Bulletin

• Author: Kawin Wilairat
• Position: IMF Office of Technical Assistance Management

Köhler Calls For Coordinated International Response in Wake of September 11 Attacks

In the aftermath of the terrorist attacks on the United States, Horst Köhler, Managing Director of the IMF, called for a coordinated international response to deal with weakness in the world economy and the new risks in the global economic outlook. He cautioned that, in the immediate future, economic policies would need to be framed in an exceptionally uncertain environment.

Köhler made his comments in a statement to the IMF's Executive Board that was also transmitted to the IMF's Governors and released to the public. While he noted that "there are good reasons to expect that the current deterioration of economic conditions may be relatively short-lived," he added that there was a "nonnegligible probability of a worse outcome" that would involve lower economic growth and increased financing difficulties for many countries. The IMF, its member countries, and other international organizations would need to coordinate their policies in responding to these developments and risks.

Global outlook

Even before the attacks, the Managing Director said, there had been a marked economic downturn in all major regions of the world. In the aftermath of the attacks, there would be a slowing of activity, particularly in the United States but also elsewhere. The situation of emerging markets and developing countries had become more difficult, with reduced access to global financial markets and deeper declines in demand and in commodity prices. In addition, security concerns after the attacks were translating into higher costs for airline transport, reduced tourist travel, and higher prices and transportation costs for goods.

The United States had been the main engine of world growth for the last decade, the Managing Director said. A further softening in the United States would significantly affect the Latin American and Caribbean countries, and tourist destinations worldwide. Emerging market debtor countries would be affected by the reluctance of international investors to take risks; emerging Asian economies would feel the impact of lower demand in the industrial countries, including for high-tech products; and lower demand and commodity prices were likely to cloud further the outlook for primary producers.

Köhler said that there could be a large impact in either direction on oil prices. Lower oil prices would benefit the net fuel-importing countries, many of which were among the poorest countries. Higher prices would have the opposite effect, although they would benefit the petroleum exporters, including some emerging market borrowers.

Role of the IMF

Faced with the current situation, Köhler said, the IMF could take a number of steps to help its member countries. He encouraged members to review their policy frameworks and approach the IMF early to discuss the implications of recent developments for their economic policies.

· The advanced economies had a key responsibility to ensure that their macroeconomic and financial policies support an early return to sustainable growth and financial strength. The steps already taken to ease monetary policy in these countries were an appropriate and welcome response; if necessary, these countries should take the opportunity for some further easing. Automatic fiscal stabilizers should be allowed to work as a first step, and some discretionary fiscal easing might also prove appropriate-although this should be consistent with a country's medium-term needs. An acceleration of structural reforms needed to raise countries' growth potential over the medium term would contribute strongly to restoring confidence.

· Emerging market economies were vulnerable to any interruption of private financial flows, and sound economic policies were imperative. For its part, the IMF could (1) encourage eligible countries to consider its Contingent Credit Lines (its precautionary facility designed to assist members with strong policies and financial systems to resist contagion from capital market disturbances), (2) consider new programs supported by the Supplemental Reserve...