1. We, the Finance Ministers of the G7 countries, the Central Bank Governors of Canada, Japan, the United States, and the United Kingdom, the President of the Euro-group, and the President of the European Central Bank, met today in Palermo with the Managing Director of the International Monetary Fund to review recent developments in the world economy. We, the Finance Ministers and Central Bank Governors of the G7 also discussed the progress made towards strengthening the international financial architecture, in particular by laying plans for the reform of Multilateral Development Banks, the implementation of the HIPC Initiative and ways to proceed beyond debt relief, including for the preparation for the Genova Summit. We also met with the Finance Minister and the Central Bank Governor of Russia and with Representatives of the European Commission to discuss recent developments of the Russian economy.

Developments in the World Economy

2. Although global growth this year is likely to be somewhat slower than we expected when we last met, the basic factors that have supported sustained growth in many of the major industrial economies remain in place. We agreed on the need for both macroeconomic and structural policies in all our countries to support growth. In this context, lower energy prices and stable oil markets are important.

3. We reemphasized our commitment to foster conditions for sustainable growth worldwide. In this context, we stressed the importance of continued cooperation among the G7 countries. More specifically:

• In the United States, economic growth has slowed, though economic fundamentals remain strong. Monetary and fiscal policies should aim at supporting sustained growth, while preserving budgetary restraint and price stability and increasing national saving over the medium term.
• In the United Kingdom and Canada, growth remains healthy and unemployment is low, with some signs of a temporary slowing in economic growth. Policies should continue to sustain growth and employment over the medium term, while meeting inflation targets.
• In the euro area growth prospects remain favourable, thanks to strong domestic demand. Policies should be directed at enhancing growth potential, through continued coordinated reform efforts aimed at increasing product and labour market efficiency. Tax reforms are being implemented while pursuing fiscal consolidation. In view of Europe's aging population, budgets and social security systems need to be further strengthened.
• In Japan, while a modest recovery is expected, prices continue to decline and downside risks remain. In this context, monetary policy should continue to ensure that liquidity is provided in ample terms. Efforts to strengthen the financial sector should be enhanced.

Exchange Rates

4. We discussed developments in our exchange and financial markets. We reiterated our view that exchange rates among major currencies should reflect economic fundamentals. We will continue to monitor developments closely and to cooperate in exchange markets as appropriate.

Emerging Market Economies

5. After two years of strong recovery, the outlook for emerging market economies has become more mixed. We welcome the substantial progress achieved in emerging Asia to reduce vulnerabilities, including the improvement of the external debt structure in the crisis-affected countries, and the adoption of more sustainable exchange rate regimes. To secure future growth, it is important to pursue necessary reforms of the financial and corporate sectors. In Latin America, sound macroeconomic and structural policies are needed to help reduce vulnerabilities. In all emerging market economies, we stress the importance of further intensifying efforts to implement internationally agreed standards and codes. The pace of reforms should not be relaxed.

Russia

6. We welcome the recent improvements in the macroeconomic and balance of payments situation of the Russian economy. We strongly urge the Russian authorities to step up the process of economic reforms and meet in full their financial obligations in order to restore promptly normal relations with the international financial community. While some elements of the comprehensive tax reform package have been adopted, critical challenges remain, such as enforcing the rule of law, attacking nonpayments and barter, strengthening the banking system, improving corporate governance, and fighting money laundering. On the latter, we urge the Russian authorities to move quickly to remedy the deficiencies identified by the FATF in June 2000. We call upon the Russian authorities, as they address the difficult and complex process of economic transition, to implement a credible programme of reform, and create the essential market institutions and infrastructure for sound growth. In this context, we encourage the Russian authorities to continue to work with the IMF and World Bank.

HIPC and Development Beyond Debt Relief

7. We noted with satisfaction that the implementation of the enhanced HIPC (Heavily Indebted Poor Countries) Initiative has already enabled 22 countries to reach the Decision Point. These countries are now receiving significant debt relief. We are committed to helping them implement their poverty reduction strategies and thereby reach their Completion Points. This will lead to $34 billion of debt relief under HIPC, reducing the debt of these countries on average by two thirds. We noted that most of the eligible countries that have not yet reached the Decision Point are currently in, or just emerging from, conflict. We call on these countries to reach a peaceful resolution of their problems, and we intend to help them in their reconstruction efforts.

8. We urge all creditors to participate fully in providing on a timely basis their share of debt reduction under the enhanced HIPC Initiative. The G7 governments have gone beyond the HIPC targets and agreed to commit to provide 100 percent debt reduction on ODA and eligible commercial credits for countries qualifying for HIPC debt reduction. We urge other bilateral creditors to take similar action.

9. We consider that debt reduction is only one element of a broader, more ambitious strategy for poverty reduction, based on three pillars. First, action is needed to launch a new multilateral trade round and to open further markets to exports from the poorest countries. Second, a more favourable environment for attracting private investment needs to be created in the poorest countries. Third, within country-owned poverty-reduction strategies, resources need to be channelled, in a more efficient and coordinated way, to the social sector, as we work towards the objectives contained in the 2015 International Development Goals (IDG).

Strengthening the International Financial Architecture, including Reform of the Multilateral Development Banks

10. We noted the progress made to reinforce the international financial system. We look forward to further progress on prioritization of IMF conditionality, implementation of the internationally agreed codes and standards, crisis prevention, private sector involvement, and financial liberalization. We note the need for further discussion on quotas at the IMF Board.

11. We also discussed the main features of the reform of the MDBs, following on the recommendations contained in the Fukuoka report of July 2000. The MDBs have made considerable progress on internal and policy reforms in recent years, but more can be done to focus their action on poverty reduction, consistent with the IDG. Key principles of the reform are: greater selectivity in setting priorities, focus on the needs of the poorest, effective and transparent internal governance, and improving development impact.

12. To this end, MDBs should:

• further improve and strengthen accountability and transparency, including through the establishment or the reinforcement of central control mechanisms to ensure compliance with agreed policies and safeguards;
• enhance substantially coordination and interaction among themselves and with other development actors;
• ensure full and timely disclosure of all program and policy documents;
• undertake expeditiously a comprehensive review of pricing policies;
• integrate due diligence and fiduciary diagnostics into country assistance strategies and in decisions on the choice of lending instruments.

In our view, selectivity in setting priorities and improving development impact require particular attention to: appropriate provision of global public goods, good governance, private sector development in lower income countries, and financial sector development, including fighting financial abuse. We look forward to intensifying our dialogue with the MDBs to this end and to reviewing progress at the Spring meetings.

Action against the Abuses of the Global Financial System

13. Following our report to the Okinawa Summit and the Heads' recommendations we note the positive evolution of the dialogue with the countries involved. The Financial Action Task Force (FATF) has recently reported the significant progress made by most of the fifteen non co-operative countries and territories (NCCTs) listed in June 2000. Seven countries have already enacted most, if not all, of the legislation needed to fight money laundering effectively. We encourage those jurisdictions to demonstrate their willingness and ability to implement these reforms, so that they can be de-listed at the earliest possible time. To this end, we remain committed to continuing dialogue with the identified countries, and to provide technical assistance where possible. However, we reaffirm our commitment, where dialogue has failed to generate adequate progress, to implement coordinated countermeasures that may be recommended by the FATF at its meeting in June 2001. We urge the International Financial Institutions, in particular the International Monetary Fund and the World Bank, to help NCCTs implement the relevant international anti-money laundering standards (the FATF 40 Recommendations), as appropriate, through technical assistance, programme design and policy dialogue.

14. We reaffirm our support for the efforts of OECD to address harmful tax practices. We encourage the OECD to continue its efforts. We encourage the efforts of the OECD member countries to meet their commitments. We welcome the cooperative dialogue which has been established with countries and jurisdictions outside the OECD area. We welcome the new commitments made by some jurisdictions to eliminate their harmful tax practices by end of 2005. We encourage others to make early commitments, so that as few jurisdictions as possible are included in the list of uncooperative tax havens which we look forward to examining at the Genova Summit. We encourage all OECD governments to consider offering, under the auspices of the OECD and other international organizations, technical assistance to cooperating jurisdictions, if needed to comply with their commitments.

15. We welcome the intent of certain OFCs to improve supervisory, regulatory, co-operation and information exchange policies and practices and encourage OFCs to disclose assessment findings, including those done by the IMF, as a means of demonstrating compliance with and progress in meeting international standards in these areas. We ask the FSF to monitor the implementation of its recommendations and to consider means of recognising progress being made by certain OFCs and recommend any future action, if necessary.

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Source: Department of Finance, Canada