International Monetary Fund Annual Report 2004 : Making the Global Economy Work for All

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• eBook ISBN:
  9781589063716
• Year: 2004

NONE

INTERNATIONAL MONETARY FUND

ANNUAL REPORT 2004

1 IMF Surveillance—promoting Growth and Stability

One of the core responsibilities of the International Monetary Fund is to maintain a dialogue with its member countries on the national and international consequences of their economic and financial policies. This process of monitoring and consultation, referred to as surveillance, is mandated under Article IV of the IMF’s Articles of Agreement and lies at the heart of the Fund’s efforts to prevent crises.

The IMF exercises this responsibility of surveillance in several ways (see Box 1.1). Highlights of its surveillance activities during financial year 2004 follow.

• As part of the Fund’s surveillance of the global economy, the Executive Board conducted its twice yearly comprehensive assessments of the World Economic Outlook in August 2003 and March 2004. Against the background of prospects for a gradual—albeit moderate—global economic recovery, Directors in August 2003 called for macroeconomic policies to remain appropriately supportive and for reinvigorated structural reform efforts. By March, the nascent recovery had strengthened and broadened, and Directors agreed that the focus of policy efforts should be on medium-term measures that would underpin the sustainability of the recovery while rebuilding room for maneuver to respond to possible future shocks. In addition, they observed that managing the transition to a higher interest rate environment would be a key challenge.
• Also in August 2003 and March 2004, the Board discussed developments in financial markets worldwide, based on Global Financial Stability Reports prepared by the staff. In August 2003, Directors noted that financial markets had remained resilient, notwithstanding continued lackluster economic growth, but expressed their concern about several downside risks, with a focus on the policy implications of these market developments. By March 2004, with the prospects for financial stability appearing brighter, Directors stressed, among other things, that relatively benign conditions in mature and emerging markets provided a window of opportunity to focus policy attention on several key structural reforms.
• The Board completed 115 consultations with individual member countries as mandated under Article IV of its Articles of Agreement.
• Executive Directors discussed regional developments on several occasions. In particular, they discussed euro area policies (September 2003), the adoption of the euro by central European members (February 2004), and developments and policies in the Central African Economic and Monetary Community (November 2003).

Country Surveillance

To conduct surveillance in accordance with Article IV, an IMF staff team visits each member country to meet government and central bank officials and collect and analyze economic and financial information. The consultations cover recent economic developments and the exchange rate, monetary, fiscal, and relevant structural policies the country is pursuing. The Executive Director for the member country usually participates as an observer. The team generally also meets with other groups—such as members of legislative bodies, trade unions, employer associations, academics, and financial market participants. The IMF staff team normally prepares a concluding statement, or memorandum, summarizing the findings and policy advice of the staff team and leaves this statement with the national authorities, who have the option of publishing it.

Box 1.1 Forms of IMF Surveillance

With its nearly universal membership of 184 countries, the IMF serves as an international forum where members can monitor global, country, and regional economic developments. IMF surveillance takes three main forms:

• Country (“Bilateral”) Surveillance. As mandated by Article IV, the Executive Board holds regular consultations with each member country on its economic and financial policies, and the international repercussions of these policies. Through these “Article IV” consultations, which are based on staff reports, the IMF aims to identify policy strengths and weaknesses, indicate potential vulnerabilities, and advise countries on appropriate and corrective policy actions. The IMF also conducts bilateral surveillance through the Financial Sector Assessment Program, or FSAP (see Section 2).
• Global (“Multilateral”) Surveillance. The IMF’s Executive Board regularly reviews global economic and financial market developments. The reviews are based partly on the staff’s World Economic Outlook reports and the Global Financial Stability Reports, both of which are prepared twice a year. In addition, the Board holds more frequent informal discussions about world economic and financial market developments. Activities in mature and emerging financial markets are monitored continuously, including in a daily internal report prepared by the staff.
• Regional Surveillance. To supplement country consultations, the IMF also examines policies pursued under regional arrangements. It holds regular discussions with such regional economic institutions as the European Commission, the European Central Bank, the Central African Economic and Monetary Community, the Eastern Caribbean Currency Union, and the West African Economic and Monetary Union.

The IMF also takes part in policy discussions of finance ministers, central bank governors, and other officials in a variety of groups, such as the Group of Seven major industrial countries, the Group of 24, and the Asia-Pacific Economic Cooperation Forum. (See also Section 6 on governance.)

On their return to headquarters, IMF staff members prepare a report describing the economic situation in the country and the nature of the policy discussions with the national authorities, and evaluating the country’s policies. The Executive Board then discusses the report. The views of the country’s authorities are conveyed to the Board by the country’s Executive Director. The views expressed by the Executive Directors during the meeting are summarized by the Chair (or Acting Chair) of the Board, and a written summing up is produced. Subject to the approval of the member country concerned, the full Article IV consultation report and a Public Information Notice (PIN), containing a summary of the Board discussion and background material, are released to the public. The country authorities may authorize release of a PIN even if they do not wish to release the full report. In FY2004, the Board conducted 115 Article IV consultations with member countries (see Table 1.1). All PINs and the Article IV reports that the authorities have agreed to release are published on the IMF website.

Table 1.1 Article IV Consultations Completed in FY2004

In addition, the Board assesses the economic conditions in, and policies of, member countries borrowing from the IMF in the context of its discussions on the lending arrangements that support the member countries’ economic programs. The Board also holds frequent informal meetings to monitor and discuss developments in individual countries.

Global Surveillance

The Executive Board’s conduct of global surveillance relies heavily on two staff reports—the World Economic Outlook and the Global Financial Stability Report—as well as on regular sessions on world economic and market developments.

World Economic Outlook

The Board’s twice-yearly reviews of the World Economic Outlook are an integral part of the Fund’s ongoing surveillance of economic developments and policies in its member countries and of the global economic system. These surveys of prospects and policies are the outcome of a comprehensive review of world economic developments and analyze short-term and medium-term prospects for the world economy as well as for individual countries and country groups. They draw for the most part on information gathered through the staff’s consultations with member countries and provide a framework for assessing the relationships among the economic policies of Fund members.

In FY2004, the Board discussed the World Economic Outlook on two occasions—in August 2003 and in March 2004. (See Box 1.2 for a chronology of key economic developments during FY2004.)

World Economic Outlook, August 2003

At the time of the August 2003 World Economic Outlook discussion, economic data in some countries and forward looking indicators, particularly in financial markets, pointed to a strengthening of global growth in the second half of 2003 and 2004, and Executive Directors noted the prospects for a gradual—albeit moderate—recovery.

Given this environment, Directors called for macroeconomic policies to remain appropriately supportive and for reinvigorated structural reform efforts to strengthen confidence and reduce vulnerabilities over the medium term. In particular, monetary policies in industrial countries should remain supportive for the time being, and—with inflationary pressures very moderate—Directors considered that most regions had scope for further monetary easing if the recovery faltered or inflation significantly undershot policy objectives. The orderly depreciation of the dollar was generally welcomed. Going forward, most Directors agreed that the cooperative approach, which would be needed to underpin the global adjustment process, would be helped by currency adjustments that were more broadly spread, with several emerging Asian economies being relatively well placed to handle greater upward exchange rate flexibility.

Directors agreed that fiscal policy would have much less room for maneuver. While automatic stabilizers should generally be allowed to operate, they stressed that greater priority would need to be given to credible, high-quality fiscal consolidation to address both the recent deterioration in the fiscal outlook of the largest economies and the impending pressures of population aging. Directors also called on industrial and emerging market economies to make sustained further progress in vigorously implementing ongoing structural reforms.

Directors underscored the particular importance of a successful outcome of the World Trade Organization (WTO) Cancun Ministerial meeting in September 2003 in curbing protectionist pressures and achieving further trade liberalization, which would help strengthen confidence in the economic recovery. Progress with agricultural reforms—especially in the largest industrial economies—would be critical for boosting the growth prospects of developing economies and making progress with poverty reduction. In this context, Directors expressed strong support for the initiatives being taken by the IMF and the World Bank to strengthen their support for developing countries’ efforts to liberalize their trade regimes.

World Economic Outlook, March 2004

The nascent recovery apparent in mid-2003 had begun to spread by the time of the Board’s second meeting on the World Economic Outlook. Directors welcomed the strengthening and broadening of the global economic recovery, noting especially rapid upturns in the United States and emerging Asia; a sharp pickup in industrial production and global trade; strengthened business and consumer confidence; and positive investment growth in most regions. A broad-based rally in financial markets, including a rise in equity prices, a further drop in bond spreads, and a rebound in private financing flows to emerging markets, supported the recovery. Although growth had picked up and oil and commodity prices had moved up, worldwide inflation remained subdued—a reflection of continued excess capacity, still-weak labor markets, and competitive pricing in both domestic and global markets.

Directors noted the significant upward revision to the global growth forecasts for 2004 and 2005, with the strength of the ongoing recovery pointing to upside risks in the short run. However, Directors also highlighted a number of downside risks. The terrorist attacks in Madrid of March 11, 2004, and developments in the Middle East were sobering reminders of the continuing geopolitical uncertainties under which the global outlook was being shaped. Although recent exchange rate adjustments had been helpful given the large global current account imbalances, most Directors cautioned that these imbalances would still remain large, thereby posing risks of potentially disorderly currency movements and increased protectionist pressures. Most Directors also pointed to possible increased market volatility and adverse consequences for private consumption in countries with buoyant housing markets that could result from an abrupt increase in interest rates from their currently very low levels.

Against the backdrop of the improved global outlook, Directors agreed that the focus of policy efforts should be on medium-term measures th...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• A Global Institution
• Highlights
• Message from the Managing Director
• Executive Board
• Letter of Transmittal to the Board of Governors
• Contents
• ANNUAL REPORT 2004
• Appendix Contents
• Footnotes