Final speech al FMI
Statement by the Honorable Giulio Tremonti
Minister of Economy and Finance and Governor of the IMF for Italy
Speaking on behalf of Albania, Greece, Italy, Malta, Portugal, San Marino
International Monetary and Financial Committee
Washington, D.C., April 20, 2002
The Global Economy
The global recovery is under way, led by the US, where productivity growth is picking up
faster than expected. While the euro area is growing somewhat less rapidly than the US, it
shows a greater resilience to shocks, as indicated by the mild slowdown, confirming its
strong fundamentals. The European Council meeting in Barcelona has brought about
progress in major areas needing reform, including labor markets, pensions, financial market
integration, energy, state aid, and R&D. These important pieces of structural reform will add
to potential growth and employment creation in the euro area.
There are, however, risks associated with the recovery. Political uncertainties in the Middle
East and in Latin America may lead to a sustained rise in the price of oil, thereby negatively
affecting both the recovery and inflationary expectations. Financial markets may prove to be
overoptimistic about the strength of the recovery. The US current account deficit might
widen as US growth accelerates more than EU growth. The payments imbalance goes hand
in hand with the persistent misalignment between the U.S. dollar (which is estimated to be
overvalued by 20 percent) and the other major currencies, the euro and the yen. This overall
picture brings to the forefront, once again, the issue of the sustainability of such imbalances.
Policy authorities should stand ready to counter disorderly developments. As the events in
the aftermath of September 11 have shown, cooperation at the international level and an
active role on the part of international institutions are key factors in preserving global
Finally, in Japan the pace of reform remains slow and stimuli to growth via exchange rate
depreciation risk producing only limited short-term benefits, while adding to potential
imbalances in the region and elsewhere.
An important positive feature of the world recovery is the renewed access to private-sector
financing for most emerging market economies. The combination of a more favorable growth
environment and a more selective attitude by private investors suggests that the financing
requirements of emerging markets should be met with fewer difficulties than expected, at
least for those economies that show strong fundamentals and sound macroeconomic
Beyond such positive developments, caution is warranted. Apart from the uncertainties
associated with the situation in Argentina, there might be deeper causes for concern that need
to be tackled. One is the imbalance between capital account liberalization and trade
integration that characterizes many emerging market economies, especially in Latin America,
where trade integration is still limited. These countries have limited capacity to generate the
export revenues needed to service their external debt. As the upswing gains momentum, their
debt-to-export ratio tends to increase, adding to the risks of instability.
Improvement with respect to this problem could come from trade liberalization. However,
this is a long-term process and one, like many reform policies (including the much needed
reforms to increase financial deepening), generally easier to implement within a favorable
growth environment. The next few years should offer an important window of opportunity in
this respect. Trade liberalization, including through open regional agreements, would
significantly strengthen regional as well as global stability. The commitment to further
eliminating the barriers to trade should be strongly pursued by industrial and developing
Growth in Africa has held up relatively well compared with other regions. What is also
important is that strong growth is increasingly associated with sound policies in a relatively
large number of African economies, where a sustainable fiscal stance is associated with
declining inflation. Conversely, growth remains constrained in countries where
macroeconomic policies have not been appropriate, governance is weak, and institutions are
plagued by corruption.
Policies for Low-Income Countries
The Monterrey Conference has been a success. There is now widespread consensus on the
establishment of a general strategy to fight poverty, whereby all parties involved are called
upon to share responsibility. Industrial countries will increase the flow of resources to poor
countries and accelerate access to their markets. Poor countries will have to make substantial
progress in implementing strong policies, reforming their institutions, and adopting sound
Concrete steps have already been taken, as Europe and the US have increased their
commitments to aid flows. In addition, a number of multilateral initiatives are now under
way to provide support to African countries, including the New Partnership for African
Development and the Everything but Arms trade liberalization initiative of the EU.
Two years have passed since the inception of the PRGF. The PRGF has made substantial
progress in implementing the PRSP approach, especially in the increase of anti-poverty
spending and in its consistency with the country's poverty objectives.
The PRGF provides the strongest support to economic policy. However, in recent cases, a
few countries that did not show a balance of payment financing problem could not qualify for
a PRGF since a precautionary form of the PRGF is not available. This raises the issue of
programs for low-income countries without access to Fund resources. A mandate to the Fund
to explore the technical implementation of precautionary PRGF programs is the appropriate
The recent review of the HIPC Initiative shows that good governance does make a
difference, in that countries with an adequate policy framework have benefited more.
Looking forward, we must be aware that the lack of systematic evaluation of new borrowing
may undermine the prospects for debt sustainability in many HIPC countries. These countries
should put more effort into developing a comprehensive institutional and legal framework for
debt management, and they should increase coordination between macroeconomic and debt-
We regret that few commercial creditors and only some non-Paris Club bilateral creditors
have agreed to provide debt relief under the HIPC Initiative, and that even within the Paris
Club some countries do more than others. The result is that the poorest and most indebted
countries are not getting all the debt relief they need. Italy believes that this issue must be
strongly emphasized as you know, we are already writing off all our claims. The IMF and
the World Bank should underline this issue more forcefully.
Fund surveillance has significantly contributed to improving the quality of economic policy
in a growing number of member countries. One reflection of this improvement is that the
incidence of major crises notably, but not exclusively, in the advanced countries has
declined markedly. On the other hand, significant macroeconomic imbalances persist and the
frequency and severity of crises both in emerging market economies and the developing
world have not fallen. Hence, we need to continue to look for ways to improve the modalities
and to strengthen the impact of the Fund's bilateral and multilateral surveillance.
While the purpose of surveillance remains centered on helping member countries to attain
and preserve macroeconomic equilibrium, changes in the global environment and lessons
learned from crises suggest important qualifications for this general principle.
Balance of payments equilibrium is best understood in a medium-term horizon. This is
particularly true when debt sustainability issues have to be addressed. At the same time, it is
equally important to gain a good understanding of structural and microeconomic phenomena,
in a situation of widespread capital account liberalization and increasing risk of capital
account crises. The way to counter these risks is to enhance transparency and availability of
Multilateral surveillance serves a key purpose in taking into account spillover effects that are
not considered in the context of bilateral surveillance.. Concerns about such spillovers and
about how to counter risks of contagion have already affected Fund's surveillance activities.
Yet further analysis is needed, especially in surveillance of systemically relevant countries.
More effective surveillance may also imply a more authoritative surveillance. But this
requires surveillance to be independent and accountable. Recent experience has shown the
need for a more independent IMF assessment of country economies. There is indeed
evidence that, in the case of bilateral surveillance, Fund staff is more candid in assessing
countries that do not have Fund programs than they are in assessing those that do. This might
be because of a need to avoid scaring market participants away from investing in the country,
but it can also be a signal of an apparent conflict of interest within Fund staff, as surveillance
may lead to questioning the adequacy, design, and implementation of a Fund program.
If a conflict of interest exists, it needs to be corrected. We should encourage Management,
staff, and the Executive Board to examine possible solutions that, while preserving the role of
the Board, can contribute to achieving the degree of independence needed to improve
surveillance. In addition, a clearer separation between surveillance, program design, and
implementation would increase program ownership and the effectiveness of conditionality.
Furthermore, surveillance, to be more effective, should also be more accountable. One way
to achieve this is to increase transparency. More publicity of Art. IV staff reports could be a
solution. However its implementation should take into consideration possible trade-offs
between transparency and confidentiality. In addition, keeping a track record of the impact of
surveillance over the medium term would be important.
In the recent past, the Fund has begun to streamline structural conditionality in program
countries. Although there is still considerable variation across countries in the extent of
conditionality, this is largely a reflection of different country-specific circumstances.
Therefore, pushing further with streamlining may limit the flexibility needed to adapt
conditionality to program objectives and country circumstances.
We should also better understand how structural conditionality could be improved to
incorporate policies conducive to higher growth. This is important for all countries with
structural balance of payment and external indebtedness problems. Structural measures (such
as privatization) that may have a strong impact on long-term economic efficiency might be
considered for a program, even though their fiscal effects are not expected to be significant.
Lastly, streamlining without weakening conditionality requires a clear sharing of
responsibility between the Fund and the Bank. We need to understand exactly where we
stand in terms of cooperation with the Bank before we decide to move further ahead with
streamlining. We therefore look forward to the completion of the Fund-Bank collaboration
Our framework for crisis resolution rests on four components that are mutually supportive
and clearly interconnected: debt sustainability analysis, policy for access limits, private
sector involvement, and procedures for orderly debt restructuring. We look forward to the
forthcoming discussion on debt sustainability analysis and on access limits. We also
welcome the ongoing discussion on mechanisms for orderly debt restructuring, and we
encourage the efforts to reach operational conclusions in the near future.
In the current context, too much of the burden of crisis resolution falls on the debtor country.
Striking the right balance between PSI, the SDRM, and outright default as crisis resolution
mechanisms is key, in the general understanding that official financing is limited.
The SDRM proposal should not be examined in isolation from the overall PSI strategy (under
the Prague framework) since it completes the sequence of steps available to creditors and a
sovereign debtor. The SDRM is complementary to intermediate PSI, not a substitute for it.
Each would apply to different stages of a crisis, and the SDRM would be an additional
coordination mechanism that could be resorted to in the event that previous coordination
efforts were not successful.
The contractual approach, rooted in an extensive use of Collective Action Clauses (CACs)
should be equally pursued. The contractual approach is complementary and supportive of the
statutory approach. The Fund should work on this issue, especially to clarify the links
between standstills and the IMF policy of lending into arrears.
Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT)
Anti-money laundering and combating financing of terrorism, to be successful, must be
global. We acknowledge the great progress that has been made, in the very short time since
the Ottawa meeting, in working together with the FATF toward a unified methodology for
assessing the FATF 40+8 recommendations and the definition of a ROSC module. We look
forward to identifying ways to implement the joint action of the Fund, the World Bank, and
As one of the 38 member countries that answered the questionnaire distributed in preparation
for Art. IV consultations, Italy welcomes the decision to expand the coverage and encourages
other countries to participate in the exercise. We also look forward to the summary report of
Technical Assistance is crucial for member countries and we support the intention to
strengthen Fund and Bank TA on AML/CFT. At the same time, there is a strong need for
coordination at all stages of the process, starting from the identification of needs going
through the search for additional funding, up to the final stage of providing TA and
monitoring its results. In this context, we support the idea of developing a global TA
The Italian Economy
Growth prospects for the Italian economy in 2002 have significantly improved over
the last few months. Leading indicators show that the downturn, experienced in
2001, bottomed out in December and that the recovery is currently in place.
Industrial production increased markedly in January. Notwithstanding the slowdown
in output during the last quarter of 2001, employment growth also accelerated
markedly. In addition, capacity utilization remains relatively high and destocking
had fully run its course by the end of 2001. Both demand and supply factors,
therefore, indicate that the outlook is for a rapid pace of economic recovery.
The upturn is projected to strengthen during the year, mirroring the expected revival
of the world economy and the continuing strength of consumer and business
confidence. Household spending will receive a boost from the decline in inflation,
the expansion of employment and the steady fall in unemployment. Similarly, the
incipient economic recovery should foster a significant revival in investment
spending. Exports should strongly benefit from the projected expansion of
Economic policy will also support the recovery in domestic demand. The increase in
minimum pensions and the hike in tax allowances for low- and medium-income
households will boost consumer spending. Similarly, temporary tax allowances for
new capital spending should favor a substantial recovery during 2002 in investment
Growth projections are characterized by significant uncertainties on the timing and
the momentum of the expected international upturn. Under the assumption of an
early and sufficiently strong international recovery, activity is expected to achieve,
by the end of the current year, a pace consistent with the projections contained in the
Economic Financial Planning Document 2002-2006 (DPEF), notwithstanding the
unfavorable carryover from 2001.
Economic policy is also geared to the implementation of a comprehensive program
of structural reforms with a view to raising potential growth. The government has
proposed to parliament a far-reaching set of measures that cover the tax system, the
working of the labor market and the reform of pensions. The new tax system is
designed to reduce both the tax rates, thereby boosting private incentives, and the
complexity of existing regulations. It will be implemented gradually in line with
Italy's commitment under the Stability Pact. Labor market reforms, along with
improvements in regulations, are also a key priority. They are envisaged to continue
at a rapid pace, further spurring employment growth. Finally pension reform aims at
raising the retirement age, on a voluntary basis, so as to strengthen the sustainability
of the system in the long run and to boost employment and output in the short run.
The budgetary outlook remains favorable. The trend toward further budgetary
consolidation will continue in 2002, taking the country one step closer to achieving
a balanced budget in 2003, as scheduled. Tight spending controls, the sale of public
real assets, the continuing benefits from previous reforms, and lower interest
spending will help achieve the budgetary target for 2002. The Italian government is
strongly committed to meeting all the budgetary objectives set out in the Stability
and Growth Pact.
The Outlook in the Other Countries of the Constituency
The Albanian economy, despite the energy crisis, has continued its stabilization, with GDP
growth averaging at about 7 percent, the domestically-financed deficit being reduced from
6.4 percent in 1998 to less than 3 percent in 2001, and inflation dropping sharply from double
digits to the 2-4 percent band set by the authorities. FDI flows have also significantly
increased, with projected figures for 2001 reaching 5.2 percent as a share of GDP, mainly
reflecting future growth potential.
Authorities have maintained momentum on structural reforms, moving aggressively on the
path of privatization, improving significantly tax collection, streamlining the civil service,
opening the economy to foreign trade flows, and creating a business environment conducive
to investment and growth.
Greece continues to experience robust economic growth, accompanied by moderate inflation,
strong public finances, declining unemployment and an improving external current account
position. The increase in real GDP in 2001, at about 4 percent, was well above the EU
average (for the sixth year in a row). It is likely to be sustained at close to that level in 2002,
if (as expected) demand in the main trade partner countries picks up momentum in coming
months. Consumer and investment spending have been the most dynamic components of
demand, benefiting from falling interest rates and the disbursement of large EU community
support funds. In addition, exports (notably to Central and Eastern Europe) have performed
well, contributing to some narrowing of the external current account deficit. The rate of
inflation has shown some variability, in response to several temporary adverse shocks, but
has tended to ease in recent months and is set to decline further in the period ahead, although
a sizable differential relative to the euro area average is likely to persist.
Economic policies are geared to maintaining macroeconomic stability while fostering rapid
convergence of the standard of living to the EU average. In this setting, public finances have
continued to be strengthened, with the general government balance swinging into surplus in
2001 and the public debt falling below 100 percent of GDP. The fiscal and debt positions are
targeted to improve further in coming years. At the same time, an ambitious program of
market liberalization and structural reform is being implemented, focusing at present on
revamping the tax system, improving budgeting and control arrangements, the further
opening of product markets, the completion of the government's privatization program and
the initiation of long-overdue reforms of the health care and pension systems.
The Maltese authorities continued to pursue prudent macroeconomic policies and undertake
structural reforms in order to enhance the international competitiveness and overall
efficiency of the Maltese economy ahead of EU accession. Malta's economic performance
was, however, negatively affected by the hostile international environment particularly in the
last quarter of the year following the tragic events in the US. Nevertheless, the Government
continued to maintain its policy of fiscal restraint. Indeed, the deficit was reduced further to
5.3 percent of GDP from 5.5 percent a year earlier. Malta also made further progress in its
accession negotiations with the EU and succeeded in obtaining special arrangements where
employment and the acquisition of property by foreigners were concerned. The preparatory
work in connection with the privatization program continued, though progress was slower
than anticipated due to longer-than-expected negotiations. It is expected that a number of
state entities, including the airport, the grain terminal and the lottery system will be
privatized this year. Initial measures aimed at reforming the social security system in the area
of health insurance will also be implemented this year.
With regard to monetary policy, the Central Bank of Malta continued to adopt a cautious
stance as capital controls were eased further as of the beginning of the year. The Bank
continued to pursue a fixed exchange rate policy in the context of its ultimate objective of
achieving price stability. It kept official interest rates unchanged until the late summer, when
these were lowered by fifty basis points in two stages, while reserve requirements were
reduced by a percentage point to 4 percent.
During the year 2001, the Maltese economy contracted by 1 percent in real terms. The
decline in GDP was mainly attributed to the sharp drop in export demand for electronic
components. A decline in tourism activity particularly in the final quarter of the year also
contributed to the overall contraction in economic activity. At the same time, slower growth
was also registered in private consumption and investment. As a result of these developments
the current account of the balance of payments narrowed significantly to 5 percent of GDP
from around 14 percent a year before. The improved performance of the balance of payments
was reflected in the external reserves position which rose by 18 percent during 2001.
Inflation was on a rising trend for most of the year despite the weakness of domestic demand.
The increase was mainly attributable to food prices, which rose sharply primarily as a result
of poor weather conditions. At the end of the year inflation stood at 2.9 percent compared
with 2.4 percent a year earlier. Meanwhile the unemployment rate edged up marginally to 5.1
percent from 5.0 percent at the end of 2000.
Projections for 2002 indicate that GDP growth should recover to about 2.5-3.0 percent. This
recovery is expected to gain momentum in the second half of the year as activity within the
electronics sector becomes stronger in response to higher export orders, while the decline in
tourism is gradually reversed. Economic growth should also be underpinned by increased
investment in construction as work on major infrastructure projects gathers pace. A pick up
in domestic demand is therefore anticipated but this is not expected to lead to inflationary
pressures. Inflation in fact is expected to ease back to below the 2.5 percent level. On the
other hand the rate of unemployment may edge up slightly due to an acceleration in the restructuring
(of the manufacturing industry) process as protective levies continue to be
dismantled. The current account position is expected to remain stable at around 5 percent of
GDP, while further fiscal consolidation should be achieved as the deficit-to-GDP ratio
declines to an officially-projected estimate of about 4.5 percent.
In Portugal GDP decelerated in 2001 (to 1.8 percent) following the general movement
registered in the euro area. Given the increase in the net external sector contribution to GDP,
this slowdown was basically driven by the more moderated growth of domestic demandan
important ingredient to overcome the present imbalances of the Portuguese economy. This
trend of the domestic demand is expected to continue in the current year resulting in a new
slowdown of economic activity and favourable effects on inflation pressures.
The annual inflation rate increased in 2001 and reached 4.4 percent. In 2002, inflation is
expected to decrease significantly, due also to the unwinding of the base effects that were
determinant in the previous year (related to the pattern of domestic energy price
adjustments). In fact, the inflation rate came down to 3.2 percent in February. The labor
market remains tight, with low levels of unemployment (consistently around 4 percent),
which makes both inflation and growth prospects crucially dependent on wage moderation.
The budget deficit deteriorated sharply in 2001 and the original target under the Stability and
Growth Pact Program was significantly overshot. Both overoptimistic projections of revenue,
partly due to the slowdown in economic activity, and overruns on the expenditure side,
accentuated by an unexpected surge of the level of indebtedness of local administration at the
end of the year, contributed to this outcome. In any case, the Portuguese authorities
reconfirmed their commitments, under the Stability and Growth Program, to a budget deficit
of 1.8 percent of GDP in 2002 and a balanced budget in 2004.
San Marino continues to enjoy strong economic growth, while unemployment is diminishing
and inflation remains low. The budget and economic policies have been devised to safeguard
a small but open economy, highly integrated with the neighboring regions.
The change over from the Italian lira to the euro took place without any complications and
The creditworthiness of the country has remained unchanged thanks to its small public debt,
while the Government has already embarked on public finance recovery in order to redress
its fiscal balance.
San Marino has extended further its cooperation in the fight against money laundering, and is
strongly committed to combating international terrorism and its financing.