis suggested for your countries' strategies, and for the Fund as well. I think it is proper today to review, first, how successful your strategies have been; and second, how the Fund itself has adjusted to the opportunities and challenges of this new world. Let me take these two issues in turn.

Economic Strategies and Performance First, about your strategies and how far we have come in enhancing global stability and growth. Well, there are encouraging signs of progress: world economic and financial conditions are generally satisfactory, and the outlook is favorable. Among the more positive developments, I would cite the reduction in world inflation. In particular, many industrial countries have come close to achieving effective price stability. I would also point to the continuation of solid 6 percent economic growth in developing countries, and the fact that this growth is now becoming more widespread. The pace of economic activity in Asia continues to moderate to a more sustainable but still remarkable rate of about IVi percent. Let us pause here for a moment and take a slightly longer-term view of what has been happening. In two huge countries—China and India— which together account for more than one-third of the world's population, there have been striking improvements in average per capita incomes, even though poverty is far from being conquered. Meanwhile the recovery in Latin America is gaining momentum, thanks to stronger policies in many countries. And here, I cannot but emphasize the continued outstanding performance of your own country. Africa's growth performance also deserves special mention. Last year, there were 25 countries with annual growth of 4 percent or more— nearly twice the average number in 1990-93. Although performance across countries is still mixed, we expect Africa as a whole to grow by 5 percent this year and next, the highest rates of growth in two decades. Africa, for which so many seemed to have lost hope, appears now to be stirring and on the move. In the countries in transition, economic activity is projected to stabilize this year, after five years of decline. Among those more advanced in the transition, eight are expected to record growth of 5 percent or more, and four to achieve single-digit inflation. So the countries in transition that were thrust into a brave new world are no longer dazed and have begun their upward climb of growth and development.

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For the world as a whole, I must also mention the continued growth in the volume of world trade, progress toward trade liberalization and current account convertibility, the trend toward increased freedom of capital movements, the rebound in private capital flows to developing countries, and developments in exchange markets, which have brought the relationships among major currencies more closely in line with economic fundamentals. These are major developments indeed from the point of view of the IMF's purposes, and they have all contributed to today's broadly favorable economic situation. But we must build upon them further, as globalization requires that we continue progressing toward freedom of capital movements, but that we do so safely. Of course, these developments are not just happenstance. They are, first of all, a reflection of the growing consensus among Fund members on the need for adjustment and reform. And they are the result of the fact that many countries have had the courage—often in very difficult circumstances—to strengthen their economic and financial policies, and that the Fund has been in the position to provide an appropriate level of support for their efforts. Today, about 60 countries have programs with the Fund, amounting to commitments of roughly SDR 30 billion. In addition, there are some 25 new arrangements under consideration. Yes, there have been many positive developments in the global economy. Yet, we also know that macroeconomic and structural weaknesses persist in all of our countries. Moreover, we know that the forces of globalization can magnify the adverse effects of policy weaknesses, pose new risks for all of our countries, and raise difficult policy dilemmas even when policies are sound. All of these considerations impel us to greater vigilance and renewed partnership in facing this new world. This is why I particularly welcome the broadening and strengthening of the Madrid Declara- tion, which was endorsed by the Interim Committee last Sunday. Let me emphasize to you that this declaration you have on your tables is not just another text, another call to action. No, it is something quite special: it is the distillation of Fund surveillance lessons by the world's most representative body of finance policymakers. You have eleven commandments there; let me emphasize four of them. First point: it is clear that we must adopt a more ambitious approach to fiscal consolidation. The agreed common objective is to achieve budget balance and strengthened fiscal discipline in a multiyear framework. We know that many countries could achieve faster, more sustained growth if they could substantially reduce their large budget deficits and the sizable claims that these deficits place on private savings. But reducing budget deficits cannot be the only concern; the composition of fiscal adjustment also has profound effects on economic welfare, capital accumulation, and growth. To put it another way, we know that the quality of adjustment also has a large bearing on its sustainability. Thus, fiscal adjustment must not only

©International Monetary Fund. Not for Redistribution 18 SUMMARY PROCEEDINGS, 1996 reduce budget deficits, but also improve the quality of expenditure by reducing unproductive outlays to make more room for spending on such critical areas as health and education. It must also improve the incentives for private sector activity; and in some countries, it must deal with medium- term problems associated with aging populations. Finally, fiscal adjustment must create enough room to put human development at the center of our fiscal strategy, as we know that the sustainability of economic growth hinges on that. Second point: if countries are to benefit fully from globalization, they must take a bolder approach—not just to fiscal reform—but to structural reform in general. In every country, we can point to ways in which comprehensive structural reform—not just tinkering at the margin with this measure or that—would improve the effectiveness of macroeconomic policies, help create jobs, and protect against the risks I mentioned earlier. Third point: in a number of our member countries, reform of the state. There can be no sustainable development without the responsible management of public affairs. This means, first, that governments must demonstrate that they have no tolerance for corruption in any form; and second, that they must dedicate themselves to fulfilling those tasks that are so essential to the confidence of private savers and investors and the smooth functioning of their economies. Tasks such as maintaining public safety, protecting property and contractual rights, providing reliable public services, establishing a simple and transparent regulatory framework that is enforced fairly, and guaranteeing the professionalism and independence of the judiciary. These are not easy tasks, but they are essential for sustained economic growth. And fourth: to take urgent care of the Achilles' heel of the global economy today—the fragility of national banking systems. In many countries, a banking crisis is an accident waiting to happen. And we know all too well why. Why? Weak macroeconomic policies and poor economic performance undermine banking sector health and, conversely, weak banking sectors stand in the way of effective macroeconomic policymaking. As a result, countries with banking problems may shy away from tightening policies when needed for fear of provoking a domestic banking crisis. The failure to take early action can be costly. For the country concerned, the fiscal costs of resolving banking sector problems can be truly exorbitant and involve a tremendous drain on countries' resources. On the basis of recent experience, let me tell you that this is something that we truly don't want to see repeated. At the same time, we must also avoid the systemic consequences such crises can entail. Needless to say, in working closely with all other interested institutions, we will not fail to respond to the call for particular vigilance that this implies for the Fund. In this connection, I am happy to report that Jim Wolfensohn and I have decided to join our financing and surveillance

©International Monetary Fund. Not for Redistribution ADDRESS BY MANAGING DIRECTOR 19 forces to address these risks in a strongly coordinated way. The IMF and the World Bank's cooperation is already producing positive results—to cite the most significant examples—in Latin America, where we work hand in hand with the Inter-American Development Bank (IDB), and in the Baltic countries, Russia, and other countries of the former Soviet Union, and the East European countries, where we work actively with the European Bank for Reconstruction and Development (EBRD) and continue to cooperate closely with the Bank for International Settlements (BIS) in providing technical assistance on central banking issues. No more on these key elements of our common strategy. Let me turn now to my second point.

The Fund's Agenda You remember certainly the agenda that we established last year. The purpose was to adjust so that the Fund could help ensure that globalization truly becomes an opportunity for the world. Let's see where we are. The first item of business was to strengthen surveillance. To this end, we have continued to sharpen the focus of Article IV consultations, giving greater attention to capital account developments, to countries where developments could have spillover effects, and to regional surveillance. We have also encouraged all countries to improve the quality, comprehensive- ness, and timeliness of the basic statistical data they provide to the Fund and to the public. As regards the latter, the Fund has helped develop and disseminate a set of standards regarding the coverage, frequency, and timeliness of data; their quality and integrity; and their availability to the public. Countries subscribing to this Special Data Dissemination Standard agree to adhere to these sound practices and to provide information to the public on their own specific practices via an electronic bulletin board on the Internet, maintained by the Fund. This transparency promises to give market participants the information needed to form judgments on the policies and performance of subscribing countries, thereby contributing to more informed investment decisions and fewer market surprises. I am very pleased to report that 37 industrial and emerging market countries have subscribed to the new Special Data Dissemination Standard. I encourage many more to join, and I can tell you that many are preparing to do so. But there is another essential part of our agenda: strengthening the Fund's resources so that the IMF can continue—as it is said in our Arti- cles—to "give confidence" to all members to undertake bold programs of adjustment and reform. Moreover, since it is unlikely that we will be able to avert every crisis, we must equip ourselves to face unexpected, and potentially disruptive, developments. Decisive progress has been achieved on three fronts:

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First, in securing additional resources for the Fund to use in emergency situations. In particular, Group of Ten countries and a number of other Fund members in a sufficiently strong balance of payments position to support the international monetary system are about to finalize arrangements to double the lines of credit previously available to the Fund and thereby bring the total amount of these credit lines to SDR 34 billion. Let me record here my appreciation for all those who worked hard in preparing these agreements. These arrangements could become a key supplement to the Fund's own resources in a time of systemic crisis. But they cannot support the Fund's normal operations—nor should they. The Fund is a cooperative institution based on quotas, and its strength and credibility depend on its maintaining its quota strength. The current quota review, the eleventh, is an opportunity to reflect in members' quotas the changes in the world economy that have taken place since the last increase in quotas was agreed. With relatively strong demand for Fund resources, the Fund's liquidity ratio is currently on a relatively sharp downward trend, and by the end of 1997, it is projected to decline to below the traditionally critical threshold of 70 percent. This would be the Fund's lowest liquidity ratio since late 1983, just before the Eighth General Review of Quotas came into effect. This makes it a matter of urgency, particularly at a time of increased uncertainty in the global economy, to finalize the negotiation on a substantial quota increase with no further delay. The Interim Committee has called upon our Executive Board to resume discussions on the Eleventh General Review of Quotas, with a view to coming to a positive conclusion in the near term. This truly will be a critical priority in the coming months. The second front on which I can record major progress goes to the heart of the IMF's character as a cooperative monetary institution, and that is the issue of Special Drawing Rights (SDRs). We all have been concerned about the fact that many members have not been able to participate fully in the SDR system. I am very pleased that the Executive Board has reached agreement on a way for all members to receive an equitable share of cumulative SDR allocations and thereby put all participants on the same footing in the SDR system. This has required a very high cooperative spirit from our members, with the flexibility of some on the vehicle for the solution (now as an amendment of the Articles) being matched by the flexibility of the others on an amount broadly reflecting my own suggestion of SDR 26 billion. And now the third breakthrough: a similar—and I must say truly remarkable—spirit of compromise by members of the Executive Board has allowed us to find a constructive solution to the complex issue of financing the continuation of Enhanced Structural Adjustment Facility (ESAF) and the Fund's contribution to our joint World Bank and IMF

©International Monetary Fund. Not for Redistribution ADDRESS BY MANAGING DIRECTOR 21 initiative in favor of the heavily indebted poor countries. We are all too close to the intricacies of this negotiation to realize fully what was finally achieved. But let me tell you that I am very proud of what has been done. All of us have given in somewhat on our favorite option in order to contribute to an effective and efficient consensus. All of you have pledged to secure the needed financing, through bilateral contributions, and, if needed, as we say in our jargon—through the "optimization of our reserve management." Even the poorer countries have accepted a part of this burden to help those suffering from the most adverse conditions of poverty and indebtedness. Indeed, when you hear the representatives not only of Chile, but also of Armenia and Azerbaijan, Tunisia and Bangladesh, Paraguay, Peru, and Russia—to mention just a few of those contributing to this effort jointly with the industrial countries—then you realize that, yes, the world can change for the better and that a new partnership is emerging. And I repeat, I have only mentioned a few. Many others join in accepting this individual and common responsibility for mutual support. In doing this, you have endowed the Fund with a self-sustained—and de facto, permanent—instrument that will allow it to continue to play its role in addressing decisively—whenever it may be necessary in the future—the problems of the countries in the most distressed situations, provided they show their readiness to make all their own efforts to stand again on their own feet. I have talked about the New Arrangements to Borrow-General Arrangements to Borrow, equity in the SDR system, the new quota increase, and the permanent ESAF. Each of these issues or initiatives has illustrated a decisive new dimension of our partnership—namely, the greater share of responsibilities in the global economy that many countries, including emerging market economies, are now willing and able to accept. This, no doubt, has the full potential, provided we continue to adapt our institutions and procedures to reflect it, to forge greater international cohe- siveness in meeting the common goals of a stable world monetary system and a growing global economy. We have a very challenging agenda. But these are challenging times. In looking to the future, we must bear in mind that many of the challenges in today's global economy are much greater than any single country or group of countries can cope with alone. But when we, the international community, work together, our tasks become more manageable and our objectives, within closer reach. So let us keep our sights on our common goals: greater stability in the world and stronger, more sustained, more broadly shared and higher-quality growth. Let us redouble our collective efforts to achieve these goals. This is what our partnership is now all about.

©International Monetary Fund. Not for Redistribution OPENING ADDRESS BY THE PRESIDENT OF THE WORLD BANK GROUP1

James D. Wolfensohn

Introduction I am delighted to welcome you to these Annual Meetings. I would like to thank the Chairman for his support for our efforts, and I would also like to express my deep appreciation to Michel Camdessus, who has helped me so much this year with his experience, advice and, above all, his friendship. Like Michel, I extend an especially warm welcome to Bosnia and Herzegovina, our one hundred and eightieth member country. During my visit to Sarajevo last April, I saw the magnitude of the challenge facing the country, and I was profoundly moved by the courage and hope of its people. Working with them, and with all our partners, the Bank has already begun to help with the massive task of reconstruction. Elaine and I join with everyone here in offering our heartfelt best wishes to the citizens of Bosnia and Herzegovina for peace and happiness in the years to come. I have visited over 40 countries in these past 16 months. I have met with governments and business and nongovernmental groups. But it is the people—the poor and disadvantaged—who have made the biggest im- pression on me. I have learned that they do not want charity; they want opportunity. They do not want to be lectured to; they want to be listened to. They want partnership. Like all of us, they want a better life for themselves and for their children. What I have seen in country after country is that when they are given a chance, the results are truly remarkable. I have also been struck by the critical importance of history and culture. We must build upon local tradition, not disrupt it. We must encourage the young to respect their heritage. And we must accord dignity to the individual. Without respect for cultural continuity and for social institutions, I believe there can be no true development. Let me express my gratitude to the groups represented here in this room—whether donor or recipient, private business, foundation, or nongovernmental organization. I feel privileged to have become a member of this great community. And I believe that by strengthening our partnership even more, we can offer the people we serve better opportunities and more hope for the future.

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Working together is in everyone's interest. There are not two worlds— rich and poor—there is one. We are linked in so many ways. Simple economics gives the industrialized countries reason enough to assist the developing countries. With their 4.5 billion people, these are the markets of tomorrow. But rich and poor countries are also linked by a host of challenges that have no respect for national borders: migration, disease, environmental degradation, famine, terrorism, and war. More positively, we are linked by a common humanity, and are united in a historic undertaking to improve the human condition. We must get this message across to our leaders and to voters—so that we can maintain and strengthen our common effort.

The Past Year: A Progress Report When we met last year, I set out six immediate priorities: • Bringing ID A-11 to a successful conclusion • Addressing the debt problems of the poorest countries • Building and expanding partnerships • Accelerating private sector development • Doing more to help in postconflict situations and • Creating a "results culture" within the Bank Group. Thanks to your support, tremendous help from our Executive Direc- tors, and a great deal of effort from our management and staff, I have significant progress to report. First, I pledged that we would do all in our power to ensure sufficient funding for IDA-11. The agreement reached last spring should enable the International Development Association (IDA) to lend close to $22 billion over the next three years—a remarkable achievement under the circumstances. At the same time, the agreement is fragile. It depends crucially on donors' understanding of each other's individual positions on the replenishment and, of course, on commitments being honored as speedily as possible. Beyond this, we must all intensify our efforts to ensure IDA's long- term future—remembering always that it is the lifeline for three billion people living in the world's poorest countries. Second, I committed last year that we would work closely with our other partners to address the problem of unsustainable debt in the poorest countries. As Michel Camdessus has noted, after a year of hard work and much debate, the Bank and the IMF together have developed a proposal that is flexible, comprehensive, and responsive to debtors and creditors alike. At the Development Committee meeting yesterday, Ministers gave their strong endorsement to this proposal. Now, presuming fair burden sharing with other donors, we are ready to move ahead with debt-relief operations in select countries. I extend my thanks to everyone who has

©International Monetary Fund. Not for Redistribution 24 SUMMARY PROCEEDINGS, 1996 helped in this effort, which I believe will prove to be a major breakthrough in the fight against poverty. Third, I said we would build stronger partnerships. This past year, I met with the leaders of the other multilateral banks to explore better coordination of our programs. We have expanded our links with the United Nations and its agencies, the World Trade Organization, and the European Union. We have forged new relationships with the major foundations and with nongovernmental organizations, both international and local. We are building partnerships on gender issues, the environment, the social impact of economic reforms, the private sector, and other priority areas. We are also deepening partnerships with our shareholders, including trying to benefit more from the successful development experience of our "graduates," such as Sin- gapore. Above all, we are strengthening partnerships with our clients: for example, through the innovative program for Capacity Building in Africa, prepared and recommended by the African Governors at these Meetings. Fourth, we have stepped up our efforts to promote private sector development, and to rationalize the Bank Group's activities with the private sector. • The Bank is working with governments to help them improve the policies, and legal, tax, and judicial systems that are crucial for encouraging investment. We have strengthened our outreach to corporations, helping them to assess and implement projects in our client countries. We have also heard one of the messages coming through loud and clear at these Meetings: to strengthen our guarantee program. I am pleased to report that there are 43 confirmed and probable projects in our IBRD guarantee pipeline—most awaiting government action or investor decisions for the next step. And we are actively looking at how we can expand this program even further. • The International Finance Corporation (IFC), celebrating its fortieth anniversary, has had a record year, leveraging more than $19 billion in support of projects worldwide. Since its founding in 1956, it has provided financing to nearly 2,000 companies in 125 countries. As you know, IFC often works in countries where few other financial institutions are willing to go and, in the next year, it will extend its reach to 16 nations where it has never worked before—and where the investment climate is the toughest. • The Multilateral Investment Guarantee Agency (MIGA) also continues to exceed our original expectations. Its guarantees have catalyzed foreign direct investments now totaling an estimated $15 billion, and its on-line marketing and information service, the IPAnet, offers data and analysis on the business climate in more than 90 countries. Given the rapid growth in demand for its services, our Board will soon be discussing my recommendation for a capital increase for MIGA.

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We have established a Private Sector Development Group to pull together the catalytic strengths of our three institutions, and to make them more easily accessible to our private sector partners. In addition, the Bank and IFC have initiated joint country strategies to help ensure that our activities reinforce each other and stay clearly focused on development impact. Fifth, we have organized ourselves for postconflict work, and have made great strides in improving our programs. In Bosnia and Herzegovina, 14 projects are being implemented, with Bank Group financing of over $325 million. In Gaza and the West Bank, our joint efforts are yielding results and have contributed to the creation of 22,000 new jobs. In Haiti, we are working with a coalition of donors to help sustain peace and build economic opportunity for the poor. We are also working in Angola and Lebanon to assist with employment and reconstruction. More broadly, we will soon be presenting to our Board a policy paper aimed at strengthening our support for postconflict recovery. Sixth, I pledged last year to build a "results culture" at the Bank, and this effort is showing tangible progress. I am extraordinarily grateful to my colleagues in the management team for their advice and support, without which none of our achievements would have been possible. We have stressed that we will not measure our performance by dollars lent or projects approved, but by our development impact—results on the ground. I cannot overstate the importance of this change. By putting quality ahead of quan- tity, we have fundamentally changed the incentives that guide our staff. Backed by tougher quality assurance for our work and enhanced accountability, this will result in major improvements in project design. We also have raised country portfolio issues to a higher level of attention with our clients. I myself have discussed these issues with the authorities in Russia, Brazil, and other countries. And we have launched a major review of country portfolios with the highest concentrations of risky projects. We are increasing our country focus through much stronger client involvement in our assistance strategies and by locating some of our country directors in our borrowing countries. We are paying greater attention to our clients' needs, with customized advisory services and important new products such as the single-currency loan, which allows our clients to borrow at an effective 50 basis points above the AAA rate. And we are speeding up our procedures. We are also improving our professional expertise through the creation of sectoral "networks" among our staff, with the first of these established in the area of human development. We are strengthening our management capacity with a substantial executive education program, as well as an exchange program with a broad range of private and public institutions. And we are investing more in our staff, including a doubling of skills training this year. In all these areas, we are choosing our best women and men, who

©International Monetary Fund. Not for Redistribution 26 SUMMARY PROCEEDINGS, 1996 reflect our rich geographic diversity, to build a Bank that can work most effectively with women and men all over the world. While we still have a long way to go, I believe we have made real progress toward changing the course of the institution. We now have a committed and talented team—staff and management—working to improve the Bank Group and to prepare it for the next century. There is excitement and empowerment; there is challenge and innovation. We will succeed with some initiatives, and we will fail with others. But our institution is on the move.

The Strategic Agenda Together, we have accomplished a great deal over the past 12 months. But it is just the beginning—the downpayment on the bigger task that lies ahead. Together, we need to look towards the challenges facing us in the new millennium. Last year, I suggested four major themes, which have evolved but which remain valid for the coming year and beyond: • First, a new compact between donors, investors, and recipients to ensure that resources are sufficient to meet the needs of the world's poorest people and also to ensure that those resources are used efficiently and transparently. • Second, a broader, more integrated approach to development to ensure sustainability. • Third, strengthening and expanding partnerships, both global and local. • And, fourth, continuing to pursue change in the Bank's culture to focus on excellence and results.

The New Compact First, the new compact. I have already mentioned IDA and the debt initiative and their critical role in catalyzing resources for development. We also need to attract more private flows to the poor countries. And then we need to work on the second part of the compact: to ensure that all resources are used efficiently. In 1995, private flows to developing countries exceeded $170 billion, three times official flows, and four times what they were just five years ago. However, 75 percent of these flows went to just 12 countries. About 50 countries, most of them very poor, received virtually no private inflows. Our new world of open markets raises the stakes for developing countries. Investment is linked to good policies and good governance, liberal trade regimes and high savings rates, combined with sound legal and judicial systems. Simply put, capital goes to those countries that get the fundamentals right. And we are working with our clients on those fundamentals.

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Strong financial systems are key. But there are pervasive problems with prudential regulations and their enforcement. About one in five developing countries faces a banking crisis. Unproductive public expenditures and uncollected taxes are a further huge drag on these economies. That is why the Bank Group, working with the IMF, is strengthening our capacity to help our clients strengthen their financial sectors and reform their expenditure programs. If the new compact is to succeed, we must tackle the issue of economic and financial efficiency. But we also need to address transparency, accountability, and institutional capacity. And let's not mince words: we need to deal with the cancer of corruption. In country after country, it is the people who are demanding action on this issue. They know that corruption diverts resources from the poor to the rich, increases the cost of running businesses, distorts public expenditures, and deters foreign investors. They also know that it erodes the constituency for aid programs and humanitarian relief. And we all know that it is a major barrier to sound and equitable development. Corruption is a problem that all countries have to confront. Solutions, however, can only be home grown. National leaders need to take a stand. Civil society plays a key role as well. Working with our partners, the Bank Group will help any of our member countries to implement national programs that discourage corrupt practices. And we will support international efforts to fight corruption and to establish voluntary standards of behavior for corporations and investors in the industrialized world. The Bank Group cannot intervene in the political affairs of our member countries. But we can give advice, encouragement and support to governments that wish to fight corruption; and it is these governments that will, over time, attract the larger volume of investment. Let me emphasize that the Bank Group will not tolerate corruption in the programs that we support; and we are taking steps to ensure that our own activities continue to meet the highest standards of probity.

The New Paradigm The second element of our strategy is the need for a broader, more integrated approach to development—a new paradigm, if you will. Poverty reduction remains at the heart of everything we do. But the magnitude and complexity of the task is daunting. This was brought home to me time and time again in my travels as I met and talked with people, whether it be the coal miners of Ukraine, the Moslem women's groups of North Africa, the unemployed of Tucuman in Argentina, or the fishermen of the Aral Sea. Reducing poverty clearly involves the interplay of a number of issues: macroeconomic policy, private sector development, environmental sus-

©International Monetary Fund. Not for Redistribution 28 SUMMARY PROCEEDINGS, 1996 tainability, and investments in human capital, especially girls' education and early childhood development. All the elements are important. But let's face it, at the end of the day, people make policies and projects work. Social, cultural, and institutional factors are key to success and sustainability. In the Balochistan province of Pakistan, for example, where female school enrollment rates have traditionally been among the lowest in the world, local communities and parents worked together through a Bank-supported project to design culturally sensitive schools and curric- ula. The result is that Balochistani parents are now sending their little girls to school. This is even more true at the policy level. We are all familiar with the record of the East Asian countries. But it was those countries' strong institutions and social cohesion that enabled them to consistently choose sound macroeconomic policies, promote rural development, and make large investments in basic education and health. And the result was rapid growth and poverty reduction. Without the social underpinnings, it is difficult for economic development to succeed, and virtually impossible for it to be sustained. We see this in countries that are mired in poverty, where economic growth is fragile, population is rising rapidly, children are not going to school, and even more tragically, where they are dying from diseases we know how to prevent or cure. On a more extreme scale, we see it where the social fabric is torn and conflict has broken out. I referred to the horror in Bosnia. But just last year, there were some 50 major in-country conflicts worldwide. Over the past decade, more than half of the world's poorest countries have experienced conflict. The lesson is clear: for economic advance, you need social advance, and without social development, economic development cannot take root. For the Bank, this means that we need to make sure that the programs and projects we support have adequate social foundations, • by designing more participatory country strategies and programs, reflecting discussions not only with governments, but also with community groups, nongovernmental organizations (NGOs), and private businesses, • by putting more emphasis on social, cultural, and institutional issues— and their interplay with economic issues—in our project and analyti- cal work, and • by learning more about how the changing dynamics between public institutions, markets, and civil society affect social and economic development. I see this as a critical challenge, in fact, the critical challenge before us. But if we can succeed in broadening our approach in this way, I believe it will have a tremendous payoff in helping our clients to achieve truly sustainable development.

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The New Knowledge Partnership The third item on the strategic agenda is partnership. We have made good headway over the past year. But today, I want to focus on a specific form of partnership that will take on special importance as we enter the new millennium—a partnership for creating and sharing knowledge and making it a major driver of development. Development knowledge is part of the "global commons": it belongs to everyone, and everyone should benefit from it. But a global partnership is required to cultivate and disseminate it. The Bank Group's relationships with governments and institutions all over the world and our unique reser- voir of development experience across sectors and countries position us to play a leading role in this new global knowledge partnership. We have been in the business of researching and disseminating the lessons of development for a long time. But the revolution in information technology increases the potential value of these efforts by vastly extending their reach. To capture this potential, we need to invest in the necessary systems, in Washington and worldwide, that will enhance our ability to gather development information and experience, and share it with our clients. We need to become, in effect, the Knowledge Bank, • by networking and pooling our wealth of cross-country experience, capturing the best global thinking and expertise on a given issue, and making it easily accessible to our clients and partners, • by expanding the role of our Economic Development Institute, which already reaches thousands through its learning programs, and is well on its way to reaching millions by harnessing teleconferenc- ing, television, and the Internet, and • by pioneering new partnerships that connect our clients with global centers of knowledge and investment: one example is our World Wide Web site, which is accessed 1.5 million times a month; another is the Information and Development Fund, through which the Bank and our partners help the poorest countries to realize the potential of information technology. Let me stress one other point: the global knowledge partnership is not about machines. It is about people. The challenge is to harness the technology to link people together and to leverage its impact for development. That means both accumulating the right kind of knowledge, and helping our clients build the capacity to use it.

The New Bank Let me turn briefly to the fourth and final item on our strategic agenda: the Bank itself, and building a culture based on results, accountability, and excellence.

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To get the biggest bang from our scarce resources, we must be absolutely tough minded. Sometimes in the past, we set overly ambitious targets and committed ourselves to objectives that were simply not realistic. That must change. We have to promise only what we can deliver, and then, deliver what we promise. This new culture of realism and results is fundamental to the changes at the Bank to which I referred earlier: • getting closer to our clients; • developing new products, customized to our clients' needs; and • ensuring that our products are of top quality. To be successful, we will need new skills and new ways of working together. We need to continue the effort to invest more in our staff, to keep them at the cutting edge in their field. And we need also to become much better at working with others, tapping knowledge sources around the world to bring the very best expertise to our clients. We have started down the road to revitalizing our institution. It will not be done overnight; and it will require some special investment up front. As part of the effort, we are taking a fresh look at our finances and at our fee and cost structure. We must be able to make more flexible and better decisions on how we use our resources. We have before us a real opportunity to invest in the future. With your support, I am confident we can build a new Bank: a more responsive, focused institution, dedicated to learning and excellence, serving the needs of our entire membership, and reinvented to face the challenges of the twenty-first century.

Conclusion I have spoken of a strategic agenda that will carry us forward to the next millennium. But we can only meet it through partnership. And that leads me back to where I began today, with my visit to Sara- jevo. I met there with religious leaders: Catholic, Moslem, Orthodox, and Jewish. And I was struck by the fact that each of them spoke, not of hatred, but of the need to work together and to look to the future. One of them, a Moslem leader, told me how he had lost his wife and two daughters to a single shell, on a single day of fighting, as they went to the market to buy some water. And yet, as I sat with him on a carpet in his mosque, he spoke of the meaning of the Koran, and of forgiveness. "We have to work together," he told me, "It's our only hope." Working together is a challenge for us all and a responsibility for our world: for social justice, for economic opportunity, for human well-being, and for history. We are all here because we share the dream of a better world. To achieve it, we have to work together.

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REPORT TO THE BOARD OF GOVERNORS OF THE INTERNATIONAL MONETARY FUND BY THE CHAIRMAN OF THE INTERIM COMMITTEE OF THE BOARD OF GOVERNORS OF THE INTERNATIONAL MONETARY SYSTEM

Philippe Maystadt

It is a great pleasure to have this opportunity to report to the Gover- nors, in my capacity as Chairman of the Interim Committee, on the work of the Committee over the past 12 months. The issues before the Commit- tee have been well covered in its communiques and I shall therefore limit myself to commenting briefly on the main items.

The World Economic Outlook At its spring meeting on April 22, and again on Sunday, the Commit- tee expressed optimism at prospects for the world economy and noted that many of the favorable developments reflected the implementation of key aspects of the cooperative strategy set out in the Madrid Declaration of October 1994. Several key factors support this positive outlook: the progress toward price stability and fiscal consolidation in many countries, the improvement in exchange market conditions among the major currencies, the strong growth of trade and financial flows, and the increasing reliance worldwide on market forces. Against this background, the Committee concluded that the broad thrust of the medium-term strategy set out in the Madrid Declaration remains valid. At the same time, the Committee saw a need to broaden it to take into account the new challenges of the changing global economy, as well as the lessons from the reviews by the Executive Board and by the Committee of members' economic policies. Accordingly, the Interim Committee has adopted this new Declaration on Partnership for Sustain- able Global Growth, which Michel Camdessus presented to you a few minutes ago. • This declaration stresses the interdependence between macroeconomic policies and structural reforms. These policies and these reforms are mutually reinforcing. • It reiterates the need for fiscal discipline, but it also draws attention to the quality and the composition of the fiscal adjustment, and also to the need for greater transparency in government finances—in particular, the reduction of off-budget transactions. • It also emphasizes the importance of promoting good governance in all its aspects, which includes ensuring the rule of law, improving

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the efficiency and accountability of the public sector, and tackling corruption. • It also pays attention to the soundness of banking systems through strong prudential regulation and supervision and to the need for more action to prevent money laundering. • Finally, the Committee agreed that the realization of this common strategy will help to avoid significant exchange rate misalignments and to provide a foundation for reasonable exchange rate stability. The Committee has endorsed these principles of sound policies in a spirit of renewed partnership, confident that firm commitment by all members—industrial, developing, and transition economies alike—to respect them will help all countries to achieve sustainable high-quality growth.

Strengthened Fund Surveillance Governors will recall that last year the Committee carried forward its work on its far-reaching proposals to strengthen Fund surveillance that had been formulated in the wake of the crisis in Mexico. On Sunday, the Com- mittee welcomed the substantial progress that has already been made in adapting Fund surveillance to the new global environment. It noted in particular that the six-monthly reviews of member countries' policies have yielded important lessons for both the membership and the Fund on the conduct of surveillance in the new global environment. It also welcomed the Special Data Dissemination Standard and was pleased to note that 37 countries representing a broad range of the Fund's membership have already subscribed. In view of the importance all of us attach to improving the quality, timely provision, and dissemination of economic statistics, the Committee encouraged other members in a position to do so to subscribe to the "best practices" embodied in the Special Standard. It also requested the Executive Board to complete its work on the general standards for data dissemination, that will apply to all countries, so that they are in place before the spring 1997 meeting of the Committee.

Fund Financial Resources and Assistance The Fund's financial resources and assistance have been a central concern of the Committee over the past year, and very good progress has been made in three areas. First, on the New Arrangements to Borrow, which will effectively double the resources currently available under the General Arrangements to Borrow, an agreement in principle was reached in May. The Committee requested the participants in these arrangements and the Executive Board to complete their work promptly.

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Second, the Executive Board reached a consensus on a one-time allocation of SDRs to resolve the so-called equity issue. This will require an amendment of the Fund's Articles of Agreement. On Sunday, the Commit- tee endorsed this approach while emphasizing at the same time that such an amendment would not in any way affect the Fund's existing power to allocate SDRs on the basis of long-term global need as and when that need arises. The Fund's Executive Board has been asked to finalize the work on the amendment by the time of the Committee's next meeting. Finally, the Committee reached an agreement on the initiative to assist the heavily indebted poor countries (HIPCs). I am very much encouraged by the full support expressed by all Committee members for the implementation of this initiative. When in October 1995—less than a year ago—the In- terim Committee encouraged the Fund and the World Bank to continue their work on ways to address the problem of the burden of multilateral debt, few observers would have thought that a credible strategy could have been de- vised and endorsed by the international financial community as early as today. Even fewer observers would have found it likely that the Fund could be a key partner in this strategy. Today, I am pleased that we have reached an agreement on a set of proposals to help the poorest countries to achieve an exit from unsustainable debt. I am also pleased that the Committee endorsed the Fund's participation in this initiative through the Enhanced Struc- tural Adjustment Facility (ESAF) with grants or loans on longer maturities. I would like to end my report by noting that the Committee has requested the Executive Board to complete the Eleventh General Review of Quotas as soon as possible. My hope is that I will be able to report to you next year that the Board has indeed come to a positive conclusion on this very important issue.

REPORT TO THE BOARDS OF GOVERNORS OF THE BANK AND THE FUND BY THE CHAIRMAN OF THE JOINT MINISTERIAL COMMITTEE OF THE BOARDS OF GOVERNORS ON THE TRANSFER OF REAL RESOURCES TO DEVELOPING COUNTRIES (DEVELOPMENT COMMITTEE)

Mohamed Kabbaj

I am pleased to report to you, as Chairman of the Development Com- mittee, on the Committee's work over the past 12 months. These have been, in my view, very productive months for the Committee. I should like to emphasize three points today in this brief report.

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First, the successful launching yesterday of the debt initiative for the heavily indebted poor countries (HIPCs) is an excellent example of how the Committee and the Bretton Woods institutions, working closely together, can produce significant results. Second, with an improved format and operational procedures, along with active support from Bank and Fund managements, the Committee's effectiveness has been markedly enhanced. Third, that the Committee has been able to focus on several other topics of great importance in the past year, including IDA, poverty reduction, and a major assessment of multilateral development banks; it also benefit- ted from presentations by the United Nation's Secretary-General and the Director-General of the World Trade Organization (WTO).

The Debt Initiative Yesterday the Committee launched the initiative for the heavily indebted poor countries. The real test will come during its implementation, but in my view this already represents a significant accomplishment of international cooperation. This event results from extensive consultation and coordination between this Committee, the Bank and Fund, and their partners in the international community. This effort began at the Madrid Annual Meetings when U.K. Chan- cellor Clarke urged the Interim and Development Committees to consider the subject of multilateral debt; they then asked Bank and Fund Executive Directors to examine proposals to address the problems of the most indebted poor countries. In the spring of 1995, based on a short paper prepared by the Bank and Fund following several discussions in their Boards, the Development Committee had an excellent preliminary conversation on the issue in a closed luncheon session. Members noted that some of the poorest and most heavily indebted countries had a large debt burden to multilateral institutions and asked the Bank and Fund to develop further ideas for the Octo- ber 1995 meeting. At that time, the Committee concluded that for a small group of HIPCs, use of current instruments is insufficient to bring debt down to sustainable levels; they asked the Bank and Fund to come up with concrete proposals based on detailed country studies. With strong leadership from Mr. Wolfensohn and Mr. Camdessus, a joint Bank/Fund team proceeded to develop a framework for action based on six principles, including a comprehensive approach to a country's debt leading to a real exit from further reschedulings, with which the Committee concurred in April 1996. The Bank and Fund were asked to work closely with other multilateral institutions and bilateral creditors and donors, and produce an action program for consideration at these Annual Meetings.

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Yesterday the Committee warmly endorsed the Initiative and the Ac- tion Program, and asked the Bank and Fund, working closely with their partners, to move swiftly to implement the initiative. Thus, in a very short period of time, the Bank and Fund pushed ahead with this path-breaking initiative. They were encouraged by their Boards, public opinion, and the Development and Interim Committees. Other creditors have been exten- sively consulted, many multilateral institutions have indicated their intention to support the initiative, and bilateral creditors in the Paris Club and elsewhere will play a significant part in this common effort. The Committee and its debates have served as an important stimulus to the institutions. Our regular meetings and communiques have served as valuable action-forcing events, and ministers have expressed their strong interest in resolving this difficult problem. This is, I believe, an excellent example of how the Committee, working closely with the managements and boards of the Bank and Fund, can have a significant impact. I wish to use this occasion to thank the Bank and the Fund as well as the bilateral creditors and other international financial organizations that have cooper- ated to make this initiative possible. There are previous examples in the Committee's history, as with the establishment of the Global Environment Facility, or the creation of the Special Facility for Sub-Saharan Africa. We look forward to more frequent opportunities to play a similar role in the future on behalf of all members of the Bank and Fund.

Strengthening the Committee My second point is that for issues of significance, such as the HIPC initiative, to be properly addressed by the Committee, radical changes in our operating procedures were needed. In the past year, we have made such changes. Most important to strengthening the Committee is the careful selection of major policy issues that deserve ministerial consideration. These are drawn particularly, but not exclusively, from those issues high on the World Bank's agenda. This approach was agreed upon by ministers last October, along with ten other points designed to enhance the effectiveness of the Committee. One bold step was to eliminate the lengthy plenary session during which all ministers and a number of other speakers read prepared statements, thereby taking an entire morning without opportunity for discussion. By eliminating most of the plenary, we now concentrate on debate in a more restricted session. This has worked well, and ministers exchange views and interact with their colleagues on matters of substance. One result is a rather short communique, focusing on the key issues. We also have an additional luncheon session that is not reflected in the communique—an opportunity for ministers to discuss with Mr. Wolfensohn

©International Monetary Fund. Not for Redistribution 36 SUMMARY PROCEEDINGS, 1996 major issues he faces in managing the Bank, in a setting limited to only Committee members and Mr. Camdessus. The progress made so far is considerable and widely recognized. I was pleased, for example, that the Group of Seven Summit in Lyons concluded that "the reform of the Development Committee has made it possible for ministers from developed and developing countries to consider issues together and provide guidance for the institutions." We shall, of course, keep our procedures under continuous review in order to make the Committee an even more valuable forum.

Other Issues Considered by the Committee The Committee remains, as its formal title suggests, very concerned about the transfer of resources to developing countries. At each of its recent meetings, for example, it has addressed the importance of achieving a significant level of funding for the International Development Associa- tion (IDA); it has urged IDA donors to continue the strong multilateral support that has always been a key feature of IDA. While welcoming the IDA-11 $22 billion agreement as a significant achievement under difficult circumstances, the Committee recognized that the reduced share of donor contributions in this total was a matter of concern. As a result, they have agreed to focus attention in April 1997 on establishing a stronger foundation for IDA in the future. Another important feature of the Committee's work was its Task Force on Multilateral Development Banks, chaired by Arab Fund Chair- man Mr. Abdlatif Al-Hamad of Kuwait. This group of distinguished officials, appointed by the Committee in 1994, reported to the Committee in April, 1996; it provided, for the first time, an overall assessment of the five multilateral development banks (MDBs). Ministers considered the report an excellent analysis of the importance of multilateralism and the role MDBs play in a rapidly changing world. Ministers urged the MDBs to act upon the relevant recommendations, as a matter of priority, to further strengthen their policies and practices. Ministers looked forward to hear- ing from the MDB Presidents in April 1998 on progress achieved in implementing the Task Force's major recommendations. Two additional highlights of this past year illustrate the Commit- tee's interest in other parts of the UN family. The Secretary General addressed the Committee in October 1995 to mark the fiftieth anniversary of the United Nations; at this same session, the Committee reviewed the implications of the UN Social Summit in Copenhagen. Yesterday, we heard from Mr. Renato Ruggiero, Secretary General of the World Trade Department; the Committee recognizes the important links between trade, investment, and development, and will undoubtedly return to consideration of related issues in the future.

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Conclusion As we look ahead, we anticipate continuing to address issues of central importance to the Bank and Fund, and the broader development community. We believe the Committee now has a strengthened structure and format that encourage ministerial consideration of, and guidance on, important issues. There is a growing interest by members in the Committee's work. We seek to further strengthen the Committee and its effectiveness in the future by building on the experience gained from each meeting.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE REPUBLIC OF ARMENIA

HrantA. Bagratian

Since independence, the Republic of Armenia has been at the forefront of reforms among the republics of the former Soviet Union. In 1991, Arme- nia was the first republic to privatize land. This was followed by liberalization of the prices of most goods and services, and privatization of small enterprises. However, these early successes could not be consolidated until the spring of 1994, owing to the siege conditions imposed by war and blockade. The cease-fire agreement over the Nagorno Karabagh conflict gave us the opportunity to reenergize the reform program. Since then, negotiations over a long-lasting peace have progressed steadily. Let me reiterate here Arme- nia's commitment to a peaceful settlement of the conflict over Nagorno Karabagh. Progress in negotiations has been complemented by other positive political developments in the Caucasus region, which speaks well for Armenia's future economic growth. For instance, there are good prospects that key trading routes will reopen in the near future and that greater stability in Georgia will continue to ease Armenia's isolation. In addition to the improved external environment, the acceleration of economic reforms was supported by political continuity. Since independence, the country led by President Ter-Petrossian has pursued a policy of building and strengthening national institutions. In July 1995, the first post-Soviet constitution was approved by plebiscite, and parliamentary elections were held. On September 22, 1996, President Ter-Petrossian was reelected for another five-year term.

The Main Achievements The government's economic reform program has been highly successful on both the stabilization and structural reform fronts. Inflation has

©International Monetary Fund. Not for Redistribution 38 SUMMARY PROCEEDINGS, 1996 fallen sharply, and after three years of steep decline, growth of 5.4 percent was recorded in 1994 and 6.9 percent in 1995. GDP growth for 1996 is expected to be around 5 percent. Prices have been liberalized, energy subsidies reduced, and payment discipline in the energy sector increased. Clear- ing trade has been abolished and foreign exchange surrender requirements eliminated. Over 3,450 small-scale enterprises and about 900 medium and large enterprises have been privatized. And key pieces of economic legislation, such as the 1995 Real Property Code, have been approved. Armenia has made impressive strides in the area of macroeconomic stabilization. After the introduction of a national currency, the government began to tighten financial policies in early 1994. Public expenditures were limited to priority items, and revenue collection was increased. Central bank financing of the fiscal deficit was curtailed. Interest rates on central bank re- financing of commercial bank credit were allowed to become highly positive in real terms to further restrain monetary growth. In December 1994, fiscal and monetary restraints were reinforced by an elevenfold increase in the price of bread and the consequent elimination of a substantial part of the bread subsidy, which was estimated to equal 12 percent of GDP in 1994. As a result of these measures, the fiscal deficit declined from 48 percent of GDP in 1993 to 16.4 percent of GDP in 1994, and to 8.7 percent in 1995. Inflation has fallen sharply. In 1995, inflation averaged 2 percent a month, as compared with 46 percent a month in the first quarter of 1994. Inflation has averaged around 1 percent a month in 1996. This has been accompanied by broad stability in the nominal exchange rate. There are also signs that external adjustment is beginning: the current account deficit, excluding official transfers, declined to 26.4 percent of GDP in 1995, from 35.5 percent in 1994. This has been accompanied by an accumulation of foreign exchange reserves equivalent to nearly one-and-a-half months of imports.

The Government Program and Remaining Challenges The primary objective of the next phase of structural reforms is to continue reorienting the state away from direct management of the economy. The emphasis of government policy will be on creating the conditions for the private sector to be the engine of growth in Armenia, while providing adequate social services and protection for the most vulnerable groups in society.

Trade and Clearing The government is aware that, given the size of the domestic market, increased exports will be key to sustaining the economic growth needed to improve living standards. It is therefore strongly committed to maintaining a free trade regime. All restrictions on exports have been removed, and protection for domestic producers greatly reduced. At present, the import

©International Monetary Fund. Not for Redistribution ARMENIA 39 tariff has only two rates, zero and 10 percent. Furthermore, the government is committed to early accession to the World Trade Organization, and will aim to participate in the most important agreements. No new nontariff import or export restrictions will be introduced. Clearing trade arrangements have been discontinued, and the government is no longer involved in gas- related barter. Gas importers are allowed to operate only on a commercial basis. Export trends are encouraging. Estimates for 1995 suggest export growth of 22 percent over 1994 levels; at the same time, export data show successful diversification into nontraditional markets.

Energy Sector Policy The reform of energy sector policy and institutions has a key role to play in reshaping the Armenian economy. The government has therefore initiated a fundamental reform of the sector. During 1996, electricity tariffs will be raised in stages until full cost recovery is reached. Collections targets of at least 75 percent of supply have been established for end-1996 to reduce the very high level of nonpayment.

Privatization Privatization is seen by the government as essential to accelerating enterprise adjustment, to improving corporate governance, and to reducing the pressure for subsidies. While the privatization targets for 1995 were not fully achieved, the pace of privatization increased throughout the year. The government is committed to continued acceleration without losing the competitive and transparent structures and techniques that have been developed to date. The Privatization Program for 1996 has been built on the 1995 experience. The 1996 program includes over 650 medium- to large-scale enterprises and the approximately 2,000 remaining small enterprises.

Financial Sector An effective financial intermediation system is key to the mobilization of resources and the development of the private sector. However, at present, the Armenian financial system is unable to play this role. Many Armenian banks are in a serious financial condition and are committed to taking actions to correct this situation. With the assistance of the World Bank and the IMF, a rehabilitation strategy has been designed to produce a healthier banking system. This strategy seeks to differentiate between viable and nonviable banks, and to ensure that the former are given all available assistance in building themselves into strong organizations and that the latter are either restructured or closed in an efficient manner.

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Social Safety Net The government's social safety net strategy involves moving progressively from generalized subsidies to targeted benefits, with a medium-term goal of relying primarily on income-tested poverty benefits to protect vulnerable groups in society. To achieve that goal, the government is improving targeting by category in the short term while developing the information base for incomes testing. To consolidate the gains achieved from the flattening of the state pension structure in the 1995 Pension Law, the government is preparing legislation to regulate private pension schemes in order to facilitate their emergence to supplement the state system. The government has also prepared a draft Employment Law, which will regulate unemployment problems, including unemployment registration, unemployment benefits, and job provision.

Economic Prospects and External Financing Needs The program of measures I just described should help lay the basis for a sustained economic recovery. As the reform program deepens, output should continue to grow to around 6 percent a year. Growth is expected to be led by export demand both in former Soviet Union markets as those economies recover, and by increasing penetration of nontraditional markets, such as the Middle East and Europe. The expansion and diversification of exports would be stimulated by improvements in the incentives framework induced by the reform program. Infrastructure investments designed to overcome Armenia's poor transportation and communications connections with neighboring countries will be key to facilitating growth in external trade. Export growth is expected to come primarily from light industry and agroprocessing, which currently represent around 55 percent of export revenues. The importance of heavy industry, which fell from 46 percent of GDP in 1990 to 39 percent in 1995, is likely to continue to diminish due to the increased real price of energy and other inputs. The satisfaction of the previously repressed demand for services in the domestic market is also likely to make a major contribution to growth. Value added in the services sector grew by over 70 percent in 1994 and by nearly 40 percent in 1995. Further growth of 10 to 15 percent a year is projected for the sector over the medium term. Investment in new capacity will play an increasing role in generating growth as the potential for expanding capacity utilization is gradually exhausted. Armenia's investment rate would need to rise from its present level of 9.4 percent to around 13 to 14 percent by the year 2000, in order to sustain the projected growth path. This would occur as private sector confidence, both domestic and foreign, responds to the improved investment climate, and as the financial sector plays a more effective role in channeling savings into investment.

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Sustained economic recovery is contingent on the availability of sufficient external financing. Since the country's investment and spending needs cannot be wholly financed out of domestic resources, substantial additional flows must be mobilized from foreign sources. Without such external support, there is a risk that the reforms could entail an unsustainable level of poverty for the population. In the near term, significant balance of payments assistance will continue to be needed. However, external capital inflows are also critically needed to underpin the reforms in the energy sector, investments in transport infrastructure, and the reforms in health and education. To this effect, the substantial humanitarian aid Armenia has been receiving on a grant basis is expected to be progressively replaced by development lending. This would help consolidate the investments in infrastructure and human capital that are needed to support economic growth over the medium term, and to deliver a sustained increase in the living standards of the Armenian population.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR AUSTRALIA

Peter Costello

I take the opportunity of this annual meeting to warmly thank Jim Wolfensohn and Michel Camdessus for the leadership that they have brought to their respective positions over the past year. We assure them of our continuing support—Michel as he commences an unprecedented third term as Managing Director of the Fund. I join with others in welcoming Bosnia and Herzegovina to the Fund and the Bank. There has been important progress on a number of fronts in the past 12 months: • We are close to finalizing new arrangements for the IMF to borrow from its members. This will greatly enhance the Fund's financial position in handling large demands in emergencies. • The Fund's approach to surveillance has been greatly strengthened, including through the data initiative. • Under difficult circumstances, funding for the International Devel- opment Association (IDA) for the next few years has been settled. • A historic agreement has been reached on a framework for debt relief for the heavily indebted poor countries, with the World Bank and the Fund playing a central role.

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• And the process of reforming the World Bank has been given new momentum. These developments show a vitality in the IMF and the World Bank, and demonstrate their effectiveness in facilitating international cooperation and achievement.

Partnership for Sustainable Global Growth The Declaration of the Interim Committee is described by the Man- aging Director as the 11 commandments. He emphasized four principles: fiscal consolidation, structural reform, responsible management of public affairs, and ensuring strong financial systems. He stressed the need to achieve budget balance and strengthened fiscal discipline in a multiyear framework. None of this is easy. But it is important for us to accept the challenge. In Australia we have. We have announced and are now implementing a fiscal strategy with a multiyear framework, which will balance our budget in 1998-99. We are implementing structural policies and labor market reform that are complementary and mutually reinforcing. As the declaration observes, together these policies will establish conditions for growth, employment, and rising living standards.

New Arrangements to Borrow (NAB) I am particularly pleased that Australia has been able to play a constructive role in the design of the New Arrangements to Borrow. Their formal establishment as the Fund's principal borrowing facility will be a milestone for the institution and the international monetary system. The NAB will enhance the Fund's ability to safeguard the international monetary system. Importantly, the new facility will be open to all Fund members that have the capacity, and are willing, to support the international monetary system and participants will have equal rights and responsibilities. These two features will do much to ensure that the arrangements have the broad support that will make them a central element in the management of the international financial system into the next century. The wider participation of member countries in the NAB appropriately reflects the changing structure of the world economy.

The Heavily Indebted Poor Countries (HIPC) Initiative The measures that have been developed to assist the heavily indebted poor countries have both economic and humanitarian dimensions. They will remove the burden of unsustainable debt and help raise living standards and reduce poverty. They will lift constraints on economic policy that will allow the countries benefiting an opportunity to set up longer-

©International Monetary Fund. Not for Redistribution AUSTRALIA 43 term development and economic growth to make inroads against want and misery. It is important for the success of this initiative that those countries that qualify use the opportunity to address their fundamental economic problems to lay the ground for permanent improvement. That is why the demonstration of a clear track record of sustained economic reform is required before debt relief is provided. There will also need to be a firm political commitment to undertake the further economic reforms required. The framework developed by the IMF and the World Bank is based on these important principles, and on ensuring that the resources available for debt relief are used most effectively. Australia supports an extension of the Enhanced Structural Adjust- ment Facility (ESAF) as the central plank of the IMF's contribution to the debt initiative. We are also willing to consider returning our refund of con- tingency reserves as a bilateral contribution to ESAF. I would like to applaud the lead role taken by the Bank in earmarking US$500 million from its net income as its initial contribution toward the debt initiative and its willingness to consider further contributions, while not losing sight of other demands on its net income. I also welcome the in- dication by the Paris Club, of which we are a member, that it will provide debt reductions of up to 80 percent for countries qualifying for additional relief under this initiative. Other multilateral institutions and bilateral creditors with large stakes in the heavily indebted poor countries will also need to play their part.

World Bank Reform In March, the Task Force on Multilateral Development Banks reported to the Development Committee. The implementation of the recommendations must continue to be a matter of priority for the boards vand managements of the five banks. I welcome the fact that the banks have begun to implement some of the task force's recommendations. The task force emphasized the importance of being cost conscious. Governments around the world are under significant pressure to reassess and reduce their own costs. International institutions must accept the same scrutiny. Costs are, of course, part of transacting the operations of the banks. But in the end, the higher the costs the less finance is available for the important lending of the banks. Mr. Wolfensohn, to his credit, has already made progress in reforming the World Bank in a wide variety of areas. He has stressed today how he plans to make it results oriented and match best private sector practice. The renewed commitment to quality and to strengthening accountability for results is very welcome. Cost control, education, training, and management will make the Bank stronger.

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The World Trade Organization (WTO) The completion of the Uruguay Round marked the beginning of a new chapter in trade relations—it underscored the stake of the developing countries in promoting free trade and extended the ambit of multilateral trade negotiations to sectors such as agriculture and services. We need to maintain the momentum of globalization and to ensure that all countries benefit from the globalization that is taking place. As Mr. Ruggiero reminded the Development Committee yesterday, trade is an important engine to growth. One of the main priorities for the forthcoming Singapore ministerial meeting should therefore be to ensure that the market access gains from the Uruguay Round are delivered and consolidated. But greater cooperation between agencies is also important. The Fund and the Bank have been working with the WTO on formalizing their working arrangements. I hope that agreement can be reached on this without too much delay. Access to the benefits of trade, and domestic policies that maximize the sustainable gains from that access, will do most to improve economic welfare for both developing and industrial countries. These are our goals: economic development, sustainable growth, a stable and open financial system, and responsible policy. These are the goals of the Australian government and this is our determination—to implement them.

STATEMENT BY THE GOVERNOR OF THE BANK FOR AUSTRIA

Viktor Klima

This fall of 1996, Europe's economy presents itself in a puzzling state. While some of the fundamentals, like inflation and interest rates, are low and decreasing further, growth and especially employment performance show disturbing weaknesses. Business and consumer confidence are still pessimistic on balance, even though some indicators point to renewed optimism. There are signs that the pace of economic recovery is picking up; at the same time, there are signs that in some countries renewed growth is not yet in sight. However, most indicators point to the fact that the downward trend, which set in more than a year ago, has at last come to a halt. In this situation, the recent signals coming from the European central banks have been helpful in stabilizing expectations and in giving an additional boost to investment.

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Within this picture, the Austrian economy shows an above-average degree of robustness. In spite of the fact that the sizable consolidation package presented to Parliament this spring now begins to take hold, consumer spending has been quite buoyant (especially for durables), and investment activity has accelerated significantly. The rationalization and modernization requirements that the Austrian production and service sectors face in light of the recently increased competitive pressures from firms in the European Union and from the central and eastern European reform countries, have led to an expansion in investment demand. Unfortunately, rationalization investment does not stimulate the demand for additional labor in the investing firms, thus the production sector continues to shed employment. Overall, by international comparison, the Austrian unemployment rate is very low, however. At 4.1 percent it stands at less than half the European average. Nevertheless, the situation is not one to be complacent about, since labor supply keeps growing while employment opportunities remain scarce and the number of registered unemployed is rising. Therefore, it is all the more important that the "partnership for sustainable global growth," which we discussed in the Interim Committee, stresses policies that not only establish the conditions for sustained noninflationary growth, but also contribute to job creation and social cohesion. At this time, domestic policy priorities combine the need to consolidate our government budget further with the need to solve labor market problems and the required restructuring of our economy in the face of globalizing economic competition. While this policy mix successfully as- sures that both budget consolidation and growth and employment targets can be balanced, it does not leave space for expansionary policies of the traditional type. The Austrian economy, being heavily dependent on trade with its European partners, needs growing export markets in order to return to a path of sustained economic growth. Our consolidation strategy, which involves reducing the general government budget by around 4 percentage points of GDP within only one and a half years, has proven to be successful. Recent data show that the consolidation process is right on track, not only at the federal level, but also at the level of the states and communities. Our determination to fulfill the Maastricht stability criteria in order to join the European Monetary Union in the first round is as strong as ever. Now it is corroborated by empirically justified optimism that we will reach this ambitious target. The Austrian government's efforts to consolidate the budget impose significant burdens on wide segments of the population. In the short run, this leaves a strain on economic performance. We see already, however, that this strategy pays off and that we will be able to reap its rewards in the years to come. Short-term sacrifices will be turned into longer-term gains. The Austrian population understands and supports this course. The international financial markets honor it. We are on the right track.

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The international community has managed to refine the instruments for preventing and coping with international financial market turbulence. Work on two of the major conclusions drawn from the Mexican crisis has now been completed satisfactorily. First, through the strengthened and improved data standard made accessible since mid-September on the Internet, the markets can get better data in a timely way, and possible market disturbances as a result of inadequate information can be avoided. Austria is one of 34 industrial and developing countries that have already subscribed to this standard and committed themselves to meeting its requirements. I should also add that it is not only the IMF that is getting more modern in this way, but also a number of member countries, including industrial countries that have to modernize and remodel their sometimes antiquated and sleepy statistical bureaucracies in the wake of this international policy initiative. Second, the negotiations on expanding the present General Arrange- ments to Borrow (GAB) into the New Arrangements to Borrow (NAB), by including a number of new participants, have been completed in all important aspects and are ready for acceptance by the respective authorities and parliaments. The international financial system is thus in a better position to withstand possible challenges of a systemic nature than in the past. We are reassured by the fact that the NAB not only constitutes an increase in financial resources but also manages to maintain an efficient organizational mechanism in the form of the IMF's acting as the secretariat of the arrangements. We also feel that the establishment of the NAB represents a necessary adjustment and diversification of the circle of responsible countries to the new realities of global financial markets, which are no longer limited to the Group of Ten countries. In this sense, the NAB is the beginning of a new, more transparent and less exclusive era in international financial relations, in official policy dialogue and coordination, as well as sharing of responsibility. At the same time, it is clear that the successful completion of NAB negotiations cannot obviate the need for strengthening the IMF's quota resources, as the NAB's use would be limited to systemic crises and would not be available for regular Fund operations. Here, while the IMF's liquidity ratio seems comfortable for the time being, caution would call for an early completion of the Eleventh Quota Review in order to meet potential demands for Fund resources. I hope we will be able to make more progress on that score in the coming months than has been the case so far. While progress on the Quota Review to date falls short of policy requirements, the signs of a resolution of the open and protracted SDR issue along the lines of a special allocation are very promising. We need to recognize the spirit of compromise shown by the developing countries in that respect. It is now up to industrial countries to take the next step and take up elements of the compromise proposal made by the Managing Director. The Executive Board and the Interim Committee have spent a considerable amount of time on resolving issues related to the heavily in-

©International Monetary Fund. Not for Redistribution AUSTRIA 47 debted poor countries (HIPC) initiative and the continuation of the En- hanced Structural Adjustment Facility (ESAF). The results of these deliberations have been acceptable and fruitful in many respects. In particular, we now have the necessary consensus for starting the HIPC initiative operations and the contours of an agreement on the ESAF. However, I would still like to raise my concerns about an eventual sale of gold for the financing of ESAF. In my view, in a monetary institution recourse to gold sales should be only in times of an emergency situation. The reserves of the IMF should not be used for raising funds for a loan facility of the Fund, however justified the financing needs of the recipient countries may be. For good reasons, ESAF I and II were financed out of bilateral contributions, and we should not depart from the sound rea- soning underlying our previous ESAF financing philosophy. But above all, I fear that by accepting gold sales we will legitimize a further major shift away from bilateral to multilateral development assistance, a policy move that might strain the IMF's role in the years to come. With regard to the World Bank Group, I would like to congratulate President Wolfensohn for the very able leadership he showed in many ways during his first year. Under his guidance, the World Bank took an outstanding role in bringing the HIPC debt initiative toward its present state of solution. In the context of the Bank's engagement in postconflict situations, I very much appreciate that—after some initial infighting among the international institutions involved—under the leadership of the Bank, progress in the assistance to Bosnia for economic reconstruction is now becoming visible. While I welcome these initiatives, I regret that, despite the serious efforts of the institutions under the leadership of the new president, to improve their operational activities, the agreement on IDA-11, which was welcomed last spring, now falls structurally short due to considerable cutbacks by the largest contributor. In the context of the future role and the funding principles of multilateral aid, it is of utmost importance that all donors ensure the success of IDA-11 by fully respecting their commitments on time. I would like to use this opportunity to remind ourselves that, in addition to the valuable and important efforts to support the poorest countries through various instruments, there is the World Bank itself, which, according to its Articles of Agreement, is supposed to help borrowing countries to improve the living standards of their people. This main purpose of its existence has to remain at the core of its activities, and the financial power of the World Bank should not be seen primarily as an instrument to substantially relieve large donors of their bilateral obligations. I urge the Executive Board to consider carefully the interdependencies of the operational needs of borrowing countries and the desired level and use of the Bank's net income in order to avoid a situation where borrowing countries, in particular smaller borrowing countries, are left alone in their endeavor

©International Monetary Fund. Not for Redistribution 48 SUMMARY PROCEEDINGS, 1996 to improve economic circumstances in their countries. In conclusion, I would also like to inform you that Austria intends to join the Multilateral Investment Guarantee Agency (MIGA) during the coming calendar year.

STATEMENT BY THE GOVERNOR OF THE BANK FOR BANGLADESH

Shah AM.S. Kibria

It is indeed a great pleasure and privilege to address the 1996 Annual Meetings of the Board of Governors of the World Bank and the IMF. I take this opportunity to extend to you, Mr. Chairman, my warmest felicitations on your election as chairman of this august body. My country, Bangladesh, itself has gone through fundamental changes in terms of both political and economic policy during the last two and a half decades. Established as an independent and democratic state in 1971, Bangladesh went through traumatic experiences of a military coup d'etat and the assassination of the founder of the state, Father of the Na- tion Bangbandhu Sheikh Mujibur Rahman, which weakened—if not destroyed—the foundations of democracy. The effort to build up a democratic political system was further stymied by authoritarian use of the government's power and manipulation of elections. In response to popular demand for fair and free elections under a neutral caretaker government, the constitution was amended to provide for elections under a nonparty neutral caretaker government. The present government took office on the basis of the free and fair elections held on June 12, 1996 that were acclaimed throughout the world. Seventy-three percent of voters exercised their right of franchise, with a high proportion of participation by female voters, reflecting political maturity as well as awareness among women. The present government represents secular and liberal political be- liefs. It intends to establish a democratic system on strong foundations that can be ensured through broad participation by the citizens in all spheres of public life. To establish a stable democracy, the government has already initiated reforms in the following areas: • The parliament has been assigned the central role in the process of governance and accountability. The government has sought broad societal consensus in all critical issues and policies within the parliament as well as the larger civil society. • To make the parliamentary system effective and the government transparent and accountable, parliamentary committees are being set

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up headed by members of parliament from both treasury and opposition, who are not ministers. As our experience shows, parliamentary committees headed by ministers, as in the past, cannot establish accountability of the government. • Representative local government institutions will be restored soon with a view to decentralizing power and enabling the communities to take decisions in matters of local public interest. • The judiciary shall be separated from the executive branch of the government. An independent and efficient judicial system is the foundation for democratic governance, which is the prerequisite for the rule of law. • The government is committed to the removal of corruption and rent- seeking through a series of measures including an independent judiciary, representative local self-government, and deregulation and liberalization in the economic sphere. The present government in Bangladesh, under the leadership of Prime Minister Sheikh Hasina, has adopted an economic agenda based on market and export-led growth in an increasingly integrated world. The fundamentals of our economic development strategy, based on growth with social justice, include: • a high growth rate rising to 7 percent per annum from 5.5 percent by the end of the century, to be sustained by adequate investment at 16-20 percent of GDP; • alleviation of poverty and improvement of the quality of life of the people to be achieved through rapid development; • maintaining macroeconomic balances and stability through prudent management of the budget and balance of payments, and noninflationary growth; • expansion and deepening of deregulation and liberalization of the economy, the design and speed of which will be adapted to our specific conditions; and • expansion of economic space for private investment, including foreign investment, through appropriate regulatory reforms and incentives. The goals of social and economic development that I mentioned just now are realizable, given committed political leadership. Further, we also expect that opportunities for rent-seeking and corruption will diminish as a result of deregulation and liberalization in the economic sphere, reinforced by transparency and public accountability in the system of governance. Of late, there are alarming signs of a continuous decrease in the flow of concessional resources to developing countries. The official development

©International Monetary Fund. Not for Redistribution 50 SUMMARY PROCEEDINGS, 1996 assistance (ODA) to developing countries fell in real terms for six successive years. Official assistance from Development Assistance Committee (DAC) countries amounted to about 0.27 percent of their combined GNP— the lowest ratio since the United Nations adopted a target of 0.7 percent in 1970. The decrease in the flow of resources has impeded the development of both physical and social infrastructure in most developing countries, particularly the least developed countries. Enhanced private flows did little to help these countries. According to available data, only eight developing countries accounted for two-thirds of foreign direct flows in 1990-93, while half of all developing countries received very small amounts, if any. Obviously, foreign direct investment is attracted to areas with well-developed hard and soft overhead. Most developing countries will have problems in the short to medium term in mobilizing the resources necessary to build and maintain the minimum physical and social overhead required for sustainable development. For instance, to contain population growth and provide minimum health care facilities, expenditure on health alone in developing countries will have to be increased fourfold. Reduction of concessional flows from the industrial societies to developing countries will therefore pose a threat to the sustainable growth of the latter. In this context, I would like to draw your attention to the difficult process of the International Development Association's (IDA's) eleventh replenishment. IDA continues to be the world's most important channel for providing concessional financing to the 79 low-income developing countries with a total population of more than 3 billion. IDA embodies the commitment of the industrial countries to foster economic growth, social development, and better living conditions for the people in the poorest countries. Adequate funding for IDA's operations is necessary to meet this commitment. We welcome the agreement reached at the meeting of donors in Tokyo on March 19, 1996, which will allow concessional lending of US$22 billion during July 1996 to June 1999. The funding commitment for ID A-11 is far less than that of ID A-10. The carryover from ID A-10 will, to some extent, augment IDA's lending resources. It is only a temporary solution, and IDA will continue to be seriously constrained financially to help developing countries in their development efforts as well as in their reform programs. A mechanism needs to be evolved to eliminate uncertainty about the funding of any future replenishment, which is essential to preserve IDA's multilateral character and its capacity to raise resources to sustain concessional lending at an adequate level. The world economic outlook indicates signs of new opportunities— uninterrupted growth with subdued inflation and accelerated expansion of global trade accompanied by relative calm in the foreign exchange market. There are, however, lurking dangers, particularly in respect to the developing countries. Nontrade barriers, including demands for unrealistic labor standards, may impose new forms of protectionism that will constrain the

©International Monetary Fund. Not for Redistribution BANGLADESH 51 expansion of exports from developing countries. The social and political order in many industrial countries is vulnerable to destabilization because of hard-core poverty and a rise in the absolute level of unemployment. In a number of developing countries, current account deficits are projected to widen reflecting the growth of domestic demand and the volatility of commodity prices. The IMF will have to play a more active role not only in en- forcing surveillance and policy imperatives but also in providing additional resources. In this context, we welcome the initiative to make the Enhanced Structural Adjustment Facility (ESAF) a continuing facility. I am happy to report that Bangladesh has decided to contribute $1.2 million to ESAF, despite our resource constraint. We also hope that appropriate measures will be taken for an equitable SDR allocation and the Eleventh General Review of Quotas, preferably on an equiproportionate basis. Reforms and restructuring are difficult processes, though admittedly necessary. There is no unique prescription or panacea for all problems for all countries. Programs for reforms, therefore, need to be based on contex- tually specific and realistic assumptions. More importantly, the relevant countries should have a greater role in designing the reform program, which alone can ensure a sense of "meaningful ownership." This is ig- nored all too often, which not only results in incomplete or incoherent reforms that fail to deliver the promised benefits, but also causes political instability and social unrest. It is unnecessary to mention that political stability and "ownership" are essential for policy and structural reforms. I would, therefore, emphasize that the Bank and the Fund take into account the political and economic realities in designing reform programs and the associated conditionalities. Rigidities in the technical details of conditionalities—which are liable to bureaucratic interpretation—are also likely to be counterproductive; what is required is a realistically designed and con- textually specific set of reform packages. The world stands at a critical juncture of history. On the one hand, there is almost universal recognition of the validity of liberal political and economic order; adequate resource support is necessary to restructure several societies on these lines. On the other hand, the resources available to the developing countries are getting smaller in relation to what has been available in the past, not to speak of the increased demand. The industrial countries will do well to recognize the historical implications of the decision they would take today, which will deeply influence the course of history of the world tomorrow. I would urge fervently that the Governors remain sensitive to their historical role. In concluding permit me to reiterate the strong commitment of the government under the leadership of Prime Minister Sheikh Hasina to improve the conditions of the people of Bangladesh, the vast majority of whom live in poverty, and to implement the necessary reforms toward that goal. Devel- opment cooperation will help us achieve that cherished objective.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR BELGIUM

Philippe Maystadt

One year ago, speaking to this same gathering, I emphasized the importance of providing adequate financing for development. Such support is essential for promoting the adjustment efforts of the poorest countries and improving the chances that they and their peoples have of taking their places in a rapidly globalizing economy. Today, I am pleased to see what has been accomplished since last year. Negotiations on replenishments for International Development Asso- ciation (IDA) and the African Development Fund have been brought to their conclusion; the IMF and the Bank are in the process of organizing financial support with a view to providing the poorest countries with additional debt relief; and the Paris Club has announced that it will now be able to provide debt cancellations of up to 80 percent. I would like to take this opportunity to pay tribute to Mr. Michel Camdessus and Mr. James Wolfensohn for the decisive roles they played in bringing about the necessary consensus. Although the prospects for financing may be better today than they were last year, it is no less true that many difficult challenges still remain. • First, the promise to provide more resources to assist the poorest countries must be followed up by tangible measures, and we are under an obligation to produce results. • Second, it is by no means enough to supplement the actions of the "invisible hand" of market forces by showing support for the poorest countries; in addition, we must ensure that all member countries abide by the same code of conduct. This is the only way to ensure that globalization will continue to be a force for progress in the world economy.

An Obligation to Produce Results Ten years ago, in August 1986, the IMF Executive Board approved the first arrangement ever to be supported by the structural adjustment facility. The intention of the Fund—under the leadership of Mr. Camdessus—was to assist the poorest countries by offering them a new adjustment mechanism that would be better suited to addressing the underlying causes of their economic problems. For the first time, the revitalization of growth and the implementation of social reforms became priorities for the Fund in its activities in the developing countries.

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Now, ten years later, the agreement just reached on financing a continuation of the Enhanced Structural Adjustment Facility (ESAF) and the Fund's participation in the debt initiative serve to confirm our commitment to this task. It is my hope today that in another ten years this agreement will be remembered as the decisive step in removing the debt burden from those low-income countries that are undertaking serious adjustment and reform programs. In other words, the new initiative must achieve the same degree of success as the 1989 Brady Plan. Even though the countries involved in the two initiatives are different (in the former, middle-income countries severely indebted to commercial banks; in the latter, poor countries heavily indebted to bilateral and multilateral creditors), the objectives in both cases are identical: to reduce the debt burden on the countries concerned, restore confidence in the future of these countries, attract private capital flows back to them, and reestablish economic growth. Much is at stake. It is absolutely essential for us to succeed, and the Fund and the Bank have a direct responsibility in this matter. Programs must be drawn up to enable the poorest countries to achieve higher growth rates, and I attach considerable importance to the current evaluation of ESAF-supported programs, to be discussed by the IMF Executive Board in the spring of 1997. This will provide a unique opportunity for learning from the experience acquired since the ESAF was established, and adapting the ESAF to meet current needs.

The Uncertain Future of Multilateralism Neither the official launching of the new debt-relief initiative nor the commitments obtained for financing it should make us forget that multilateralism faces an uncertain future. There is a clear reminder of this in the current negotiations on the replenishment of the Asian Development Fund. With contributions from the United States and other major industrial countries declining in recent years, the multilateral development assistance system has been plunged into uncertainty. The ad hoc measures recently adopted in the context of IDA and the African Development Fund ought not to be repeated, for fear of triggering a return to certain forms of bilateralism. As decisions for the long term should not be taken in a climate of ten- sion and turmoil, no country should be denied the right to adjust its role within the multilateral system, insofar as burdens are duly shared and responsibilities allocated on the basis of objective criteria. The goal, therefore, should be to devise appropriate methods for ar- riving at suitably objective criteria, while identifying the best way to ensure that countries can participate fully in the multilateral effort to the extent their resources permit, while honoring their future commitments. As far as these countries are concerned, it is clear that the fast-growing emerging economies, which have benefited from trade and market liberalization,

©International Monetary Fund. Not for Redistribution 54 SUMMARY PROCEEDINGS, 1996 will be called upon to play an increasingly important role in this process. Preliminary evidence of this is provided by the fact that some of these countries are taking part in the New Arrangements to Borrow. This trend is a precursor of the new international economic order that is expected to emerge in the next century. The emerging economies, as the chief beneficiaries of economic globalization, can be expected to take on new responsibilities within the framework of international institutions as well as in the financing of development assistance. If these countries should refuse to take their place alongside the traditional donors and lenders, I fear that the world economic system that will emerge in the next century could well be less supportive and more dangerous than the system that emerged at the Bretton Woods conference.

Abiding by a Code of Conduct In an increasingly interdependent world community, the task of achieving security and stability will be greatly facilitated if the governments of all countries of the world can abide by a code of conduct. This is essential if the development and prosperity of the majority are not to be en- dangered by the irresponsible actions of the few. To be sure, such a code of conduct would be focused on a wide variety of concerns. A random selection—and the list is by no means exhaustive—might be as follows: proper regard for the environment, nuclear safety, long-term peace, human rights, effective action against drugs and corruption, and international economic cooperation. There is no doubt whatsoever in my mind that last Sunday, a whole new dimension was added to the code of conduct that I have just described, a code of conduct that all the world's countries should agree to abide by. I am referring to the new declaration adopted by the In- terim Committee. As Michel Camdessus himself said yesterday, this is more than just another call to action. The adoption of this new declaration is a watershed for the following reasons: • First, the declaration sends a universal message; it provides additional proof that globalization has brought the peoples and governments of the world closer together in a way that would have been unthinkable only a few years ago. • Second, the declaration marks a sharp contrast to the usual "tunnel vision" approach, reflecting the wide-ranging and invaluable lessons learned as a result of the IMF's surveillance activity. • Third, I am convinced that those governments that endeavor to implement the declaration will have chosen the most reliable method of ensuring the prosperity of their respective countries. • Fourth, the declaration attaches particular importance to promoting good governance, ensuring adherence to the rule of law, and adopting

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firm measures to deal with corruption and money laundering. Not so many years ago, the Fund's "neutrality" would not have allowed it to declare that these principles of good governance are the "essential elements of a framework within which economies can prosper." • Last but not least, the new declaration entrusts the IMF with the task of overseeing the efforts that member countries make in these areas. Thus, in building what Michel Camdessus has referred to as an economy with "three hands" (which are law and justice, the market, and a spirit of community), an environment will be created in which the opportunities afforded by economic globalization outweigh the potential risks.

STATEMENT BY THE GOVERNOR OF THE BANK FOR BOSNIA AND HERZEGOVINA

Hasan Muratovic

I have a great honor to speak to you on behalf of the delegation of Bosnia and Herzegovina, and I am pleased to say that, this time, our delegation is represented in full, with representatives of the State, of the Fed- eration of Bosnia and Herzegovina, and of Republika Srpska. Thus, today I speak on behalf of this delegation of Bosnia and Herze- govina, a country just emerging from a devastating period of war and destruction, and entering a time for reconstruction and for investment in the future. The war has produced horrible social and economic effects: • more than 200,000 people were killed; • over one million people are still refugees abroad, while some 650,000 are displaced and homeless inside the country; • almost the entire infrastructure was destroyed or heavily damaged; • more than 30 percent of housing was devastated; • the war damage, in a country with 4.5 million inhabitants, exceeds US$80 billion; • the numbers of the disabled, orphans, and people dependent on humanitarian aid are huge; and • about 75 percent of the workforce is unemployed. Today, in Sarajevo, capital of Bosnia and Herzegovina, despite all of the assistance Bosnia and Herzegovina has been receiving from the world,

©International Monetary Fund. Not for Redistribution 56 SUMMARY PROCEEDINGS, 1996 with winter nearing, in more than half of the apartments there are no glass windows in a single room. Those windows are covered only by tattered plastic sheets. The situation in smaller towns and villages is far worse. Dozens of factories are ready to restart production, and thousands of workers might find employment, if credits of relatively small amounts of funds—totaling not more than a couple of hundred thousand U.S. dollars—could be provided for working capital. Nevertheless, we are all very happy that, with the efforts of the international community, and primarily the United States, an agreement for a fragile peace has been concluded. The first elections were held, as you are aware, with enormous organizational problems. We are now entering an extremely important period of setting up of the state structures, government, and institutions, in accordance with the Dayton Agreement. The Dayton Agreement and the elections have created a chance for stabilization of peace, and we are determined to continue with the reconstruction of the country. We here all understand that, without strong, long- term support, neither stable peace nor economic recovery is possible. On the other hand, the Dayton Agreement set up the conditions that must be respected if parties wish to receive international financial support. As a major tool of the international community it is necessary to continue with just distribution of the reconstruction assistance, in proportion to the extent of destruction and degree of compliance with the agreement, and not primarily on the basis of ethnic criteria. The international community has assisted, and continues to render assistance to, Bosnia and Herzegovina. Unfortunately, although this assistance is certainly remarkable from the donor standpoint, it has, nonethe- less, proved insufficient to bring about significant progress so far. Of US$1.8 billion pledged in grants and loans, less than one-half is in the implementation stage as of this day. Even for this part, the pace of implementation is slack due to the complexity of procedures and slow decision making. The world must act in Bosnia and Herzegovina with still greater determination. Allow me here to commend most highly the efficiency of the World Bank. Within a very short period, we succeeded in defining, jointly with the World Bank, fundamental strategies of our economic reconstruction, reprogrammed our old debts, and began using new loans. Let me state this quite clearly: without such efforts of the World Bank, the situation in Bosnia and Herzegovina would be catastrophic by now. Approximately one-half of the funds in implementation today in the reconstruction program of Bosnia and Herzegovina either came directly from World Bank loans or were mobilized with their great assistance. The World Bank also managed preparations for both donor conferences held so far. Here I wish to express our most profound gratitude and convey our respect to President

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Wolfensohn and the World Bank experts involved in programs for Bosnia and Herzegovina. Also, I would use this opportunity here to invite the donor countries to support projects of the World Bank for the reconstruction of Bosnia and Herzegovina through the provision of cofinancing of these projects. We are of the opinion that, in cooperation with the World Bank, we can make further quality progress through the securing of larger amounts of International Development Association (IDA) credits already for this year. Additional funds will be best utilized if given in a form of a new transition assistance credit (TAG). But I believe that we all here understand fully that the support of the World Bank alone is not sufficient to ensure full recovery of Bosnia and Herzegovina. Even stronger efforts must be made to expedite mobilization of the funds that have already been pledged. In addition, we are fully convinced that the donor conference for 1997 should take place before the end of this year. The major reason for implementation delays so far is the fact that this year's conference was held too late—in April 1996. For its own part, the government of Bosnia and Herzegovina has as- sumed the obligation to create conditions for using donor money in the best possible way. In order to ensure transparency, the government, in cooperation with the World Bank, continues to work on the establishment of a Procurement Monitoring and Auditing Unit. With the assistance of the World Bank and IMF, the payment system, Customs and Tax Administra- tion, Financial Police, Banking Supervision Agency as well as the Privati- zation Agency, and the systems of pension, disability, welfare and health care funds, have been set up. For the purpose of coordinating reconstruction throughout the country, a Reconstruction Cabinet has been established at the state level, and a complete structure for project implementation has been put in place. Here, unfortunately, I have to point out that a huge obstacle in implementation of the reconstruction program continues to be a lack of proper institutions at the level of the Federation, due to the existence of the Bos- nian Corat parastate, the so-called Herzeg Bosnia. Therefore, we shall need stronger international support so that the Federation will finally function in full. On the other hand, on the part of donors, complicated mechanisms of procurement slow down the process of implementation. Our expectations are that radical changes will occur in this field as well, in order to accelerate implementation of the projects. Together with the World Bank, we are working to develop a fund for banking guarantees in order to attract foreign investors. We welcome the decision of the Multilateral Investment Guarantee Agency (MIGA) Gov- erning Board, of September 14 of this year, on the basis of which Bosnia and Herzegovina succeeded to the membership of this organization. We

©International Monetary Fund. Not for Redistribution 58 SUMMARY PROCEEDINGS, 1996 hope that, as soon as next year, a special trust fund for Bosnia and Herze- govina will be established within this organization's framework. We also welcome the recently adopted decision by the International Finance Cor- poration (IFC) Board concerning the first project in our country, and we hope that its implementation will soon be under way. We also expect cooperation with the IMF in the establishment of a new central bank in the very near future and with swift introduction of a new single currency for Bosnia and Herzegovina soon afterwards. In the macroeconomic sphere, we shall implement policies aimed at reinforcing reintegrative trends in the country, at the same time ensuring economic growth in keeping with a future IMF program, which we intend to initiate as soon as possible. Fiscal policy will focus on preservation of monetary stability with avoidance of any borrowing at all government levels. Budget expenditures will be strictly monitored, with regular review of priorities and reliance on collected revenues with avoidance of any form of domestic borrowing, particularly in the wage and social contributions sector. Negotiations about the IMF program should start immediately. All conditions for an Enhanced Structural Adjustment Facility (ESAF) program have been fulfilled, and it is hoped that an agreement can be reached expeditiously. This is connected to the pressing need of Bosnia and Herze- govina for assistance in reducing foreign debts as a precondition for successful restoration of the country's borrowing power and for attracting additional funds for the reconstruction. Without significant writing off and reprogramming of debts under the most favorable conditions, it will be impossible to ensure long-term financing of the reconstruction. Very soon, this may destroy all results of past and present efforts of the international community in this area. Let me conclude by reiterating that Bosnia and Herzegovina needs urgent, more intensive and long-term assistance. At this time, it is indispensable to: • ensure quick reaction credit lines for rehabilitation of existing companies and the development of new ones. Only credit can restart the economy; • mobilize formerly pledged grants and loans; • urgently hold the next donor conference, in any case before the end of 1996, in order to agree on new priorities and find ways for their financing; • encourage foreign investors to invest in Bosnia and Herzegovina, and open credit lines to support them; • expedite IMF activities on the establishment of a central monetary institution and monetary system, and start implementation of an ESAF program;

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• resolve the issue of old debts; and • increase technical assistance to facilitate more effective establishment of the institutions. All this requires assistance of foreign experts and international institutions. For our part, we shall do everything necessary and everything in our power to speed up and facilitate resolution of these and other pressing problems. Let me reassure you, one more time, that the basic orientation and policies of the government of Bosnia and Herzegovina, despite the impending transfer of power and establishment of a new structure, will remain the same. This reconstruction program is the only hope for our country, and no government can fail to recognize it. But, even with all our determination, we shall continue to need and count on you and the international community as a whole—as much for political support to a united and sovereign Bosnia and Herzegovina as for funding and expertise needed in our economic recovery. I wish to convey to you here, and to all your associates, that we highly appreciate the enormous efforts and assistance extended to our country so far in this vastly complex undertaking. Together, we have done a great job, and I know that we shall all continue to do so. And, it is this knowledge alone that makes me certain that we cannot fail.

STATEMENT BY THE GOVERNOR OF THE FUND FOR BOSNIA AND HERZEGOVINA

Kasim Omicevic

When discussing Bosnia and Herzegovina, either in Sarajevo or in numerous international meetings all over the world, there are at least two essential facts to be respected. The first is the readiness of the people and citizens of Bosnia and Herzegovina to implement the General Framework Peace Accord for Bosnia and Herzegovina, including all of its annexes and elements. The second is the need for significant support of the international community to restore peace and renew and reconstruct the country on the basis of this peace accord. Since the cessation of hostilities, Bosnia and Herzegovina has directed all its activities and available resources to preserve peace and, parallel to the establishment of democratic institutions, to start economic recovery and revitalization.

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The key causes of a very difficult postwar economic and social situation in the country will be alleviated or partly removed only over the medium term. It is important to point out that Bosnia and Herzegovina has already taken the first steps toward economic recovery. Between January and August 1996, industrial production increased by 82.3 percent, compared with the same period in the previous year. (This is less than 10 percent, compared with the average in 1991.) It is estimated that 25 percent of the prewar labor force is employed and that their wages in July 1996 amounted to some DM 120, on average. Mar- ket supply of basic agricultural and foodstuff products, as well as relatively low and stable prices, significantly contributes to an easier life for the citizens, at least those who are employed or earn some income. Re- tail prices of goods and services during the same period are lower by 30 percent. Compared with the prices in December last year, they are now stable. It is more than two years since the government of Bosnia and Herzegovina borrowed funds from the National Bank of Bosnia and Herzegovina or from commercial banks, although it has been facing a series of difficulties in financing public expenditures, particularly large social needs. The exchange rate of DM 1 per BHD 100 was fixed in the summer of 1994 and remains firm. Deviations of the exchange rate in free market operations have been reduced only to several percent, while the scope of these transactions is negligible. The National Bank of Bosnia and Herze- govina has been operating de facto, for more than two years as a currency board. Bosnia and Herzegovina quickly joined the international financial community, becoming a member of the IMF only six days after signing the peace agreement in Paris. Soon after this, membership in the World Bank and the European Bank for Reconstruction and Development was acquired. At the end of 1995 and at the beginning of 1996, two international donor conferences were organized in Brussels, where support of $1.8 billion was pledged for 1996. The schedule of disbursement of the resources was rather slow at the beginning of the year, although the flow of funds has improved during the past months. The World Bank is leading in the overall activities in Bosnia and Herzegovina, particularly in various credit arrangements. Bosnia and Herzegovina has reached agreement concerning 13 projects with the World Bank in the course of 1996, has regulated its credit arrears, received a very soft loan, transition assistance credit (TAC), for supporting its balance of payments, and continued its work on the economic program, as well as on the preparation of new projects. Of course, significant help is being received, or is about to be received, from the United States, the European Union, Japan, and Islamic countries, among others. It is expected that soon special arrangements with the IMF—probably under the Enhanced Struc-

©International Monetary Fund. Not for Redistribution BOSNIA AND HERZEGOVINA 61 tural Adjustment Facility (ESAF)—will be concluded, as well as intensification of activities concerning regulation of arrears payment to the Paris Club and London Club. In view of the above, I would like to thank the World Bank and the IMF, and the donor community for their endeavors in this process, and I would like to express my hope that this cooperation will continue in an even more intensified manner. However, when making the final count it can be estimated that during this year only some 50 percent of funds pledged in Brussels will be implemented, mostly owing to the slow action of some donors, but also because of the initial difficulties in the process of adjusting to the new challenges in Bosnia and Herzegovina. After the elections held on September 14, 1996, the following institutions will be established: the presidency, parliament, the council of ministers of Bosnia and Herzegovina, the presidents and vice presidents, the parliaments, and the governments of both entities (of the Federation of Bosnia and Herzegovina, and of the Republika Srpska), and cantonal bodies in the Federation of Bosnia and Herzegovina. It is of special importance that those bodies take over their responsibilities, as determined in the constitution, as soon as possible; focus their attention and work on the establishing of the new institutions, primarily the economic and market institutions; and establish a consistent economic program and macroeconomic policies (especially fiscal and monetary policies) for the medium term. The establishment of the new central bank is among the top priorities. The central bank will be the only institution in charge of monetary policy and issuing money. During the first six years of its work, it will function as a currency board. The central bank, a monetary institution independent from the government, will be governed by the governing board, consisting of a governor and three board members, with a six-year term. The staff of the IMF and the staff of the High Representative's Office is significantly supporting technical preparations for the establishment of the central bank and the steps toward creation of the conditions to start the reconstruction of commercial banks. This will facilitate the transition process (from an economy during war to one during peace, and from a socialist to a market economy, with private property as a dominating factor), which will represent one of the key factors of economic reconstruction and development of the country. Furthermore, it is important to mention the future economic integration of Bosnia and Herzegovina, which, through the authorities and economic institutions, is to be carried out through more efficient mobilization and direction of international financial support and technical assistance, especially by the international financial institutions and numerous international donors.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR CAMBODIA

Keat Chhon

I am pleased to be here today to represent the Kingdom of Cambo- dia at this august annual assembly of top-level macroeconomic policymakers of the world community. My delegation brings to you all the warm greetings and good wishes of the people and the Royal Govern- ment of Cambodia. This is an opportune time to take stock of our past successes and shortfalls in achieving socioeconomic growth with equity and to project our vision to the next century a mere five years from now. We will all stand judged by posterity if we do not set in motion measures to ensure a better twenty-first century for our future generations by policies that we adopt from now on. It is in this context that I would like to share with all of you a perspective and a plea from Cambodia as one of the poorer countries. As is widely known, after two decades of war and international isolation and neglect, Cambodia began its fresh lease on life three years ago. We are beset by many daunting tasks and challenges in our earnest endeavors to rehabilitate our war-torn economy; to rebuild our political, economic, and social institutions from scratch; and to rapidly usher in an era of peace, prosperity, and growth for our people. In rebuilding our nation with one of the lowest per capita incomes in the world, multifarious initiatives are to be launched all at the same time, and everything needs to be fast-tracked to make up for the lost decades. We are grateful for the international attention, advice, and generous financial and technical assistance to help us in our efforts. Much has happened in Cambodia, all for a better future, in the last three years, indeed even since we met here last year. Our economy has commenced a steady and robust growth, reversing the uncertain trends of the past. Inflation has been contained. Our national currency enjoys relative stability under clear market conditions. Our national monetary institutions have been revamped. Our revenues are growing and becoming di- versified. We are into a major process of public administration reform to make the state apparatus more relevant and responsive to a modern market-oriented economy. Private investment is vigorous and growing, and trade is vibrant. The international community noted and commended us on our achievements at the first consulting group type meeting held in Tokyo in July. A month later, a team of Executive Directors of the World Bank visited us and held extensive discussions with our two Prime Ministers and various groups in the society. I believe they were equally impressed and assured about our progress and commitment for the future.

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Politically, a coalition royal government is stable in spite of overblown media accounts of day-to-day differences that will exist among coalition partners anywhere in the world. Also, in a major joint effort among these parties, the threat of the outlawed Khmer Rouge, already confined to some remote pockets of international borders, has been recently reduced significantly, as many of them have agreed to a truce and to joining the national mainstream. This takes us one major step towards lasting peace although some may mistakenly look at only the temporary effects of concessions that have been made. Our significant achievements in a short period are presently being en- dangered by the heavy flooding along the Mekong River. And there are many other challenges before us, including new ones still to arise as we proceed ahead. The internal issues include the paramount need to focus on poverty alleviation and the sustainable management of our natural resources, in particular of our forestry capital; the external factors encom- pass the need to integrate our economy into the region. We have the political determination and commitment to take the country forward speedily. We are, at the same time, conscious that progress can be stable and sustainable only if there is a dynamic, ever-adjusting equilibrium—politically, socially, and economically. Countries such as Cambodia, which are emerging from long years of internal and externally imposed instability, need special understanding, consideration, and support from the international community as they launch into an era of development. New instruments have to be chiseled to help them, and new and bold strategies are needed. Let me highlight a few: First, we need strong assurance from the international community of continued support over the long haul of, say, a decade or more. We are therefore disappointed to note that IDA replenishments are now slight and slow in coming, leading to new assistance being funded from the interim trust fund in some cases. We urge the international community to contribute generously to this soft window and earmark a special portion of funds for countries such as Cambodia so that unpredictable vagaries of international situations do not affect assistance to us. Second, the IMF needs to be more liberal and understanding in apply- ing criteria for Enhanced Structural Adjustment Facility (ESAF) assistance. This is because, even as we struggle to adhere to all the strict parameters, there are inescapable internal political realities and external adjustments to be made with our neighbors, all necessary for longer-term stability, which in the short term impose restraints on the pace of our progress. Third, we welcome the Bank President's initiative to earmark internally generated Bank funds to alleviate the severity of the external debt situation of poorer countries. International debt, which was incurred a long time ago and used during externally imposed conflict situations or the assets of which were destroyed in such conflict, poses a great burden on the economy. We

©International Monetary Fund. Not for Redistribution 64 SUMMARY PROCEEDINGS, 1996 need support and understanding to readjust these loans, mostly by write-off. Also, it is necessary for institutions like the IMF and the World Bank to per- suade our creditors to adjust repayment terms to current rates of exchange rather than the highly illusory rates at the time the debts were incurred. Fourth, there is a strong case for increasing technical assistance on a grant basis from international institutions like the IMF and the World Bank. Fifth, we are wedded to fostering private-sector-led growth and development where individual initiative and enterprise will have full play in a market-oriented environment. For increased and more rapid private investment to take place, we urge for the most favorable and sustainable terms of trade with industrialized nations. Sixth, we appreciate the International Finance Corporation's Reach Initiative, the Mekong Project Development Facility, and the Asian Devel- opment Bank's role in the Greater Mekong Subregion or Mekong 6. We urge that these be aggressively followed to promote private sector investment in countries such as Cambodia. Distinguished colleagues, I have raised these issues because I believe that the strong growth of emerging postconflict countries is a necessary underpinning for sustaining peace, stability, and growth, not only in the immediate region, but globally. Let us make a commitment to solve the problems of poorer countries to assure a bright world for all of us in the next century.

STATEMENT BY THE TEMPORARY ALTERNATE GOVERNOR OF THE FUND AND THE BANK FOR CANADA

Douglas Peters

Global Economic Situation and Policy Requirements In recent years, significant progress has been made in addressing many of the key macroeconomic policy challenges of the global economy, especially in the larger industrial countries where inflation has been reduced substantially and, over the past year, has remained under control. Commitment to fiscal consolidation has reduced government deficits, with many deficits now on a clearly downward trend. These achievements have created the enabling conditions for lower interest rates, higher sustainable rates of growth and job creation, stronger investment, and improved current accounts.

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Despite this important progress, there remain unmet challenges. Many economies continue to experience a relatively slow pace of economic recovery and expansion. The disappointing pace of economic growth in many industrial countries over the past year has postponed expected drops in high unemployment rates. How can we improve our prosperity? The general policy prescriptions—sound public finances, price stability, and structural reforms—embodied in the Interim Committee's Madrid Declaration two years ago remain the best long-term program for creating jobs and prosperity. Some policymakers have expressed concern that further fiscal consolidation will only worsen an economic slowdown. In some countries, however, post- poning essential deficit reduction has led to financial market turmoil, which is a prescription for continued economic weakness. Indeed, the challenge is to balance credible and decisive fiscal consolidation maintaining needed social programs for the needy and using monetary policy to offset any short-term contractionary effects. And I would note that this is consistent with a medium-term objective of price stability. The fact that unemployment remains unacceptably high in many countries highlights the need for more rapid economic growth as well as for skills to be better matched to employers' needs. If we improve the effectiveness of labor markets by removing unnecessary regulations that discourage hiring and improve the ability of workers to match their abilities with the skills employers are demanding, a better employment situation should result. It is encouraging that the improvement in economic fundamentals in recent years has not been limited to the industrial countries. Many transition economies are benefiting from financial stabilization and structural reform through stronger output growth and substantially lower inflation. Strong growth in a number of African countries has also resulted from efforts at fiscal consolidation, structural reform, and steps toward improved governance. These visible payoffs for macroeconomic and structural reform encourage other countries to follow suit.

Canada's Policy Approach Canada is a good example of a country now reaping the benefits of sound macroeconomic and structural policies. The Canadian government has committed to macroeconomic targets as well as to structural reforms, to create an environment conducive to job creation and sustained economic growth. Canada's fiscal policy combines a program of deficit reduction with a careful evaluation of programs and a setting of priorities. A sequence of rolling two-year deficit targets has been adopted, and the deficit has been below its target each year. Recognizing that tax increases reduce incentives

©International Monetary Fund. Not for Redistribution 66 SUMMARY PROCEEDINGS, 1996 to work, save, and invest, the bulk of deficit-reduction actions have been expenditure measures. Both the federal and also all provincial governments within Canada are committed to deficit reduction. Explicit targets have also been established in the conduct of monetary policy. The government and the Bank of Canada have jointly established a target range for inflation of 1-3 percent that extends through to the end of 1998. Monetary policy is geared to keeping inflation within this target range. Structural reforms have also been undertaken to improve economic efficiency. These include the reduction of business subsidies, the privatization of Crown corporations, and the reform of social programs, including labor market reforms, to increase work incentives and better prepare workers for job opportunities. While Canadian economic performance in 1995 and early 1996, like that of many other industrial countries, was weaker than expected, the outlook for 1997 and beyond appears strong. Continued low inflation and fiscal consolidation in Canada have led to sharp reductions in Cana- dian interest rates since 1995, which, in turn, are stimulating domestic demand. Short-term interest rates are presently some 150 basis points lower than those in the United States, and long-term spreads with the United States have narrowed by over 100 basis points over the past year. An increase in Canada's international competitiveness has been reflected in a surge in exports and a marked improvement in Canada's international current account position. In the second quarter, Canada's current account recorded a surplus for the first time since 1984. Further, the private sector has created 220,000 new jobs since last November, a 1.9 percent increase, indicating that one of our key objectives, sustained job creation, is being realized.

International Challenges We collectively face other challenges in the realm of global governance. One of these is the need to ensure the robustness of the international monetary system in the face of potential financial crises. We have recognized a need to strengthen the capacity of the international community to anticipate problems (and, thus, to avoid full-blown financial crises) and to respond to such situations effectively. I am very encouraged by the progress we have made, particularly over the past year, with the implementation of several noteworthy reforms. • The IMF has introduced the new Special Data Dissemination Stan- dard for capital market borrowers, to provide more timely and reliable economic and financial statistics to institutions and markets. This will improve surveillance capabilities and make it easier for both markets and the international institutions to identify problems before they reach crisis proportions.

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• Final agreement has been reached on the New Arrangements to Bor- row (NAB), doubling the resources currently available to the Fund in a financial emergency. This new agreement reflects the participation of a wide range of countries, extending far beyond the Group of Ten, with the capacity to support the international financial system. I am particularly pleased by the important role Canadian officials played in bringing this about. Still on the agenda are a couple of important resource issues for the Fund. • We must ensure that the Fund has adequate resources for regular lending operations. Accordingly, we must make early progress on the size of the quota increase in the Eleventh General Review of Quotas. • A number of new members did not participate in earlier SDR allocations, leading to the present inequitable distribution of SDRs. We must reach decisions soon on the size and distribution of a special equity SDR allocation. Let me now turn to issues of importance to Canada regarding the World Bank and the regional development banks. First, I am pleased with the progress President Wolfensohn has already made in his effort to bring about reform at the World Bank. The Bank has improved cooperation and coordination with other multilaterals (including regional development banks and the United Nations); expanded contact with local communities, nongovernmental organizations (NGOs), and borrowing countries; and established new and important links with the business community, private foundations, the academic community, and others. I am confident that President Wolfensohn's reforms will significantly increase the Bank's efficiency and its development effectiveness, and I fully support his continued efforts. Second, I am delighted that we are now in a position to launch the initiative to assist heavily indebted poor countries (HIPCs). Excessive indebtedness, often compounded by large negative transfers to the international financial institutions (IFIs), imposes serious constraints on economic reform and broader development prospects. Effective development strategies for these countries must therefore incorporate debt relief as well as expenditures on new projects and programs. The HIPC debt initiative, embodying a much-needed comprehensive debt-relief effort by all major creditors, including, for the first time, the IFIs, holds great promise for those among the poorest, most indebted countries that are committed to necessary reform. A third issue of importance to Canada is the improvement of the development impact of operations of the World Bank and the regional development banks. This was a major focus of the Multilateral Development

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Bank Task Force Report. Improving the development impact is essential to reducing poverty and fostering sustained development. I believe there are four priorities here that must be addressed. First, continued efforts are required to improve the quality of projects, and this must take precedence over the volume of loan approvals or disbursements. Second, multilateral banks must work together to establish reliable and consistent impact indicators that measure the effectiveness of development. Third, national accountability for results must be further strengthened in lending decisions, taking into account, for example, unproductive expenditures (particularly excessive military spending). Fourth, lending programs should better reflect the potential role of the private sector. While responsible and efficient government is essential, there are some things that the private sector can do better in areas such as the financial sector, power, telecommunications and information technology, industry, and mining. Addressing these priorities will have a positive impact on development and will help demonstrate the benefits of international cooperation and coordination. The poor countries of the world will be the ultimate beneficiaries. Finally, I am encouraged by the flows of private capital we have seen in the 1990s from the industrial economies to the emerging economies, including a growing number of developing economies. These flows are of great importance to the developing world at a time when aid budgets are under pressure in donor countries. They do pose challenges of their own. But they also hold the promise of great benefits—not just in the transfer of capital, but in the transfer of new technologies and new methods of doing business. We should all do what we can to ensure that these flows of private capital are used effectively to improve the well-being of people in the developing world.

STATEMENT BY THE GOVERNOR OF THE FUND FOR THE PEOPLE'S REPUBLIC OF CHINA

Dai Xianglong

Please let me first congratulate Mr. Camdessus on his being reelected as Managing Director of the Fund. I believe that, under the leadership of Mr. Camdessus and Mr. Wolfensohn, the Bretton Woods institutions will make due contributions to the promotion of international monetary cooperation and sustained world economic development. Since the last Annual Meetings, the world economic situation has continued to improve, and prospects are broadly favorable. Inflation has

©International Monetary Fund. Not for Redistribution PEOPLE'S REPUBLIC OF CHINA 69 remained generally low in the industrial world and has significantly decelerated in the developing countries, thanks to the improvement in their macroeconomic management and the deepening of structural reforms. These developments are conducive to sustained world economic growth. The impressive economic performance in many developing countries has made them a powerful engine and a most dynamic element of the world economy. Particularly encouraging is that Africa's growth prospects have further improved following their vigorous structural adjustments. Many developing countries in Asia have adopted prudent financial policies to avoid overheating and to sustain healthy economic development. Further progress has also been made in transition countries, with some of them enjoying a relatively high rate of economic growth. We have noted the continued economic growth in the United States and the recovery in Japan, despite weak growth in most European countries. Despite the recent favorable developments, challenges facing the world economy are still enormous. Many industrial countries are confronted with high fiscal deficits, and persistently high structural unemployment resulting from labor market rigidities has increased their fiscal spending and social costs. The protracted high fiscal deficits and their excessive reliance on monetary policy have not only been unfavorable to their domestic economic growth, but have also been a major factor underlying the international financial market instability. Industrial countries are urged to strengthen fiscal consolidation, accelerate labor market reform, and contain fiscal deficits, so as to create favorable conditions for lower interest rates in the international markets and minimize uncertainties in the world economic outlook. The task for further structural adjustments and reforms is still tremendous in the developing and transition countries. We are delighted to see that a growing number of developing countries are making efforts to eliminate structural impediments and improve their macroeconomic management. For emerging market countries, given the increasing sensitivity of international capital flows to the macroeconomic conditions in recipient countries, maintenance of macroeconomic stability is crucial to sustaining economic growth and withstanding external disturbances. Heavy debt burdens in many developing countries constitute severe impediments to their economic development. The Bretton Woods institutions are therefore encouraged, on the basis of their respective mandates, to play a more active role in assisting heavily indebted poor countries in alleviating their debt burdens and promoting economic development. We hope resources for financing the interim Enhanced Structural Adjustment Facility (ESAF) can be secured at an early date. The industrial countries are urged to make due contributions toward the reduction of poor countries' debt burdens and to refrain from cutting official development assistance with various excuses. The smooth development of world trade is crucial to sustained global growth. However, the substitution of unilateralism for multilateralism and

©International Monetary Fund. Not for Redistribution 70 SUMMARY PROCEEDINGS, 1996 frequent resort to trade sanction measures by some industrial countries have damaged multilateral trade rules and threatened the order and expansion of international trade. It is essential for industrial countries to reduce nontrade barriers and provide greater market access for the developing countries. The unreasonable demands of certain contracting parties have delayed China's access to the World Trade Organization (WTO), jeopar- dizing the universality of its representation and bringing unfavorable consequences for the healthy development of world trade. China has made its position clear on WTO membership, namely, China is prepared to assume the due rights and obligations consistent with its level of economic development based on the Uruguay Round. China has fulfilled all of its commitments and met the WTO membership qualifications. We believe that China's early accession to the WTO will not only facilitate further progress in its reform and opening to the outside world, but will also enhance its trade cooperation with the rest of the world and, consequently, promote world economic and trade development. China has made remarkable progress in economic reform and opening to the outside world. At an average rate of 11.8 percent, China's real GDP growth in the last five years has been the strongest and most stable in nearly five decades, resulting in a significant improvement in the standard of living. The reform has also led to the rapid development of trade and China's integration with the world economy. Imports and exports have increased at an average annual rate of 19.5 percent to US$288 billion in 1995, accounting for 40 percent of GDP. The favorable investment environment and the huge size of the market have attracted massive foreign capital, which has added impetus to the Chinese economy. With years of effort, China has made a breakthrough in its economic reform and, as a result, the fundamental role of market forces in resource allocation has been greatly strengthened. The Ninth Five-Year Plan formulated early this year envisages a target of quadrupling China's 1980 per capita GDP by the end of the century and the virtual elimination of poverty. The Chinese government attaches great importance to the sustainability of economic development and particularly to the quality of growth. The year 1996 witnessed a good start to the Ninth Five-Year Plan. Real GDP increased by 9.8 percent in the first six months and is expected to stabilize at 9 percent for 1996; inflation, measured by the retail price index, decelerated to 7.1 percent and is projected to be about 7 percent for the whole year. The summer grain harvest was satisfactory, and industrial production continued to grow. Investment and consumption demand grew at an appropriate level. Fiscal revenue increased significantly, and the financial conditions remained stable. The balance of payments continued to improve, with imports and exports at a balance, and foreign direct investment amounting to US$19.6 billion in the first six months. Foreign exchange reserves are expected to reach US$95 billion at the end of Sep-

©International Monetary Fund. Not for Redistribution PEOPLE'S REPUBLIC OF CHINA 71 tember. The current macroeconomic environment is significantly better than a few years ago, with fulfillment of the key economic targets envisaged at the beginning of the year—some even better than anticipated. Macroeconomic adjustment has not been implemented at the expense of sustained high growth, nor has it caused a substantial rise in urban unemployment. We are well aware of the challenges facing the Chinese economy, particularly the need to enhance the efficiency of the state-owned enterprises, further strengthen the fiscal position, and improve the quality of the commercial banks' loans. The solution to these problems lies in deepening the reform and maintaining appropriately tight monetary and fiscal policies. The interest rate cuts on two occasions this year were mainly responses to substantial declines in prices. With controlling inflation as its primary task, the People's Bank of China will maintain an appropriately tight monetary policy, rely more on indirect instruments in controlling the money supply, and, together with an appropriately tight fiscal policy, facilitate sound economic development. Since July 1, 1996, China has allowed foreign-funded enterprises to sell and buy foreign exchange with banks, and has eliminated exchange restrictions on payments for trade and trade-related current transactions. China expects to introduce current account convertibility of the renminbi by the end of this year, thus meeting the relevant obligations of Article VIII of the Articles of Agreement well ahead of our original schedule. The sustained high economic growth rate over the past 17 years, which has far exceeded that of the world average, has significantly enhanced China's relative economic strength. However, its share in Fund quotas has continued to decline, which is contrary to the principle that the distribution of Fund quotas reflects the relative economic positions of members. Effective measures are called for to address such anomalies. China's resumption of its exercise of sovereignty over Hong Kong, which will take place in nine months, is of great interest not only to the Chi- nese people, including those living in Hong Kong, but also to the international community. The social and economic situation in Hong Kong is generally favorable for a smooth transition. China will strictly implement its commitments made in the Sino-British Joint Declaration on the Question of Hong Kong; will abide by the Basic Law of the Hong Kong Special Ad- ministrative Region; and will, after the return of Hong Kong, adhere to the principle of "one country, two systems." Hong Kong will enjoy a high degree of autonomy and be governed by local inhabitants. Its current social laws and economic systems and lifestyle will remain unchanged. Its existing laws will also basically remain unchanged. It will retain the status of a free port and a separate customs territory. The Hong Kong dollar will continue to circulate as legal tender in the special administrative region. It will also retain the status of an international trade, financial, and transportation

©International Monetary Fund. Not for Redistribution 72 SUMMARY PROCEEDINGS, 1996 center. Foreign interests in Hong Kong will be given due regard. The Chi- nese government will keep these policies intact for 50 years. We have full confidence in Hong Kong's long-term prosperity and stability. The financial relationship between China's mainland and Hong Kong after the transition will be characterized by the coexistence of two currencies, two monetary systems, and two monetary authorities within one sovereign state. The central government will remain fully supportive of the Hong Kong Monetary Authority in its endeavors to maintain financial stability and its status as an international financial center. Next year's Fund/Bank Annual Meetings will be held in Hong Kong. It will be the first important international meeting to take place in Hong Kong after China's resumption of the exercise of its sovereignty over Hong Kong. The Chinese government will have the honor of playing host. We will do everything possible to make the meetings a great success. I am looking forward to seeing you all again in Hong Kong next autumn. Wel- come to the Annual Meetings in China, and see you again in Hong Kong.

STATEMENT BY THE GOVERNOR OF THE FUND FOR THE REPUBLIC OF CROATIA

Marko Skreb

Following a decade-long stagnation of the former Yugoslavia in the 1980s, the Croatian economy suffered a tremendous supply shock caused by the disintegration of Yugoslavia and by aggression toward Croatia. GDP decreased by one-third. However, in 1995, some signs of growth of the Croatian economy started to show. The 2 percent growth in GDP (the first since 1990) was moderate compared to expectations. After decades of high inflation and even periods of hyperinflation, expectations were more than optimistic, following the implementation of the Stabilization Program by the end of 1993. During 1995, Croatia regained control over major parts of its territory under occupation, and peaceful reintegration of eastern Slavonia is proceeding well. Price and exchange rate stability has been maintained for the third consecutive year. After 3 percent deflation in 1994, retail prices increased by only 3.7 percent during 1995, which places Croatia at the top of countries in transition, and is more in line with trends in developed countries. Fur- thermore, developments in the first eight months of 1996 indicate that Croa- tia's inflation over the past three years will continue to average 1 percent annually. Despite the fact that Croatia's domestic currency, the Croatian

©International Monetary Fund. Not for Redistribution REPUBLIC OF CROATIA 73 kuna, has been floating, it has shown remarkable stability both in nominal and in real terms. These results were achieved in an environment of very rapid remone- tization of the economy and reverse currency substitution. In 1995, base money, the main product of the central bank, grew by 43 percent, while at the same time the broad monetary aggregate, or total liquid assets (M4), grew by 40 percent. In 1996, these trends have continued, though at a slower pace. During the first eight months of 1996, money supply has increased by 26 percent. Although monetary policy has not changed since 1993, the main means of creating base money have been interventions by the central bank in foreign exchange markets. At the end of 1995, net foreign assets of the central bank amounted to more than 95 percent of the total balance sheet. Presently, the amount of international reserves is about US$2.3 billion, which surpasses the money supply. These results were achieved not only through radical changes in the monetary policy instruments (introduced after the establishment of monetary independence), but also through enormous reform efforts within the fiscal area. Despite lower tax rates, overall central budgetary revenues have tripled over the past four years, making the central budget share of GDP about one-third. However, the main stabilization factors included a budgetary surplus in 1994 and a moderate budget deficit amounting to 2 percent of GDP in 1995. A similar budget deficit is expected for 1996. More important, the deficit mentioned was not financed through the central bank, but from external sources. Today, Croatia has one of the lowest profit tax rates of 25 percent and is about to introduce a modern single-rate VAT of 22 percent. The 1995 current account deficit of around 9 percent of the estimated GDP has been the main topic of numerous discussions. However, it is important to note that this deficit was a result of the increase of both imports and exports. Nevertheless, we should keep in mind that in conditions of relatively low domestic savings, real growth can be financed only from foreign sources. In 1995, international reserves of the central bank grew by 35 percent. By September 1996, the international reserves of the National Bank of Croatia reached the level of three months' worth of imports of goods and nonfactor services. The past two years have been marked by the resolution of the external liquidity problem, i.e., external debt incurred mostly by the former Yu- goslavia. In March 1995, we reached an extremely important arrangement with member countries of the Paris Club, and by end-July 1996 an agreement with the London Club was completed as well. Croatia's total external debt amounts to US$4.5 billion, which is 23 percent of the estimated GDP, resulting in a very comfortable debt-servicing ratio of no more than 10-11 percent in the coming years. We do view these numbers as favorable, and we regard them as an addition to our overall external credibility.

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At the same time, we expect the international community will assist us, not only in dividing liabilities of the former Yugoslavia, but assets as well.

Relations with the IMF and the World Bank It can be said without hesitation that Croatia has enjoyed excellent relations with both the Fund and the World Bank Group. The stand-by and Systemic Transformation Facility (STF) arrangements with the IMF were carried out successfully, contributing to the overall credibility of the Croa- tian stabilization program that started a year before the arrangements with the Fund. At the same time we have benefited from numerous programs with the Bank, which included an emergency reconstruction loan, health care sector programs, and road infrastructure facilities. Smaller programs in public sector management, development of capital markets, and private farmers' support were greatly appreciated as well. Their total amount comes to US$280 million. Needless to say, our plans for the future are even more optimistic. We repeatedly have emphasized that structural reforms are the key to Croatia's prosperity. Thus, we are now entering the final phase of negotiations with the IMF on a three-year Extended Arrangement, and the progress achieved so far in negotiating several loans, the Enterprise and Financial Sector Ad- justment Loan (EFSAL), the Public Sector Adjustment Loan (PSAL), and the Agriculture Sector Adjustment Loan (ASAL), with the World Bank is substantial as well. Six more projects are being prepared for the future in regional infrastructure, environment, etc. Croatia has adopted the Special Data Dissemination Standard (SDDS) to ensure prompt and transparent information on its economic policies, and supports the continuation of the Enhanced Structural Adjustment Facility as well.

Economic Policy Priorities for the Future After achieving stability should we now turn toward development? In brief, macroeconomic populism has been gaining ground. It seems that there have been two conflicting goals, namely, a trade-off between stability and growth. We do not believe in the long-term Phillips curve, and we regard stability as a necessary condition for sustainable growth in the future. Decision makers in Croatia firmly believe that sustainable economic growth cannot be achieved without a stable macroeconomic framework. Achieving and maintaining price stability is considered one of the basic aims of economic policy. We plan to keep our inflation target at about 3 percent in the future, as speedier and sustainable growth is now a priority. There are also reliable indications that real growth in 1996 could be 7 percent, and growth rates of 5-7 percent could be achieved over the medium term. We plan to pursue a fiscal deficit of no more than 3 percent as the

©International Monetary Fund. Not for Redistribution REPUBLIC OF CROATIA 75 long-term goal, without financing it through monetization. Public debt, now at about 45 percent of GDP, should not surpass 50 percent. The main objective for growth is to lower the overall fiscal burden from the current more than 53 percent to about 40 percent. Needless to say, Utopia has not been achieved yet, thus much work remains to be done within the Croatian economy. There are at least four areas of major importance where substantial progress could be expected. First, speedier restructuring and privatization of commercial banks and enterprises is a must. The main problem of the financial system as a whole since the introduction of the stabilization program has been high real interest rates and a large interest rate spread. Interest rate spreads are primarily affected by domestic structural factors such as the high portion of (inherited) illiquid or dud assets; segmented and oligopolistic markets of the banking industry (which is reflected in high differences in interest rates among various deposit money banks); and inadequate financial discipline, causing high risk premiums (i.e., high total interest charged). Low labor productivity of our banks (measured by assets per employee) also contributes significantly to the above tendencies. A high number of banks that operate domestically—some 60 of them—have not significantly increased competition in this industry. By mid-1996, as the bank rehabilitation process has gained ground, interest rates have started to decrease. Money market rates have fallen from 30 percent to single-digit numbers. Lending rates of commercial banks follow that trend, though at a much slower pace. Second, domestic savings must increase for medium-term growth to be sustainable. The following are some of the most important measures to be carried out in order to increase savings in Croatia: strengthening financial discipline and stability of the financial system; reforming the pension system as a medium-term measure; enhancing fiscal discipline, i.e., increased government savings and credibility of economic and all other policies; and improving the trust not only in the banking system, but in the country in general. Decreasing fiscal pressure is essential. Within the area of pension system reform, we expect significant cooperation with the World Bank, as mentioned already. Third, it is of key significance to emphasize the medium term while planning Croatian economic and financial policies. We should de-emphasize the short-term (monthly or even daily) results and turn our attention to long- term trends. The theory and practice of central banking have been developed around the inflationary pressures arising from the conflict between the medium-term and long-term effects of monetary expansion. Expectations among the population at large regarding Croatia's economic future are very high. In this context, we are realistic in our expectations, keeping in mind that increasing the money supply cannot produce real goods and services. In economics one does not always get what one wants. Credibility must be

©International Monetary Fund. Not for Redistribution 76 SUMMARY PROCEEDINGS, 1996 earned day by day, but can be lost in a moment. For a central bank with the power of producing money, this is an important concept to keep in mind. Fourth, Croatia is a small open economy, not a trend setter. The world has been developing in the direction of forming trade and currency zones. Globalization, increasing complexity of financial instruments and their rapid growth are some of the visible sides of financial markets today. Croa- tia has been, and will remain, a part of Europe. It is important to note that two-thirds of our merchandise exports and imports are traded with countries of the European Union. By adding the central European free trade area (CEFTA) countries, this share climbs to around 80 percent. Therefore, we must be more determined about accepting European and world standards, especially in financial operations. It is very important for us to fulfill most of the Maastricht criteria (with the exception of interest rates) for joining the European Economic and Monetary Union (EMU). Does Croatia have a choice in its economic policies? As any other modern country, it does, and it will choose the path it wishes to follow. Sur- rounded by conditions of globalization we know that world markets are becoming more cautious and more transparent. Mistakes in the economic policy of a country are much more visible, causing stronger far-reaching consequences than ever before, as seen in the case of Mexico. High mobility of capital has not only enhanced the responsibilities of authorities, but also has required the implementation of sound policies. Miracles do not happen, at least not in economics, and economic success, i.e., sustainable growth, is always the result of long-term hard work. The political economic aspects of this development paradigm should not be neglected. In the long run, sound economic policies are good politics as well, especially in a nonelection year. The famous Thomas Alva Edison once said, "There is no substitute for hard work." Allow me to restate that and say that healthy and credible medium-term economic policies, directed towards increasing domestic savings and with a clear European vision, simply have no substitute in Croatia. If there is one, let it be said that the marginal rate of substitution of these policies is such that no rational decision maker would choose it.

STATEMENT BY THE GOVERNOR OF THE BANK FOR DENMARK

Paul Nielson

I have the honor of addressing this Annual Meeting on behalf of the Nordic countries: Denmark, Finland, Iceland, Norway, and Sweden. Allow me first of all to extend a warm welcome to the newest member of the Bank, Bosnia and Herzegovina.

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Over the last couple of years, we have seen both discouraging and encouraging developments in the international economic scene. Economic development has gained ground in many developing countries, thanks largely to successful stabilization and reform policies. Ultimately, economic development depends on these countries' own efforts. The countries in economic transition are going through a thorough restructuring process, and we now see economic growth picking up. The early 1990s have seen a remarkable increase in private flows to developing countries, and private flows now far exceed official resources. Also, trade has become increasingly globalized. The Bank has to adjust to these favorable developments in its lending policies. It is encouraging that the Bank's initiatives in the transition economies have met with initial success. However, the poor countries are falling behind and risk being marginalized. Special attention must be given to these countries. Therefore, in the following, I shall concentrate on the plight of these countries. Continued and increasing poverty in a number of developing countries is today's most challenging development problem. The international debt initiative is an encouraging development, indicating willingness in the international community to fight poverty and enhance social and economic development. The poor countries continue to depend on external concessional finance. However, it is worrying that the international community is not even able to maintain the previous level of official development assistance (ODA). Due to fiscal constraints, many countries of the Organization for Economic Cooperation and Development (OECD) have been forced to cut down on ODA. The decline in the size of ODA as a percentage of OECD members' GNP has now fallen to only 0.27 percent in 1995, the lowest level since the United Nations adopted the target of 0.7 percent in 1970. This has created severe difficulties in securing funds not only for the UN system, but also for the concessional windows of the international financial institutions (IFIs). The Nordic countries have, on average, been able to sustain ODA at a level well above the UN target. We are deeply concerned about the present trend and hope conditions will soon be in place again for ODA levels to be restored and effectively used. Today, private flows cannot compensate for ODA to the poor countries. Private flows are concentrated on too few countries, none of which are among the poorest. While it is important to maintain these flows, it is equally important to broaden their geographic coverage. The World Bank plays an important role in this respect, and the Nordic countries welcome further efforts by the Bank in this direction. In addition to non-debt- creating flows and ordinary private and official lending, the soft windows of the IFIs continue to be important providers of concessional resources for development. And we believe that their existence makes a great difference. Burden-sharing mechanisms should help mobilize a high level of funding for the soft windows of the IFIs. It is, however, unfortunate when

©International Monetary Fund. Not for Redistribution 78 SUMMARY PROCEEDINGS, 1996 the valued principle of burden sharing leads to the opposite, due to the failure of a major donor to comply with its responsibility. This happened both in the replenishment negotiations for IDA and for other development funds. The Nordic countries were prepared to support a larger IDA-11. The burden-sharing mechanism, however, did not encourage that. Therefore, and in order to avoid difficulties in reaching adequate replenishment of ID A-12, we see a need to review the existing formula for replenishment negotiations and to find adequate ways to induce donors to solve the present financing problem. Let me now turn to the debt initiative. The Nordic countries were among the first to draw attention to the need for a comprehensive solution to the problem of unsustainable debt. At the initiative of the Nordic countries, the so-called fifth dimension was established in the late 1980s. Con- currently, the IDA Debt Reduction Facility was established. These measures have been successful: year by year it has been possible to transfer enough net resources to most of the heavily indebted countries to cover their payment needs. But their total debt has not decreased. On the contrary, it increased from US$128 billion in 1988 to US$186 billion in 1995. Much of the resources transferred during this period were in the form of concessional multilateral loans. Also, concessional loans contribute to the debt burden. The Nordic countries particularly support the heavily indebted poor countries (HIPC) initiative, as it addresses the debt problem in a comprehensive way, covering not only bilateral but also the equally important multilateral debt. Why should we worry about the debt overhang of poor countries as long as the financing gaps are covered by new transfers each year? In our view, the high and mounting debt of the heavily indebted poor countries is both a direct disincentive to development and a cause for uncertainty. A disincentive because potential investors get discouraged knowing that the debt will result in future increased taxation. A factor of uncertainty because the countries depend on the continuation of bilateral and multilateral transfers at very high levels. Therefore, the Nordic countries welcome the debt initiative and wish to see the initiative implemented as a matter of urgency. We also believe that its procedures should be flexible and transparent. Flexibility, in our view, should also apply to the timetable, so that countries that have pursued successful stabilization and reform policies will be credited for these efforts. We realize that the financing modalities, including the burden sharing between bilateral and multilateral creditors, is not yet fully in place. These modalities must now quickly be settled. The decision by the Paris Club members to provide enhanced debt reduction is important, although not as bold as we had hoped for. There is willingness among the Nordic countries to contribute to the initiative through the proposed trust fund, and we ex-

©International Monetary Fund. Not for Redistribution DENMARK 79 pect other donors to contribute their share. The Nordic countries have already, on a bilateral basis, provided assistance to relieve the debt of poor countries to the multilateral institutions in the amount of US$143 million during 1995 and 1996. Allow me, in this context, to extend an invitation on behalf of the Danish government to host the founding meeting of the trust fund in Copenhagen. The early convening of a founding meeting will demonstrate a firm political determination to carry forward the initiative. The initiative could very well be seen by future generations as the decisive building block of the international debt strategy, the element that, around the turn of the century, made it possible for the poorest and most hopelessly indebted countries to exit from their debt problems. Let me touch upon three other issues that the Nordic countries regard as important on the international agenda: the development in the transition economies, the role of the state, and good governance. We warmly welcome the attention that the World Bank and IMF have given during the last few years to the problems of the transition economies. An overwhelming majority of the transition economies in central and eastern Europe have taken impressive steps toward market economies. For example, Russia has now made considerable progress in bringing down inflation within the framework of the stabilization programs agreed with the IMF. In parallel with this achievement, however, many problems remain and create a truly challenging task for the World Bank in its support for the transition economies. Therefore, work must continue to assist these economies in their efforts to reform and restructure. The International Finance Corpora- tion (IFC) has an important role to play here. The social effects of transition and environmental concerns should also be given high priority. Reforms of the public sector and good governance are important prerequisites in the struggle against poverty. The public sector can—and should—facilitate development of physical and social infrastructure, especially health and education. It requires planning, financing, and monitoring capacity. At a time of increased globalization, the state should also have the capacity to address issues of common global concern such as environmental degradation, climatic change, and migration. Public sector and civil service reforms should be aimed toward these objectives. Regarding privatization, it is, in many cases, sensible to break state- owned monopolies. The issue is not so much whether ownership is private or public. The issue is to enhance, where possible, competition on market terms and, at the same time, minimize the drain on public resources due to mismanagement and corruption. Good governance plays an important role in economic development, and we welcome increased priority in the Bank to this issue. The public sector must be credible, transparent, and accountable. There is a need for improving good governance through enhancing the capacity and institu-

©International Monetary Fund. Not for Redistribution 80 SUMMARY PROCEEDINGS, 1996 tional competence of the public sector. By bringing resources and authority closer to those involved, decentralization of government would make it easier for the priorities of the people to be reflected in decision making. Finally, I would like to mention that the Nordic experience has shown that decentralization can consolidate democracy and contribute to improved service delivery and increased accountability in the use of public funds. The Nordic experience is not unique. Well-implemented public sector reforms, including decentralization, have facilitated economic and social development in Africa, Latin America, and Asia. The Nordic countries wish to encourage the Bank and member countries to give priority to such governance and reform issues.

STATEMENT BY THE GOVERNOR OF THE BANK FOR FIJI

Berenado Vunibobo

It is an honor to attend the Fifty-First Joint Annual Meetings of the In- ternational Monetary Fund and the World Bank Group. I welcome Bosnia and Herzegovina to the membership of the Bretton Woods institutions. I also join fellow Governors in warmly congratulating Mr. Camdessus on his third term as Managing Director of the Fund. There is a general air of optimism on the immediate global economic outlook. Many industrial countries appear to have quickly stabilized the temporary economic slowdown in 1995. I am particularly encouraged by the economic recovery in Japan and Germany. On the other hand, the developing countries have put the contagion effects of the Mexican crisis firmly behind them and have continued to perform well as a group. I believe that the stable price environment offers us an excellent opportunity to establish a higher sustainable growth path. We should take full advantage of this rare opportunity and quickly sever the shackles that are holding us back. In particular, we must renew our efforts on fiscal consolidation to give us the necessary elbow room to persevere with the fight against inflation and, at the same time, keep interest rates down. This will help us maintain stability on the exchange rate market, providing further impetus to global trade and financial flows. Ultimately, this economic stability will create the springboard for better growth prospects among member countries, particularly the poorest among us. Having said that, I note that, while developing countries as a group continue to perform strongly, the pattern of growth has not changed at all. The dynamic economies of southeast Asia continue to forge ahead, al-

©International Monetary Fund. Not for Redistribution FIJI 81 though they have to develop contingencies against possible overheating. The slowdown in the Latin American countries was to be expected in the aftermath of the Mexican crisis and some economies are now back on track. However, while there has been significant improvement in the economic performance of African countries, the region still lags behind. In my part of the world, the Pacific island nations have not performed up to potential. In my view, this regional growth disparity must be brought to the top of the agenda of the multilateral institutions including the Fund and the Bank. The pursuit of a broader-based growth among the developing countries requires a multipronged approach on many fronts, cutting across the areas of spe- cialization of the network of multilateral institutions. I would like to see the multilateral institutions, particularly the Bank and the Fund, adopt this challenge as a collective mission through a global partnership approach. Let me turn to the issue of globalization. The world markets are being unified through technological advancement and innovation. Significant progress has been made in trade liberalization across the globe. It is encouraging to see many countries adopt Article VIII of the Fund. World trade has increased in leaps and bounds funded by more dynamic capital flows. The World Trade Organization is now firmly in place. What does this globalization imply for small member countries of the Bretton Woods institutions like Fiji? We are fully aware that we are a part of the global family, and we accept that there is really no other viable alternative but for us to find our niche in the world marketplace. We also realize that the key factor to successful integration is competitiveness. Herein, I think, is where, for reasons mainly beyond our control, we are most vulnerable. The biggest constraints that we face in the South Pacific islands are our isolation from major markets and our small resource endowments. These factors effectively inflate the costs of imported raw materials and the landed costs of our exports. At a time when we are still trying to search for solutions, our preferential trade agreements are being dismantled. To make matters worse, our scarce human resources, particularly those with special skills, continue to be attracted to more affluent industrial countries. We, therefore, call for bilateral and multilateral assistance in the following areas to help us in this transition period and allow us to effectively compete: • First, the development of our human resources through training and technical support; • Second, the strengthening of our institutions, procedures, and systems through technical assistance and advice; • Third, the development of our physical and social infrastructure; • Fourth, assistance in establishing new markets for our exports; • Fifth, the continuation of existing trade agreements; • Finally, the provision of concessionary financial flows.

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The age of high technology and sophistication has also allowed a high degree of international financial intermediation. This issue of resource transfer is critical for the continuing growth of developing countries. Most of our Asian neighbors have been successful in attracting private equity capital and portfolio investment. Unfortunately, we in the Pacific islands have not been as successful, but this is not entirely because of the lack of our economic efforts. For instance, in the case of Fiji, the Executive Board of the Fund has acknowledged that we have been successful in securing economic stability in the last two years. Economic growth in Fiji has averaged 3 percent in the 1990s, inflation is moderate at 3 percent, the current account is expected to be in surplus in 1996, and external debt servicing is less than 5 percent of exports of goods and services. In addition, we have recently established the Capital Market Development Authority to coordinate the development and deepening of our capital markets to assist us to mobilize savings and to improve the efficiency of intermediation. However, because of our size and location, it is unlikely that we can compete for private capital flows in a big way. Like many developing countries, we would rely mostly on official capital flows. At the same time, the needs of other developing countries, particularly the transition economies, are significantly larger than ours. I therefore fully share the concern of fellow Governors that the expected financial requirements of members may impose severe strains on the future resources of the Fund and the Bank. I am therefore happy to note the progress on the Eleventh General Re- view of Quotas. Likewise, I also note the somewhat faster progress toward doubling the borrowed resources currently available to the IMF under the General Arrangements to Borrow (GAB). I fully agree that the quota and the GAB are not substitutes. I would like to see the Fund remain as a quota-driven institution. The GAB can play a supporting role in helping out with international emergencies supplemented by other emergency funding mechanisms. The existing formula for the quota increase appears broadly appropriate. I would go along with an equiproportionate increase in quotas and a relatively smaller special increase to address the quotas of member countries that are seriously out of line. I also support the agreement on the Managing Director's proposal for an SDR allocation to resolve the equity issue. I, therefore, urge the Executive Board of the Fund to quickly finalize its deliberation and call on all member countries to accelerate the political process needed for the quick ratification of the eleventh quota increase and the SDR allocation. On the Bank side, I warmly welcome the eleventh replenishment of the International Development Association (IDA), which will allow disbursements of $22 billion over the next three years. I join the call for the richer members of the Bank to fully subscribe to their IDA obligations. In contrast to official bilateral debt, multilateral debt has been fairly stable at about 30 percent of total debt. In an environment where private capital flows are gain-

©International Monetary Fund. Not for Redistribution FIJI 83 ing dominance, it is indeed heartening that the Bank is offering a currency choice for its new and existing loans. I appreciate this initiative because it offers an alternative to the otherwise expensive currencies in which the mul- ticurrency debt is usually recalled. Furthermore, it will reduce the uncertainty and allow us to better project our debt-servicing and financial flows. I feel that one of the major challenges that face the Fund and the Bank today is to ensure that the allocation of funds and the modalities of their facilities are constantly aligned to the needs of member countries. This would go a long way to lifting the effectiveness of the twin institutions and improving the economic well-being of its members. The special needs of member countries like those in transition and the heavily indebted call for bold and innovative approaches. I am therefore pleased to support the continuation of the Enhanced Structural Adjustment Facility (ESAF) as a permanent feature of the Fund's facilities. In my view, the temporary and monetary features of the Fund's mandate are not being compromised by ESAF. The Fund's role is constantly being frustrated by the lack of adjustment and reforms that are prerequisites to the achievement of the Fund's wider and, I believe, more strategic objectives of growth and prosperity. I therefore request the Bank and the Fund to work very closely together to address the special structural needs of member countries. The South Pacific island nations have their own special needs. In particular, our countries are regularly devastated by hurricanes, which imposes severe strain on our balance of payments position and considerable cost on infrastructural rehabilitation. While we are grateful for bilateral assistance that we receive at such times, our needs could be further addressed by a fast disbursing emergency facility from the Bank and the Fund. Tech- nical assistance must take up a major portion of the Bank and the Fund's assistance to the region. I would like to take this opportunity to express Fiji's satisfaction at the attention the Bretton Woods institutions have placed on the Pacific region. I welcome the setting up of the new division in the World Bank to address the needs of small South Pacific islands. In Fiji, we are also fortunate that the Pacific Financial Technical As- sistance Centre (PFTAC) is located in Suva. I commend the continued support for the Centre, which has been granted a second three-year phase, and gratefully acknowledge the contributions of the donors. We have found that PFTAC provides the necessary and much-needed technical advice and training in public expenditure management, tax and customs reform, banking supervision, and statistics on national accounts and balance of payments. The PFTAC is helping small island nations in the region undertake much-needed reforms and conform to the new reporting requirements for data provision to the Fund. I would also like to specifically thank the Bank and the Fund for their help and support in the rehabilitation of the National Bank of Fiji. I conclude by wishing the Bank and the Fund well in their next year of operation.

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STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR FRANCE

Jean Arthuis

Allow me first of all to warmly congratulate the Managing Director of the International Monetary Fund on the eve of his unprecedented third term. The ardor and talent of Michel Camdessus have earned him the ad- miration of all and the gratitude of many, and I am confident that he will continue to face up to the heavy responsibilities of his task with rigor and caring. I have come away from the preliminary meetings of the last few days and from yesterday's speech by the Managing Director of the IMF with a feeling of confidence and even optimism on the prospects of our economies. Already, a great number of developing countries have steady growth with moderate inflation. I welcome the dynamism of the developing countries, many of which are experiencing a positive progression of their per capita GDP. The success of many African countries, which are now achieving growth superior to 5 percent per annum, bears witness to the fact that there were solid grounds for undertaking the efforts of the last few years. We all know that these good prospects will depend on being able to maintain what has been achieved: inflation kept in check in the industrialized countries and in a growing number of developing ones; the reduction of fiscal deficits well under way all over the world, even if some dangerous situations persist; and the reduction of external imbalances. However, growth in France and in continental Europe was fairly disappointing at the end of 1995 and in the first half of this year. Neverthe- less, we now have good reason to believe that the conditions for a recovery are in place; I note that the IMF forecast for France is practically identical to our hypothesis of 2.3 percent growth for 1997. The absence of inflationary risk; the high profit margins of private enterprise, and thus their capacity to finance new investments; the low interest rates following the sharp reduction observed over the last 12 months; and the relative stability of the exchange markets after the turbulence of 1995—all these elements create conditions favoring the return of growth to our countries. I would add that progress achieved in fiscal consolidation has made possible a significant reduction in long-term interest rates, which testifies to the fact that the credibility of our fiscal policy has been restored. The government of Alain Juppe had promised that we would reduce the deficit from 6 percent to 5 percent of the GDP in 1995, and we did it. We promised that we would reduce this deficit to 4 percent in 1996; we are doing it, and I can guarantee that this target will be met. We have committed ourselves to

©International Monetary Fund. Not for Redistribution FRANCE 85 reduce the deficit to 3 percent in 1997. We will keep this commitment as we have the previous ones. What then, in this favorable context, are our priority tasks? I subscribe unconditionally to the recommendations in the declaration of the Interim Committee, but I would like to emphasize two goals. First, the necessity to reach a new stage of fiscal consolidation. Certainly, we must pursue the reduction of the fiscal deficit now in progress, but the criterion of 3 percent that France, like several other European countries, has vowed to attain in 1997, is only a step. The medium-term goal, which we must now envisage, is to reestablish the balance in public finance. The high level of public debt in most of the industrialized countries, the aging populations, the necessity to lower taxes—all these considerations create the need for more lasting fiscal consolidation; that is, a return to balanced budgets. This certainly does not preclude taking the economic cycle into account by tolerating some reasonable margins of fluctuation. Such is the sense of the "Stability Pact" discussions on fiscal policy within a single currency now under way in Europe. Control of public expenditure will require great effort, but I am convinced that it will enhance the well-being of our people. The other goal that I want to emphasize is the necessity to promote international financial stability. This has several aspects. First, exchange rate stability. We have made progress over the last 12 months. The orderly reversal that we all hoped for is under way, and the improved economic environment that we all have observed can in part be attributed to it. The coming months will be decisive ones for Europe. The deadline for the single currency is nearing. We already fulfill many of the conditions, notably the most important one: most of our countries have achieved convergence at a very low level of inflation. We can say that price stability in Europe is presently assured. We need to undertake further fiscal efforts in continuity with what we have already accomplished. I have previously stated my determination and my confidence. I am convinced that France and several other European countries will be ready in time and under the agreed criteria to participate in the single currency from January 1, 1999 on. This will result in greater monetary stability in Europe, and we will, of course, have to cooperate with our other partners in order to strengthen global stability. The second aspect relates to the security of financial markets. Several recent crises in new financial products, as well as in traditional banking systems, in the industrialized countries and in the emerging countries or those in transition, have demonstrated the urgency of this question. The more our economies integrate, and the more the capital markets globalize, the greater the need for security in financial markets becomes. This can no longer be treated separately, country by country. Several initiatives have been, or are on the point of being, launched as a result of the impetus of

©International Monetary Fund. Not for Redistribution 86 SUMMARY PROCEEDINGS, 1996 the Lyons Summit. Many organizations are involved: the Basle Commit- tee, of course, the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS). I consider that the IMF itself will be called upon to play an important role in these efforts. What are the priorities? As for myself, I see four. First of all, we must enhance cooperation among prudential authorities in order to adapt their supervision to the reality of internationally active financial institutions and conglomerates, whose businesses span national borders and the traditional separations between financial services. Second, we must improve transparency in financial markets. The better the investor information, the more reliable their decisions or at least the decisions of those who wish to be prudent. The third question concerns the financial stability of emerging economies, which has particular importance for the IMF, the only institution with a worldwide mandate. It is indispensable for these countries to create prudential standards that are sufficiently dependable and respected to inspire investor confidence. This task cannot be limited to transposing to emerging economies the standards developed for international banks in the industrialized world. The emerging economies present different, often higher, risks that call for tailored responses. Finally, we must reflect on the consequences of the rise of electronic money. It is not certain that our as yet insufficient arrangements to prevent financial fraud and to fight money laundering can accommodate the rapid appearance of these new technologies. The last aspect that I would like to mention is the management of economic crises and the prevention of their spread. We all know that a priority effort must be directed at preventing crises through strengthening the surveillance of authorities, mostly the IMF, and of the markets themselves. Whence the importance of the creation of the standard for data dissemination and, I am delighted at the success with which this initiative has met. Men are fallible and markets will always be unpredictable, so, even with strengthened surveillance, we cannot hope to protect ourselves from future crises. It is therefore essential that we have at our disposal the resources to face up to them. I am happy that we have been able to agree to double the General Arrangements to Borrow (GAB). The first-time participation of a number of emerging countries is also a sign of the times and accurately reflects the new economic and financial world. As Mr. Maystadt, the Presi- dent of the Interim Committee, reminded us, this exceptional financing must be rapidly coupled with a strengthening of the normal financing of the IMF, a quota increase. In conclusion, I would like to return to the development question, which is once again at the center of our work, or rather to take up an expression used at the Lyons Summit and used yesterday by Mr. Camdessus and Mr. Wolfensohn, that of a new partnership for development. When

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President Jacques Chirac took the initiative to invite for the first time last June the President of the World Bank and the Managing Director of the International Monetary Fund, together with the United Nations Secretary General and the Director of the World Trade Organization, to a work session with the heads of state and government, he intended to deliver a double message to his colleagues: a message of openness and of attentive- ness. We all have a voice in this worldwide enterprise, and we will only prosper together. It was also a message of confidence and support. The multilateral institutions, and in the economic sphere the International Monetary Fund and the World Bank, can best channel our cooperation to build this common prosperity. It is therefore essential that the richest countries uphold the example of unfaltering support and scrupulously honor their commitments. Support, of course, can never be unconditional and each partner has its responsibility. The developing countries owe it to themselves to implement good policies, allying economic rigor and social justice. The international institutions must prove their capacity to change, to adapt to the new demands of their members; and the rich countries must remain faithful to their obligation to stand by them. It is in this spirit that we have worked together during this assembly. I want to acknowledge again the agreement that has permitted us, through common effort, to guarantee the permanent financing of the Enhanced Structural Adjustment Facility and therefore the future support of the IMF for the adjustment efforts of the poorest countries. We are left with some issues to settle. It will be necessary to make decisions that cannot be deferred for too long. I have confidence that the same spirit of consensus that prevailed during these meetings will allow us to find a good and solid financial agreement at future ones. This agreement has made possible the participation of the IMF in the new debt initiative. It is remarkable that, within three months of the impetus provided by the Lyons Summit, all the partners of the international community have been able to come to an agreement. The creditors of the Paris Club are committed to a new effort to increase debt relief from 67 percent to 80 percent for the heavily indebted and poorest countries. I would like to renew my thanks to Mr. Camdessus and Mr. Wolfensohn for the exemplary spirit of cooperation that inspired their work and made this agreement possible. I hope they will participate in the implementation of this initiative to secure the flexibility and pragmatism necessary to its success. To my mind, this agreement is a major advance that will permit us to offer the heavily indebted and poorest countries the prospect of emerging from debt, and thus the hope of regaining a growth rate that can raise the living standards of their people. Naturally, they must also do their part in maintaining tight fiscal policies, openness to trade, and monetary stability, without which no progress is possible.

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STATEMENT BY THE GOVERNOR OF THE FUND FOR GABON

Marcel Doupamby Matoka

The Global Economic Outlook As we approach the dawn of a new millennium, global developments give us cause for renewed optimism. In the last ten years, the advance of global economic integration has accelerated at a dramatic rate, in step with an expansion in world trade and flows of private capital to a number of developing countries. A broadly favorable international economic environment is thus envisaged for developing countries in the medium term, fueled jointly by a stable industrial country growth, low inflation, and low world real interest rates. Developing countries as a whole are thus expected to grow by over 5 percent a year on average over the next decade. Huge disparities remain, however, among developing countries, and this gives us cause for serious concern. The pace of integration into the global economy has been very uneven among developing countries. The ratio of trade to GDP has fallen in almost half of all developing countries in the last ten years, according to World Bank reports. Moreover, two- thirds of all foreign direct investment flows between 1990 and 1993 were concentrated in just eight developing countries, while half of all developing countries, including most of sub-Saharan Africa, received little or no inflows. This in spite of enormous investment opportunities resulting from the emergence of a more liberal macroeconomic environment. Sub-Saharan Africa enjoyed growth of more than 3 percent in 1995, a marked improvement over the 1991-94 average of 0.7 percent a year. This growth was partly due to improved commodity prices, but also to the effect of economic reforms undertaken by a growing number of countries in the region. However, regional averages mask significant variations in growth rates, and, while a small number of countries have continued to ex- hibit strong performance, many others continue to experience contraction. Only very modest increases in per capita incomes are envisaged in sub- Saharan Africa for the foreseeable future, unless the efforts of reforming countries in the region are rewarded with adequate flows of capital, both private and official.

Resource Flows Official Development Assistance (ODA) Within this context, the poor prospects for aid flows to sub-Saharan Africa are particularly worrisome. As is well known, for many countries in the region, official development assistance (ODA) constitutes virtually the

©International Monetary Fund. Not for Redistribution GABON 89 only source of external financing and often represents a very significant part of their revenues. Yet in recent years, ODA has been on a persistently downward trend, falling from 0.35 percent of donors' GDP in 1982/83 to just 0.29 percent in 1994, the lowest level in over two decades, according to World Bank estimates. Almost all donor countries have reduced their ODA contributions in recent years. This trend is expected to continue, and the poorest countries, most of which are in Africa, may not be able to count on adequate flows of ODA in the future. With limited access to private capital due to creditworthiness constraints, and declining levels of ODA, sub-Saharan African countries risk further marginalization in spite of significant progress with policy reform. The World Bank Group should assist African countries' efforts to promote private sector development and to make them more attractive to foreign investment. In particular, potential investors must be made aware of the sizable gains made by African countries in reforming their economies. IDA-11 In this environment of limited flows of private capital and ODA, the Bretton Woods institutions will have an even greater role to play in supporting the development efforts of sub-Saharan African countries. The recently concluded eleventh replenishment of the International Development Association (IDA), while far short of estimated lending requirements and well below previous levels, was arrived at only after the exceptional efforts of some IDA donors. Despite tight budget constraints and competing demands, many donors pledged additional amounts to make up for the significant shortfall in IDA resources. We are grateful for their support. The longer-term outlook for IDA is of serious concern to us. Donor funding under IDA-11 is lower in real terms than in IDA-9 or ID A-10. More important, it is significantly less than what IDA recipients are likely to require in future years, particularly as the number of claimants is anticipated to increase, and as lending resumes to currently inactive borrowers. This will call for substantially higher levels of donor contributions for the year 2000 and beyond, if planned lending programs are to be completed successfully. The concessional financing needs of sub-Saharan African countries are certain to remain substantial in the short term, as they pursue vigor- ously their economic reforms with a view to achieving sustainable development. To this end, we would like to reiterate the importance for our countries to receive an adequate proportion of IDA funding, and we trust that our region will receive about 50 percent of total IDA-11 resources, as agreed under previous replenishments. Enhanced Structural Adjustment Facility (ESAF) We strongly support a self-sustained ESAF as a means of solidifying the work of the Fund in low-income countries. The success of ESAF- supported programs in the past few years provides firm evidence that the

©International Monetary Fund. Not for Redistribution 90 SUMMARY PROCEEDINGS, 1996 best approach to dealing with the balance of payments problem in low- income countries is to encourage adjustment, structural reform, and increased investment in these countries in the context of a long-term strategy supported by external financing that does not aggravate an already heavy debt burden. We must build on this success with an ESAF that is ade- quately funded in order to respond effectively to the needs of the eligible members. In this connection, we are pleased with the consensus on the continuation of ESAF operations with its existing features. We, therefore, appeal to the donor community for bilateral support for both the loan and subsidy elements. Such support would be a clear signal of a collective commitment to the efforts of the Fund in helping those of the membership that are most in need and are making efforts on their part to become eligible to benefit fully from the process of global economic integration. Quotas We believe that the size of the IMF must keep pace with growth in the world economy. While we agree that efforts to enhance borrowing arrangements under the General Arrangements to Borrow (GAB) are a prudent step in preparing for potential shocks to the international financial system, this is not a substitute for a quota increase and, therefore, we attach great importance to reaching a timely agreement under the Eleventh General Re- view of Quotas. Having said this, we must also emphasize the importance we attach to finding a more equitable approach to the calculation of quotas, in view of the fact that past reviews have led to successive declines in the voting strength of most developing countries, especially low-income countries, most of which are in Africa. This means that our influence in the decision-making process of the IMF continues to decline with each increase in quotas. Besides having negative implications for the maximum amount of financing that our countries can obtain from the IMF, this unfavorable trend threatens the representation of Africa in the Board of the IMF. The situation calls for an examination of the variables in the quota formulas and the possibility of including new variables. In addition, we feel it opportune for the Fund to reactivate the system of basic votes so as to compensate for the weakness in voting power of certain countries or groups of countries, particularly those representing sub-Saharan Africa in the Fund. The IMF must be prepared to consider other options, including selective intervention, in view of the very limited access of many of these countries to private capital and much more limited latitude than the rest of the Fund members to finance their payments deficits out of their own resources.

Resolving the Debt Problems of African Countries For many years, the heavy burden of debt has stifled the growth of many African countries. There is now general agreement that a large num-

©International Monetary Fund. Not for Redistribution GABON 91 her of these heavily indebted poor countries (HIPCs) have debt burdens that are likely to remain above sustainable levels over the medium term, even with strong policy performance and full use of existing debt-relief mechanisms. The Development Committee, at its spring meeting, endorsed a joint Bank and IMF initiative on a framework for action to resolve the debt problems of the heavily indebted poor countries. We would like to express our appreciation for the joint efforts of Messrs. Camdessus and Wolfen- sohn and their colleagues in responding to the Development Committee's request to develop an action program by the time of the 1996 Annual Meet- ings. It is important that debt relief be comprehensive, provided in a flexible and coordinated manner, and include broad burden sharing and equitable participation by all creditors. The success of the HIPC debt initiative will depend to a very large extent on the conceited efforts of all the principal creditors involved. Both bilateral donors and the multilateral institutions, as well as other creditors, must be committed to providing significant levels of funding of an additional nature in support of the initiative. Paris Club creditors will have a particularly prominent role to play in this endeavor, and we trust that we can count on them to make the extra effort required to make this initiative successful by significantly exceeding the Naples terms. Ultimately, creditor and debtor countries alike stand to benefit from an early and successful resolution of this protracted debt crisis. We are encouraged by the strong support shown for this initiative by the members of the Group of Seven meeting in Lyons last June. The Bank has played a lead role in this initiative, and has shown a willingness to make a sizable contribution to the proposed trust fund. We trust that the IMF will also play a proactive role by contributing some of its resources to the proposed fund. We firmly believe that the sale of a portion of its gold reserves would be one way in which the IMF could make a sizable contribution to the initiative. We believe that a larger number of countries than currently anticipated will need to be included in the initiative, and we would caution against a rigid adherence to the numerical classifications by which debt sustainability is being determined. The eligibility criteria used in the proposal to determine access to the Fund may have the effect of excluding deserving countries. We also believe that the export growth assumptions in- herent in the proposal are overly optimistic, and that more realistic projections should be incorporated in the calculations. A flexible, case-by- case approach must be followed in determining eligibility and, most important, a shorter, more realistic time frame must be used to establish a country's track record of reform so as to enable eligible countries to begin to benefit from the initiative as soon as possible and to encourage them to maintain the momentum of reform.

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Capacity Building in Africa A key prerequisite for sustainable development, especially in sub- Saharan Africa, is adequate mobilization of resources for the building of human and institutional capacity. Without sufficient capacity to ensure the effective implementation of projects in Africa, our countries are unable to implement them with commitment and effectiveness. This fact is increasingly being recognized by our development partners and it is gratifying to note that, more and more, capacity-building concerns are being incorporated into programs in the region, while the emphasis on traditional technical assistance is diminishing. In our discussions with Mr. Wolfensohn during the last Annual Meet- ings, we, the African Governors, expressed concern about the capacity problem in Africa and urged the Bank to address it more decisively. Mr. Wolfensohn has been an active proponent of capacity building and en- thusiastically supported the African Governors' efforts to improve the Bank's approach to capacity building in Africa. Since then, on the recommendation of the Governors, the African Executive Directors, with the assistance of the Bank's Africa Region, have organized subregional and national workshops in Africa to identify the key capacity needs and possible solutions, and to build consensus on the key issues. National capacity assessments in some countries to identify strategic capacity gaps, and an assessment to enhance the impact of Bank policies, instruments, and operational practices on capacity building and capacity utilization in Africa, have also been completed. A working party has also been established to assess the impact of Bank-sponsored projects on capacity building into Bank operations. Various constructive discussions have led to the preparation of an action program for capacity building in Africa. We have thus agreed to launch a broad initiative in support of partnership and capacity building. This initiative could be based on the creation of a trust fund, to be funded by resources from official and private sources. We look forward to seeing the impact of these changes as soon as possible in the Bank's operations in our countries.

Africa and International Trade In the aftermath of the Uruguay Round, the volume of trade has continued to grow at a brisk pace, tariffs have been reduced in many countries, and the costs of trade, especially communications costs, have fallen. Many African countries have lagged behind, however, in opening to world trade, fearful of the formidable adjustment costs and the uncertain benefits associated with trade reform. We are concerned that the world markets do not offer a level playing field, thus limiting the benefits that could potentially accrue to African countries from more liberal trade policies. In particular, antidumping actions are on the increase, and the agriculture of developed

©International Monetary Fund. Not for Redistribution GABON 93 countries remains highly protected and subsidized. Furthermore, the Mul- tifibre Arrangement, to be phased out by 2005, continues to distort global trade, acting as a huge compulsory export tax on developing country exports of textiles and clothing. In spite of the reduction of tariffs, we have observed an increase in nontariff barriers, coupled with high transportation costs, which generally put many sub-Saharan African countries at an economic disadvantage. Moreover, the fact that the reduction of customs tariffs is lower for manufactured products than for raw materials tends to be a disincentive for the local processing of our products. For sub-Saharan Africa, losses are estimated at up to 0.5 percent of GDP, or some $1.3 billion, while gains are mostly predicted for all other developing country regions. African exports face reduced preferential trade margins, which will lead to export losses for almost all African countries. The price effects of the Round will increase Africa's food import bill significantly, and its agricultural trade balance is projected to de- teriorate. The final act of the Round, in recognition of these potential costs, included various provisions for differential obligations, technical assistance, other financial support, and improved tariff preferences as compensation for these countries. These commitments should now be honored. The World Trade Organization (WTO) and especially the Com- mittee on Trade and Development must play a major role in monitoring the impact of the Round on the poorest countries, ensuring compensation commitments are honored, and providing technical and capacity-building assistance to affected countries. The United Nations Conference on Trade and Development (UNCTAD), in close cooperation with the African regional and subregional institutions, could act as a forum for analyzing the relationship between trade and development, coordinating changes in preference schemes, and setting priorities for technical assistance, especially with regard to the new issues currently under negotiation, such as the multilateral investment agreement, competition, and trade and the environment.

Regional Cooperation and Economic Integration We strongly believe that economic cooperation and regional integration, as provided for in the Abuja Treaty, are a means of promoting sustainable development in Africa, as in other regions of the world; strengthening regional peace and political stability; guaranteeing our participation in international trade; and halting the growing marginalization of our economies. This is why, by combining our limited resources, we are striving to harmonize and to coordinate our countries' macroeconomic policies, to develop cross-border trade and investment, and to improve the international competitiveness of our productive sectors, in particular through the progressive elimination of obstacles to the free movement of labor, capi-

©International Monetary Fund. Not for Redistribution 94 SUMMARY PROCEEDINGS, 1996 tal, goods and services, and through the improvement of the political and social environment. This strategy merits support by the international community in the context of the various initiatives already taken by our governments. To this end, the World Bank and the International Monetary Fund should develop the appropriate resources and instruments to enable them to contribute more actively to the attainment of these objectives through constant and enhanced support of our regional and subregional organizations for economic cooperation and integration.

Conclusion The coming years will be crucial for sub-Saharan African countries. If their reform efforts, both economic and political, are supported by adequate donor funding and increased flows of private capital, together with debt reduction and a hospitable external environment, then they can look forward to improved growth prospects. If, however, ODA flows continue to dwindle, private capital flows continue to bypass the region, and the donor community remains tentative about debt reduction, then Africa may be prevented from sharing in the global economic expansion and integration that other regions are currently enjoying. While much will depend on our own countries' commitment to reform, Africa's development must also be a shared responsibility, as the continent's performance will have implications for the world at large. In an increasingly integrated world, the decisions that we all make today will determine the kind of world in which we will live tomorrow.

STATEMENT BY THE GOVERNOR OF THE FUND FOR GERMANY

Hans Tietmeyer

On behalf of Germany, I would first of all like to welcome the new members of the IMF and the World Bank, Bosnia and Herzegovina and Brunei Darussalam. Trends in the world economy have, on the whole, been encouraging of late. There is steady, and actually quite often buoyant, growth in many regions at present. World trade continues to expand sharply, and, in a large number of countries, inflation appears now to be under better control than it has been for many years. Even so, both of the Bretton Woods institutions are faced with new challenges at the start of their second half-century of existence. Above all,

©International Monetary Fund. Not for Redistribution GERMANY 95 the integrative forces in the world economy—"globalization," for short— are having an ever-stronger impact, not only on the institutions themselves but also on their member countries. All around the globe there are impressive examples of how economic liberalization and integration in the world economy are opening up stronger growth and welfare prospects than any other strategy. That is also true of financial markets. It will therefore be important for the Bretton Woods institutions to assist their members in accepting the new economic environment and its challenges and in turning them to their own advantage. Serious structural weaknesses continue to exist in many industrial countries. It is surely no coincidence that those countries that responded to the challenges presented by the global market at an earlier date and with fewer reservations are now enjoying more favorable conditions for growth and employment. In its most recent World Economic Outlook (WEO), the IMF rightly noted that, in the vast majority of cases, unemployment in continental Europe is of a structural origin; in other words, it cannot be tackled by means of expansionary financial policies. What is needed are more flexibility and deregulation of the labor and product markets and the recti- fication of undesirable developments in the welfare state. At the same time, it is also important to continue consolidating budget deficits and reducing government debt in a vigorous and sustained manner, so as to foster the confidence of investors and consumers, and to lower interest rates (which, rightly so, is also a key subject of the WEO). Monetary policy cannot make up for shortcomings in structural adjustment. Nor can it play a direct role in stimulating economic activity. Rather, monetary policy must be committed to the goal of stability. What it can do is stabilize expectations and generate confidence. That is what offers the best outlook for long-term growth—an experience emphasized also by the Madrid Declara- tion. In this context, we notice with some concern the recent revival of the view that economies might be better off with a certain percentage of inflation than with price stability. The differences in economic activity reflecting the degree of economic opening and liberalization are often even more striking in the developing countries and countries in transition than they are in the industrial world. In many regions, especially in the emerging markets, growth is meanwhile noticeably higher than in the industrial countries. There are even signs of overheating in the Asian region. Also, in the majority of countries in transition, the economy is reacting more and more to market forces and its increasing integration into the world economy. Many countries have realized that economic liberalization releases more productive energy than any conceivable amount of bilateral or multilateral aid. By contrast, in many other developing countries and countries in transition, prevailing structural obstacles have left the growth potential under- utilized. In most of those countries, large public sector shares in GNP and the

©International Monetary Fund. Not for Redistribution 96 SUMMARY PROCEEDINGS, 1996 scale of government intervention continue to restrain the development of the private sector. Bearing this in mind, we welcome the World Bank's intention of making the role of the public sector the key topic of next year's World De- velopment Report. Reforms such as the creation of free markets or the liberalization of foreign trade and capital movements often founder, not because of any alleged lack of funds but because of a lack of political will or attempts to maintain "control" over the development of an economy. This prevents a country's production potential from being put to full use. The progressive liberalization and globalization of the financial markets also pose challenges to all countries. A number of countries have also been forced to learn in the recent past that international capital markets impose sanctions on inappropriate policies. Easy access to foreign resources, for instance, must not tempt capital-importing countries into an undue expansion of domestic demand. High current account deficits—especially if they are financed at short term and are accompanied by a sharp expansion of the domestic money stock—must be taken as a warning signal. The unparalleled expansion and integration of the international financial markets also require more effective supervision of the financial institutions in order to contain the risk of payment difficulties, domino effects, or other adverse implications for the real economy. This is, above all, a challenge for the authorities in the emerging markets, while in a large number of countries in transition, banks still have to cope with the inherited problems posed by the former economic system, namely, large-scale nonperforming loans. The overall economic situation in Germany, too, has shown a positive trend over the past few months. Now that last year's excessive appreciation of the deutsche mark has largely been reversed, and given the present more moderate trend in wages and low interest rates, the government expects a growth rate above 1 percent this year, which could increase to 2!/2 percent in 1997. Progress in budgetary consolidation and in structural reforms has also improved the medium-term outlook for growth. Overall, however, the improvement in the situation in itself is not sufficient to guarantee high, sustained, and noninflationary economic growth and to solve our most pressing problem—high unemployment. With respect to the budget, Germany must and will continue its consolidation policies. For next year, the government has the firm intention to reduce public expenditures again tangibly, which will provide the basis for a reduction of the public deficit to less than 3 percent of GDP so that Ger- many can fulfill the Maastricht criteria. Consolidation focusing on the expenditure side is a precondition for continued low interest rates and provides additional scope for investment and consumption and, consequently, for higher growth rates. Germany has also recently introduced reform measures to combat the high level of unemployment. These aim to increase flexibility in the labor

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market and in wage formation, to reduce high nonwage labor costs, and to cut subsidies that inhibit private initiative. As elsewhere, loosening traditional structures is very difficult in Germany. However, there is no alternative to this approach. Any attempt to avoid or postpone the necessary adjustment by short-term stimulation of economic activity would only increase the price of adjustment to be paid later on. German monetary policy has also played its part in creating the necessary conditions for stable growth and successful structural reforms. The inflation rate and official interest rates in Germany are now at an all-time low. Long-term interest rates have also come down. These successes bear out the appropriateness of the monetary policy strategy that is being pursued. Obviously, our policy of targeting the expansion of the money stock has proved its worth. The IMF and the World Bank have reacted promptly and resolutely to the new global economic challenges. We welcome, above all, the IMF's decision to intensify its surveillance over its member countries' economic policies with shorter time lags so that critical developments can be identified at an early stage. That is also the purpose of the newly developed standards for the statistical data that member countries are to make available to the markets. Germany will adopt these standards; however, the flexibility announced by the IMF for their implementation is necessary to strike a proper balance between timeliness and reliability of the data to be supplied. On the other hand, we are viewing with mixed feelings the rise in the IMF's lending to a record level. First, we note that the IMF has been in a position to support some of its members in a particularly difficult situation in an unconventional manner by providing large amounts of financial assistance. At the same time, however, we have two concerns: • First, the IMF must not become a lender of last resort for certain groups of creditors who have entered into excessively large exposures and who, as a result, have reaped large risk premiums. Bail-out operations of this kind could undermine the discipline of the international financial markets to the detriment of global stability. • Second, building up undue credit exposures financed by central bank resources is problematic in terms of global anti-inflation policy and might ultimately undermine the financial integrity of the IMF. A greater appreciation of these principles, including the catalytic role of the IMF, would appear to be warranted. Even so, Germany remains willing to cooperate in the Eleventh Gen- eral Review of Quotas in a constructive manner, with a view to meeting the IMF's need for liquidity as justified by its mandate. The envisaged New Arrangements to Borrow (NAB) will provide the Fund with additional credit lines to cope with balance of payments dislocations threatening the

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stability of the international monetary system. Germany will make a substantial contribution to these arrangements. However, these lines of credit must not become a substitute for an appropriately sized quota increase. In decisions on financing the IMF, the abundant supply of credit in the international markets must be taken into consideration. Countries with sound financial policies can draw there on ample liquidity at favorable conditions. Hence, there is no global need for an allocation of special drawing rights (SDRs). Nevertheless, we would support a one-off "equity allocation" on the basis of an amendment of the IMF Articles of Agree- ment enabling new members to participate in the SDR system. In this spirit, we welcome the recent proposals made by the Managing Director as a basis for further progress in this area. The debt initiative in favor of a few poor countries has made decisive progress during the past months. All groups of creditors—the IMF, the World Bank, regional development banks, and bilateral creditors—must each contribute broad and equitable shares. We are pleased to note that the IMF and the World Bank have already declared their participation. Also, Paris Club creditors are prepared to contribute appropriately and to grant debt cancellation of up to 80 percent on a case-by-case basis. Germany supports these decisions fully, even though they come at a time when fiscal consolidation places heavy burdens on most of the creditor countries. However, the debt initiative must be targeted at those countries whose debt situation is unsustainable according to the joint analysis of the IMF and the World Bank and that have proved their commitment to strong adjustment. Given these criteria, only a limited number of countries facing debt problems will be eligible for the initiative. The International Monetary Fund and the World Bank must continue to perform their tasks, under their respective mandates, in a flexible and constructive manner, while preserving their tried and tested division of labor. They must avoid "short-termism" and the search for "free-of-charge" and "free-of-pain" solutions and must deploy the available resources as effectively as possible. In those terms, both institutions have our full support. For the IMF, it will chiefly remain important to make a contribution to macroeconomic stabilization as a precondition for the successful integration of its members in the world economy. It will be the task of the World Bank to provide assistance in the necessary process of market-oriented structural adjustment—for instance, in the areas of good governance; development of human capital; poverty alleviation; privatization; and the opening up and strengthening of financial markets—thereby ensuring that developing countries benefit from globalization. Finally, we are pleased that next year's Annual Meetings will be held in a region in which integration in the world economy on the basis of monetary stability has been particularly successful.

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STATEMENT BY THE GOVERNOR OF THE FUND FOR GREECE

Lucas D. Papademos

I am very pleased to address the Joint Annual Meetings of the Inter- national Monetary Fund and the World Bank Group. I would first like to express my warm congratulations to Michel Camdessus on his election as the Managing Director of the IMF for a third consecutive term. I would also like to join the other Governors in extending a special welcome to the delegation of Bosnia and Herzegovina, the new member of the Bretton Woods institutions. These meetings provide a forum for discussing not only global economic developments and policy issues, but also the economic performance of individual countries. I will devote part of my statement to sharing with you the progress made in Greece toward attaining stability and sustainable growth, as well as to explaining the economic policy challenges we face on the road to European economic and monetary integration in an increasingly globalized world economy. The consensus assessment of global economic developments is overall positive, and medium-term prospects for the world economy remain favorable. Economic growth is strengthening and is projected to accelerate further next year. Inflationary pressures continue to be subdued in industrial countries and are moderating in developing and transition economies. Con- siderable progress has been made with respect to exchange rate stability. World trade continues to expand at a fast pace and international financial markets have not displayed the volatility experienced in previous years. Fi- nally, in many countries fiscal consolidation is being pursued with resolve, and structural reforms that enhance efficiency are being implemented. Notwithstanding these positive developments, economic performance across regions and countries is uneven. On the one hand, it is very encouraging to note that developing countries on the whole continue to grow rapidly and that economic recovery is under way in transition economies. On the other hand, growth has been moderate in some industrial countries, particularly in Europe. Moreover, many economies still face problems associated with the restructuring being induced by, inter alia, technological advances and increasing globalization, as well as by historic developments, such as the continuing transition of centrally planned to market economies and the process of European economic and monetary integration. In the European Union, the weakening of economic activity in early 1996 is expected to be reversed, because conditions favoring a recovery have improved. Nevertheless, unemployment is projected to remain high. This is partly attributed to the effects of budgetary consolidation efforts aimed at meeting the criteria for participation in the single European cur-

©International Monetary Fund. Not for Redistribution 100 SUMMARY PROCEEDINGS, 1996 rency area. The unemployment problem in Europe, however, reflects primarily deep-seated structural factors, and any trade-off between fiscal re- trenchment and economic activity can be expected to be temporary, because budgetary discipline will ultimately have beneficial effects on growth. Indeed, fiscal consolidation, and more generally, stabilization policies need not affect economic activity adversely even in the short run. An appropriate macroeconomic policy mix combined with structural reforms can create conditions conducive to increased investment, partly by boosting confidence and creating favorable expectations about the future course of the economy. In today's integrated financial markets, these effects can be especially strong in countries that tackle their fiscal imbalances decisively. The experience of my own country supports this view, as well as the need for further concerted and sustained efforts in order to promote structural changes that will enhance growth potential. A key feature of the Greek economy in the last two and a half years is that substantial progress toward stabilization has been accompanied by faster economic growth. Over this period, inflation has gradually declined to single-digit levels for the first time in more than 20 years. A tight monetary policy, which has progressively relied more on the exchange rate as a nominal anchor, has succeeded in stabilizing the drachma's external value and moderating inflationary pressures. Moreover, the general government deficit has shrunk by more than 5 percentage points of GDP. The deceleration of inflation, the consolidation of the budget deficit, and the enhanced credibility of exchange rate policy have led to substantial capital inflows and a significant drop in interest rates. These developments and improved confidence in the prospects of the economy have stimulated private investment, which, together with increased public infrastructure investment, has underpinned an acceleration of growth to an estimated 2.5 percent in 1996. Thus, disinflation and budgetary consolidation have been accompanied by an upturn in economic activity. Moreover, the significant increase in private and public investment is strengthening the foundations for sustained growth. However, in the short run, the pickup in production has not proven sufficient to prevent a rise in unemployment. Despite the significant progress achieved in recent years, economic and monetary policy in Greece continues to be confronted with various challenges. The still-high budget deficit and public debt constrain the country's growth prospects and the effectiveness of stability-oriented monetary policy. In an environment of integrated financial markets, monetary policy faces difficulties in controlling credit expansion fueled by capital inflows that are induced by the high differential between domestic and international interest rates and a credible exchange rate policy. Since fiscal imbalances are the fundamental cause of high domestic real interest rates, effective control of liquidity in the medium term requires an improved policy mix involving faster fiscal consolidation. At a microeconomic level,

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competitiveness is adversely affected by low productivity growth relative to competitor countries. Administrative and organizational rigidities ham- per the flexible adjustment of markets to changing economic conditions and pressures from globalization. Consequently, to consolidate the progress achieved and attain sustainable growth, it is essential to pursue a strategy that combines stronger fiscal adjustment with the implementation of structural policies that will enhance the productivity and competitiveness of the economy. On the fiscal front, the Greek government intends to place greater emphasis on expenditure cuts by curtailing public employment, improving financial control of public entities, and reducing state subsidies. In addition, the effort to expand the tax base and improve the efficiency of the tax collection system will be continued, given the magnitude of tax avoidance. The structural reforms envisaged include: large infrastructure projects; measures to improve the effectiveness of public administration; policies for enhancing labor mobility and upgrading human capital; acceleration of the privatization process; and institutional and technological changes to promote the efficiency of financial markets. The government is committed to the implementation of the convergence program aimed at fulfilling the preconditions for Greece's participation in the European economic and monetary union, an objective supported by the majority of the Greek people. A consistent set of policies involving fiscal consolidation, stability-oriented monetary policy, and structural reforms will be mutually reinforcing in achieving this objective and in establishing conditions for sustainable growth.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR INDIA

P. Chidambaram

Let me join my fellow Governors in congratulating Mr. Michel Camdessus for his unanimous election as the Managing Director of the In- ternational Monetary Fund for an unprecedented third five-year term. Mr. Camdessus has steered the IMF with consummate skill during a decade of remarkable economic changes. We look forward to his continued stewardship of the IMF as we prepare for the challenges of the twenty- first century. I would also like to welcome Bosnia and Herzegovina into the Bank-Fund family. Several fellow Governors have noted favorable aspects of the world economic situation, including a pickup in world output growth, a decline in long-term interest rates, better alignment of exchange rates, and strong

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growth of developing countries. We should recognize that the relatively favorable economic situation is not a fortuitous outcome, but the product of many years of hard work and sacrifice in pursuit of sound economic policies at both national and international levels. Developing countries have undertaken major restructuring of their policies, and this is reflected in improved performance. I am particularly happy to note that developing countries are increasingly playing a greater "locomotive role" in the world economy. Rapid growth in developing countries is actually strengthening the pace of growth in industrialized countries. Global economic interdependence is broadly reflected in favorable "reverse linkages" between developing and industrial economies. The evolution of healthy economic interdependence has been greatly aided by the progress achieved in moving toward an open, rule-based, nondiscriminatory world trading system. But we still have a long way to go and threats of protectionism are ever present. The international community must remain especially vigilant and united against insidious new forms of protectionism through linkage of trade with labor standards, the environment, and other issues. We must also avoid undue complacency about the world economic situation. Many developing countries have yet to benefit significantly from world growth and increasing interdependence. Unemployment levels in many Organization for Economic Cooperation and Development (OECD) countries remain high, reflecting loss of potential world output and providing combustible tinder to flashes of protectionist sentiment. The burden of debt bears heavily on some of the poorest countries, aid flows are declining, and there are serious concerns about the highly uneven distribution of private capital flows to developing countries and about their potential volatility. It is a matter of great satisfaction that we have at last made progress toward solving the problem of heavily indebted poor countries. We hope that the remaining details will be sorted out expeditiously. We also welcome the progress made in establishing the New Arrange- ments to Borrow, which would effectively double the resources available to the IMF under the General Arrangements to Borrow, and thus improve the Fund's ability to provide emergency financing to members in situations of systemic stress. However, access to borrowed resources cannot be a substitute for an increase in Fund quotas. The Fund's basic financial strength must be derived from a substantial expansion of its own resources through quota increases. There is an urgent need to reach a satisfactory conclusion on the Eleventh General Review of Quotas. It is also necessary to act on a fresh allocation of SDRs. A fresh general allocation of SDRs remains, in our view, the best solution. However, as this does not have sufficient support, we have, in a spirit of compromise, supported the proposal for a special allocation with an agreed benchmark ratio

©International Monetary Fund. Not for Redistribution INDIA 103 to quotas through an amendment of the Articles of Agreement. We welcome the Interim Committee's conclusion that such an amendment of the Articles would not in any way affect the power to have a general allocation of SDRs when there is sufficient support for this long overdue initiative. An increasingly large number of countries have accepted the obligations under Article VIII and moved toward current account convertibility. Success in managing current account convertibility should lead to greater flexibility in the capital account. However, it is important to recognize that complete freedom with respect to capital transactions must be approached cautiously, since many developing economies may have limited abilities to deal with volatility of capital flows, and capital flights may occur in crisis situations. The Madrid Declaration, as modified a few days ago, gives expression to our common aspirations for the progress of the world. It is a document that stresses both growth and social cohesion. It calls for fiscal adjustment but at the same time calls upon countries to pay attention to the quality and composition of that adjustment so that nations achieve sustainable growth along with the development of human resources. This has always been our approach to fiscal adjustment, and I am happy that this finds full expression in the Declaration. Let me now turn to issues relating to the World Bank Group. It is disappointing that official development assistance (ODA), as a proportion of the GNP of donor nations, fell to 0.27 percent in 1995. This is the lowest recorded level since the United Nations adopted the target of 0.7 percent in 1970. We do recognize that private capital flows have shown tremendous buoyancy, and many countries, my own included, are taking active steps to benefit from these flows. However, in the majority of developing countries, private flows cannot be a substitute for adequate flows of official concessional assistance. Against this background, I would like to express my warm appreciation for the tremendous energy and leadership that Mr. Wolfensohn has shown in concluding negotiations on the eleventh replenishment of the International Development Association. IDA remains central to the global effort to alleviate poverty. There is also a need to expand the flow of resources from the World Bank. The level of World Bank lending in FY 1996 remains almost unchanged from the level ten years ago, even in nominal terms. And this despite the fact that a large number of new members have joined the Bank in the past few years, and the Bank has the headroom necessary for new lending. There is a case for increasing the flow of lending from the World Bank to support critical areas, including especially infrastructure. This is an area where most developing countries are trying to increase both public and private investment. I believe the World Bank can help support this effort through a combination of direct lending and imaginative use of guarantee facilities. I have already welcomed the World Bank role in the joint initiative to alleviate the debt problems of the heavily indebted poor countries.

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However, I should like to emphasize the paramount importance of preserving the financial integrity and preferred creditor status of multilateral creditors. The present debt initiative must therefore be a one-time initiative, with clear boundaries. The structural conditions that have led to the need for this extraordinary initiative have to be addressed in a forthright manner so that they do not recur. I am happy to know that the President of the Bank is very conscious of these issues and has launched a number of initiatives to bring about necessary changes in Bank lending practices. Turning briefly to developments in India, I am happy to report that the postcrisis recovery, ushered in by the reform process begun in 1991, is continuing. Economic growth has averaged 6.5 percent in the past two years, and inflation has come under control. Industrial growth accelerated to 12 percent in 1995-96, and a third consecutive year of strong export performance recorded growth in dollar terms of more than 20 percent. For- eign investment inflows are steadily increasing, and our foreign exchange reserves are comfortable. The prospects for 1996-97 are for continued growth at 6.5 percent. Strong growth has ensured the expansion of employment and reduction in poverty. Our four-month-old government has already passed a fiscally prudent budget and taken steps to deepen and widen the process of economic reforms. We have aimed to reduce central government's fiscal deficit to 5 percent of GDP, continued the process of tax reforms, undertaken new initiatives to encourage foreign investments, and established a target of $10 billion a year of direct foreign investment. We are also strengthening the institutional structure and trading and settlement practices in the domestic capital market, and have established a Disin- vestment Commission and initiated measures for public sector reforms. The budget has accorded priority to agriculture, social sectors, and infrastructural development. We are hopeful that these and other measures will address the critical constraints on India's economic development and ensure sustained, broad- based growth at about 7 percent a year. We are deeply conscious that the rapid economic growth with substantial budget allocations for health, education, and basic minimum services, under a caring and compassionate government, provides the surest route to abolishing the scourge of poverty from our country. To achieve this cherished goal, we, like other developing countries, need a supportive international economic environment. We need sustained expansion of world trade in an open and nondiscriminatory system. We also need strong and well-equipped international financial institutions that are responsive to our needs and the fast-changing global environment. I believe the World Bank and the IMF are geared and able to fulfill their mission and, therefore, they continue to have our support.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR INDONESIA

Mar'ie Muhammad

I would briefly like to touch upon two issues of considerable importance. First, I would like to comment on the framework proposed by the Bank and the Fund to deal with the external debt problems of the most severely indebted countries. Second, I would briefly touch on the two trends that mark world trade: the growing role for regional trade associations and the reliance on multilateral trade. Before doing so, let me note that Indonesia's per capita income now stands at about $1,000, a considerable increase from the $550 level we achieved in 1985. Even two years ago, Indonesia was classified as a "low- income country." While this recognition of our progress is heartening, I think it is more important to note that Indonesia's growth has been accompanied by substantial reductions in the number of persons living in poverty. This growth has been achieved through the application of a number of clear policy principles. First, we established and maintained a stable, consistent, and prudent macroeconomic framework. As part of that framework, we steadfastly refused to monetize budget deficits. Second, we ensured that our economic activities, particularly in the industrial sector, achieve and maintain international competitiveness. And third, we have maintained the free convertibility of the rupiah, which ensures that our domestic investors can borrow at the most competitive rates and that foreign investors can easily partake of the many opportunities in Indonesia. This perennial achievement is based on basic principles of our development, namely stability, growth, and equity. With some variations, these same policies are followed in all the high- performance East Asian economies. As a consequence, the global center of economic activity has shifted. This is slowly being recognized in the composition of those bodies that have played a leading role in setting global economic policies and guidelines. For example, the Bank for International Settlements recently announced an expansion of its membership to include some of the rapidly growing Asian economies. I welcome this development and hope that other international economic bodies will follow suit. Enlarging the membership of these bodies gives the more dynamic developing economies a forum to express their legitimate concerns. Let me now turn to the other important issue at hand. Three years ago when I had the honor of addressing this body for the first time, I noted that "the successful resolution of the debt crisis is in the interest of developing and developed countries alike." That is still true today. Although some developing countries have experienced robust growth, such is not the case for

©International Monetary Fund. Not for Redistribution 106 SUMMARY PROCEEDINGS, 1996 the most severely indebted countries. If they are to achieve long-run sustainable growth, they require long-term debt relief. In 1966, Indonesia was the recipient of long-term debt relief. Such debt relief significantly assisted us in the early stages of our development program. Let me stress that Indonesia has honored fully, and will continue to honor fully, all its international financial obligations. Indeed, I should add that as part of our prudent debt management we have prepaid, and will continue to prepay, some of our loans, using proceeds from our privatization endeavors and from our budget surplus. I am encouraged that the Bank, under the dynamic leadership of Mr. Wolfensohn, together with the Fund, takes breakthrough steps to provide a new hope to the many poor countries, which desperately need to see that development can make difference in the lives of their peoples. Long- term debt relief is an essential element for economic progress, and, without such relief, the severely indebted countries cannot achieve the growth needed to lift their populations out of poverty. While Indonesia supports the heavily indebted poor countries debt initiative, we would note that there are elements of the proposal that need strengthening. First, Indonesia hopes that the Bank and the Fund can be more forthcoming in their contributions. Foremost, we would hope that the Fund would participate in the trust fund that is to be set up. This is important because such a fund can be used to reduce the stock of debt, whereas the proposed IMF contribution in terms of grants and softer Enhanced Structural Adjustment Facility (ESAF) loans would only provide for debt- service relief. Second, while Indonesia appreciates the need to monitor economic reforms for some time to ensure that they are well founded and effectively implemented, we would hope that the decision point under the initiative could be shortened. And finally, debt relief must be based on burden sharing. Indonesia hopes that the World Bank, which has already taken some important steps, could increase its contribution to the trust fund. Let me now briefly turn to the issues of regional and international trade relations. World trade is marked by two apparently divergent trends. On the one hand the Uruguay Round is complete and the World Trade Or- ganization (WTO) can now focus on ensuring that the promise of free trade is realized. In this regard, we urge the WTO to implement the concept of "universality of WTO membership," and not to take up nontrade issues. At the same time we witness the growing popularity of regional trading arrangements, such as Association of Southeast Asian Nations (ASEAN) free trade area (AFTA). We also have seen the establishment of the Asia- Pacific Economic Cooperation forum, with its 18 member economies. We are aware that our economic success continues to depend on our participation in international trade and the global capital market. But the growing reliance on regional trading associations need not run counter to the fundamental General Agreement on Tariffs and Trade (GATT) principles of

©International Monetary Fund. Not for Redistribution ISLAMIC REPUBLIC OF IRAN 107 nondiscrimination and the creation of a trading system based on multilateralism. Indeed, on November 14, 1994 at the conclusion of the Asia Pacific Economic Cooperation (APEC) conference held under the leadership of President Soeharto, the Bogor Declaration committed the APEC economies to actively pursue free and open trade in the Asia-Pacific region. Let me conclude by expressing the appreciation of the government of Indonesia to the World Bank and to the International Monetary Fund for the sustained support they have given to our development efforts. We look forward to maintaining a constructive dialogue for many years ahead.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE ISLAMIC REPUBLIC OF IRAN

Morteza Mohammad-Khan

At the outset, I would like to congratulate Mr. Camdessus on his new term as Managing Director of the International Monetary Fund. We hope that under his leadership the Fund will continue to make new contributions to world financial stability and development in these difficult and challenging times. I am pleased to see Bosnia and Herzegovina seated for the first time at these meetings as a member. I hope that this will signal an era of peace and reconstruction in Bosnia and Herzegovina. The world economy is increasingly being shaped by the processes of globalization and liberalization. Restructuring of the global economy and of national economies through structural adjustment has been driven by the promise that a higher growth rate will translate into improved standards of living for individuals and the world community as a whole. The current World Economic Outlook presents an optimistic appraisal of the prospects of the world economy and reveals that certain countries in the developing world have made substantial progress in economic development. However, there is now concern that the convergence and divergence consequences of the globalization and liberalization are accentuating income disparities in the world economy, with most of the benefits accruing to the already industrialized and a relatively small number of newly industrialized economies, while the weaker developing countries and the least-developed countries have become poorer and progressively marginalized from the mainstream of the world economy. The ability of these countries to create a stable macroeconomic environment is being weakened by declining terms of trade and susceptibility to fluctuations in international commodity prices and interest rates. The growing reliance of commodity exporting countries on a

©International Monetary Fund. Not for Redistribution 108 SUMMARY PROCEEDINGS, 1996 narrow band of commodities being produced by an increasing number of low-income countries has increased their vulnerability to external shocks and pressures, a phenomenon that calls for more international support and particular efforts by the Bretton Woods institutions. I would like to proceed by acknowledging the commendable joint initiative by the World Bank and IMF, particularly the personal dedication of Mr. Wolfensohn and Mr. Camdessus, to relieve the debt burden of the world's heavily indebted poor countries. It should be emphasized that sustainable levels will only be achievable by the joint action of bilateral creditors, multilateral financial institutions, and other concerned parties. I also wish to acknowledge the recent institutional changes in the Bank as well as the new policies adopted to consolidate its operational thrusts, particularly its recent philosophy to measure the Bank's performance in terms of its efficiency in reducing poverty, rather than sheer number of approved loans. I would like to express my support in principle for the Bank's recent cofinancing strategy and guarantee policy, aiming to increase financial resource flows to developing member countries, especially in view of the huge investment requirements of infrastructure developments. How- ever, this policy should not affect the net allocations of the Bank's own resources to developing member countries, or prevent the Bank from dis- charging its responsibility to finance big infrastructure projects. One important issue, which has drawn increasing attention in recent development debate, is good governance. No doubt the policy environment in which development takes place should be appropriate, and accountability, participation, predictability, and transparency issues should be addressed. Despite constructive intentions that might have been behind the idea of re- quiring good governance, there is concern regarding its abuse—that it might serve as a tool to impinge on national sovereignty. In particular, this could occur where extraterritorial aspects of certain internal legislations, by trans- gressing the globally accepted rules and principles, exert undue political pressures on other countries that are merely seeking their own freedom and independence. As a result, the Bretton Woods institutions, by upholding the notion that is explicitly stipulated in their founding charters, should maintain their full independence, and elude any discriminatory treatment being forced by certain members against the others. In our opinion, the Bank, by being affected by the particular political interests of one of its members, has indeed not adhered to the principles of the Bretton Woods institutions. We support the IMF's proposed framework for funding continued En- hanced Structural Adjustment Facility (ESAF) operations that seek to balance the large uncertainties related to the demand of ESAF resources, in connection with both ongoing ESAF operations and the debt initiative. We also support the IMF's proposal to sell a limited amount of gold to raise the subsidy resources to back up a self-sustained ESAF for an interim period. We feel that ESAF operations are the centerpiece of the IMF's strat-

©International Monetary Fund. Not for Redistribution ISLAMIC REPUBLIC OF IRAN 109 egy to help low-income countries facing protracted balance of payments problems, including the most heavily indebted. Large use of IMF resources during 1995/96, and expected high demand for its resources over the next few years on one side, and the constraints of the IMF liquid resources on the other side, call for an increase in Fund resources. In this regard, a general increase in quotas within the context of the Eleventh General Review of Quotas enjoys our full support. We also fully support the proposal of the Managing Director of the Fund for a one-time special allocation SDR 26.6 billion through the amendment of the Articles of Agreement. We give our support in the spirit of compromise to achieve an equitable allocation of SDR quotas for all members. We expect, as part of this compromise, that the Managing Director of the Fund will propose a general allocation, should the amendment not be ratified. Among other issues deserving special attention is the procedure for compulsory withdrawal pursued by the IMF against certain members with protracted arrears. Recognizing that nonfulfillment of obligations by these members is the direct consequence of poverty, and that the international efforts, particularly the joint debt initiative by the World Bank and IMF, are directed toward the alleviation of the debt burden of the heavily indebted poor countries, compulsory withdrawals will not help the situation but will further intensify the deteriorating conditions. We believe the IMF should continue to work closely with countries in arrears to help them resolve their overdue financial obligations. Now, I would like to present an overview of economic conditions in my country. The first five-year development plan, which was based on an import substitution policy and promotion of required infrastructure, came to a successful end in 1994, resulting in an average annual growth rate of 7.3 percent. The second five-year development plan, which commenced in March 1995, pursued the earlier economic reforms, but also addressed the present challenges in economic, social, and cultural development, and aimed at further sustainable economic growth and greater social justice. The second development plan concentrates on the completion of investments already made in the fields of basic infrastructure, such as energy, water resources, transportation, and communications. The country's present power-generating capacity, a major recent achievement, not only meets the domestic consumption requirements, but provides exports as well. The existing transportation infrastructure of the country is now capable of providing proper links between central Asian landlocked countries and other parts of the world by connecting those countries to international waterways and to Eu- ropean countries in the West. Opening of the new silk road has been one of our major achievements. In light of the political stability and enhanced economic capacities acquired by the country, our current economic strategy was founded on two

©International Monetary Fund. Not for Redistribution 110 SUMMARY PROCEEDINGS, 1996 main pillars. First, a self-sustained economy, independent of crude oil export revenue, aims to minimize the dependence of the government budget on oil income in the medium term. In this regard, some of the selective policies are: • increasing the tax revenues by improving the taxation system; • diversification and expansion of non-oil exports; and • reduction of government expenditures. Second, greater social justice will be attained through the reduction and containment of inflation, promoting people's purchasing power, and enhancing poverty alleviation programs. In the last two years, the economic policies adopted have emphasized sustainability, external sector viability, better fiscal discipline, and stronger commitment to social sectors and human resource development. To date, the macroeconomic results are encouraging. We have been able to bring inflation down and pursue our economic strategy in a more flexible and stable macroeconomic environment. Economic stabilization, price stability, effective control over monetary aggregates, balanced budget, and exchange rate stability were among the achievements of the last two years. All these successes have been achieved despite lack of cooperation from the international markets and at times a very hostile external environment.

STATEMENT BY THE GOVERNOR OF THE FUND FOR IRAQ

Hikmet M. Al Azawi

Mr. Chairman, I would like to begin my remarks by extending my congratulations on your being selected to chair the 1996 Annual Meetings of the Governors of the International Monetary Fund and the World Bank Group. During the Annual Meetings in 1992 and 1994, the Iraqi delegation asserted that the economic sanctions imposed upon Iraq and the freezing of its assets were completely incompatible with one of the most important purposes of the International Monetary Fund, as stated in the Articles of Agreement, paragraph 4 of Article I, which calls for the elimination of restrictions and obstacles to international trade and settlements in order to achieve economic stability and prosperity. Today I assert for the third time that this abnormal situation, which opposes and contradicts the philosophy of the IMF and its Articles of Agreement, remains in effect despite the fact

©International Monetary Fund. Not for Redistribution IRAQ 111 that over six years have elapsed. I therefore appeal to the Fund, in accordance with its fundamental purposes, to raise its voice against continuation of the economic sanctions that have been in effect all these years, particularly in view of the fact that Iraq is one of the founding members who signed the Bretton Woods Agreement in 1945. On March 20, 1996, after negotiations that lasted more than three months, Iraq signed a memo of understanding with the Secretariat of the United Nations, whereby it would be allowed to export limited amounts of oil and thus be able to import food, medicine, medical equipment, and other necessities to meet the humanitarian needs of its citizens, in accordance with Security Council Resolution No. 986 of 1995. It is truly para- doxical that this agreement has still not been implemented more than four months after it was signed, owing to the position taken by the United States and supported by Britain, but not by the rest of the international community. The international community's objective with respect to this agreement between Iraq and the UN Secretariat, as you know, was to alleviate a small portion of the suffering and pain of the Iraqi people caused by the extended sanctions, whose harshness has never been equaled in the modern history of mankind and which are in gross contempt of international law. During the 1994 Annual Meetings in Madrid, the Iraqi delegation described in detail the effects of the continued sanctions, both economic and humanitarian, including the direct effect on production and all economic sectors involving goods and services; spiraling inflation rates and the resultant decline in family incomes; the shortage of medicine and medical equipment and the resultant increase in death rates in all age groups; and new epidemics of infectious diseases that had once been totally eliminated from Iraq, including infantile paralysis, cholera, viral hepatitis, and other infectious diseases; and the contamination of the environment and its direct negative impact on life in Iraq. Despite the efforts of Iraq to implement the Security Council's resolutions, including its total cooperation with the Security Council and with the special committee chaired by Mr. Rolf Ekeus, and despite the efforts of the Iraqi delegation to sign a memorandum of understanding with the UN Sec- retariat, the biased political position of the United States and the United Kingdom—alone in the international community—has prevented the removal of economic sanctions or even implementation of the memorandum of understanding, notwithstanding the insistence of the international community that it be implemented without delay. These two countries have not limited themselves to biased political actions aimed at extending the economic sanctions, but have also unilaterally imposed no-fly zones above the 36th and below the 33rd parallels in northern and southern Iraq, based on un- founded and false pretenses of protecting the rights of Shiite Kurds in these regions, while it is well known that the Kurds are united in spiritual soli-

©International Monetary Fund. Not for Redistribution 112 SUMMARY PROCEEDINGS, 1996 darity with all the citizens of their beloved country. Our citizens in southern Iraq, just as in the north, center, east, and west, Christian and Muslim alike, Shiite or Sunni, Kurds and Arabs, are all engaged in the difficult tasks of producing needed goods and fighting against hunger, disease, and the con- spiracy aimed at destroying the unity of Iraq. In light of all that I have said, I request the International Monetary Fund and the World Bank, based on the principles set forth in the Articles of Agree- ment, to call for the removal of economic sanctions and the release of Iraqi assets held by international banks. I humbly appeal to all Governors present today, Ministers of Finance, and Governors of Central Banks, to explain our situation to their respective governments and seek their assistance to end the suffering and pain of the Iraqi people, to restore balance to our relations with the international community, and to stop the coercion and tyranny being imposed on Iraqi society, for there is no guarantee that tomorrow it will not be imposed on other societies. I request your cooperation to help remove the economic sanctions and no-fly zones, imposed unilaterally without the benefit of a Security Council resolution or international approval.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR IRELAND

Ruairi Quinn

As Ireland currently holds the Presidency of the Council of the Euro- pean Union, I am honored to address this meeting on behalf of the Union. Against a background of slower than anticipated growth in 1995, the prospects for growth in the international economy in 1996 have improved since the beginning of the year. Some of the major European economies experienced a growth pause in the early months of the year, but a stronger performance during the second half of 1996 is likely to lead to moderate growth for the year as a whole. Thanks mainly to the persistence of strong economic expansion in Asia, output growth in the global economy is forecast to reach about 3.8 percent this year, while growth within the industrial countries area should continue to strengthen to about 2.3 percent. On the basis of a continuation of current policies, we would expect this rate of growth to strengthen in 1997. In the United States, growth has been underpinned by continued buoyancy in investment and private consumption. Unemployment is now nearing a 20-year low, while risk of an acceleration of inflation cannot be excluded. In Japan, the recovery, which began in late 1995, is strengthen-

©International Monetary Fund. Not for Redistribution IRELAND 113 ing and broadening, aided in part by strong growth in public investment. The recovery is forecast to continue, albeit more moderately, in 1997. In the developing world, economic growth remains buoyant, although unevenly spread among the regions. Economic recovery has continued within the countries of central and eastern Europe, although performance from country to country is uneven. In the Baltic countries, Russia, and the countries of the former Soviet Union, the progress of reform has not yet generated economic growth in all successor countries. Nevertheless, there are good prospects for 1997. In the European Union, growth is unlikely to reach much more than 11/2 percent in 1996. However, we expect a stronger performance in the Eu- ropean Union during the second half of this year to continue into 1997, as business and consumer confidence within the Union recover. The expectation of a rebound in economic activity is based on the improved fundamentals within the European economy, including good investment, prof- itability, and moderate wage developments, and a favorable international environment. Average inflation in the Union is expected to continue its downward trend in both 1996 and 1997, reflecting continued wage moderation and the stability-oriented stance of monetary policies. Unemployment within the European Union is a matter of great concern. While the conditions for recovery in Europe are in place, its rate of unemployment remains unacceptably high. It is clear that creating the conditions for the maximum possible increase in sustainable employment must be a major priority of economic policy in the Union and for the member states. Sustainable employment creation requires an approach that, while taking account of the needs of the environment, involves macroeconomic stability; structural reforms in the functioning of product and services markets as well as labor markets; and a wide range of labor market policies designed to help, among others, the labor categories particularly hit by unemployment (for example, the long-term unemployed, and, in most countries, the young, women, and the unskilled). A Single Report on Employment will be agreed upon by the Council on economic and financial affairs, the Coun- cil on social affairs and the Commission before the end of this year; this report will review the measures taken in the individual member states to implement the principles agreed by the European Council in Essen. Other initiatives related to employment include President Santer's proposal for a Confidence Pact on Employment, the Commission's proposal for establishing an Employment and Labour Market Policy Committee to advise the Council meeting on social affairs, and President Chirac's initiative on the "European Social Model." The coordination of member states' employment policies is an important issue on the agenda in the Inter-Governmental Con- ference (IGC). Among other things, the IGC will have to determine whether and how the Treaty could further help the efforts of governments and the social partners in the field of employment.

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Considerable progress has been made within the Union in respect of price and exchange rate stability. More limited progress has been made with respect to the fiscal convergence criteria established within the Maastricht Treaty. Nevertheless, the general government deficit of the member states as a whole fell by Vi of 1 percent of GDP in 1995, despite the adverse impact of the slowdown in economic growth. However, at 5 percent, it remained far too high, and only three member states reported general government deficits not exceeding 3 percent of GDP in that year. Clearly, this signaled an urgent need for stronger measures to be identified and implemented to reduce government deficits. The response of member states makes clear their commitment to credible and well-designed reductions in budget and social security deficits, although efforts need to be stepped up in some countries. Despite unfavorable economic conditions in the early part of 1996, substantial corrective packages have been undertaken, which are expected to lead to a further significant reduction of budget deficits in the Union this year and an even more significant improvement in 1997. The European Council in Florence confirmed the continued commitment of the member states to strict budgetary discipline on an enduring basis. There can be no doubt of the importance of this for the Union as a whole, in terms both of the changeover to the single currency and of the smooth functioning of the single market. Budgetary discipline, combined with monetary policy directed at price stability, will enhance growth prospects—even in the near term—through boosting business and consumer confidence and reducing interest rates, thereby stimulating investment, growth, and employment. Preparations for the third stage of Eco- nomic and Monetary Union, which will begin with the introduction of the single currency on January 1, 1999, are currently focused on developing appropriate arrangements for securing budgetary discipline ("stability pact") and for promoting currency stability between participants and non- participants in the single currency area. Maintaining macroeconomic stability in the third stage will be a key factor in ensuring the success of Economic and Monetary Union. In a report on preparations for that stage endorsed by the Florence European Council last June, the Council of Economic and Finance Ministers highlighted a number of areas where progress could be made in relation to budgetary discipline within the provisions of the Treaty on European Union. One relates to the further development of multilateral surveillance procedures, such as effective early warning procedures, to prevent excessive deficits from happening. In addition, considerable work is being done to strengthen and accelerate the excessive deficit procedure, with the aim of making it more of a deterrent and effective. In the coming months, many details, such as the definition of sanctions in the event of an excessive deficit, will have to be dealt with. Another important issue for all member states is the relationship between the euro and the currencies of member states not participating in the

©International Monetary Fund. Not for Redistribution IRELAND 115 single currency area from the outset. A particular concern is the potential for unwarranted currency movements to cause distortions within the single market. In this regard, the Economic and Finance Ministers' Report in Flo- rence emphasized the importance of disciplined monetary policies combined with sound fiscal and structural policies for the achievement of exchange rate stability. We are also working toward agreement on the operating features of a new exchange rate mechanism, to be in place at the beginning of the third stage, which will further support exchange-rate stability among member states. The European Union now stands at a crucial juncture in its development. The current agenda reflects the continuing concerns and preoccupa- tions of the Union and of the member states. We are seeking to steer the Union through a number of major decisions, both in addressing institutional and other issues at the Inter-Governmental Conference and, at Coun- cil, in tackling some of the critical economic and social challenges confronting the Union's citizens. At the same time, the Union must continue to ensure balanced economic development in order to realize the full potential of the internal market. It will also equip itself to play a role commensurate with its responsibilities in Europe and in the wider world. It must therefore prepare to admit other democratic European nations that wish to become members. Last, but nevertheless of the greatest importance, the Union must build upon its achievements so that the peace and prosperity it currently enjoys are consolidated for future generations. Within the ambit of the Council meeting on economic and financial affairs, the main priorities, in addition to employment and the preparations for the third stage of Economic and Monetary Union, include taxation issues and financial services. The development of Community lending to third countries is also a significant issue, to which I will return. The Inter-Governmental Conference is, of course, of major significance to the development of the European Union. The main topics being considered by the IGC fall into three categories: • first, making the Union more relevant to its citizens; • second, enabling the Union to work better and preparing it for enlargement; and • third, giving the Union greater capacity for external action. Considerable work has been done on each of these issues during the first half of 1996. The Florence Council has asked that a general outline for a draft revision of the Treaties be prepared for the Dublin Summit in De- cember, with a view to completing the Conference by mid-1997. As I have already indicated, there are positive signs for world economic growth as a whole. These include relatively low levels of inflation generally, the fact that interest rates in many industrial countries are at a

©International Monetary Fund. Not for Redistribution 116 SUMMARY PROCEEDINGS, 1996 level that is conducive to business investment and economic expansion, and the continuing expansion of world trade associated with greater globalization. At the level of the world economy, however, there are still many major problems to be overcome. The value of closer contacts between international trading partners is reflected in the plan to hold a meeting between European and Asian finance ministers next year, when we look forward to discussing matters of common interest. I am glad that the IMF and the World Bank Group are continuing, within their respective mandates, to address the problems and to enhance their effectiveness toward that end. We hope that the World Trade Organi- zation meeting in Singapore will be successful in further stimulating the liberalization and expansion of trade. I would like to focus my remarks on a number of specific areas, namely financial resources, debt relief, and development issues. The European Union notes that progress has been made on the Eleventh General Review of International Monetary Fund quotas and that the Interim Committee has asked the Executive Board to agree on the out- lines of the next IMF quota increase as soon as possible. The European Union calls for a timely conclusion of this review. The Union welcomes the agreement in principle that was reached on the New Arrangements to Borrow (NAB) for doubling the resources currently available to the IMF under the General Arrangements to Borrow. This arrangement will include a broader group of countries with the capacity to support the international monetary system. The availability of these additional resources will increase the capacity of the IMF to cope with exceptional situations that pose a threat to the international monetary system. Such borrowing arrangements, however, cannot substitute for a quota increase, which is the main source of IMF liquidity. The European Union notes the Interim Committee's endorsement of the consensus reached in the Executive Board of the IMF on a way for all members to receive an equitable share of cumulative SDR allocations, and now looks forward to the finalization of work by the Executive Board on this issue. The provision and effective use of the Fund's financial and staff resources are critical to its success. The prevention of balance of payments disequilibria should remain the focal point of Fund policy. The European Union therefore welcomes the IMF's continuing review and adaptation of its surveillance regime. The establishment of the Special Data Dissemi- nation Standard is a welcome innovation that will, in time, reduce the likelihood of sudden and disruptive market reactions before manageable problems grow to crisis proportions. We call on developed and developing countries to join. We look forward to further progress in this area, notably in establishing a general standard for data dissemination for all members shortly.

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The progress of recent days with the initiative to address the problems of a limited number of poor countries with unsustainable levels of external debt, which maintain sound policies, is a welcome development. We look forward to the implementation of the outcome of the deliberations of the Interim and Development Committees on this issue. The member states of the European Union are prepared to support the alleviation of debt burdens in countries with sound economic policies, through bilateral assistance as well as through a contribution to the resolution of the Enhanced Structural Adjustment Facility (ESAF) financing issue. There is a widespread acceptance that the ESAF plays a meaningful role as a centerpiece of Fund strategy to help low-income countries in conjunction with the International Development Association (IDA) in a fully effective multilateral effort. A joint effort by bilateral donors and creditors and the Bretton Woods institutions is essential to make a meaningful impact on the problems of these countries. The ID A-11 and African Development Fund replenishment negotiations were a significant achievement this year. We reaffirm our commitments to the principle of multilateralism and the need for each member of the international institutions to fulfil the financial commitments it has adhered to. It is important that all donors ensure the success of ID A-11 by fully respecting their commitments on time. However, issues other than funding must be borne in mind if the IDA and other development funds are to continue to be valuable development instruments. It is important to continue to improve their effectiveness and developmental impact. In a fast-changing world, all institutions need to conduct a continuous assessment of their performance if they are to ensure their continued relevance. The recent report of the Task Force on Multilateral Development Banks was particularly useful in this context. These banks must now act on the recommendations made to strengthen further their policies and practices. We consider it desirable that the IMF and World Bank define jointly with the United Nations and the WTO a medium-term strategy for Africa, thereby building on the special initiative launched by the UN Secretary General on March 15. This strategy could be described in a joint document issued by the four organizations, proposing coordinated action for the development of Africa and its integration into the world economy. For the Union and its member states, support for the Bretton Woods institutions is just one aspect of a broader commitment to assisting developing countries. The Union and its member states are actively furthering the development of less-developed countries through the member states' bilateral aid programs, the European Community budget, the European In- vestment Bank, and the European Development Fund. The Union is now active in the African, Caribbean, and Pacific states through the Fourth Lome Convention, in central and eastern Europe, the Mediterranean, Asia, Latin America, Gaza, the West Bank, and South Africa. A decision on the

©International Monetary Fund. Not for Redistribution 118 SUMMARY PROCEEDINGS, 1996 renewal of European Investment Bank (EIB) lending mandates will have to be taken later this year. The Union's relationship with third world countries has often provided the lead for others to become involved. In the case of transition economies, we have supported reform through substantial financial contributions. In appropriate cases, it is our policy to continue to do so, subject to proper burden sharing by other contributors. The European Union was among the first to pledge a significant amount of money to the reconstruction of Bosnia. Its efforts have been very closely coordinated with the World Bank and have led to the participation of a large number of other bilateral donors. It is important that the "developed" countries do not become hardened to the needs of those countries recovering from political and social upheaval. Therefore, the Union and its members call on donor countries to continue to supply countries in need with bilateral assistance. During the last year, much has been achieved by the international financial institutions. We are making progress toward improved approaches to the debt problem, though implementation will take time. We are in a better position to cope with global financial crises. The member states have reinforced their commitment to development through the eleventh replenishment of IDA and the seventh replenishment of the African Development Fund. However, we have also had to face considerable challenges. Each of us is aware of the limitations of national budgets and the limitless demands on them. A wholehearted commitment to multilateral action is vital if the international financial institutions are to continue to be relevant in a changing world. In a complex and rapidly changing world, the choice for governments is not between multilateralism and bilateralism; the challenge is to integrate both in an appropriate way and thus to optimize results at national and global levels. On behalf of the member states of the European Union, may I take this opportunity of congratulating the Bretton Woods institutions on their achievements this year and reiterate our support for their important role within the international monetary system and for development. I would now like to make some comments on developments in the Irish economy. For most of the last decade, Ireland's economic performance has been exceptional by European and Organization for Economic Cooperation and Development (OECD) standards. Economic growth has been about twice as fast as the European Union average. At the same time, inflation has been below the EU average, and the general government deficit has been below 3 percent of GDP each year since 1989. Over the two years 1994 and 1995: • GNP growth averaged almost ll/2 percent (well balanced between domestic demand and net exports);

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• Employment expanded at an annual average rate of almost 3 percent; • Inflation remained low at about 2.5 percent; and • Budgetary discipline was maintained—with the general government deficit comfortably below the 3 percent Maastricht Treaty guideline. In 1996, for the third year in succession, the Irish economy will be one of the fastest growing in the OECD. However, while growth will remain strong by international standards, it is likely to moderate to around 6 percent in volume terms, reflecting the less favorable EU economic environment. This year, domestic demand is the major contributor to growth, with consumer spending and investment growing strongly. Employment will increase by around 314 percent; but the reduction in unemployment will be smaller than this because of labor force growth. Inflation will be moderate, at under 2 percent. Export growth will be slower than in 1995, but despite this, a further healthy current account surplus is in prospect. On the fiscal side, it is now clear that the general government deficit will be well below the budget target of 2.6 percent of GDP. Looking further ahead, Ireland should continue to achieve growth rates well above the European Union average over the next few years. This will enable further progress in terms of increasing employment and reducing unemployment. Fiscal discipline will be maintained, and inflation will remain moderate. However, achievement of all this will depend crucially on continued wage moderation at home and sustained recovery in Europe. What have been the reasons for Ireland's exceptional performance? There are many factors that could be cited, but let me briefly outline what I believe are the principal ones: • the prudent fiscal and economic policies adopted by successive governments here since the mid-1980s; • the consensus among the social partners (government, employers, trade unions) on the broad parameters of policy—low budget deficits and moderate nominal pay increases to maintain competitiveness, boosted where possible by tax reductions to ensure real increases in take-home pay; • low interest rates, which are in part the reward for prudent policies enunciated above; • the rising education and skills level of new entrants into the labor force, with a consequent increase in productivity; • strong foreign direct investment, which helps to overcome capacity constraints and provides the foundation for future growth; and • the impact of EU structural funds since the late 1980s, which are also raising the growth potential of the economy.

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Needless to say, this very positive picture does not mean that we do not continue to face very serious and significant challenges: • Unemployment remains unacceptably high. While employment growth has been impressive, it is barely sufficient to keep pace with the natural increase in the labor force, rising female participation rates, and the prospect of inward migration in response to improved employment prospects at home. • As a small, open economy, we are particularly sensitive to developments in the world economy, and the slowdown in the major European economies this year is having an impact on our export performance. • We are clearly benefiting from foreign direct investment, particularly in the more modern high-technology sectors. But our more established industries are vulnerable to competition from newly emerging lower-cost locations. • The Bovine Spongiform Encephalopathy (BSE) crisis and slump in the demand for beef in Europe is a particular problem for us, since we export the bulk of our cattle output, and agriculture is still relatively more important to us than to most other EU members. • Buoyant growth can give rise to excessive expectations regarding public expenditure and taxation. I am confident we can meet these challenges successfully by maintaining and developing our current broad policy setting. The demonstrable success of these polices will be a key factor in supporting the measures that will be necessary for continued growth in a rapidly changing world economic environment.

STATEMENT BY THE GOVERNOR OF THE BANK FOR ISRAEL

Jacob A. Frenkel

Mr. Chairman, distinguished Governors, delegation members, ladies and gentlemen, Managing Director of the International Monetary Fund, President of the World Bank Group: it is a great honor for me to address you today as Governor for Israel. The world economy is in positive shape. This was the message conveyed in the discussions to date. World growth has reached 3.8 percent, which is the highest level since 1988. Just recall that a few years ago many

©International Monetary Fund. Not for Redistribution ISRAEL 121 countries were in the negative territory, and today industrial growth has reached 2.3 percent and developing countries' growth for the fifth year in a row exceeds 6 percent; and for the first time, the countries in transition are about to leave the minus territory. Inflation in the world economy is so much lower in the industrial world; it is between 2 percent and 2.5 percent, one-third of the level just a decade ago. In developing countries it is at its lowest level in recorded history, and it is less than one-half of what it was just a decade ago. This is not the result of an accident. It is the result of strategic policy decisions guided, aided, and supported by the multilateral organizations that we are all members of. Trade in the world economy expands, and just a few years ago, each Governor concluded his remarks by hoping that the Uruguay Round would be concluded and the World Trade Organization (WTO) would be established. Well, this is behind us. And budget consolidation is not part and parcel of the strategy of policymaking in the world economy. The Managing Director reminded us of the crisis that was with us three years ago—Africa, protracted decline in per capita income; two years ago, Russian hyperinflation; a year ago, Mexico. Those of you who looked at the proceedings for the previous years, for 10 years, for 20 years, will have found that each year there was another crisis. And yet the world economy sailed through each crisis, and one of the reasons is that the policy prescriptions and policy advice shifted from being a strategy of crisis management to being a framework of economic policy within which, of course, there were ups and downs, but basically the way is forward. Just years ago, Governors were standing here and asking about the mission for the Fund and the Bank and what the agenda is in the new era. I believe that those of us who listened carefully to the statements yesterday of the Managing Director and of the President found that the key questions have received satisfactory answers and that the two organizations are meeting the challenges of the new realities—the reality of new global markets of open capital account, the reality of a strategy of reducing the size of government, the reality of changes in the geopolitical picture, and the reality of democratization as an approach that moves forward. And in this regard, the International Monetary Fund is now encouraging an Article VHI-type arrangement for the capital movement. It is encouraging the development of a database that is timely and updated. It is emphasizing the importance of macroeconomic management and, of course, it is ready to stand and meet the challenges of emergency situations. In the World Bank, there is growing emphasis on the role of the private sector and cooperation; there is again growing emphasis on structural reform, and a renewed emphasis, as President Wolfensohn stated yesterday, on people and on the social dimension of all of what we are saying.

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Basically, in some languages some of you may notice that the concept of crisis is a concept that combines two elements: an element of danger and an element of opportunity. And in many languages the notion of crisis and crisis management appropriately is leading the way from averting dangers and seizing the path that opportunity presents itself. In an era of globalization, a notion that was so well emphasized by the Managing Director yesterday, we are now in the midst of it. Markets such as goods markets are global, service markets are global, and capital markets are global. The market for ideas is global, and also migration is now much more prevalent. These facts mean that we have much more consensus today about what it takes to achieve sound economic policy. We no longer have the debate of old times between populism and professional economics but, rather, it is more and more recognized among policymakers that good economics is basically good politics. But because of the fact that we are responding very rapidly, it therefore requires a renewed focus on multilateralism. This is the framework that provides the rationale for strengthening our multilateral organizations, the very fact that borders no longer recognize knowledge, pollution, or terror, as well as good consequences of economic policies. And we are now witnessing the results of the silent revolution that was coined a few years ago. We see that growth will not be sustainable unless it is grounded on structural economic policies. We have learned that there is no trade-off, that you cannot buy growth by accelerating inflation. And we have learned that structural policies and macroeconomic policies are not substitutes but, rather, they are complements that reinforce each other. It makes no sense to have macroeconomic policies in an environment full of distortions, and efficacy of macroeconomic policies will be enhanced through competitive forces that will be brought about by structural policies. This brings me, of course, to the point of quality of measures. It is not only on the quality of people that we must focus but also on the quality of measures. And it is not good enough, as the IMF now emphasizes, just to cut down budget deficits; rather, one needs to be much more informative, maybe a little intrusive in some places, by noting that one should not cut education spending, infrastructure spending, research development spending, with the effort of cutting down the budget deficit, but, rather, one should just focus on the expenditures that are wasteful and the like. We have learned—and the Mexican experience has given us another renewed reminder—that you cannot sustain growth unless you rely on domestic savings. And, therefore, savings must be the base for investment, but you must also enhance the domestic base for your savings so you reduce vulnerability. But in order to do this, financial market reform must be key, because only under these circumstances will we see savings en-

©International Monetary Fund. Not for Redistribution ISRAEL 123 couraged as the planning horizons of households and entrepreneurs are being lengthened. This is the reason that IMF programs as well as the World Bank orientation are cases in a medium-term strategy in a multiyear approach. And this is the reason that more and more we realize that the unemployment problem is not a macroeconomic business cycle phenomenon but, rather, a structural phenomenon that requires handling with and through structural measures of job retraining and the like. This, therefore, brings again a renewed emphasis on the need to fight protectionism as much as one can, especially in a day in which budgets are tight, and the best way that industrial countries can help the developing countries and the countries in transition is by opening their markets to the products of these economies. These are efforts that do not require budgets. They require political decisions, which is the real test for the resolve of the multilateral approach to the world economy. In my own country, Israel, which is a very small economy and does not affect importantly the world economy, we were privileged in benefiting from the importation of such ideas and the vast experience that these multilateral organizations have accumulated over the years. We are a small country. Growth in the past few years, since the beginning of the decade especially, has been very robust, at about 6 percent a year in real terms. We have absorbed huge numbers of immigrants, primarily from, though not only from, the Baltic countries, Russia, and the other countries of the former Soviet Union, immigrants that, as in every case, provide important social, political, and economic challenges. And the issue was how to meet those challenges and seize the opportunity. Today I can say that the strategy of absorption that relies primarily on the private sector, and not through bloated government, has proven to be successful. And, indeed, the unemployment rate has diminished to levels that are at the lowest for many years, around 6 percent or 6.5 percent today, after being more than 11 percent just four years ago—and all of this while maintaining control of inflation. As a matter of fact, in the past five years, inflation is about half of its level of the preceding five years. And I believe that it is fair to say that the three elements that have governed the shape of the Israeli economy today have been: first, the influx of immigrants; second, the geopolitical developments in our region; and, third, the macroeconomic and structural measures that have been facing these challenges. And here I would emphasize the budget, which was by and large a very responsible budget, with reducing the size of government and the budget deficit, monetary policy that looked at inflation, and opening up the economy through trade liberalization, financial market reform, and the like. The result has been investments that have grown on an annual basis at a rate of about 15 percent and exports that each year expanded faster than GDP.

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Of course, stability has not been an integral part of our region. We all hope that stability will be restored and will indeed be reinforcing the economic processes. In the Middle East, as we all know, time is not linear, and things can happen very rapidly, and, therefore, we are all hopeful that wisdom will prevail and that determination and resolve will help us to proceed in this way. We say we face challenges, and the challenges ahead, with the help of the advice of the International Monetary Fund and the wisdom that the World Bank has provided to us and to the entire region, are the challenges of raising domestic savings, of bringing about balance of payments that is more sustainable, of reducing the degree of indexation in our economy, and of moving ahead with the reform program. And this is one of the ban- ners that the Israeli government with the new Finance Minister and the Prime Minister have put on their strategy, namely, globalization. Global- ization is viewed as a norm—a norm that involves globalization of markets, globalization of ideas, and globalization of policymaking. Of course, we are not users of Fund resources, but we benefit from the Fund's advice. And for this I would like to express my appreciation. Con- gratulations to the Managing Director for his vision and reappointment. Best wishes to President Wolfensohn for the vision and leadership of the World Bank and the contribution that these two great organizations are performing not only in the policy advice to Israel, but for the entire region that the destiny of Israel depends so much on. I would like to use this opportunity to thank the Executive Directors, to thank the staff, to thank the Joint Secretariat, and to wish all of us continuing success.

STATEMENT BY THE GOVERNOR OF THE FUND FOR ITALY

Carlo Azeglio Ciampi

World Economic Outlook World economic developments since our last meeting continue to be encouraging. Growth is accelerating in many areas, while inflation remains subdued or continues to decline. In the developing world, growth is more evenly spread and more resilient than in the past to external disturbances. In the transition economies, the progress already achieved in macroeconomic stabilization and structural change is helping the resump-

©International Monetary Fund. Not for Redistribution ITALY 125 tion of economic activity. In the industrial countries, overall growth continues, if at a moderate pace. Among the industrial countries, improvements in the economic picture remain incomplete, as growth is not yet broadly based in Europe, where the unemployment problem has instead been exacerbated. There is, however, ground for optimism. Economic fundamentals in Europe are good, with broadly consistent exchange rates, budget deficits on the decline, and inflation near historical lows. The external environment is also quite favorable, as an acceleration of world output and growth is expected next year. Structural unemployment remains the major challenge for Europe. It has heavy negative effects in the economic, social, and political spheres. Unemployment in our countries is due to several factors: technological change, the effects of globalization on the location of production and competition, the new organization of productive processes, and rigidities in labor markets. There are policy and institutional changes that are needed to cope with unemployment, some of which require time and sustained efforts. But we are all well aware that resumption of growth in Europe is also necessary to substantially reduce our unemployment rates. The full realization of the European Union, and of its potential, is in itself critical to increase growth and to permanently lower unemployment. The united Europe that has been taking shape in the past few years, and that we want to strengthen through monetary unification, is an important new reality that is emerging at the global level. Greater economic and financial weight implies greater regional and global responsibilities in the economic and political domains. Europe will discharge them, keeping to its values of international cooperation, openness, and fair competition. International capital markets have absorbed the effects of the Mexican crisis while learning some of its many lessons. The serious adjustment efforts pursued in many Latin American countries, by restoring investors' confidence, have helped stabilize financial markets. Moreover, the Fund's ability to deal with financial crises of the Mexican type is in the process of being strengthened significantly. We must take advantage of these positive developments and press forward with those adjustments and reforms at the national level and with the strengthening of our institutions to ensure that growth continues in a stable global framework.

The Roles of the IMF and the World Bank In recent years, the Fund's surveillance has been made more timely and continuous and has been enlarged in scope and depth. The Fund's conditional support to its members performs both a direct and a catalytic role in mobilizing means of finance. In the poorest countries, its contribution is

©International Monetary Fund. Not for Redistribution 126 SUMMARY PROCEEDINGS, 1996 often fundamental for the resumption of growth. These important functions must be maintained and strengthened. The smooth functioning of the capital markets, whose disciplinary role has clearly increased in recent years, can be enhanced through the improvement of the statistical information provided to the public. We are therefore very pleased by the establishment of a set of common standards, the Special Data Dissemination Standard (SDDS). The relatively large number of members, including Italy, that have already subscribed to the SDDS is above expectations. Besides the main industrial countries, the group now comprises a significant number of emerging-market economies and some economies in transition. This is of great value. We are confident that this initial group of "subscribers" will expand rapidly in the months ahead. We consider it essential that we preserve the Fund's role and operational capabilities. This implies not only keeping the Fund's size broadly in line with that of the world economy, but also preserving its liquidity and financial resources at the levels needed to meet the ever-changing needs of its membership in both ordinary and exceptional circumstances. Although it will remain comfortable through the end of 1997, the Fund's liquidity position has gradually weakened, and in the not so distant future it could fall below safe levels. We must not allow this to happen. We believe that an increase in overall Fund quotas is in order and that it should be agreed upon in the context of the Eleventh General Quota Re- view. We also continue to believe that an overall quota increase should go hand in hand with a realignment of individual quotas, to make them better reflect the members' relative weights in the world economy. The cooperative nature of the Fund requires that individual members' responsibilities and capacity to discharge them be strictly interrelated. However, a large part of the membership has seen its actual quotas depart significantly from what quotas should be, and it is now time to remedy such a situation. Given the size of the divergence problem, we cannot favor "ad hoc" solutions aimed at rectifying the positions of only a restricted group of members. On the contrary, we continue to believe that it is in the best interest of the Fund and the Bank to tackle the problem on a general basis and for the whole membership. For these reasons, we welcome the recent creation of a working group within the World Bank with the purpose of studying proposals to harmonize the capital shares of the International Bank for Re- construction and Development (IBRD). While the increase in the Fund's ordinary resources is necessary for it to operate under normal circumstances, the availability of adequate supplementary resources (to be called upon in exceptional situations) can provide an important safeguard in an environment where markets are global and increasingly integrated. Therefore, we welcome the New Arrangements to Borrow, which will make available supplementary re-

©International Monetary Fund. Not for Redistribution ITALY 127 sources to cope with exceptional situations posing a threat to the stability of the international monetary system. The Italian government, through the presidency of the negotiating group, has contributed to a balanced solution to the problems of representation and contribution of the new participants. Concerning the SDR, we believe that its role in the international monetary system must not be diminished. At the same time, we remain convinced that the creation of SDRs should be determined on the basis of global liquidity needs, a condition that does not seem to be present today. On the other hand, we have long recognized that a problem of equity existed, especially for those new members that have never participated in previous allocations. We are thus ready to support a special SDR allocation aimed at addressing this specific equity problem.

Dealing with the Problems of Low-Income Countries We fully support the Bank's and the Fund's role in assisting the poorest of our members. For this reason, we continue to support the Interna- tional Development Association (IDA) within the limits set by our budgetary situation. We also favor a continuation of the Enhanced Structural Adjustment Facility (ESAF). We are thus ready to consider ways to finance the ESAF in the interim period, using both resources held by the Fund and bilateral contributions. We also support reasonable Bank and Fund contributions to the debt initiative in favor of the low-income countries—the heavily indebted poor countries (HIPC) initiative—provided that it is restricted to a limited number of countries, namely, those where the external debt burden is clearly unsustainable in the medium term, despite serious and sustained efforts to cope with it. We are also well aware of the risk of moral hazard that exceptionally favorable debt-exit options carry within themselves. Regarding the proposed debt initiative, about which we heard reports at the Interim and Development Committees, we would like to stress just a few points: • First, we must recognize that concessional resources, no matter what their origin, are scarce and that the external concessional financing that can be extended to member countries is useful only as long as it brings about the policy changes necessary for establishing sound and lasting growth. • Second, the provision of exceptionally favorable financing must be temporary in nature. If it were offered for an indefinite time, moral hazard would be enlarged instead of being circumscribed. Besides, we must recognize that the Fund has a limited role in development assistance, for which IDA remains the main avenue.

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• Last, but not least, resource transfers must not be financed by the use of "core" resources. This would, sooner or later, jeopardize the financial integrity of our institutions and inevitably result in a reduction of their creditworthiness. We thus believe that the financing of the ESAF in the interim period and of any HIPC initiative must be based on a judicious use of the Bank's profits, and a blend of noncore resources held by the Fund—such as General Resources Account (GRA) resources for loans and resources from the second Special Contingent Account (SCA-2) for subsidies—plus additional contributions, as needed, from countries that wish to avoid using GRA and SCA-2 funds. Such a blend would be amply sufficient to meet the net present value of the overall financing need. The burden must, of course, be distributed as broadly and equitably as possible. The use of other Fund-held resources, particularly the core ones, should be considered as the last option, after all others have been pursued and exhausted.

Progress and Policies in Italy Since 1992 we have made momentous headway in public finance adjustment and inflation reduction, which are the cornerstones of balanced and sustainable growth. Progress has continued in 1996, despite an adverse economic cycle. The current government will persist in these efforts and quicken their pace. On September 27, the government adopted the 1997 Budget Law. For the goals it pursues, the size of the adjustment that it embodies, this law marks a key step forward for the future of our country. Since the beginning, the government has embraced, as its main priorities, adherence to a path of reduced inflation and fiscal consolidation consistent with the Maastricht criteria and timetable, and the reduction of the unemployment rate. These goals are mutually reinforcing—higher employment is not brought about by higher public spending, but rather by lower real interest rates, which promote private investments and lasting growth. Adherence to the economic and monetary union (EMU) convergence path is a critical factor in restoring growth and creating jobs. These policy principles were the basis of the 1997-99 (three-year) planning document approved by the government in July. The 1997 Bud- get Law now implements them, and we are going ahead with our programs of privatization and deregulation of the economy. Our new budgetary target is to reach a total deficit-to-GDP ratio of 3 percent in 1997. Compared with 1996, the budget law will determine the ways to reduce the deficit by about 3 percentage points of GDP. About three-fifths of this reduction will occur as a direct result of the measures already detailed in the budget draft approved recently, while the other two-fifths remains to

©International Monetary Fund. Not for Redistribution ITALY 129 be itemized by the end of the year. The primary surplus will be about 6 percent of GDP. The measures already specified combine expenditure cuts of about $17 billion and revenue increases of $8 billion. The cuts are concentrated on central and local government expenditures. They are connected with the reform of the public administration and of the budget already approved by the government, and are aimed at increasing the efficiency and decentralization of the public sector. Health and social security expenditures have also been reduced, together with transfers to public utilities. The increases in revenue come mostly from the elimination of a number of tax deduc- tions and from anti-evasion and anti-erosion measures. Before the end of the year, further measures equivalent to $17 billion will be introduced. These additional budget savings will be based largely on a onetime increase in income taxes, on top of the other budget deficit reduction efforts, which will continue as planned in 1998. An integral part of our budget adjustment is a substantial package of measures aimed at increasing employment, especially in the south of Italy. With this action, our budget will be, and will remain, in order. The structural causes of inflation will have been eradicated by the long- established and widely agreed income policies; a stability-oriented monetary policy consistently followed by an independent central bank; and the completion of controlling public expenditure. Markets reacted favorably to the preparation and presentation of the 1997 budget. Interest rate spreads over our relevant benchmarks narrowed by over 50 basis points in less than a week. Significantly lower nominal and real rates are now in sight. Interest rate reduction may prove to be an important part of our convergence effort, although our quantitative objectives are not predicated on such an occurrence. Reduced interest expenditure from lower rates would therefore constitute additional savings to those already envisaged in the budget. I am fully aware that my country is undertaking an extraordinary effort, but equally extraordinary are the motivations. The economic motivations lie in the will to fight budget deficits and to increase employment. The political motivations are the same as those that guided Italy to be one of the founding members of the European Economic Community almost 40 years ago. We intend to be among the founders of the EMU in 1999. But even more important are our ethical motivations. Our participation in the EMU on January 1, 1999 will represent the final accomplishment of a long, painful, and cathartic process that Italy has undergone since 1992. It will represent the crowning event of the peaceful revolution that is deeply changing our country. Italy will by then be ready to be an active member of the EU, one of stability and growth that was designed at Maastricht, and that will be achieved.

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STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR JAPAN

Wataru Kubo

Introduction May I begin by saying what a pleasure it is for me to be able to address the Fifty-First Annual Meetings of the International Monetary Fund and the World Bank Group. Before turning to my remarks on policy, I'd like to extend a warm welcome to Bosnia and Herzegovina, which joined the Fund and the Bank as an independent nation after last year's meeting. I am sure we all welcome the increased support of both institutions and member countries for a nation attempting to recover from the ravages of war, as evidenced by the recent democratic elections. May I also take this opportunity to express our congratulations to the IMF Managing Director, Mr. Camdessus, for his reelection in May, and best wishes to both the Fund and the Bank.

State of the World Economy and Policy Coordination I want to begin by reviewing the state of the global economy. I think we can agree that it hit bottom in 1991 and that since then it has seen a steady recovery. This is the result of the continued efforts of our member nations, despite their own political and economic difficulties, to pursue a disciplined macroeconomic policy and to promote market-oriented economic reforms. It is vital that we promote economic structural reforms still further. In order to sustain noninflationary growth, the industrial nations are working to reduce fiscal deficits, stabilize prices, and achieve structural reform. Clearly, the biggest challenge is the reduction of fiscal deficits. Without this, the vitality of the private sector will be undermined and the world's savings will be put at risk. Developing countries on the whole are enjoying high economic growth. This trend is particularly evident in the emerging economies, whose influence on the world economy as a whole is therefore considerable. Ideally, these emerging economies will contribute to sustainable global growth while guarding against domestic overheating. Now to the Japanese economy. A steady increase in private demand has encouraged recovery. Among the positive signs are a rise in private consumption, private sector investment in plants and equipment, and housing construction. In the monetary area, the relaxed monetary policy stance remains unchanged, as evidenced by the current official discount rate of

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0.5 percent, which is an all-time low. For its part, the government of Japan is determined to oversee the implementation of the budget for FY 1996 while addressing the problem of nonperforming loans as quickly as possible. We believe this will further the momentum and the sustainability of recovery. Monetary policy will remain accommodating and responsive closely watching the economic situation at home and abroad, including the state of the financial markets. With Japan's recovery clearly in place, I believe it is timely for us to look ahead to the next century, to consider what must be done to address the economic challenges. Our foremost challenge is to tackle structural fiscal reform. Japan's fiscal situation is the worst among the industrial nations and, indeed, is at something of a crisis point. We face an unprecedented wave of population aging and, with it, an enormous burden on the people. Reform of Japan's fiscal structure is imperative. The major responsibility of this generation is to limit the burden we pass on to our children and to secure a bright future for generations still to come. We must also take into account the ongoing integration of the world's financial markets—something that I feel sure will continue into the next century. Japan is committed to making our financial and capital markets more liberalized and more efficient, while ensuring the stability and transparency of our financial systems.

Redefining Rights and Responsibilities in the International Monetary System Until almost a quarter of a century ago, the world economy and international trade were supported by the postwar exchange rate system. When that collapsed, we were launched on an uncharted voyage. Since then, we have experienced extraordinary changes in the world economy. There has been a dramatic increase in the volume of international capital transfer. In- creasingly integrated financial markets have created new financial products one after another. There has been regional integration, such as with the European Union and other such blocs. And the emerging economies have started to play a key role in the international economy. This has meant a considerable expansion of the world economy and trade. But you could argue that it has also resulted in the heightened risk that a financial crisis in one market may have an immediate and contagious effect on other markets. Similarly, you might point out that exchange rates are now subject to abrupt fluctuations. To minimize the risks, while promoting policy coordination among the industrial nations and close cooperation in exchange markets, we have a number of mechanisms, for example, cooperation among regulatory and supervisory authorities and better settlement systems. I hope you will agree that the capacity to cope with varied risks in the international financial markets must be strengthened even further. To that

©International Monetary Fund. Not for Redistribution 132 SUMMARY PROCEEDINGS, 1996 end, it is essential that we collaborate with the new players in the international economy, to redefine both rights and responsibilities so that we can better manage the international monetary system while promoting international policy coordination even further. It is in this context that I particularly welcome the fact that the Group of Ten countries, along with new players in the international economy, had a hand in creating the New Arrangements to Borrow (NAB). Japan also strongly supports the call for the earliest possible quota increase under the Eleventh General Review of Quotas in a way that reflects the relative position of each member in the world economy by fully respecting the wish of many emerging economies to minimize the gap between calculated and actual quota shares. Additionally, due attention should be paid to the fact that many new members of the Fund have not been allocated special drawing rights (SDRs). This is an inequity that must be addressed, and I call on member nations to redouble our efforts so that a final agreement will be reached by the time of the Interim Com- mittee meeting next spring. Both the quota increase under the Eleventh General Review of Quotas and the allocation of SDRs are challenges that must be addressed to redefine our rights and responsibilities in a new environment characterized by emerging economies as well as by economies in transition. In this respect, I believe that dealing with both issues simultaneously and as a package will make more sense and will also allow members to win support at home more easily. The stabilization of exchange rates, at the same time, is of global concern: it is no longer of interest simply to the industrial nations. It follows, then, that policy coordination and cooperation in exchange markets since the Plaza Accord are no longer limited to the industrial nations. The emerging economies of Asia and other developing countries must also have a voice. It is in this context that the monetary authorities in Japan have strengthened collaboration with their counterparts in the Asia and Pacific region. The foreign exchange reserves of the Asian nations amount to almost 40 percent of the world's total foreign exchange reserves. It is therefore of great significance to the global economy that this region is working toward a framework to maintain exchange rate stability and that it is doing so through meetings of the APEC Finance Minis- ters and cooperation among monetary authorities in the Asia and Pacific region. Naturally, Fund surveillance capability could, and indeed should, play a part in such a regional framework. Let us not forget that the statistical capability of developing nations must also be enhanced so that they can subscribe to the Special Data Dis- semination Standard. This is why, when considering requests for the use of the Japan Administered Technical Assistance Account with the Fund, it is hoped that priority will be given to projects intended to enhance the authorities' statistical capability.

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Support for Developing Countries Let me now move on to outline Japan's views on assistance to developing countries. Today, one cannot categorize the situation of developing countries by using just one uniform characteristic. The emerging economies, the poorest countries, the postconflict countries, and the transition countries are all facing different tasks. Hence, development strategy should be tailored to the specific circumstances of a given country while fully drawing on the experiences and lessons we have learned in other regions. To allow us to respond in this way, we must study a variety of development experiences, exchange views on them, and share the knowledge. This is an essential process, yet it is still in its initial stage. Japan, together with other countries, would like to make a greater contribution in this regard. We can transfer our experience of postwar reconstruction and high economic growth; we can also help systemize the east Asian economies' growth experiences. In recent years, the industrial nations have faced their own financial difficulties. Consequently, development assistance has leveled off. It is therefore all the more necessary to ensure an even more efficient use of assistance. It is to be hoped, especially, that the multilateral development banks will continue their efforts at reform based on the March Report of the Development Committee Task Force on Multilateral Development Banks. It is also essential that the emerging economies, these new players in the international economy, join the donor community. I would also like to take this opportunity to thank you for supporting Japan's share increase at the Governors' vote last June. We are determined to make contributions commensurate with our increased share. A few remarks now on the poorest countries. Reducing poverty in these countries and integrating their economies into the world economy are a major challenge that must be addressed. The prioritized distribution of assistance must be continued. With this in mind, and despite the severe domestic financial situation, Japan has made active contributions to both the eleventh replenishment of the International Development Association and the seventh replenishment of the African Development Fund. I hope most sincerely for the steady implementation of these two agreements. I also hope that the current negotiations on the sixth replenishment of the Asian Development Fund will reach agreement as early as possible and on a level sufficient to address such major challenges as the fight against poverty in Asia, as well as environmental destruction. Hand in hand with this, it is vitally important that the Enhanced Structural Adjustment Facility (ESAF), the Fund's core instrument of assistance for the poorest countries, continue. Japan is ready to make active bilateral contributions in line with the other industrial countries. With regard to the problems of heavily indebted poor countries (HIPCs), it is vital that the IMF, the World Bank, and other international

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financial institutions make the most effective contributions. I welcome President Wolfensohn's willingness to make a contribution. Japan joins the intention of the Paris Club to go beyond the Naples terms, up to 80 percent, after confirming significant progress made at the international financial institutions. This action will be applied on a case-by-case basis, for a limited number of countries that successfully complete their HIPC programs with stronger modalities. Turning to postconflict countries, Japan will continue to support their reconstruction through the Japan Special Fund of the Bank. Finally, a few words on the emerging economies. For those economies, primarily in Asia and Latin America, to maintain steady growth, the public sector will continue to play an important role. It is equally important, however, to draw on the vitality of the private sector. To ensure an adequate flow of private capital and to meet the huge demand for financial resources for developing infrastructure, the World Bank Group must take full advantage of its catalytic and advisory functions to help recipient countries improve their capital markets, as well as their accounting and legal systems. For its part, Japan will continue to be active in providing technical assistance by making the most of the Japan Special Fund in the Bank and the International Finance Corporation (IFC). We would also encourage the World Bank Group to further strengthen the functions of the IFC and the Multilateral Investment Guarantee Agency (MIGA). In this context, I would encourage the World Bank, the IFC, and MIGA to start developing how they might better contribute to the promotion of private capital flows for infrastructure development in these emerging economies. I hope that the World Bank Group will report on its achievements to the next Annual Meetings to be held in Hong Kong.

Conclusion A quarter of a century ago, the whole world was launched on an uncharted voyage, puzzled and concerned. At the time, and from this very podium, Japan's Minister of Finance, Mikio Mizuta, called for closer international cooperation. Allow me to quote from a statement he made on September 28, 1971: "The greater the difficulties lying ahead of us the stronger the need for closer cooperation. I strongly urge that all of us do our utmost to contribute to forming a solid common front to overcome the crisis." During the 25 years that have followed, the world economy has been increasingly integrated, and the emerging economies have become the key engine for the growth of the world economy. Today, we are faced with the impending new millennium, and the need for cooperation is far greater than it ever was. Today, everyone, not

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simply the industrial nations but also the emerging economies and other new players in the international economy, must join hands in redefining our rights and responsibilities to ensure better management of the international monetary system and sustainable growth, while strengthening international cooperation even further. I strongly hope that the Fund and the Bank will continue to remain at the heart of such international cooperation, thus ensuring that future generations inherit a vital world economy.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR KOREA

Seung-Soo Han

I am very pleased to take this opportunity, on behalf of the Korean government, to address the Fifty-First Annual Meetings of the Interna- tional Monetary Fund and the World Bank. In their opening remarks, the Managing Director of the Fund and the President of the Bank have shown a keen awareness of the imperatives of global economic change. I would like to join my fellow Governors in commending them for their dedicated and enlightened leadership in preparing to deal with these challenges. The world economic order has changed substantially since the establishment of the Bretton Woods institutions half a century ago. During this period, Korea has achieved a remarkable level of economic maturity. Once one of the world's poorest countries, Korea managed to transform its simple agrarian economy into an industrial economy within a short span of time. In the process, Korea has benefited greatly from the resources and expertise provided by the Bretton Woods institutions, for which we are grateful. The Korean people have come to recognize our country's increasing responsibilities to the global economy. During the past three and a half years, the Korean government has been implementing a bold strategy in response to Korea's new place in the globalizing world. Termed segyehwa in Korean, or globalization in English, this concept extends well beyond conventional economic liberalization. Indeed, its broader purpose is to fully integrate Korea into the emerging global civilization of the twenty-first century. In this spirit, Korea will continue to contribute to the efforts of the Fund and the Bank to address the chal-

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lenges currently facing the world economy and to prepare for their enhanced roles in the twenty-first century.

Policy Directions for the IMF and World Bank Continued Efforts to Safeguard the International Monetary System In the aftermath of the financial upheaval in early 1995, the world financial market stabilized rather quickly, owing to extensive international cooperation and the activities of the IMF. However, we share the view that the possibility remains for similar disturbances in the world financial market. Thus, the IMF should continue to implement a comprehensive strategy to avoid potential risks in the integrated world financial market. For instance, the IMF needs to extend technical assistance to help member countries subscribe to the Special Data Dissemination Standard (SDDS) by the end of 1998. In addition, the IMF should develop an efficient operational plan for the SDDS to function as a key component of the early warning system. As for managing any future financial crisis, remarkable progress has been made in reinforcing the Fund's resource base through the successful creation of the New Arrangements to Borrow (NAB). The Group of Ten countries and the new participants deserve much credit for their far- sighted efforts, which made this important initiative possible. However, the fundamental task of enlarging quotas in the Fund has not progressed as much as we would have expected. I would like to remind you of two of the key principles that had been agreed in the earlier stages of the discussion on creating the NAB. First, the IMF should remain a quota-based institution. Thus, enlarging the borrowing facility should not be a substitute for a quota increase. Second, the quota structure should better reflect the changes in the economic map of the global economy. Toward this end, the Eleventh General Review of Quotas should include an ad hoc increase for member countries that have a significant gap between their calculated and actual quotas. In this regard, we welcome the Interim Committee's call for an early conclusion of the eleventh review. I urge the major shareholders of the Fund to expedite the progress of the Eleventh General Review of Quotas in the same cooperative spirit demonstrated in making the NAB.

Increased International Cooperation in Helping Heavily Indebted Poor Countries (HIPCs) There are still more than 1.3 billion people in the world trying to live on less than $1 a day, and despite their best efforts as well as the aid

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from the multilateral development banks (MDBs), the HIPCs have not substantially improved their situation, mainly owing to the heavy burden of their external debts. In this regard, we believe that the initiative jointly taken by the Bretton Woods institutions to ease the debt burden of the HIPCs was very timely. We welcome the major progress made in the initiative and support close and extensive consultation with all interested parties to resolve the remaining concerns.

Korea and the Bretton Woods Institutions As Korea has now been transformed from a recipient to a donor country, it is time to review and rethink the relationship between Korea and the Bretton Woods institutions. I believe that the MDBs should aim to work out development strategies relevant to their client countries. They should enlarge nonlending services as well as lending services. To contribute to the enlargement of the Bank's nonlending services, the Korean government will substantially replenish the Korea Consultant Trust Fund, in response to President Wolfensohn's call. Those funds will be used to transfer Korea's experience and know-how in development to other member countries to expedite their development process. This fund will also be used to promote cooperation by exchanging experts between Korea and the Bank. Moreover, as Korea is moving steadily forward in its bid to become the twenty-ninth member of the Organization for Economic Cooperation and Development (OECD), we are striving to adapt our economic systems, including our financial market, labor market, and environmental regulations to the norms and standards expected of industrialized nations. The Korean government wishes to contribute to the world economy by actively participating in all aspects of international cooperation in keeping with the globalization drive. In fact, the Korean government has already made significant efforts in this direction. For instance, we have contributed to the International Development Association (IDA) Replenishment and the Enhanced Structural Adjust- ment Facility (ESAF). We have also actively participated in creating the NAB and in the establishment of the Middle East and North Africa Development Bank as a founding member. Just recently, we have decided to join the Central American Bank for Economic Integration, and we have increased our donations to many regional development institutions. I would like to seek the support of the member countries for Korea to play an even greater role in contributing to the betterment of the world economy as a new donor country and a country with a unique development experience.

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Concluding Remarks As we all know, the world economy is being integrated at a pace and in a way never experienced before. The technological advance in communications and the coming of an information age will serve to accelerate the integration of the global economy in the twenty-first century. In this new environment, the IMF and the World Bank will continue to be just as important to global economic prosperity and stability as they were in the immediate post-World War II years, if not more so. That is as- suming, of course, that they continue to adapt creatively, and in a timely manner, to changing circumstances. Today, I have sought to emphasize Korea's determination to contribute, as best we can, to the global efforts toward free trade and multilateralism in the spirit of economic cooperation. This is the basic rationale for our participation in the Fund and the Bank and the foundation of our commitment to these two great institutions. In closing, I would like to express my gratitude to the Joint Secre- tariat for its excellent preparatory work, which has done so much to ensure the success of these meetings.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE LAO PEOPLE'S DEMOCRATIC REPUBLIC

Xaysomphone Phomvihane

The delegation of the Lao People's Democratic Republic is very pleased and honored to represent the government of the Lao People's De- mocratic Republic at these Annual Meetings of Governors of the World Bank and the International Monetary Fund. I wish to join other distinguished Governors in congratulating the chairman of these meetings, the management of the World Bank Group, the Managing Director of the Fund, and the Governors and delegates of all member countries. The delegation also congratulates James D. Wolfensohn, the President of the World Bank, and Michel Camdessus, the Managing Director of the Fund, for their valuable efforts in contributing to the development of member countries. We wish the President, the Managing Director, and their management teams well in continuing their well-expounded and widely publi- cized objective of reducing poverty in developing countries. In 1996, world economic growth on average has continued at a satisfactory rate, and Asia achieved a growth rate of more than twice that of any

©International Monetary Fund. Not for Redistribution LAO PEOPLE'S DEMOCRATIC REPUBLIC 139 other developing region. The year 1996 also posed big challenges for the transition economies as well as new opportunities for development, cooperation, and integration with the world economy. We welcome the continued acceleration over the past decade in the pace of global integration and the widening and intensification of international linkages in trade and finance. Moreover, we welcome the framework for action, discussed by the Development and Interim Committees at their spring meetings, for resolving the debt problems of the heavily indebted poor countries (HIPCs). We welcome the decision to expand the currency choice of loan products, which allows greater flexibility for borrowers in managing their own currency risks. As a development institution, the World Bank should constantly aim at minimizing the cost of borrowing for its members. As for the Lao People's Democratic Republic, the real economy performed quite well in 1996, with overall real GDP growth of 7.1 percent. However, we faced difficulties in many areas. In mid-1995, our country experienced severe floods that caused great losses of cultivated crops and basic infrastructure, and worsened the situation with respect to poverty. On the other hand, there was a sharp increase in aggregate demand owing to macroeconomic imbalances. The government responded to these adverse developments through tightened financial policies, the implementation of which restored overall macroeconomic stability. In the first quarter of 1996, two important events occurred in the political life of the multiethnic Lao people: the Sixth Congress of the Lao Peo- ple's Revolutionary Party and the Eighth Plenary Session of the National As- sembly (Third Legislature). Both of these events have reaffirmed the strong determination of our government in pursuing our renovation policy, accelerating the economy's transformation to a more market-oriented system while maintaining sustainable economic growth, and steadily leading the country into the twenty-first century. In particular, our government will resolutely continue the implementation of our socioeconomic development plan up to the year 2000, especially the eight priority programs aimed at fully exploit- ing natural resources and using new technology and successful economic experiences for the socioeconomic development of the country, while linking development with the protection of the environment. On the other hand, the main focus of the strategy of macroeconomic management will be on containing inflationary pressures and current account deficits, while sustaining structural reforms, mainly to control public expenditures, broaden the revenue base, and improve the balance of payments position. One of the important factors contributing to the success of the country's socioeconomic and development plan is the continued and increased support of the international community, including bilateral and multilateral donors, the international financial institutions—in particular, the World

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Bank Group, the International Monetary Fund, and the Asian Development Bank, and nongovernmental organizations. The government of the Lao People's Democratic Republic highly appreciates the catalytic role of the World Bank and the Fund in promoting and facilitating the process of cooperation and economic development, such as the third structural adjustment credit and the Enhanced Structural Adjustment Facility (ESAF). As one of the world's poorest economies, the Lao People's Democratic Re- public continues to need financial assistance on concessional terms to avoid debt-servicing problems. In this connection, we place utmost importance on the ESAF and on the World Bank's structural adjustment loan, which have made a major contribution to the success of the Lao People's Democratic Republic in its economic reform efforts. We therefore welcome the progress the IMF has made toward financing a continuation of ESAF and participating in the HIPC initiative. To this end, we strongly believe that some gold sales will be necessary as part of the optimization of the IMF's reserve holdings. Furthermore, we maintain that the self- sustained ESAF should be financed jointly by bilateral contributions and returns on the investment of proceeds from gold sales. On behalf of the Lao government, I would like to express its sincere thanks to the financial institutions and the friendly countries for their valuable support. We hope that they will increase their financial support for the growing investment in our country, thus helping the Lao People's Democratic Re- public to overcome its status as a least-developed country in a short period of time, to upgrade its economic conditions, and to join the Association of Southeast Asian Nations (ASEAN) in the near future. We not only need to conclude negotiations for the eleventh replenishment of the International Development Association (IDA-11) at an early date, but also we need to ensure that the size of IDA-11 will not be reduced. Otherwise, the Bank will not be able to play its role in contributing to the development of its member countries. Therefore, we wish to urge that adequate concessional funding be made available for countries pursuing economic reforms and, at the same time, we appeal to the donors to increase their contributions. For our part, the government of the Lao People's Democratic Republic will mobilize and promote all economic sectors, attaching great importance to the private sector, and will create favorable conditions for foreign investment. Meanwhile, together with other countries, we will help make our region peaceful, stable, and more prosperous. By implementing a consistent policy of expanding foreign economic relations, we believe that international institutions and other donor countries will continue and increase cooperation in providing grants, concessional loans, and technical assistance; promoting private investment; and creating opportunities in trade relations with our countries. To conclude, we would like to offer our best wishes for the success of these meetings.

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STATEMENT BY THE ALTERNATE GOVERNOR OF THE BANK FOR THE REPUBLIC OF LATVIA

Guntars Krasts

On behalf of the Governors for Estonia, Latvia, and Lithuania, I am pleased to inform you that last year our cooperation with the World Bank was further strengthened with three projects already completed and another 17 under implementation in all three Baltic states. Our governments highly appreciate this cooperation and look forward to a further deepening of cooperation in the future. We are aware that the economic restructuring currently under way in our countries is a long-term effort, and access to long-term financing by the World Bank is thus a key component for its success. I am also pleased to note that, according to the World Bank, of all agricultural projects granted, the one to Latvia has been the most successful. In this connection, the Latvian government intends to transform the current Agricultural Development Project into a Rural Development Project. The process of political and economic transition in the Baltic countries is now irreversible. Macroeconomic stabilization efforts and structural reforms of recent years have laid the foundations and created the institutions necessary for the functioning of a market economy. The private sector now generates over 60 percent of the output in our countries. During 1995-96, Estonia has made further progress toward becoming a modern market economy. Growth increased to 3.2 percent in 1995 and an estimated 3 percent to 5 percent in 1996, while inflation declined from almost 50 percent in 1994 to 29 percent in 1995, and 22 percent is projected in 1996. Structural reforms were accelerated, particularly in the area of privatization of medium- and large-scale enterprises and housing. The regulatory environment for the domestic banking system was further improved, and the government continued to maintain a very open trade regime. The Latvian economy has recovered quickly from the banking crisis of 1995; after falling in 1995, output grew by 1.5 percent in the first half of 1996 compared with the corresponding period of 1995. For the first time since Latvia regained independence, the rate of inflation has fallen below 18 percent. Significant progress has also been made in the area of fiscal consolidation: the deficit in 1996 is expected to be below the budget target of LVL 40 million, while the government has recently submitted to parliament a draft budget for 1997 with a zero deficit. Finally, the beginning of this year has marked a sharp turning point in our privatization policy; all large companies, including the main utilities, are now to be privatized. We expect that by the end of 1997 this effort will be concluded, leaving nearly all enterprises in Latvia in private sector hands.

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Lithuania has registered an accelerating economic growth in 1994/95. After growing by 3.1 percent in 1995, real GDP is, despite far-reaching restructuring in the financial sector, estimated to grow by 4.5 percent this year, while the inflation rate has further declined from 36 percent in 1995 to a projected 20 percent in 1996. Lithuania has embarked on the second stage of privatization for cash, and the government is now moving toward further liberalization of the land market, notably allowing foreigners to own land. The interest rates on government T-bills has decreased significantly as a result of macroeconomic stabilization. The credibility of Lithuania was officially recognized by the granting of a positive international credit rating, which paves the way to international capital markets. The most important strategic goal for our countries is economic integration with Europe and accession to the European Union. We consider this fundamental for our security and for consolidating our ties to the West. At the same time, the geographic position of the Baltic countries enables us to be an important trade link between East and West. This requires upgrading the physical infrastructure in order to create an effective transport corridor, both east-west and north-south, and integrating it with a common European transport system; as well as eliminating barriers to the flow of goods, services, and capital between the Baltic countries. This is a tall order, but we have started taking important steps in this direction. In this connection, it should be noted that in the Baltic countries, just as in all other economies in transition, considerable benefits can be derived from foreign direct investment. This is, therefore, one of the chief economic objectives of our governments. On behalf of the Governors for Estonia, Latvia, and Lithuania, I am looking forward to further fruitful cooperation with the World Bank, which will help us achieve an orderly and successful transition, and realize our long-term economic objectives.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE SOCIALIST PEOPLE'S LIBYAN ARAB JAMAHIRIYA

Mohamed A. Bait Elmal

I am very pleased to address you on behalf of the Governors of the Arab member states of the International Monetary Fund and the World Bank. I would like to begin by congratulating you on being selected to chair the Board of Governors this year, and by congratulating Mr. Camdessus on his reappointment to a third term as Managing Director

©International Monetary Fund. Not for Redistribution LIBYAN ARAB JAMAHIRIYA 143 of the Fund. I would also like to welcome Bosnia and Herzegovina as a new member of our institutions. We have seen a number of encouraging developments in the world economy, including a significant reduction in rates of inflation, which have provided a favorable environment for continued growth of the global economy at reasonable rates. As these encouraging developments follow the unfavorable conditions that characterized world financial markets last year subsequent to the Mexican financial crisis, we commend the effective role of the IMF and the World Bank in containing that crisis and limiting its negative effects on world financial markets. We would also like to express our appreciation of the effective role of the Bank and the Fund in meeting the challenges resulting from the fundamental changes that have taken place in the world economy, and their valuable participation in helping countries meet these challenges by monitoring economic developments and providing financial assistance and technical advice. In view of the generally encouraging prospects of world economic developments, I would like to call your attention to the fundamental role of economic growth in developing countries in supporting global economic growth, and to the sustained efforts of these countries, including the Arab countries, to continue the process of economic reform that has strengthened their material and human resources and improved their growth rates. The positive developments taking place in the developing economies encourage us to call on the developing and transition countries to redouble their efforts at reform, in order to ensure continued and sustainable improvement in their economic performance. Naturally, the success of the economic reform efforts in these countries is largely dependent on improved opportunities for marketing their exports to the industrial countries. Once again we would like to express our hope that the industrial countries will refrain from adopting any policies or taking any protective measures aimed at pursuing unjust goals. Most of the industrial countries have been successful in reducing their budget deficits and maintaining lower inflation and interest rates, and this has had a significant positive effect on the world economy. But the slowdown of economic growth in the industrial countries, together with the continued need to further reduce their budget deficits, has made it necessary for the governments of these countries to adopt appropriate fiscal policies, which, in turn, affect economic growth, exchange and interest rates, and patterns of trade in the rest of the world. We hope the IMF will continue to encourage the industrial countries that control the principal traded currencies to coordinate their policies and make them more transparent. At the same time, we are concerned about the high rates of unemployment in most of the European countries. The continuous growth in international commercial and financial exchanges has been accompanied by a brisk trend of capital flows to an increasing number of countries. While we welcome the increased openness of financial markets, we also note that fluctuations in capital flows have had a

©International Monetary Fund. Not for Redistribution 144 SUMMARY PROCEEDINGS ,1996 considerable negative effect on the banking system in both developing and industrial countries. The banking sector in these countries must be strengthened and economic policies must be adopted to control these fluctuations and allow the flow of capital to play an effective role in economic development. In view of the increased globalization of the economy and the continuous expansion of economic exchanges between countries, we must strive to enhance the Fund's ability to meet the challenge of these global economic developments. The IMF must have sufficient financial resources to carry out its role of financing economic reform and transition programs in an effective manner, to deal with financial crises and emergencies that affect the global economy. We must, first and foremost, ensure that the Fund's resources are adequate. We look forward to the Eleventh General Review of Quotas of IMF members and wish to stress that any increase in quotas must be based on the principle of equitable increases for all members. We must avoid at all costs any distribution of increases that would reduce the ratio of developing countries' quotas to the total quotas of all members, to prevent the marginalization of the role of these countries. We attach particular importance to ensuring the adequacy of the Fund's own resources, thus enabling it both to carry out its traditional functions and respond to unforeseen emergencies. We also consider it crucial to provide the Fund with additional resources that will enable it to respond rapidly, when required, to requests for exceptional financing. We welcome the New Arrangements to Borrow, which are expected to be finalized shortly, and which constitute an important and necessary addition to the Fund's exceptional resources. We strongly support your efforts to ensure the continuation of the En- hanced Structural Adjustment Facility (ESAF) activities, which will allow the IMF to continue providing concessional loans to low-income member countries and to help solve the problems of heavily indebted poor countries. There is no doubt that these arrangements have a fundamental role in supporting the economic reform policies of these countries. In reality, the resources required to finance ESAF activities are very small when compared to their enormous impact on economic growth in these countries. We applaud the agreement recently reached by the members of the Paris Club concerning debt relief for poor countries, and we hope that a final agreement can be reached in the near future on continuation of the ESAF, that will include the use of a small portion of the Fund's gold reserves for this vital purpose. Our continued conviction of the need to increase international reserves leads us to call once again for a new allocation of special drawing rights (SDRs). We would still prefer a general allocation, in accordance with the Fund's Articles of Agreement, and consider it the best way to carry out a new allocation of SDRs. However, in order to ensure the fair distribution of SDRs among members, we are prepared to support a new allocation that would result in a unified ratio of accumulated allocations

©International Monetary Fund. Not for Redistribution LIBYAN ARAB JAMAHIRIYA 145 for all members. Nevertheless, we believe that the principle of general allocations should remain the basis for future allocations of SDRs. I shall now move on to a number of issues related to the World Bank. We are pleased to note the expanded activities carried out by the World Bank Group over the past year and the efforts expended to improve performance standards in the planning and implementation of projects. We note in particular the expanded activities of the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral In- vestment Guarantee Agency (MIGA). Although the World Bank increased somewhat its real expenditures on projects, we regret to learn that over the past year it has reduced its commitments to heavily indebted countries. We hope that the poor countries of Africa will receive the attention they require to help them stimulate their economies and improve their social conditions. We also welcome the expanded activities carried out by the Bank and IDA in the Arab world during the past year after their activities in the region had been greatly reduced for a number of years, and we applaud the Bank's role in helping to reconstruct Gaza, the West Bank, and Lebanon. We urge the donor countries to fulfill their commitments promptly, thus helping to achieve the goals of reconstruction and stability. And we ask the World Bank and the IMF to expand the technical and financial assistance they provide to individual countries and regional institutions in the Arab world. We support the continued efforts of the World Bank Group to provide debt relief to developing countries, and we endorse the increase in social development projects and assistance aimed at helping countries plan their transition to greater reliance on the private sector. However, we feel that additional support is needed to reduce the negative social effects of reform programs, especially for low-income sectors of the population. We also support the World Bank Group's determination to place greater emphasis on project quality and the ability to achieve development objectives. We approve of the goals that the Bank's management hopes to achieve through changes in work methods and administrative structure. We hope that these changes will produce tangible results; that they will help the Bank respond appropriately to the particular circumstances of each country, simplify the complicated procedures for granting loans and credits, improve implementation, and shorten the period of time required. At the same time, we hope that these trends will not overshadow the need to increase the size of loans and credits, especially given the fact that the developing countries are still suffering from the steady decline in official assistance from the main donor countries. We applaud the World Bank's role in developing and monitoring the debt-relief initiative for a number of poor countries, and its willingness to allocate US$500 million for this purpose. While we are pleased with the prospects for implementing this initiative, we feel that the Paris Club countries should assume greater responsibility to avoid placing the brunt

©International Monetary Fund. Not for Redistribution 146 SUMMARY PROCEEDINGS, 1996 of the burden on the World Bank Group and other international institutions, which we agree must maintain their financial positions. It should also be mentioned that many other developing countries that have not met the conditions of the debt-relief initiative are still suffering from the burden of indebtedness, which consumes a large share of their resources, including foreign assistance. A high degree of flexibility is required in addressing the indebtedness of these countries. I would like to conclude my remarks by drawing your attention to the continued efforts made by the Arab countries to reform the various sectors of their economies, and to the improved economic performance resulting from these efforts. Yet at the same time, we are fully aware of the important challenge we face, to persevere in our reform efforts and help our countries move forward on the path to development. I would also like to draw your attention to the large amounts of financial assistance provided by the Arab petroleum exporting countries to many developing countries. As a percentage of their GDP, these countries give the highest amount of assistance among all the donor countries, despite the austerity measures they have incorporated into their fiscal policies. While on the subject of the Arab world, I feel I must avail myself of this forum to invite the international community to fulfill their responsibilities by insisting that Israel end the suffering of the Palestinian people and remove the obstacles preventing them from exercising their legitimate rights and developing their economy. We appeal to donor countries and international financial institutions alike to assist the Palestinian people by increasing their support and helping the Palestinian National Authority raise the standard of living and build the infrastructure required in the autonomous regions. Further on the subject of our region, I would like to remind you that the economy of the great Socialist People's Libyan Arab Jamahiriya has suffered for a number of years from sanctions and other restrictions imposed upon it. We request that these decisions be reviewed objectively, in accordance with the Articles of Agreement of the international financial institutions, in order to facilitate the flow of funds and relieve the suffering of the Libyan people.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR MALAYSIA

Dato Seri Anwar bin Ibrahim

We are all optimistic that the world economy will continue to grow in the coming years. This has encouraged more countries to liberalize their

©International Monetary Fund. Not for Redistribution MALAYSIA 147 trading systems to meet the requirements of the World Trade Organization. This will lead to further dismantling of trade barriers. International resources will be more efficiently allocated and wider opportunities for investments made available. Though we cannot overemphasize the beneficial effects of this trade globalization, we must be wary too of the pitfalls. As market forces will be the main determinant of economic endeavors, the richer countries will have the upper hand in making the most of this at the expense of the less- developed and weaker economies. The more powerful economies will gain firm control on strategic industries and acquire a further competitive edge in all economic and noneconomic endeavors, while the weaker ones continue to be marginalized. It is therefore imperative that a meaningful partnership be forged between the developed and developing countries to ensure a more equitable socioeconomic distribution of the wealth and opportunities that are to be generated from this globalization. As the world trade scenario continues to evolve as a result of this trend of liberalization, we would want to see the gap between the richer and the poorer countries being progressively reduced. The World Economic Outlook has forecast good growth prospects for developing countries. But the fruits of the harvest may be denied to a larger sector of the world's population due to the unsustainable debt burden of many developing countries. It is even more unfortunate that despite continuous economic adjustment efforts, growth in heavily indebted poor countries (HIPCs) is still retarded. This is because HIPCs are diverting resources toward debt repayment, making it almost impossible to expend capital on infrastructure and education. Experiences in many countries have proven that external assistance to relieve repayments was crucial for the undivided pursuit of economic policies to promote growth. We are relieved that the IMF has decided on the modalities to finance the Enhanced Structural Adjustment Facility (ESAF). Although the understanding reached is less than desired, it nevertheless will enable the Fund to participate in the HIPC initiative. The debt relief will ensure a better chance of success for IMF programs and lead to sustainable growth over the medium and long term. But this can only happen if debt relief is comprehensive and substantial. The Fund must expedite efforts to ensure adequate resources for a self-sustaining ESAF. Bilateral contributions cannot be the only funding source. Eventually the Fund must optimize the management of its reserves, including the sale of some of its gold, to ensure growth with economic stability in member countries. More concerted efforts in this direction are necessary to change the perception in the developing world that the Fund is out to impose unfair social costs in its adjustment programs and is responsible for the economic hardship in many poor countries. We are concerned that over the past few years the Fund has tended to apply different standards in its treatment of member countries. The Exec-

©International Monetary Fund. Not for Redistribution 148 SUMMARY PROCEEDINGS, 1996 utive Board must not be a mechanism to pressure member countries to ac- quiesce to demands on noneconomic matters by denying the rights of members to the Fund's financial and technical assistance. Difficult as it may be, the Fund must ensure that its decisions and recommendations are based purely on economic considerations. This is necessary to restore the credibility of the Fund as an institution that is committed to assisting the poor countries and improving their economic management to create growth and employment. Malaysia, for its part, is prepared to assist and cooperate with the Fund. We have supported the Fund's effort to improve surveillance via greater transparency of data. Despite problems and limited resources, Malaysia has subscribed to the Special Data Dissemination Standard (SDDS). On financing operations, we are ready to pledge our share of the second Special Con- tingent Account (SCA-2) balances to finance the ESAF subsidy, on the understanding that there will be an equitable burden sharing among all countries. Malaysia is also committed to participate in the New Arrangements to Borrow (NAB) to play its part to ensure a stable global financial system. While we continue to provide resources to the Fund through existing and new financial assistance for the ESAF, the NAB, and regular lending to the Fund through the operational budgets, we look forward to international recognition of this effort. This recognition should be reflected in the new quotas under the quota review to be completed soon. In this regard, we look forward to representation in the Fund that is more in line with relative economic strength. We also welcome the joint Fund-Bank report on their continuing efforts to reduce the multilateral debt burden of HIPCs to a sustainable level. The broad framework of agreed principles should improve on the existing debt-relief mechanisms, which are clearly inadequate for a number of HIPCs. However, as time is of the essence, agreement on the specifics must be expedited so that the HIPC debt initiative can be implemented without delay. In particular, we would urge for pragmatism and support the case-by-case approach to ensure flexibility in the provision of debt relief. While we agree to the linkage between debt relief and a strong adjustment program, together with a commitment to reform by recipient countries, greater flexibility is necessary in determining which countries are more deserving of access to the HIPC initiative. This is to avoid the risk of providing debt relief "too little and too late." The implementation of the HIPC initiative must be more forward looking and consider individual country circumstances in determining country eligibility instead of relying strictly on narrow numerical classifications. In addition, the evaluation of performance should be not only measured in macroeconomic terms, but it should also take into account the social implications. We must avoid imposing excessive social costs on the affected populations, which could derail the adjustment process in the domestic political economy.

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The success of the HIPC initiative hinges on coordinated and concerted assistance from all creditors. Bilateral donors and multilateral institutions must play their respective roles to provide exceptional assistance beyond the existing mechanisms. In this regard we welcome the World Bank's commitment to provide a significant financial contribution to the proposed HIPC trust fund, and its readiness to provide other forms of assistance including International Development Association (IDA) grants, supplemental credits, and Bank transfers of net income as needed. We urge the Paris Club and all creditor countries to review their positions and to consider debt relief beyond 80 percent. We welcome the Bank's continuing efforts at internal reform to maximize its ability to assist member countries in the most efficient manner. In particular we support the World Bank's efforts to promote conditions for private enterprise as the engine of growth for less-developed countries, while continuing to pay due attention to investment in health and education as the basis for long-term development. In an environment of declining official development assistance contributions and with the increasing importance of private capital flows, the Bank should continue to pay due attention to the needs of the poorer member countries to ensure that no country is left out of mainstream global economic development.

STATEMENT BY THE GOVERNOR OF THE FUND FOR MALTA

Francis J. Vassallo

It is a great pleasure and honor for me to address the Joint Annual Meetings of the International Monetary Fund and the World Bank. I would like, first of all, to join other Governors in extending a warm welcome to Bosnia and Herzegovina as a new member of the Bretton Woods institutions. I am sure that membership in the Bank and the Fund will hasten the process of reconstruction in that country, which has experienced such tragedy and misfortune over the past few years. I would also like to congratulate Mr. Michel Camdessus on his reappointment for a third term as Managing Director of the Fund. I am confident that he will continue to provide that sound and capable leadership that has enabled the Fund to meet the challenges of the new global economic environment. International economic conditions and prospects this year have generally been satisfactory and encouraging. Economic growth in the industrial countries has reemerged, after moderating slightly toward the end of last year. This has been achieved against a background of historically low

©International Monetary Fund. Not for Redistribution 150 SUMMARY PROCEEDINGS, 1996 levels of inflation. At the same time, world trade has continued to grow significantly, as economic activity in the emerging-market economies, the economies in transition, and other developing countries has been sustained, underpinned notably by strong policies of macroeconomic adjustment and structural reform. These favorable economic developments have, however, been accompanied by a number of negative trends that may hinder the attainment of higher levels of economic growth. In the fiscal field, for example, despite progress in reducing budget deficits, many countries have still not achieved fiscal consolidation. In the labor market, the existence of various rigid structures in a number of industrial countries remains a primary factor contributing to unacceptably high levels of unemployment. In the financial field, there is a need for stronger supervision of financial institutions and markets in order to reduce the impact on the international financial system of macroeconomic and financial instability in individual countries. In this regard, there is no doubt that a strengthening of the Fund's surveillance function will contribute significantly to the prevention of a Mexican-type financial crisis. The establishment by the Fund in late March of the Special Data Dissemination Standard (SDDS) to guide members having, or seeking, access to international capital markets is certainly a step in the right direction. Consequently, the obligation of member countries to provide up-to-date economic and financial data for public consumption should contribute not only to macroeconomic discipline and monetary stability, but also to the promotion of sound financial systems and efficient market mechanisms. I am glad to say that over the last year my country has taken a number of measures to strengthen and upgrade its resources where the compi- lation of statistics is concerned in order to attain the high level required by international standards. Thus, as part of our preparations for membership in the European Union, we are in the process of integrating our statistical system with that of the European Union. While for the moment we will adhere to the General Data Dissemination Standard, we hope to be in a position to subscribe to the SDDS well before the end of the transition period in December 1998. Malta remains committed to a program of economic and financial reform, which has now reached a very advanced stage. Reforms have been aimed at liberalizing all sectors of the economy and reducing the role of the state in economic activity. This has enabled our economy to operate within the framework of a market system and to integrate more closely with the economies of our major trading partners. We have been able to achieve relatively high levels of economic growth against a stable macroeconomic background and very low rates of unemployment. Important reforms have been implemented in both the fiscal and financial fields. In the fiscal sector, these have involved a switch to a more indirect system of taxation,

©International Monetary Fund. Not for Redistribution MALTA 151 with the introduction of a value-added tax in January 1995 and a substantial reduction in taxes on incomes from the beginning of this year. The reforms in the financial sector have been aimed at strengthening and developing the money and capital markets. An important measure was the decision by the monetary authorities to totally liberalize interest rates towards the end of last year. This has enabled the central bank to pursue an active monetary policy, aimed at maintaining price stability, through the use of market instruments, which it has continued to develop over the past few years. In its role as regulator and supervisor of the banking system, the central bank has continued to reinforce its surveillance function with the aim of safeguarding the soundness of the system as well as encouraging more competition between the financial institutions. Financial stability and a competitive environment are thus the two key elements of our strategy to establish Malta as an international business and financial center. It is also the intention of the Maltese monetary authorities to liberalize the capital account completely in coming years. Although all restrictions on current payments have been lifted, there are still some restrictions on capital movements by residents. Consequently, as we proceed further with capital control relaxation, we would like to reiterate our support for the establishment of a Fund facility that will provide resources to countries that may face sudden external shocks as a result of destabiliz- ing, short-term capital movements following the removal of capital controls. While we strongly support the recent initiative by the Fund to establish an emergency financing mechanism, we feel that the allocation of resources for the specific purpose I referred to earlier would act as an incentive to countries that still maintain controls on capital to hasten the pace of capital liberalization. On the subject of capital flows, it is encouraging to observe that, during the past few years, the developing countries have been the recipients of capital inflows. However, a substantial proportion of these inflows are short term and can thus be susceptible to sudden withdrawal at the first sign of economic or financial problems in the recipient country. It is obvious that such short-term capital does not contribute to stability in countries that are undergoing macroeconomic adjustment and structural reform. The international financial community should therefore strive to stimulate investment in these countries through long-term capital instruments and direct participation in investment projects. With low-income countries continuing to face unsustainable debt- servicing problems, it is essential that the Enhanced Structural Adjustment Facility (ESAF) continue to operate even during the interim period that will continue through the early years of the next century. Malta welcomes a rapid conclusion of the discussions on this subject, as it is in the best interest of all parties concerned. Malta continues to support an extension of the ESAF, and, despite its limited resources, it is willing to contribute to

©International Monetary Fund. Not for Redistribution 152 SUMMARY PROCEEDINGS, 1996 the resources of the new facility. In this regard, Malta believes that the proposal to sell a portion of the Fund's gold holdings in order to increase its financial resources through the investment income earned should be considered only if all other options for augmenting such resources have been exhausted. In focusing on the liquidity position of the Fund, I would like to as- sociate myself with other Governors who have advocated a balanced distribution of the IMF's resources. Indeed, there is a possibility that the large amounts borrowed by some countries might crowd out the amount of money available for other countries, in particular the heavily indebted low- income countries. For this purpose, Malta favors an early conclusion of the discussions on the Eleventh General Review of Quotas. These discussions should, of course, take into account the changes in the economic and financial weight of member countries. However, at the same time, it should also be ensured that such a quota increase does not unnecessarily dilute the voting power within the Fund of the smaller countries. Finally, Malta wishes once again to show its support for a general allocation of SDRs. In this regard, it also favors a selective increase for those countries that have never received an SDR allocation. In concluding, I would like to say that my country will continue to support and cooperate with the Fund and the Bank in their efforts to foster a stable economic environment conducive to growth and development. I would also like to take this opportunity to thank the managements and the staffs of the two institutions for their constructive advice and assistance whenever this was requested by my country. I am happy to say that the various technical missions that have visited Malta in recent years have played a significant role in enabling us to implement the important economic and financial reforms that were necessary to liberalize our economy and transform it into a market-oriented system.

STATEMENT BY THE GOVERNOR OF THE FUND FOR THE FEDERATED STATES OF MICRONESIA

John Ehsa

I am pleased and honored to address these Fifty-First Annual Meet- ings of the International Monetary Fund and the World Bank. On behalf of the members of our Pacific constituency—Kiribati, the Marshall Islands, Solomon Islands, Vanuatu, and Western Samoa—I would like to take this opportunity to join my colleagues in extending a warm welcome to Bosnia

©International Monetary Fund. Not for Redistribution FEDERATED STATES OF MICRONESIA 153 and Herzegovina, the newest member country of the Fund and the Bank. I also would like to take this opportunity to express our profound thanks to the Fund's Managing Director and the Bank's President for their inspirational remarks, and their wisdom and charisma in leading the two institutions in this era of increasing globalization, complexities, and challenges. Over the past decade, we have witnessed that the pace of global economic integration has intensified. The growth of global economic integration expanded world trade and increased private capital flows significantly, which contributed to the impressive global economic growth. The developing countries are faced with the daunting challenge of removing market and structural constraints and integrating in the global economy to reap the benefits of global economic integration. In meeting this challenge, it is imperative that the Fund and the Bank continue to provide financial and technical assistance to the developing countries in their efforts to integrate into the global economy. We support the Fund's initiative in finding viable ways and means to finance a self-sustained Enhanced Structural Adjustment Facility (ESAF). There is no doubt that a self-sustained ESAF will greatly benefit the developing member countries, especially those member countries that are seriously undertaking economic and structural reforms. On the other hand, member countries that are borrowing from the Fund should likewise honor our members' obligations by ensuring that the ESAF resources are effectively used and repayments are timely to ensure its sustainability. We commend the staff of the Fund for completing the framework for the publication and dissemination of data of member countries. There is no doubt that the standards will enhance transparency by publishing and disseminating official statistics that shed light on macroeconomic policies and performance. However, before subscribing to these data standards, we would like to reiterate to the Fund to take note of the need for technical assistance in the case of developing countries, especially the small Pacific island countries, which, at present, lack the expertise in compiling the necessary statistics needed to meet the Fund's reporting requirements. Like any other financial institution, the Fund's liquidity is of utmost importance for the Fund to carry out its mandates effectively and to respond to crises of major proportions. We therefore support a doubling of the Fund's quotas with a significant equiproportional component in the increase. In view of the growing disparities in the voting rights of member countries, we also urge the Fund to review the basic votes allocated to member countries. The International Development Association (IDA) is an important source of credit and assistance. IDA is essential to us in our quest for poverty reduction, which is central to the Bank's objective. In this context, we express our appreciation to those countries that have contributed to the IDA 1997 interim trust fund and to those that have committed to the

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eleventh replenishment of IDA for FY 1998 and FY 1999. And we would like to join the other speakers to appeal to the remaining donor countries to contribute likewise. We commend the Bank for recently creating the Private Sector De- velopment Group as a means to further enhance development and growth in the private sector. In creating the Private Sector Development Group, we would like to request the Bank through the International Finance Corpora- tion to make the Pacific islands investment fund a permanent feature of its assistance in the Pacific region by incorporating it into its country and regional assistance program. With respect to Country Assistance Strategy, we noted with satisfaction that the Bank has taken the position to enhance its partnership with its members by soliciting member countries' participation and inputs in the formulation of country assistance strategy. Through this participatory approach, the Bank and Fund are in a better position to learn more about the priorities and needs of their poorer member countries. Along this line, I wish to underscore the importance of maintaining a fruitful partnership and policy dialogue with our regional bank, the Asian Development Bank, and other donors so that efforts are closely coordinated and resources are mobilized. We would like to express our thanks to the Bank for creating a Papua New Guinea and Pacific Islands Division. The creation of such a division will sharpen the Bank's focus in assisting the Pacific island member countries. Fi- nally, on behalf of the Pacific island members of our constituency, I would be remiss if I concluded my remarks today without expressing how appreciative and delighted we are for the work and technical support provided by the Bank and the Fund through their field offices in the Pacific, namely: the Pacific Fi- nancial Technical Assistance Center (PFTAC) in Suva, Fiji; the South Pacific Project Facility (SPPF) in Sydney, Australia; and the Foreign Investment As- sistance Service (FIAS) also in Sydney, Australia. Their work has been proven to be effective, which we all appreciate. Their establishment increases our accessibility to your assistance and enhances our partnership in development. For all of these, we are indeed grateful.

STATEMENT BY THE GOVERNOR OF THE FUND FOR MONGOLIA

Puntsagiin Tsagaan

The current Annual Meetings are being held at a historic time, when the trends toward globalization and integration in economic, financial, and

©International Monetary Fund. Not for Redistribution MONGOLIA 155 all other fields are progressing rapidly. By and large, the world today finds itself at a moment of both opportunities and challenges for financial stability and economic growth. Today, no country can afford to remain aloof from the ongoing tremendous transformations in Mongolia. For one thing, 1996 is a remarkable year. As a result of general elections held last summer, state power has been peacefully transferred to the coalition of the two democratic parties for the first time in 75 years. It is the logical outcome of the 1990 democratic revolution, which laid down a solid foundation for stable democratic development in my country. The reform process is very complex, time consuming, and challenging, and to some extent painful. Like many other developing nations, Mon- golia faces a host of problems inherited from the past low level of development, external debt burden, budget deficit, and the underdeveloped structure of the national economy, which is vulnerable to fluctuations of the world market. However, we do not consider that these problems are our destiny forever. Therefore, despite the existing hardships, the new government is determined to take decisive measures in close cooperation with the IMF and other international financial institutions in the areas of price liberalization, fiscal and banking reforms, pension system reforms, and privatization of state ownership, including that of land, and to accelerate the whole process of systemic transformation creating the conditions for sustainable social and economic development in Mongolia. We have already started to implement what we planned. As an example, we made the last price adjustment on electricity, fuel, and heating and approved urgently needed laws on banking affairs. Draft laws on tax reform, budget, housing and land privatization, and foreign direct investment are pending before the parliament. I have no doubt that the ongoing reforms carried out by the government will have a far-reaching, positive impact on macroeconomic stabilization, the reduction of the budget deficit, the inflation rate, and sustainable growth in the country in the immediate future. The new government of Mongolia, acting in compliance with its strategic policy agreed with the IMF, is determined to utilize this historic opportunity to put the country on its feet and on the road to prosperity. In conjunction with this, let me express my sincere support to your new approach, which emphasizes the efficiency of all assistance and cooperation provided by the international financial institutions for the benefit of the recipient country. The main thrust of our government policy is to reduce the role of the state in the economy and to encourage private sector expansion and investment. Thanks to the privatization of state ownership, started in 1990, hundreds of small and medium-sized enterprises have been transferred to private owners. At present, securities of 470 shareholding com-

©International Monetary Fund. Not for Redistribution 156 SUMMARY PROCEEDINGS, 1996 panies are traded at the stock exchange. Livestock (28 million head, more than 95 percent of which are privately owned) is still the backbone of Mongolia's economy, and stocks have increased by 3-4 percent every year. Mongolia has not only overcome the enormous difficulties attrib- utable to the collapse of the Soviet Union and the Council for Mutual Economic Assistance, but has seen economic growth in the past two years. The trend is likely to continue and will strengthen further. I would like to emphasize the high priority that our government gives to foreign investment. I was very pleased to know during this annual meeting that the Inter- national Finance Corporation is going to make its first investments in Mongolia. Foreign investors may be surprised to find a highly skilled, mo- tivated, and competitive workforce ready and willing to deal with new ventures and new challenges. Mongolia has vast and spacious land, covering 1.5 million square kilometers rich in deposits of minerals like copper, molybdenum, zinc, iron ore, gold, silver, oil, uranium, coal, fluorspar, and phosphorus. Our geopolitical position between two giant markets is offering us business opportunities without limits. In addition, Mongolian laws provide the most favorable conditions for foreign investors; in particular, they allow fully owned subsidiaries and 100 percent profit transfers abroad. For your kind attention, I would like to inform you that, in cooperation with the World Bank, we will convene a roundtable meeting this coming November and the International Conference of Foreign Investors in the fields of oil, gas, and mining in early June 1997 in Ulaanbaatar. We invite you to join us. In conclusion, allow me to reiterate Mongolia's strong will to vigor- ously pursue the necessary economic reforms to be supported by a new ESAF arrangement with the IMF and assistance from donors, including the World Bank, in order to achieve the successful completion of our transition to an efficient market economy with robust noninflationary growth.

STATEMENT BY THE GOVERNOR OF THE BANK FOR MYANMAR

Win Tin

I feel privileged to have the honor of addressing the 1996 Annual Meetings of the International Monetary Fund and the World Bank. I would like to begin by saying how heartened I am that we are starting out the second half of the decade with two able, dedicated men at the helms of the Fund and the Bank.

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I wish to congratulate Mr. Michel Camdessus on being selected for an unprecedented third term as Managing Director of the Fund. With his vast experience, we look forward to his creating the image of the Fund as an institution capable of fulfilling the responsibility of international monetary cooperation. I also wish to congratulate Mr. James Wolfensohn for his ability to raise Bank staff morale through reorganization and further staff training. I am confident that he will achieve equal success in the bid to reduce poverty in developing countries. We observe with satisfaction that the world economic outlook remained generally encouraging. Behind this overview, however, we note that many industrial countries face challenges of addressing weaknesses in their economies, and, in the midst of a growing number of success stories among developing countries, there are also many countries that are struggling with macroeconomic imbalances. Turning to the important developments in the Fund and the Bank, we find that, although SDR allocations have an important role to play in the international monetary system, agreement has not been reached for new allocations. As regards the Eleventh General Review of Quotas, discussions have yet to be concluded for action. We welcome the recent agreement on the eleventh replenishment of IDA, which would allow disbursements of US$22 billion over the three years beginning July 1996. We would like to express our deep appreciation for the debt-relief initiative being undertaken by the Fund and the Bank for the heavily indebted poor countries. The SDR allocation, the quota increase, and the debt-relief initiative are issues of great interest to developing countries. We, therefore, eagerly look forward to the materialization of these issues in the near future. Let me now turn to how Myanmar has fared as it moves further down the road of a market economy. The good growth performance over the past few years continued into 1995/96, the last year of the Four-Year Short-Term Plan, when GDP rose by 9.8 percent. This brings the average growth during the entire plan period to 8.2 percent, as against the original target of 5.1 percent. Mainly responsible for this good performance was the remarkable progress in the productive, services, and trade sectors, together with the substantial rise in investments and exports. Since the last Annual Meetings, much has been done to maintain the momentum of our good record at striving to attain macroeconomic stability. The Central Bank raised its interest rate by 2.5 percent to 15 percent in April 1996, the highest ever since regaining independence, and has stepped up mobilization of savings. Positive results appear to be emerging from these moves as the growth of money supply has slowed down to 35.3 percent in 1995/96 from 39.1 percent in 1994/95. Inflation, which has been stable around 22.4 percent in 1994/95 and 1995/96, has now been brought

©International Monetary Fund. Not for Redistribution 158 SUMMARY PROCEEDINGS, 1996 down to 14.5 percent at the end of August 1996, while savings have increased by 57 percent in 1995/96 compared to an increase of 48 percent a year ago. As a result of our continuing commitment to infrastructure development, we still have a budget deficit and have been trying to narrow it by reducing nonproductive expenditure. The export tax on most exports has been removed, and the collection of revenue has improved with the adjustment of customs duties combined with assessments based on prevailing market prices. These measures will contribute to improve revenue and reduce the budget deficit in the current year. Despite the increase in exports of 15.2 percent in 1995/96, the much stronger increase of 18.1 percent in imports resulted in a wider trade balance deficit. The current account suffered a setback on account of the reduction in income from services. The increase of 53.1 percent in foreign direct investment inflow has resulted in a capital account surplus. In this context, I would like to mention that our direct foreign investments reached US$4.3 billion at the end of August, covering 204 projects in ten sectors. The overall balance of payments showed a deficit in 1995/96, but the gross reserves remain comfortable at the equivalent of three months of imports. The exchange system has undergone considerable liberalization. For- eign currency swaps between exporters and importers are being allowed, and banking arrangements have already been made between the banks of neighboring countries to normalize border trade. Our good economic performance has been made possible by the prevalence of law and order. This in turn has earned us the acceptance of our neighbors and trading countries as worthy partners in building regional cooperation. In fact, the members of the Association of Southeast Asian Nations (ASEAN) have welcomed us and granted us observer status. This is an important step toward becoming a full-fledged member of the ASEAN group, which commands considerable respect in the region. As neighbors and trading partners, the ASEAN countries are constantly in close touch with us to be able to assess and understand us. We appreciate their understanding of our situation and their acceptance of us as a future member. The recognition accorded to us by the ASEAN countries is a strong testimony to the friendly relationship we share with them, and the warm welcome extended to us projects a meaningful image of our international standing in Asia and brightens our economic prospects. Looking ahead, we believe our association with ASEAN will enable us to contribute toward strengthening regional cooperation in southeast Asia and, in the process, help us to sustain our present economic performance to secure for us a place among the successful economies of this region. We wish it to be known that our cooperative efforts are not confined only to the regional level, but that we are equally eager to pledge our cooperation and support to the Fund and the Bank in the spirit of cooperative

©International Monetary Fund. Not for Redistribution NEPAL 159 strategy as set out in the Madrid Declaration, with the firm belief that the services and advice of these twin institutions will play a crucial role in guiding us toward the goal of macroeconomic stability.

STATEMENT BY THE GOVERNOR OF THE BANK FOR NEPAL

Ram S. Mahat

At the outset, I join other speakers in welcoming the new member, Bosnia and Herzegovina, to the Bretton Woods institutions and look forward to its valuable contribution in nurturing these institutions for the common benefit of the member countries. I also take this opportunity to extend congratulations to Michel Camdessus, Managing Director of the IMF, on his election to a third consecutive term. The sharp increase in external private financing to developing countries over the past few years is very encouraging. However, the continued decline in official development assistance (ODA) in the face of the rising need for it in developing countries is discouraging. Looking at global economic performance, 1995 was a turbulent year, as the world could achieve only moderate economic growth. However, the encouraging pace of global integration and its impact on world trade and finance have spread optimism on the horizon. This has inspired developing countries, because integration would particularly enhance the scope of their trade expansion and eventually the magnitude for aid resources. In- dustrial countries, we believe, have a crucial role to play in sustaining and safeguarding important reform processes that are under way in developing countries. We, therefore, urge all major industrial country governments to strengthen their domestic macroeconomic policies and to move speedily toward the true spirit of a world trade accord. We are pleased to note that negotiations for the eleventh replenishment of the International Development Association (IDA-11) have been successfully concluded. The need for concessional ODA is undoubtedly enormous in the poorest countries to build, sustain, and enhance their economies. As the majority of developing countries, including my own, are confronting the formidable task of alleviating poverty, their efforts have been deficient compared with their requirements for infrastructure and human resource development, institutional and policy reforms, and other priority development programs. They still have a long way to go to establish foreign creditworthiness so as to be able to borrow from foreign private funding sources. I, therefore, would like to reiterate that foreign

©International Monetary Fund. Not for Redistribution 160 SUMMARY PROCEEDINGS, 1996 grants and concessional assistance are the only pragmatic means of support for these countries. As I stated last year, IDA funds should be allocated solely to the poorest and the least-developed countries to help them build up their institutional and technical capacity. We understand that the level of commitment for the IDA replenishment is significantly less than what IDAs planned lending program is likely to require in the coming years. Hence, we urge donors to make adequate resources available for IDA funding to support far-reaching economic reforms in poorer countries. We support the principle of fair burden sharing that has been raised by IDA Deputies. We fully agree with the IDA recommendation that it should consolidate and sharpen its focus on poverty reduction. In this respect, we also commend the President and the management of the Bank, particularly for strengthening poverty-reducing activities in developing countries. Like many developing countries in the world, we are engaged in deepening as well as widening the liberalization process to establish the private sector's lead role in economic development. In this context, we feel that both the Bank and the Fund should speed up their actions to help promote the private sector. We think that the current initiative by the Bank to develop new instruments, namely, IDA guarantees and the IDA private investment fund, is an encouraging beginning. Similarly, we consider that the activities of the International Finance Corporation and the Multilateral Investment Guaran- tee Agency should be further streamlined to promote private sector development. I wish to commend both the Bank and the Fund on their efforts toward resolving the debt problems of heavily indebted poor countries. A review of SDRs, although taken up seriously by the Fund, was postponed, because agreement on its modality could not be reached. We hope that the review process will resume soon. We firmly believe that the En- hanced Structural Adjustment Facility (ESAF) has assisted immensely to strengthen economic liberalization policy and maintain macroeconomic stability. There should be no second thoughts about its continuation in the interest of the poorest and most highly indebted countries. In this regard, we endorse the initiatives taken by the Managing Director of the Fund. We would like to note that the decreasing volume of lending in real terms in recent years will have a significant impact on the net transfer of resources to developing countries. Efforts should be made to reverse this trend. Now, I would like to briefly describe the economic situation of Nepal and outline the current economic reform initiatives undertaken by the government. Nepal's overall economic indicators of the last fiscal year have shown an encouraging picture. GDP is estimated to have increased by 6.1 percent compared with the preceding fiscal year. Economic growth has been broad based; the fiscal deficit was contained within desirable limits; the money supply and inflation have remained under control; and foreign trade has

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shown signs of improvement. These achievements have been stimulants for us to continue the economic reform process. We are aiming to achieve high rates of economic growth while reducing poverty. For this, we have emphasized strengthening the economic liberalization program and maintaining economic stability, creating employment opportunities mainly by expanding economic liberalization to the rural and underdeveloped areas, developing human resources, empowering local bodies by providing them authority and resources, allocating limited resources to high-priority sectors, controlling unproductive expenditures, and accelerating internal resource mobilization. These measures are expected to increase the revenue/GDP ratio by 1 percentage point and the development expenditure/GDP ratio by almost 2 percentage points. However, the current expenditure/GDP ratio is projected to remain at last year's level. We have substantially increased the government budget allocation to the social sectors. We have also developed specific strategies for expanding employment-generating activities, skill development programs, access to credit facilities, and self-employment opportunities to alleviate poverty. The government has made a strong commitment to export promotion. Emphasis has been given to the production, processing, and export of agro-based products. In addition to the existing facilities, incentives like concessional loans, a leasing facility for public land, and other tax incentives have been introduced to promote exports. Incentives have also been provided for the development of linkages for export-oriented products. Considering the underdeveloped state of infrastructure, which is a major bottleneck for the country's economic development, we have emphasized the development of power, roads, and communications. The parliamentary ratification of the Mahakali Treaty between Nepal and India has paved the way for possible investment and financing by private investors on agreed hydroelectric projects. Tourism is emerging as an important sector of our economy and has immense potential for development. We are implementing a program to improve and protect the environment and develop tourism-related infrastructure. Fellow Governors, allow me to take this opportunity to inform you that we have designated 1998 as "Visit Nepal Year," and solicit your support in making our mission a success. We are thankful to the international donor community for its consistent and strong support for our economic reform measures and also for its commitment to provide funding to carry out these measures. We note with great satisfaction that the Aid Group Meeting held in Paris in April 1996 has pledged an amount close to $1 billion for implementing our socioeconomic development programs. We express our sincere appreciation to the Nepal Aid Group members. Finally, both the Bank and the Fund have significantly contributed to our development endeavor. I express our sincere appreciation to them and look forward to a strengthened development partnership in the days to come.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR THE NETHERLANDS

Gerrit Zalm

First, I would like to welcome Bosnia and Herzegovina as a new member of the IMF and the World Bank Group, and I am proud that it has chosen to become a member of our constituency. I strongly support continuing efforts of the institutions to provide adequate support to Bosnia and Herzegovina during this crucial phase of reconstruction.

Economic Outlook The economic results of 1997 will be a decisive factor in determining which European countries will participate from the start in the third stage of the Economic and Monetary Union. With the deadline in view, policy discussions on the need for further budgetary consolidation have intensified. It has been suggested that because of the fragility of the recovery in Europe, efforts to comply with the Maastricht criteria could harm the prospects for economic recovery and employment growth. I do not subscribe to this view. Let me first stress that budgetary consolidation is very much needed for its own sake, quite apart from the considerations of Maastricht. This is true not only for Europe; the IMF staff has convincingly argued in its World Economic Outlook that the need for a restructuring of government finances prevails among all country groupings—be they industrial, developing, or transition economies. In industrial countries, progress has been made with checking inflation. However, on the budgetary side, the levels of public debt and interest payments have continued to rise. In its surveillance activities, the IMF has therefore rightly emphasized the need for further budgetary consolidation, also in the light of future demographic pressures on government spending. Moreover, it is a misconception that the restructuring of government finances hampers economic growth and job creation. To illustrate this I would cite several examples—such as the United States in recent years—but perhaps you will allow me to focus on the experience of my own country, the Netherlands. By 1997, the budget deficit will equal 2.2 percent of GDP, down from 4 percent in 1992. Yet over the same period, economic growth, and especially employment growth, have been substantially above the European average. This is no miracle performance; it just shows that it is possible to turn around a vicious cycle of low employment, increasing high public spending, and a rising burden on the

©International Monetary Fund. Not for Redistribution THE NETHERLANDS 163 private sector, resulting in still higher labor costs. The key to such a turnaround lies in a mutually reinforcing combination of fiscal prudence and structural reforms, supported by—and giving support to—continued wage moderation.

Multilateral Institutions Not only industrialized countries should continue to pursue sound economic policies. This is also true for developing and transition countries, of which many have already strengthened their economic and structural policies. At the same time, the multilateral institutions have been improving the effectiveness of their own operations. In addition, shareholders have assigned several new responsibilities to them. It would be most unfortunate if progress on these fronts were to be endan- gered by lack of adequate financial support for the institutions. Recent replenishment discussions in the International Development Association (IDA), the Enhanced Structural Adjustment Facility (ESAF), and some of the regional banks have shown a downward trend in donor contributions from major shareholders. The IDA Interim Fund was a constructive response to this situation. However, because of the more permanent nature of the present funding problems, structural issues within the World Bank Group will have to be considered. This includes the decision-making rules in the institutions. We cannot start from scratch at every replenishment negotiation, and we cannot keep com- pensating for the effects of unilateral decisions by other donors. We welcome the agreement by the Interim and Development Com- mittees on the debt initiative for the heavily indebted poor countries (HIPCs). It provides heavily indebted poor countries that perform well with an opportunity to achieve an exit from their unsustainable debt position, while preserving the financial solidity and the preferred creditor status of the multilateral banks and the IMF. We are also pleased with the fact that all parties—creditors in the Paris Club as well as the multilateral institutions—have shown readiness to take responsibility. Now that this breakthrough has been achieved, the Netherlands will make a contribution to the HIPC trust fund, if other bilateral donors do the same. We also intend to provide 100 million guilders, approximately US$60 million, to enable continuation of ESAF operations of sufficient size. Finally, we also welcome the considerable progress that has been made in a good atmosphere on issues that have been on the Fund's agenda for some time now, like the equity allocation of SDRs and the establishment of the New Arrangements to Borrow (NAB). We hope that this pace can be maintained in our discussions on the quota increase.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR NEW ZEALAND

Murray J. Horn

The current prospects for sustained global economic growth are promising. One important factor has been the impressive success of the monetary authorities in the industrial countries in keeping inflation at low levels. There is now a very widespread and welcome recognition that maintaining price stability is the key contribution of monetary policy to growth in output and employment and that monetary policy must act pre- emptively to contain emerging inflationary pressures. A second feature of the global outlook in recent years is the very high growth rates being achieved by a number of developing countries, and the impact this is now having on global output. This reflects the increasing adoption of comprehensive market-based strategies and the growing international consensus that governments must concentrate on their core business of achieving macroeconomic stability and creating the right environment for vigorous private sector growth. Of course, a number of developing countries are wrestling with very high debt burdens, and current efforts by the international community to address this problem are discussed below. Third, it is significant that growth is forecast to resume in the transition economies as a group in 1997, and at the welcome rate of 4 percent. The differences in performance across transition economies demonstrate very starkly, however, the rewards from early, decisive efforts at stabilization and restructuring. One critical element lagging in many transition economies is trade reform. As has been shown elsewhere, moving to transparent, tariff-based regimes and lowering rates of protection create a powerful spur to enterprise restructuring and international competitiveness and innovation, and put the economy on a higher growth path. We strongly support the efforts of the Bretton Woods institutions to create more open trade and investment systems. While the overall prospects for continued solid growth in the global economy look good, serious risks remain. Continuing vigilance is required to prevent a reemergence of inflation in the industrial economies. The key risk continues to be chronic fiscal deficits around the world, because of their role in triggering financial crises and inflation, and their negative impact on the level of global savings, interest rates, and the allocation of investment. A critical failure in fiscal policy in many countries is the focus on the short-term fiscal position at the expense of sound medium-term policy. Short-term political pressures for more spending and lower taxes, as well as the temptation to use fiscal policy to moderate the cycle, tend to produce

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fiscal policies that move from one short-term distraction to the next. While most agree on the need for a sound medium-term approach, in practice the medium term is often little more than a succession of short-term reactions. The result is long-standing deficits, mounting public debt burdens, and high interest rates that restrain growth and job creation. New Zealanders are only too well aware of the dangers of "short termism" in fiscal policy. High deficits experienced throughout the 1970s and 1980s were associated with very poor macroeconomic performance and mounting public debt. The seriousness of our position obviously helped create the conditions for decisive action to cut the deficit and move the budget to surplus. However, a key element in breaking with the past was also the adoption of an explicit medium-term framework for fiscal policy, with strengthened institutional processes for fiscal management. These culminated in the adoption of the Fiscal Responsibility Act in 1994, which provides legislated requirements for the conduct of fiscal policy. Perhaps the key element here is the use of transparency requirements as an enforcement mechanism. The government is now required by law to publish a more complete set of statements about its financial position than perhaps any publicly listed company in New Zealand. Significantly, the Fis- cal Responsibility Act enjoys broad political support. We believe greater transparency in fiscal policy is both desirable and inevitable in today's world of open capital markets, and we welcome the greater interest the IMF is taking in these issues. Supporting those domestic interests most supportive of fiscal and financial prudence has always been one of the key contributions of the Bretton Woods institutions. In their roles as policy advocates, conditional lenders, providers of technical assistance, and (in the Fund's case) setter of international standards for fiscal accounting, the Fund and the Bank have the ability to play an even greater role in supporting greater fiscal prudence around the world. The improvement in New Zealand's fiscal performance has been dramatic. From a deficit of 7 percent of GDP in 1991/92, the budget moved into surplus in 1993/94, and the surplus reached 3.8 percent of GDP in the year to June 1996. This has allowed rapid repayment of public debt. It has also been possible at the same time to make significant cuts in income taxes and increase spending in the priority areas of education and health. Despite further tax cuts planned for next year, the budget surplus is projected to increase to 5.9 percent of GDP by 1999/2000. Hand in hand with improved fiscal performance in New Zealand has been a greatly improved economic performance across the board. After av- eraging 11.3 percent in the 1980s, inflation has averaged just 2.0 percent in the period since 1991. Even with very strong economic growth in 1994 and 1995 (with growth peaking at 6.6 percent in the year to June 1994), underlying inflation has been kept firmly in check. The current annual un-

©International Monetary Fund. Not for Redistribution 166 SUMMARY PROCEEDINGS, 1996 derlying rate of inflation is 2.3 percent, and it is expected to be back within the 0-2 percent target band by the middle of next year. Unemployment, which reached 11.5 percent in 1991, has come down to 6.1 percent currently as a result of both strong economic growth and fundamental labor market reform. And after growing at an average of just 1.2 percent a year between 1977 and 1991, the economy has grown at an average of around 2.8 percent over the past five years. Even at the trough of the current business cycle, New Zealand will enjoy growth nearly double the average in the 15 years from 1977. While the current account deficit has widened to about 4 percent of GDP, this is much smaller than in previous periods of strong growth and is associated with large foreign investment inflows and sustained fiscal surpluses. We attribute the success of our reforms to the sustained and comprehensive implementation of both macroeconomic and microeconomic measures, and to the establishment of an ongoing economic strategy to maintain the focus of policy squarely on a "growth-friendly" environment. We therefore very much support the adaptation of the Madrid Declaration to emphasize the importance of the complementarities between different reforms and the need to move in a sustained manner on both macroeconomic and structural fronts if reform efforts are to bear full fruit. In particular, we agree with the stress being placed on fundamental labor market reform in industrial countries to deal with the current very high unemployment levels in many of them. New Zealand's experience has been that comprehensive reform of labor market structures, welfare programs, and education arrangements has greatly assisted the dramatic reduction in unemployment. The fall in the unemployment rate of the long- term unemployed has been even more rapid. The government has also increased targeted assistance to low-income working families to improve their ability to share the benefits of growth. Returning to the position of the heavily indebted poor countries (HIPCs), New Zealand supports the current efforts by the international community to address this problem on the basis of additional coordinated actions by all creditors. Clearly, in some countries the legacy of poor past policies and performance has reached the stage where debt burdens are acting to stifle efforts to grow out of the problem. A limited and carefully designed debt-relief initiative could remove a serious impediment to the adoption of sound medium-term policies. The framework developed by the Bank and the Fund seems broadly appropriate as a means of providing incentives for the pursuit of responsible economic policies, and the requirement of a good track record before qualifying for debt relief is necessary in order to limit the risk of moral hazard. We would be prepared, however, to consider more flexibility in the procedures as a way of recognizing good past performance. Some flexibility is essential to make the initiative work, and is at the heart of the case-by-case approach being proposed.

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As far as the role of the multilateral institutions in the initiative is concerned, we support the proposed modalities as a judicious balancing of the need to protect their preferred creditor status with the recognition that multilateral debt is a significant component of the debt burden of the HIPCs. We support the Bank's moves to contribute to the HIPC initiative through a combination of transfers from net income to the HIPC trust fund, and, where appropriate, International Development Association (IDA) grants and supplemental IDA allocations. We also welcome the Bank's intention to set aside US$500 million to the trust fund from FY 1996 net income, but note that this allocation is contingent on coordinated action by all creditors. Progress since last year on the HIPC initiative has indeed been impressive. We would encourage all creditors to maintain the momentum and agree on equitable burden-sharing arrangements. On the IMF's role, we support use of the Enhanced Structural Adjust- ment Facility (ESAF) as the means by which the Fund will contribute to the initiative. To the extent that bilateral contributions fall short of the amounts to put ESAF on a self-sustaining basis, we can support a consensus in favor of more active use of a limited amount of the Fund's gold. With respect to the adequacy of the IMF's general quota resources, in our view the Fund's liquidity position remains comfortable, and there need be no urgency to conclude the Eleventh General Review. We agree that the Fund should remain primarily a quota-based institution, although we consider there is an important role for Fund borrowing in certain circumstances. We do not consider, however, that the increased globalization of financial markets points to a need to increase the Fund's quota resources in any major way. The primary lesson to be drawn from the growth of financial markets is the need for greater credibility in economic policies; the first priorities must therefore be to improve the Fund's surveillance and the effectiveness of Fund programs. Throughout the year, the Bank has sought to improve its development impact. One aspect of this has been to improve, wherever possible, the Bank's use of its resources. This internal change in the management agenda is large, challenging, and important. The Bank is undertaking a variety of initiatives designed to clarify accountabilities, to enhance the level and mix of skills available within the organization, to improve the quality of its services, and to improve its overall effectiveness and efficiency. New Zealand supports steps to improve the Bank's results on the ground. We take a cautiously conservative position with respect to whether investment to improve the Bank's administration and performance requires additional funding. We would stress that, in a changing world, the Bank needs to ensure that it concentrates on those activities it does best and to operate in partnership with other players, be they private, public, or sister multilateral institutions, to ensure that quality outcomes are achieved at the lowest practical cost.

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Similarly, while we welcome the recent efforts to strengthen surveillance, we consider that the IMF could further improve both its effectiveness and efficiency by focusing more carefully on priorities and continued strengthening of its management practices. Finally, New Zealand looks forward with great interest to the upcom- ing World Trade Organization (WTO) ministerial meeting in Singapore. The formation of the WTO completes the Bretton Woods vision of an international trade organization, working alongside the Bank and the Fund, and sets the scene for a new era of international economic cooperation. The priorities for Singapore must be to ensure that the market access gains from the Uruguay Round are realized. In particular, the Uruguay Round agreements to commence negotiations on a range of issues, including agriculture and services, should be developed following the preparation of appropriate work programs. The Singapore meeting should also focus on the opportunity to prepare the way for the start of further comprehensive negotiations as soon as possible. The world cannot afford to ignore the improvements in living standards, for both developing and industrial countries, that are possible from concerted collective international action to remove the impediments to international trade.

STATEMENT BY THE GOVERNOR OF THE FUND FOR NICARAGUA

Jose Evenor Taboada Arana

First of all, Mr. Chairman, allow me to congratulate you personally on your part in the economic achievements of your own country, Chile, which are an inspiration and example to all our countries. Mr. Camdessus, on behalf of the President of Nicaragua, Violeta Bar- rios de Chamorro, and on my own behalf as well, I congratulate you on your reappointment as Managing Director of the International Monetary Fund. It is a sign of the recognition commanded by your abilities and un- questionable world leadership in this period of major challenges. And I also wish to thank you for the resolute support you and the staff of the Fund have provided for Nicaragua in these difficult times, marked in its case by profound economic, social, and political transformations. Mr. Wolfensohn, I congratulate you on the major changes you have introduced within the World Bank Group and on the refocusing of its worldwide development assistance objectives, especially where the most disadvantaged groups are concerned. I also thank you for your institution's

©International Monetary Fund. Not for Redistribution NICARAGUA 169 invaluable support for Nicaragua. It is our earnest hope that the Bank Group will have sustained access to the human and financial resources needed to allow such support to continue. With only 18 days left before general elections in Nicaragua that will secure its democracy and pave the way for the constitutional replacement of our esteemed President, we come before you, our partners in Nicaragua's recovery, to report to you on the progress we have achieved with your help. Nicaragua can be regarded as the sole example of a transition economy in Latin America today—a point on which I would note that it was our government's economic policy actions, consistently aimed at achieving adjustment in three key areas, namely the public sector, the private sector, and the external sector, that have produced the present results. Adjustment in the public sector was a matter of structural measures that reduced its size to financially sustainable levels in current account terms, a structural reform that also laid the foundations for sustained long- term growth based on private investment incentives. Adjustment in the private sector consisted of abolishing government subsidies provided through credit and exchange policies, reducing tax ex- emptions, and eliminating an index-linked wage policy in the public sector. Action in the external sector involved two important initiatives: an exchange policy consistent with the objectives of promoting exports and achieving long-term balance of payments equilibrium; and intensive rene- gotiation of the external debt, on the basis of the government's political commitment to recognize Nicaragua's debt-service obligations to the international community. As a result of its changed approach to the management of economic policy instruments, Nicaragua today possesses a market-oriented economy with interest rates freely determined by the forces at play in that market, an exchange system based on keeping depreciation in line with inflationary trends, a tariff policy consistent with the country's aim of achieving a more outward-oriented economy, an independent labor market, and a credit policy fully separate from the central bank. In other words, there exists no resemblance between the country's expansionary monetary and fiscal policy during the 1980s and the responsible monetary and fiscal policy (consistent with the objectives of stability and economic growth) that the government of Violeta Barrios de Chamorro has pursued and that you yourselves have supported financially. As part of the process of rethinking the government's role in the economy, a program of privatization was begun, which will come to fruition in the next few years. Especially significant are the privatization of 40 percent of ENITEL, the government-owned telecommunications corporation; the forthcoming transfer of its management to the private sector; and the project for capitalization and control of Banco Nicaraguense, the country's

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second largest government-owned bank, by private international banking interests. Progress has been made in the area of institutional reform. For instance, central bank autonomy has been strengthened; a Superintendency of Banks has been set up; the role of the government-owned banks has been redefined; and legislation has been enacted introducing a separation between the commercial and regulatory activities of public utility service agencies, so that private interests may now invest in the business of providing these services. As far as incentives for private enterprise are concerned, new legislation governing foreign investment has been enacted, measures promoting the establishment of export processing zones have been introduced, steps guaranteeing freedom of private capital flows have been taken, and foreign banks are now at full liberty to establish themselves. Significant progress has been made in resolving conflicts stemming from real estate confiscations during the 1980s. Previous owners have been paid compensation in the form of bonds, while legitimate purchasers have been granted title. This has contributed greatly to an important urban and agrarian reform process with a major impact on social stability in Nicaragua. Where inflation is concerned, the Nicaraguan economy has gone from a hyperinflationary phase to one of stability. The average annual inflation rate over the past three years has been 12 percent. The hyperinflation of 13,490 percent, with which this present decade began, is now hardly more than a memory. Economic growth in Nicaragua has gone through three stages over the last 13 years. The first was a period of prolonged deterioration lasting from 1984, when GDP declined at an average annual rate in excess of 2 percent, until 1989, when GDP fell by more than a third, and per capita GDP by more than 45 percent. The second of these contractionary stages lasted from 1990 to 1993, with the economy showing virtually zero growth. Fi- nally, a rebound started in 1994, with growth beginning again at an initial average annual rate of over 4 percent. Inflation control and growth resulted in a substantial improvement in government finances, evident in a healthy current account savings rate that has reached 5 percent in 1996, compared to a deficit of 18 percent of GDP in 1990. If grants and interest payments on the external debt are excluded, the consolidated fiscal deficit is seen to have improved significantly, having moved from 20.3 percent of GDP in 1990 to less than 8 percent of GDP in 1996. Nicaragua's external position has also improved significantly. The trade deficit has shrunk from a level of 30 percent of GDP in 1992 to less than 15 percent of GDP in 1996, thanks to a threefold growth in our exports and sustained import performance. The real economy has righted it-

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self, and total expenditure within the economy (consumption plus investment) has achieved equilibrium in relation to domestic GDP. This result is admirable, especially when recalling that total expenditure as recently as 1992 exceeded that year's GDP levels by more than 30 percent. As for the private sector, it has increased its savings rate by more than five times, and its exchange operations by more than six times since 1990. One contributing factor here has been the increasingly outward-oriented nature of the Nicaraguan economy, which has opened the doors to private capital flows. In their own turn, these results have led to a reduction of more than 5 percent in the unemployment rate, and to a slight increase in per capita income. While it has taken a major effort to bring Nicaragua over the long road to the point where it now stands, much ground still remains to be covered. Our country must continue to lift tariff barriers, increase productivity, and target social expenditure effectively, especially in primary and technical education and in preventive health care. In the external sector, the extent to which Nicaragua can achieve sustainability will depend on its accomplishing more rapid and substantial reductions in its external debt. In this regard, we welcome the Heavily In- debted Poor Countries initiative and await its implementation as a matter of urgency; together with the bilateral relief measures proposed, this initiative will be an indispensable factor in ensuring Nicaragua's self- sustaining economic development. On my government's behalf, I wish to express our profound gratitude for the support provided not only by the institutions that have accompanied us on many difficult though hopeful journeys, but also by those individual countries that have accorded us their practical friendship during this time. It is not only my own wish but that of my government as well that the energy you have all put so resolutely into assisting Nicaragua will be available to our new government, in the sure knowledge that the triumph of the people of Nicaragua over poverty will stand worldwide as an example of how successful structural adjustment programs can be.

STATEMENT BY THE GOVERNOR OF THE BANK FOR PAKISTAN

VA. Jafarey

At the outset, I would like to congratulate Mr. Camdessus on his new term as Managing Director of the International Monetary Fund. We hope that under his leadership, the Fund will continue to make new contribu-

©International Monetary Fund. Not for Redistribution 172 SUMMARY PROCEEDINGS, 1996 tions to world financial stability and development in these challenging times. It is an honor for me, once again, to represent Pakistan at the Annual Meetings of the Fund and the World Bank Group. We meet this year against the backdrop of a global economic picture that projects a confident optimism, and with encouraging signs that the conditions are in place for a broadening and strengthening of the economic expansion in 1997. There is much in the current situation to justify the optimism. In the industrial world, the conjuncture of low inflation, steady growth, and calm financial markets is a striking illustration of the benefits of sound macroeconomic and financial policies, while the forces of globalization continue to mani- fest themselves in the continuing rapid expansion of trade and financial flows. The developing countries, as a whole, continue to grow at impressive rates and provide the most dynamic markets for exports from the industrial countries. There are encouraging signs that in Africa improvements in economic performance are beginning to be felt in a modest rise in living standards. Even the countries in transition offer a generally positive outlook. There are, however, shadows in this sunlit landscape because many policy challenges remain. For the industrial countries, the most important challenges are the need to sustain growth, reduce unemployment through bold measures to address structural rigidities, and prevent a resurgence of inflation. Sustained and decisive progress in these areas can be expected to have a favorable impact on the stability of international capital markets and minimize the risk of disruptive reactions in interest and exchange rates. Growth in the developing countries, particularly in the poorest, must be maintained and extended, supported by a global environment that offers improved access to industrial country markets and timely financial support on appropriate terms. The design of adjustment programs must continue to place appropriate emphasis on growth-promoting forces, while providing for social safety nets that are well targeted so as to alleviate the adverse impact on the most vulnerable groups. Furthermore, if developing countries are to be encouraged to liberalize and open their economies further to external competition, protectionist groups must resist using labor standards, environment security, and human rights as disguises for their advocacy for trade restrictions. Let me make a few comments on some of the important issues that have been placed on the agenda of this year's Annual Meetings before turning to a brief description of the present economic situation of my country. We welcome the concrete steps that have been taken recently to strengthen Fund surveillance of member countries' policies. The review of policies in the context of surveillance contains important lessons for all of us: the quality and composition of fiscal adjustment; disinflation strategies in countries with persistent inflation; and the challenges of

©International Monetary Fund. Not for Redistribution PAKISTAN 173 trade policy action in the transition countries. While the Fund is justified in supporting rapid and ambitious movement toward desired medium- term objectives in all these areas, it is important to remain mindful of the fact that country-specific constraints, which are often political and social, can make actual progress somewhat less rapid. We encourage the Fund to broaden and deepen its work on the costs of inflation and the magnitude of the "sacrifice ratio" involved in programs of rapid disinflation. We commend the management of the two institutions for the initiative that has been launched to address the debt problem of the heavily indebted poor countries. All parties concerned must now reinforce their efforts toward finalizing the framework for action. It is clear that the success of the program depends on the participation of all creditors, and action by them is vital if we are to resolve the debt problem decisively and in a sustainable manner. We hope that the framework will be applied with a high degree of flexibility and take cognizance of the need to accord public finance indicators the same weight as traditional balance of payments indicators in the evaluation of debt sustainability. The Fund must have the resources necessary to discharge its obligations as the central institution of the international monetary system. We have always been supportive of its mandate and of actions that will ensure that the institution remains strong enough to serve its purpose in the new environment of globalized markets. The prospect of a decline in the Fund's liquidity ratio to its lowest level since 1983 adds urgency to the need for an early completion of work on the Eleventh General Re- view of Quotas, and we urge the Executive Board of the Fund to do its utmost to reach a conclusion as soon as possible. It is our hope that the size of the increase in quotas will be of a magnitude that will ensure that the Fund keeps pace with the growth of the world economy and reflects the increased scale of international financial flows. We also welcome the progress that has been made in establishing the New Arrangements to Borrow. The Enhanced Structural Adjustment Facility (ESAF) remains the centerpiece of the Fund's strategy to deal with the problems of low-income countries and has provided critically needed support for their adjustment and reform programs. We note the progress that has been made relating to the financing of the ESAF during the interim period and look forward to its timely implementation. An appropriate division between bilateral and multilateral sources of funding will be critical to a successful outcome. I am pleased to say that Pakistan is prepared to make a contribution to this effort in a spirit of fair burden sharing. We continue to support a strategy of optimization of the Fund's reserves, along the lines proposed by the Managing Director of the IMF, if bilateral contributions should prove insufficient to secure the full financing of this initiative.

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It is difficult to hide our disappointment over the failure to reach a consensus on the SDR allocations as envisaged at the time of our Annual Meetings in Madrid. Nevertheless, in a spirit of solidarity, we are prepared to support a one-time move to equalize the ratio of cumulative SDR allocations to present quotas. While the increase in the level of private capital flows to developing countries continues to be impressive, it has been unevenly distributed across regions. Thus, despite a near tripling in the level of foreign direct investment inflows in 1995-96 in my country, and the expectation that these inflows will continue to rise in future years as we continue to strengthen the foundations for private-sector-led growth, our need for concessional resources will remain substantial for some time to come. In this context, we are troubled by the unremitting decline in the ratio of official assistance to the GNP of donor countries, and remain concerned that donor contributions to the eleventh replenishment of the Interna- tional Development Association (IDA-11) will remain inadequate to support even current levels of lending. It is clear that an adequate IDA remains a key ingredient for greater effectiveness in development assistance, in enhancing growth prospects in low-income countries, and in addressing poverty concerns. Let me say a few words about the issue of good governance, which appears to have gained momentum and needs to be managed carefully. We in Pakistan are fully committed to the principles of good governance, and are conscious of the need to address the problem in a decisive and comprehensive way. But, given their apolitical mandate, the Fund and the Bank need to proceed with extreme caution in being drawn into an area that defies easy quantification, that entails subjective evaluation, and that requires symmetry of treatment between debtor and creditor governments, especially in the two-sided area of corruption. As emphasized by the Chairman of the Group of 24, we would ask that Fund and Bank concerns on the issue of governance be translated into a collabora- tive role of providing technical support for initiatives that are taken by member governments themselves and that are aimed at improving efficiency and accountability in state institutions. May I conclude on the current economic situation and prospects in Pakistan. We have continued to pursue our agenda of adjustment and reform. Economic growth has improved, and inflation has started to show signs of easing. We recently implemented a tough budget that ran into fierce opposition at home and triggered an intense media campaign of exaggeration and disinformation. As a consequence, our relations with the Fund and the Bank have passed through difficult times in recent months. We are determined to restore the relationship to one of full cooperation and trust, and reaffirm our commitment to stabilization and reform.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR PAPUA NEW GUINEA

Christopher Haiveta

I am privileged to have the opportunity to present my government's views on fostering further economic and social progress in the current and future world economic growth environment. To this end, I share the views of my fellow governors that the increased world economic globalization requires the pursuance of appropriate fiscal and monetary policies and the undertaking of necessary structural adjustment programs to achieve sustained and broad economic growth. I am pleased to announce that Papua New Guinea continues to enjoy the political stability that has now been successfully maintained over the past two decades, with the current coalition government enjoying a large majority in the parliament. The coalition is confident of leading the nation into and out of the next election, which is due in mid-1997. Over the past year, we have continued to pursue with all our efforts gradual but consistent progress in solving long-standing difficulties on Bougainville. The attainment of real peace is of great significance for Papua New Guinea's social and economic future. In economic terms, it will bring about an increase in agricultural production from what was once our most vibrant agricultural exporting province and reduce expenditures on security, freeing resources for development. The costs of rehabilitation and restoration of services on Bougainville are continuing to provide substantial challenges. The question of the resumption of mining in the province is not of early priority and will take longer to resolve with the need to ensure that future solutions are socially and politically sustainable. Another challenge faced by the government has been the implementation from 1996 of major provincial government reforms aiming to enhance effective delivery of goods and services to the majority of our people who are living in rural areas. During the 1990s we have experienced continued strong growth in mining, and in petroleum and logging production, but growth in the rest of the economy has remained relatively subdued. The resource sector has provided substantial revenue but few jobs. Government revenue from the resource sectors allowed an expansion of the public service but failed to produce better services for our people. The public sector—particularly the national government—was not delivering goods and services in an efficient manner. Accordingly, many functions have been transferred to the provincial and local governments to improve the responsiveness to users of service delivery systems.

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The reform will make it possible for the ordinary people to produce and benefit from their labor. Over the past year, developments in the international economy have been generally favorable for Papua New Guinea. Long-term sustainable growth with low inflation has been experienced in most of our trading partners, including Australia, the United States, western Europe, and most of Southeast Asia. Sharp terms of trade improvements for Papua New Guinea through 1995 have largely been sustained to date through 1996. The international prices of our major commodities continue to be mixed, although most are doing better than our 1996 budget price fore- casts, including coffee, copra, cocoa, palm oil, logs, rubber, and, to a lesser extent, gold, the price of which has been stable though not spectacular. Our main recent price disappointment has been with regard to copper. Offsetting this, the price of petroleum has been stronger than anticipated throughout 1996, and recent price hikes have been very beneficial for our fiscal and balance of payments outturns. The current improved stage of the commodity price cycle is being used as an opportunity to repay debts that most of the agricultural commodity industries accumulated in the early 1990s as a result of unsustainable price-support schemes that we had in place at the time. Savings from mining and petroleum windfalls are also being built up in the Mineral Resources Development Corporation, which has accumulated very significant net worth over the past decade, and which has recently represented the government's main vehicle for accumulating savings and wealth from mining and petroleum activities for the benefit of future generations. The government is in the process of privatizing 49 percent of many of its mining and petroleum interests in a float that will be open to domestic and foreign investors. The government's long-term reforms to restructure the economy continue to work toward opening up the economy and restructuring taxation, tariff, trade, and industrial policies and improving the levels of public investment and the delivery of public services. These reforms should assist economic growth over the medium term. In the shorter term, the macroeconomy has now been stabilized following the relatively severe difficulties and instability we experienced in the second half of 1994. The Papua New Guinea government continues to put on the fast track major private and public projects such as the Lihir gold mine, Gobe oil development, and major road and infrastructure projects, which are important to the economy in terms of economic growth and development. With regard to structural reforms and the attainment of macroeconomic targets under the World Bank structural adjustment program and the

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IMF arrangements, I wish to advise that, among other things, over the past two years we have taken the following actions: • devalued and floated the kina in 1994; • brought down the fiscal deficit from high levels to a manageable and sustainable level of about 1 percent of GDP; • tightened monetary policy, introduced market-determined interest rates, and removed central bank guidelines for interest rate spread; • reduced the size of public service; • reduced import duties on a wide range of products in line with a medium-term trade liberalization strategy; • announced a five-year timetable to reduce duties on selected items to internationally comparable rates; • set up a national economic development forum to assist in promoting the development of the private sector; • introduced surveillance and monitoring of log exports, provided adequate funding for the national forest authority, and introduced a code for conduct logging and a new forestry revenue system; • introduced a new organic law for the decentralized transfer of additional funds for health, education, and infrastructure to provinces; and • promoted the profile of nongovernmental organizations and representatives of the civil society. Despite the undertaking of all these and many other actions, our reform agenda is not yet complete. We are now focusing increasingly on medium- to longer-term economic objectives and policies that aim to ensure the stable well-being of our people beyond the next budget and the next election. While macroeconomic adjustments have been painful, they are not commencing to achieve the expected results. Following the stabilization of the currency over the past 15 months, inflation is now sharply dropping back to levels close to our major trading partners and broadly consistent with our 1996 budget estimates of 6 percent for December 1996. Growth in the nonmining and petroleum sectors is projected to expand by 4-5 percent over the medium term, and we are targeting our policies to achieve this. The external sector has now been stabilized, in part through a return to positive capital flows in the resources sector. A strong overall balance of payments equivalent to 3-5 percent of GDP was recorded in 1995. Im- proved external performance is the result of the application of sound and

©International Monetary Fund. Not for Redistribution 178 SUMMARY PROCEEDINGS, 1996 sensible economic policies. Significant overall surpluses are now being projected on the external account for 1996 and 1997 along with continued stability of the currency. Following this brief review of our recent economic developments, let me turn briefly to review our relations with the Fund and the Bank over the last year. The International Monetary Fund was initially very supportive of our economic reform program. This was reflected when their Board approved a Stand-by Arrangement of SDR 71.5 million in July 1995, although negotiations were quite protracted. Although the implementation of the IMF program has in recent times been halted by differing views between the Fund and the government over macroeconomic program targets, we remain hopeful that, within the spirit of constructive dialogue and consultations that still remain, we can resolve outstanding issues. I am sure that the Fund shares the view that the road to economic prosperity requires commitment, sacrifice, and hard work combined with the openness to understand constraints and timing considerations. Among the important constraints has been a fundamental inconsistency between World Bank structural targets and IMF macroeconomic targets. Papua New Guinea nevertheless is very appreciative of assistance received during these difficult times and equally values its relationship with the Fund. Even after the time for the program has passed, and that time is rapidly approaching, the advice of the Fund will continue to be valued. The government of Papua New Guinea has also attached high priority to maintaining stable macroeconomic conditions through prudent financial policies, recognizing that such stability is a vital precondition for attracting the private capital inflows needed to develop the country. In this context, it is important that in undertaking macroeconomic adjustment policies to deal with temporary internal and external imbalances stemming from external shocks, we keep our long-term social and economic development objectives clearly in view. The World Bank has been aware of our development needs and, to its credit, has moved quickly to provide assistance in the rehabilitation program following the Rabaul volcanic eruptions. We are appreciative of such support. Our relationship with the Bank has yielded a total of $593 million in loans and $112 million in credits over the years. The implementation of Bank-funded projects and programs and the development impact of the Bank's operations on the ground cannot be isolated from the economic, political, and social environment in which we operate. The combination of internal and external constraints has affected our performance in implementing projects effectively. We are, however, confident that the structural reform program, which the Bank and the Fund supported, has given us the opportunity to restructure our economy, to address

©International Monetary Fund. Not for Redistribution THE PHILIPPINES 179 various constraints impeding the implementation processes arising from weaknesses of staffing, and to enhance project management and institutional capacities for the coordination and efficient delivery of basic services. Our lessons from involvement with the Bank in the structural adjustment program have been, first, that we should never agree to structural and macroeconomic targets that are inconsistent with each other. Second, that letters of development policy must be worded in ways that provide the Bank with no scope for believing that we have ceded political sovereignty to them. Finally, we must ensure that the Bank and the Fund coordinate their efforts effectively and, at minimum, communicate with each other. I must commend the Bank management for its decision to establish an operational office in Port Moresby last year to create a better understanding between the Bank and the government on policy and operational issues. We do feel, however, that the office can be made more effective if it is upgraded to full resident representative status. We also take the opportunity to extend our appreciation to the Multi- lateral Investment Guarantee Agency and the International Finance Cor- poration for their interest and involvement in our development efforts. We look forward to their support in the future on our investment ventures. I thank you for this opportunity for Papua New Guinea to outline recent economic developments and to provide a frank assessment of its relationship with the Fund and the World Bank Group. For Papua New Guinea, the Fund and the Bank will remain very important institutions, and we are fully committed to continuing the close and frank working relationship in the years ahead. I congratulate all the other Governors on their enlightening presentations. I trust that the sum of all our contributions will eventually provide tangible benefits for the developing nations of the world.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE PHILIPPINES

Roberto F. De Ocampo

The delegation from the Republic of the Philippines joins other delegations in welcoming Bosnia and Herzegovina as the newest member of the Bretton Woods institutions. We join the other delegations in congratulating Mr. Michel Camdessus for his election to his third term as Manag- ing Director of the IMF. We also congratulate Mr. James Wolfensohn, President of the Bank, for his remarkable performance in the past year filled with challenges and for his able leadership and guidance in addressing the concerns of the Bank as well as of the developing world.

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World Economic Outlook We meet at a time of great promise and novel perils. These are the best of times, these are the worst of times. Growth in the developing world continues to set the pace for global expansion. This is reinforced by the continued dynamism of the U.S. economy and Japan showing signs of renewed vigor. Still, major uncertainties remain for the long-term prospects of countries in Africa and the countries in transition. The rapid rise in prosperity, both across and within countries, has, at times, aggravated the gulf between the rich and the destitute. The global integration of capital markets has opened opportunities, as well as new risks that pose daunting challenges for authorities in host countries, market participants, and the international community.

Challenges for East Asia Nowhere are these challenges more formidable and immediate than in east Asia. There, the changes have been most rapid and wide ranging—be it in market structures, output growth, political systems, urbanization, or demographic patterns. It is also in Asia where we find much pragmatism and eclecticism in seeking solutions to new problems. As such, east Asia might be called the workshop for reinventing the future. The Bank's Annual Report identifies the salient characteristics of east Asia: • rising integration of international markets, with growing trade, capital flows, and international migration; • the transition by several countries from central planning to market- based economies, and its effect on two-thirds of the region's population who are entering the international market via trade integration; • the transition from predominantly rural to predominantly urban societies, and the heavy demands on infrastructure this brings; • the move by 30 percent of the workforce from informal to formal sectors, and the increased demand for skilled workers brought about by the structural changes that have occurred as countries move from agricultural to manufacturing-based economies; • the rapid aging of the population, and its impact on the viability of social security systems and long-term growth; and • environmental degradation, as deforestation has been more rapid in the Philippines than in any other region, and problems related to water availability and severe air and water pollution. These challenges rise to a common agenda—an agenda for the countries in the region to address in partnership with one another and with the rest

©International Monetary Fund. Not for Redistribution THE PHILIPPINES 181 of the world, particularly the Bretton Woods institutions. The key ingredients of this common agenda are by no means simple and easy: reducing poverty and achieving growth with equity; meeting growing infrastructure needs; developing the institutions for market economies; providing social insurance, managing structural change, and upgrading labor; and striking a balance between development and the protection of the environment. Next month, the Philippines hosts the Asia Pacific Economic Cooper- ation (APEC) leaders' meeting in Manila. This will be more than a routine chore we perform for yet another regional association. It will be for us, in a sense, a coming-out party—an opportunity to showcase our recovery and signal our firm commitment to free trade. Over the past few years, we Fil- ipinos have become more confident in our ability to compete globally and to thrive in a borderless world.

Challenges for the Tiger Club Within east Asia, a number of developing countries have had to cope with rapid changes and global integration of markets at an accelerated pace. Having, early on, taken to heart the lessons of getting fundamentals right and adopting market-friendly reforms, they have reaped its rewards early and in large volume. These rewards have been amplified by large flows of private capital, both direct and portfolio, in a virtuous cycle of confidence and success. We know from Mexico's experience that this works two ways, and the virtuous cycle can easily turn vicious in even less time. The Mexican financial crisis was a strong reminder both of the potential impact of sudden changes in financial markets' assessments of a country's economic policies and prospects, and of the need for caution and self-discipline in macroeconomic policy. Thus, questions have been raised lately: Are the tigers now troubled? Are they still frisky felines or drained dinosaurs?

The Philippine Case My country has been a latecomer to the tiger club and, for now, only lays claim to a growing tiger status. Perhaps for this reason, others have yet to see the Philippines as being an aging tiger. We are, nevertheless, careful to nurture hard-earned gains in securing the confidence of the financial markets that has facilitated our progress from being the "sick man of Asia" to being its rising star. We have sought to maintain a fiscal surplus—now on its third consecutive year after two decades of deficits. This has helped to raise the level of domestic savings and bring down inflation to single digits along with the risk premium on interest rates.

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The fiscal surplus has also helped limit the nominal appreciation of the exchange rate and an ensuing loss of competitiveness that would have accompanied foreign capital flows. Without such fiscal surpluses, the ability of the monetary authorities to buy foreign exchange would have been constrained by tighter monetary ceilings. Our central bank was able to increase its gross reserves to a record high of US$11.4 billion from only US$4.5 billion five years ago. At the same time, we limited our recourse to short-term borrowing to 14 percent of total external debt, even as total external debt was brought down to 49 percent of GNP from 88 percent ten years earlier, and debt service down to 14 percent from 36 percent over the same period. Through careful demand management and a market-determined exchange rate policy, the current account deficit as a percentage of GNP has been kept manageable at 2.6 percent in 1995—a further reduction from the 4.5 percent level in 1994. Macroeconomic stability and structural adjustment reforms, covering the trade and payments regime, banking liberalization, privatization, deregulation, and market confidence have resulted in a GNP that grew steadily, from almost nothing in 1992 to a sustainable 5.5 percent in 1995. This growth was driven by exports and foreign investment flows, which grew at 31 percent and 46 percent, respectively, last year. For 1996, we are optimistic that the Philippine economy will gain further momentum with a growth rate of 7 percent. We are now halfway through our "exit" program with the IMF and by this time next year, we expect to graduate from the IMF after two decades of almost uninterrupted recourse to its programs. This is no reason, however, for complacency. We still have the phenomenon where many of our people prefer to seek employment abroad, and there continue to be pockets of poverty in our country that have to be brought down to much lower levels. We have no illusions that our exit from the IMF signals our opportunity to relax. On the contrary, it means that we will be under tighter surveillance by the private capital markets, perhaps a tougher master, whose confidence has to be earned every second of a 24-hour trading day. We welcome it, for, as we have discovered, good governance can be a tool for global competitiveness.

Conclusion We have established a strong foundation for long-term, sustainable economic growth. We have put in place outward-looking and investor- friendly economic policies. And, with the signing of a peace agreement between the government and a rebel Muslim group, we have shown that a country of different religions and ideologies can live in peace and brother- hood and, at the same time, achieve economic progress.

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We are determined to build a new model of third-world economic development, where there is a balance between growth and equity, modernization and environmental consciousness, peace and progress, and where growth is private sector led—all in the context of a democratic system of governance. The challenges ahead are formidable. But, this is the choice that we have made, and, with vigilance, this is the choice that we will follow. For, certainly, in today's world, eternal vigilance is the price, not only of freedom, but also of prosperity. We have chosen both freedom and prosperity, and we invite partners abroad to participate in their exercise and rewards. Born in the 1990s, we are confident that this new Philippine tiger— a gentler, kinder one—is fit for the next century.

STATEMENT BY THE GOVERNOR OF THE FUND FOR POLAND

Grzegorz W. Kolodko

In the Madrid Declaration, adopted two years ago, in the first paragraph a fundamental drive for the economies in transition is identified: their necessary integration into the international economy and setting them firmly on the path of sustainable growth. We have taken this direction with full determination. For seven years, Poland has been removing barriers on its way to this integration. Continuous progress in stabilizing and restructuring the growing economy, the acceptance of the obligations under Article VIII and the liberalization of capital flows, reductions in tariffs, and adjustments in legislation and legal procedures to international standards have been major components of redesigning the Polish economy to develop its underlying potential. We have entered successfully the international financial markets. This in itself would already have been evidence of the remarkable economic performance. The investment grade we have obtained recently from the rating agencies, based on investment risk assessment, is close to the levels of more advanced economies, and provided a further recognition of the outstanding progress made by my country. The invitation extended to Poland last July to join the Organization for Economic Cooperation and Development (OECD) gives us the stamp of approval as an open, advanced market economy, thus concluding a stage in transition. I may say, we have made it! Although our way to the transformation into a full-fledged market economy is more straightforward nowadays than a few years ago, and the

©International Monetary Fund. Not for Redistribution 184 SUMMARY PROCEEDINGS, 1996 many signs of strong and viable recovery on the real side reconfirm our steady progress in achieving the long-run targets, these bright lights have not been the only signals we have received. In the shadows remains a relatively resilient inflation that should be mentioned. Despite decreasing inflation—which fell from 70 percent at the end of 1990 to about 17 percent at the end of 1996—inflation is still causing several problems, and coun- tering it is one of the priorities of our policy. The rate of inflation is expected to decline by end-1997 to 13 percent and to a single-digit figure within a year and a half or so. With gains in terms of credibility, and inflation still high by international standards, the exposure of the economy to short-term foreign capital flows increases. The policies that aim at their containment are costly for the recipient countries. These policies also require continuous monitoring of the respective trends in individual countries and groups of countries in their actual and expected macroeconomic indicators. There is a relationship between the intensity of capital movements and capital exporters' economic performance. Thus, the indicators of concern should cover not only the emerging markets, but also industrial countries as major short-term capital exporters. The Fund's strengthened surveillance mission would help reduce or avoid this dramatic need in the future. The Special Data Dissemination Standard, which we accepted in April, should be essential in this respect, contributing to the provision of timely and comprehensive economic and financial data. Notwithstanding the improved statistical basis for surveillance, we strongly appreciate the Fund's recent search for a more adequate approach in terms of a qualitative assessment of macroeconomic adjustment and an increased insight into structurally important areas, both crucial for the performance of economies in transition. Paying necessary attention to the quality of adjustment does not mean neglecting its social aspects—on the contrary. An ultimate aim of economic policies is the social welfare. The results of the economic growth have to be shared by society as a whole. This implies necessary public expenditure on education and health to maintain the investment in human capital at levels high enough to allow the country to be competitive on the international front, and to restructure those sectors in order to increase expenditure efficiency. Poland—like many other countries in transition in east and central Europe and the former Soviet Union—had experienced bitter years at the onset of transformation to a market economy. Deep transitional recession, declining output, and high inflation had caused a deterioration of the standard of living. This hardship to some extent was unavoidable, but to some degree, was due to policy mistakes. The financial policy pursued in the early 1990s had caused the so-called perverse effect of fiscal adjustment. The industrial output in Poland had contracted in 1990-92 by 40 percent in real terms, and GDP fell by 18 percent. Contrary to this, in 1994-96 real

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GDP has increased by close to 20 percent. Since this increment is export and investment led, the growth of the Polish economy is sustainable and will bring the Polish GDP to about US$200 billion by the year 2000. The budget deficit was close to 7 percent of GDP in 1992. Since 1993 it has been below 3 percent and currently stands at only 2.7 percent of GDP—well below the Maastricht criterion. Only in 1994-96 has the real consumption of the household sector jumped by 15 percent, and about half a million new, internationally competitive and better-paid jobs have been created. During the same three-year period, as much as US$8 billion of foreign direct investments have been absorbed by the economy, thus raising our export ability. Close to 80 percent of the record-high Polish exports nowadays goes to the OECD countries. Such an improvement has been achieved by the successful implementation of the medium-term development program "Strategy for Poland." The more gradual but very determined policy of macroeconomic stabilization, accompanied by adequate public finance reforms, has started to bring the fruits of transition to Polish society—both the enterprise and household sectors alike. This new approach, implemented three years ago, is based upon comprehensive structural policy, tough monetary policy, and sound fiscal policy. But it is also compatible with social partnership and a negotiable incomes policy. This set of policies continues the economic liberalization initiated seven years ago, but simultaneously a different structural policy, improving microeconomic efficiency and upgrading the competitiveness of the Polish economy, has been introduced. For some time, the Polish economy has really soared like an eagle, although it is often called "the tiger of Europe." After the period of "shock without therapy" the policy of "therapy without shock" is being exercised. And this is a program that works. Against this background and in light of the experience of a thorny process of structural adjustment through which the economies in transition are going on the eve of the twenty-first century, the IMF and World Bank declaration on "global partnership for sustainable economic growth" has to be supported. Poland and other economies in transition appreciate the financial and technical assistance that has been provided by the Bretton Woods institutions during this difficult period. A part of the credit for the recent success of the Polish economy is due to the IMF and the World Bank, and I would like to express my gratitude to the staff of these institutions and especially to the Managing Director of the Fund, Michel Camdessus, and the President of the World Bank, James Wolfensohn. Transition to a market economy in our part of the world is also a process of learning by doing. I am glad that we were not only able to learn from the others, but also the staffs of the Fund and the Bank have drawn the proper conclusions from our experience on what works and why, and what does not work and why. We are ready to share our knowledge on the

©International Monetary Fund. Not for Redistribution 186 SUMMARY PROCEEDINGS, 1996 economics and politics of transition with those who believe it would be wise to follow the Polish model. However, the continuation of efforts to stabilize the economy and to sustain sound economic development on the path of liberalization of international trade and successful structural adjustment calls for further engagement of the Bretton Woods institutions. Therefore, I would like to declare our full support for the solidarity of the international community mobilized and promoted by Mr. Camdessus and Mr. Wolfensohn in their initiatives on the strategy to meet the challenge of poverty. The concrete proposal on the financing of a continuation of the Enhanced Structural Ad- justment Facility (ESAF) and the heavily indebted poor countries (HIPC) initiative is appealing. Among the three groups of partners involved, the governments of the poorest countries, the donor community, and the international financial institutions, we have been ready to take our part in this effort. Notwithstanding our share in the contributions to ESAF financing, we are ready to reduce our claims in bilateral negotiations with those of our debtor countries that are on the list of those covered by the Fund and the World Bank initiative. I do believe that, owing to our joint efforts, our ability to learn from each other, our openness to new ideas, and our willingness not only to teach but also to listen, the Bretton Woods institutions can serve still better the purpose of world economic development and peaceful international cooperation. We are ready to take advantage of these activities and to contribute to them in the best possible way.

STATEMENT BY THE GOVERNOR OF THE BANK FOR PORTUGAL

Antonio de Sousa Franco

It is a pleasure for me to address the 1996 Annual Meeting of the In- ternational Monetary Fund and the World Bank. The world economic outlook sounds encouraging. Growth prospects are improving in many regions of the world such as Latin America and Africa. Many structural changes are also taking place in international and national economies. But let me focus on Europe. As the President of the Council of the European Union (EU), Mr. Quinn, has reported yesterday, the EU economy is recovering in a slow but consistent path that is expected to accelerate next year. Europe is in the midst of profound changes. The project of building an Economic and Monetary Union (EMU) is progressing well and on the right track. Recently, new rules for budgetary pol-

©International Monetary Fund. Not for Redistribution PORTUGAL 187 icy coordination have been agreed as an essential part of the viability of the EMU. There is, of course, much to be worked out on political, social, and economic levels. But the EMU is nevertheless the most substantive issue for the strengthening of the Union. Last year, unemployment in the European Union reached very high levels as a result of several causes, among which is the increased international competition as the world economy becomes more and more globalized. There are, of course, domestic reasons as well, such as those related to labor markets and to the restructuring of productive structures and technologies. The promotion of high levels of employment, essential to avoid social exclusion, to promote economic welfare, and to fight poverty and injustice, requires the adoption of sound policies, both at national levels and under EU and international cooperation and coordination. Growth and employment are becoming, with globalization, more and more global problems and call for supranational policies. On the other hand, to create political support for the construction of the EMU, it is necessary to reinforce the social aspects of economic policy. Thus, there is a real need for advancing with policies toward employment and equity along with increased competitiveness. Progress on the employment front would result from increased flexibility in European economies in the context of a stable macroeconomic environment provided by the monetary union. Moreover, the future of Europe requires also a political design, which cannot be a copy of existing models; the EMU is, thus, part of an overall challenge for all of us Europeans who care about the responsibility for achieving a society with a human face in peace and offering prosperity, social cohesion, and solidarity. Portugal is fully committed to monetary union and has adopted convergence policies and measures to fulfill in 1997 the conditions for participating in the third phase of the EMU. Progress on fiscal consolidation has been obtained. We expect to reduce the fiscal deficit to 4.1 percent of GDP this year, compared to 6.9 percent in 1993. The Portuguese government has set the goal of a deficit of 2.9 percent in 1997, which requires efforts in containing expenditures, improving tax administration, and adopting new measures concerning the reform of the social security system. Public debt is set to fall to 70.7 percent this year, from 71.5 percent of GDP in 1995. As a result of the acceleration of the privatization program and improved debt management, this ratio should fall again next year. The current upturn in major European economies should provide further stimuli to our growth, improving conditions for further reducing fiscal deficits. We expect for 1997 a 3 percent growth, higher than that of 1996. The stable external value of the escudo during the last years has been instrumental in the disinflation process. The Portuguese annual inflation

©International Monetary Fund. Not for Redistribution 188 SUMMARY PROCEEDINGS, 1996 rate, at 3.3 percent, is only 0.8 percentage point above the EU average. Significant progress has been achieved without too much pain. The 1997 objective is a further decline in inflation, bringing the rate to between 21A and 2l/2 percent. Another clear sign of improvement is given by the cost of public debt. The ten-year treasury bond yield is currently less than 2 percentage points above the equivalent German rates. Last year, this gap was more than 4 percentage points. My country's commitment to the single currency in 1999, according to the calendar and convergence criteria, is as strong as our commitment to Europe. In our competitive world, Europe has to forge ahead, building up new institutions to sustain prosperity, reinforce competitiveness, and resist the temptation of falling behind. This is also true for Portugal, as its future is enmeshed with that of Europe; like other European countries, Portugal achieved prosperity and progress when it was opened up to the world, maximizing the opportunities thereof. The point is that we face real conditions of free trade and fair trade, without the acceptance of a new focus on dumping, on social and ecological issues, or others. Turning now to our agenda. Poverty reduction and improving living conditions continue to be the ultimate purposes of our institutions as well as of our governments. Sustainable development is—and shall remain— the first of the world's goals as the main root and foundation for peace. We all have to address these challenges within our boundaries and worldwide, both in the North and in the South, for we shall succeed or fail together. Multilateral cooperation remains central to this endeavor. Despite difficulties since our last meeting, we have to remember the conclusion of the negotiations for the ID A-11 and the replenishment of the African Devel- opment Fund (ADF). These negotiations have undoubtedly illustrated several issues of great concern. We can remark, indeed: • the continued high level of demand by developing countries; • in spite of signals for hope and visible progress in various countries, sub-Saharan Africa is still facing important difficulties to take off from extremely low economic and social levels; this region has not been able to attract significant private investment and continues dependent upon development assistance; and • the severe budgetary constraints in donor countries are forcing a more efficient and selective allocation of assistance and even cuts in some countries. Within this uneasy framework and despite our fiscal constraints, Por- tugal has increased its contribution to ID A-11 and has kept abreast with partners in other replenishments. Particularly, I would like to emphasize the special efforts Portugal and several other donors committed to ADF-7.

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Again, in this Assembly, our multilateral effort has been called upon. The debt initiative is at the core of our deliberations. It will contribute to solving the problems of those countries facing an unsustainable debt situation. We warmly support this initiative to assist the poorest countries. We attach particular importance to key elements such as: • the full commitment of beneficiary countries to adopt strong economic policies; • the compliance with agreed basic principles, in particular those to preserve the financial status of our institutions; and • the equitable and broad participation of all creditors in the initiative. Furthermore, the increasing scarcity of resources requires that they be allocated to those countries where they are most needed and are most effectively used. Portugal congratulates President Wolfensohn and Manag- ing Director Camdessus for this far-reaching initiative. Its successful implementation requires the efforts of all member countries. I am pleased to announce today that Portugal is prepared to contribute to the financing of the ESAF and encourages others to do so.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE RUSSIAN FEDERATION

Vladimir Potanin

On behalf of the government of the Russian Federation, it is my pleasure to welcome the participants and guests of the Annual Meetings of the World Bank Group and the International Monetary Fund. We are pleased with the results of the activities of the Bretton Woods institutions in the 1996 financial year. Much has been done by them to ensure the stability of the international monetary system, create favorable conditions for sustainable economic growth, and mobilize the transfer of resources to developing countries and economies in transition. Their activities were carried out against the backdrop of complicated political, social, and economic developments in various regions of the world. Over the past year, the economic situation around the world has been uneven. Differences were particularly pronounced among industrial countries, which account for the lion's share of world trade and capital flows, and which objectively act as the driving engines of the global economy. The continuation of relatively stable economic growth in the United States

©International Monetary Fund. Not for Redistribution 190 SUMMARY PROCEEDINGS, 1996 and a rebound in the Japanese economy were accompanied by a slowdown in economic growth in western European countries, which face complicated structural problems in an environment of growing trends toward globalization and integration in the world economy. Economic growth in many developing countries was more dynamic, although growth did vary widely by country and region. While some of them managed on the whole to maintain stable growth rates, the social and economic indicators of a number of others continued to be a cause of serious concern. In this regard, we are troubled by the recent trend toward a reduction in official development assistance in real terms, which is especially painful for the poorest countries that are not particularly attractive to private capital. Differentia- tion among economies in transition is growing. Following the first stage of reforms, some countries managed to resume economic growth and improve the living standards of the population, and now they are attracting significant foreign direct and portfolio investments, while others, including a number of the countries of the former Soviet Union, have not yet emerged from a state of economic recession. We are pleased to note that there has been a certain stabilization of the situation on the international foreign exchange and capital markets, which is largely due to a gradual optimization of monetary and financial policies in the majority of countries around the world. The IMF deserves a great deal of credit for this. We are also encouraged by the fact that the capital inflows into developing countries have broadly returned to the level that existed prior to the financial crisis in Mexico in late 1994. Nevertheless, the emerging new risks and volatility in the operations of commercial and investment banks, including those in the industrial countries, and the changing foreign exchange structure of external borrowing of a number of countries, which involves significant future foreign exchange risks, are worrisome. The lessons of world economic development reconfirm the necessity to maintain macroeconomic equilibrium as an essential condition for noninflationary growth. At the same time, a substantial contribution toward attaining sustainable socioeconomic growth can result from the choice of the proper goals and instruments of state regulation of the economy. This is particularly relevant to the regulation of the financial, banking, and external sectors. Specifically, developments in recent years mandate a more cautious approach in assessing the role of portfolio investments in the national economy. An active use of this source of financing places special demands on the quality of the national banking supervision system, and monetary and foreign exchange regulation. A well-designed structural and investment policy, aimed at maintaining and developing the crucial elements of the national production infrastructure, takes on particular importance in transition and developing economies. An active social policy also plays a critical role in ensuring stable social and economic development.

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Objectively, the International Monetary Fund has to play a larger role at a time of growing interdependence in the world economy and the increased importance of international capital flows. The Fund has the unique capacity for obtaining current and objective information on the monetary and financial situation in member countries for early diagnosing and preventing of potential crises. We commend the Fund's efforts aimed at maintaining balanced macroeconomic and structural policies, stability, and order in the international monetary system. In light of the growing demand for the Fund's resources by the countries that are pursuing profound macroeconomic and structural reforms, and also with a view to maintaining at an adequate level the Fund's pre- paredness to provide assistance to member countries in overcoming sudden financial shocks, it is necessary to substantially strengthen the financial basis of the Fund as soon as possible. Efforts in this area should be directed primarily at the speedy completion of work on an increase in the Fund's own capital within the framework of the Eleventh General Review of Quotas. Russia supports the proposal by the Managing Director of the Fund to double the Fund's quotas and would favor implementing it primarily on an equiproportional basis. Generally, we believe that the Fund should remain an institution whose financial basis rests upon its quotas, while borrowing arrangements by the Fund should play only a complementary role. We welcome the progress in expanding the group of the Fund's potential creditors beyond the list of participants in the General Arrangements to Borrow. Neverthe- less, in our view, development of this initiative should not substitute for or delay the work on the quota review. To our deep regret, Russia and 37 other Fund members have so far not been given the opportunity to participate fully in the SDR mechanism. Once again, we call upon all Fund members to demonstrate the necessary will to reach a compromise in order to resolve this "problem of equity." We welcome the constructive attitude of those countries that have already indicated their willingness to support the formula for resolving this matter proposed by the Managing Director. Now it is necessary that the rest of the membership make their move toward the compromise on all remaining un- resolved aspects of the proposed solution. It is our hope that the Fund will finally manage to leave behind the stage of declarations and consultations on this subject, and take up the practical aspects of the decision to allocate SDRs in the near future. We regard positively the efforts of the World Bank Group aimed at promoting stable economic growth in borrowing countries, poverty alleviation, improvement in the functioning of public institutions, and development of the private sector. We note with satisfaction that the Bank is at the center of recent major initiatives to assist countries in overcoming the consequences of armed conflicts and restoring the economies of countries that were vie-

©International Monetary Fund. Not for Redistribution 192 SUMMARY PROCEEDINGS, 1996 tims of such conflicts in various regions of the world, and in obtaining urgent relief for the heavily indebted poor countries. We also regard with understanding and support the efforts by the IBRD leadership to bring about changes in the Bank's policies, working style, and methods. At the same time, the Bank's participation in these initiatives, as well as changes in its internal organizational structure, should not interfere with its main activities in providing support to sovereign borrowers. In particular, we are concerned with the attempts on the part of some Bank members to use the mechanism of its revenue generation and distribution to shift the burden of supporting the poorest countries onto other borrowers. To avoid crisis situations, such as the one that the heavily indebted poor countries (HIPC) initiative is trying to address, the Bank should accord timely attention to identifying the sources of the funds to repay its loans and credits as early as at the stage of drafting the country strategies and developing specific projects. In its country portfolios, the Bank should increase the share of projects that promote development of the productive base, diversification of the economy, and the export potential of the borrowing countries. The Bank's activities are especially important for Russia during this critical period in the country's development, when it has come very close to resuming economic growth under the new conditions of macroeconomic stability and profound structural change. Over the past period, the Bank has demonstrated that it is capable of responding quickly by assisting its borrowers in dealing with complex problems of their development, which has particularly been the case in the preparation of the loan in support of the structural reorganization of Russia's coal industry. We count on the Bank's continued support in implementing a number of investment projects that are necessary to provide the structural reforms with the investment underpinning that is a real basis for the economic recovery. In conclusion, I would like to say a few words about the state of Russia's economy. Despite the remaining economic difficulties and a complicated social and political situation, Russia perseveres with the course of financial stabilization and continues to carry out structural reforms, which, we are convinced, are an essential condition for future balanced growth of the Russian economy. The results of the last quarterly review of the progress under Russia's Extended Arrangement show that all main performance criteria under the government's program have been met, and, in some areas, with considerable margins. Of great importance for the further course of reform in Russia is the decision to adopt obligations under Article VIII of the Fund's Articles of Agreement, which provide for the convertibility of the national currency for all current account transactions. This year, Russia reached an agreement with commercial banks of the London Club of creditors on debt rescheduling, which constitutes an important condition for regaining the country's access to in-

©International Monetary Fund. Not for Redistribution ST. KITTS AND NEVIS 193 ternational capital markets. A similar agreement is being prepared with other commercial creditors. However, the situation is rather difficult regarding the execution of the budget in the areas of tax collection, servicing domestic debt, and supporting the social sphere. The government has recently adopted a package of measures aimed at correcting the situation in these areas and further overall strengthening of fiscal discipline. Implementation of the program of structural reforms agreed with the Fund, including continuation of the process of privatization, restructuring of enterprises that remain in the public ownership, and regulation of natural monopolies, will be considerably accelerated. The draft federal budget for 1997 provides for the continuation of the austere anti-inflationary course, and further reduction of support from the budget to industry and agriculture in real terms. It also envisions the broadening of the revenue base through reduction of tax breaks and introduction of new types of taxation. While adopting austerity measures in the fiscal area, we, nevertheless, understand their limited nature. We believe that the root causes of many of Russia's financial difficulties are related to the continuing economic downfall, and, in particular, the profound investment crisis. Recent developments show that macroeconomic stabilization is a necessary, but far from sufficient, condition for Russia's economic rebound. Economic recession, combined with tight fiscal and monetary policies, has already resulted in a sharp deterioration of social indicators. For this reason, we still consider as two priority areas of Russia's cooperation with the Fund and the Bank their continued support of our course of macroeconomic stabilization and structural reforms, and their assistance in the implementation of the government's social policy measures. I am certain that further cooperation with the Bretton Woods institutions will make an important contribution to the implementation of the program of restoring economic growth and raising the living standards of the population of Russia.

STATEMENT BY THE GOVERNOR OF THE BANK FOR ST. KITTS AND NEVIS

Denzil Douglas

I have the honor to speak on behalf of the Caribbean Community and Common Market (CARICOM), namely Antigua and Barbuda, the Ba- hamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Lucia,

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St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago, and my own country St. Kitts and Nevis. The fiftieth anniversary of the Bretton Woods institutions two years ago stimulated the debate on the current role and mission of the Fund and the Bank. That debate has been accompanied by an effort in both institutions to shape strategic new policies that will guide their work for many years to come.

Debt Prominent among these new policies is the joint work of the World Bank and the IMF to reduce the debt of the heavily indebted poor countries. We are pleased that the extremely complex issues holding up this initiative are now largely resolved and the way is clear for all partners to play their part. Beyond this vitally important debt initiative, we must continue to keep the overall question of the debt burden of developing countries under close review. The experience of the last 15 years has taught us that, progress notwithstanding, there is never a point where concerns over debt are finally settled. We must stand prepared to examine rigorously and dis- passionately what further advances we can usefully make to reduce the onerous debt position of other countries.

IMF Issues We strongly support the broad thrust of the efforts to strengthen the finances of the IMF, since there must never be any doubt in the international financial system that, with the appropriate conditionality, the Fund has the capacity to respond to the ordinary and emergency financing needs of any member. Quotas must continue to constitute the centerpiece of the Fund's financing. We regret, however, that in spite of the extensive discussion, there is as yet no conclusion on any of the principal elements of the Eleventh General Review of Quotas currently under way. We continue to support a doubling in quotas to ensure the capacity of the Fund to meet the likely financing needs of members while maintaining a comfortable liquidity margin. We also believe that a major portion of any quota increase should be distributed equiproportionally, even as efforts are made to address each selected case where a member's position in the world economy is markedly out of line with its quota share. Further, in order to avoid any precipitate erosion of the voting power of small developing member countries of the Fund, we suggest that the ratio of basic votes to total votes be restored to the level that obtained at the inception of the Fund and that this ratio be made permanent. We in CARICOM look forward to seeing substantial progress on the quota review exercise in the coming months.

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We welcome the solid progress made toward enlargement of the borrowing arrangements of the Fund, and are particularly pleased that the group of countries participating in the new system is being widened considerably, with the likely inclusion of emerging market countries. We agree that the borrowing arrangements should not be seen as a substitute for a substantial increase in quotas, that access to these additional resources should only be in exceptional circumstances, and that disbursements should be speedy. We are greatly encouraged that the IMF has made progress in structuring the financing arrangements for maintaining the operations of the Enhanced Structural Adjustment Facility (ESAF) up to the time when there will be a smooth transition to a self-sustaining facility. The provision of resources for maintaining ESAF is worthy of broad-based support, and countries of our group are favorably disposed to making our contribution. We also support proposals to use a very modest amount of the Fund's gold holdings to mobilize resources for ESAF in a manner that preserves and enhances the reserves of the Fund. We in CARICOM believe that there is a continuing role for the SDR and have supported a new general allocation, along with action to address the equity problem. We are pleased that some progress has been made on the SDR issue, on the basis of the most recent proposals tabled by the Managing Director. We urge that the matter be concluded early with a special allocation of at least SDR 26 billion.

World Bank Issues Let me turn now to Bank issues. We are pleased, Mr. President, that your efforts have secured a satisfactory outcome to the eleventh IDA replenishment of the International Development Association, and we note with satisfaction that the continued access of vulnerable small island states to IDA resources has also been protected under the current agreement. We are pleased to welcome Barbados, one of the countries on whose behalf I speak, to the ranks of IDA donors. We look forward to an expanded role for the International Finance Cor- poration (IFC) in the development of the private sector in CARICOM, especially in countries that have been graduated from the status of borrowing members of the Bank and yet have a long way to go in developing a private sector capable of playing an expanded role in economic growth and development, and in employment creation. The IFC can provide assistance to the private sector in areas such as project development, evaluation, and financing, and in financial sector development. We look forward to working with the IFC as it creates new facilities and as it makes a greater effort to understand and serve the needs of smaller member countries. We must return to graduation from the Bank, an issue of great concern to us. The Bank should reexamine its graduation policies to ensure greater

©International Monetary Fund. Not for Redistribution 196 SUMMARY PROCEEDINGS, 1996 flexibility in the application of its guidelines and to ensure that the decision to graduate is made when the graduating country is on a sustainable path. But even where graduation has taken place, we urge the Bank, as a minimum, to continue to provide critical technical assistance, which is often needed to help members stay on a sustainable path. We remain convinced that the decision to graduate the tiny vulnerable country of St. Kitts and Nevis from the use of IDA resources was premature. It has been our experience that the donor community views IDA graduation as a signal for the reduction of the level of development assistance to a country. The fiscal, economic, and social impact of such sudden and dramatic reduction of development assistance has been very severe and debilitating. Mr. President, Caribbean Community heads of government were indeed pleased at the opportunity for our exchanges with you in Guyana in March, and we were heartened by your understanding of our concerns. We look forward to continuing the joint search for appropriate solutions. Last year an unusual spate of hurricanes destroyed the entire productive capacity of Antigua and Barbuda, the banana crop, and significant por- tions of the infrastructure of Dominica, as well as causing considerable damage in St. Kitts and Nevis. When we met with you, Mr. President, we asked for assistance with a disaster mitigation program. We welcome the response of the Bank so far and hope that the work that is going on will bear fruit before the next season of hurricanes is upon us. In June this year we had another successful Caribbean Group for Co- operation and Economic Development (CGCED) meeting. Donor interest in the region has remained high even though resources have practically dried up. We continue to look forward to an improved flow of resources to our countries to support domestic efforts toward sustainable growth. Through you, Mr. President, we again wish to thank Bank staff for their efforts in organizing the CGCED and we look forward to our close cooperation and joint action when the findings of the review team help us identify the way forward for the CGCED.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR SPAIN

Rodrigo de Rato Figaredo

This is the first time I have addressed the Annual Meetings of the In- ternational Monetary Fund and the World Bank, and it is an honor and a

©International Monetary Fund. Not for Redistribution SPAIN 197 pleasure. I also find it encouraging to be doing so at a time when the prospects for the global economy are good.

The Global Economy Worldwide, GDP is increasing by more than 3.5 percent in real terms, and the IMF expects growth to exceed 4 percent in 1997. Attention should be drawn to the special contribution made by the developing countries, particularly the emerging economies. For 1996, the anticipated growth rate for the industrialized countries is 2.3 percent, with a 1.6 percent average for European Union members. In 1997, we expect the economic growth rate in the industrialized countries to be about 2.5 percent, and this is also the average anticipated for the European Union. These prospects of increased growth in all countries, including those of eastern Europe, coincide with historically low inflation rates in the industrialized countries (2.4 percent in 1997), and with encouraging progress in the reduction of inflation in the developing countries, particularly in eastern Europe.

The International Monetary Fund As regards the surveillance function of the IMF, we regard the Fund's implementation of the Special Data Dissemination Standard as a very positive step, and Spain has subscribed to it since its introduction. We trust that the establishment of a generalized standard for all members can soon be finalized. With respect to the Fund's financial resources, Spain firmly supports an increase in quotas—which constitute the Fund's principal and basic resource—as a means of responding to members' financing needs. It is most important that this general increase in quotas contain an ad hoc component to reflect institutionally the relative positions that economies such as that of Spain occupy in the global economy in such a way as to eliminate the differences existing in a small number of countries between theoreti- cal quotas and real quotas. On this same subject of resources, I would like to emphasize the importance of the agreement to double the lines of credit provided for the Fund. Spain has contributed toward the doubling of these resources under the New Arrangements to Borrow, which we hope will become an effective tool for dealing with balance of payments problems that have potential systemic implications. As regards the Fund and Bank's initiative for enabling heavily indebted poor countries that adopt appropriate policies to achieve debt sustainability in the medium term, I would also like to affirm our support for an agreement in principle to guarantee IMF participation

©International Monetary Fund. Not for Redistribution 198 SUMMARY PROCEEDINGS, 1996 through a continuation of the Enhanced Structural Adjustment Facility. It is also important that a final agreement be reached on the equitable allocation of new special drawing rights, and such an agreement is now within reach. Finally, I must congratulate the Fund's Managing Director, Mr. Camdessus, on his election for a third term. The substantial progress made in the Interim Committee is evidence of the skill and intelligence he shows in achieving agreement among the members.

The World Bank Under the leadership of its President, Mr. Wolfensohn, the World Bank Group has deepened and broadened the process of change launched over a year ago. We trust that this process, together with the introduction and development of a large number of initiatives within the framework of a reduced budget, will serve to strengthen and reinvigorate the Group and enhance the impact of its policies in the developing countries. Over the past fiscal year, the Bank has played a crucial role in the rehabilitation of the economy of Bosnia, in close cooperation with the Euro- pean Union and the international donor community. Now that Bosnia and Herzegovina is a member of the Bretton Woods institutions, we hope that progress can be made in normalizing its economic life. I would like to draw attention to the Bank's prompt and skillful action in the face of this emergency, and the efforts made to strengthen the institution so that it will be able to deal with similar situations in the future. There can be no doubt that the conclusion of the negotiations on the eleventh replenishment of the International Development Association (IDA-11) was a complete success. Despite the problems encountered during the process, the successful outcome is proof of the support shown for the International Development Association's objectives, namely, to promote economic growth in the poorest countries and to alleviate poverty by taking action on a multilateral basis. My own country has provided unconditional support for this process, and the government has increased Spain's contribution to this new replenishment.

The Spanish Economy

I would now like to refer to the current situation and probable trends in the Spanish economy. The Spanish economy is now on a path toward sustained economic growth, with anticipated growth rates of 2.3 percent for 1996 and 3 percent for next year, both rates being higher than the European average. The following are basic elements in this process:

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• budgetary policy; • structural reforms; and • the enhanced role of the private sector in the economy. This is a medium-term strategy, the final objective of which is employment creation. To be successful, it is necessary to achieve sustained growth; i.e., at the same time as measures for maximizing growth potential are adopted, basic economic disequilibria must be corrected. We need a more flexible economy with low inflation, sound public sector accounts, and low real interest rates. From the outset, the new government adopted a broad set of measures designed to achieve these aims. First, in June a group of structural reforms were introduced in order to liberalize key sectors of the economy and both revitalize activity and reduce inflationary pressures. The sectors in question were telecommunications, land and housing, professional associations, and energy. At the same time, fiscal reforms were introduced to promote job creation in small- and medium-size enterprises, and savings taxation (as applied to capital gains and corporate balances) was overhauled in order to foster increased efficiency in the use of savings. Second, the government is attaching the following guidelines to the budgets it has introduced for 1997: • Increased budgetary discipline. Measures have been adopted to ensure that budget execution corresponds to initial plans, eliminating the existing scope for discretionary action. • Limits on increases in government expenditures in 1997. Spending will not increase by more than 1.7 percent in nominal terms (or 2.1 percent in the case of the central government). Given the objective of achieving a 2.6 percent inflation rate, this represents a reduction in spending in real terms. • Maintenance of government capital investment capacity as the best form of contribution to internal demand. This includes the promotion of projects with joint government and private financing. • Increased control of fraud in social support services. Improvements in their management are also to be implemented. • Containment of overall fiscal pressures. This will be accomplished by using the least inflationary taxation categories. The effects of these measures can already be seen in the form of market confidence and stability, so that our long-term interest spread is at a historic low, only 180 basis points above the Bundesbank's 10-year bond rate. We are also making progress on reducing inflation, and by the end of next year, the rate will be 2.6 percent. The government will in-

©International Monetary Fund. Not for Redistribution 200 SUMMARY PROCEEDINGS, 1996 tensify the process of liberalizing the economy and reforming the basic sectors. Overall, the Spanish government considers macroeconomic stability and structural reforms as the most appropriate means for achieving sound and sustained growth, which will lead to employment creation combined with low inflation. The economic policies applied by Spain are fully consistent with Eu- rope's plan for achieving economic and monetary union (EMU) by Janu- ary 1, 1999, with respect not only to objectives (sustained economic growth), but also mechanisms. My government is firmly committed to the adoption by Spain of the euro from the very outset. The process of union is positive in that it constitutes the final step in the formation of the single market and provides us with a stable economic area to which we can contribute with cohesive policies implemented over the medium term. Our aim is not simply to adopt measures for achieving the objectives stated at Maastricht, but to apply economic policies to bring about lasting structural improvements and thus guarantee the stability necessary for the sort of sustained economic growth that will ensure job creation.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR SRI LANKA

G.L. Peiris

Let me, at the outset, join my fellow Governors in congratulating you on your assumption of chairmanship of these Joint Fund/Bank An- nual Meetings. Let me also congratulate Mr. Michel Camdessus on his reappointment for an unprecedented third term to steer the affairs of the Fund. It is an unequivocal expression of the deep confidence the membership has reposed in his able stewardship. We wish him all success in his most challenging tasks ahead. I also wish to join my colleagues in welcoming our newest member, Bosnia and Herzegovina, to our midst. We are encouraged by the satisfactory growth of the world economy in 1996 and its positive growth projection for 1997. Over the medium term, expansion in the global economy is expected to remain satisfactory. In general, all regions in the world show positive growth trends in 1996 and good prospects for 1997. We are particularly encouraged by the turnaround that transition economies as a group were able to achieve this year for the first

©International Monetary Fund. Not for Redistribution SRI LANKA 201 time since they embarked upon their massive reforms to transform their economies; indeed they are expected to record a growth rate of around 4 percent next year. We congratulate them on their steadfast commitment to market reform despite many daunting challenges. The rather positive outlook the world economy is showing is in fact masking many disparities that exist today, both among regions and within regions. These are only too well known to be repeated here. Most of us today are involved in macroeconomic stabilization and structural adjustment programs to strengthen our economies and put them on a more sustainable growth path. The problems we have to grapple with depend upon the unique nature of our individual countries and the specific challenges we are facing. Though it is difficult to generalize, one of the most difficult problems confronting many of us today appears to be the rather in- tractable fiscal deficits. They appear to lie at the root of most of our problems. As we all know, large budget deficits lead to crowding out private investment, increasing inflationary pressures, and widening external current account deficits. They are thus major impediments to recovery of growth and job creation. We are trying to fight our way out of this quagmire, but it is a difficult battle, as experience has shown us. Our tax systems have to be further improved and streamlined. Our expenditure has to be prioritized, and more resources have to be found for the development of human and physical capital. Moreover, the limited resources at our disposal have to be used more efficiently. We have to make the public sector smaller and allow the private sector to perform what is within its competence. Most of these measures are painful and unpopular, and demand great courage and commitment on the part of policymakers. Yet these short-term pains and hardships have to be lived through if gains in the medium and long term are to be achieved. Countries that take this difficult path, therefore, deserve help and encouragement from the international community to sustain their efforts and soften the severe hardships and dislocation that will inevitably accompany them. Talking about our own country, Sri Lanka, we have made substantial progress in our fiscal reform and structural adjustment program. To strengthen our tax administration further, we will very soon be introducing a goods and services tax (GST). We are speeding up the process of reform and privatization of the public sector enterprises. Two of the largest public sector enterprises, Sri Lanka Telecom and Air Lanka, the national carrier, will soon be partially divested. Private sector initiative is encouraged to make investments in infrastructure projects under "Build-Operate-Own" and "Build-Operate-Transfer" arrangements. Treasury cash management is being strengthened with a view to maintaining tighter control over the fiscal budget. Let me now make a few comments on the Bretton Woods institutions. We commend the initiatives taken by the Fund toward the establishment of an interim Enhanced Structural Adjustment Facility (ESAF),

©International Monetary Fund. Not for Redistribution 202 SUMMARY PROCEEDINGS, 1996 before the commencement of the self-sustained ESAF in the year 2005. We also commend the progress made by the Fund and the World Bank in developing a relief package for the heavily indebted poor countries (HIPCs). As a token of our strong support for these two initiatives, we wish to contribute as a grant the funds credited to Sri Lanka in the second Special Contingent Account (SCA-2). We hope that our colleagues here will also be able to make similar contributions, in addition to what- ever other funds they will be able to advance to the ESAF Trust and the subsidy account. If, however, sufficient funds cannot be raised for these two important initiatives, we have no objection, as a last resort, to the sale of a modest amount of gold and investing the profits toward raising the shortfall. We would, however, wish that the HIPC initiative does not lead to a reduction of the access traditional nondebtor borrowers have so far enjoyed to the concessionary funds. We welcome the successful conclusion of the eleventh replenishment of the International Development Association negotiations recently, even though we are worried about the level of funds committed. It is our hope that all donors will fulfill their commitments in time for it to take effect on a permanent basis without delay. We regret, however, that the task of funding IDA is becoming increasingly difficult. Similarly, a declining trend is observed in the flow of official development assistance resources to the developing world. In view of the increasing need for such funds and the crucial role they have been playing in strengthening the economies of many poor countries, we urge the international community to reverse these native trends soon. We are encouraged by the progress being made by all concerned parties toward reaching an agreement on the New Arrangements to Borrow (NAB). We particularly welcome the prospective new participants to this proposed arrangement. We hope that the ongoing discussions will soon lead to a satisfactory conclusion of this matter. We hope the Executive Board of the Fund will be able to reach a satisfactory conclusion soon on the Eleventh General Review of Quotas. Being a quota-based institution, a greater part of the Fund's liquidity should come from its quotas. The importance of strengthening the liquidity of the Fund, so as to make it effectively fulfill its mandate in a world of rapid globalization and fast-expanding needs of member countries, needs no emphasis. Doubling of present quotas would, in our view, satisfy this objective to a great extent. It is our fervent hope, however, that in any quota-increase exercise, greater weight should be given to an equiproportional increase. We commend the Executive Board and the management of the Fund for the substantial progress already achieved in seeking a solution to the SDR issue. We would encourage the Fund to complete the remaining work and put up its final recommendations soon. We do, however, feel that the quantum mentioned in the Managing Director's proposals appears rather insufficient. In our view, the size of the proposed new issue should be dou-

©International Monetary Fund. Not for Redistribution SWEDEN 203 ble the existing amount if it is to achieve the twin objective of meeting equity and satisfying, at the same time, the needs of many developing member countries for owned and low-cost reserves. As regards the amendment route proposed by the Managing Director for resolving this issue, we wish to reiterate our position that if unforseen difficulties or protracted delays were to occur in this path, we should fall back as early as possible on the Fund Articles to proceed with a general allocation. We welcome the further progress made by the Fund in promoting the use of the Special Data Dissemination Standard (SDDS). In particular, we commend the Fund for launching the electronic bulletin board for the SDDS a few days ago. We hope we will be able to see more progress soon in this very important area, such as the establishment of hyperlinks to connect the electronic bulletin board to individual country data sites on the In- ternet. We also hope that many of us will be able to connect with the electronic bulletin board in the near future. We encourage the Fund to expedite the work on the General Data Dissemination Standard (GDDS) too, so that it could be launched without delay. We are pleased at the progress made by the Fund in strengthening its surveillance of member countries. Taken together, the establishment of the special data standards and the enhanced surveillance efforts will no doubt make a substantial contribution toward improving the transparency, integrity, and health of the international financial system. The remarks made by the Chairman, the Managing Director of the Fund, and the World Bank President at the opening ceremony yesterday clearly emphasized the challenges we will be facing in the coming years and how the Bretton Woods institutions are preparing to face them. We wholeheartedly endorse the common message that came out of yesterday morning, that by working and sharing together more equitably the fruits of growth we can face these challenges successfully. Indeed the entire gamut of global prosperity in the next century seems to rest heavily on this simple and time-honored philosophy.

STATEMENT BY THE GOVERNOR OF THE BANK FOR SWEDEN

Erik Asbrink

Introduction I have the honor of addressing this meeting on behalf of the Baltic countries: Estonia, Latvia, and Lithuania; and the Nordic countries: Den- mark, Finland, Iceland, Norway, and Sweden. I shall focus on matters per-

©International Monetary Fund. Not for Redistribution 204 SUMMARY PROCEEDINGS, 1996 taining to the International Monetary Fund. Before I start, I would like to cordially welcome Bosnia and Herzegovina as a new member in the IMF since our last Annual Meeting.

Surveillance Since the early 1980s, we have witnessed a dramatic increase in the interdependence of our economies. In today's world, characterized by financial innovation and integrated capital markets, it is more important than ever that IMF surveillance be continuously adapted and enhanced in order to keep it as efficient as possible. Performing effective surveillance implies promoting sound economic and financial policies, and having the capacity to identify and deal with deviations from such policies in a timely manner. More- over, as we are all affected by developments outside our borders, it is also important that countries shape their policies with this in mind, in order to ensure low inflation, sustainable growth, and employment. I sincerely welcome the strengthening of the Fund's surveillance, in particular the development of the Special Data Dissemination Standard (SDDS) and the decisions to carry out a more continuous process of surveillance. This will make the IMF better equipped for facing future challenges. The quality of the Fund's surveillance depends critically on the availability of timely and reliable data. The member countries also stand to gain from providing economic and financial data to markets, since it enhances the transparency of economic and policy making performance. I am therefore pleased to see that the SDDS has been set up so swiftly. It is encouraging that as many as 36 countries have already subscribed to the Standard. Now, it is important to continue work on a set of general standards, which all Fund members should strive to meet. Technical assistance will be needed for those members that cannot meet the required minimum standards on their own. This leads me to improved transparency in a broader sense. Credibility and effectiveness in surveillance is dependent, among other things, on frankness in the dialogue between the member countries and the Fund. Moreover, effectiveness of surveillance increases all the more if the Fund's advice is candid and straightforward. We welcome the efforts made in this regard during the last year. At the same time, I believe that additional steps toward increased openness would strengthen surveillance and also contribute to a more informed public debate. Making Fund advice on surveillance issues available to the public and to the markets in appropriate ways could be part of such a strategy. The issue of openness is delicate, but I do believe that it is possible to find solutions that permit increased openness while preserving the confidential nature of the dialogue between the Fund and its members. It is therefore my view that the matter deserves the continued attention of the IMF's Executive Board.

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IMF's Financial Resources Let me now proceed to the second "pillar" of the Fund's activities— provision of financial assistance. I would like to underscore the importance of an adequate expansion of the IMF's resources to match the potential needs of members in today's global economy. The eleventh review of the Fund's quotas was initiated in early 1995. In view of the projected sharp fall in the Fund's liquidity through 1997 and early 1998, most members today favor a substantial increase in quotas—so do the members of my constituency. Therefore, I find it unsatisfactory that very little progress has been made so far in this review. It is imperative that work on this issue be accelerated with the aim of reaching an early conclusion on a substantial quota increase. Quotas should continue to be the Fund's prime source of financing. However, the speed with which financial crises develop in interdependent economies, as well as their size, underlines the need for a substantial strengthening of the Fund's financial resources. The agreement in principle that has been reached on the New Arrangements to Borrow (NAB) will give the Fund the financial ability to deal with crises of this magnitude. We welcome the fact that a broader group of countries has agreed to support the Fund by participating in this new arrangement. Having said that, it is essential to underline that expanded borrowing arrangements can never be a substitute for a quota increase.

ESAF/HIPC Another aspect of the Fund's resource needs concerns the future financing of the Enhanced Structural Adjustment Facility (ESAF) operations. I would like to emphasize my strong support for the ESAF as the centerpiece of the Fund's strategy to assist its poorest members. I welcome the recent un- derstandings regarding the financing of the interim ESAF and the Fund's participation in the initiative for the heavily indebted poor countries. This is an important step in the work toward implementing the initiative. The recent progress made in the Paris Club also paves the way for a balanced overall agreement based on a combination of bilateral and multilateral contributions. I hope that the creditors in the Paris Club will apply considerable flexibility and tailor the debt relief to the specific circumstances of individual countries.

Changing the Articles of Agreement In spite of the rapid and profound changes in the Fund's external environment, the Articles of Agreement have stayed remarkably relevant. They have provided the Fund with a solid mandate, but also with sufficient flexibility to allow the Fund to adapt to new challenges. But, over the last years, a number of proposals for reform have been put forward that would require a

©International Monetary Fund. Not for Redistribution 206 SUMMARY PROCEEDINGS, 1996 change of the Articles. Most recently, the discussions on the SDR issue show that a solution to the so-called "equity problem" will require such a change. A review of the Fund's Articles has to be carefully prepared. Otherwise, there is a risk that the discussion will be very time consuming and complicated, with too many competing proposals. We also need to be certain that any changes that we decide upon today will stand the test of time many years from now. In order to have a reasonable chance of success, a review of the Articles has to be limited to a relatively small number of well-defined issues. In fact, an agreement on which issues to include should be a precondition for going into discussions on substance. In particular, I believe there are three such issues that merit consideration. • The first area to be considered is the SDR issue. Here, I welcome the Executive Board's recent agreement on the broad principles of a solution to give all Fund members a stake in the SDR Department. This solution, based on a one-time allocation, will eventually require an amendment of the Articles. • A second issue is capital account convertibility. The present Articles were agreed upon in a different environment. Since then, the importance of capital account issues has increased, and recent experience points to the minimal effectiveness of exchange and capital controls. There are good arguments for reviewing the Fund's jurisdiction in this area. • A third candidate is the system for financing the costs of the Fund. The widespread interest in moving to a more transparent and equitable system argues for including this matter in a review of the Articles. To sum up, even if a review of the Articles may run the risk of opening up for discussions too many issues, there are still substantial benefits to gain in the long term. It is clear to me that it is not a question of if, but rather a question of when, to undertake this review. The time is now ripe for starting serious work.

STATEMENT BY THE ALTERNATE GOVERNOR OF THE FUND FOR SWITZERLAND

Kaspar Villiger

It is an honor and a pleasure for me to attend the Annual Meetings of the Bretton Woods institutions for the first time, and it is a privilege to ad-

©International Monetary Fund. Not for Redistribution SWITZERLAND 207 dress this distinguished audience. Let me especially welcome Bosnia and Herzegovina as a new member of our institutions. Today, the international community faces considerable challenges. We must strive toward price stability at a time when the consequences of monetary policies are increasingly difficult to predict. We must balance our budgets, while not failing to meet our responsibilities toward the most vulnerable members of society. We must achieve economic growth, and this inevitably requires painful structural adjustments. By addressing these issues with foresight and with good common sense, we can turn these challenges into an opportunity: we can lay the foundations now for high- quality sustained growth. In industrialized countries, economic growth in 1996 has remained uneven. In Europe, growth is lower than we had hoped for, and we are making little headway in fighting unemployment. Fortunately, receding inflation has allowed restrictive fiscal policies to be tempered by more expansionary monetary policies. Almost all countries in transition have already crossed —or are about to cross— the pass leading to a market economy and economic growth. Al- most all have managed to recover control over their monetary and budgetary policies. These countries deserve high praise for their determined policy stances. To consolidate the progress achieved so far, it is now crucial to move ahead rapidly with difficult reforms in the structural area. This will ensure that these countries fully reap the benefits of their efforts to date. The developing world, in its diversity, faces different problems. There are countries in Asia and in Latin America that are now struggling with the consequences of their impressive growth performance over the last years. In Africa, several countries achieved positive growth rates; others are destabilized by political turbulence, causing their development to suffer serious setbacks. Furthermore, growth prospects for many African countries are hampered by the effects of unsustainable levels of external debt. In this context, I warmly welcome the Bretton Woods institutions' determination to help meet the challenge the most heavily indebted poor countries of the developing world are facing. The initiative to assist these countries is an excellent example of constructive cooperation between the World Bank and the Fund. I fully endorse the initiative. It is crucial that debt sustainability be targeted on a case-by-case basis for countries with a convincing track record of sound economic policy and that the preferred creditor status of the multilateral financial institutions be preserved. In this context, it is essential that bilateral creditors contribute according to their share of the outstanding debt. Although some of the modalities regarding the participation of the various creditors in the initiative remain unclear, important steps have been taken. The World Bank has set aside $500 million to fund its initial contribution. The Fund will contribute to the initiative through the Enhanced

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Structural Adjustment Facility. We welcome the agreement reached on the continuation of this concessional financing mechanism, which is the centerpiece of the Fund's strategy to help low-income countries. As regards the general financial resources of the Fund, we feel that the work on the Eleventh General Review of Quotas should be completed at the time of the next Annual Meeting. The New Borrowing Arrangements, which are presently being negotiated, should also become operational at that time. Notwithstanding this substantial future increase in financial resources, we remain convinced that prevention is the best protection against possible crises. We therefore welcome the strengthening of Fund surveillance. We have been favorably impressed by the decisive progress made in establishing data dissemination standards. Lastly, we encourage the Fund to pursue its efforts to improve its transparency and its accountability. In this respect, we particularly welcome the decision to ask outside experts to evaluate activities of the Fund. Turning to the World Bank Group, we must acknowledge the crucial support it can provide to communities and governments willing to take advantage of the opportunities offered by a growing and multipolar world economy. Beyond the general attention devoted to macroeconomic and sectoral policies, we believe that the Bank's major priority should continue to be poverty reduction. While during recent years hundreds of millions of people have been able to raise their living standards above subsistence level, many more continue to endure inhuman living conditions. The absolute number of people surviving on less than one dollar a day has increased. This is not acceptable. It is our common responsibility to build upon the results already achieved and to give hope to those thus far excluded from the expanding prosperity. Sub-Saharan Africa occupies, in this context, a special position. The continent is not getting sufficient attention from bilateral partners. This increases the role and the responsibility of multilateral organizations. There- fore, we feel that the special program for Africa should be a continuing priority for the International Development Association (IDA). Indeed, a renewed commitment is justified by the sound economic policies consistently implemented by several governments of the region. The ongoing program of operational renewal will certainly improve the World Bank's effectiveness. This will increase the credibility of the institution in financing projects and giving advice to governments. We are confident that the development of new tools for controlling, monitoring, and evaluating operations will enhance efficiency and ultimately strengthen borrower ownership. The private and public sectors can both contribute to achieving development and growth, each in its own way. Significant volumes of private capital flow to countries that have established favorable economic and in-

©International Monetary Fund. Not for Redistribution THAILAND 209 stitutional environments. Even in these cases, the advice and financial support of the Bretton Woods institutions continue to be necessary. In a large number of poor countries, policy reforms and the creation of basic infra- structures, which would be necessary to attract foreign private capital, are still lacking. In these situations, the demand for resources and services of the International Finance Corporation (IFC) and the Multilateral Invest- ment Guarantee Agency (MIGA) is increasing. Unfortunately, the expansion of both IFC's and MIGA's cooperation with the private sector is beginning to be constrained by their limited capital bases. We believe that the time has come to reconsider their financial position. Looking back over a year of intense work in the Fund and in the World Bank, I wish to express the gratitude of the Swiss authorities to the management and the staff of both institutions for their professionalism and their dedication.

STATEMENT BY THE ALTERNATE GOVERNOR OF THE BANK FOR THAILAND

M.R. Chatu-Mongol Sonakul

I am honored to have the opportunity to address the Joint Annual Meetings of the Governors of the Bank and the Fund. At the outset, allow me to congratulate the heads of both institutions for another successful year. At the Bank, Mr. Jim Wolfensohn brought with him a strong leadership, clear vision, and compassion for development. I wish him and his management team continued success in their work, particularly in poverty reduction. My congratulations also go to Mr. Michel Camdessus on his reappointment as Managing Director for an unprecedented third term. Let me turn briefly to the global economy. The outlook has been mixed with continued low inflation and interest rates providing good opportunity for growth. However, the slowdown in world trade in the past year poses considerable challenges to many developing countries as their export earnings and growth rates declined. We hope that this is a cyclical phenomenon and that trade expansion will resume. As it is in the interest of all countries to ensure a sound global economic environment conducive to growth, we urge the industrial countries to further improve market access for goods of export interest to the developing countries. The economic development of Thailand in 1996 has been affected by the trade slowdown. The growth rate is expected to be around 7 percent, compared with 8.6 percent in 1995. The soft landing provides a welcome

©International Monetary Fund. Not for Redistribution 210 SUMMARY PROCEEDINGS, 1996 relief from incipient domestic and external pressures. The inflation rate continues to fall after a peak of over 7 percent earlier. The current account deficit has been addressed through several measures and is showing encouraging signs of abatement. Debt profile—a cause of recent concern— is closely monitored with a view to reducing the short-term debt to a more appropriate level. The government is committed to the policy of a stable exchange rate, which has served as a main pillar of Thailand's economic policy. A fiscal surplus has been recorded for nine years in succession. In- ternational reserves are at a comfortable level of around $39 billion or six and a half months of imports. In short, the government is committed to the policy of promoting growth with stability. For the long-term policy initiatives, efforts have been increased to strengthen our human resource base, to redistribute income and wealth, and to reform the financial sector and other important economic sectors. Let me now turn to the issues related to the policies and operations of the Bank. For decades, the Bank's overarching objective has been poverty reduction. We commend the strategy that emphasizes broad-based growth and investment in education, health, and social services as well as through target intervention. I reaffirm Thailand's support for the heavily indebted poor countries (HIPC) debt initiative. However, I wish to emphasize that appropriate burden sharing must be a condition for the Bank's full involvement and urge donor countries who support the initiative to make their fair contribution to the trust fund. I welcome the Bank's policy initiatives responding to client needs, including the expansion of currency choice of loan products. However, we caution the Bank on its increasing emphasis on the issue of governance. The policies of the Bank must be realistic and consistent with the Articles of Agreement. While we are in support of several initiatives proposed by the management, we must also recognize that the institution is cooperative in nature and, as such, should be shaped by shared vision and benefits. In this respect, I wish to urge the management to seriously consider the increase in interest waivers for merit IBRD borrowers. I also see the merit for the Bank to provide softer windows for the social sector loans and poverty alleviation in order to encourage IBRD borrowers to borrow for such purposes. Lastly, with respect to investment guarantee operations, I feel that the Bank should avoid setting up new institutions that would undertake similar tasks when the expertise is already available in the Multilateral Invest- ment Guarantee Agency (MIGA). Let me now speak briefly on issues related to the Fund. The initiative in launching the Special Data Dissemination Standard (SDDS) is commendable. The SDDS, through the bulletin board will provide the market with accurate and timely information. The rapid transmission mechanism

©International Monetary Fund. Not for Redistribution TONGA 211 will also help to avert any misunderstanding or panic reaction from the market. Thailand has subscribed to the SDDS and is committed to the development of transparent and timely economic and financial information. We welcome the progress on the proposal for the New Arrangements to Borrow and see this as a symbol of close cooperative spirit to safeguard the international monetary system against global disturbances. We strongly urge the Fund to expedite the Eleventh General Review of Quotas to ensure adequate financial assistance to all members. Due regard, however, must be given to issues concerning size and distribution. Adequate considerations should be given for selective increases to bring members' actual quotas more in line with the size of their economies and, in appropriate cases, allow for ad hoc increases for the "out of line" cases. The Enhanced Structural Adjustment Facility will continue to be instrumental in assisting the poor and heavily indebted countries. We urge that a meaningful solution be reached for its continued financing so that those countries that make good progress in economic reforms can continue to benefit from the program. On the issue of SDR allocations, we believe that the challenges of globalization and greater openness, together with the need to address equity considerations, call for significant strengthening of member countries' own reserves. We therefore support the Managing Director's proposal and hope that some members will consider their positions in a spirit of compromise, and that consensus will be reached soon. The Bank and the Fund will be facing a large agenda and difficult challenges in the years ahead. We wish both institutions every success in their pursuit of stable global economy and development goals.

STATEMENT BY THE GOVERNOR OF THE BANK FOR TONGA

K.T. Fakafanua

I am honored to represent the government of the Kingdom of Tonga at the Fifty-First Joint Annual Meetings of the International Monetary Fund and the World Bank Group. I congratulate Eduardo Aninat, Governor of the In- ternational Monetary Fund and the World Bank Group for Chile, on his ap- pointment to the Chair. I also join other Governors in welcoming the delegation from Bosnia and Herzegovina, attending these Annual Meetings in the capacity as a member for the first time, and to the delegation from Brunei Darussalam, who joined the Fund and the Bank during the Annual Meetings last year. On behalf of my delegation, I would like to thank the Managing Di-

©International Monetary Fund. Not for Redistribution 212 SUMMARY PROCEEDINGS ,1996 rector of the Fund, the President of the Bank, and the management and staff of both institutions for the excellent arrangements made for the meetings. The political and economic changes taking place around the world today are affecting the international and regional environment. The Bank, in its May 1996 report entitled Global Economic Prospects and the Devel- oping Countries, suggests a likely acceleration in the pace of international integration over the next few years—even compared with the rapid pace of the past ten years. Real interest rates will be moderate, and the growth of world trade is likely to exceed 6 percent a year in volume terms, faster than at any time since the 1960s. Trade remains essential to the economic well-being of many developing countries whose economic performances are tied inextricably to developments in the industrial world. Prolonged recessions, distortions in energy prices, and other major global disequilibria have the potential to exert a profound and negative effect on growth prospects in developing countries, as do changing trade relations between nations. The rise of many new and potentially exclusionary trading blocs brings with it the possibility of a disruptive impact on world trade, particularly affecting the trading patterns of developing countries. Given the dramatic reshaping of the world's economic and political scene, a number of distinct issues now confront us, such as the increased competition for foreign aid and loan assistance—both private and public, bilateral and multilateral. This is because, while the demand for financial resources by countries around the globe has by no means increased, the pool of available funding has not significantly increased either. Turning now to my country, the Kingdom of Tonga is endeavoring to restructure her economic and social environment in a manner consistent with the changing global environment. During 1996, the government has given priority to enhancing private sector development through a review of the public sector. Concurrently, efforts are being directed toward, inter alia, diversi- fying the country's export base and markets, and improving infrastructure and tourism facilities. On the external front, the government is reviewing its trade policy in line with arrangements under the World Trade Organization. The year 1996, however, has not been without problems for the King- dom. The drought of 1995 brought about an economic growth rate of around 1.7 percent, compared with the more favorable rates attained in previous years. The relatively low export receipts of 1995, coupled with the rapid expansion in domestic credit to the private sector, have had an adverse effect on the country's external foreign reserves position. This has called for major efforts by the government to ensure fiscal and monetary discipline during the year. Allow me now to touch briefly on Bank issues. We join other developing member countries in urging the donor community to give its full support to an increase in the International Development Association (IDA)

©International Monetary Fund. Not for Redistribution TURKEY 213 resources, and in particular, to ensure that favorable consideration is given to small island developing member countries, given the unique problems they face. In this respect, we urge the World Bank and other lending institutions to give special consideration to the economic vulnerabilities of the small island developing countries so that access to loans, grants, and other forms of assistance are based on appropriate and realistic measures. On the issue of private sector development, we acknowledge the proactive developmental and catalytic role played by the International Finance Corporation (IFC) in the Pacific region, and the financial assistance provided by the governments of Australia and New Zealand for that purpose. Turning now to Fund matters, we join other developing member countries in supporting the Managing Director's proposed compromise package on the issue of the SDR allocation. On the financing of the self-sustaining Enhanced Structural Adjustment Facility (ESAF) and the heavily indebted poor countries (HIPC) initiative, we, like many other developing member countries, urge a quick and effective resolution of these issues. With respect to the Fund's technical assistance program, we are concerned with the tightening of the Fund's operating budget and consequent cuts in allocations for technical assistance, particularly with regard to the allocation for the Pacific region. In this regard, we would like to acknowledge the valuable assistance provided by the Pacific Island Finan- cial Technical Assistance Facility based in Suva, Fiji, and pledge our support for its continuity. In closing, I wish to reaffirm the commitment of the government of the Kingdom of Tonga to the pursuit of sound economic and financial policies with a view to creating the conditions for sustainable growth and improving the welfare of our people. As the Fund and the Bank play a lead role in providing structural adjustment policy advice to their member countries, we urge them to bear in mind that the net effects of the changes in the global economic environment on individual small island developing countries such as ours will vary according to their differing resource endowments, socio- cultural conditions, level of development, and economic strategies.

STATEMENT BY THE GOVERNOR OF THE FUND FOR TURKEY

Ufuk Soylemez

The Fund's analysis of the world economic situation is on the whole quite positive. Economic growth is expected to increase to 3.8 percent in 1996 from 3.5 percent in 1995, with inflation remaining under control.

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We are also pleased to see that the global expansion will continue, though trade growth will slow somewhat as the effects of trade liberalization, financial globalization, and cyclic recovery level off. National economic policies have also remained appropriate, with most countries actively pursuing medium-term stability targets broadly in line with the common strategy outlined in Madrid. While stabilization efforts have been relatively successful, the same is not true in the area of deficit reduction. Continued complacency in the face of this problem will jeopardize the otherwise favorable world outlook. The urgency of correcting domestic imbalances and bottlenecks is increased by the global integration of the financial markets. In today's highly integrated world, the best way to promote trade and sustainable growth is to convince everyone that sound policies make a difference. Very timely for this reason is the launching of the Fund's Special Data Dissemination Standard (SDDS), which will encourage members to publicize their economic and financial data. Having to seek access to the international financial markets, my country of Turkey well understands the importance of high-quality economic and financial data and subscribed to the SDDS in early August. Given existing uncertainties about future demand for Fund resources, it is important for the Fund to remain strong at all times. An early decision on the Eleventh General Review of Quotas is needed to improve the Fund's liquidity position more durably. The ESAF has proved itself a valuable vehicle for assisting the poorest members to undertake structural adjustments. We therefore support its continuation. It is particularly regrettable that the debt situation of the poorest countries has not improved. The international community needs to increase the supply of concessional resources and work to create a more favorable economic climate so that these countries can reach higher rates of sustainable growth. Let me now turn to recent developments in the Turkish economy and outline Turkey's short- and medium-term outlook. GNP growth of 7.5 percent is expected for 1996. Prices are expected to increase by 75 percent, adjusted with the GNP deflator. Ex- ports should increase by 11 percent to US$24.4 billion. Imports should reach $44.5 billion. Taking account of invisibles, the projected current account deficit is $6.8 billion, or 3.75 percent of GNP. Foreign direct investment will fall by 16 percent to $650 million. Medium- and long-term loans are expected to produce inflows totaling $4.5 billion. An additional $4.5 billion is expected from short-term capital flows. It is expected that all this will translate into a $4.4 billion increase in international reserves. The consolidated budget deficit for 1996 is expected to amount to TL 1301 trillion, equivalent to about 8.8 percent of GNP. The budget as-

©International Monetary Fund. Not for Redistribution TURKEY 215 sumes that both expenditures and revenues will rise, by 5.1 percent and 0.4 percent respectively. More than half of Turkey's total targeted foreign borrowing for the year has already been accomplished. Borrowing from the international capital markets has reached $1.9 billion, two-thirds of the amount targeted for the year. This leaves a comfortable amount of room for maneuver during the balance of the year. The management of short-term debt has become quite efficient, and an increase in market confidence was visible following the announcement of the recent package. Although Turkey's external debt rose in 1995, all relative measures of indebtedness improved. The ratio of debt to GDP, which had been 41.8 percent in 1994, fell to 34.5 percent in 1995. The debt exports ratio and the debt service/exports ratio also improved. The debt exports ratio, at 176.6 percent, was the lowest in more than a decade, and the debt service/exports ratio fell despite heavy principal repayments in 1995. Despite the relatively favorable external position, however, the accumulating problems in the fiscal sector are a source of concern. However, with emergence of a consensus on the nature and causes of these problems, they do not seem insurmountable, and it is expected that the process of structural reform will now gain momentum, especially in the fiscal area. The European Union is already an important source of foreign investment capital. Once Turkey joins the Customs Union, it is expected that foreign capital investment will rise in response to increased opportunities for trade and production and to the harmonization of production standards and competition regulations. This will help increase employment, provide a source of technological modernization, and expose Turkey to the benefits of increased competition. In the structural area, the law that permits the privatization of the Telecommunications Company has been passed by Parliament, and the law on the Special Consumption Tax was submitted to Parliament in 1996. To offset the losses due to elimination of some charges and import duties, tax rates were increased for automobile purchases, imported tobacco and alcohol, and petroleum products. A Special Consumption Tax aimed at replacing about 10 excise taxes and increasing the efficiency of excise tax collection is scheduled for parliamentary discussion. Other tax measures under consideration are a 1 percent increase in the standard VAT, now awaiting approval by the cabinet; a law for taxing capital gains on urban real estate; and changes in the commercial and banking codes to tax unregistered activities. The Treasury's ability to obtain Central Bank financing of budget deficits is gradually being reduced and by 1998 will reach its new level of 3 percent of the annual increase in its budgetary appropriation. In this environment of contrary economic trends, Turkey is gradually becoming a regional economic power in a very active "eco-strategic" area.

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We expect to share the benefits and the advantages of this privileged position with our fellow members of the European Union in a relatively near future. As it approaches the twenty-first century, the world economy is undergoing an interesting transformation. The former centrally planned economies are seeking liberal market reforms. The western industrial economies are facing the rigors of regionalization and globalization. And the rather surprising takeoff of many southeast Asian economies has demonstrated new evidences of vigor and dynamism.

STATEMENT BY THE GOVERNOR OF THE BANK FOR UKRAINE

Victor M. Pynzenyk

Allow me, on behalf of the leadership of Ukraine, to wish success to the new member of the IMF and the World Bank, Bosnia and Herzegov- ina, which has also joined our constituency. This year, Ukraine, in close cooperation with the IMF and the World Bank, has passed several remarkable milestones in economic reforms. More than half of our GDP comes from the private sector for the first time. By mid-1996, we had completed our small-scale privatization, after 90 percent of all small state enterprises had been sold. Since March, shares in about 400 large- and medium-sized enterprises have been auctioned off each month. Now our aim is to move on to land reform. More important, 1996 stands out as the year when Ukraine finally managed to get inflation under control. In 1993, Ukraine faced hyperinflation of 10,155 percent. Therefore, Ukrainians have learned to hate inflation, and the control of inflation is the main priority for the Ukrainian President, the government, and the National Bank. Monthly inflation was brought down to 0.7 percent in May, and to a mere 0.1 percent in June and July. In- flation rose somewhat in August owing to a radical reduction of subsidies of communal services. Underlying inflation remained under 1 percent. Last month we successfully introduced our national currency, the hry vnia. Financial stabilization has had other positive effects. The exchange rate of the Ukrainian currency has actually appreciated by 10 percent in nominal terms since the beginning of the year. The average dollar wage has tripled in the past one and a half years, from a very low level. The people of Ukraine have benefited from stabilization in many other ways as well. These accomplishments are quite visible, thus facilitating the government's efforts to move on with further reforms. Implementation of reforms was also facilitated by two other factors—adoption of the new Constitu- tion of Ukraine this June, and a two-year horizon before the next election.

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The leadership of Ukraine is fully aware that financial stabilization is the necessary precondition of successfully addressing this challenge, but only deep structural reform can lead to sustained economic growth. We are now, therefore, working hard to create a favorable environment for both domestic and foreign investors, while maintaining financial stability. To this end, substantial institutional and structural reforms are envisaged. Tax reform is an urgent requirement. The highest tax rates on incomes and payrolls should be reduced, while the tax base should be broadened and tax collection improved. At the same time, budget expenditures must be reduced to further diminish the budget deficit. While the Ukrain- ian economy is already largely liberalized, the deregulation will go further and become more effective. Ukraine is actively working on the development of a medium-term program, which can be supported by the Extended Fund Facility (EFF). We expect to start implementing this program by this year's end. The Ukrainian leadership wants structural measures to be rigorous enough so that Ukraine can return to growth in 1997. Together with the World Bank, we have concluded major programs on privatization, and an energy and agricultural reform. We are developing programs on public sector reform and financial sector restructuring. The coal sector restructuring project, which we expect to become operational soon, envisions the rapid closure of 50 coal mines. But in addition, we face the challenge of closing 100 such loss-making mines. These measures are important, as well as painful, and we need substantial support from the international community of donors and creditors to undertake them, especially while Ukraine's international reserves remain low and the balance of payments is negative. I want to use this occasion to appeal to bilateral donors, especially the European Union, the United States, and Japan, to assist us with bilateral balance of payments support for the next year at the Consultative Group Meeting to be held on October 24-25 in Paris. As our economy has just started to recover, trade becomes the most important issue. This year, Ukrainian exports are rising sharply, as the Ukrainian foreign trade regime has been liberalized. However, we are facing substantial problems with protectionism from other countries. We need international support to deal with these problems, and although it has been two years since Ukraine applied for membership in the World Trade Orga- nization (WTO), little progress has been achieved. We would appreciate it if the Bretton Woods institutions would support us in resolving the outstanding trade problems and would assist us and our neighbors in joining WTO as soon as feasible. I would like to conclude my statement by underlining my government's firm commitment to successful economic reforms in Ukraine and further close cooperation with the IMF and the World Bank.

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We welcome the ideas from the World Bank to offer more client- oriented instruments, such as single-currency loans, which will lower our cost of World Bank loans. We hope that the IMF would also be in a position to assist more effectively new emerging-market economies in undertaking radical restructuring, and, thus, to expect the Eleventh General Review of Quotas to be completed soon. My government also counts on an additional SDR allocation to achieve greater equity among the IMF member countries.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR THE UNITED KINGDOM

Kenneth Clarke

Introduction I would first like to thank the IMF and World Bank staff for the excellent organization of these meetings. I look forward to next year's meetings in Hong Kong. I would also like to congratulate Michel Camdessus on his reappointment to an unprecedented third term.

Multilateral Debt Initiative Two years ago, I brought to these meetings a proposal to reduce the burden of multilateral debt on some of the very poorest countries that are following successful economic development programs. Since then, we have addressed the problem that unsustainable debt causes in many of the poorest countries and agreed that, for some countries, existing mechanisms will not be enough to solve the problem. Two years on, we have finally come up with a proposal that can release these countries from unmanageable debt burdens. And we have secured an undertaking by the three major creditors—the IMF, the World Bank, and the Paris Club—to finance this proposal. We all owe our thanks to Jim Wolfensohn and Michel Camdessus for their energy and dedication in bringing us to this point. By the standards of global international diplomacy, that is a lot to accomplish in just two years. But it is not yet enough. The IMF and the World Bank must now focus on implementation. Each creditor must take the necessary steps to ensure that they coordinate their actions. And those countries that have already demonstrated a substantial commitment to economic reform must continue their efforts in order to qualify for enhanced relief.

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I hope that the implementation of debt-relief measures for the most impoverished and best-performing countries will now be pursued with some urgency. Each country must be considered sensibly and flexibly on a case-by-case basis without the over-rigid application of bureaucratic rules. Countries that have already demonstrated a good track record should not be obliged to wait for long for further help. I look forward to immediate action and to the first tranche of eligible countries' being well on their way to an exit from their burdens of unsustainable debt before our spring meetings.

Trade Policy The opening of markets and the expansion of international trade have brought substantial increases in living standards in the postwar era. The General Agreement on Tariffs and Trade (GATT), and now the World Trade Organization (WTO), are the bulwark against protectionism the world over. The first WTO ministerial meeting in Singapore represents an opportunity to continue the momentum toward multilateral liberalization and to move toward realizing the vision of global free trade. This is in all our interests, both developed and developing countries alike. I hope the WTO Ministers will endorse a broad liberalizing agenda to implement the Uruguay Round. I welcome the imaginative proposal by Mr. Ruggiero for abolishing the tariffs on exports from the least- developed countries. I also want to see the start of preparations for further negotiations on agriculture and the implementation on time of the WTO Agreement to dismantle the protection of the textile sector. We must also resist all attempts to link standards on labor and social affairs to trade policy. Action on debt and action on trade are both essential components of our efforts to involve some of the poorest countries more effectively in the modern global economy. They do not replace the need for official development assistance for the poorest of the poor countries of the world. But, in the long run, they will be the most effective way of raising the living standards of those in deepest poverty by paving the way to economic development of the kind that has so improved the prospects of people living in the emerging economies of southeast Asia and Latin America.

Private Capital Flows and IMF Articles of Agreement Over the last decade, private capital flows have increased enormously. These flows have already brought great benefits, particularly to a dozen or so countries now enjoying rapid growth. But I want to see these benefits also spread more widely and more securely across all countries. That means pressing on carefully with capital liberalization.

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Within the Organization for Economic Cooperation and Development (OECD), we have done a great deal to liberalize capital movements, and the European Union (EU) has prohibited all restrictions. At the IMF, too, capital account issues are becoming more prominent in surveillance and program design. But the Fund does not have an explicit mandate to promote further liberalization. The Articles were framed for a world of limited private capital mobility and widespread capital controls that is now long gone. They now need to be brought up to date to reflect the Fund's changed role in a transformed world. In my Interim Committee speech, I called for the scope of Article I to be widened so that the Fund would encourage all members, over time, to liberalize capital account payments. Other Articles would need amending too, to bring them into line with this new mission. I hope that the Board will make early progress on this issue, so that we can consider specific proposals at the spring meetings next year. As we continue with the process of capital liberalization, we must, at the same time, adapt our policies to cope with the new challenges that greater capital mobility will bring. For example, we need to strengthen the supervision and regulation of the financial system in many countries. And, of course, we need to work out how to manage domestic economic policy in the face of strong capital inflows. The IMF and the World Bank have key roles to play here. They can advise on the implementation of standards for regulation and supervision and give technical assistance to countries trying to improve their procedures. And we look to the IMF to distill, disseminate, and help members implement the lessons we have already learned about the management of domestic policy in the face of liberalized capital flows.

World Bank Management Ensuring that the international financial institutions continue to adapt to the changing circumstances in which they operate is one of our key objectives. I congratulate President Wolfensohn on his efforts to initiate reform at the World Bank within a context of continuing budgetary discipline. His aim of an organization that focuses more clearly on results and is more suited to the modern world of liberalized capital flows is one that we all share. If these aims are to be achieved, it is important that specific goals be set, against which the Bank's performance and the progress of the change initiative can be measured. In particular, I welcome the Bank's continuing effort to improve the coordination of its private sector activities.

Money Laundering In recent years, we have been working very closely with other countries to increase our efforts to tackle the threat posed by money laundering. We

©International Monetary Fund. Not for Redistribution UNITED KINGDOM 221 take this threat very seriously, because it has a key role in protecting against the proliferation of serious crime. But money laundering also has significant implications for sustained economic growth and financial stability. This is a problem that can only be effectively tackled on a fully international basis. International criminals will always seek out the vulnerable financial centers while any remain. Recent work done by the IMF shows convincingly how clamping down on money launderers will protect countries' economic reform programs against serious dangers. • Reliance on short-term criminal money reduces confidence in the financial sector. It deters legitimate business. In turn, this damages liquidity and competitiveness and, ultimately, the country's scope for growth. • Illicit flows can be unpredictable and volatile and can obscure trends in legitimate investment. This creates misleading signals, which lead to policy mistakes. • Money laundering also has damaging supply-side effects. Dirty money will look for a home in businesses offering protection from the law, rather than in enterprises offering the best economic prospects and investment returns. • And last, but by no means least, anti-money-laundering controls can increase the tools available in the fight against tax evasion. Over recent years, the work that the Financial Action Task Force (FATF), and other organizations inspired by the FATF, have done on money laundering has been invaluable. I hope that this work can be taken forward in three key ways. First, I believe that all countries' anti-money-laundering systems and procedures must strive to meet the highest international standards. That means the benchmarks set by the FATF. The FATF has recently updated its 40 recommendations to reflect changes in the money-laundering threat. I fully endorse these changes. Second, the work of the FATF over the last few years shows how "peer group" pressure and encouragement can help to spread best practice in the international fight against money laundering. So, I believe we should actively support the establishment of regional anti-money-laundering review groups, modeled on the Caribbean FATF, to enable all countries to monitor each other's progress in the future. Finally, given the economic and financial damage that money laundering can do, I strongly urge the IMF, the World Bank, and other international financial institutions not only to offer advice and technical assistance but to take fully into account progress in introducing anti-money-laundering controls, in line with the FATF standards, in their regular surveillance of members' economies.

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Taken together, these measures will reduce the hiding places for dirty money—an important contribution to both the worldwide battle against organized crime and to the increased stability of the world financial system.

Surveillance and Data Standards Macroeconomic surveillance is rightly at the very core of the IMF's role. It is vital that the quality of surveillance be maintained and enhanced if we are to stand the best chance of preventing financial crises and promoting sustainable economic growth. One way in which the Fund has answered this call is by establishing the Special Data Dissemination Standard (SDDS). I fully support the move toward greater openness in economic policymaking and surveillance in order to improve the quality of economic debate in our countries, as well as improving the flow of reliable information to investors and markets. I am pleased to say that the United Kingdom was the first country to subscribe to the new data standard. Now, over 30 other countries have followed our lead. The next step will be the establishment of a basic standard, which all Fund members should strive to meet. I am also keen to encourage continued improvements in the surveillance conducted by the Fund during Article IV consultations. Here, we have been pressing for franker, more focussed reports and Board discussions. In my view, this frank and independent advice is one of the key benefits of being an IMF member. This summer, I became the first U.K. Chan- cellor to publish the Concluding Statement of the Article IV mission to the United Kingdom. I would urge others to do the same. A logical next step would be to publish the Chairman's summing up of Board discussions of Article IV reports. The United Kingdom continues to support an IMF policy change that would allow this. I am aware that some members fear that frankness would be inhibited. If our experience with publishing the Concluding Statement is anything to go by, this should not be a problem in practice.

The World Economy World economic and financial conditions are very encouraging. The IMF expects the global economic expansion to continue at a satisfactory pace next year and over the medium term. The strength of the economic recovery has been particularly impressive in the emerging economies. Among most industrial countries, inflation has remained under control, but growth and labor market performance have remained uneven. Continental Europe has been particularly disappointing. The United Kingdom is now doing better than any of its major Euro- pean partners. The British recovery came sooner and has been steadier and

©International Monetary Fund. Not for Redistribution UNITED KINGDOM 223 stronger. And we are reaping the benefits of over a decade of labor market reform. We have a lower rate of unemployment and a higher proportion of our people in jobs than any other major European country. Our industrial relations have never been better. Our living standards are rising, and our social standards remain intact.

The U.K. Economy The IMF agrees with me that the United Kingdom will be the fastest growing major European economy this year and next. The IMF forecast for the United Kingdom confirms the broad picture set out in my latest official forecast, published in the summer. We expect activity to continue to gain momentum this year, as consumer spending continues to strengthen and as business investment revives. I expect the U.K. economy to grow by 3!4 percent next year, without prejudicing our ability to meet the target I have set of reducing inflation to 2Vi percent or less by the end of this Parliament. What is more, I believe that we can go on delivering the above trend growth over several years, as we close the output gap, without inflation reemerging. I have said before—and I firmly believe—that these are the healthiest set of economic prospects we, in Britain, have seen in a generation. It is 20 years ago, almost to the day, that a British Chancellor, Denis Healey, on his way to address the IMF Annual Meetings, turned back from the airport. He returned to face the worst postwar crisis in the British economy. When Denis Healey did finally speak to the IMF, it was to negotiate a massive loan in return for his agreement to make huge cuts in British public spending and capital investment programs. This ironic anniversary is the best evidence of the scale of the reform of the British economy over the last two decades. This recovery has broken the mold of previous British recoveries: • During the 1970s recovery, it took more than two years for unemployment to begin to fall. In the early 1980s recovery, it took 5]/2 years. In this recovery, unemployment started falling after only one year. And it has gone on falling: down by nearly 900,000 in total. The IMF shares my belief that we can go on bringing unemployment down without any increase in inflation. • During the early 1980s recovery, the U.K. economy met reviving demand by sucking in imports. Eventually, we found ourselves with a yawning gap in our current account. In this recovery, imports have grown, but exports have grown faster. Our current account is broadly in balance. In the latest quarter, we enjoyed our best current account performance for nine years. • We are now in the fifth year of our recovery, and there are no significant signs of inflationary pressures. This has enabled me to keep interest rates close to their lowest level for 25 years.

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• During the 1970s recovery, earnings growth never fell below 10 percent. During the 1980s recovery, earnings growth was never lower than 11A percent. Currently, earnings growth is half that and, so far, has showed no signs of accelerating. How have we cured ourselves of the British disease that brought previous recoveries grinding to a premature halt? The answer lies in the British government's far-reaching program of structural reform over the past 17 years. Our agenda of privatization, deregulation, and labor market reform has made the U.K. economy more flexible, more responsive to changes in market conditions, and less inflation prone. Our structural reforms were praised by the IMF Article IV mission to London this summer. They said they had "contributed greatly to economic performance" and offered "a genuine prospect of improvement in the United Kingdom's growth performance over the longer term." I would single out our progress on labor market reform as truly remarkable. Twenty years ago, the British government was operating a "voluntary" incomes policy, where wage increases were decided in negotiations between the Chancellor and union leaders over beer and sandwiches. That may sound quite civilized, but, in reality, it was a form of unarmed combat. Conflict was the way that pay increases were secured. The number of working days lost a year because of strikes was 15 times what it is today. We are finally breaking with the inflation psychology of British industry and the British people. In previous recoveries, British employers were too ready to take the easy route of giving in to excessive wage demands. They would always be able to push up their prices. British employees were always deceived by the big money increases that industrial militancy appeared to give them. The acceleration of inflation was inevitable. It was always not a matter of whether, but when, inflation sprang out of its box. In contrast, this government is gaining the reputation it deserves for being tough on inflation. Our inflation target and our transparent setting of interest rates are gaining credibility. Inflation has been below 4 percent for over four years, the United Kingdom's best performance for nearly 50 years. We have said we will bring inflation down to 2Vi percent or less, and we will. The IMF believes we will, and the British people believe we will. The virtual ending of national wage bargaining outside the public sector has allowed individual enterprises and their employees to protect their best interests in a noninflationary world. Any employer facing an excessive wage demand knows inflation will not appear to bail it out. If wage increases cannot be paid for through increases in productivity, employer and employees know they will face the consequences, on profits and on jobs, of a loss in competitiveness. Good industrial relations, and a better

©International Monetary Fund. Not for Redistribution UNITED STATES 225 sense of shared responsibility and community of interest between employers and employed have kept earnings at sensible levels in this recovery, created new jobs, and kept unemployment coming down. My overriding aim when I set the British budget in November will be to get government borrowing down to a sustainable level and to keep us on course toward a balanced budget. That is the background against which I shall then judge whether or not the government can make progress in its tax-cutting agenda. The British government believes in tax cuts, but only when we can afford them, and only when they make good economic sense. Two years ago when I addressed these meetings, I spoke of my belief that the British recovery was going to follow a different, healthier pattern from the previous recoveries. The words of finance ministers should always be judged by results. Those two years have been positive proof that healthy lasting recovery can be achieved, but it must be sustained. If I keep the lid on inflation, if I can keep public borrowing coming down, and if I can keep on reforming the British economy and making it more flexible, then I am confident that the British economy can go on from strength to greater strength. With continued good economic management, this recovery could be the healthiest, the strongest, and the longest ever enjoyed by the people of the United Kingdom.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR THE UNITED STATES

Robert E. Rubin

Good morning. It is a pleasure, once again, as I did yesterday when introducing the Vice President of the United States, to welcome all of you to the Annual Meetings of the IMF and the World Bank. Before I present the remarks that I had intended to present, I would like to comment on something that I saw in the newspaper this morning. Over the past two years, I have been the Secretary of the Treasury, and in my many years when I was in the private sector I met with large numbers of finance ministers, business people, and heads of state. I developed a very strong feeling or view that one of the principal impediments to development in the developing world was the issue of corruption. I would like to very much identify with and support the comments of Michel Camdessus and Jim Wolfensohn yesterday with respect to lifting the fight against corruption to the top of their agendas, and also express the full support of the United States to this very important initiative.

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Secondly, I would like to recognize that this is the first meeting at which there has been a united delegation from Bosnia and Herzegovina, and I think that is something that we should all note with satisfaction and good feeling. Last year when the IMF and World Bank met, it marked the fiftieth anniversary of the Bretton Woods Conference. It was a historic occasion; it was also an opportunity to review the successes and challenges for these institutions and to focus on the vision going forward. As President Clinton has said many times, it is vitally important that these institutions adapt and renew themselves in the face of new challenges and new opportunities. Last year he called for a number of initiatives to do exactly that. To advance the goals of long-term growth for all, we meet this week with three clear objectives: first, to work together to promote strong and durable global growth; second, to advance a sound development agenda; and third, to strengthen safeguards to the international financial system. Let me deal with each of these briefly. There has been an emerging consensus over the last decade with respect to how best to promote growth, and it struck me, even in the last couple of days as I have met with finance ministers from the Group of Seven, from developing nations, and from transition economies, how widespread that consensus is. In a word, that consensus is to open markets, not close them; free businesses to compete, not restrain them; reduce deficits, not sustain them; and invest publicly in people, infrastructure, and the other areas critical to future productivity, not blindly ignore a wise and appropriate role for government. With so many economies now basically following this approach, the fundamentals of the global economy are more solid than they have been in a long, long time. Here in the United States, we have had solid growth and low inflation. While many factors have contributed, I believe the key and indispensable factor was the deficit reduction program of 1993, which changed the fiscal direction of this country. In addition, the President has focused on investments in education and training, the other areas critical to future productivity, and on opening markets around the world, including opening our own markets. I believe that if we continue to follow the right policy path in this country, we can have solid growth and low inflation on balance over the long term. That is good for us and it is good for the rest of the world. As I mentioned, I believe that our approach to promoting economic growth is in line with the emerging consensus around the world. But we well recognize that taking actions such as cutting budgets—while absolutely essential to economic health—is also difficult, and that too often the burdens fall on the least well off in our societies. That does not mean that we shouldn't act, but it does mean that we should act with fairness, compassion, understanding, and a commitment to

©International Monetary Fund. Not for Redistribution UNITED STATES 227 equip the least well off with the tools that they need to be successful in the mainstream economy. Our second objective this week, which to some extent I have already touched on, is development and promoting growth in poorer nations and raising living standards for all people. This should be a priority for all of us, no matter what our stage of development. For one thing, it is the right thing to do. Secondly, it is overwhelmingly in the self-interest of the developed nations, both to promote stability and to create bigger markets for all of us. I have had the opportunity to visit the work of the multilateral development institutions in a number of countries—India, Indonesia, the Philip- pines, Argentina, and Brazil. I was struck by the effectiveness of the programs that I saw. One of the conclusions I reached was that it was enormously important for us to try to get members of our Congress to visit these kinds of programs and these kinds of projects, and to see what these institutions are doing on the ground. I was also struck by the major challenges these countries face in growing their economies. Multilateral development banks have a unique role to play in fostering growth around the world by building the underpinnings of a private sector economy and by meeting the needs that free markets by their nature will not meet. This means focusing more selectively on the poorest developing countries, on education and health care, and on the environment. This means encouraging these institutions to be more innovative with respect to financing mechanisms in order to catalyze private investment. Moreover, in order for these initiatives to work, they must be part of a joint venture between the institutions and between the receiving countries that are committed to reform. One clear obstacle to growth has been unsustainable levels of debt in some of the poorest countries. The World Bank, the IMF, and the Paris Club have now reached agreement with a program that will be a comprehensive approach to reducing the excess of debt of several of the poorest countries to sustainable levels. We now need to work to bring together the rest of the international financial institutions into this effort. As the Vice President said yesterday, and the President said at this same meeting a year ago, the United States is committed to its leadership role in the global economy and to meeting its financial responsibilities to these international financial institutions. The Administration has been making, and will continue to make, the fullest and utmost effort to work with our Congress to achieve those ends. In that regard, let me touch on a sensitive subject. I well understand why the eleventh replenishment of the International Development Associ- ation (IDA-11) Interim Trust Fund has procurement restrictions, but I can tell you from working with the members of Congress, as we think now about getting funding, going forward for IDA-11, that these restrictions

©International Monetary Fund. Not for Redistribution 228 SUMMARY PROCEEDINGS, 1996 have created enormous resentment, even among those who are most supportive of ID A-11 and who feel the United States has played a leadership role over many decades in the global economy. I believe that these restrictions are counterproductive with respect to future funding and would urge that they be removed. The World Bank has made great progress for making itself more effective. As the Vice President said yesterday, President Wolfensohn deserves a great deal of credit for his good work. But we need to continue in encouraging good governance, and that very much includes the issue of corruption that Michel Camdessus and Jim Wolfensohn raised yesterday, increasing transparency, measuring results, expanding microenterprise lending, strengthening our capacity to deal with the national crises, as well as the issues I discussed a few moments ago. The third objective for the week is to carry forward the progress we have made in strengthening safeguards of the international financial system against risk. At Halifax and again at Lyons, Group of Seven leaders agreed to an ambitious program of initiatives to safeguard financial stability in the global markets. Virtually all of the initiatives that were brought forth have now been brought either to completion or almost to completion, including strong IMF disclosure standards to prevent future crises, the new arrangements for borrowing to expand the resources available to the IMF for financial emergencies, recommendations to facilitate market-based solutions to sovereign financial crises to reduce the expectation of official finance, and encouraging private investors to focus more attention to risk. Just as with the debt-reduction program that I mentioned a moment ago, which was also a Halifax initiative, these accomplishments show that we can achieve major objectives when we work together. Over the coming year, we strongly urge that the IMF and the World Bank, in cooperation with international financial supervisory bodies, take up the Group of Seven call for following through on the Lyons communique to promote soundness in the financing systems of emerging countries. Too often banking problems and capital market problems have undermined economic growth and progress in these developing nations. Let me conclude by expressing the President's strong conviction that the economic futures of all nations are inexorably linked. Here in the United States, our jobs and living standards are increasingly and substantially affected by whether our global partners, including the developing nations, are prosperous and growing. The same is true for all the nations of the world. It is a strong conviction of the President and this Administration that the only effective path toward future prosperity for all of us is to work together and that, by working together, we can promote a strong and growing global economy for all of us.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR URUGUAY

Luis A. Mosca

As the representative of the Latin American countries and of my own country, Uruguay, I am very pleased to have this opportunity to address these Annual Meetings of the Governors of the International Monetary Fund and the World Bank. Over the past year, the World Bank has made a number of decisions with important implications for our region. First, I wish to refer to the introduction of loans denominated in a single currency chosen by the borrower. This is a historical event, and a change that had been long called for by our countries. I congratulate the institution—particularly its Presi- dent—on its work in bringing this measure forward, since it will serve to reduce both the cost of debt servicing and the effects of exchange rate volatility. The Bank has enormous potential for providing its clients with new, competitive, and innovative financial products, and for transferring its knowledge of external asset management based on the experience it has gained from operating in international financial markets and managing its own assets. We therefore believe that the Bank should develop new activities in these spheres, thus providing a complement to its other services. Consistent with this, we believe that the Multilateral Investment Guarantee Agency (MIGA) should be increased as soon as possible by means of a capital transfer from the Bank. This will enable the Agency to strengthen the essential role it plays in facilitating external private investment in the region and to overcome the constraints resulting from its clearly inadequate level of resources. Similarly, we approve of the efforts made to increase International Fi- nance Corporation (IFC) operations for financing the private sector, particularly in those countries of the region where its activities are still limited. It should basically be concerned with small- and medium-sized enterprises, and—as far as possible—it should maintain its current form of organization so as to avoid cost increases and any risk of fragmenting its operations. Recently, the possibility was discussed of establishing a guarantee fund—financed from the Bank's net income—to facilitate participation by the private sector in the financing of infrastructure and the provision of public services. We believe it is crucial that this proposal be implemented as soon as possible, since it would be an effective complement to current structural reforms. I should also add that a country's sovereign guarantee should not be considered essential for such operations, and that subsidiary forms of guarantee presented by the borrowers should be acceptable.

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To turn to another topic, I wish to state that the initiative now under discussion for providing relief for the heavily indebted poor countries both recognizes the reality of the situation, and provides a response to the pressing needs of many countries affected by external payment problems. It is thus a milestone in the history of the Bretton Woods institutions. For the first time, definite mechanisms will be set up for reducing the burden of debt owed to multilateral organizations. Both pragmatically and imaginatively, an effort has been made to solve the problem of the unsustainable debt of a number of countries and to enable them to resume growth. In this same context, we believe it is essential to preserve the Bank's preferred creditor status and that bilateral debt should continue to be classified as subordinate. Second, the Bank's contributions must be commensurate with those of other creditors, and this must be clearly stated in the documentation relating to the debt initiative. As Mr. Wolfensohn stated when he became Presi- dent, the institution is immersed in an intense restructuring process that is essential if it is to adapt to its new challenges. Among these, decentralization is an important component, and it will call for considerable efforts to be made, even at budgetary level, our region being one of the areas in which this process has already begun. In order for the region to achieve its objectives, it must be provided with the necessary budgetary resources, otherwise decentralization will take resources away from other urgent activities. If the necessary corrective steps are not taken, the quality of services and scope of assistance provided for our countries will be compromised. Each year, the Bank generates substantial amounts of net income. The basic criterion for their application must be to maintain a sufficient level of reserves to ensure the institution's financial integrity. Historically, decisions on how to distribute the resulting surplus have not been easy. We wish to repeat that the institution must continue to analyze closely how its net income is generated and used through a frank and open dialogue involving all parties. In this way, we will ensure that the available resources are efficiently applied, and will, at the same time, preserve both the multilateral character of the institution and its financial integrity.

The Bank and the Region I would now like to focus on regional topics, and must say with some satisfaction, that over the past year most of our countries have achieved fiscal consolidation and resumed economic growth, overcoming the adverse effects of the crisis that occurred at the end of 1994. What happened goes beyond the cold, stark message conveyed by indicators. Events showed that the region was capable of responding promptly and resolutely to the crisis—in some cases, by deepening the programs of reforms, and in others by ensuring that macroeconomic programs were truly consistent.

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The fact that these responses were possible is—in our view—clear evidence that the development strategies adopted had been the right ones, and the process showed that the structural reforms implemented throughout the region were irreversible. From now on, the two key questions are: how can we deepen them, and what additional steps should governments place on their agendas? There is no longer any question as to the need for—and relevance of—the current reforms, and we must concentrate our efforts on continuing them and optimizing their effects, in accordance with each country's needs and circumstances. If we are able to do this, we are sure that the region will continue to be one of the most dynamic areas of the world. We have sufficient evidence of this, given that, despite the past year's crisis, substantial volumes of direct external investment continued to flow in, offsetting the temporary decline in portfolio and equity investment. Similarly, during the first half of 1996, new bond issues in the region were double the amount for the same period last year, while maturities were longer without interest rates being significantly higher. This is con- firmation that the international financial community now has greater confidence in the economic programs that have been implemented and in the future of our economies. Nevertheless, we must acknowledge that the region still faces considerable challenges. The reform program must be further extended and brought into new areas. For example, reforms in the financial sector and social security systems are key to ensuring that the changes already introduced will be consistent and irreversible. Also important are administrative reforms, so that central and state government policies can be better coordinated, thus removing the constraints that characterize many countries in the region and make their economic programs less cohesive. As regards social concerns, the elimination of poverty has yet to be achieved despite all our efforts. Together with this, the continuing deterioration of social capital—mainly in urban areas where poverty has reached critical levels—is becoming alarming. In addition to this, some countries are seeing the development of high rates of unemployment that will become unsustainable over the medium term. The World Bank can play a crucial role in helping improve these conditions; first, by increasing its resource flows to the region so that these can be used to finance basic infrastructure, thus complementing private investment; and second, as we have already said, by establishing mechanisms such as the guarantee funds in order to facilitate the participation of the private sector in this undertaking. It is likewise essential to upgrade our social capital so as to provide stability and justification for the reform process. Direct measures are needed for eliminating extreme poverty, improving basic and technical education—the purpose being to produce a skilled labor force and increase overall productivity—and enhance the delivery of basic services.

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At the same time, there are spheres of management in many countries in the region that require profound structural changes or new regulatory frameworks. Some of the most obvious examples are reforms of social security systems, deregulation of labor markets, and the appropriate regulation of financial systems. In all these areas, the Bank has an important role to play, contributing its rich experience in these fields, as well as its financing. Consequently, we wish to repeat that the budgetary resources necessary for financing these activities must be made available. Finally, the IFC must help promote the small and medium-sized enterprise sector by providing technical assistance and the necessary financing. The nature and functions of the Corporation make it the ideal organization for providing such support. I must also say that we are very pleased to see the Bank and Inter- American Development Bank (IDB) coordinating their efforts and resources, since this will help increase the effectiveness of the contributions made to development in our countries by both institutions—and particularly by the Bank.

Uruguay I would like to refer briefly to recent events in the Uruguayan economy. First, Uruguay has resumed growth after a short interruption that began in 1995 as a result of the regional recession. Fiscal consolidation continued, producing a steady and sustained fall in the inflation rate without any serious underlying macroeconomic tensions, thus validating the gradualism of our strategy. This progress toward stabilization is significant in a country affected by endemic inflation and makes it essential that we persevere in our efforts. Over the past year, several important reforms began to be implemented. First, the reform of our social security system is a landmark in the history of our country, especially given that this institution is one of the cornerstones of our national identity. The transition from a tax-based to a fully funded system exceeded our most optimistic expectations, indicating overwhelming acceptance of the proposed reform. A second series of reforms was applied to the state, the purpose being to increase efficiency and overall productivity and free up resources for the development of private sector activities. This law has just been passed and provides for a series of measures for modernizing the state, making it more efficient and, as a result, helping increase overall productivity. Further basic structural changes have been applied to the system of primary and secondary education and are designed to maintain the high standard of education while preparing future generations to deal with the new demands they will encounter in the labor market.

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This set of current reforms will make it possible to increase our competitiveness so as to benefit from the advantages offered by the southern cone common market (MERCOSUR) and adapt the country to the challenges posed by the increasing globalization of factor markets. MERCOSUR itself has now become one of the most dynamic economic integration systems in the world as a result of the recent agreements with Chile and Bolivia and the framework agreement with the European Union, which provides a basis for achieving tariff convergence between both regions. We trust that now that we are on a path that offers enormous potential for the region—and particularly for Uruguay—the World Bank will play an active part by contributing its valuable experience and its resources, helping us take full advantage of the vast range of opportunities presented to each member.

STATEMENT BY THE GOVERNOR OF THE BANK FOR VENEZUELA

Luis Raul Matos Azocar

It is an honor for me to be the Fund's representative for the Latin American countries at these meetings and to act in this capacity on behalf of the Governor of the International Monetary Fund and President of the Central Bank of Venezuela, Dr. Antonio Casas Gonzalez. I am addressing you at a time of economic integration and globalization. These have become irreversible facts of life that leave our countries no alternative but to exercise discipline in our economic policies, if we wish to avoid the backlash of the markets, and if our people are to reap the benefits of sustained and equitable economic growth with low inflation. I must point out that the economies of the developing countries, especially the emerging economies, have been leading world production growth since the beginning of this decade. The economies of Latin Amer- ica, in particular, have been revitalized; recovery is becoming stronger; in- traregional and extraregional trade continues its vigorous growth; and confidence is returning. This is reflected in the full resumption of capital flows to our region, which is on the verge of recovering its true potential and re- claiming its place in the world economy. Although we have certainly not rid ourselves of all the problems of our economic past, we are now firmly convinced that sound economic policies, together with appropriate social policies, are the key to progress and development.

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Our region's production is expected to increase by 3 percent in 1996. Though this level of growth is still very low, especially in comparison with population growth, it is nevertheless a vast improvement over 1995. Though inflation remains very high, it continues to decline markedly, as national and international confidence in our economies is restored, following the regional and potentially systemic impact of the Mexican crisis. These results show the true economic potential of Latin America and sharply contrast with the prevailing pessimism about the region throughout the 1980s. There is nothing hypothetical about the significance of the growing developing country—and consequently Latin American—share of world production. If the current trend continues, in less than 10 years the GDP of the developing countries will exceed that of the industrial countries, and I am quite sure that the economic and political impact will be resounding. In the economic sphere, the strong performance of the developing economies prevented a worldwide recession at the start of this decade. In the political sphere, it is necessary for these countries to claim the rights due to them, because of their growing economic importance, in international forums and institutions. Similarly, just as the countries have had to rise to the challenges of globalization, the multilateral institutions will also have to adapt progressively to changes in their decision-making structures if they are to remain relevant in the future. In that connection, it is inconceivable that key decisions affecting the rules of the game and the conditions in international financial and monetary circles should continue to be taken without appropriate or representative participation by the emerging and developing countries. I am sure that the Latin American countries will be equal to the task of invigorating the Group of Twenty-Four—which is also at risk of losing its relevance to its members— and of energizing our own regional and subregional organizations so that Latin America will have a greater say in important forums and institutions. We must recognize the very significant role played by the Fund and the Bank in creating this generally favorable situation in the world economy and in our Latin American region; the Fund, through its tireless efforts to promote sound macroeconomic policies, and the Bank through its development financing. These institutions are urged to continue providing their invaluable support for the sustained and more equitable growth of the economies of their members. In order to so do, they must have the necessary resources to fulfill their purposes. We agree that there is a need to continue strengthening the surveillance role of the Fund, both in the industrial and in the developing and transition countries. We therefore welcome the updating of the Madrid De- claration, recently adopted by the Interim Committee. It is significant that the Declaration on the Partnership for Sustainable Global Growth stresses the close interrelationship between macroeco-

©International Monetary Fund. Not for Redistribution VENEZUELA 235 nomic policies and structural reform—the former are only effective and can only be sustainable in the long term if the latter are implemented; the strengthening of financial systems and banking supervision, both nation- ally and internationally; and, in particular, the importance attached to human development and the need to improve the quality and efficiency of public sector management in all countries. We believe that the major industrial countries bear particular responsibility for the systemic impact of their policies on the world economy as these affect the possibilities for growth and development in the rest of the world. We therefore insist on the need for those countries to further their fiscal consolidation efforts and firmly undertake the structural reform necessary to ensure that the behavior of long-term interest rates and the attainment of a reasonable level of exchange stability among the major reserve currencies will continue to be conducive to sustained world economic growth. As representatives of Latin America in the Fund, we also believe that a more rapid conclusion of the Eleventh General Review of Quotas is necessary for the Fund to be able to carry out its financial mission. In this connection, we have been in support of doubling the current quotas. We also welcome the New Arrangements to Borrow, but we hope that these new lines of credit will be more useful than the General Arrangements to Borrow proved to be when Mexico faced the first crisis of the twenty-first century. An important dimension of the Fund's cooperative role is international solidarity, which has been reflected in the progress announced by the Interim Committee regarding the continuation of the Enhanced Structural Adjustment Facility and the efforts to make it self-sustaining. Many Latin American countries have already demonstrated that they are more than willing to collaborate. We support the joint initiative of the IMF and the World Bank on behalf of the heavily indebted poor countries, but maintain that the eligibility criteria must attach equal importance to the fiscal burden of debt service as it does to external debt-exports ratios. One should also take into account, on a case-by-case basis, the particular circumstances of countries with a high proportion of multilateral debt. I also wish to point out the growing importance that the IMF is attaching to the social dimensions, as I myself have witnessed in the case of Venezuela. This is concisely, but admirably, stated in the Interim Commit- tee Declaration on the Partnership for Sustainable Global Growth, which stresses the importance of improving the quality and composition of fiscal adjustment; developing and protecting human resources in all countries by increasing spending on education and training; reforming public health and pension systems to ensure their long-term efficiency and viability; alleviating poverty; and providing well-targeted but affordable social safety nets. All of this will, of course, have to be done in coordination with the other international organizations.

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In addition to these social guidelines, the Declaration also calls for an improvement in the quality and efficiency of public sector management, including combating corruption, which has been championed by President Caldera's administration, at the national and international levels, and which is a prerequisite for the material and moral well-being of our people. Who would have thought that only a few years ago these concepts of social order, which are now set out in a very important declaration by the Interim Committee, would have become a part of the economic philosophy of the International Monetary Fund. Without wishing to detract from the achievements of others who may be equally deserving, I wish to pay tribute to the influence of a man of singular intelligence and technical and diplomatic skills, who has left his mark on this institution over the past 10 years, in particular, by making it more humane and socially oriented, and who has deservedly been reappointed to the helm of the institution. I refer to Michel Camdessus. We trust that Mr. Camdessus will entrench and in- delibly imprint these social ideals on the philosophy of the Fund during his new term. We cannot ignore the persistent problems in developing countries and in Latin America, which have yet to, or are just starting to, implement a critical mass of macroeconomic and structural reforms. As a result, we in Latin America continue to face very complex challenges—most of them structural in nature—and must tackle them with resolve and courage and with the support of the international community. It should no longer be surprising, for instance, that a number of Latin American countries have had to resort to prudential regulations to discourage inflows of speculative capital and to attract long-term capital, preferably in the form of direct investment. Capital volatility may require action on the part of the international community and the International Monetary Fund, in particular, and should be directed toward assisting our countries to solve these complex problems in a pragmatic manner, rather than systematically resorting to conventional methods, since these can have serious adverse repercussions on our competitiveness. The issue of capital flows is closely linked to the soundness of our national financial systems. We are making a great effort to strengthen these systems and improve supervisory capacity. The call to strengthen our national banking and banking supervision systems and the international coordination of supervision is welcome and timely. Achieving good governance is another of the major challenges facing Latin American countries. This can have a profound positive effect on income distribution and, consequently, can reduce and possibly eradicate poverty in our countries. Bearing that in mind, our efforts should now be directed at reinforcing mechanisms that provide for sound management and supervision of markets and economic operators; at more efficient taxation; at strengthening the rule of law and the legal security of persons and

©International Monetary Fund. Not for Redistribution VENEZUELA 237 investments, which includes a strong commitment to fight against corruption; at regional administrative decentralization, guarding against the proliferation of unproductive and inefficient bureaucracies; and at guaranteeing that our citizens are provided with health, education, and social security services—the best tools governments can use to place people at the center of the development process, truly achieve better income distribution, and reduce poverty in a democratic society. These structural reforms require the advisory, technical, and financial assistance of your institutions. It is therefore disconcerting to note that net financial flows from the World Bank to Latin America are currently negative. This situation must be remedied without delay.

Venezuela This audience is well aware of the efforts the government of Venezuela is making to implement an economic stabilization program aimed at controlling inflation and laying the foundations for sustained development. This process involves the incorporation of the human, social, and political components to make such development viable within the context of our democratic institutions. After nine months of difficult but creative negotiations with the Fund, the Bank, and the Inter-American Development Bank (IDB), which has been a learning experience for all concerned and which allowed for a transparent discussion of the economic and social program, the Venezuelan Agenda, President Caldera's administration, despite its minority status in the congress, succeeded in passing a series of measures that changed the quality of fiscal revenue in a very short span of time. At the risk of seeming overly optimistic, let me say that the stabilization program is firmly on track and that our economy is reaping the benefits of the renewed confidence of domestic and external economic transactors. Perhaps even more important, anti-inflation performance under the program is virtually on target, which, I understand, is not always the case with many Fund programs. Now, in September, the inflation rate is already almost four times lower than it was five months ago at the start of our stabilization program. Though still high, its rapid reduction is evidence of the strength of the government's fiscal policy and the central bank's monetary policy, as well as the determination and consistency with which they have been applied. We hope to see a slight fiscal surplus in 1996, as opposed to the deficit of 8.3 percent of GDP reported in 1995. This is the result of the disciplined implementation of all the fiscal revenue and expenditure measures and stronger oil prices on international markets. These circumstances did not weaken the government's resolve to implement the program but strengthened it and bolstered the program itself.

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These results were achieved by sterilizing the additional resources in a fund to pay the public debt, manage the debt, and begin to finance the contingent liabilities of the public sector, all of which will also help to facilitate the process of public sector restructuring. We have changed our approach and will not stimulate artificial growth through government spending. Venezuela has made every effort to pay its external arrears. We are ad- hering to the schedule set in the program with the Fund and have been able to successfully place US$500 million in bonds on the German market. Our steadfast implementation of these fiscal and monetary policies has 6een reflected in the renewed confidence of economic transactors and the stability of our currency. International reserves have also increased substantially. The banking sector is considerably stronger, as is the supervisory capacity of the Superintendency of Banks. A process of reprivatizing nationalized banks has been started in the wake of the crisis. Various enterprises essential to the economy—telecommunications, aluminum, and iron and steel— are also being privatized. Despite the hardship that this economic program has caused, it is being implemented in a climate of stability and social peace, surprising to many. In my opinion, this is mainly the result of the substantial reinforcement of social safety nets for the most vulnerable segments of the population and the government's active, transparent, sincere, and convincing information campaign to explain to the people the scope, objectives, and probable effects of the program. This has helped to strengthen the concept of national ownership of the program and made it more likely to succeed. The results so far show growing confidence on the part of economic transactors and enable us to be optimistic about the future, provided that we stick firmly and consistently to the course we have charted with the Fund's support. As evidence of the government's willingness to do so, I wish to restate our intention to deepen structural reform with advisory assistance from the Fund, the Bank, and the IDB, because we are convinced that the real root of our economic problems is structural. Before concluding, let me make a point that has to do with Venezuela but might be of interest to all countries. Economic activity is not generating the levels of employment or rates of job creation to which we were accustomed in the past, and we all know that the best social policy is a policy that guarantees a stable income and creates the conditions for building a society in which there is opportunity. We are designing programs, in conjunction with the World Bank and the IDB, to improve family income and train young school dropouts, pending the conversion of Venezuela, through the structural reform of the education system, into a society offering the opportunities we all wish to see. These examples illustrate our concern for the human dimension, which is the basis for all our government's actions and which is also the basis of the Interim Com- mittee declaration.

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STATEMENT BY THE GOVERNOR OF THE FUND FOR VIETNAM

Cao Sy Kiem

First of all, allow me on behalf of the Vietnamese delegation to extend our warm greetings and best wishes to the Chairman, the Managing Director, the President, the distinguished Governors, and the other participants present here today. I would like to take this forum to express Viet- nam's high appreciation of the efforts exerted by the IMF Managing Di- rector and the World Bank President in promoting the activities of our two institutions. I would like to join the previous speakers in commenting that world economic growth has continued, on average, at a satisfactory pace, supported in particular by buoyant growth in many emerging-market countries. However, growth slowed more markedly than expected during 1995 in western Europe and North America, leading to further increases in unemployment in some countries from already high levels and also to fears of a new economic downturn. It is said that a number of positive trends and developments point to the likelihood of continued, relatively solid world growth in the period ahead. Global inflationary pressures remain subdued. It is interesting to note that capital flows to emerging market countries have been generally well sustained following the containment of spillover effects from the Mexican crisis. Recoveries already seem to be under way in both Mexico and Argentina, and activity remains buoyant in many other emerging- market countries where the danger of overheating appears to have sub- sided. It is also necessary to stress that some of the poorest countries, especially in Africa, have strengthened their growth performance and prospects as a result of intensified adjustment efforts. World trade has continued to expand faster than in the past. The relationship between output and trade growth would seem to predict continued economic expansion reflecting the liberalization of trade and the trend toward current account convertibility in recent years, together with the dynamic forces of globalization. Clearly, progress in implementing policies consistent with the global strategy set out by the Interim Committee three years ago, and reaffirmed in its October 1994 Madrid Declaration, has brought significant results in many years. Since the normalization of their relations with Vietnam in October 1993, the IMF and the World Bank have continued to provide vigorous support and assistance to Vietnam in terms of medium-term economic programs, long-term projects, and technical assistance. This support has played an important role in helping Vietnam maintain sustainable economic growth and control inflation.

Vietnam is implementing the three-year economic program supported by the Fund's Enhanced Structural Adjustment Facility (ESAF) with the total value of SDR 362.4 million (about US$525 million). So far one-half of the available amount has been disbursed. In early September, an IMF staff mission joined the Vietnamese government in Hanoi in conducting the midterm review of the second-year ESAF arrangement to provide a foundation for the IMF Executive Board's consideration and approval of the fourth drawdown of about $88 million next November. Vietnam's IDA credit-funded portfolio continued to expand in FY 1996, adding another five projects to the six approved in FY 1994 and FY 1995 for a total of eleven, including one structural adjustment credit. In addition to the credit-funded portfolio, IDA is also assisting Vietnam through a grant-funded technical assistance portfolio consisting in FY 1996 of 50 projects or consultant assignments totaling some $27.5 million. Although Vietnam's Bank-funded projects are still new, with our own efforts and the wholehearted assistance and support of experienced Bank staff, the implementation of these projects has made remarkable headway. It is interesting to recall that annual project approvals have occurred as programmed, credit effectiveness has been achieved quickly, key indicators of project development and implementation performance are rated satisfactory by Bank staff, and cumulative disbursements were close to projections. How- ever, we are fully aware that we should make further efforts to accelerate the qualitative and effective implementation of these projects so as to increase the confidence and satisfaction of the IDA donors. Allow me to review the economic development of Vietnam over the past year. The export-led expansion of recent years continued during the first half of 1996. Buoyed by a record agricultural harvest and strong industrial growth, real GDP grew at an annual rate of over 9 percent. Despite this rapid growth, inflation fell to 2.2 percent per annum by the end of Au- gust 1996. The reduction in inflation partly resulted from falling rice prices and an abundant import supply following trade liberalization moves early in the year. Monetary policies have been kept particularly tight, with domestic credit expansion effectively controlled through bank-by-bank credit ceilings and high real interest rates. Our country is entering into the last five years of this century with much bigger potential and opportunities than in previous years, together with bitter challenges. In this context, in late June 1996 the Communist Party of Vietnam convened in Hanoi its eighth National Congress to work out the five-year (1996-2000) economic plan on the basis of the following guidelines: first, to realize simultaneously the four economic targets: a high sustainable and efficient economic growth; macroeconomic stabilization; preparation of the premises for the phase of more advanced development beyond the year 2000, mainly the development of human resources, science and technology, and infrastructure; and the streamlining of the in-

©International Monetary Fund. Not for Redistribution VIETNAM 241 stitutional system. Second, to continue in a consistent manner and on a long-term basis the policy of developing the multisector economy, bringing into full play all resources for the development of productive forces, and improving the market mechanism with state management. Third, to ensure that economic growth goes hand in hand with social and cultural development, and to concentrate efforts on solving pressing problems with a view to tangible improvements in social equity and progress. Fourth, to combine economic development closely with sociopolitical stability and to enhance efficient utilization of resources. Fifth, to combine the development of key economic regions with that of other regions, creating conditions for all regions to develop and bring into full play their own compar- ative advantages, thus avoiding excessive growth disparity among regions. Resources and efforts are to be concentrated on attaining development targets in the next five years, i.e., to achieve an average annual economic growth rate of 9-10 percent, and, in the year 2000, to double per capita GDP over that of 1990. In industrial output, the goals are to obtain an average growth rate of 14-15 percent per annum, to increase agricultural output by 4.5-5 percent, services by 12-13 percent, and, in actual performance, to strive to attain an even higher growth rate. We are facing a bright prospect with innumerable challenges to be surmounted by enormous efforts of the entire nation with the valuable support and assistance of the world community, including the Fund and the Bank. We therefore have every reason to firmly believe that the objectives charted out by the eighth National Congress of the Communist Party of Vietnam for the next five years will be accomplished successfully.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE UNITED ARAB EMIRATES

Ahmed Humaid Al-Tayer

It is with great honor that I accept, on behalf of the United Arab Emi- rates, the chairmanship of the Boards of Governors of the World Bank Group and the International Monetary Fund for the coming year. I hope that I shall be able to carry out my stewardship over next year's meetings with the efficiency and graciousness that have been demonstrated by the current Chairman, Mr. Aninat, the Governor for Chile. The past year has been characterized by generally moderate growth and low inflation in the industrial economies and, I am happy to say, more robust growth in the emerging market economies. The transition and developing economies have also shown encouraging progress. This is something for which we can all be grateful. These meetings have shown what the Bank and the Fund can accomplish working together and with the countries they serve. But at the same time, these meetings have also shown that, despite the progress that has been made, much remains to be done. While we can justifiably be proud of our accomplishments, we must also be conscious of what has not been done and remain humble in the face of the many tasks that are still before us. Our memberships now span nearly all the nations of the world, which makes the burden all the greater and the responsibilities heavier than ever. The challenge is there; it is up to us to meet it head-on. Let us redouble our efforts in these the closing years of the twentieth century. Hundreds of millions of people on this globe still live in poverty, suffering the ravages of hunger and disease. It is they who are the main challenge and whose lives must be made longer, healthier, and more productive. By bettering their lives, we improve the well-being of everyone, for we live in a world of interdependent nations and regions. In order to help bring this about, we must ensure that those in the industrial, transition, emerging, and developing economies manage their institutions in ways that will bring about steady, noninflationary growth, whose benefits will be spread widely among the world's peoples. The President of the World Bank Group, Mr. Wolfensohn, and the Managing Director of the Fund, Mr. Camdessus, have demonstrated their

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©International Monetary Fund. Not for Redistribution CONCLUDING REMARKS 243 determination that the Bretton Woods institutions will continue to be leaders in achieving the goals that we have set at these meetings. I am sure that you all join me in expressing our appreciation for their efforts and that of the staff of the Bank Group and the Fund. The year before us will be filled with promise as well as perils. I hope that when I speak to you next year, I shall be able to talk to you about successes that have been achieved and perils that have been avoided. I look forward to seeing all of you at our meetings in Hong Kong next year.

STATEMENT BY THE CHAIRMAN OF THE EXECUTIVE BOARD AND MANAGING DIRECTOR OF THE INTERNATIONAL MONETARY FUND

Michel Camdessus

Mr. Chairman, Governors: I have listened intently to all that has been said during the past few days, and I thank you for your friendly support and good wishes and, above all, for the candor and insight that you have brought to our discussions. In the course of these meetings, I have been struck by four recurring themes: • First, your cautious optimism about your countries' future in the global economy; • Second, your strong consensus on the most effective economic strategies for securing this future; • Third, your desire to have a strong, effective IMF to help members in this process; and • Fourth, your sense of common purpose and shared responsibility for your mutual prosperity in the global economy. Let me take each of these themes in turn. First, your cautious optimism. You have noted with satisfaction that the world economic situation is favorable: world economic growth has become stronger and more widespread; inflation has been brought under better control; and the prospects for continued global economic expansion are good. As you rightly point out, today's encouraging situation and outlook are due to the fact that so many of your countries have strengthened their economic policies. Indeed, in the words of the Governor from India, "We should recognize that the relatively favorable economic situation is not a fortuitous outcome, but the

©International Monetary Fund. Not for Redistribution 244 SUMMARY PROCEEDINGS, 1996 product of many years of hard work and sacrifice in pursuit of sound economic policies at both the national and international levels." Yet your optimism is guarded because you know that weaknesses remain in each of your economies and that the forces of globalization can ac- centuate them. Many of you have been quite frank about the problems you face—in reducing fiscal deficits, creating more jobs, strengthening the banking sector, and eliminating the structural problems that stand in the way of fuller integration into the global economy. Many of you are also concerned about the uneven distribution of private capital flows, and their potential volatility; about the fact that some countries have not shared in the expansion of world trade and capital flows and that aid flows are declining; and about the unmet needs in health and education in many countries. A number of you have also mentioned the risks that protectionism could pose to the global economy. Indeed, we must all be concerned about these issues and find ways to address them. At the same time, however, I think all of us have sensed a new dynamic in the world economy. The rapid pace of global integration and its impact on world trade and finance have inspired many countries to accelerate reform. Increasingly, countries are realizing that, in the words of our Chairman, "Reaping further gains from globalization requires a firm commitment to even further opening of our economies." Indeed, the reform process does appear to be gaining momentum. And why is this so? Because of the broad consensus on economic strategy—the second theme emerging from our discussions. So many of you have spoken eloquently about the visible payoffs for macroeconomic and structural reform! I particularly recall the Governor from the Philippines speaking of his country's "progress from being 'the sick man of Asia' to being"—well, he put it two ways: "its rising star" and "a new gentler, kinder tiger"; and the Governor from Korea's reminder that "though once one of the world's poorest countries," his country had "managed to transform its simple agrarian economy into an industrial economy within a short period of time." The vibrant economy of your own country, Mr. Chairman, is also a monument to the benefits of sustained adjustment and reform. In this context, many of you have pointed to the continuing validity of the strategy set out in the Madrid Declaration and its emphasis on macroeconomic stability and structural reform. But increasingly, you are also bringing other issues to the table—such as the importance of investing in health and education; the role that such investments can play in increasing social equity; the link between social equity and the sustainability of the reform process; and yes, what Vice President Gore has termed, "the challenge of good government." As you recall, this latter point was one that I stressed in my opening address, and I am gratified that a number of you insisted on its fundamen-

©International Monetary Fund. Not for Redistribution CONCLUDING REMARKS 245 tal importance for sustained, high-quality growth. Bangladesh, Chile, Den- mark, and others have remarked on this. The essential point is this: good governance is inextricably linked to the efficiency of resource allocation, to incentives for savings and investment, and, increasingly, to external competitiveness—for capital inflows tend to be attracted to countries where investors can count on the transparent and responsible conduct of public affairs. Indeed, for all of these reasons, good governance is central to the basic economic objectives that the Bretton Woods institutions are trying to help their members achieve. Governors, you have laid out an ambitious reform agenda for your countries. In the words of the Governor from Australia, "None of this is easy. But it is important to accept the challenge." It is gratifying to see how many of your countries have accepted the challenge, and how much progress you have achieved toward stronger, more sustained, more broadly shared growth. In turning to the third theme—your desire for a strong, effective IMF—let me assure you that we at the Fund also "accept the challenge." We hear your call to continue strengthening Fund surveillance—in industrial, developing, and transition countries alike—and we will continue our efforts in full evenhandedness. Indeed, as Chairman Aninat has said, surveillance is now "more relevant than ever." For this reason, and in light of the challenges of globalization, I particularly welcome the Interim Com- mittee's new declaration on the "Partnership for Sustained Growth." You have also expressed very strong support for the Special Data Dis- semination Standard; indeed, we will build on this initiative by establishing a general data standard. As part of our surveillance activities, we will also take up your call to help strengthen members' financial systems, especially the soundness of their banks, and to give further consideration to the role the Fund could play in encouraging capital account convertibility, even through an appropriate change in its Articles of Agreement. We have also heard your call to strengthen Fund resources. I think the Governor of Sri Lanka expressed the conviction of the entire membership when he said, "Countries that take this difficult [adjustment] path. . .deserve help and encouragement from the international community to sustain their efforts and soften the severe hardships and dislocation that will inevitably accompany them." All of you have welcomed the agreement that will permit a self- sustained, and therefore de facto permanent, Enhanced Structural Ad- justment Facility (ESAF) and the Fund's contribution through ESAF to help relieve the debt burden of the heavily indebted poor countries. Many of you have mentioned your intention to make a bilateral contribution to ESAF, and I encourage others to join them. This is a superb demonstration of what our new partnership is all about. Industrial countries and advanced developing countries must also make room in their

©International Monetary Fund. Not for Redistribution 246 SUMMARY PROCEEDINGS, 1996 budgets for increased official development assistance. I can think of no better expression of our new partnership and certainly no better investment in the future than supporting in this way the development efforts of poor countries. We must also thank the countries participating in the New Arrange- ments to Borrow for their help in doubling the credit lines available to the Fund. You have also expressed satisfaction at the consensus reached at the Executive Board on an equity allocation of SDRs; I trust that a final agreement will be reached in good faith before the spring meetings. Yet all of you have emphasized that the Fund is a quota-based institution and must remain so. I have heard the call of many members for early progress on the Eleventh General Review, and I assure you that this will be our priority in the coming months. I am also mindful of the concern of many members that quotas should better reflect the new economic realities in today's global economy while ensuring an adequate increase for all members; we will need to address these issues in the coming months. Finally, I would like to highlight the sense of common purpose and shared responsibility that has guided our deliberations here this week. At the end of the day, all of our countries are seeking similar goals, and each of our countries has a stake in the success of all the others. In the words of the Vice President of the United States, "If we have learned anything from the second half of the twentieth century, we have learned this: that we cannot achieve peace and prosperity in isolation or in the absence of a healthy international economic system." So, let us keep our sights on our common goals: greater stability in the world and stronger, more sustained, more broadly shared, and higher- quality growth. And let us return to our daily tasks with a commitment to our new partnership and with a renewed sense of purpose, which you, Mr. Chairman, expressed in such a visionary fashion. You told us that the context of stability and economic progress we are experiencing is a promising sign. But it shall not take profound root in the history of mankind unless it serves to open up clear opportunities for all of our citizens. . . It is this crucial link of economic and social development with the efforts at the dignification of mankind that makes our work a truly meaningful task. Thank you for these inspirational words. As this is the last time I will appear at these meetings in the company of the Secretary of the Fund, Mr. Leo Van Houtven, I would like to tell him that I will miss him greatly—for many reasons that I cannot expand on now, including the nice way he had of calling me to order from time to time! And now, before he lowers the gavel with a bang, let me say thank you and wish you a safe and pleasant journey home.

STATEMENT BY THE PRESIDENT OF THE WORLD BANK GROUP

James D. Wolfensohn

I want to acknowledge the wonderful remarks of the Managing Di- rector of the Fund in summarizing the views of the Governors at these meetings and for the direction he has given us once again. I have felt very inspired, really, by these meetings. I think that the contributions by the Governors have been very direct and very centered. Insofar as the Bank is concerned in our work in poverty alleviation and sustainable development, I have felt, for myself and for all my colleagues, that there has been a very, very strong measure of support for our efforts and indeed a unity in the international community, both from donor and recipient countries. I was impressed that Vice President Gore, speaking of the Bank and the Fund, would say, "We should not underestimate what the Bank and the Fund can do." I believe that these meetings have demonstrated that we can, in fact, make a difference together. Behind the speeches there has been a great deal of accomplishment. Starting with our Development Committee, under the very able chairmanship of Chairman Kabbaj, I think we set out a format and procedures for discussions that were extraordinarily fruitful and helped us shape our agenda, and I want to express my gratitude to Chairman Kabbaj for his leadership of the Committee. I think we should all be very proud of the joint initiative of the Bank and Fund for the heavily indebted poor countries (HIPCs), and I am delighted that you gave it your unanimous support. But this is now really just the beginning. We should remember that the task of implementation is before us. We will need your support, flexibility, and ideas in the period ahead so that we can bring to fruition the initiative that we have placed before you. I very much look forward to working not only with the Fund but with all of you as we move forward on this very, very important initiative. The Governor for Denmark remarked that future generations may well look back on our debt initiative as the building block that made it possible "for the poorest and most hopelessly indebted countries to exit from their debt." And if that is true, as I hope it is, then we have been present at a historic occasion. I would like also to thank the Governor for his invitation that we should hold the first meeting of the HIPC trust fund in the very near future. On that point, may I add also a plea to all of you to give consideration to the bilateral contributions to the trust fund. It is very important that we should build up our resources so that we can be effective in the efforts that we will share.

In addition to the debt initiative, I think we also had constructive meetings on eleventh replenishment of the International Development As- sociation (IDA). We are all aware of some of the problems associated with this agreement, but arising from the meeting of the Deputies yesterday, I think we can say that there was a very positive feeling emerging, and we look forward to the next meeting. Certainly the Vice President's assertion of the strong support of the United States was an important aspect of the meetings, and I look forward to building a stronger foundation for the IDA at our next meetings in April. We heard many welcomes to the delegation from Bosnia and Herze- govina and an admirable statement by Prime Minister Muratovic. This effort in which we are engaged in Bosnia and Herzegovina is indeed a very, very important one for all of us. I very much hope that at the meeting early next year, when we are looking at the resources that are available, we can come up with a very practical and straightforward approach. We have achieved a lot in terms of implementing the first phase of the program, but I think we should be realistic and straightforward with each other that the pace of spending in Bosnia and Herzegovina has not been significant enough. And what we should do when we come to that meeting is be clear with each other as to precisely what it is we are going to do and then, in every way possible, try to coordinate our efforts. The start has been very good, and we are working closely with our colleagues in the European Union, but it is essential that all members participate directly, forcefully, and with speed. I was also very pleased with the initiative taken by the African Gov- ernors in launching a Task Force on Human and Institutional Capacity. The report they produced is truly an admirable document, not just for Africa, but I think for the World Bank in terms of our activities in developing capacity wherever we operate in the world. I hope that by the time of our next Annual Meetings, we will be able to report very significant progress in the implementation of their recommendations. I was also pleased with the views of the Latin American Governors, particularly on the social sector, and on the recognition of the very close relationship that exists between the Bank and the Inter-American Devel- opment Bank. This partnership, which is very real, I think is to the benefit of all of us in the development community and is a very vivid illustration of the strength that comes from a close relationship between the Bank and regional banks—and nowhere is this more true than in Latin America with the Inter-American Bank. The Governor of Japan, speaking of the future agenda, raised the issue of the promotion of private capital flows on which many of you spoke, particularly in terms of infrastructure in emerging countries. And he has suggested to us that we work with the Japanese government and with Gover- nors in preparation for the next meeting of the Development Committee to

©International Monetary Fund. Not for Redistribution CONCLUDING REMARKS 249 have a focus on efforts in relation to this massive new movement of private capital to the developing countries. It has been pointed out, of course, that much of it goes to 12 countries and that we need to broaden the base, but this subject suggested by the Governor of Japan is, I think, one that can be very effectively and fruitfully followed by us in the coming year. By the way, this year, we had a very successful seminar series that several hundred people attended—and paid for attending. This is a remarkable new private sector initiative. I was happy that these seminars were universally acclaimed, and we shall certainly try to carry them on next year. The International Finance Corporation (IFC) reported its initiative to move into a further 16 countries, and that was well received. The Multi- lateral Investment Guarantee Agency (MIGA), which has had such significant accomplishments, is now facing a capital increase, and I would hope that Governors would give very careful attention to their request for increased capital support. I do not want to talk any more about the activities inside the Bank, but I was extremely heartened and gratified by your support, and we will do our best to continue our reorganization of the institution to expand its effectiveness and excellence in the years ahead. There are six issues that I want to deal with in the next 12 months. The first is to continue the debt initiative. The second is our collaboration with the International Monetary Fund on strengthening our support of the financial sector. The third is the work that we will certainly continue to be doing in the area of corruption—where governments are interested in working with us, and certainly in the implementation of our own programs. I repeat, we will not seek to interfere in the international affairs of countries, but will give support where asked. The fourth is our effort to intensify our integration of social issues in our country assistance strategies and, in particular, programs. The fifth, which I mentioned, is a very much stronger emphasis on the rural sector. We will be completing our work and implementing our additional programs in the whole rural sector. And finally, expansion in the area of technology with our new global knowledge partnership. In closing, I would like to again congratulate Mr. Camdessus for his election to a third term. He is a remarkable man, and we are happy and sleep better when we know he is there. I would also like to commend our Chairman, Mr. Aninat, for what I think has been the superb handling of these meetings and an opening address that was truly of great significance. I have appreciated very much the opportunity to work with him and congratulate him on this year and look forward to our further work together in other areas.

I would also like to join in congratulating Minister Ahmed Humaid Al-Tayer of the United Arab Emirates for his election as Chairman for next year. Mr. Minister, we very much look forward to working with you in the coming year. And finally, may I also express the gratitude of everyone in the Bank to Leo Van Houtven for the work that he has done in these past years. I appreciated very much all of his support. These have been very full Annual Meetings. It is one that has certainly encouraged me and my colleagues to continue our work. We feel very much a part of your family, and I hope you will feel a part of ours, and I look forward to significant work in the coming years for the benefit of the 4.5 billion people whom we serve and whose lives we want to change.

CONCLUDING REMARKS BY THE CHAIRMAN OF THE BOARDS OF GOVERNORS AND GOVERNOR OF THE FUND AND THE BANK FOR CHILE

Eduardo Aninat

It has been a great privilege to have served as the Chairman of the Boards of Governors of the Fund and the Bank over the past year, and a special honor to chair these historic meetings. I would like to take this opportunity to thank all those involved for the generous support extended to me during my tenure. I would also like to express the warm appreciation of the Boards of Governors for the very insightful remarks of the Vice President of the United States and his valuable support for the ongoing work of the Bretton Woods institutions. As these meetings draw to a close, I would like to review briefly what we have concluded about the world economic outlook and our policy and institutional agenda for the coming year. Governors have welcomed the encouraging world economic outlook, noting that the strength of economic activity has been particularly impressive in the emerging market economies. In the industrial countries, Gover- nors recognized that while inflation should remain subdued, further progress would be needed toward reducing fiscal imbalances and addressing structural rigidities. Governors were of the view that the developing countries would sustain their positive growth performance, but much remained to be done to take full advantage of their improving access to world markets. Governors felt that the transition countries had achieved remarkable progress toward macroeconomic stabilization and reform. Nev- ertheless, the basis for sustained growth had not yet been fully solidified.

During my opening address, I emphasized that our two partner institutions stood at a unique vantage point, and at a propitious moment in time, to focus on the needs of all our citizens, including the disadvantaged and vulnerable, as we worked to create the conditions for sustained, noninflationary global growth and development. I fully support the Vice Presi- dent's call for making "promise and prosperity the birthright of all people." And I sense that we all share that very fundamental goal. I also believe these meetings will be remembered for the emphasis that many of you have given to the importance of good governance. As Mr. Camdessus reminded us, sustainable development requires responsible and open management of public affairs, and, more important, "governments must demonstrate that they have no tolerance for corruption in any form." I also believe Mr. Wolfensohn has aptly emphasized our responsibility to work together "for social justice, for economic opportunity, for human well- being, and for history." Encouraged by the prospects for the world economy, Governors endorsed the new 11-point strategy of the Interim Committee of the Fund. In a renewed spirit of partnership for global growth, Governors stressed the importance of making progress in fiscal consolidation and deepening structural reforms, viewing those two core elements of the global strategy as critical for enhancing the growth prospects of the private sector. In that regard, many Governors stressed the mutually reinforcing nature of structural and macroeconomic reforms. In a similar vein, many Governors stressed that the quality of adjustment would have an indelible bearing on its sustainability. Those Governors welcomed the focus of the global strategy on improving the quality of expenditure by reducing unproductive outlays and seeking creative approaches for redefining the role of government, and for improving social equity through higher-quality, better-targeted social spending, particularly in the areas of health and education. Some of you have also given prominence to ensuring the soundness of banking systems to safeguard financial stability in global markets. Oth- ers have stressed the need to uphold the multilateral trading system. Turning for a moment to the specific role of the Fund, Governors welcomed efforts to strengthen its surveillance over members' policies, and were of the view that more continuous, intensive, and probing surveillance would play a critical role in averting financial crises and establishing higher and more transparent policy standards. Governors welcomed the progress toward creating a self-sustaining Enhanced Structural Adjustment Facility (ESAF), as the principal means for the Fund to assist the low- income countries, and endorsed the program of action proposed by the Fund and the Bank to ensure that the heavily indebted poor countries (HIPCs) that have shown a strong track record of economic adjustment can attain a sustainable debt situation over the medium term and not be marginalized as the pace of globalization accelerates. Governors have sup-

©International Monetary Fund. Not for Redistribution 252 SUMMARY PROCEEDINGS, 1996 ported my call for an early completion of the Eleventh General Review of Quotas, and welcomed the progress that has been made in securing additional resources—through the New Arrangements to Borrow—for the Fund to use in emergency situations. Many of you have also welcomed the rapidly emerging consensus for a one-time special allocation of SDRs through an amendment to the Fund's Articles. Finally, Governors welcomed the launching of the Special Data Dissemination Standard and the opening of the Dissemination Standards Bulletin Board. They were encouraged that a diverse mix of countries had already subscribed and urged others to do so as soon as feasible. Noting the standard's beneficial impact on global transparency, some members highlighted the necessity of appropriate technical assistance to help many of the less-developed countries subscribe. Governors have welcomed the World Bank Group's reaffirmation of its commitment to excellence and to strengthening accountability for achieving results on the ground. They appreciate and support the initiatives taken and the reforms pursued by Mr. Wolfensohn and the staff of the World Bank Group in order to respond quickly to the needs of their clients, and they urge further progress in that direction. Governors applaud the effort to build stronger partnerships with multilateral banks, nongovernmental organizations, and other players in the international community on vital issues that affect the development strategies and agendas of developing countries. In the sphere of private sector activities, Governors urged the World Bank Group to make full use of its catalytic and advisory functions to help promote the development of this critical sector. Governors reiter- ated their strong support for the International Development Association (IDA) and its central importance to the global effort to reduce poverty, and underscored the importance of timely contributions from all donors to ensure the success of the eleventh replenishment of IDA. They welcome the recent rapid expansion in demand for the services of the Multilateral In- vestment Guarantee Agency (MIGA) and emphasize the need to address the issue of MIGA's resource constraints. Before adjourning, I would like to express my appreciation to Mr. Camdessus and Mr. Wolfensohn and the staffs of their organizations for their dedication and professional integrity in making our meetings a success. It is with respect that I welcome the election of the Governor for the United Arab Emirates as the Chairman of the Boards of Governors for the coming year. I pledge my full support and that of my colleagues for the success of his work. On that note, I now declare the 1996 Annual Meetings of the Governors of the International Monetary Fund and the World Bank Group closed. May I wish you a safe journey home.

Sunday September 29 9:30 a.m. — Interim Committee2 2:30 p.m. — Interim Committee Monday September 30 9:00 a.m. — Joint Development Committee 3:00 p.m. — Joint Development Committee Tuesday October 1 10:00 a.m. — Opening Ceremonies Address from the Chair Annual Address by Managing Director, International Monetary Fund Annual Address by President, World Bank Group 3:00 p.m. — Annual Discussion Wednesday October 2 9:30 a.m. — Annual Discussion 3:00 p.m. — Annual Discussion IMF Election of Executive Directors IBRD Election of Executive Directors MIGA Election of Directors 6:15 p.m. — Joint Procedures Committee 6:30 p.m. — MIGA Procedures Committee Thursday October 3 9:30 a.m. — Annual Discussion Following the Procedures Committees' Reports conclusion of the Comments by Heads of Annual Discussion Organizations Adjournment

Meetings of the Joint Development Committee were held jointly with the Board of Governors of the Bank. The sessions of the Annual Meetings were held jointly with the Boards of Governors of the World Bank Group. 2Fund only.

255

Admission 1. Sessions of the Boards of Governors of the Fund and the World Bank Group Organizations will be joint and shall be open to accredited press, guests, and staff. 2. Meetings of the Joint Procedures Committee shall be open only to Governors who are members of the Committee and their advisers, Ex- ecutive Directors, and such staff as may be necessary.

Procedure and Records 3. The Chairman of the Boards of Governors will establish the order of speaking at each session. Governors signifying a desire to speak will generally be recognized in the order in which they ask to speak. 4. With the consent of the Chairman, a Governor may extend his statement in the record following advance submission of the text to the Secretaries. 5. The Secretaries will have verbatim transcripts prepared of the proceedings of the Boards of Governors and the Joint Procedures Com- mittee. The transcripts of proceedings of the Joint Procedures Com- mittee will be confidential and available only to the Chairman, the Managing Director of the Fund, the President of the World Bank Group, and the Secretaries. 6. Reports of the Joint Procedures Committee shall be signed by the Committee Chairman and the Reporting Member.

Public Information 7. The Chairman of the Boards of Governors, the Managing Director of the Fund, and the President of the World Bank Group will communicate to the press such information concerning the proceedings of the Annual Meetings as they may deem suitable.

256

1. 1996 Annual Report 2. Report of the Chairman of the Interim Committee (Fund Document No. 4) 3. Report of the Chairman of the Joint Development Committee (Fund Document No. 5) 4. 1996 Regular Election of Executive Directors (Fund Document No. 6) 5. Financial Statements and Audit Report (Appendix X of 1996 Annual Report and Fund Documents Nos. 7 and 8) 6. Administrative and Capital Budgets for Financial Year ending April 30, 1997 (Appendix IX of 1996 Annual Report and Fund Documents Nos. 8 and 9) 7. Amendments of Rules and Regulations (Fund Document No. 10) 8. Selection of Officers and Joint Procedures Committee for 1996/97

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Chairman — Chile Vice Chairmen — Papua New Guinea, South Africa Reporting Member — Portugal

Other Members Belarus, Belgium, Denmark, El Salvador, Equatorial Guinea, Ethiopia, France, Germany, India, Jamaica, Japan, Mauritania, Molodva, Saudi Arabia, United Arab Emirates, United Kingdom, United States, Venezuela, and Vietnam

Report I1

October 3, 1996

Mr. Chairman: At the meeting of the Joint Procedures Committee held on October 2, 1996, items of business on the agenda of the Board of Governors of the International Monetary Fund were considered. The Committee submits the following report and recommendations: 1. 1996 Annual Report The Committee noted that provision had been made for the annual discussion of the business of the Fund. 2. Report of the Chairman of the Interim Committee The Committee noted the presentation made by the Chairman of the Interim Committee.2 The Committee recommends that the Board of Governors of the Fund thank the Interim Committee for its work.

1 Report I and the Resolutions contained therein were adopted by the Board of Gover- nors of the Fund in Joint Session with the Boards of Governors of the Bank, IFC, and IDA, on October 3, 1996. Seepages 31-33.

258

3. 1996 Regular Election of Executive Directors The Committee noted that the 1996 Regular Election of Executive Di- rectors of the Fund (Annex I) had taken place and that the next Regular Election of Executive Directors will take place at the Annual Meeting of the Board of Governors in 1998. 4. Financial Statements, Report on Audit, and Administrative and Capital Budgets The Committee considered the Report on Audit for the Financial Year ended April 30, 1996, the Financial Statements contained therein (Fund Document No. 7 and Appendix X of the 1996 Annual Report), and the Administrative Budget for the Financial Year ending April 30, 1997 and the Capital Budget for capital projects beginning in Financial Year 1997 (Fund Document No. 9 and Appendix IX of the 1996 Annual Report). The Committee recommends that the Board of Governors of the Fund adopt the draft Resolution set forth in Fund Document No. 8.3 5. Amendments of Rules and Regulations The Committee has reviewed and noted the letter of the Managing Di- rector and Chairman of the Executive Board to the Chairman of the Board of Governors, dated October 1, 1996, reproduced as Fund Document No. 10, regarding amendments of the Rules and Regulations set forth in Annex I to that document (Annex II). The Committee recommends that the Board of Governors of the Fund adopt the draft Resolution set forth in Annex II of Fund Document No. 10.4

Approved:

/s/ Eduardo Aninat /s/ Fernando Teixeira dos Santos Chile—Chairman Portugal—Reporting Member

Resolution No. 51-4; see page 273. Resolution No. 51-5; see page 274.

Annex I to Report I REGULATIONS FOR THE CONDUCT OF THE 1996 REGULAR ELECTION OF EXECUTIVE DIRECTORS

1. Definitions: In these Regulations, unless the context will otherwise require: (a) "Articles" means the Articles of Agreement of the Fund. (b) "Board" means the Board of Governors of the Fund. (c) "Chairman" means the Chairman or Vice-Chairman acting as Chairman of the Board. (d) "Governor" includes the Alternate Governor or any temporary alternate Governor when acting for the Governor. (e) "Secretary" means the Secretary or any Acting Secretary of the Fund. (f) "Election" means the 1996 Regular Election of Executive Directors. (g) "Eligible votes" means the total number of votes that can be cast in an election. 2. Date of Election: The election shall be held during a plenary session of the Annual Meeting on Wednesday, October 2, 1996. 3. Eligibility: The Governors eligible to vote in the election shall be all of the Governors except those of the members that: (a) are entitled to appoint an Executive Director pursuant to Article XII, Section 3(b)(i); (b) have notified the Managing Director, in accordance with the procedure established by the Executive Board, of their intention to appoint an Executive Director pursuant to Article XII, Section 3(c); and (c) have had their voting rights suspended under Article XXVI, Sec- tion 2(b). 4. Schedule E: Subject to the Supplementary Regulations set forth herein, the provisions of Schedule E of the Articles shall apply to the conduct of the election. 5. Number of Executive Directors to Be Elected: Nineteen Executive Di- rectors shall be elected. "Nineteen persons" shall be substituted for "fifteen persons" in paragraphs 2, 3, and 6, "eighteen persons" shall be substituted for "fourteen persons," and "nineteenth" shall be substituted for "fifteenth" in paragraph 6 of Schedule E.

6. Proportion of Votes Required to Elect: In paragraphs 2 and 5 of Sched- ule E, "four percent" and in paragraphs 3, 4, and 5, "nine percent" shall not be changed. 7. Nominations'. (a) Any person nominated by one or more Governors eligible to vote in the election shall be eligible for election as an Executive Director. (b) Each nomination shall be made on a nomination form furnished by the Secretary, signed by the Governor or Governors making the nomination, and deposited with the Secretary. (c) A Governor may nominate only one person. (d) Nominations may be made until 12 o'clock noon on the day before the day on which the election is scheduled to be held. The Secretary shall post and distribute a list of the candidates. 8. Supervision of the Election: The Chairman shall appoint such tellers and other assistants and take such other actions as he deems necessary for the conduct of the election.

9. Ballots and Balloting: (a) One ballot form shall be furnished, before a ballot is taken, to each Governor eligible to vote. On any particular ballot, only ballot forms distributed for that ballot shall be counted. (b) Each ballot shall be conducted by the deposit of ballot forms, signed by Governors eligible to vote, in a ballot box. (c) When a ballot has been completed, the Chairman shall cause the ballots to be counted and the names of the persons elected to be announced promptly after the tellers have completed their tally of the ballot forms. If a succeeding ballot is necessary, the Chairman shall announce the names of the candidates to be voted on and the members whose Governors are entitled to vote. (d) If the tellers shall be of the opinion that any particular ballot is not properly executed, they shall, if possible, afford the Governor concerned an opportunity to correct it before tallying the results, and such ballot form, if so corrected, shall be deemed valid. (e) If a Governor does not vote for any candidate when entitled to do so, he shall not be entitled to vote on any subsequent ballot, and his votes shall not be counted under Article XII, Section 3(i)(iii) toward the election of any Executive Director. (f) If at any time of any ballot a member does not have a duly appointed Governor, such member shall be taken not to have voted on that ballot.

(g) If a second or subsequent ballot would be required under Sched- ule E, but the number of remaining candidates is equal to the number of vacancies to be filled, those candidates shall be deemed to have been elected on the preceding ballot, provided that paragraph 14 of these Regulations shall apply. 10. If on any ballot there are more candidates than the number of Execu- tive Directors to be elected and two or more candidates tie with the lowest number of votes, no candidate shall be ineligible for election in the next succeeding ballot, but if the same situation is repeated on such succeeding ballot, the Chairman shall eliminate by lot one of the candidates from the following ballot. 11. If any two or more Governors having an equal number of votes shall have voted for the same candidate and the votes of one or more, but not all, of such Governors could be deemed under paragraph 4 of Schedule E to have raised the total votes received by the candidate above nine percent of the eligible votes, the Chairman shall determine by lot the Governor or Governors, as the case may be, who shall be entitled to vote on the next ballot. 12. When on any ballot the number of candidates is the same as the number of Executive Directors to be elected, and no candidate is deemed to have received more than nine percent of the eligible votes, each candidate shall be considered elected by the number of votes received, even though a candidate may have received less than four percent of the eligible votes. 13. If the votes cast by a Governor raise the total votes received by a candidate from below to above nine percent of the eligible votes, the votes cast by the Governor shall be deemed, under paragraph 4 of Schedule E, not to have raised the total votes of the candidate above nine percent. 14. Any member whose Governor has voted on the last ballot for a candidate not elected may, before the effective date of the election as set forth in Section 16 below and subject to the limits specified above on the total number of votes that may be cast toward the election of an Executive Director, designate an Executive Director who was elected, and that member's votes shall be deemed to have counted toward the election of the Executive Director so designated. 15. Announcement and Review of Result: (a) After the last ballot, the Chairman shall cause to be distributed a statement setting forth the result of the election. (b) The Board of Governors, at the request of any Governor, will review the result of the election in order to determine whether, in

light of the objectives set forth in Chapter 0, Section 2 of the Re- port by the Executive Directors to the Board of Governors on the Proposed Second Amendment to the Articles of Agreement, an additional Executive Director should be elected to serve for the term of office commencing November 1, 1996. 16. Effective Date of Election of Executive Directors'. The effective date of election shall be November 1, 1996, and the term of office of the elected Executive Directors, and of any Executive Director appointed under Article XII, Section 3(c), shall commence on that date. Incum- bent elected Executive Directors shall serve through October 31, 1996. 17. General: Any question arising in connection with the conduct of the election shall be resolved by the tellers, subject to appeal, at the request of any Governor, to the Chairman and from him to the Board. Whenever possible, any such question shall be put without identifying the members or Governors concerned.

As approved by Board of Governors Resolution No. 51-3, August 26, 1996

STATEMENT OF RESULTS OF ELECTION, OCTOBER 2, 1996

Members Whose Votes Candidate Elected Counted Toward Election5 Number of Votes

Abdulrahman A. Al-Tuwaijri Saudi Arabia 51,556 Thomas A. Berries Antigua and Barbuda 335 The Bahamas 1,199 Barbados 739 Belize 385 Canada 43,453 Dominica 310 Grenada 335 Ireland 5,500 Jamaica 2,259 St. Kitts and Nevis 315 St. Lucia 360 St. Vincent and the Grenadines 310 55,500

5Somalia did not participate in this election. Sudan and Zaire did not participate owing to the suspension of the voting rights of these members under Article XXVI, Section 2(b).