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Pronunciamentos
Apr. 16, 1998
Mr. Malan´s
remarks in the meeting of the IMF
These are the remarks made by Mr.
Pedro Malan, Minister of Finance of Brazil, during the 50th Meeting
of the Interim Committee of the International Monetary Fund (IMF), on April, 16,
1998.
Agenda Item 2
1. The deepening and spreading of
risks associated with the financial turmoil in Asia, seem to have abated.
2. Otherwise, among industrial
economies, the maintenance of domestic demand in the United States and its
strengthening in much of continental western Europe is encouraging. This trend
in Europe should be consolidated by a successful implementation of the monetary
union. But these countries have insufficiently stressed their responsibility to
contribute more to their own recovery as well as that of developing and
transitional countries by more emphasis on structural change.
3. In Asia, exceptional external
financing for the countries most affected has provided support for their
adjustment efforts. We expect additional resources to be made available--if
needed--to ensure a rapid and sustainable recovery in these economies. Besides
financing support, the flexibility contemplated in Fund programs, where fiscal
targets adjust with changing circumstances, is one important element in this
process. Flexibility in fiscal policies to preserve poverty alleviation
programs, including the strengthening of social safety nets, is also welcome.
The approach in the Fund’s programs in Asia for an appropriate balance between
the need to restore macroeconomic stability and the need to ensure that domestic
demand is not unduly compressed should be commended. Indonesia constitutes a
special case, while in Japan reaction to recovery is expected.
4. Elsewhere, the positive growth
experienced in 1997 by transition countries as a group for the first time in
eight years was most encouraging. Among developing economies, we welcome the
improved perspective of growth in many countries in Africa, reaping the benefits
of continued implementation of strong adjustment and reform policies. In Latin
America, the effects of the crisis in Asia have been moderate, and weathered
through tightening fiscal and monetary policies and steady implementation of
structural reforms. In particular, improvements have been achieved in
strengthening the financial sector regarding prudential regulation and
supervision, as well as bank restructuring. Capital flows, especially foreign
direct investment, have been maintained. As long as the external environment
remains unstable; however, it is essential to maintain a cautious macroeconomic
stance.
5. To assess properly the current
crisis centered on South East Asia and Japan, a more comprehensive analysis is
required.
6. Strengthening policies and
institutions in the emerging market countries is fundamental, but appropriate
policies in the advanced economies are also necessary to avoid the occurrence of
excessive and distortive fluctuations in capital flows, and there may be need as
well for a more careful supervision of industrial-country banks. Episodes of low
interest rates in the major industrial countries in the 1990s may have led
international interest rates to a level that generated major distortions in the
allocation of global resources. These sustained declines in world interest
rates, and increased interest rate differentials in favor of the emerging
countries’ domestic currencies, have induced surges in capital flows to these
economies which complicated their macroeconomic management.
7. Financial intermediaries
reallocated the excess of credit in industrial countries across the borders
towards emerging countries. Furthermore, strong growth performance and potential
in emerging economies during a period in which growth was sluggish and
investment opportunities were less attractive in industrial countries created an
additional incentive for a sharp increase in private capital flows to emerging
market economies. Flows became very large relative to the absorptive capacity of
many recipient countries. Imperfections in international financial
intermediation--either in the country where the resources originate or in the
capital-recipient country--have exacerbated the distortions.
8. In small economies, the design of
an appropriate response to avoid domestic or external imbalances has to take
into consideration effects on their economies of policies followed by industrial
countries. In an ever more interdependent global economy, the Fund needs to pay
greater attention to the policies of countries of systemic importance, i.e. the
major industrial countries. Interest rates and exchange rates of those countries
critically affect the environment in which other countries must set their
policies.
9. In a context of low interest
rates in industrial countries, the systemic risks arising from large-scale,
short-term, foreign currency borrowing by emerging markets, merit special
attention in an adequate system of prudential regulation; the World Economic
Outlook report correctly raises this point. Creditors with short-term claims
have, by and large, been protected; they could easily exit as such claims are
very liquid. In this context, control on capital inflows, especially short-term
ones, may be an alternative available for small economies to mitigate
distortions resulting from excessive liquidity abroad.
10. The present movement in the direction of
intensifying capital account liberalization requires care. Capital account
liberalization must be gradual and will depend on progress in other areas,
especially a framework which will preserve the stability of the financial
system. Weak financial sectors and inadequate prudential supervision tend to
lead both borrowers and lenders to underestimate risks associated with many
investments. There is an "optimal" order of economic liberalization,
which may vary for different liberalizing economies depending on their initial
conditions. Moreover, emerging markets will need to manage the maturity
structure of their external debt--public and private--in such a way as to
minimize the risks of a liquidity crisis. The accumulation of short-term
borrowing to finance large current account deficits was a crucial ingredient
precipitating recent crises through sudden reversals in capital inflows and
sharp changes in exchange rates.
11. We fully agree that there are important
preconditions for an orderly liberalization of capital movements. These include:
(a) a robust financial system underpinned by effective regulation and
supervision of financial institutions; (b) market based instruments such as
reserve requirements on short-term borrowing; and (c) prudential limits on
foreign currency exposure in the financial system. Ideally, what should be the
role of the Fund in capital account liberalization? We can support an advocacy
rule on capital account liberalization for the Fund, but see no need at this
time to endow the Fund with jurisdiction over the matter.
12. We welcome the progress made under the
HIPC-ESAF initiative by a number of countries and encourage the Fund to continue
its efforts under this program. We support the initiative taken by the
International Monetary Fund and the World Bank, that have jointly developed a
program of action to help solve the debt problem of poor countries that follow
sound policies. This initiative is a comprehensive, integrated, and coordinated
approach which requires the participation of all creditors, bilateral,
multilateral, and commercial. In our case, we are working with Congress to
obtain the necessary legislative approval to put this initiative into effect.
13. Finally, a word on Brazil. Since December,
the situation in the financial market has eased, and the official interest rate
was reduced further to 28 percent in March from the peak of 43 percent in
November. As a result of tighter policies, the economy slowed with industrial
production decelerating, although growth in the production of capital goods
remains steady. In late 1997 and early 1998, fiscal consolidation efforts have
been burdened by the increase in interest payments, and the effect of lower
growth on fiscal revenues. Pending major reforms for improvement in the public
finances, monetary policy will continue to play a key role, supported by the
proceeds of privatization to amortize public debt, with the objective of
avoiding undue expansion both of private credit and public debt. Therefore,
monetary policy will continue to be conducted carefully to maintain its
consistency with the stabilization program, and further efforts in the fiscal
area will be pursued to bring public sector finances to a more sustainable
pattern.
14. The final approval of the administrative
reform by the Congress occurred in March; this reform is a fundamental component
to strengthen over the medium and long term the fiscal situation not only of the
federal government but also of states and municipalities. Social security reform
will continue to be pursued. External accounts have showed further improvements,
with steady improvement of the trade account and increase in foreign direct
investment. The rise in capital inflows, importantly stimulated by Brazil’s
privatization policy, has allowed a substantial increase in international
reserves, regaining the levels observed in October. We continue in our process
of strengthening the financial system to comply with international standards for
banking supervision, in close collaboration with the BIS, Fund, World Bank, and
others.
Agenda Item 3
1. On Agenda item 3 "Strengthening the
architecture of the International Monetary System--Prevention, Management and
Resolution of Crises." I have the following comments, prompted among
other things by the reading of the Managing Director’s Report to the Interim
Committee on the subject.
2. First of all, to express our support to the
view that dealing with these problems--real or perceived potential
problems--will require not only action by individual member countries--developed
and developing--but also "a broad-based effort in international
cooperation."
3. In particular, I should like to emphasize the
importance that we attach to what is said in the second bullet point of
paragraph 4 of the Managing Director’s text on the responsibilities of the
international community:
"...Increased international cooperation
will also be required in areas beyond the establishment of standards,
including in the sharing of information between regulators, especially those
with supervisory authority over institutions operating in major financial
centers. Regulators also need to look carefully at flows from offshore
centers, where lack of information can blur the portrayal of a country’s
market exposure and delay the identification of a problem."
4. We agree that these are complex issues,
especially in the light of the rapidly changing structure of international
capital markets and of the growing importance of trading in derivatives, hedge
fund activities and strongly reduced transaction costs, but surely there is room
for continuing our efforts in the BIS, in the Fund, in the World Bank, and
especially towards a higher degree of cooperation among regulators and banking
supervisors of the main developed and developing countries.
5. Secondly, on "Strengthening Fund
Surveillance and Fund’s recommendations including publicity of Fund
advice."
6. We agree with the fairly general point that
Fund surveillance will continue to play a crucial role in crisis prevention
which, by and large, should be our main concern even though we all agree that it
is unrealistic to expect that every crisis can be anticipated or prevented.
7. We are convinced that the effectiveness of
Fund surveillance in crisis prevention depends in a very fundamental sense on
the nature, the depth, the frankness and quality of the evolving policy dialogue
between the Fund and its member countries. Policy dialogue means, per necessity,
a readiness of the country’s authorities to leave no questions unanswered and
to provide all types of information required, but also a readiness of Fund staff
to probe deeper, to understand, to perceive directions of change, to develop a
sense of perspective and to avoid pushing too far the intellectual hedging
process which has been underway since the Mexican crisis of late 1994, and which
has been given a major boost after the Asian crisis.
8. Most relevant Fund recommendations, in
this context, should be made in the context of this evolving and on-going policy
dialogue. Joint efforts at confidence-building and mutual trust in these policy
dialogues must be seen as an indispensable element of effective Fund
surveillance--be it in prevention, management or resolution of crises. It is
through this dialogue that Fund’s views could be effectively communicated to
members. We do not agree with the statement that "effective Fund
surveillance depends crucially on the willingness of members to take the
Fund’s advice" because there may be cases in which the authorities of the
country may reasonably differ from certain views of the Fund. No one--even the
Fund--has the monopoly of truth and the capacity to define precisely, beyond any
doubt, the "right" thing to do, the moment of doing it, and the unique
manner of balancing inevitable trade offs in economic policy making. In fact, we
thought this point had been accepted.
9. Of course, in cases where there are sharp,
fundamental disagreements about basic issues, or cases in which the country
refuses the policy dialogue, one may think about a "process of incremental
steps through which the Fund’s concerns are expressed," but we should try
to make this the exception rather than the rule.
10. Third, on transparency and
disclosure of data to the Fund, and the public, we should make a key
distinction between the Fund and the public. To the Fund, there should be no
secrets whatsoever, the policy of members must be on total transparency and full
disclosure of everything the Fund is interested in or concerned with--as long as
there is trust in the relationship, that is to say, confidence that
information provided in confidence to the Fund would be treated as such and
would not be leaked or publicized without the government’s consent.
11. The information to the "public"
poses some non-trivial questions. I am under the impression that in some
quarters there is a recurrent underestimation of the degree of sophistication of
the analytical capabilities and especially of the extent of the
information already available to many financial institutions and duly processed
by them. The idea that they depend on getting information through the Fund as an
intermediary or go-between does not square with reality, especially for the
larger developing countries, unless one refers not to quantitative information
but to qualitative information. But the view is very controversial that the Fund
should be providing specific qualitative judgements about countries to market
participants outside the framework of existing procedures which, of course,
should be kept under review and flexibly changed as deemed appropriate.
12. Fourth, a word on crisis prevention:
we have difficulties with the idea of developing "early warning signals of
imminent crisis" as "an intensive focus of staff work"as
suggested in the Managing Director’s Report. As Secretary Rubin rightly put it
in yesterday’s speech,
". . . while greater transparency to
help investors reach an informed judgment about potential problems is
essential, giving the IMF the responsibility to publicly predict formal
warnings of crisis is not. While it is possible to identify problems that
may develop into difficulties and occasionally into crisis, it is not
possible in our view to reliably predict combustion into crisis."
13. Fifth, on the Fund’s role in the management
of a crisis after it occurred, it is clear by now that, after the huge external
financial assistance packages to Thailand, Indonesia, and Korea (making a total
notional amount of well over 100 billion dollars), the Fund’s role must be
complemented by other sources of official support from governments and other
multilateral institutions. The key issue here is the nature of the program which
must be implemented by the country as the necessary counterpart of the external
financial assistance package. In this connection, we feel that the Fund and the
World Bank must work closely together with the authorities of the country
concerned. We are back to the issue of the nature and depth of the policy
dialogue between these actors.
14. Lastly, the early involvement of the
private sector in crisis resolution is a rather difficult subject which must
be seen in conjunction with three related discussions. First, with the enhanced
coordinated role of regulators and supervisors prior to the crisis especially in
drawing attention to situations of excessive risk-taking and excessive reliance
on short-term lending and excessive exposure. Secondly, since governments of key
industrial countries must necessarily be involved in ensuring an appropriate
degree of burden-sharing by the private sector after a crisis has materialized,
their prior actions, through their regulators, are essential elements of the
discussion, which will never be an easy one (witness the seven-year period
required for acceptance of some minor burden-sharing by private banks under the
Brady scheme). Thirdly, the rather controversial issue of the pros and cons of
an international lender of last resort, lending at a penalty rate, under
conditions which could be imposed on debtors and creditors in terms of organized
debt work outs should be reactivated if for no other reason to allow us to probe
deeper on the difficult set of issues involved. If history is any guide, the
private sector needs the guiding hand of the public sector in achieving orderly
restructuring of debt, especially when it is supposed to be bearing some of the
costs involved.
15. In short, this last set of subjects requires
further discussion, but there is much more to be done in the realm of attempting
prevention of crises, rather than how to deal with crises which have
erupted--as, unfortunately, is bound to occur.
16. We endorse the draft code of good practices
on fiscal transparency. It is a constructive contribution to the complex issue
of governance and government accountability. One has to admit--as the code
rightly does--that the implementation will respect different institutional and
legal environments. This is obvious, and the proposal put forward by the Fund
seems to be in the realm of what all or most countries can do. Our experience in
Brazil indicates that setting higher standards of transparency must be a
permanent concern; a concern that must be extended to local authorities as well,
when they collect their own taxes and elaborate their own budgets. Two final
comments: (1) fiscal statistics are not necessarily comparable in different
countries. The understanding of what they actually mean, in other words,
international data comparability, is essential when one wants to assess the
level of transparency inherent in published data. (2) We applaud the readiness
of staff to provide technical assistance to countries in the implementation of
the code. The code shall open a new space for cooperation and improvement of
government expertise rather than a reason for additional requests imposed on
member states.
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