International Monetary Fund VOLUME 28 SUPPLEMENT September 1999 www.imf.org Contents Financial markets recover 1 IMF adapts to changing global environment Overview 3 to meet member countries’ needs Financial architecture After a series of financial crises between mid-1997 and stem the crisis affecting its economy. In these and other early 1999, which for a time raised fears of a global areas, the IMF has been directly involved––providing 4 Organization recession, there has recently been a marked improve- policy advice to its 182 member countries, extending ment in financial market conditions and most of the financial support for soundly formulated adjustment 5 economies that were affected by the crises have begun and reform programs, offering contingent financing to Executive Board table to recover. Although there are a number of remaining countries affected by financial contagion, granting low- global downside risks, growth appears to have bot- cost assistance to the poorest and most indebted of its 6 Quotas tomed out at 2!/2 percent in 1998, in what appears to member countries, and taking steps to strengthen the have been the mildest of the four world economic slow- international financial system, including by promoting 7 downs of the past three decades. transparency and good governance in its members. Quota table In Southeast Asia, where the first crises occurred, the Despite the signs of progress, many challenges remain. 8 countries most directly affected––Korea, Indonesia, Continuing recovery depends on sound policies at the Surveillance Malaysia, and Thailand––are all showing signs of recov- national level and also on a healthy global economic envi- 10 ery. In Russia, despite many difficulties, the government ronment. Globalization, characterized by increasingly Conditionality implemented policies that have helped stabilize the integrated financial markets, accompanied by freer capi- tal flows across national borders, is now accepted as a per- 12 economy. In Latin America, Brazil took swift action to Financial facilities manent and beneficial feature of the world economy. and policies All participating countries can benefit––enjoying more 13 investment and a better standard of living––although Access limits many have been left out of this progress. The crises gave powerful impetus to proposals to 16 Contingent Credit strengthen the architecture of the international finan- Lines cial system and commanded much of the Executive Board’s attention in 1998 and the first half of 1999. The 18 Debt strategy proposals addressed, among other issues, transparency and accountability; internationally accepted standards 21 Photo copyrighted, of good practice in economic, financial, and business Technical assistance not available activities; capital market liberalization; the role of the 23 private sector in forestalling and resolving crises; and Borrowing improvements in financial market supervision. The 24 IMF made considerable progress in these areas and also Liquidity devoted much of its time to discussing ways to 24 strengthen its support of member countries, particu- Income and charges larly the poorest and most heavily indebted. 25 Overdue payments Developments in the world economy World output growth slowed to 2!/2 percent in 1998 26 SDRs from 4!/4 percent in 1997, largely as a result of the emerging market crises and the deepening recession in 28 Japan. Global growth is projected to pick up moder- IMF Chronology South Korean investors at a securities brokerage in Seoul react happily to rising stock prices. South Korea’s ately in 1999 and to be only slightly below its long-term economy has shown signs of recovery. average in 2000. (Please turn to the following page) 1 ©International Monetary Fund. Not for Redistribution SUPPLEMENT IMF adapts to global changes (Continued from front page) Commodity prices fell Among the industrial countries, divergences in eco- across the board in 1998, with the price of oil declining nomic performance became more pronounced in 1998. more than 30 percent for the year as a whole, depressing Japan’s economy contracted by 2#/4 percent, largely because Globalization growth in the oil-producing countries of Africa and the of weakness in private demand and in the emerging mar- is now accepted Middle East. The prices of other commodities weakened ket economies of East Asia. In contrast, the U.S. economy as a permanent steadily and were partly responsible for a sharp slowdown continued to grow strongly, expanding by almost 4 percent and beneficial in growth in Latin America in the second half of the year. for the second successive year in 1998. In Canada, growth feature of the Although the price declines lowered global inflation, they slowed in 1998 as a whole, but picked up toward the end of world economy. also reduced real incomes and domestic demand in many the year. Unemployment in the United States reached a 29- commodity-exporting developing countries. Oil prices year low of 4!/4 percent in early 1999. began to recover in March 1999, partly in response to In Europe, the third stage of European Economic signs of economic recovery in Asia but also because of and Monetary Union began on January 1, 1999, when supply constraints by many producing countries. 11 countries adopted the euro as their currency. Among the crisis-affected countries in Asia, output Growth in the euro area, which picked up in 1997, growth was negative for 1998 in Hong Kong SAR, slowed significantly in late 1998, particularly in Indonesia, Korea, Malaysia, and Thailand, but eco- Germany and Italy, before beginning to recover in early nomic activity picked up toward the end of the year in 1999. Outside the euro area, growth in the U.K. econ- Korea and Malaysia, and in early 1999 in Indonesia, omy slowed markedly during 1998, but showed signs of Thailand, and Hong Kong SAR. The Philippines also recovery by mid-1999. Inflation remained low in the experienced a slight drop in output in 1998, mainly advanced economies, partly reflecting low-cost imports because of the impact of bad weather on agricultural from Asia and declining commodity prices. production. Real GDP grew by 7#/4 percent in China in 1998, but economic activity was weak in Singapore, IMF in 1998/99 which was hard hit by the crisis. In its 1998/99 fiscal year, ending on April 30, 1999, the IMF In early 1999, the Russian economy began to recover continued to deal with the fallout from the Asian crisis and from its low point of September 1998, with the rise in the subsequent crises affecting Russia and Brazil and their oil prices and macroeconomic policies helping to repercussions, which presented the institution with addi- improve the fiscal position and balance of payments. tional challenges and underscored the risks of financial Output declined by 4!/2 percent in 1998 as a whole, and contagion. During August–October 1998, most emerging inflation picked up somewhat in late 1998 and early market economies temporarily lost access to private 1999, with the ruble remaining under pressure. The financing amid fears of a global credit crunch, before calm Russian crisis spilled over to neighboring transition returned to financial markets by the end of the year. As a countries, depressing economic activity in many of result of the ongoing financial market turbulence during these, but its impact on Central and Eastern European the year, the demand for IMF financing continued to be economies was limited and mostly temporary. heavy—amounting to $30 billion––and the IMF resorted In the developing countries as a group, growth to borrowing on two occasions (see page 23). Its resources slowed to 3!/4 percent in 1998 from 5#/4 percent in 1997; subsequently dipped to a very low level in December growth increased slightly in Africa, to 3!/2 percent. Most 1998–January 1999, but were augmented by the increase in Latin American countries, which had coped well with members’ quotas that took effect in late January. The IMF the financial pressures stemming from the Asian crisis, was thus able to provide a high level of assistance to its were more negatively affected by the Russian crisis. member countries during the year. Brazil came under particularly heavy pressure because The largest users of IMF resources in 1998/99 were of concerns about its large fiscal deficit and the sustain- Brazil and Russia, although a number of other coun- ability of its exchange rate peg. These led Brazil to tries also used relatively large amounts, including adopt a flexible exchange rate regime in January 1999. Bulgaria, Indonesia, Korea, Pakistan, the Philippines, Pressures did not abate until March 1999, when the Thailand, and Ukraine. As of April 30, 1999, 9 Stand-By government took steps to strengthen its fiscal and mon- Arrangements, 12 Extended Arrangements, and 35 etary policies under its IMF-supported program. This Enhanced Structural Adjustment Facility Arrangements helped confidence to recover in Latin American coun- were in effect with member countries. In the face of tries generally. The economies of several Central continuing uncertainties in Russia, the IMF approved, American countries, especially Honduras and on July 28, 1999, a 17-month Stand-By Arrangement Nicaragua, were devastated by Hurricane Mitch in for $4.5 billion to enable Russia to tackle the root causes Supplement 1999 October 1998, prompting emergency support from the of the crisis––including persistent fiscal imbalances, 2 IMF. structural rigidities, and financial sector weaknesses. ©International Monetary Fund. Not for Redistribution Reform of the international of Article IV consultation discussions with individual financial architecture members are released when the member country con- SUPPLEMENT The IMF has recently taken a number of initiatives that cerned agrees. In another move intended to increase pub- will enable it to assist members that have experienced dif- lic awareness of its activities—and to demonstrate its ficulties over the past year and to better meet the challenges commitment to greater openness—the IMF released, for of a globalized economy.