VZCZCXYZ0005
RR RUEHWEB

DE RUEHEG #1526/01 1991448
ZNR UUUUU ZZH
R 171448Z JUL 08
FM AMEMBASSY CAIRO
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 9873

UNCLAS CAIRO 001526 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EAID EG
SUBJECT: DR. BOUTROS-GHALI'S THOUGHTS ON WHAT LAYS AHEAD FOR IMFC 
 
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 
IMFC. 
 
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 
management. 
 
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 
(signed) 
 
End text. 
SCOBEY