1. We, the Finance Ministers and Central Bank Governors of the G-7 countries, met today to review recent developments in the world economy and financial markets.(1)
2. Together with the Managing Director of the International Monetary Fund, Michel Camdessus, we examined the outlook for the G-7 economies and exchanged views on policy requirements.
3. In the G-7 economies, maintaining or achieving sustained balanced expansion remains the key objective. We noted that many indicators are positive. Inflation remains low, and growth continues at a solid yet sustainable pace in some countries and is increasing in others. Moreover, fiscal action in many countries is reducing budget deficits and putting public finances on a more solid footing than has been observed in many years. With moderate growth, low inflation and improved fiscal positions, interest rates have generally declined over the past several years.
4. Yet challenges remain. Not all countries have yet seen a satisfactory recovery in job growth, and more needs to be done in some cases to improve structural performance and to restore sound long-term fiscal positions. Continued attention to ensuring the soundness of the financial system remains important in some countries. The aging of industrial country populations poses economic challenges, and the concomitant effects on public budgets and social security and health care systems require further action to ensure long- term solutions.
5. Most countries also face distinctive problems related to their special circumstances, requiring solutions suited to their distinctive needs.
-- North America. The United States has been on a long upward growth path, with a marked fall in unemployment attributable both to the long-lasting recovery and to a dynamic labor market. It is important to remain watchful to avoid a resurgence of inflation and to continue the process of budget deficit reduction as part of an effort to increase national savings. In Canada, on the other hand, growth was sluggish until the second half of 1996, and considerable slack remains in the economy. Employment and output growth now appear to be strengthening in response to a substantial easing in monetary conditions made possible by the impressive progress made on fiscal consolidation and continued low inflation.
-- Europe. In continental Europe the principal task is to reduce persistently high unemployment, which has serious consequences for growth, public finances, and for society as a whole. In addition to maintaining an appropriate macroeconomic policy stance, attention must be concentrated on implementing structural reforms to reduce barriers to job creation, reduce the role of government in the economy and reform tax systems. The economic situation in the United Kingdom is more like that of the United States, with a need to remain watchful of inflation and maintain fiscal consolidation.
-- Japan. Japan has the objective of achieving a strong domestic demand led growth and avoiding a significant increase in the external surplus. Further structural reforms, including broader deregulation initiatives and appropriate fiscal structural reforms, are important over the medium term to revitalize the Japanese economy further.
European Monetary Union
6. In the context of surveillance, we reviewed recent developments toward EMU and discussed its implications for the G-7 economies.
Exchange Rates and Financial Markets
7. We discussed developments in exchange and financial markets since our last meeting in Berlin where we noted that major misalignments in exchange markets had been corrected. We agreed that exchange rates should reflect economic fundamentals and that excess volatility and significant deviations from fundamentals are undesirable. In this context, we emphasized the importance of avoiding exchange rates that could lead to the reemergence of large external imbalances. We agreed to monitor developments and to cooperate as appropriate in exchange markets.
8. Ministers and Governors agreed that the IMF plays a critical role in helping to steer the international financial system and to manage shocks to it. They noted the policy reforms adopted in recent years and underlined the importance of maintaining this momentum in order to ensure that the institution continues to be an effective and relevant force in the evolving global economy, They attached particular importance to the following areas:
Enhancing long-term growth potential through market-opening measures, which has been an important part of many IMF programs;
Promoting freedom of capital flows, adapting to new challenges in global capital markets, and amending the IMF articles to clarify its role in this area;
Increasing the IMF's capacity to prevent financial crises through enhanced surveillance and greater emphasis, within its mandate, on promoting good governance and transparency of policies in both program and non-program members; and Maintaining and improving the effectiveness of the Fund by assuring appropriate transparency in its operations and careful attention to administrative expenses. In this context, they welcomed the recent decision by the IMF Board to increase transparency.
9. We welcomed progress on the Eleventh General Review of quotas by the IMF's Executive Board, and agreed that it is important that the IMF continue to have adequate resources to fulfill its responsibilities for the international monetary system. We also welcomed progress toward a proposed amendment of the IMF Articles to provide for an "equity" allocation of Special Drawing Rights.
10. Joined by representatives of the European Commission, we met with Russian authorities to exchange views on the economic situation and outlook in Russia and agreed that Russia is at a critical juncture in its economic transformation process. We welcomed President Yeltsin's call for action on economic reform in his March State of the Federation address and noted that this call has been reinforced by statements from the new Russian cabinet. We also noted the necessity of taking resolute action on reform of tax administration and tax policy. The rapid improvement of the revenue situation under the Russian authorities' 1997 economic program will be of crucial importance for further reform progress. In addition, deepened structural reform to improve the environment for private investment was seen as critical for propelling Russia onto a path of sustained growth. We welcome the imminent agreement on Russia's IMF program for 1997 under the current EFF. This agreement will help catalyze higher flows of private investment as well as significant financing from the World Bank, which has indicated that $6 billion can be made available over the next two years to support reform. We welcome the expanded focus of this Fund program to include fiscal reforms for the long term and structural reforms. We urge Russia to intensify its work with the World Bank to advance additional structural reforms. We look forward to an agreement that would permit Russia to participate in the Paris Club as a creditor on appropriate terms.
11. We are increasingly concerned that the Ukrainian government has been unable to implement its ambitious reform agenda developed in cooperation with the IMF late last year, for which the international community generously pledged its support in December. Designed to boost investment and bring the shadow economy above ground, we consider these measures to be Ukraine's best chance to achieve positive, sustainable economic growth. We urge the government to engage fully and quickly to implement this package while this window of opportunity remains open and before further delays make the reform task more difficult.
12. Together with the Managing Director of the IMF and the President of the World Bank, we reviewed prospects for economic progress in Africa. We support the ongoing movement toward more democratic political systems. We are greatly encouraged by the strong performance of certain sub-Saharan countries in moving toward financial sustainability and more market-oriented economic policies. We are determined to support these reforms as effectively as possible. Building on the undertakings of last year's Summit in Lyon, we agreed that countries implementing these reforms and vigorously combating poverty should benefit from: enhanced debt relief under the HIPC initiative and adjustment financing; IFI support conditioned on further opening of economies in a regional and worldwide context, investment in human resources and basic infrastructure, and improved economic management; increased access to world markets; and bilateral support focused on these reforms.
Financial Stability Agenda
13. We reviewed progress toward the initiatives on promoting financial stability identified at the Lyon Summit:
-- strengthening international supervisory co-operation;
-- improving market transparency and risk management;
-- promoting prudential supervision in emerging markets; and
-- analyzing the implications of electronic money.
We welcome the efforts being undertaken on the entire Summit agenda on financial stability by national authorities and international bodies such as the Basle Committee on Banking Supervision, the Technical Committee of the International Organization of Securities Commissions, the International Association of Insurance Supervisors, and the Joint Forum on Financial Conglomerates. We look forward to continued progress from all of them as work on international regulatory cooperation proceeds after Denver. We endorse the strategy for strengthening financial systems in emerging markets developed by the Working Party on Financial Stability in Emerging Market Economies established by the G-10 and are encouraged by progress toward a broad consensus and suggest all the bodies identified in the report work together to assist implementation. We also endorse the forthcoming report of the G-10 Working Party on Electronic Money and agree with its key findings.
Heavily Indebted Poor Countries (HIPC)
14. We welcome the decisive progress achieved within the World Bank, the IMF and the Paris Club in implementing the new debt initiative. We urge other creditors to finalize comparable arrangements as soon as possible on the basis of fair burden sharing. We underscore the importance of continued debtor reform efforts under this initiative, and agree that, wherever necessary, the International Financial Institutions should provide interim relief benefits under the initiative in advance of the completion point. We look forward to timely decisions on additional countries, taking account of each country's special circumstances, and the agreed architecture of the initiative, in particular the qualification criteria.
WTO Financial Services Negotiations
15. Recognizing that lower barriers among financial markets will contribute to a freer flow of capital and accelerate capital market development, we express support for the resumption this month of financial services negotiations in the WTO. As noted in the Singapore Ministerial Declaration, we look forward to full MFN agreements based on improved market access commitments and national treatment. Accordingly, we will aim to achieve significantly improved market access commitments with a broader level of participation in the agreed time frame.
16. The globalization of national economies has resulted in the challenge of increasing harmful international tax competition. As stated in the Lyon Summit communique, tax schemes aimed at attracting financial and other geographically mobile activities can create harmful tax competition between states, carrying risks of distorting trade and investment and could lead to the erosion of national tax bases. Harmful tax competition also undermines the fairness and neutrality of the tax system. Hence, we attach great importance to the work undertaken by the OECD and will pay close attention to the work and the conclusions and recommendations the OECD is due to produce by 1998.
Bribery and Corruption
17. In view of the corrosive effects of bribery and corruption generally on the achievement of sustainable economic development, growth and stability, we welcome the increased attention to these problems in the IFIs and in the OECD. We call on these bodies to carry forward their work and to reach early agreement on solutions. We urge:
-- The Multilateral Development Banks (MDBs) to collaborate to establish uniform procurement standards modeled on those of the World Bank and ensure strong oversight at headquarters of all facets of the procurement process;
-- The IMF and the MDBs to strengthen and expand, within their own areas of responsibility, their activities to help countries fight corruption, including measures to ensure rule of law, improve the efficiency and accountability of the public sector, and promote good governance;
-- The OECD countries to reach agreement on measures that will permit effective and coordinated criminalization of foreign bribery and facilitate expeditious elimination of the tax deductibility of such bribes.
(1) U.K. Chancellor of the Exchequer and Canadian Minister of Finance were not present.
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