IMF Executive Board Approves Three-Year, US$28.3 Million Extended Credit Facility Arrangement and US$14.2 Million Disbursement for The Gambia

The Executive Board of the International Monetary Fund (IMF) today approved a new arrangement for The Gambia under the Extended Credit Facility (ECF) in an amount equivalent to SDR 18.66 million (about US.3 million). The Board’s decision will enable an immediate disbursement equivalent to SDR 9.33million (about US.2 million).

The authorities’ program is aimed at meeting an acute balance of payments need arising from the recent crop failure due to drought, and helping to catalyze support from development partners for The Gambia’s new poverty reduction strategy, theProgramme for Accelerated Growth and Employment (PAGE). Over the medium term, the authorities seek to ease the government’s heavy debt burden through fiscal adjustment, while implementing a strong economic reform agenda in support of thePAGE.

Following the Board’s discussion of The Gambia, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, issued the following statement:

“The Gambian economy has made good progress in achieving strong growth and making a substantial reduction in poverty. However, major crop failure due to the drought has created hardship and calls for effective and timely delivery of assistance for the most vulnerable households.

“The Gambia’s heavy debt burden poses high costs for the government and risks for the economy. To address this problem, the authorities' new ECF-supported program rightly focuses on fiscal adjustment to curb government's domestic borrowing. Limiting external borrowing to concessional loans is also necessary to reduce the risk of debt distress. The authorities’ planned fiscal adjustment will require consistent strong implementation to build confidence and achieve fiscal savings. Rebuilding the government’s revenue base is key to fiscal adjustment, especially the upcoming introduction of a VAT and reductions in fuel subsidies.

“Progress toward eliminating fiscal dominance has enhanced the independence of the Central Bank of The Gambia and its capacity to conduct sound monetary policy. The central bank will continue to build capacity for effective financial sector supervision, particularly for stress testing.

“Financing the government’s new poverty reduction strategy, the Programme for Accelerated Growth and Employment, under tight budget constraints will be a challenge. In this regard, fiscal savings from lower interest on domestic debt and private sector participation in infrastructure investment could be helpful. To ensure that such investments are productive and to guard against potentially large contingent liabilities for the government, robust institutions and regulatory frameworks are critical. To support growth, reforms are needed in key sectors such as energy and telecommunications.”

Recent economic developments

The Gambian economy performed well during the previous ECF arrangement, which expired at the end of March 2011. During that period (2007–10), real GDP growth was robust and inflation was low-to-moderate, despite the global financial crisis and sharp food and fuel price shocks. Moreover, growth was inclusive and the incidence of poverty fell considerably. However, the fiscal deficit widened substantially in the latter years of the program, due to a steady erosion of revenues and large extra-budgetary spending, leading to a sharp increase in costly domestic debt.

In the 2011–12 agricultural season, a severe drought resulted in a major crop failure, putting about one-fourth of the population at risk. Initially, the government will bear much of the cost of relief efforts, notably imports of food, seeds, and fertilizer. Despite this severe shock, the authorities have been able to maintain macroeconomic stability, thanks largely to an ample stock of official international reserves.

The crop failure will affect economic growth over the near and medium term. Real GDP is projected to contract by 1½–2 percent in 2012, reflecting effects of the crop failure carrying over into the first half of 2012. With a recovery in agriculture spread over 2–3 years, real GDP is projected at about 8–10 percent a year in 2013–14, provided there is an effective response to the drought by the government, aid agencies, and development partners.

However, this outlook depends on sound macroeconomic policies and is subject to a number of downside risks, mainly the heavy debt burden, a potentially prolonged weakness in the global economy, particularly in Europe, and possible terms of trade shocks, especially on food and fuel prices, and weather-related shocks.

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-approves-three-year.html

IMF Executive Board Completes Fourth Review Under the Policy Support Instrument for Uganda

The Executive Board of the International Monetary Fund (IMF) has completed the fourth review under a three-year Policy Support Instrument (PSI) for Uganda. The Executive Board’s decision was taken on a lapse of time basis and enters into effect today¹. The PSI for Uganda was approved by the IMF’s Executive Board on May 12, 2010 (see Press Release No. 10/195). The IMF’s framework for PSIs is designed for low-income countries that may not need IMF financial assistance, but still seek close cooperation with the IMF in preparation and endorsement of their policy frameworks. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners.

The PSI-supported program with Uganda remains on track. All end-December 2011 quantitative assessment criteria were met, as were most of the structural benchmarks.

The stance of macroeconomic policy remains appropriate. Monetary tightening, initiated in July 2011 in response to rising inflation, has been effective in reducing demand and price pressures in the economy. High interest rates supported by tighter fiscal policy have strengthened the currency and raised reserve levels, while private sector credit growth and overall demand pressures are now much reduced. Prices have been generally stable for the last few months and annual inflation is coming down. The disinflationary effort has had limited effect on financial sector stability. Nonetheless, the tighter policies combined with weaker global demand are projected to reduce economic growth this year.

Looking forward, economic growth should recover significantly next year, as the expected decline in inflation will allow a phased and gradual relaxation of the monetary policy stance and a recovery of credit growth. The FY2012/13 budget aims at further moderate fiscal consolidation while increasing spending on infrastructure and other development priorities. In addition, tax policy measures will be introduced and a comprehensive reform of tax exemptions linked to a new tax procedure code carried out, both aimed at improving revenue and budget performance over the medium term. While external borrowing for development is expected to increase in the years ahead, debt sustainability analysis carried out jointly by the IMF and the World Bank establishes that Uganda continues to face a low risk of debt distress.

Key risks to the outlook arise mainly from external factors. Slower than expected global growth would worsen the trade deficit and possibly reduce remittances and capital flows. Higher energy prices would dampen growth, as would deterioration in the regional security environment. However, absent these risks materializing, economic growth is expected to continue to improve, reaching 6 percent by 2013/14, and achieving its estimated potential of about 7 percent by 2014/15.

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¹ The Executive Board takes decisions under its lapse of time procedures when it is agreed by the Board that a proposal can be considered without convening formal discussions.

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-completes-fourth_19.html

IMF Executive Board Discusses Implementation Plan in Response

On May 25, 2012, the Executive Board of the International Monetary Fund (IMF) discussed the implementation plan in response to board-endorsed recommendations for the Independent Evaluation Office (IEO) evaluation of IMF performance in the run-up to the financial and economic crisis.

Background

On January 26, 2011, the Executive Board discussed theIndependent Evaluation Office’s Evaluation of IMF Performance in the Run-Up to the Financial and Economic Crisis. In that report, the IEO put forward a set of recommendations aimed at making IMF surveillance more effective.

Based on those IEO recommendations that were endorsed by the Board, staff and management have prepared an implementation plan. Consideration of this plan was scheduled to be after the2011 Triennial Surveillance Review, given that many of the issues raised in the IEO report were also addressed in that context.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss management’s implementation plan for the Board-endorsed recommendations arising from the Independent Evaluation Office’s (IEO) report on the IMF Performance in the Run-Up to the Financial and Economic Crisis. Directors generally considered that the proposed implementation plan complements well the action plan for the Triennial Surveillance Review (TSR), and together should help enhance the effectiveness of Fund surveillance.

Directors emphasized that a comprehensive long-term approach is needed to tackle the shortcomings highlighted in the IEO report. They broadly supported the specific proposals in theimplementation plan, and welcomed management’s statement on an ambitious agenda to break down silos and promote diverse views and candor, further advancing initiatives underway. Directors considered that both sets of proposals provide a good start and encouraged management and staff to continue to build on them, and where appropriate, engage the Board in the process.

Encouraging Candor and Diverse Views

Directors endorsed the actions taken in the context of the TSR to strengthen risk assessments and better identify vulnerabilities and transmission channels. They also supported the action plans to make further progress on staff diversity in all its dimensions, leverage the diverse opinion inside the institution, and seek alternative perspectives from outside the institution as appropriate. Some Directors saw scope for more active engagement by the Board with external experts, including in terms of direct interactions and topic selection. Many Directors favored greater Board involvement in strategic human resource issues. Directors welcomed the establishment of the Working Group on Summings Up Review, and looked forward to its recommendations to management before the 2012 summer recess.

Speaking Up to Power

Directors welcomed the specific proposals in both the implementation plan and the TSR to improve the traction of Fund surveillance. They were encouraged by the work underway to develop a statement of workplace values to guide desired behavioral changes, and a leadership development framework that will clarify expectations at senior levels. A few Directors called for more concrete proposals to ensure that staff views are not influenced by pressure from country authorities. Directors looked forward to examining progress on these issues in the context of the next staff survey.

Integrating Financial Sector Issues into Macroeconomic Assessments

Directors emphasized that more needs to be done to integrate financial stability assessments into bilateral and multilateral surveillance. They viewed the Financial Surveillance Work Agenda as a first step toward the development of a strategic plan for financial sector surveillance, and looked forward to discussing the forthcoming paper.

Breaking Down Silos

Directors recognized that improving departmental collaboration and the Fund’s ability to “connect the dots” is a long-term endeavor. They noted that the implementation plan and the proposed steps in my statement present a rather comprehensive response to the problems identified by the IEO in these areas. In particular, Directors stressed the importance of accountability around a set of institutional priorities and collective ownership through a more consultative budget process, as well as cross-departmental collaboration and mobility. They also agreed that an appropriate balance needs to be struck between promoting staff mobility across country assignments and ensuring continuity in mission teams.

Delivering a Clear and Consistent Message on Outlook/Risks

Directors noted that the Consolidated Multilateral Surveillance Report responds to the IEO recommendation to distill for policymakers the Fund’s key messages on outlook and risks in a consistent and comprehensive manner. A few Directors were of the view that further streamlining multilateral surveillance products would help reduce risks of overlap and conflicting messages. Directors also commended recent efforts to improve the risk focus in all surveillance outputs.

Directors stressed the importance of monitoring and verifying progress on all these fronts in the context of future Periodic Monitoring Reports. They looked forward to revisiting, in a year’s time, matters related to institutional culture, including those identified in my statement, noting that change in this area is a continuous, long-term process that requires ownership and sustained commitment. I realize that, in the view of some, the incremental steps already underway and those proposed today may still not fully address remaining concerns or more fundamental problems—including governance reforms, as noted by a few Directors. We will need to monitor progress and adapt as we go along. Many valuable suggestions have been offered, which I will consider carefully with my management team.

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-discusses.html

IMF Executive Board Concludes 2012 Article IV Consultation with New Zealand

On June 6, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with New Zealand and considered, and endorsed, the staff appraisal without a meeting on a lapse-of-time basis.²

Background

The New Zealand economy continues to grow at a modest pace. Output grew by 1 percent in 2011, as elevated export commodity prices and favorable agricultural conditions helped offset the adverse impact of large earthquakes in Canterbury in late 2010 and early 2011. Continued aftershocks have delayed earthquake-related reconstruction. Domestic demand has remained soft as households and businesses continue to deleverage amid a weak housing market and an uncertain outlook. Elevated rates of unemployment, currently above 6 percent, and spare capacity have helped contain inflation.

The Reserve Bank of New Zealand (RBNZ) lowered the policy rate in March 2011 by 50 basis points to cushion the impact of the February earthquake. Since then, it has kept the policy rate on hold given the deterioration in the global economic position, subdued domestic activity, and the expected impact on future domestic activity of the strong exchange rate.

The nominal effective exchange rate has appreciated by around 30 percent since its trough in early 2009. The appreciation reflects the effects of higher export prices, positive interest rate differentials, and, although currently volatile, some increase in global risk appetite since end-2011.

Reflecting the slow recovery, past revenue and spending decisions, and accrued earthquake-related spending, the fiscal deficit in 2010/11 reached a record high of 9¼ percent of GDP on an accrual basis. Net government debt increased to 20 percent of GDP by mid-2011 from a low of 5½ percent in 2008.

The current account deficit in 2011 remained low at 4 percent of GDP, well below the 8 percent level in 2005-08, reflecting terms of trade gains, weak domestic demand, and low world interest rates. Net external liabilities have declined, but remain high at 72 percent of GDP at end-2011.

The banking sector remains sound. Bank profits are strong and nonperforming loans have fallen to less than 2 percent of total loans. Capital adequacy has improved since 2007, with the Tier 1 capital ratio reaching 10 percent in September 2011. Banks have made steady progress in lengthening the maturity profile of their wholesale funding since 2008 and increasing the share of retail deposits, but the total stock of banks’ gross external liabilities remains above 70 percent of GDP and loan-to-deposit ratios remain high.

The pace of New Zealand’s economic recovery is likely to remain modest. Output growth should pick up somewhat to 2⅓ percent in 2012 as earthquake reconstruction spending gains pace, although the size and timing of this spending is still uncertain. Growth is projected to rise to 3¼ percent in 2013, led by reconstruction. The key risks to the outlook are largely on the external front and on the downside, related to emerging weaknesses in the global economy and a possible upheaval in the global financial system.

Executive Board Assessment

In concluding the 2012 Article IV consultation with New Zealand, Executive Directors endorsed staff’s appraisal as follows:

Outlook and risks. The pace of New Zealand’s economic recovery is likely to remain modest. Output growth should pick up somewhat in 2012 as earthquake reconstruction spending is expected to gain pace, but the size and timing of this spending is still uncertain. High household debt is likely to weigh on the growth of private consumption as households will need to save to strengthen their balance sheets. The spare capacity and elevated unemployment will contain wage and inflation pressures in the near term. The risks to this outlook are on the downside and largely external, stemming mainly from emerging weaknesses in the global economy and a possible upheaval in the global financial system. The flexible exchange rate would provide an important buffer against shocks.

Monetary policy. The current accommodative monetary stance is appropriate. If the recovery remains on track and downside risks dissipate, monetary policy will need to tighten gradually to contain inflationary pressures. However, if the global recovery stalls or international capital markets are disrupted, the RBNZ has scope to cut the policy rate and provide liquidity support for banks.

Fiscal policy. The planned deficit reduction path strikes a balance between the need to contain both public and external debt increases while limiting any adverse impact on economic growth during the recovery. The authorities’ plan to return to budget surplus by 2014/15 should put New Zealand in a better position to deal with future shocks and the long-term costs of aging. Moreover, it will relieve pressure on monetary policy and thereby the exchange rate, helping contain the current account deficit over the medium term. New Zealand’s relatively modest public debt gives the authorities some scope to delay their planned deficit reduction path in the event of a sharp deterioration in the economic outlook.

External vulnerabilities and the exchange rate. New Zealand’s large net liabilities present a risk. Despite recent improvements, the current account deficit is projected to increase over the medium term as earthquake reconstruction activity gains pace and global interest rates normalize. To contain this increase and limit a further buildup of foreign liabilities over the longer term, the New Zealand dollar would need to be weaker than its current level. However, part of its current strength may dissipate over time with the eventual tightening of policy rates by major central banks. Increasing national saving, including through the planned fiscal deficit reduction, would reduce external vulnerability.

Financial sector issues. Banks remain sound, but they are exposed to highly leveraged households and farmers and rollover risks associated with large short-term offshore funding needs. While New Zealand’s bank regulatory norms are more conservative than in many other countries, the authorities should assess on an ongoing basis the balance between banking sector vulnerability versus efficiency to minimize the risk that systemically important banks pose to the economy. Options to strengthen prudential norms if needed could include setting banks’ capital requirements above the Basel III minimum or raising the core funding ratio more than the planned 75 percent to reduce short term external debt further. The RBNZ’s continued work on the costs and benefits of macroprudential measures is welcome, as is the authorities’ intention to implement key features of Basel III in early 2013.

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-concludes-2012_19.html

IMF Executive Board Completes Fourth Review Under the Policy Support Instrument for Rwanda

The Executive Board of the International Monetary Fund (IMF) has completed on June 7, 2012, the fourth review under a three-year Policy Support Instrument (PSI) for Rwanda.¹ The Executive Board’s decision was taken on a lapse of time basis.²

The Rwandan economy continued to grow strongly, and its economic program supported under the PSI remains on track. Real GDP growth is estimated at 8.6 percent for 2011, driven by agricultural output, exports, and domestic demand. Inflation rose sharply—mainly due to rising food and fuel prices but also an accommodative monetary policy—but stayed in single digits (8.3 percent in March 2012) and was the lowest in the region. All quantitative assessment criteria for end-December 2011 including fiscal and monetary targets were met. Most structural benchmarks were also met, albeit some with delays. In completing the review, the Executive Board approved the modification of the end-June 2012 assessment criteria. Rwanda continues to be assessed at moderate risk of external debt distress.

Growth is expected to remain high in 2012, but risks remain—a renewed global slowdown or sharply higher world fuel prices could threaten growth, revenue, and inflation objectives. The fiscal framework for 2012/13 is in line with the main objectives of the PSI, and the authorities committed to delay non-priority spending rather than resort to additional domestic financing if revenue collections fall short of target. Efforts are ongoing to further strengthen public financial management and enhance revenue administration. Monetary policy is aimed at maintaining inflation in single digits, and efforts are continuing to improve the liquidity management framework. To that end, it will be important to be proactive in monetary policy and improve the functioning of the money and foreign exchange markets. Improving access to financial services while safeguarding financial stability remains a key objective for Rwanda. Careful management of the consolidation of Savings and Credit Cooperatives will be very important in that regard.

The Executive Board approved a three-year PSI for Rwanda on June 16, 2010 (see Press Release No. 10/247).

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-completes-fourth_1230.html