World Economic Situation and Prospects
10 September 1996
At this year's Commonwealth Finance Ministers' Meeting in Bermuda, Ministers will first consider the world economic situation and its prospects. In a paper prepared for the Meeting, the Commonwealth Secretariat notes that globalisation of the world economy has increased integration of the world markets for goods, services and capital. But it has yet to benefit many developing countries + and several risk being marginalised - unless domestic and international policies work together in spreading the benefits of integration more widely.
On global economic performance, the paper notes that after a period of strong expansion, growth in the world economy moderated somewhat in 1995. In industrial countries there was a slowdown but developing countries have now seen sustained growth for five years and their long-term prospects are for faster growth, albeit with sharp variations in performance. There were, however, a number of downside risks if progress in domestic policies and changes in the external environment turned out to be less than favourable.
Ministers are expected to focus on action that can be taken at the national and international level to broaden private flows to a wider group of countries. They will also focus on reviving support for aid, which has continued to decline, particularly in the context of implementing the new Strategic Vision on Development Co-operation developed by the Development Assistance Committee (DAC) Aid Ministers. They will consider recent developments in world merchandise trade and discuss ways of ensuring that the WTO Meeting in Singapore later in the year helps to promote trade and development in all countries (including speedy implementation of Uruguay Round agreements) and finds a way forward on "new" issues on the international trade agenda such as regionalism and labour standards.
Multilateral Debt
The issue of multilateral debt will figure prominently on the Meeting's agenda. A concrete proposal for multilateral debt relief was first launched at the Commonwealth Finance Ministers Meeting in Malta, 1994, by Britain's Chancellor of the Exchequer, the Rt Hon Kenneth Clarke. Following this initiative there has been a growing recognition that the multilateral debt problem has to be tackled comprehensively by international financial institutions. The Commonwealth Secretary-General, Chief Emeka Anyaoku, wrote to G7 leaders prior to the Lyon Summit in June urging support for the Commonwealth position.
Following the impetus given at the Lyon Summit, Ministers will be pushing for a substantial strengthening of current proposals on multilateral debt if they are to have a decisive impact on the multilateral debt problems of the heavily indebted poor countries (HIPCs). A special report has been prepared for Finance Ministers to assist their discussions. This report underscores the areas where the current proposals need further strengthening, e.g. the restrictive eligibility criteria, the double waiting period before relief is triggered, funding of the debt initiative, equitable burden sharing between the World Bank, the IMF and bilateral creditors and mechanisms for enhancing debtor ownership of current initiatives.
International Monetary Fund
Besides these major policy issues, the Meeting will focus on questions related to the IMF and World Bank. On the IMF, Ministers are likely to emphasise the need for it to be equipped with adequate resources, through an appropriate increase of quotas, to enable it to meet the liquidity needs and balance-of-payments requirements of its member countries. Developing countries are concerned that any quota increase would need to be substantial and the formulae for calculating such quotas should protect their voting strength, which has been eroded over the years.
In response to the financial market disruptions caused by the Mexican crisis, the Fund has strengthened surveillance over the policies of countries and has established special standards for data publication and dissemination to markets. Ministers are expected to discuss whether improved data dissemination could reduce market surprises and act as an effective "early warning system" and how the Fund's enhanced role in this respect carried the risk that its seal of approval might affect market perceptions and sovereign ratings.
In this context, Ministers are likely to discuss the adequacy, flexibility and speed of the new Emergency Financing Mechanism to deal with financial crises and consider whether the eligibility criteria could be broadened to allow support for countries in crises which are not necessarily systemic in nature. There is also likely to be a discussion of Special Drawing Rights and consideration whether the current proposal by the management of the Fund for a fresh allocation is adequate to meet the needs of Fund members.
World Bank
On the World Bank, Ministers are expected to focus on the uncertainty regarding IDA. This arises out of a lack of progress on the US fulfilment of its commitment to IDA-10 which could unravel the carefully crafted agreement on IDA-11. Ministers are expected to consider if a Commonwealth initiative could be launched to break the impasse. Ministers are also likely to discuss the greater attention to governance and corruption in Bank discussions on country strategies and in its lending. Concern is likely to be expressed that IBRD lending levels continue to be disappointing and negative net transfers have increased.
Ministers are also likely to consider the implications of the new "change management" in the context of the Bank having undergone an almost continuous period of reorganisation over a protracted period and the apparent need for a period of stability and consistency in Bank policies in order to revitalise its operations and make it more effective. Other matters of current interest include the adequacy of Bank programmes to support poverty reduction and the development effectiveness of the IFC.
Special Theme: Private Capital Flows
The Meeting's special theme, Private Capital Flows and Development: Role of National and International Policies, is particularly timely. A background paper commissioned for Ministers discusses the implications of Mexico-type crises for the global financial system and the risks associated with the volatility of private capital flows. Private capital flows have increased dramatically and play an important role in supplementing savings and financing investment. However, surges of capital inflows can create macro-economic problems because of the effects on the exchange rate and other macro-aggregates, together with the risk of abrupt cessation or outflow. The paper discusses a number of issues that arise in attempting to manage private capital flows, including use and limitations of sterilisation policies, reserve requirements, capital controls and the role of cross-border transaction taxes.
Ministers will examine the key issues in creating an effective mechanism for the provision of official finance in response to financial crises. They will discuss the adequacy of existing international arrangements for emergency financing. They are also expected to focus on new and innovative proposals such as those developed by the G10 on sovereign liquidity crises and its recommendations on orderly debt workouts for "solvency" problems in relation to securitised debt and consider, among other items, the possibility of the Fund lending into arrears under strict limitations.
Private Investment
The meeting will review a range of development co-operation activities undertaken by the Commonwealth Secretariat. In particular, Ministers will discuss progress reports on the implementation of the Commonwealth Private Investment Initiative (CPII) which they agreed in Kingston (1995), and on the fight against money laundering. CPII envisages the setting up of a co-ordinated series of regional investment funds to mobilise capital for commercial investments in new and small- and medium-sized private sector businesses. The first regional fund under CPII is the Commonwealth Africa Investment Fund which was launched in July in the presence of President Nelson Mandela of South Africa and the Rt Hon Michael Heseltine, Deputy Prime Minister of Britain, with a capital of US$62.5 million subscribed by investment agencies of Botswana, Brunei Darussalam, Malaysia, Singapore, South Africa and Zimbabwe. Ministers are expected to discuss proposals for launching similar funds for the South Pacific and the Caribbean.
Combatting Money Laundering
Last year Ministers discussed the fight against money laundering as a special theme, which culminated in a Special Report which was later endorsed by Commonwealth Heads of Government. They also requested the Secretary-General to convene a meeting of relevant Senior Finance Officials to review progress in implementing the Financal Action Task Force's (FATF) recommendations and assess what additional measures may be needed.
Ministers are expected to consider the recommendations of Senior Finance Officials who met in June. These state that it is important to level up international standards at least to the minimum set by the FATF on measures to combat money laundering, that the self-evaluation exercise had been particularly useful and should be undertaken again in 1997, and that the Secretariat should undertake further work on the implications of the existence of parallel economies in some countries for combating money laundering. Ministers are also expected to discuss regional initiatives and endorse the Commonwealth guidance notes for the financial sector as a basis for assisting countries in developing and implementing effective strategies for the financial sector to combat money laundering.
The CFTC
Ministers will also review other development co-operation activities undertaken by the Commonwealth Secretariat; this will include a discussion on the resource position of the Commonwealth Fund for Technical Co-operation (CFTC) and the necessity for advance pledges and timely payment of contributions.
Debt Management
Senior Finance Officials will meet the day before the Ministerial meeting (24 September) to consider the provisional agenda for Ministers and the framework of the Communiqué. They will also discuss a technical theme, Fiscal Policy and Domestic Debt Management. The management of domestic debt is becoming a challenge for many Commonwealth countries as they move to market-oriented interest rate policies. In this respect they are likely to focus on an enhanced version of the computer software developed by the Secretariat - the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) - which has been extended to assist governments in the task of effectively monitoring and managing of their domestic and external debt.
Issued by the Information and Public Affairs Division, Commonwealth Secretariat,
Marlborough House,
Pall Mall,
London SW1Y 5HX,
United Kingdom.
Tel: 0207-839 3411;
Fax: 0207-839 9081;
Telex: 27678
96/42 10 September 1996
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