Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Welcome everyone. Mr O'Donnell, I think you would like to make a few opening remarks.

  (Mr O'Donnell) Very briefly, Chairman; I know that briefness is appreciated on these occasions. First of all, may I thank you for your interest in this subject. We hope you like this second annual report that we have produced. It has been quite a busy year with a new managing Director at the Fund, Horst Köhler, and has really been a year of implementation. The points I would emphasise on HIPC are the fact that we have 22 countries through to decision point and, on codes and standards, the fact that we now have 83 assessments under codes completed covering about 33 countries. That is important for us. The announcement by the Chancellor with respect to conflict countries on HIPC again is a very important step and I think we are making some progress in implementing private sector involvement framework that has been agreed now. It started off at G7 level. That is very important for us. On development, I think the bigger prize is moving towards international development goals and I think that, looking forward, will be the focus of our attention bringing in debt relief as part of that but as only a part of what is needed to achieve those goals. The other aspect and the reason I am here as well as Stephen is that you need to think of all of these issues within the broader context of the world economy and we are facing some challenging periods in the world economy. In particular, the IMF have not produced a new forecast but they have said that they will downgrade their world growth forecast from around 4.25 per cent to 3.75 per cent. The US numbers will come down from around 3.2 to 2.5 per cent and this is a background against which we need to consider carefully the implications for UK economy. We are doing that in time for our forecast for the Budget and we think that is one of the key issues which will be very important to the world economy because the US has been a large driver and there have been quite important implications for the way monetary authorities around the world respond.


  2. Firstly, can I say how pleased we are that you are producing these annual reports on a regular basis. If you remember, it was in response to a request from this Committee because we think it is very important that our representatives at the IMF should have an opportunity to account for their decisions and for the policies in front of a Parliamentary Committee and indeed in front of Parliament as a whole. Also, this report is substantially larger than the one last year. May I begin by asking you, in a way leading on from what Mr O'Donnell has said, how you see the prospects of the world economy. How is that going to influence the IMF and how is it going to influence our strategy at the IMF and the World Bank?
  (Mr O'Donnell) I think the best way for me to answer that is to talk about the broader issues and to pass IMF specific issues over to Stephen Pickford, our Executive Director. The biggest world development is obviously the change in the US and I think that there we are focusing on four issues. First of all, there is the direct trading impact and that is important for us. The UK exports to the US are around 4.5 per cent of GDP which is not an insignificant number. To get it in context, our exports to the US are around 17 per cent of the total compared to, say, 52 per cent for the EU as a whole. So, it is a significant element.

Sir Teddy Taylor

  3. Is that for goods?
  (Mr O'Donnell) For goods and services, I think, but I am happy to check that.

  Chairman: I think you are right.
  (Mr O'Donnell) So, there is the trade connection. Investment flows are very important. The US investment in the UK was around £20 billion in 1999. It is a very large number. If those investment flows reduce somewhat, there will be a direct effect. Also, we would expect the balance of payments effect to come through from our investments in the US. We are a very large investor in the US so, to the extent that equity prices fall there, dividends fall etc, there will be less of a flow back to our current account, so we will observe that. On equity prices directly, there is a very high observed historical correlation between the US and UK equity prices, so one might expect UK equity prices to respond as well as US equity prices. In addition, there is a direct equity price effect through pension funds where UK pension funds hold US equities, so there is an effect there. Then, the next channel is interest rates and exchange rates where—and this is really a key—if you expect, as the market seems to do, an aggressive Fed response to what has happened—they have cut 50 basis points already and the markets are expecting quite a lot more to come—if that were to lead to an increase in the US/UK interest rate differential, that would have implications for the sterling/dollar exchange rate. Obviously, the MPC will take all these factors into account in coming to its decisions. I think the final channel is the most important and that is a question of confidence. If expectations about future growth come down, then that confidence channel could be quite important. This is the area where the models are hopeless, to be perfectly frank. They do not pick up this effect well. We will only be able to come to a view about it using a high degree of judgment and that is where, I hope between now and when we have to produce our forecast for the Budget, we will be able to think carefully about precisely how significant the slow-down in the US is. So, those are the issues that we are thinking about. Obviously with this decline in world growth and world trade, the world is a less benign place for the IMF to operate in. On the other hand, we are still talking about quite significant world growth. You will remember that last year was the best year for a decade in terms of world growth. So, although there is a slow-down, a necessary slowing in the US, it is actually still quite a reasonable growth and we expect the euro area to still be growing quite well and, with the right responses from monetary authorities, I would expect these necessary slowings to be something which will create a world environment that, whilst not as buoyant as last year, is not a bad one to operate in.
  (Mr Pickford) Perhaps I could add a little more about the specific implications for the IMF and World Bank as you suggested. Obviously, the Fund has an overall role in terms of surveillance in the world economy and is keen to analyse and identify the potential risks from all of the routes that Gus outlined. More specifically, I think the main implication for the Fund will be in terms of whether the Fund has to step up its assistance for the programme countries or the countries that are vulnerable. Also in that regard, it is not clear as to the way in which the linkages will work and it will vary from country to country. To take, for example, Argentina which we have just agreed a programme for. Argentina does have trade linkages with the US, which are not that important, but it also is very heavily reliant on trying to get its access back to private capital markets. It suffered during the latter part of last year. It saw the spread at which it could borrow in international financial markets go up enormously compared to US treasuries. Then, with the combination of the program being agreed and also the Fed cutting its interest rates, the spread fell, so not only did Argentina see its borrowing cost fall by as much as the 50 basis points of the Fed cut, but it actually fell by considerably more than that. So, there are pluses and minuses and it will vary from country to country, but it does mean that the Fund will need to be quite alert to the risks and also the risks of financial sector problems which can arise in these circumstances.

Mr Beard

  4. On the impact of the American scene on the IMF, are there any indications that the new policies with the new presidency in America will have any adverse effects on the IMF and the World Bank?
  (Mr O'Donnell) It is very early to answer that question. We do have some information in that Mr O'Neil was asked about the IMF in his hearings and he said that he thought that they might have made some mistakes in the past but that, in general, they did not have any large conflicts with them now. He did put some emphasis on the need for better surveillance at the Fund and indeed the US Treasury. That was the area he focused on.


  5. Who has to be better at surveillance?
  (Mr O'Donnell) Both the Fund and the US Treasury—that is what he was saying, that these things do not happen overnight and we should have early warning systems to make sure that we pick these things up earlier and indeed that is one of the points we have emphasised for some time, that actually you need to think very early on about countries like Argentina and make sure that you are on top of them.

Sir Teddy Taylor

  6. I would like to ask a question about accountability. A number of things are done in the IMF which affect us all but a number of people ask how we can hold them accountable. These days, there are a number of organisations which are not very accountable. How do you think we can best do this? What is the best way of making sure, for example, that we know what is going on and about decisions taken which affect us? There is one particular matter that I am going to ask Mr O'Donnell about because he knows all these things but, in general, how can we best do it?
  (Mr Pickford) In general, I think the approach which we have tried to follow is to make the Fund more transparent and open and I think there have been enormous strides made in the last few years. Gus was my immediate predecessor and I suspect that he will have seen an even bigger shift in the IMF's openness. We publish a great deal now. We publish Article IV staff reports for many countries; we publish the programme documents relating to when countries are borrowing from the Fund; we publish the Board's work programmes; we publish all the financial accounts of the Fund on a regular basis. That, to some extent, helps to increase accountability. I personally think that a report like this, of which the Treasury has produced two now at your request, is an enormous step forward in terms of presenting in a relatively accessible form the operations of the Fund over the last year and I hope you will agree that it has actually added to the general understanding of the public as to what the Fund is up to. Obviously in terms of the formal lines of accountability, the line operates from the Fund staff to the Managing Director; the Managing Director is appointed by the Board, ie the Executive Board on which I sit, but the Executive Board only has its responsibility devolved to it from the Board of Governors which is all 183 governors of the Fund—the Chancellor is the UK's governor—given that I feel I am accountable to the Chancellor and the Chancellor is accountable to Parliament, I think that gives you the formal linkage of accountability. In practice of course, as I said at the beginning, I think publishing information which allows you to ask questions of people like me is probably a good route for delivering accountability.

  7. We certainly have some information and the annual reports are an example, but there is no reference as to how the UK votes. There is a great deal of general philosophy but we have no idea as to how the UK votes. Is that not something, if we are going to hold you accountable, that should be published in the annual report?
  (Mr Pickford) We did cover this when I last appeared and I said that this was a matter for the Chancellor. You did in fact raise it with the Chancellor and I think I interpreted his answer that he is very sympathetic but what he would actually like to do is to try to move forward across the organisation. In practice, with his permission, I will tell you how the UK votes on individual items but that does not necessarily tell you a great deal about the way the Board discussions went. I suspect that providing more information about the totality of the Board's decision making process would be more informative to you, but this is an issue which I think we have under review.

  8. Perhaps we could ask Mr O'Donnell to speak to him.
  (Mr O'Donnell) Certainly, but I should stress that votes are incredibly rare on the Board and, quite often when the discussion is taking place, everybody is aware of where a vote would get to and therefore a vote is not taken. So, I think actually giving you a record of votes you would find very disappointing. May I come back to your point about accountability because it relates to surveillance.

  Sir Teddy Taylor: On this question of voting, if there are very few votes, it would be quite nice to tell us that.


  9. I think you just said that you have no objection to saying how we voted on individual issues.
  (Mr Pickford) I said with the Chancellor's permission. I suspect that he would have no problem in my repeating again that there was a vote on executive directors' salary increases and we voted against.
  (Mr O'Donnell) I just want to make one brief point on your point about accountability related to surveillance. One of the things that we need the Fund to be accountable for is whether it was keeping its eye on these countries doing appropriate surveillance to ensure that it tries to prevent crises rather than deal with them, prevention being far more important. There is a conflict there between them, in all of the things Stephen was talking about, being more transparent and saying how they think countries are doing. If we can get countries to routinely publish all the information relating to this surveillance, then we will not have such a difficult problem when we actually face a case where we think countries are going off-track and the Fund is somewhat reluctant now to publish that sort of information because it is nervous about triggering a crisis. If we could get into the routine of publishing—it is a standard annual surveillance exercise, you could publish, as the UK does, the concluding mission statement, which we did back in November of last year, the press information notice which includes the full details of the Board discussion and all the staff reports relating to the country in question—and if we could get all of that information out there, then I think that the surveillance process would work better and I think that that would have quite important implications for crisis prevention.

Sir Teddy Taylor

  10. My final point is that, in the report that you put out "The UK and the IMF", I see that, on page 7, at article 3.3.8, it mentions that the Executive Board discussed exchange rate policy in the euro area and I was fascinated about what on earth that meant. I saw that, on 16 January, which was last Tuesday, for the first time ever, the Bank of England put out notes in a foreign currency in euros raising money in euros, £500 million. Incidentally, it said that American firms were not allowed to bid for them. I am just wondering what this is all about because putting out notes in foreign currency is something we have never had before. I am just wondering if this is something that arose out of the IMF initiative which is mentioned here or whether it is something which could be explored with them because it could be quite exciting for the world economy if member states or individual countries are going to be putting out notes of other currencies. For example, the French could put out dollars or the yen. Some people have argued that this article last Tuesday about £500 million being raised for the Bank of England in euros was just to try to prop up the euro but others think that it is something far more significant. I wonder if Mr O'Donnell could tell me because I know that he knows everything.
  (Mr O'Donnell) I am happy to answer both matters. On the issue of the IMF discussing the euro area, that is part of its surveillance job now because obviously it does surveillance of individual countries and, when it comes to doing surveillance, it looks at monetary policy and fiscal policy. Monetary policy is now set for the euro area by the ECB, so it has to do some surveillance of the euro area as a whole and it is now starting to do that. The ECB has observer status on the Fund Board and is there for those occasions when the IMF, just as it does surveillance of the UK, does surveillance of the euro area. So, the reference in there is quite rightly informing you that that sort of process is now starting. On the question of raising money, the UK and indeed many other countries have always raised funds, borrowed money in foreign currencies from time to time. I remember us raising money through borrowing Deutschmarks; we did it through ecus, you will remember, so it does not surprise me if . . .

  11. Was it ever done outside the euro area?
  (Mr O'Donnell) Yes. I think a number of countries borrowed in yen thinking that Japanese interest rates were so low that this was a good idea. They forgot about exchange rate risk in general. Argentina is a classic example. Virtually all of Argentina's external borrowing is done in US dollars.

  12. Is this something that the IMF is interested in?
  (Mr O'Donnell) Absolutely because it has implications but, when you do the surveillance exercise, you want to look at the risk to an economy from its external exposure, to foreign currency fluctuations.

  13. They must think it is a good investment.
  (Mr O'Donnell) They will be doing it for diversification reasons.


  14. As I understand it, this is really because the Bank of England has taken over from the Treasury and that is why the Bank of England has done it for the first time.
  (Mr O'Donnell) Yes. This is standard; we have been doing it for a long time now.

Mr Davey

  15. Can I take you back to accountability and pressure you a little more about where you see that improvements could be made for the future. The UK Government have a long-term vision of how the accountability of the IMF to the people of the world could be improved.
  (Mr Pickford) One very important step forward that we have taken is to set up an independent evaluation office for which the UK has been pressing for some time and we finally agreed that in last September at the Prague meetings. We are in the process of recruiting a director for this office, at the moment. The Board is responsible for hiring this person and we have an executive search firm that is going through an international recruitment process at the moment. We actually put out the terms of reference for the office. I do not know if you have seen but basically the way in which the office is going to operate is that it will do evaluations of Fund operations; it will be housed within the Fund but it will be independent of the Fund, that means it is independent of management; it operates at arm's length from the Executive Board; it will set its own work programme, so it will decide what it wants to evaluate and it will report regularly both to the Board and to the IMFC. The terms of reference say that there is a presumption that it will publish its reports regularly. I think this is a large step forward. The World Bank has had its own independent evaluation office for some time, several years, and it does very good work in terms of looking with an independent but informed view at the way in which the operations have taken place and have learned lessons from that so that the organisation can improve its effectiveness and we are very confident that the Fund's evaluation office will do precisely that as well.

  16. One of my colleagues might want to take you up on that particular innovation. Does the Government have any wider vision beyond this? For example, have you studied Charter 99 which is a whole series of proposals making global institutions like the IMF rather more democratic and accountable? It has 15 principles of accountability. So, (a) are you aware of Charter 99 and (b) have you done any audit of how the IMF performs against Charter 99's 15 principles of accountability?
  (Mr Pickford) I am only aware in broad terms. One of the issues that I think you run straight into when trying to change the arrangements of accountability for such organisations is that both the Fund and the Bank are member based organisations which means that, as the articles say, they are responsible to member governments through the Executive Board. The UK is a shareholder of the organisation, it has a share of the vote; we have a director on the Board and all the lines of accountability at the moment go through member states and then, from that, out to parliaments and the wider public. Many of the suggestions that I have seen would actually change that fundamental arrangement so that the link between the IMF and the member states/member countries would be weakened in some way and that has huge implications for the organisations. I do not know if my shareholder wishes to comment on that.
  (Mr O'Donnell) I think Stephen is right. It is quite difficult to get general agreement given the voting structure that exists within the Board to change that structure in some way away from the member country principle. So, our focus has been to operate within that structure, and to try and encourage greater openness and transparency is the best way to improve accountability. I think we are making some progress there and I think that measures like the independent evaluation office are a welcome step forward for the Fund. Also, it is changing the climate within the Fund towards releasing information—that needs to change and it is getting better. Certainly they have looked again at their external relations department and there have been quite large changes there over the last couple of years which have tended to result in greater release of information in general.

  17. I accept that there might be some practical difficulties. You have to negotiate with every member of staff if you are going to alter particularly any structure of accountability that exists at the moment but, given the UK's Government's fairly good record of trying to push for this, I am trying to see if you have a wider vision longer term, if you would like to see some of the global institutions like the IMF adopting a more rigorous form of accountability than it currently does and would you be interested in those more radical, far reaching ideas?
  (Mr Pickford) As I say, most of those more far reaching ideas do actually break the link in some way or another or attenuate the link between institutions and member states. There have been suggestions, for instance, that the Executive Board should not be appointed by individual countries which would be a pretty fundamental shift in the relationship or there have been suggestions that the IMFC should become a council, a decision making body sitting in between the Board of Governors and the Executive Board. The IMFC is an advisory body at the moment but there have been suggestions around for quite some time that it should be a decision making body. The only thing that I want to say in addition is to point out that the Fund and the Bank are actually, in my view, two of the more successful international organisations in the sense that they have decision making processes within them that allows them effectively to take decisions. As Gus said, most of the decisions that we take actually end up being taken by consensus or a large degree of agreement, despite the fact that you often have many different points of view represented on the Board from the various countries and I think the fact that the organisations can actually bring together all of those different interests for the wider goal of the organisation is a large strength of them and I guess I just raise the issue as to whether changing those accountability structures might make those decision making processes more difficult and hence the organisations less effective.

Mr Beard

  18. You mentioned the increase in transparency; would you like to summarise any of the other measures that have been taken that you think have increased the transparency.
  (Mr Pickford) In the Fund itself, the main areas where we have increased transparency and openness are in terms of publishing Board documents, of publishing the forward work programme and publishing information about the Fund's financial arrangements. I would argue, as I think Gus has done already, that the first group is by far the most important in terms of getting information out on the Fund's regular surveillance activities and also on programmes it has with countries because I think producing that information is extremely helpful in terms of allowing the public generally to know what is going on within the organisation. We publish these press information notices after each Article IV discussion and after each programme is agreed. It also allows the markets some greater information concerning the information that we have about these countries and it helps them to make a better assessment of the risk they might face in investing in particular countries and it also helps to avoid surprises in the sense that, if you have a regular flow of information, commentators can see the trends in a particular country and I think this is a very important role for the Fund and I would not at all under-estimate the impact that, over time, publishing these staff reports and programme reports will have in terms of introducing some stability through greater information.

  19. Why will the Executive Board not publish its minutes in this climate of transparency?
  (Mr Pickford) We publish what we call summings-up and so, for each Article IV discussion and for each programme discussion, we will publish usually half-a-dozen pages of the Chairman's summing-up of the discussion and, where there is a disagreement, individual directors will not be named but it will give an indication of the balance of the argument, so it will say that most directors took one view and a few directors took another. The Fund has always steered away from naming what director takes a particular position on a particular issue and there we are coming back to the question that Sir Teddy raised. That, I think, is a fundamental point of principle that the whole Fund's membership would have to be comfortable with before naming names, but we actually do go quite a long way in terms of putting out minutes, anonymised minutes if you like, which give you the flavour of the discussion of the Board. If the Board takes a different line from the staff report so that having that information whereby you read the staff report on the website and you can also read what the Board said about is, I think, an additional tier of information which is useful for people.

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