Annual IMF/World Bank meetings; Mutual Banks Amendment Bill

Relevant Document
Statement made to the National Assembly on the recently-held annual meetings of the International Monetary Fund and the World Bank by Trevor Manuel, Minister of Finance (Appendix 2 below)

SUMMARY
In the Minister's briefing of the annual IMF/World Bank meetings he emphasised the significant role played by South Africa in the African economy. The Minister's appointment as Chairperson of the Board of Governors for 1999/2000 is the key to enhance the South African and the African position at large. The Committee adopted the Mutual Banks Amendment Bill.

MINUTES
Annual IMF/World Bank Meetings
The Department of Finance briefing team comprised of the Minister of Finance, Mr Trevor Manual; the Deputy Minister, Mr Mandisi Mpahlwa and the Director General, Ms Maria Ramos. The Minister said the meetings were an opportunity for member countries to open a series of discussions on what is to be done over the next few years. The meetings highlighted the changes in the world economy and the focus fell mainly on the high level of indebtedness and the declining Gross Domestic Product (GDP) of certain countries. (See Appendix 1 for an outline of his presentation).

In addition the Minister said that Sub-Saharan Africa find itself in a much improved economic position despite the fact that it remains haunted by instances of war and other conflict. Although world inflation is at its lowest in 40 years, the macro-economic instability caused by volatility in asset prices is a cause of concern.

South Africa as a developing country holds a very small proportion of the world GDP - according to the Minister, South Africa has a GDP equal to the United States fiscal surplus. This might be the South African position in the world, but in Africa it holds a very large proportion of the GDP and is considered to be a significant player. Such is the position of South Africa that it can assist other developing countries to build the capacity needed for better debt management. Furthermore South Africa's participation in the Financial Stability Forum (FSF) and the G20 provides the opportunity to promote the African position at large. The question remains how and to what extent South Africa will utilise the Chairpersonship of the Board of Governors to enhance the South African and the African position at large.

Questions from members:
Mr A Feinstein (ANC): To what extent can South Africa use its position in G20 to restore the issue of Financial Architecture to a top position?
Response: Our participation in G 20 is very important. South Africa is a participant in both the Financial Stability Forum (FSF) as well as the G20, and one must be careful in not confusing the different mandates of these two groups. G20 has a much broader mandate of primarily looking at issues affecting the global economy, whereas the FSF's main focus is financial regulation and addressing issues of systemic risk. Because of different mandates the South African input would differ from one group to the other, but the importance of the participation remains the same and South Africa will seek to promote the African position. South Africa holds a very large proportion of Africa's GDP and therefore as a significant role player will definitely utilise the position to enhance the African position.

Mr A Feinstein (ANC): In your presentation mention was made of turnarounds in Asian economies, could you explain what gave rise to these turnarounds?
Response: The turnaround in Asian economies was largely dependent on internal and domestic service contributions. Examples of contributions are that of political changes within countries and the total commitment of countries to improve the economy. In Korea, for instance, people gave up their jewellery and even teachers worked up to three shifts a week to improve the education level.

Prof Turok (ANC) commented that issues are getting more complex and he is impressed by the Minister and his team's work. He requested the Minister to provide the Committee with documentation of the annual IMF/World Bank meetings so that the committee can be up-to-date with developments. The Minister said that copies will be made available, but is also available on the Web. The Chairperson said that an attempt would be made to make copies available to the Committee.

Mr K Andrew (DP) congratulated the Minister on his appointment as Chairperson of the joint Board of Governors. Mr Andrew asked the Minister to give some of the main possibilities that are being taken seriously in terms of Financial Architecture. The Minister responded that the FSF, who seeks to address financial architecture, looked seriously into risk management systems. Furthermore there is a substantial amount of concern in the Capital Flows committee on the issue of debt management.

Dr Koornhof (UDM): Earlier mention was made to the Council of Foreign Relation. How important is this Council?
Response: The private sector has been actively involved especially in the debate around Financial Architecture. The Council of Foreign Relation is one of the most influential private bodies in the United States. Their influence was demonstrated when the President of the United States, Mr Bill Clinton, addressed them. One must remember that Mr Clinton is very selective to whom he addresses.

Mutual Banks Amendment Bill [B47-99]
The Chairperson said that all four Mutual Banks have communicated that they have no objections to the amendments. Members were in favour of the motion of desirability and the adoption of the Bill. The Committee adopted the Bill.

The meeting was adjourned.

Appendix 1
MINISTER'S PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCE

WORLD ECONOMIC OUTLOOK
World
- Output has bottomed out in 1998
- Financial markets stabilised
- Turnaround in Asian economies
- US recovery amidst inflationary pressures - soft landing
- Japan and Europe to resume growth

Sub-Saharan Africa
- Oil price recovery to improve external balances
- Structural reforms to improve growth performance
- Trade and political cooperation

South Africa
- Renewed financial market confidence
- Lower interest rates
- Improved export performance

Inflation
- World inflation at lowest level in 40 years
- Strengthening of fiscal discipline
- Trade liberalisation and deregulation
- Volatility in asset prices contributes to macro-economic instability

World trade and Capital flows
- Recovery of oil prices and stabilization of other commodity prices
- Strengthening of global conditions will improve US current account
conditions but,
- Reduce demand for $-denominated assets
- Y2K-fears might lead to capital outflows from emerging markets

SA Small but Significant Gross Domestic Product
South Africa counts for a small proportion of World GDP, but a very large proportion of Africa's GDP

Significant Financial Markets
- The South African financial markets are well developed, well integrated in world economy
- Significant opportunity to raise considerable capital; but,
- Exposed to volatility in financial markets
- Case study of how large and sophisticated financial markets can support growth and development

SCALE OF MEETINGS
- The International Monetary Fund and the World Bank Group hold joint meetings of their Boards of Governors annually.
- The Meetings bring together over 300 Ministers of Finance and Heads of Central Banks, together with their advisers, currently representing 182 IMF and 181 World Bank member countries.
- The attendance at the most recent Annual Meeting (1999 in Washington DC) numbered some 19 000.

SOUTH AFRICA's OFFICIAL DELEGATION
- Minister of Finance (Head of Delegation, Governor at the WB, and member of the IMFC)
- Deputy Minister of Finance (Alternate Governor at the WB)
- Governor of the South African Reserve Bank (Governor at the IMF)
- Director-General of the Department of Finance (Alternate Governor at the IMF)
- Deputy Governor of South African Reserve Bank
- Chairperson: Select Committee of Finance (NCOP)
- MEC of Finance: Northern Cape Province
- MEC of Finance, Expenditure and Economic Affairs: Free State Province
- In addition to the above, a number of support staff from both the Department of Finance and the South African Reserve Bank attended the Meetings.

CONSTITUENCIES AND SHAREHOLDING
- There are 182 in the IMF and 181 countries in the World Bank.
- The five largest shareholders in the World Bank and the IMF are France, Germany, Japan, the United Kingdom and the United States of America.
- All other countries are grouped into constituencies, each represented by an Executive Director elected by a country or group of countries.
- China, the Russian Federation and Saudi Arabia are single-member constituencies based on their individual voting strength.
- The Africa Group I constituency, of which South Africa is a member, currently has the 12^th and 14^th largest block of votes within the World Bank and the IMF, respectively.
- Decisions of the Boards of Executive Directors are consensual.
- Voting strength remains important because it ensures that a constituency's voice is heard and acted on.
- The two constituencies representing sub-Saharan Africa represent 46 African countries and account for 3.44 and 3.19 percent of the total voting power of the Board of Executive Directors in the Bank and the Fund, respectively.

THE RELATIONSHIP BETWEEN MEMBER COUNTRIES AND THE WORLD BANK GROUP/IMF
Member Countries
l
Board of Governors
l
Board of Executive Directors
l
President's Office
l
Bank Group Management and Staff

INTERNATIONAL MONETARY FUND
- Oversees the international monetary system.
- Promotes exchange stability and orderly exchange relations among its member countries.
- Assists all members that find themselves in temporary balance payments difficulty with short term financing.

THE WORLD BANK GROUP
- Seeks to promote economic development of the world's poorest countries.
- Assists developing countries through long term financing of development projects.
- Encourages private enterprises in developing countries.
- Provides the poorest developing countries with special financial assistance.

ISSUES
- HIPC (Highly Indebted Poor Countries)
- IDA
- ESAF / PRGF
- Gold sales
- Financial Architecture

Addressing issues of financial architecture
- South Africa participated intensively in the working groups of the G22/33 focusing on International Financial Crisis and Transparency, Accountability and Strengthening Financial System.
- These reports have been the subject of many debates on financial architecture.
- The G7 set up the Financial Stability Forum (FSF) - a group whose main focus is financial regulation and addressing issues of systemic risk.
- There are three working groups in the FSF - Capital Flows, Offshore Financial Centres, Highly Leveraged Institutions - South Africa was invited to participate in work of the Capital Flows.

Private Sector Response to debates (eg IIF)
- Private sector has been an active player in the debate.
- Much attention has focused on the issue of 'burden-sharing', sources of vulnerability in the architecture, characteristics of contagion, capital flows, and capital account liberalisation.
- Public sector funds should not be used to "bail-out" private investors and lenders;
- The need for early and close consultation and dialogue between the public sector and the private sector.

GROUP OF 20
- The Group of 20 - USA, Japan, Germany, Britain, Italy, Canada, France, South Africa, Brazil, Argentina, Mexico, China, India, South Korea, Australia, Saudi Arabia, Turkey, Russia and two institutional Reps, the EU and IMF / WB
- The G20 will focus on global economic issues.
- A Ministerial meeting is scheduled for 16 December 1999 to be preceded by a deputies meeting.
- South Africa is expected to play a leading role in developing the agenda of the group.

FUTURE
- The Minister of Finance will chair the joint Board of Governors for the period 1999/2000.
- He will be responsible for the opening speech at the 2000 Annual Meeting which provides a unique opportunity to put the issues of the African Renaissance on the agenda of the Annual Meeting.
- This will set the tone for interventions that will follow.
- The Minister of Finance has been requested by the Constituency to continue in his current capacity as representative on the IMFC (1999/2000 to 2001/2002).

The debates at the recent Annual Meetings of the IMF and WB, which were held in Washington, USA, focused on poverty and debt relief. They were held at a time when we recognise that we now live in a world where transactions in the foreign exchange markets exceed US$ 1,5 trillion per day; where trade flows are in the order of US$ 5,5 trillion per year; where real-time information exists; where decisions made on a screen in New York can affect the education prospects of a child in South Korea; where medical science has advanced to the point of allowing complex surgery to be performed on a child whilst it is still in its mother's womb. Yet this is also a world where the chasm between the rich and the poor continues to grow, where millions of children continue to die from preventable diseases, where families and societies are being decimated by HIV/AIDS, where illiteracy continues to cast a shadow over progress and poverty shackles peoples lives.

The Annual Meetings bring together over 300 ministers of Finance and Heads of Central Banks, who together with their advisors represent 182 IMF and World Bank member countries. The meetings are also attended by Chief Executives of major financial institutions, prominent academics and representatives of non-governmental organisations from around the world. In total some 19 960 people registered for the meetings. The Annual Meetings therefore provide an ideal opportunity to reflect on these issues and to consider ways of addressing them.

South Africa has earned a place in a global economy dominated by creditor nations. This supports the political leadership role which we take up in the interest of development. The latter is expressed through our involvement in the Non Aligned Movement; the Commonwealth Heads of Government Meeting; the United Nations Commission for Trade and Development; the Organisation of African Unity, and the

Southern African Development Community.

A number of issues were dealt with at the Annual Meetings:

- On the whole, the world economic outlook looks positive with output that bottomed out in 1998, financial markets having stabilised, a turnaround in Asia economies, a recovery in the US economy and the resumption of growth in Europe and Japan.

- In Sub-Saharan Africa we are seeing a recovery in growth albeit from low base; structural reforms should also improve growth performance. However, we must also recognise that many challenges remain - peace aid stability, overcoming corruption, ensuring that more meaningful debt relief is forthcoming so that more resources are freed up for social development.

- In South Africa we are witnessing renewed confidence in the financial markets, lower interest rates and an improved export performance.

- The South African financial markets are well developed and well integrated into the world economy.

- Sound economic policies ensured that South Africa was able to weather the global financial crisis better than most.

- Significant developments on the issue of debt relief took place during the meetings in Washington.

- The "Cologne initiative" through which developed countries committed themselves to the enhancement of the HIPC framework to provide wider, faster and deeper debt relief, was endorsed.

- However, it must also be noted that this initiative does not go far enough. The required track record of reform of up to six years is still too long and continues to be a concern. Although the link between debt relief and social and poverty alleviation is correct, we have to ensure that it does not simply add to the existing conditionalities imposed on countries.

- Having made commitments, the G7 have been less forthcoming when it comes to supporting these with significant financial support. Debt relief initiatives cannot succeed unless the financial support is forthcoming.

- African countries (South Africa, Botswana, Nigeria, and Swaziland) have demonstrated their support for the initiative by pledging contributions to the HIPC Trust fund based on their quota share in the Fund.

- South Africa's contribution equals SDR 21 million (R100 million) and collectively, the contributions by African countries are in excess of SDR 40 million - the total shortfall which needed to be financed was SDR's 180 million.

- Countries eligible to borrow from IDA are home to some 3.3 billion people, some 57 percent of the world's population.

- 78 countries are currently eligible to borrow from IDA and more than 50 percent of these are situated on our continent.

- It is also worth reminding ourselves that official development assistance is at its lowest point in 20 years, seriously jeopardising IDA's role in supporting sustainable development.

- The Poverty Reduction and Growth Facility (PRGF) endorsed by the Interim Committee, aims to make poverty reduction efforts among low-income countries a key and more explicit element of a renewed growth oriented economic strategy. We have to ensure that this facility is adequately funded and that it supports the work being done on HIPC and is not replaced by since this would reduce the overall level of support to low-income countries for development.

- This approach will emphasize a comprehensive poverty reduction strategy, social and sectoral programmes aimed at poverty reduction, good governance, high priority on key reform measures critical to achieving social goals and country-driven poverty reduction strategies to form the basis for all IDA and Fund lending to low-income countries. Importantly, the strategies for development need to be formulated and developed at home. This of course requires capacity. We stand ready to participate and assist in building this capacity in our region.

- The positive development around gold sales and the gold price have been welcomed.

- Interventions by South Africa and other concerned developing countries prior to the Annual Meetings aimed at the open-market sale of gold by the IMF, paid off.

- The Interim Committee agreed to off-market transactions of up to 14 million ounces of fine gold by the IMF which would enable the Fund to finance its contribution (US$3.53 billion) to the enhanced HIPC initiative (US$27.4 billion).

- In addition, governors of 19 major central banks have agreed to a more orderly programme for official gold sales - annual sales not to exceed 400 tons and total sales not to exceed 2000 tons over five years. They also agreed not to expand their gold leasing activities over this period.

- The debate on crisis prevention and crisis resolution measures involving the financial architecture continues to receive much attention.

- There clearly exists a need for financial reform as the global financial system remains fragile.

- Financial reform should aim to improve incentives for good policy, encourage sustainable capital account liberalisation, discourage pegged exchange rates, improve financial regulation and supervision.

- South Africa's participation in the debate on the financial architecture has been intensive through the working groups of the G22/33.

- An outcome of these debates has been the setting up of the Financial Stability Forum (FSF) by the G7 whose aim is to focus on financial regulation and addressing issues of systemic risk.

- The FSF consists of three working groups namely Capital Flows, Offshore Financial Centres and Highly Leveraged Institutions.

- South Africa was invited to participate in the work on Capital Flows.

- This would involve risk management and disclosure, financial regulation, debt management, the development of domestic capital markets, managing the risk exposure of banks, capital account liberalisation and data dissemination.

- Issues of financial architecture are being actively debated by the various groupings in the private sector such as the Institute for International Finance (IIF) and think tanks such as the Council for Foreign Relations. In a recent report the Council made several recommendations which will assist in shaping the debates in the year ahead.

There are seven major recommendations in the report:

1. Good-house keeping awards - those countries who follow good policies should be recognised for it.

2. Fixed exchange rates are identified as being at the root of many of the problems.

3. Capital inflows can pose many difficulties for small emerging economies.

4. Burden sharing - including collective action clauses.

5. The IMF should scale back on the size of the loans.

6. Back to basics - better role definition for the IMF and the WB.

7. Action is required - there is a suggestion that a global conference on these issues is required.

- The Group of 20 of which South Africa is a member, brings together 'systemically significant' countries - the United States of America, Japan, Germany, Britain, Italy, Canada, France, Brazil, Argentina, Mexico, South Korea, Saudi Arabia, China, India, Russia, Australia, Turkey and two institutional representatives, being the European Union and the International Monetary Fund / World.

- Generally the work of the G20 will focus on gIobaI economic issues which in the short term is likely to concentrate on issues of financial architecture.

- South Africa is expected to play a leading role in developing the agenda for the group.

This is a poignant moment in world history. In his speech to the opening plenary James Wolfensohn, President of the World Bank, noted that the global population has now reached 6 billion and that "[O]n current trends, we will not meet the International Development Goal of halving poverty by 2015, nor the goal of universal primary education by 2015. On current trends, we will not be able to meet the International Development Goal of reversing the current loss of environment resources both nationally and globally by that date. In 25 years time, the 6 billion people will grow to over 8 billion. Of the 6 billion today, 3 billion live under $2 a day and 1.3 billion live under $1 a day. I am concerned that these extraordinary statistics may rise to 4 billion and 1.8 billion respectively. This is not a legacy to leave our children".

South Africa finds itself in a unique position to take forward many of the challenges and issues mentioned above. We have earned global recognition and respect for our commitment to democracy, transformation and our commitment to sound economic policies. In addition we currently chair the joint Board of Governors for the period 1999/2000 and as such, will be responsible for the opening speech at the 2000 Annual Meetings which take place in Prague next year. We are well placed to put the challenges and opportunities of the African Renaissance firmly on the agenda of the Annual Meetings.