Il-Ministru Leo Brincat jindirizza s-Seduta Plenarja tal-Laqgha tal-Ministri tal-Finanzi tal-Commonwealth

Il-Ministru tal-Finanzi u Kummerð, Leo Brincat, illum indirizza s-seduta plenarja tal-laqgóa tal-Ministri tal-Finanzi tal-Commonwealth li qed issir fil-Mauritius. Huwa tkellem dwar il-qagóda u l-prospetti tas-sitwazzjoni ekonomika dinjija, kif ukoll dwar it-tema ewlenija tal-proðess politiku u l-immaniíjar tal-bidla ekonomika.

Dan li jsegwi hu d-diskors tal-Ministru Brincat.

Statement by the Hon. Leo Brincat

Commonwealth Finance Ministers Meeting

Mauritius, 15-17 September 1997

I would like to begin by thanking our hosts, the Government of Mauritius, for the excellent arrangements made for this meeting and for the warm hospitality that is being extended to me and my delegation during our stay here. I would also like to thank the Commonwealth Secretariat for its excellent preparatory work and its well-researched background papers on the issues that will be covered during this meeting.

Item 3 of the Agenda: World Economic Situation and Prospects, including IMF and World Bank Issues.

There is no doubt that over the last year the world economy has witnessed positive developments. The papers prepared by the Commonwealth Secretariat clearly highlight the state of the world economy and identify the main issues that have to be addressed. The challenges facing the world economy have also been eloquently discussed by our main lead speakers.

Regarding the performance of the world economy, we do observe that, against a background of low and declining inflation, economic activity continued to expand in 1996 and the first half of 1997 and is expected to persist in 1998. Although growth was widespread across the various regions, the developing countries grew at well over twice the rate of the industrial countries, Latin America recovered from the sharp decline recorded in 1995 as a result of the Mexican peso crisis, and sub-Saharan Africa recorded the highest rate of growth in two decades. Meanwhile the countries in transition saw positive growth for the first time since the process of reform began.

There are however a number of issues of concern in this generally positive outlook. For example, there is a possibility that the growth momentum could be arrested if interest rates in industrial countries increase substantially. Also, in the case of the emerging economies, particularly the countries of South East Asia, the recent currency turmoil could have an enduring negative effect. Indeed, uncertainty about interest rate and currency movements could reverse the direction of sensitive capital flows to developing countries.

With regard to private capital flows to developing countries we are preoccupied to note that despite the fact that such flows are increasing, and were at a record level in 1996, the majority of them were directed to a small number of countries. Furthermore, official development assistance has continued to decline, due to the budgetary constraints of donor countries, and a cut back in the contributions of the International Development Association (IDA). As a result, commitments to the poorest and least developed countries, particularly in sub-Saharan Africa, have declined sharply, leaving little opportunity for these countries to embark upon the path of growth and development.

With regard to Fund and Bank issues, I am pleased to see that both instititutions have made considerable progress in implementing the HIPC Initiative. This debt-relief initiative offers eligible countries the possibility of achieving a sustainable position where their overall external debt obligations are concerned,enabling them to focus their energies on economic growth and long term development objectives. Nevertheless the initiative has some shortcomings. Indeed, there is still uncertainty concerning its financing - as funding costs appear to have risen and bilateral contributions to the ESAF Trust and the World Bank Trust Fund have fallen short of expectations. I believe there is also a need to shorten the time frame considered for the eligibility of countries under this Initiative in order to enable a larger number of countries to reach debt sustainability as early as possible. Indeed, without such flexible arrangements, the effectiveness of the Initiative could be greatly impaired. I am happy to say that my country is, in a small way - given our limited size and resources - showing its solidarity with the developing countries by giving support to the HIPC initiative, making a contribution to the IMF 's ESAF Trust.

Recently the Fund has also formalised a number of financing mechanisms to enable it to deal promptly and effectively with large financial crisis that may threaten the smooth functioning of the international monetary system, the latest of which is the New Arrangements to Borrow. Nevertheless, these mechanisms cannot substitute for a sizeable quota increase that would enable the Fund to deal flexibly, speedily, and adequately with possible balance of payments crisis affecting any of its member countries. Malta therefore supports efforts to conclude successfully, and as early as possible, the Eleventh General Review of Quotas.

The proposal to amend the Fund's Articles of Agreement so as to give the Fund the specific mandate to promote capital account liberalisation, and to give it jurisdiction over capital account movements is a favourable development, as capital flows have become one of the major catalysts of economic change over the last few years. Nevertheless, the scope of such jurisdiction and liberalisation must be clearly defined, with sufficient flexibility, through transitional provisions and approval policies, in order to make sure that it is in line with structural reform measures and that the pace of liberalisation takes into account the particular circumstances of each country. This latter point is of particular importance to Malta, which, conscious of the dangers posed by a complete dismantling of its capital controls when macroeconomic policies which ensure internal and external balance are not yet in place, has not yet fully liberalised its capital account.

We note with satisfation the Fund's ongoing efforts to strengthen surveillance procedures in order to ensure that it is in a better position to monitor its member countries in order to identify emerging crisis at an early stage. These efforts have focused on continuous surveillance and greater focus on banking and financial sector problems. Indeed sound financial systems are the foundation that help ensure favourable macroeconomic policy and performance and the efficient functioning of global capital markets. In Malta, too, we have striven, in recent years, to modernise and upgrade our financial sector through market reforms and radical changes in our financial legislation. At the same time we are giving great importance to banking supervision, to ensure that our banking system remains sound and stable in line with our overall objective of promoting Malta as an international financial and business centre of repute.

Item 4 of the Agenda: Special Theme - The Political Process and Management of Economic Change.

This year, the Special Theme that is being debated at this conference is very relevant to the recent economic and political experiences of countries in both the developed and the developing world. We particularly welcome the discussion of such a topic in the Commonwealth meetings, as it provides ministers with the opportunity to exchange views on the matter and learn from each other's experiences. We believe that the Commonwealth environment, which brings together a large number of countries of different economic size, culture, history, and political development provides the ideal setting for such a discussion.

In addition to the domestic factors that may hinder the process of economic reform, there are also international factors, which, as a result of globalisation, are becoming increasingly important. These may further limit the national authorities' room for manoeuvre. For example, where the the production of goods is concerned, productive investment today can easily move geographically to the lowest cost centres. In the area of finance, too, the integration of financial markets has facilitated the movement of short-term capital, and this has made monetary policy objectives much more difficult for individual countries to achieve.

While economic reform programmes may have to be implemented at all costs to avoid serious economic problems, the disadvantages of adjustments can be minimised if the authorities are able to manage efficiently the negative distributive impact that certain measures could have on particular sectoral groups within an economy. In other words, success will depend on the ability of the authorities to build on public support and consensus and to compensate, through social redistribution, those segments of society that would otherwise lose out of the reform process. Two important conditions that are necessary to guarantee the success of reform are political stability, which induces economic agents to believe that the effect of the policies being introduced will not be volatile and short-lived, and a clear definition of the role of the government. Thus, as the reform process moves on to tackle wide ranging issues such as privatisation, the reform of the judicial system, the efficiency of the public service, and the viability of the social security system, it will be necessary to re-define and analyse more thoroughly the role of the State.

Malta agrees with most of the ideas that have been voiced at this meeting and which have been expressed in the Commonwealth Secretariat's paper on the political process and management of economic change. The Maltese Government, on being elected into office almost a year ago, laid strong emphasis on the need for proper management of economic reforms - especially where these involved public sector entities. In this regard, a thorough review of the financial state of public sector entities was undertaken to ensure that these were managed efficiently and, as much as possible, on a commercial basis. At the same time we have placed great emphasis on the need for transparency of government operations and reforms and on creating an on-going dialogue with the public at large. We believe that consultation with the "man in the street" should be extensive, both before and during the implementation of reforms. To demonstrate this approach, I would just like to mention the introduction of a new

indirect tax system in Malta as from July of this year. After a white paper on this subject was published early in the year, the Government conducted a constant dialogue with members of the public and representative bodies to discuss the workings of the new system and its impact on the economy. A number of meetings with the business community were also organised, so as to discuss the provisions of the law before the final legislation was discussed in Parliament. This consultation process proved to be a success, and we hope to follow a similar procedure when other reforms are to be undertaken.

Item 5 of the Agenda: Commonwealth Co-operation (the Report OF Commonwealth Working Group on Private Capital Flows)

The Report prepared by the Commonwealth Working Group on the role of national and international policies in encouraging private capital flows gives us a very good perspective of the experiences of a variety of countries in this regard. It also identifies important factors that contribute to the promotion of private sector investment and the conditions that must be in place to attract such flows to the recepient countries.

Without doubt there has been a significant increase in the volume of private capital flows to developing countries - although, as has been observed, a disproportionate amount of such flows are going to a relatively small number of countries. Many developing countries still do not seem to attract a sufficient flow of private capital to sustain an adequate level of investment and growth. It is abundantly clear that private investors will only direct their capital funds to those countries which offer good opportunities for sound investment, yielding adequate returns. It is therefore the responsibility of governments in recipient countries to establish the right conditions to attract capital flows.

The Report points out a number of essential measures which governments should take to facilitate and attract private capital flows. From my own country's experience, I can confirm that the implementation of most of these measures has certainly contributed to an inflow of foreign investment. I consider that the adoption of sound macroeconomic and structural policies is a basic requirement for the creation of a proper environment for investment, particularly if such policies are accompanied by a relaxation of trade and foreign exchange controls. I am happy to say that my Government is making every effort to pursue prudent macroeconomic policies, while at the same time gradually liberalising capital controls.

There are other conditions which I believe are very important for attracting investment, and which, in the case of Malta, are already in place. These are a stable political environment, a well structured legal system, an regulatory framework which is not unecessarily burdensome, and a tax system which is simple and effective. Malta's sound banking and financial system has also enhanced its attractiveness as a location for investment. Rules concerning foreign ownership of domestic assets and foreign holdings of domestic companies are fairly liberal, although we are aware that, given the small size of the island, these cannot be relaxed altogether. Finally, from my country's perspective, I would like to mention the development of the physical infrastructure, which over the years has been upgraded substantially, so that today it is in a position to provide, without difficulty, all the essential services - including energy, transportation and telecommunications. Here, I would also like to stress the vital role that human capital plays in encouraging private investment. In Malta , the training and education of human resources continues to be given special emphasis, with expenditure allocated by the government for such purposes being increased substantially over the last year.

Item 5 of the Agenda: Commonwealth Cooperation ( Progess Report on the implementation of the Commonwealth Private Investment Initiative (CPII))

Malta welcomes the favourable developments that have occurred over the last year in connection with the implementation of the CPII. We note with satisfaction that the Commonwealth Africa Investment Fund has started to approve and commit funds in sub-Saharan African countries. The proposed creation of similar funds for the Pacific Region (Kula Fund), South Asia, and the Caribbean underpin the increasing popularity of this kind of vehicle for investment with private investors and its effectiveness in attracting additional private sector capital to developing countries. These funds, covering the developing regions of the Commonwealth, should not only contribute towards growth and development in these countries but should also help them to integrate more effectively into the world economy.