Archived - Statement Prepared for the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund: April 2014
Washington, D.C., April 12, 2014
As Canada’s new Minister of Finance and Governor to the International Monetary Fund (IMF), it is a great privilege to represent this constituency at the International Monetary and Financial Committee (IMFC) as we work together to promote jobs, growth and stability.
Since last fall, the global recovery has progressed despite experiencing bouts of volatility. Nevertheless, global growth is still too weak, unemployment remains too high in many countries, and downside risks need to be managed, including the potential consequences of geopolitical developments. The current state of affairs is not acceptable and should only increase our resolve to press ahead with ambitious reforms to promote stronger and more balanced growth and to create the conditions needed to generate more jobs. In this context, we look towards ambitious and collective action, supported through the Group of 20 (G-20) and IMFC, to spur growth and prevent the global economy from settling into a weak growth trajectory. The IMF has an important role to play in helping to achieve this objective. Providing impartial and candid advice and supporting members’ adjustment efforts must remain the Fund’s central focus. This is especially true in the case of Ukraine, where we support the IMF’s engagement and assistance and welcome the authorities’ resolve to undertake reforms necessary for stability and prosperity.
Our constituency members continue to face a diverse set of challenges and we are all carefully navigating the recovery. In this Statement, I provide updates on economic developments and key policy priorities in the constituency relating to Canada, Ireland and the Caribbean. I also convey constituency views on key issues that affect the IMF’s governance as well as its core role in safeguarding global economic stability through surveillance and adjustment lending.
Canada’s economic performance over the recovery has been solid, reflecting Canada’s sound economic, fiscal and financial fundamentals. Growth has been driven by a strong domestic economy, including robust business investment early in the recovery.
However, the global economic environment remains fragile, and Canada is not immune to external developments. Canada’s growth has been restrained by weak export markets and declines in commodity prices. Moreover, the re-pricing of global risk which began last year is exposing financial market vulnerabilities in some emerging economies while growth in the euro area remains fragile and uneven.
The Government of Canada is on track to return to budgetary balance in 2015. The return to balanced budgets will contribute to reducing Canada’s federal debt-to-GDP (gross domestic product) ratio below its low, pre-recession level by 2017, and put the Government on track to achieve, as part of its G-20 commitment, a federal debt-to-GDP ratio target of 25% by 2021. Recent policy actions aimed at achieving these goals include: targeted reductions in program spending; a government-wide freeze of operating budgets; measures to close tax loopholes and improve the integrity, fairness and neutrality of the tax system; and steps to better align compensation for federal public servants with that offered by other public and private sector employers.
Economic Action Plan 2014 built on previously announced measures to raise Canada’s economic potential and create stable, well-paying jobs. New measures announced include: tailoring skills training to the needs of the labour market and training the workforce of tomorrow; fostering trade and entrepreneurship; supporting advanced research and innovation; ensuring responsible resource development; and providing for additional investments in infrastructure and transportation.
Ireland successfully exited the European Union-IMF Program of Financial Support in December 2013, without the need for a pre-arranged backstop. The program met its key objectives, namely to put the public finances back on a sustainable path, to restore financial sector viability, to return Ireland to financial market funding and to raise growth potential. Following its exit from the program, Ireland made a successful return to the long term bond markets and is now in a position to fund itself on the markets, as evidenced by the most recent issuance of 10-year bonds at a record low of 2.97%. Moody’s upgraded Ireland by one notch to investment grade in January. Ireland is now at investment grade by all five credit rating agencies. Nevertheless, Ireland does remain vulnerable to international developments and remains steadfast in its resolve to implement the right macroeconomic and fiscal policies as set out in the Medium Term Economic Strategy published late last year.
There are also positive signals in the financial sector. Post recent disposals of assets, the State has now generated a positive cash return on its investment in Bank of Ireland. Furthermore, the National Asset Management Agency, the state agency which was set up to remove troubled assets from the affected banks’ balance sheets, announced in March that, ahead of its targets, it had redeemed 35% (EUR 10.5 billion) of the senior bonds used to purchase these assets. Nevertheless, the authorities are acutely aware of the remaining challenges such as addressing mortgage arrears, and have put significant efforts into building the necessary legal and regulatory infrastructure and ensuring that the banks have built up the operational capacity to manage arrears cases.
Ireland continued its economic turnaround in 2013. Although the preliminary figures for that year show a slight fall in GDP of 0.3%, this was largely due to one-off factors such as large amounts of drugs coming off patent in the pharmaceutical sector, which has a large weighting in Irish exports. In contrast, service exports continued to grow strongly reflecting competitiveness gains in recent years and Ireland’s success in attracting foreign direct investment. Furthermore, the positive momentum in the Irish economy is reinforced by tangible improvements in the jobs market. The unemployment rate peaked at 15.1% in the first quarter of 2012 and has fallen to 11.9% in February 2014.
The Irish authorities are determined to build on the achievements to date by implementing their own program of fiscal, financial and structural reform in order to ensure that the economy prospers and that the Irish people reap the benefits of their sacrifices over the last few years. To this end, Ireland continues to invest in capital projects to raise the supply side potential of the economy, such as school building and roads, which are funded by a combination of government, private and European Investment Bank resources. Furthermore, the authorities remain focused on improving access to finance for small and medium-sized enterprises.
The Caribbean economy has started to show signs of a recovery after a prolonged recession associated with the global financial crisis. Real GDP growth has increased as the main tourism generating economies continue to recover. As stronger growth returns to the region, the policy priorities for many countries will centre on rebuilding policy buffers and improving competitiveness so as to mobilize domestic and foreign investment. Caribbean countries will continue to face downside risks, such as economic shocks and natural hazards, but will endeavour to manage them carefully in the medium term by building stronger and more resilient economies.
A number of Caribbean countries continue to grapple with the challenges of fiscal and debt sustainability, and in response some countries have embarked on fiscal consolidation programs with the assistance of the IMF and development partners. In addition, debt restructuring is being used by some authorities, along with fiscal consolidation, to achieve debt sustainability. Further, the stability of the financial sector continues to be an area of risk that needs to be addressed. In some countries, however, fiscal consolidation has been contractionary, as reductions in current and capital expenditures have not been met by an adequate expansion in private sector activity. As a result, unemployment has remained elevated, but ongoing structural reforms and the forecast for increased real sector activity are expected to reduce unemployment levels over the medium term.
The Caribbean region continues to receive invaluable technical assistance, policy advice and, in some cases, financial support from the IMF and other development partners. This has contributed to tangible improvements in the macroeconomic framework in these countries, and they are set to build on these successes well into the future. The authorities in the region highly appreciate the commitment of the IMF and other international partners to support the region as they continue to build resilient economies capable of fostering high levels of sustainable growth and improved development outcomes.
Quota and governance reform is critical to ensuring the IMF has the appropriate tools and governance structure to promote global economic and financial stability. The 2010 quota and governance reforms were a significant step and the long overdue implementation of these measures is regrettable. Members that have not yet ratified the reforms should do so without further delay.
The 15th General Review of Quotas presents another opportunity to further strengthen governance in line with the evolving global economic landscape. It is imperative that our approach puts the membership in a position to meet the new January 2015 deadline for completing this next round of reforms. Our constituency remains open to considering all reasonable options to advance IMF reform. We should build upon the outcomes agreed in 2010 and the progress achieved over the last two years on a new quota formula.
Our ultimate objectives for the 15th Review remain twofold. First, voice and representation at the Fund must be more closely aligned with relative weights and integration in the global economy. Second, the planned assessment of the adequacy of the Fund’s permanent resources must be underpinned by a rigorous, transparent and evidence-based analysis.
IMF surveillance and advice has undergone important changes recently. This year the next comprehensive Triennial Surveillance Review (TSR) will occur. With modifications to the surveillance architecture still fresh, the TSR should focus on practical ways to strengthen the quality, effectiveness and traction of surveillance within the new framework. In particular, an assessment of experience with the Fund’s institutional view on capital flows would be timely. Also, the exercise should take stock of the depth, quality and consistency of bilateral exchange rate surveillance. Such an assessment is warranted as Fund members received assurances that the new surveillance framework would strengthen this core surveillance responsibility. Lastly, the TSR should ensure that recent policy changes have translated into better-tailored surveillance and advice to small states in line with their specific needs.
Finally, we reiterate our call on all members to submit to an Article IV review. Excessive delays without suitable explanation undermine the integrity of the surveillance process. The Fund should explore more meaningful actions that could be taken to address these delays and uphold the responsibilities of IMF membership.
The IMF must be in a position to offer effective lending programs with appropriate conditions that address the root causes of instability and provide a timely path to recovery. An integral part of achieving this objective, while also ensuring programs are effective, even-handed and delivered independently, is fostering a learning culture within the institution. When we last met, we noted in our communiqué that we looked forward to a follow-up Crisis Program Review.This has been disappointingly put on hold. This systemic review is needed. It is a complement, not a substitute, to the handful of individual country-level evaluations that will be undertaken. Thus we call on the Fund to follow through with our request and complete this comprehensive Crisis Program Review by December 2014.
The recently completed assessment of the Fund’s precautionary lending instruments illustrates the important role of self-reflection. We appreciate that strong program qualification standards will be retained and more rigorous and transparent needs assessments will be adopted for these facilities. Our constituency has been a strong advocate for better incentives to exit precautionary support. This type of support is typically large and reduces the funding available for countries with immediate needs. Thus we welcome the commitment to examine how pricing for these credit lines can be adjusted to support the goal of timely exit when these facilities are next reviewed in 2017.
Finally, I look forward to the opportunity to consider the outcomes of the Fund’s ongoing work on recent experiences with sovereign debt restructuring, particularly the implications for IMF lending policies. Scope remains to strengthen the institution’s policies so that official sector resources are better safeguarded and appropriate burden sharing occurs across creditors. This work should include clear analysis of the circumstances under which private creditors should be involved in supporting adjustment efforts and ways in which the Fund can help strengthen this linkage through its policies when circumstances warrant.
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