International Monetary Fund Managing Director Christine Lagarde had a chart with the media on development on global economy.
Excerpts
By Omoh Gabriel
Introductory remarks: I would also like to congratulate all the contenders who applied to be President of the World Bank and, indeed, special congratulations to Dr. Jim Yong Kim, who has allowed me to actually call him “Jim” when we last speak on the phone a couple of days ago. I certainly, together with David, look forward to working with him as we worked with Bob.
As you know, South Sudan is our 188th member, which is a very sizable membership, as you can imagine. Before you go into your questions, your interests, I would like to make a few points and, first of all, touch on where the IMF sees the world economy for those of you who have not attended the WEO, Fiscal Monitor, or GFSR press conferences.
Diverse world economic situation
Now, looking at the world economic situation, it is obviously very diverse. If I were to use a weather analogy because we are all very fond of weather reports, we are seeing a light recovery blowing in a spring wind, but we are also seeing some very dark clouds on the horizon, which is another way to tell you that there is a bit of a recovery, timid, and a fragile situation with still high risks.
What are those dark clouds on the horizon?
Clearly, first of all, high, sustainable unemployment in many corners of the world, not just in the advanced economies. Second, slow protracted growth. Third, potential deleveraging. Fourth, renewed financial major stress in the Euro Area. Fifth, potential oil price hikes. So, you have got lots of clouds out there in a situation where, as I said, timid recovery is blowing in the spring wind.
Now, what can be done about it?
What should be done is actually collective action. In my recent speech at the Brookings Institution, I called for a “Washington Moment,” as there had been a “London Moment,” in due course. Collective action is needed because all members have to actually address their respective issues.
If we turn to Europe, and the Eurozone, in particular, first and foremost, because it is today the epicenter of potential risks, we clearly acknowledge that in the last six months significant actions have been taken at the national country level, often with new governments; Fiscal Compact, better governance, more discipline, stronger sanctions; significant involvement of European institutions, in particular, the European Central Bank; and to top it up, as promised by Chancellor Merkel to me on March 31st, the significant improvement of the European firewall.
Yes, many of you would like to argue that there is a little bit missing here and there, but if you look at it altogether, it is a comprehensive package that shows significant determination to defend the currency zone. This 800 billion euro overall commitment, some already committed and 500 billion fresh with accelerated paid-in capital, is a clear improved firewall.
What is the message to Europe?
But if we had a message to Europe, and the Eurozone in particular, it would be keep up, keep up for better and more Europe—”keep up” means implement the reforms that have taken place nationally, at the regional level, within the currency zone—keep up in deepening the integration of the zone at multiple levels and build on the efforts.
Europe is not the only place where action needs to be taken.
If we look at, for instance, the emerging markets, they, too, have to address some of their issues, and they, too, have to be very attentive to a volatile market situation. That means clearly, for some of these emerging markets, refocusing on their domestic growth, and not only based on investment but also drawing on consumption, which means significant, in-depth reforms at home. It means for other emerging markets being very attentive to capital flows, managing them properly, with proper macroprudential measures, and adjusting currencies as appropriate, or accepting the evolution of currencies.
What does it mean for other corners of the world, the Arab Spring countries, where we will be really paying a lot of attention both during these meetings and in further discussions with partners and, obviously, with these countries, it means more resources, more attention, better market access being given to them by their partners in the region, by their partners across the globe, and clearly the IMF will continue to play a catalyst as well as a coalescing role for those countries.
What about lower income countries?
Low income countries as well have to make sure that they temper what is inevitably going to happen and what has been signaled in terms of lower aid resources, lower remittances possibly, which is going to be put them in a more fragile situation when they have actually used a lot of their buffers and their fiscal reserves.
As far as we are concerned, the IMF needs to participate in that effort as well by building additional firepower to contribute to this global firewall that we have been advocating very strongly in the last few months, and that is the reason why, as part of the outcome of this meeting, we expect our firepower to be significantly increased. I know this is sort of the topic of the day and, you know, is she going to get there; is the IMF going to reach the threshold?
Poverty Reduction and Growth Trust
I would like to call your attention to another fund that you do not write much about, and that is the PRGT, the Poverty Reduction and Growth Trust, which is our pooled resources from which we draw concessional loans for low income countries. That, too, needs to be beefed up and we will be calling the membership to actually do that. The numbers are not that big and the needs are not as voluminous, but it is equally important that we have adequate resources to help low income countries if they need it.
The second outcome that we expect of these meetings from our own perspective and for the benefit of our members is better multilateral surveillance, better IMF surveillance, if you will, in general, and the multilateral aspect of it, the interconnectedness that has been clearly identified in the post-crisis analysis that was conducted, the need to really focus on the spillover effects and what happens in other countries when a country decides on a particular policy. We are going to push those initiatives and we are going to ask the membership to validate that approach. Improved bilateral surveillance but significantly beef up multilateral surveillance.
The third outcome that we will expect, David and I and the other Deputy Managing Directors, in all the bilateral meetings that we are going to have, and in the plenary session on Saturday morning, we are going to ask the membership to finish the job in terms of quota resources and in terms of governance. There are changes that need to take place to better reflect the membership of this institution in terms of economic strength, in terms of economic roles, and we are not there yet. We still have 16 percent to go on the quota resources and nearly half the job still undone on governance reform. So, we will be pushing that as well. We will not complete the job this time, because our target and our deadline is the next Annual Meetings, which, as you all know, will take place in Tokyo.
Expectations at 2012 annual meetings in Japan
I think our final expectation out of these meetings is to make sure that all Ministers and Governors who are coming to the meetings go home with more energy and a clear understanding that everybody has a task, everybody has work to do, so that in a more cooperative fashion, we address the challenges and push away those dark clouds that I was referring to earlier.
So, you have got my introduction. You will probably not pay much attention to it and you will be essentially focused on your questions, and now it is time for your questions.
As you mentioned, since the global economy is still in a fragile stage, you have continuously called upon the country to seize the moment. Do you see countries actually responding to your call, and how much do you think needs to get achieved at these meetings to call this a success? Since the Plenary in the fall is coming up in Tokyo, what are some of the steps and discussions that are leading to that Tokyo meeting?
Well, I very much hope that the entire membership will respond and will seize the moment, but I can say that if there is one country that has seized the moment, it is Japan. After the euro members committed much earlier on in December their contribution to increase resources of the IMF, Japan was the first country to come up with a pledge of additional resources for the Fund, and it is in line with the tradition of Japan to actually participate in multilateral efforts. I can only say that we are gratified to have members of that commitment and engagement for the multilateral approach.
I have to say that it is true, also, in technical assistance, by the way. You know that the Fund provides advice, macroeconomic advice, and more pointed advice on financial and fiscal matters, but the Fund provides a lot of technical assistance in many corners of the world, particularly in low income countries, particularly in Arab Spring countries at the moment. Japan is a great financier of this endeavor.
So, I hope that this “seizing the moment” that I advocated in a recent speech will also be understood by other members. We have other commitments. The Nordic countries came in; Singapore came along. We have others in the—I do not want to precipitate any announcement because it is for them to announce, not for me, not for David. It is for them to announce.
What we expect from our Annual Meetings in Tokyo? First of all, it is in and of itself good to go to Tokyo, good to pay tribute to the Japanese people who have been so brave in working on the reconstruction after the horrible disaster that hit the coast of Japan, and if only for that as a tribute to Japan to bring out all of you, I hope, and many members, visitors, academics, you know, those thousands of people who populate our meetings out there in Japan, reporting back from Japan, spending money in Japan. All of that is good.
But I would hope that we can deliver on efforts to support the Arab Spring countries, a better and stronger commitment and actual demonstration that collective action has been taken between now and the Annual Meetings, and we will continue to support actively all these initiatives.
Madame Lagarde, you have fine taste with what you are wearing, and when you visited China on March 18th you were wearing a Chinese-style outfit. So, what message are you delivering to countries, including China and other BRICs countries? How can they help to seize the Washington moment when there are still dark clouds on the global economy? What is the rationale for BRICs countries and other members to help increase the Fund’s lending resources?
My beautiful peacock-feathered Chinese jacket is at the cleaners at the moment, so I could not wear it today, but if it is a message, it is one that demonstrates that there are talents, including in the design and fashion industry, across the globe. It demonstrates that this global partnership that we represent here with 188 members can display unity, can display diversity, can respect the individual views and the individual policy paths adopted by countries.
One thing that I have learned in the last nine months, in the first and last nine months that I have been here is probably the principle of interconnectedness that I had not seen as strongly as I have. It is also the fact that we cannot sort of propose one-size-fits-all solutions and that everything that we do, whether it is policy advice in terms of fiscal consolidation, whether it is growth initiatives, whether it is labor market reform, has to be country-specific.
Now, you asked me about the BRICs. I think it is a nice denomination invented by Goldman Sachs, if I recall. Equally, this country-specific approach applies to them. They have different issues. They have different currency issues, for instance. They have different capital flow issues to reckon with. They have different growth inclusiveness projects to work with. But certainly what they have in common is their dedication to multilateralism, and I hope that this will be demonstrated by the various members, including each of the ones that you are thinking of, loudly and clearly, and I hope before the end of the Spring Meetings.
The WEO and GFSR staffs’ recommendation that the European firewall mechanisms be expanded so they could intervene directly into the financial sector and I am wondering if you are tempted now to sort of take the next step. Given the tensions sort of converging around Spain, is it time for the Spanish government or Europe as a whole to consider a more quick, dramatic, direct intervention in the banks there to clear away the deadweight of the real estate sector and try to get the banking sector back on its feet in a clear way?
Well, thank you, Howard, for inquiring about my health, but I will make it through the meetings, no question.
First of all, I would like to observe that the Spanish authorities are taking the matter very seriously, and have announced actual measures and policies in relation to their banking sector, which is very good and very welcome.
Second, including in its present form and under its current status, both the EFSF and ESM can actually help in respect of recapitalization of banks anywhere in the Eurozone. It has to be channeled through loans to sovereigns, because that is the way it has been structured. So, it can be done. What we are advocating and what we have been advocating for a while and will continue to advocate is that possibly this be done without the channeling through the sovereign, and we would see that as a move toward stronger and better integration, a stronger and better Europe.
It could be accompanied and should, if it were to happen, be accompanied with more global European supervision with an appropriate European backstop, with appropriate an European resolution system, same as bailing-in, particularly if it applies both at home and in the host country where quite a few of those banks have subsidiaries or branches.
Last week you welcomed China’s move to allow more flexibility on the Renminbi. My question is, do you think this is a baby step? Is it enough? What do you hope to see come up next?
I did welcome the move by the Chinese authorities to widen the band to 1 percent in the fluctuation relative to the dollar, and we think that it is a good move. It is not a baby step; it is a very good step in the right direction. I certainly hope that it is not the last step, but it is one step in a longer journey which is actually probably in sync and in line with the Chinese tradition of doing one step at a time, making sure it works, moving to the next step. It is for them to decide, but at the end of the day it is the internationalization of the currency that would be highly desirable.
Congressman Cathy McMorris Rodgers, whom you had had a productive meeting with, has never taken back her legislation to rescind the $100 billion donation this country made to the IMF in 2009. In fact, it now has 100 co-sponsors in the U.S. House of Representatives. At a time when you are calling for more people, more nations and member states to make donations, are you concerned at all about this attitude of holding back donations from the IMF’s largest shareholder?
First of all, the IMF does not receive donations. We receive loans from members of the IMF who become our creditors. We only draw on those loans if need be. So, we do not receive donations. I wish we could, but no, we do not, not in the Articles.
At the time back in 2009, all members committed to—well many, many members committed to increase their participation in the lending pot of the IMF. The United States of America, which is my leading member in terms of quota and voice, governance and all the rest of it, did participate, like many others, and this took the form of what we call the New Arrangements to Borrow which has to be rolled into, for those members that have actually participated, into the quota reform that was voted, agreed and approved, including by the United States of America, back in 2010. That was the 2010 reform that we have to complete before the Annual Meetings of 2012.
That reform intends to increase the overall quota and shift a little bit of the quota, about 6 percent of it, to the underrepresented countries, essentially. I mean, it is a little bit more complicated than that, but that is the simplest way that I can describe it. All of that has to be, obviously, completed, depending on the various parliamentary rules and principles applicable in many countries. So, in the United States of America, it has to be ratified by the U.S. Congress, as I understand it. I certainly hope that it can happen in due course.
Now, I do not think that the excellent time, the productive meeting that I have had with Cathy McMorris Rodgers, who understands the issues very well, is sufficient to withdraw a proposed bill. What we need to constantly demonstrate are two things: No. 1, the efficiency of the IMF, the fact that we do not give money, we do not give grants. We give loans; we are paid back; and the loans generate interest for the creditors. It is money that is well-managed. No country has ever lost money on the IMF.
The second thing that I hope is clear is that the leading economic power in the world clearly has to have a leadership role. I think it is in the tradition of the United States, very much so, and I think that is one way to demonstrate it, but it is not the only way, if I may say. The United States of America is also providing tremendous support. Secretary Geithner yesterday referred to the swap lines, for instance, which is a technical but very efficient way to also support another part of the world that is facing difficulties.
You were talking about supporting the Arab Spring countries and the loans we are looking forward to. So, are you just waiting for the elections and political uncertainties to decrease, knowing that the Egyptian government is just telling people that the IMF is not fulfilling its promises to support Egypt with the loans you have promised.
I will rely on your competent female journalism to actually report back what I will tell you. Egypt is a very important country from many points of view, and it is one of what we regard as the five countries that we call the Arab Spring countries. The IMF stands ready, will help each of those countries, and any other member, for that matter, but each of those five countries that so requires and needs help. We are going to do so in accordance with our rules, because the answer I gave to the gentleman before you applies here, too. We have rules. The reason why the IMF is a reliable and respected institution is that we go by the rules.
For us to extend loans, it requires, number one, that we have negotiated with the country and with the authorities in the country an economic program that is going to actually help that country pull itself out of the difficulty it is in, often a balance of payments difficulty, which might arise in Egypt sooner.
The second condition is that there is broad political support in the country so that our loan and our economic program duly negotiated with the authorities actually stands and is endorsed by the authorities. We are working on it. We have been to Egypt once, twice. The team was there for an extended period lately, and we are here. There is a $3.2 billion loan that is being discussed at the moment. It will not be sufficient, and everybody knows that, so it will require other donors, other participants to also come to the table to help Egypt.
As is always the case, we will play the catalyst role that we always play. That catalyst role is, we initiate the process; we negotiate; it becomes the country’s program; it is endorsed by the local authorities; and it attests to the fact that the country is on track to recover from a difficult situation. I want to help Egypt, no question about it, but it has to be done in accordance with the principles that we abide.
In regard to the pledges that have been made, is it enough to deal with other demands for resources that would be coming on the IMF? In particular, for Jamaica, having a Fund program that, for all intents and purposes, was rescinded, how difficult would it be to negotiate with the Minister and the Governor again for a new deal that the government is seeking with the IMF? Will it require more stringent conditionality going forward?
Will it be enough? It has to be enough. By the way, this increased firepower, whether it is in the General Resources Account or in the Poverty Reduction and Growth Trust, in both cases it has to be increased and in both cases it has to be enough. I am very happy with your question, because it shows that it is not a matter that is restricted to the Eurozone and it is not as if the IMF was raising funds for the Eurozone. We are very keen to support all members and we know that there are crisis bystanders that might need help. We know that for a fact.
As far as Jamaica is concerned, there was a program in place. It went off track; that is what you mean by it was rescinded. I have had meetings with the Jamaican authorities, good and productive meetings. The dialogue has been reinitiated. I will leave it to the team and to the Jamaican authorities to continue their discussion to define the economic program that we can help put in place.
I want to ask you another question about Egypt. The IMF has taken a big step to help Europe but did not take these steps to the Arab Spring countries. They told that they have a problem with the IMF, these countries. Especially in Egypt, what is the problem? Is it in the IMF or in the government? We want details about the agreement with the government in Egypt.
Well, I might disappoint you, but I am not going to give you the details of a program that is under current discussion with the authorities. With IMF programs, it takes “two to tango,” right? So, we are ready. We have identified the needs. We are reaching out to all appropriate authorities in the country, and we want political endorsement. If we hear solid partners on the ground say, aah, I am not too sure about this program, not too sure about the IMF, not too sure about borrowing, it is a bit of an issue.
But we never leave the negotiation table. Never. We will keep at it. We are as focused on helping Egypt and other Arab Spring countries as we are in helping other countries. It is not a question of focusing on one part of the world and not the rest of the world. We will address it with equal force and energy.
Seven months ago, during the Annual Meetings last September, I had the honor to ask you about the performance of Greece, and then you answered with the almost infamous “implement, implement, implement.” I am wondering if now, after these seven months, you feel that Greece is implementing. I am asking that because a few days ago, at Brookings, you expressed your admiration for the former ECB Vice President, Mr. Papademos, who happens to be the Prime Minister of Greece over the last six months. So, is the country implementing? Is the country on the right track?
We spent in the last six months an inordinate amount of time on Greek issues, on the Greek new program, and in discussions with the Greek authorities. A lot has happened in Greece since we last met and you last asked me the question. Many things: change of government, change of approach by many of the partners on the ground, and clearly a new Prime Minister who is taking his task very seriously. A lot has happened in terms of implementation, because all the preconditions that we had identified, together with the other members of the troika, were implemented. Laws were passed. But I would stick to my previous response to you: implement, implement, implement, paying tribute to the Greek people who share and bear the burden and make the sacrifices that we know of. I would call on those that are not sharing that burden, that are not bearing it, to actually do so. If there is one area where more and better work needs to be done, it is in revenue collection, in the tax collection efforts, where more work needs to be done.
