Preparatory Committee for the

International Conference

 on Financing for Development

4^th Meeting (AM)

FREE ACCESS TO MARKETS, TRADE LIBERALIZATION, DEBT RESOLUTION NEEDED FOR SUCCESSFUL

ECONOMIC REFORM, DEVELOPMENT FINANCING PREPARATORY MEETING TOLD

The success of the economic reforms and poverty eradication programmes of developing countries lay in free access to world markets, trade liberalization and the resolution of external debt, the Deputy Minister for Foreign Affairs of Georgia told the Preparatory Committee for the upcoming International Conference on Financing for Development today.

The Committee, in its fourth and final preparations for the Conference to be held in Monterrey, Mexico, from 18 to 22 March, suspended its informal consideration of the draft outcome text this morning to hear statements by the Georgian representative, and the Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC) who reported on a recent interregional meeting on development financing.

The Deputy Foreign Minister of Georgia, David Aptsiauri, told the development financing community that it was in the context of free access to the world markets, liberalization of trade and the resolution of external debt that the initiatives of both the United Nations and the global financial institutions should be launched. The Mexico Conference should present a new agenda for global economic and financial progress that was based on sustainability and predictability.

The Executive Secretary of ECLAC stressed the need for predictability and stability of official development assistance (ODA) flows.  At the same time, he said that recipient countries should demonstrate the adequate and effective use of resources for poverty reduction and promotion of good governance.  Any conditions attached to the financing of policy reforms by multilateral banks should respect the sovereign right of countries to design appropriate structural reform programmes, he said.

Statements

DAVID APTSIAURI, Deputy Minister for Foreign Affairs of Georgia, said that poverty alleviation had been a key consideration in his Government's reform programme.  Since 1994, budgetary measures had been taken to increase social spending and real wages, improve targeting of social net benefits, and simplify the pension system.  Nevertheless, poverty remained widespread, mainly due to the country's sharp economic decline.  Also alarming was the fact that debt servicing had grown at a much greater rate than the debt itself.  It was important to collectively pursue a durable solution to the external debt problem of developing countries in ways that also addressed the structural causes.

As an example of the global debt problem, he drew attention to the high volume of Georgia's external debt.  During the past three years, the Government's total debt-service obligations accounted for nearly one fourth of its total revenue.  Tax collection for the 1997-2000 period continued to fall short of budget expectations.  Despite significant reforms, which limited pensions entitlements, the pension fund remained an extremely difficult constraint and it had been impossible to finance a basic pension.  In addition, some 300,000 refugees and internally displaced persons from Abkhazia and Tskhinvali region had placed a heavy burden on the budget.  Crisis resolution measures might be needed, but those must be accompanied by efforts to avoid future turbulence.

The bulk of resources for development were domestic in nature, but foreign direct investment was another important source of capital, know-how, employment and trade opportunities, he said.  It should also be emphasized that an enabling environment for savings and investment was needed, which included strong and reliable financial, legal and administrative institutions, sound macroeconomic policies, and the transparent and effective management of public resources.  Georgia, as a recent member of the World Trade Organization (WTO), was determined to further contribute to the policy of the global trade liberation. 

The international financial institutions were also an essential component of the development architecture, he said.  Meanwhile, a series of financial crises had highlighted the need to strengthen international cooperation to improve the existing international financial system, aimed at encouraging crisis management and preventing a recurrence of crises in the first place.  To increase the effectiveness of foreign assistance, the coordination role of the United Nations, and particularly the United Nations Development Programme (UNDP), must be strengthened.  Strengthening local capacity for devising national development policy was another important way to increase the effectiveness of foreign assistance. 

JOSE ANTONIO OCAMPO, Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), on behalf of the five regional commissions of the United Nations, presented the conclusions of the interregional meeting on financing for development, held in Mexico on 14-15 January (a full report would be distributed to all delegations).  Conclusions were made in the following areas: domestic financial resources; links between foreign direct investment and national development; the Heavily Indebted Poor Countries (HIPC) Initiative; the balance between debt workouts and emergency financing; long-term development financing; and regional schemes.

Domestic financial assets were the dominant source of resources for development for most economies, he said.  Their mobilization required the strengthening of public and private sources of financing.  Due to the essential role played by public-sector investment in the development of economic and social infrastructure, efforts to promote a broad-based and equitable tax system remained crucial.  In addition, mechanisms for stabilizing the supply of public resources for investment should be introduced, together with broad fiscal stabilization funds and multi-annual budgeting practices.

The banking sector would remain the key intermediary in the mobilization and deployment of domestic resources, he said.  That system was fragile in many

countries and had a limited capital base and a high proportion of non-performing assets in bank portfolios.  Urgent steps should be taken by governments, therefore, to restructure and modernize the banking system and facilitate the adoption of global standards.  Considering the increasing demand for long-term capital for investment, development banks continued to play an essential role, together with long-term private banking services and institutional investors.  In that regard, the promotion of bond markets was crucial, and the achievement of an active market in government securities should be the first step.  Then, a corporate bond market should be developed.

On the enhanced HIPC Initiative, he said, concern had been expressed that the Initiative might not provide sufficient debt relief to enable low-income countries to attain sustainable external debt levels.  Scenarios for debt sustainability analysis were too optimistic and did not fully take into account other external shocks and uncertainties that many low-income countries faced.  In that regard, the methodology for debt sustainability analyses should be determined on the basis of the resources required to achieve the Millennium Declaration targets for poverty reduction. 

Also, eligibility criteria under the enhanced Initiative were too stringent and had excluded countries whose economic and social conditions were very similar to those of the HIPC countries, he said.  In short, debt relief should be used for poverty reduction, and the allocation of assistance should be integrated within the national strategic expenditure framework and budget execution cycle.  At the same time, debt relief should not be at the expense of additional ODA and should be linked to sound economic management and good governance.

He said that, on the balance between debt workouts and emergency financing, debt overhangs were another problem for many middle-income countries.  There was a need, therefore, for orderly debt workout procedures that addressed the interests of both creditors and debtors.  With respect to long-term development financing, the adverse trend of ODA during the 1990s should be "urgently reversed".  The agreed goal of ODA amounting to 0.7 per cent of the developed countries' gross domestic product (GDP) should be met, as should the 0.15 per cent-0.2 per cent of GDP that was to be allocated to the least developed countries. 

Humanitarian needs and the demand for global public goods were growing, he said.  New initiatives for covering them properly were also urgently required, but resources to guarantee an adequate provision of global public goods should be additional to ODA.  With respect to regional schemes, a number of interesting experiences involving regional and subregional financial institutions in the developing world had indicated the value of regional bodies in providing liquidity, sustaining trade links and facilitating access to international financial resources through risk pooling.  Although such experiences were highly specific to each region and country, there was ample room for an interregional exchange of best practices.  That objective should be explicitly incorporated into the Monterrey outcome.

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