Cablegate: Dr. Boutros-Ghali's Thoughts On What Lays Ahead for Imfc


DE RUEHEG #1526/01 1991448
R 171448Z JUL 08



E.O. 12958: N/A

REF: A. CAIRO 1201
B. CAIRO 1036
C. CAIRO 1021

1. (U) Below is the text of a letter to Treasury Secretary Henry
Paulson received July 13, 2008 regarding Finance Minister Youssef
Boutros-Ghali thoughts on the International Monetary Finance
Committee (IMFC). Post is forwarding hard copies directly to
Secretary Paulson via fax.

2. (U) Begin text:

The Honorable, Mr. Henry M. Paulson, Jr.
Secretary of the Treasury
United States of America

Cairo, June 27, 2008

Your Excellency,

Pursuant to my letter of June 1st, 2008, permit me to share with you
some thoughts regarding the work that lies ahead for us in the

I have been following closely the activities of the Fund for over
two decades, following several years in the institution as a staff
member where I was engaged in surveillance, policy development and
negotiating Fund arrangements in a number of regions. Thereafter,
as a cabinet minister in several governments, I continued to be
involved with the Fund in various capacities, this time on the
receiving end of various Stand-by Arrangements, debt rescheduling
and, most recently, extremely effective technical assistance in the
area of fiscal reform and tax policy.

Throughout the eighties and for most of the nineties, the Fund
played a crucial catalytic role in maintaining global stability and
ensuring the integrity of the financial system at large. Today the
global system has witnessed many changes, including in particular
changes in the basic architecture of the world economy as well as
the international financial system.

These changes require us to refocus the Fund's activities and
resources, to re-equip the institution to become an effective
catalyst in dealing with any systemic threats to global
macro-stability with a clear mandate, clear instruments, and
modalities of assistance to suit the changing world economy. This
process has started, and I believe the efforts of the Managing
Director should be supported and further developed.

While the Fund appears to have had a set back in recent years, not
entirely as a result of its eroding financial transactions with
members, I believe we should all work to ensure the Fund remains
relevant and well-equipped to promote global stability. I strongly
believe that the organization is eminently capable of addressing the
changing global economic environment with its many new players and
challenges. In particular, financial turmoil emerging from major
developed countries, spilling over into the real sector and
globally, requires the Fund to develop new tools to address the
ramification of this change, in order to regain its relevance,
credibility, and legitimacy: a strong institution, one that can
quickly adjust its approach, tooling and staffing to meet the
challenge is a necessity. I therefore believe our priorities should
center around the following specific areas.

The recent and still ongoing financial crisis, triggered by the
sub-prime market in the United States, has not as far spilled into
emerging market economies significantly. However, this should not
lead us to complacency. The crisis may not have, in my view, fully
worked itself out through the global economy. The Fund needs to
address a number of issues associated with this crisis; issues of
global risk management, coordination among Central Banks in the
provision of emergency liquidity support, coordination among other
financial supervisors in addressing problems of transparency, rating
consistency, sovereign wealth funds, as well as other challenges for
which the Fund needs to develop an appropriate discourse and
instruments of assistance.

The crisis has been further aggravated by the sharp increase in food
and commodity prices, raising the specter of inflation not only in
the industrial countries but in most developing countries. Energy
price increases have initiated a major global structural shift of
resources from energy importers to energy exporters - a shift
estimated at almost 5 percent of global non-oil output. In emerging
market economies, particularly lower income countries, the problems
are compounded. Issues of balancing rising prices with sub-par
economic growth are further complicated by trade-offs between
sustainable macro-stability and poverty alleviation. A number of
major developing countries are facing this dilemma. The emerging
and particularly lower-income countries are facing this dilemma.
The emerging and particularly lower-income countries are facing a
heavy of burden of rising food prices, which often force a trade-off
between balancing the alleviation of the impact of food prices on
the poor, and maintaining sustained macro-equilibria.

The recent crisis has highlighted the need to boost the
effectiveness of the Fund's surveillance and to enhance its
influence. The Fund needs to reassess the tools at its disposal,
including the new surveillance decision and the work on
macro-financial linkages, to ensure their adequacy and relevance,
and it needs to maintain equality of treatment - only then would
policy makers avail themselves of an independent and trusted
assessment of their economies. To meet the changes in the global
economy, greater emphasis will be needed on regional surveillance
that would focus staff on a narrower set of immediately relevant
issues and thereby sharpen staff's analysis and assessments. In this
respect, the Fund's role should not be limited to resolving crises.
It should extend to preventing them or at least anticipating them
early enough for proper policy response.

Another important priority is the work on the low-income countries
where the Fund can refine its role to be more effective and to
better assist in policy formulation within the institution's
competence. While the Fund has been largely successful in assisting
to bring about stability in many of these countries, there is a need
to strengthen these countries' institutional structure and to
promote growth-enhancing structural reforms through capacity
building, something the Fund has not practices to the fullest to
date. Sufficient emphasis on these areas will be key to raising
these countries' living standards and improving their economic

Governance reform is another area. The Fund began a welcome reform
of its budget, particularly its income and expenditure model, as
well as its quota and voice reform. These initiatives will be key
to the restoration of the Fund's legitimacy and credibility. The
institution should continue in strengthening its quota and voice
reform, while maintaining as wide a representation in its board as
is necessary to maintain legitimacy.

In short, the Fund needs to analyze the causes behind the current
financial crisis that broke out in mid-2007-which in my view
confirms the beginning of a new economic era-and prepare itself to
guide and advise members to pursue policies aimed at avoiding such
crises. When they do occur, the institution should have the
capacity in collaboration with the relevant global partners to
address them effectively and swiftly, in a fashion comparable to the
Fund's intervention during the debt crisis of the eighties and
nineties. A global economy requires global cooperation and
coordination to function effectively.

Excellency, I thought these few remarks might provide us with a
brief framework in thinking about the future of the IMF and its role
in maintaining global stability.

Please accept the expression of my highest consideration.

Yours Sincerely,
Youssef Boutros-Ghali

End text.

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