Köln, Germany, June 18, 1999
1. Since we met last year in Birmingham, the world economy has faced major challenges. However, we note with satisfaction the recent improvement in market confidence and in the prospects for growth of the world economy as a whole. Continued strong growth in the United States, important policy actions to promote recovery in Japan, the successful launch of Economic and Monetary Union in Europe, a general non-inflationary environment and progress with respect to financial and economic stabilization in East Asia as well as in Latin America are encouraging developments. But a number of serious challenges remain, and continued action remains essential.
2. To turn these developments into stable and sustainable economic growth, we need to pursue balanced macroeconomic policies supportive of domestic demand and investment while preserving price stability. This will contribute to achieving more balanced growth among our economies and thereby reduce external imbalances. Some of our countries, to enhance employment opportunities and reap the potential of their economies, need to reinforce macroeconomic policies with strong structural measures aimed at improving market-based incentives for all economic actors. Such structural measures will be a prerequisite for enhancing employment growth and improving the environment for investment.
3. More specifically:
- In North America, macroeconomic policy should aim at maintaining the conditions for balanced growth.
- In the euro area, it is important to pursue an appropriate mix of macroeconomic and structural policies aimed at strengthening prospects for improved growth and higher employment.
- In the United Kingdom, economic policies should continue to aim at fostering non-inflationary growth.
- In Japan, it is still essential to implement stimulus measures until domestic demand-led growth is restored and to pursue structural measures to enhance the economys efficiency and competitiveness.
- Emerging market economies have made considerable progress, and the foundations for a renewal of growth have been established in a number of countries. While much remains to be done, currently improved prospects owe much to the policy action taken by these economies, supported by the International Monetary Fund (IMF), the World Bank and bilateral assistance. They also require a supportive international environment characterized by solid aggregate G7 domestic demand and open markets.
4. It is our conviction that an increasingly open and integrated world economy will offer expanding opportunities and shared benefits for all its members. In light of our special responsibility for the world economy, we pledge to continue close cooperation to foster worldwide economic growth. Leaders in other countries also share responsibility for promoting global growth and financial stability, and we urge them to pursue policies that contribute to these objectives. The international community will stand ready to support countries pursuing strong policies in the face of difficult economic challenges.
6. The financial crises of the past two years in Asia, Russia and Latin America have revealed key weaknesses in the international financial system, including weak policies and institutions in many developing countries and an inadequate focus on risk on the part of banks and investors in industrialized countries. In our statement on the world economy of 30 October last year, we identified some actions already taken to address these problems and a number of key areas where further reform was required. Since then, important progress has been made in a number of these areas. We welcome the report from our Finance Ministers published today highlighting this progress and recommending further steps. Taken together, we believe these recommendations represent a significant strengthening of the international financial system which will help reduce the risk of financial crises and make it easier to manage future crises effectively.
7. We attach particular importance to the following measures:
This does not require new institutions, but the existing institutions to adapt to meet the demands of todays global financial system. The IMF and the World Bank have the central role in the international economic and financial system, and in facilitating cooperation among countries in these fields. We welcome:
- the establishment of the new Financial Stability Forum to enhance international cooperation and coordination in the area of financial market supervision and regulation;
- the strengthening and reform of the governance structures of the IFIs, inter alia by giving the Interim Committee of the IMF a permanent standing as the "International Financial and Monetary Committee", and by further improving IMF surveillance and programs;
- the commitment to work together to establish an informal mechanism for dialogue among systemically important countries, within the framework of the Bretton Woods institutional system.
This will enable market participants to make informed judgments about risks and provide greater incentives for policy-makers to implement sound policies. We call for:
- rapid development and completion of internationally agreed codes of transparency and standards of best practice, both for the public sector and where appropriate for private financial institutions. In addition, priority should be given to the provision of more timely and comprehensive data on capital flows. Steps should be taken to improve the quality and timeliness of public disclosure of direct material exposure to Highly Leveraged Institutions (HLI's) and of relevant information by HLIs;
- compliance with these codes and standards, in particular through enhanced surveillance and publication of the results in the IMF's transparency reports and compilation of the various financial and economic policy standards and best practices into a common reference such as a compendium on international financial and economic policy standards;
- enhanced transparency of the IFIs through greater release of IMF and World Bank documents, and further steps to undertake internal and external evaluation of their functions.
Creditors must be induced to act with greater discipline and encouraged to assess more prudently the risks associated with their lending. We call for concrete action to:
- improve risk assessment and risk management, including through the Basle Committee's proposed revisions to the Capital Accord;
- address the implications of Highly Leveraged Financial Institutions for supervisors and regulators, including through improved transparency;
- encourage offshore financial centers to comply with internationally agreed regulatory standards and to cooperate more effectively in the fight against money laundering.
The recent crises have demonstrated the need for emerging market borrowers to strengthen their policy framework and financial systems if they are to reap the full benefits of integration into the international financial system. In this respect, we encourage:
- emerging economies to strengthen their financial systems as they carry out a careful and well-sequenced approach to capital account liberalization, and to avoid excessive reliance on short-term capital borrowing;
- emerging economies to maintain appropriate and sustainable exchange rate regimes backed by a consistent macroeconomic and a robust financial system reflecting the economic circumstances of countries. The policies of the IMF need to be focused on promoting this objective more effectively;
- the IMF and the World Bank to enhance their cooperation in providing advice and assistance to emerging economies on strengthening financial systems.
In a world of increasingly open capital markets we need to shape expectations so that private-sector creditors know they will bear the consequences of the risks they take, and to reduce the risk of financial market contagion. We call for:
- support through the IMFs new Contingent Credit Line (CCL) for countries pursuing sound and sustainable policies but potentially affected by financial market contagion;
- greater use of market-based tools to involve the private sector in forestalling and managing crises, including through stronger efforts to broaden the use of collective action clauses in sovereign debt contracts, as well as better communication and cooperation between emerging market countries and their creditors;
- agreement on a broad framework for involving the private sector in crisis resolution, which sets out in advance principles, considerations and a broad range of tools for actions as described in our Finance Ministers report;
Social policies are the cornerstone of a viable international financial architecture. Economic development and reform must benefit all members of society.
- The poor and most vulnerable must be better protected from the burden of adjustment in times of crisis.
- The international community must work with governments and national authorities to foster investment in people through education, health and other basic social needs, which are the foundations for long-term development.
8. We believe the full implementation of these initiatives and reforms will make a significant contribution to enhancing the stability of the world financial system. We ask our Finance Ministers to take them forward urgently in close cooperation with other countries, the IFIs and the private financial community.
10. The Köln Debt Initiative should be built on an enhanced framework for poverty reduction, developed by the IFIs in consultation with other institutions and with civil society. This is critical to ensure that more resources are invested in health, including AIDS prevention, education and other social needs, which are essential for sustainable development.
11. We welcome and endorse the Report of our Finance Ministers on the Köln Debt Initiative. The proposals contained in this report will lead to a deeper debt reduction through more ambitious targets, faster debt relief through greater flexibility in the timing of delivery of agreed debt relief packages, and a stronger focus on early cash flow relief by the International Financial Institutions. We also ask the Paris Club and other bilateral creditors to forgive commercial debt up to 90 % and more in individual cases if needed to achieve debt sustainability, in particular for the very poorest among these countries. In addition to these amounts, we call for full cancellation on a bilateral basis, through various options, of Official Development Assistance (ODA) debt. For poor countries not qualifying under the HIPC Initiative, the Paris Club could consider a unified 67 per cent reduction under Naples terms and, for other debtor countries, an increase of the existing limit on debt swap operations.
12. If implemented, the debt stock of countries possibly qualifying under the HIPC Initiative would be reduced, from some US $ 130 billion in nominal terms (US $71 billion in net present value) remaining after traditional debt relief, by an additional US $ 50 billion in nominal terms (US $27 billion in net present value). These measures, together with forgiveness of debts arising from Official Development Assistance, of which up to US $20 billion in nominal terms are owed to G7 countries, would reduce the overall debt stock by more than half, lowering the debt service burden significantly and freeing resources for priority social spending.
13. We recognize that these changes will entail significant costs, in particular arising from debt owed to the IFIs. We are prepared to support a number of mechanisms to meet these costs recognizing the importance of maintaining an adequate concessional lending capacity by the IFIs:
- To meet the IMFs costs, the Fund should mobilize its resources, while maintaining an appropriate level of reserves, through the use of premium interest income, the possible use of reflows from the special contingency account or equivalent financing, and the use of interest on the proceeds of a limited and cautiously phased sale of up to 10 million ounces of the IMFs gold reserves.
- The Multilateral Development Banks (MDBs) should build on the work they have begun to identify and exploit innovative approaches which maximize the use of their own resources.
- The costs to the IFIs will also require bilateral contributions. We have pledged substantial contributions to the existing HIPC Trust Fund. We will consider in good faith contributions to an expanded HIPC Trust Fund.
- In meeting the costs, we call for appropriate burden sharing among donors taking into account all relevant aspects, including the magnitude and quality of ODA already extended and past ODA forgiveness, and recognizing the contributions of countries with high ODA loans outstanding relative to GDP.
14. We would welcome efforts by the private sector to reinforce the objectives of this initiative, including through contributions to a Millennium Fund to help finance debt relief.
15. On the basis of this framework, we call on the IFIs and the Paris Club to provide faster, deeper and broader debt relief, to work with the HIPC countries to ensure that three quarters of eligible countries have reached their decision point by the year 2000, and to assist the very poorest countries to embark on the HIPC process as soon as possible. Concrete proposals should be agreed by the time of the next Annual Meetings of the IMF and the World Bank.
17. We note that significant progress has been made in carrying out the Shelter Implementation Plan to secure the environmental safety of the sarcophagus covering the remains of the destroyed Chernobyl reactor. To date, contributions to the Chernobyl Shelter Fund total US $393 million, including US $50 million from Ukraine. We have agreed that the G7 will help ensure the continued financing and the progress in the work under the Shelter Implementation Plan. We call on concerned governments and private-sector donors to join us in this effort. To this end, we plan to hold a pledging conference before the next summit.
18. We reaffirm our commitment to assist Ukraine, within the context of the MoU, in mobilizing funds for energy projects to help meet its power needs. To date, projects have been agreed totaling over US $746 million. In addition, in the field of nuclear safety US $485 million have been granted, not including the Shelter Implementation Plan. We look to the Government of Ukraine to accelerate the fundamental reforms in the energy sector, including improvements in cash collection and privatization, to encourage financially viable investments in power generation and distribution and in energy efficiency. We commend the steady work that has allowed Ukraine, the European Bank for Reconstruction and Development and EURATOM to enter into the final phase of negotiations on loans to complete two reactors at Rivne and Khmelnitsky (1). We call on the parties to take the necessary steps to provide for an early agreement on loans for safe, cost-effective, and financially and environmentally sound projects.
20. We welcome the work of the G7 Finance Ministers on financial crime and regulatory abuse. We will be promoting the Key Principles they have drawn up for improving the exchange of information between supervisory authorities and enforcement authorities, throughout the world as standards to which all countries should aspire.
21. We welcome and support the work of the Financial Action Task Force on Money Laun-ering (FATF) to identify jurisdictions which fail to cooperate effectively in the international fight against money laundering and thus facilitate the laundering of proceeds from corruption and organized crime. The FATF should take concrete steps to bring offshore financial centers and underregulated and noncooperating jurisdictions into compliance with the 40 recommendations against money laundering and to protect the international financial community from the adverse impact of those that do not comply. We call upon our Ministers of Finance, in coordination with other Ministers, in particular with Ministers of Justice and the Interior, to coordinate the development and implementation of complementary positions regarding offshore financial centers and the FATFs work on non-cooperative jurisdictions in the various fora where these issues are being addressed.
22. We welcome the establishment of the OECD's Forum on harmful tax competition and the actual start of implementing the guidelines and recommendations adopted by the OECD with respect to the harmful effects of unfair tax practices. We strongly endorse the current work program of the Forum, in particular the efforts to identify tax havens. We also support the Forum's intention to engage in a dialogue with jurisdictions identified through this process. We urge that this work be given a high priority. We also note the ongoing work to implement the code of conduct within the European Union.
23. We welcome the progress made by the OECD's Fiscal Committee and the FATF to explore further the links between tax evasion and avoidance and money laundering, and in particular to ensure the effective flow of information to tax authorities without undermining the effectiveness of anti-money laundering systems. We encourage each group to continue working on their respective responsibilities.
24. We urge the OECD to continue to address the barriers limiting effective exchange of information between tax authorities, in particular those which arise from excessive bank secrecy rules.
1 In this context, we take note of the fact that Chancellor Schröder, during his visit to Ukraine on 8 and 9 July of this year, intends to consult with President Kuchma on non-nuclear alternatives to these projects.
Source: Released at the Köln Summit 1999