Fifty-sixth General Assembly

Second Committee

10^th Meeting (AM)

SECOND COMMITTEE BEGINS CONSIDERATION OF INTERNATIONAL FINANCIAL SYSTEM,

EXTERNAL DEBT CRISIS AND DEVELOPMENT

Deteriorating Short-Term Outlook for Financial Flows

To Developing Countries in Wake of 11 September Attacks, Delegates Hear

Investor aversion to risk had risen sharply since the 11 September terrorist attack, causing the short-term outlook for private external financial flows to developing countries and economies in transition to deteriorate, the Second Committee (Economic and Financial) was told this morning as it began consideration of the international financial system.

That, said Ian Kinniburgh, Director, Development Policy Analysis Division, Department of Economic and Social Affairs, might become a severe problem in the coming months if the international financial markets and banks were reluctant to extend the new loans that were essential to roll over the maturing liabilities in many middle-income countries.

Introducing the report of the Secretary-General on the international financial architecture, he went on to say that developing countries as a group transferred an estimated $170 billion in financial resources to other countries in 2000 -- about $60 billion more than in 1999.  In 2001, they were making a smaller net transfer of financial resources abroad.

Mr. Kinniburgh also introduced the report on the analysis of international financial stability as a global public good, as well as the report on the work done by the United Nations Conference on Trade and Development (UNCTAD) to support the promotion of long-term financial flows to developing countries and economies in transition, particularly foreign direct investment.

Representing the United Nations Conference on Trade and Development (UNCTAD), Jan Kregel said that while the year 2000 had seen some improvements in the external debt indicators of developing countries, economic growth rates were currently falling rapidly and debt service continued to represent a heavy burden for many developing countries.  That burden had fallen particularly on sub-Saharan Africa and Latin America, as well as among the transition economies.

Turning to the Highly Indebted Poor Countries (HIPC) Debt Initiative, he said there had been increasing concern over the effectiveness of that Initiative in removing the debt overhang of the poorest countries.  Expectations of the Initiative had been further scaled down because of continued problems regarding

under-funding, restrictions over eligibility, inadequate debt relief, excessive conditionality and cumbersome procedures.  In order for a country to maintain long-term debt sustainability in the face of possible external shocks, a higher level of official development assistance (ODA) would be necessary.

Also this morning, the Committee decided to consider a number of its agenda items as a cluster.  While the Secretariat would introduce those items, there would be no formal debate on them in the Committee as they would be discussed within the preparatory committee for the International Conference on Financing for Development.  Also, the Committee would have only procedural resolutions on those items.

The items involved were:  trade and development; international financial system and development; external debt crisis and development; globalization and interdependence; and the high-level international intergovernmental consideration of financing for development.  Consequently, the Committee approved a revised programme of work.

The Committee will meet again at 10 a.m. on Friday, 12 October, to begin its consideration of the implementation of the first United Nations Decade for the Eradication of Poverty (1997-2006).

Background

The Second Committee (Economic and Financial) met this morning to consider the international financial system and development.  It had before it the report of the Secretary-General on international financial architecture and development, including net transfer of resources between developing and developed countries (document A/56/173).  The report is complemented by two addenda, one prepared by the United Nations Development Programme (UNDP) on international financial stability as a global public good, and the other by the United Nations Conference on Trade and Development (UNCTAD) on its activities to promote long-term private flows for development. 

According to the report, given that economic developments in the major industrialized countries play a key role in setting the international economic environment for development, those countries should pay more attention to the coherence of their policies with the global development objectives and priorities that they sponsor and endorse.  Those who call for "free trade" should do so consistently.

Concerning global governance, the report states that as economic integration increases, so does the role of international organizations.  The effectiveness of international institutions is fundamental to a strong and stable global economic and financial system.  To carry out the missions of the international forums and institutions effectively, all members need not only to be properly represented, but also to have an effective voice in policy-making and to participate appropriately in decision-making. 

The report goes on to say that as the private sector accounts for the overwhelming share of international financial flows, it has important and indispensable responsibilities in crisis prevention and resolution.  In that regard, enhanced dialogue, active and regular two-way contact on policy issues aimed at more stable private-sector activity, particularly in emerging markets, could be developed.

Also before the Committee is the report of the Secretary-General on the external debt and debt-servicing problems of developing countries, including those resulting from global financial instability (document A/56/262).  It states that while the enhanced Heavily Indebted Poor Countries (HIPC) Debt Initiative has brought some improvement over HIPC I, the Initiative needs fundamental changes to make tangible progress in resolving the debt problems of poor countries.  Those include measures to accelerate the actual provision of debt relief by facilitating the process of preparing and implementing Poverty Reduction Strategy Papers which, for many countries, constitute a major hurdle. 

Some governments of the Group of Seven major industrialized countries, adds the report, have proposed or taken action for imposing a moratorium on debt-service payments by all HIPCs that have reached decision point, and such an action proposed earlier by the Secretary-General deserves further consideration.  Also, it was important to make an independent assessment of debt sustainability.  Such an assessment should not be restricted to HIPC countries but should also encompass other debt-distressed low-income and middle-income countries.

A key issue for both HIPC and non-HIPC debtors, according to the report, is the Paris Club principles and procedures, which still fall short of addressing the debt problems of many countries in a way that would ensure graduation from the lengthy and repetitive rescheduling.  An important step towards a rethinking of approaches of official debt relief in the context of the Paris Club could be to broaden the debt eligible for write-off. 

It is generally agreed, states the report, that increased instability in international financial markets has been a major factor aggravating the external debt problems of emerging-market economies.  The international community has not yet made significant progress in providing orderly debt workout mechanisms to ensure that creditors and investors bear the consequences of the risks they have taken, and that the burden of crises be distributed equitably between debtors and creditors and among different classes of creditors.  

Statements

IAN KINNIBURGH, Director, Development Policy Analysis Division, Department of Economic and Social Affairs, introduced the reports of the Secretary-General on the international financial architecture.  He said that developing countries as a group transferred an estimated $170 billion in financial resources to other countries in 2000 -- about $60 billion more than in 1999.  The increase in 2000 reflected both positive and negative developments with regard to developing countries.  On the positive side, oil-exporting countries benefiting from the surge in oil prices accumulated large current account surpluses and those were reflected in a corresponding substantial net financial outflow. 

On the negative side, he continued, slow growth in many developing countries and debt repayment suppressed effective demand for external financial resources.  Those developments in the net transfer of financial resources were mirrored in the level of net financial flows to developing countries in 2000, with declines in both private and official flows.  In 2001, the developing countries were making a smaller net transfer of financial resources abroad.  The overall demand for external funds by other developing countries was higher than in 2000, as disappointing export earnings across the developing countries are translated into larger trade deficits or smaller trade surpluses.

Investor aversion to risk, he said, had risen sharply since the 11 September terrorist attack, causing the short-term outlook for private external financial flows to developing countries and economies in transition to deteriorate.  That might become a severe problem in the coming months if the international financial markets and banks were reluctant to extend the new loans that were essential to roll over the maturing liabilities in many middle-income countries.

Turning to reform of the international financial architecture, he said that one major pillar of consensus was the development and implementation of international standards and codes of good practice to strengthen domestic economic and financial systems and promote international financial stability.  Another major pillar was effective multilateral surveillance of national economic and financial policies.  A third major issue was the choice of appropriate exchange-rate regimes for developing countries.  There existed a wide variety of flexible rate arrangements that could reconcile stability with flexibility and suit each country’s particular growth and development objectives.

The second report before the Committee contained an analysis of international financial stability as a global public good, he said.  Financial crises and excessive financial volatility were clearly global public “bads”, and examining the need for financial stability and market efficiency from a global

public goods perspective had led to four broad policy conclusions that were elaborated in the report.

The third report, he added, provided information on the work done by UNCTAD to support the promotion of long-term financial flows to developing countries and economies in transition, particularly foreign direct investment.  UNCTAD’s two broad objectives in that area were to improve the understanding of such countries of policy options in those areas and to increase their capacity to formulate and implement policies, measures and actions to attract foreign direct investment.

JAN KREGEL of the United Nations Conference on Trade and Development (UNCTAD) introduced the report of the Secretary-General on the external debt crisis and debt-servicing problems of developing countries, including problems resulting from global financial instability. 

He said the year 2000 had seen some improvements in the external debt indicators of developing countries and transition economies.  Due to exceptionally high growth, exceeding 5 per cent, and a virtually unchanged nominal stock of debt, debt-to-gross national product ratios improved in all regions, and provisional figures for debt-exports ratios even showed larger improvements.  However, those improvements should be interpreted with care, since growth rates were currently falling rapidly and debt service continued to represent a heavy burden for many developing countries.  That burden had fallen particularly on sub-Saharan Africa and Latin America, as well as among the transition economies.  Arrears on interest payments had actually risen in Latin America and East Asia in 2000.

He added that foreign direct investment had become the single most important type of capital inflow to developing countries, accounting for about two thirds of all resource flows during the 1990s.  However, the fastest growth among all types of financial flows to developing countries and transition economies over the past decade was in portfolio equity investments, which rose sixfold to reach an annual average of more than $40 billion at the end of the decade.  The increased importance of those flows had brought potential for greater instability in external payments.  Although dividend payments tended to be cyclical since company profits were higher when output and exports were growing faster, repatriation of such capital income was more volatile than interest payments on international borrowing.

Turning to the HIPC Debt Initiative, he said that since it was launched in 1996, it had received broad support from the international community as a comprehensive and coordinated approach designed to help countries to exit debt problems.  However, there had been increasing concern over the effectiveness of the Initiative in removing the debt overhang of the poorest countries.  Expectations that the Initiative would put an end to repeated debt rescheduling for the countries concerned had been further scaled down because of continued problems regarding under-funding, restrictions over eligibility, inadequate debt relief, excessive conditionality and cumbersome procedures.

Since the risk of new debt build-up remained, he said, it was urgent to design contingency measures and safeguards for the countries that were about to reach completion points in their debt-servicing programmes.  In order for a country to maintain long-term debt sustainability in the face of possible external shocks which might require new external financing, a higher level of official development assistance (ODA) would be necessary.

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