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Representing the Constituency consisting of Bangladesh, Bhutan,
India and Sri Lanka Mr. Chairman,
The Global Economy and Financial Markets
1. We broadly agree with the Fund’s assessment of the global
economy in its latest World Economic Outlook (WEO). A positive feature of the
current growth scenario is that it is becoming more diversified. Notwithstanding
such positive developments, the continuing volatility of the international oil
prices and the ever widening global imbalances continue to be the principal
challenges which need immediate attention on the part of policy makers and market
players. Another concern is that investment demand continues to lag behind savings
in a number of countries. In addition, one has also to take note of the potential
adversities on account of the possibility of an avian flu pandemic.
2. Inflationary pressures remained modest
in 2005 despite rising international oil prices.
While global headline inflation picked up slightly, core inflation
remained contained during 2005. In recent years, stable inflationary expectations
across the globe, reflecting in part, the increasing credibility of central
banks worldwide, has been one of the most important elements of the growth revival.
Globalisation, thus, seems to have provided some break on inflation in the industrial
economies in recent years and led to a more measured monetary policy tightening
so far. In this context, I would like to highlight the following points.
First, while inflationary pressures appear to remain muted,
the second round impact of high oil prices is not yet evident in view of
incomplete pass-through of high oil prices in a number of countries. As
domestic prices of oil adjust more fully to international prices, it is
likely that some inflationary pressures may surface. Moreover, the less
than perfect pass-through on retail domestic oil prices may have important
implications for fiscal and external positions of oil importing countries.
However, given the complex relationships and feedbacks between the different
components of global oil markets it would be quite difficult to quantify
ex ante the extent of plausible adjustments. Broadly speaking, inflation
would be more demand determined and expectations driven through the process
of wage price setting in developed countries while supply constraints would
be a dominant factor in the process of price setting in developing countries.
Second, an imminent risk is that the present spate of increase
in oil prices, both in the spot and the futures markets, could result in
an abrupt revision of inflationary expectations. That in turn, could raise
interest rates, exacerbating the costs associated with the expected corrections
of the overvalued asset markets, particularly housing markets, in the developed
countries and the required adjustments to the growing global current account
imbalances.
Third, non-fuel commodity prices, particularly metal prices
have also increased recently which may further exacerbate inflationary pressures.
3. It is now widely recognized that rising international oil
prices pose a grave concern for the global economy in view of limited spare
capacity, and continuing geo-political uncertainties. On the supply side, we
reiterate the need for investment, oil conservation measures, greater dissemination
and transparency of oil market data and improvement in market structure and
behaviour. On the demand side, monetary policy makers should continue to be
vigilant for any signs of a pickup in inflation in the period ahead. An abrupt
increase in oil prices is usually borne disproportionately by the developing
and low-income countries given their higher dependence on oil imports. The welfare
implications of rising oil prices on large strata of population in developing
countries, therefore, need to be recognized.
4. Global financial conditions remained favorable in 2005 as
evident from unusually low risk premia and volatility. This has been partly
due to strengthening fundamentals and the continuing search for yield. However,
there is evidence of some excesses in financial markets as reflected in higher
equity prices and sharp credit growth. In the event of sudden corrections in
the markets, the financing conditions for developing markets may turn adverse.
Moreover, global short-term interest rates continue to rise resulting in flattening
of the yield curve, particularly in advanced countries. In terms of recent financial
innovations, the credit derivative and structured credit markets have grown
rapidly during the past few years, allowing dispersion of credit risk by banks.
While this is a welcome feature, it is necessary to evolve mechanisms to ascertain
the size and structure of risk components, the scale and direction of risk transfers,
and therefore the distribution of risk within the economy.
5. Given the increased emphasis of the financial sector in the
Fund’s surveillance activity, we welcome the improved focus and analytical content
of the Global Financial Stability Report (GFSR). While the financial market
conditions continue to remain favorable, cyclical developments, such as higher
interest rates and the turning of the credit cycle, are likely to present a
number of challenges to financial markets and institutions. In the near future
the resilience of the financial markets may get tested against plausible macroeconomic
shocks reinforced by the increasingly discernable financial market vulnerabilities.
6. Global economic prospects continue to be marked by the
risk of a disorderly adjustment to the rising level of global imbalances and
their changing distribution across nation states and country groups. The probability
of this outcome has increased as the stance of monetary policy is clearly set
to move from accommodative to more neutral levels in the Euro area and Japan.
In the event of an unwinding and sharp movements in exchange rates and asset
prices, the adverse impact is likely to be disproportionately large on net oil-importing
developing countries.
7. On the whole, it is heartening to note that cyclical
factors have been very favorable over the past few years. Low interest rates
and an abundant supply of liquidity have supported a solid global economic recovery
and set in motion a search for yield. Strong improvement in balance sheets of
financial, corporate and household sectors have created substantial financial
cushions in major financial systems. Banking systems in emerging markets have
generally strengthened following banking sector reforms and improved supervision.
However, in the event of abrupt adjustment to global imbalances there is a recognition
that the consequences would be severe with indeterminent second order effects.
In this context, I fully endorse Fund's normative assessment suggesting efforts
towards enhanced transparency and disclosures in financial markets for mitigating
the probability of contagion risk.
Implementation of the IMF’s Medium-Term Strategy
8. I compliment the Managing Director for crystallizing the
Fund’s Medium-term strategy and thank the members of the working groups for
their supportive reports. It needs to be recognized that over the past decade
and a half there has been a paradigm shift in global economic/financial environment
with the increasing adoption of liberalization and globalisation strategy across
the globe coupled with rapid technological innovation. This, in turn, catalyzed
the process of global capital market integration, which has led to a spectacular
increase in the volume and types of private capital flows.
9. The underpinnings of the international financial architecture
hinges on the issues of evolving a stable global mechanism. The most important
issue, I feel, pertains to the synchronization of the speed of adjustment of
the national economies at different stages of development to independent changes
in the global financial system. The global community’s efforts to establish
a stable global economic order would be contingent upon the recognition of three
essential principles.
First, given the wide diversity of country realities and
different 'speeds of adjustment" there cannot be any "straight-jacket"
approach towards reforms and adoption of reform initiatives both in terms
of content and timing should be guided by the fundamental premise of voluntarity.
Second, the emerging market economies should get their rightful
position in established framework for global financial governance given
the changing pattern of global growth with a redistribution of "growth
ownership" towards emerging market economies. The international community
must pay attention to the hard reality that the arrangements evolving in
the financial architecture cannot operate successfully without equal partnership
between developed and developing countries, or between capital-surplus and
capital-deficit countries.
Third, there is need to recognize the increasing importance
of regional bodies and groupings in co-ordinating the decision making process
in global policy space. I feel that several supra-national identities
would have an increasing role in influencing the decision making processes
in the international financial institutions in the near future.
Surveillance
10. During the last few years there has been a paradigm shift
both in respect of the focus of surveillance as well as in terms of the instruments
of surveillance. However, as regards strengthening of surveillance, we have
come to a stage when we may have a multiplicity of tools, but there are still
doubts about their effectiveness for a variety of reasons. The main issues of
contention remain focused on improving "even-handedness", "effectiveness",
reducing "intrusiveness", and recognizing the "preventive"
nature of Fund surveillance. I feel that the key challenge would be to effectively
integrate bilateral, multilateral and regional surveillance mechanisms with
a clearer focus on the end objectives. The recent findings of the McDonough
Report and the Independent Evaluation Office (IEO) Report on Financial Sector
Assessment Program (FSAP) and Multilateral Surveillance vindicate such a position.
Furthermore, given the recent findings of the IEO Report on FSAP that about
20-25 percent of countries that are systemically important and/or have vulnerable
financial systems have not been assessed, I stress the need for strengthening
of incentives for systemically important countries to undertake FSAP while retaining
the voluntary nature of FSAP.
11. Our view is that given the rapidly integrating global
economy, issues of bilateral and multilateral surveillance essentially share
a symbiotic relationship. The effectiveness of multilateral surveillance would
thus depend crucially on its coverage of the plausible policy spillovers from
the systemically important countries, especially the industrialized countries
since such countries account for a significant share of the global financial
flows. In this context, I would like to flag two issues.
First, while we see merit in enhancing exchange rate surveillance,
there is need for further technical work in the area of exchange rate determination
with capital mobility so as to contribute to the debate and generate a broad
consensus on the exchange rate issues. Given the sensitivity of exchange
rates for emerging markets, the Fund has to balance its role as a confidential
advisor on such issues. It would, therefore, be highly premature to consider
publication of exchange rate assessments in the WEO.
Second, on the issue of integrating macroeconomic and financial
market analysis, we feel that that the WEO should continue to remain as
the Fund's flagship publication for multilateral surveillance along with
the GFSR.
12. With respect to bilateral surveillance, we broadly agree
with the Fund prescriptions for streamlining procedures and the adoption of
a multilateral perspective and focus. However, the suggestion for realigning
the Fund's traditional macro-oriented surveillance mechanism to place financial
sector issues at the centre of the Fund's country surveillance needs to be judged
from the right perspective. It needs to be recognized that there is a wide diversity
in the level of development of the financial sector across Fund membership and
a one-size-fits-all approach would not be appropriate. Hence, the content of
financial sector analysis and the level of emphasis would need to be different
for different countries or groups of countries. It is also important to ensure
that, while bringing in the additional focus on the financial sector, the traditional
rigor of macroeconomic analysis in Article IV consultations should not be diluted
as this is the area of core competence of the Fund.
Fund's Role in EMEs
13. As alluded to earlier, we feel that the potential value
of the Fund as a co-operative institution would depend on how efficiently it
assimilates the changing aspirations of the fast growing EMEs into its structure
of governance and functioning. We seek merit in the proposal for modification
of the framework for high access contingent financing, but much would depend
on the design of the instrument.
Fund Governance
14. We have always reiterated the position that the issue
of voice and representation is critical for establishing the legitimacy of the
governance structure of the IMF. It is regrettable that, while the relative
weights and importance of different countries have changed in the dynamic global
economy in a major way, the international community has not been able to revise
the quotas of the IMF since 1998 which itself was done in an ad hoc manner.
A two-stage process with an ad hoc increase is not consistent with the
need for a comprehensive review and reallocation of quotas. By definition, a
comprehensive reallocation of quotas to reinforce legitimacy cannot be achieved
by a short-term ad hoc approach.
15. Mr. Chairman, in recent years, the international community
is commending India’s contribution to world growth and global stability. In
this context, it will be difficult to satisfactorily explain how this can be
reconciled with a decline in India’s share of IMF quota implicit in the current
proposal. Furthermore, I doubt that the legitimacy of the IMF will be enhanced
if three out of the four much acclaimed BRIC (Brazil, Russia, India and China)
countries get their quotas reduced, even if it is for a brief period. As regards
the two stage procedure, it is being suggested by certain quarters that an agreed
framework for the second stage would constitute a pre-requisite for the consensus
regarding the first stage. However, it is clear that if an agreement on the
basic framework at the second stage were possible now, the rationale for a two
stage process would disappear. The Group of Twenty-Four (G-24) have in their
latest communiqué expressed a strong preference for a comprehensive package
that would deal with all the major issues simultaneously within a firm deadline.
In this context, for moving forward, a firm prior political consensus is
called for before launching a technical exercise.
Low Income Countries: Multilateral Debt Reduction Initiative
(MDRI)
16. We note the progress in the implementation of the MDRI Debt
Relief Initiative. Looking forward, a continuing Fund involvement in low income
countries should broadly address all the outstanding challenges with emphasis
on ensuring debt sustainability and supporting policies and institutions conducive
to sustained private sector-led growth, trade and reduction in poverty. The
MDRI debt relief needs to be complemented by an effective surveillance mechanism
to monitor use of resources made available from the Fund. We view that the adoption
of a country-based approach would be crucial in this respect.
Developments in the Constituency
17. Let me now turn to some key aspects of development in
my constituency. India’s real GDP grew better than anticipated
at 8.1 percent in 2005-06. Despite the severe impact of global oil uncertainties,
a judicious combination of monetary and fiscal measures has helped in anchoring
inflation expectations and containing inflation at 4 percent. The current account
deficit widened in line with the growth in investment demand in the economy
and was comfortably financed as capital flows continued to remain buoyant. Financial
markets were generally stable. The Indian Rupee continues to demonstrate adequate
flexibility in response to global currency market developments. Despite large
allocation to the social sector, the fiscal situation turned out better than
expected. The outlook for 2006-07 continues to remain positive and the policy
endeavour would be to maintain growth momentum consistent with price stability
while being in readiness to act in a timely and prompt manner to evolving circumstances.
We are committed to deeper and stronger fiscal correction and consolidation
set by the Fiscal Responsibility and Budget Management Rules which auger well
for macroeconomic stability.
18. Bangladesh maintained the growth momentum of over
6 percent in 2005. The current account of balance of payments posted a modest
deficit of 1 percent of GDP despite the surge in international oil prices and
strong import growth, It has been particularly reassuring that exports of ready
made garments increased by 37 percent in 2005. The economic outlook for 2006
continues to remain positive. The positive per capita growth performance, aided
by the beneficial impact of NGO social programs and broad-based micro-credit
programs, have led to a significant fall in poverty levels. The authorities
are focusing on the implementation of the remaining structural reforms.
19. Sri Lanka’s economy has been performing strongly,
despite the adverse effects of the tsunami. While GDP increased by 6 per cent
in 2005, inflation has been brought down to single digits by March 2006. The
balance of payments is in surplus and efforts are being made to contain the
fiscal deficit. The economic vision of the government, as articulated by the
newly elected President in November 2005, is to promote a national economy in
which the private and public sectors would co-exist in a complementary manner
in a market friendly environment. A strong commitment is made for rapid and
equitable development of all regions and to realize the MDGs.
20. Bhutan’s pursuit of home-grown development strategy
is yielding good results. While the economy registered a robust growth of 7
percent and low inflation of 5 -5.5 percent in 2005-06, the outlook for 2006-07
is even more promising with an expected growth rate of 18 percent. The fiscal
position could turn to a small surplus and increased power exports are expected
to reduce the current account deficit to under 3 percent of GDP.
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