A Speech in Focus

Mr Bernake , the Governor of the Federal Reserve delivered a

Central Bank of Egypt speech on 15 Oct.2010 . The following is the main highlights:
Economic Research Sector Preconditions for growth is in place:
International Economy “Although the pace of recovery has slowed in recent months and is

In Focus
likely to continue to be fairly modest in the near term, the
preconditions for a pickup in growth next year remain in place”.
Job creation is too slow:
ISSUE 11 “Although
Monthly Newsletter That Provides Summaries of Reports 1and
November
Studiesoutput 2010growth should be somewhat Report in stronger Focus: in 2011
than it has been recently, growth next year seems unlikely to be
IMF: Regional Economic Outlook: much aboveforesees
The report its longer-term
less robust trend.
non- If so, then net job creation may 8 9 0
Middle East and Central Asia not
oil exceed
activity,by muchwhichthe the increaseIMFin the size of RealtheGDP labour
Growthforce,
, October 2010 implying that the unemployment
estimates will pick up by only 1 rate will decline only slowly.”
MENAP 4.6 2.3 4.2
Oil Exporters of which: 4.5 1.1 3.8
The Middle East and North Africa Inflation percentageis point
too low: between 2009 and
GCC 7.0 0.4 4.5
region is experiencing a generally “Generally 2011. In most speaking, measures
countries, of underlying inflation have been
non-oil Oil Importers 4.9 4.6 5.0
robust recovery, aided by rising oil trending sector growthdownward.”
continues to rely on Fiscal Balance(% of GDP
price and production levels and Inflation supportiveexpectation
fiscal policyiswith so far Inside This Issue MENAP
stable…
private 6.4 -3.3 -1.9
supportive fiscal policies. But the “The public’s
financing and expectations
credit still for inflation
sluggish. alsoOil importantly
Exporters of influence
which: 12.8 -2.1 0.5
inflation dynamics.
region’s oil-importing countries, in Turning to the challenges ahead, Indicators of longer-term inflation
GCC 25.4 0.3 4.0
expectations have
particular, continue to face some the report recommends that, given1- Speechgenerally been stable in the
In Focus :Oilwake of
Importers the -5.7 -5.4 -6.3
financial crisis.” Fed Current
Chairman AccountAt
Bernanke (%the
of Revisiting
significant structural policy the region’s recovery, governments GDP)
challenges. but current inflation
strengthen their focus is below theMonetaryexpectation…
on long-term Policy in a Low-Inflation Environment
MENAP 13.6 2.0 3.9
“The longer-run inflation Conference,
projections inOilthe Federal
SEP Reserve
indicate Bank of Boston,
that19.5
medium-term
The IMF’s report, covering the FOMC participants generally judge objective of Exporters
Boston, Massachusetts ,of which: 4.6 6.7
promoting economic diversification the mandate-consistent GCC 23.9 8.7 10.2
Middle East, North Africa, inflation rate to be about 2 percent October 15, 2010
or a bit below. In
and reducing the dependence of Oilcontrast,
Importersas I-4.7 -4.4 -3.5
Afghanistan, and Pakistan noted earlier, recent readings on underlying inflation have been
both the budget and the economy2- Report . in Focus:
(MENAP), projects the region’s approximately 1 percent. Thus, inIMF effect, inflation is recommends
running at Outlook:
on hydrocarbons.
output to expand by 4.2 percent in rates that are too low relative to Middle The
October report
2010 Regional Economic that
the levels
For the GCC, the challenge is to policymakers in MENAP’s oil- East that
and the
Central Committee
Asia reports on the
2010, or nearly double the 2.3 judges to bethemost gainsconsistent
made in with the Federal Reserve’s dualeconomic
regional implications
importing of the global
countries focus on the
percent rate recorded in 2009. mandate consolidate therecovery and presents key policy challenges and
in the longer run. The
past, address any remainingrecommendations. risk of deflation
following priorities: is higher than
Growth in 2011 is projected at 4.8 desirable.”
percent. vulnerabilities uncovered by the Raising growth to generate
Unemployment
crisis, and pursue is also too high:and3- Study
regulatory employment.
in Focus:During the past two
Oil Exporters: For the MENAP oil “…
exporters—Algeria, Bahrain, Iran, unemployment supervisory reform in line with decades,nearly
with an actual unemployment IMF rate
Staff ofPosition: 10 percent,
per Shaping
capita growth
the among
New Financial
evolving is
internationalclearly too
norms. high
For relative
System the October to
oil estimates
2010
importers of its
has been
Iraq, Kuwait, Libya, Oman, Qatar, sustainable rate.”
Saudi Arabia, Sudan, the United In some other oil exporters in the substantially lower than in other
conclusion…
region, the challenge is to spur emerging markets, mirroring a
Arab Emirates, and Yemen— “In particular, thedevelopment
FOMC is prepared Purpose
totrade
provide of the Newsletter
additional
greater
economic activity is picking up accommodation if needed financial by weak performance (see Chart
to support the
removing entry and exit barriers 2). Faced with already higheconomic recovery and to
considerably. With the rebound in return The unemployment—an
In Focuswith ourNewsletter Ofis issued
worldwide demand, crude oil course,
inflationstate
and reducing overownership
time to levels
in the consistent mandate. average of 11 on
in considering possible monthly
further basis,
actions,
banking system, the IMF report percent in 2008—the challenge for It
the provides
FOMC summaries
will of an
production is projected to grow to take
25 million barrels per day (bpd) in policies, notes.account of the potential costsimportant andthe oilSpeech
risks ofimporters by awill
nonconventional central
be tobanker,
raise an
and, as always, the Committee’s economic report
actions are and a recent
contingent study.
on It serves
2010 and 26 million bpd in 2011. As incoming Oil Importers : The region’s oil growth to provide employment for a
information about the economic to keep outlook the reader and updated
financialby the latest
a result, oil GDP will register conditions.” importers—Afghanistan, Djibouti, working age population that is
economic developments.
growth rates of 3.5 percent in 2010 Egypt, Jordan, Lebanon, growing faster than in almost all
and 4.3 percent in 2011. The Mauritania, Morocco, Pakistan, other regions. To absorb the
combined current account surplus of Syria, and Tunisia—have currently unemployed and new
these countries is projected to rise moderately strengthened in 2010, labor market entrants over the next
by about $80 billion on current oil with the exception of Pakistan, decade (and assuming that the ratio
price expectations; of this, close to which was hit by devastating floods of jobs created to economic growth
$50 billion is accounted for by the in mid-2010. Oil importers as a remains constant), annual growth
countries of the Gulf Cooperation whole are projected to grow 5 would need to reach 6½ percent.
Council (GCC). percent in 2010, up from 4.6 in
2009. Enhancing competitiveness.
200 200
MENAP oil importers—many of
which face burdensome regulatory
systems, weak institutions, and a
dominating public sector—have
much to accomplish to become
competitive relative to other more
dynamic economies. Sound
macroeconomic policies—in
particular, fiscal consolidation—
Study In-Focus
IMF: IMF Staff Position:
Shaping the New Financial
System October 2010
This paper argues that the current
reforms are moving in the right
direction, but many policy choices
lie ahead—nationally and
internationally -which are both
urgent and challenging. Policies
need to address not only the risks
posed by individual banks but
also, importantly, those posed by
nonbanks and the system as a
whole. The recent proposals of the
Basel Committee on Banking
Supervision (BCBS) represent a
substantial improvement in the
quality and quantity of bank
capital, but these apply only to a
subset of the financial system.
Three years after the onset of the
global financial crisis, much has
been done to reform the global
financial system, but there is much
left to accomplish. The regulatory
reform agenda agreed by G-20
leaders in 2009 has elevated the
discussions to the highest policy
level and kept international attention
focused on establishing a globally
consistent set of rules.
Comprehensive reform, once agreed
and implemented in full, will have
far reaching implications for the
global financial system and the
performance of the world economy.
In designing the reforms, it is
imperative that policymakers keep
their focus on the overarching
will help support competitiveness,
but governments will also need to
make greater efforts to improve the
business climate.
Fostering trade. The region’s
trading patterns remain oriented
mainly toward Europe, and there
has been relatively little change in
the product mix. Although there has
objective of creating a financial
system that provides a solid
foundation for strong and
sustainable economic growth.
Real progress is thus needed in
several key areas where much has
been said, but less accomplished.
Prompt progress by the international
community is essential to reduce the
likelihood and impact of another
crisis and to alleviate regulatory
uncertainty.
According to IMF staff analysis,
policymakers need to focus their
attention on the following five key
goals for financial sector reforms:
 Ensure a level playing field in
regulation. Global coordination is
needed to reap the benefits of global
finance; foster competition; and
minimize the scope for cross-sector
and cross-border regulatory
arbitrage, which could be damaging
to global financial stability.
 Improve the effectiveness of
supervision. Strengthened
supervision is a necessary condition
if a new cycle of leveraging and
excessive risk taking is to be
prevented. As a result, supervision
needs to be more intensive and
intrusive, as well as more focused on
cross-border exposures.
 Develop coherent resolution
mechanisms at both national level
and for cross-border financial
been some diversification of trade
links, the region has benefited
relatively little from the expansion
http://www.imf.org/external/pubs/ft/reo/2010/mcd/eng
/mreo1024.htm
institutions. The IMF has proposed
a “financial stability contribution”
linked to an effective resolution
regime to pay for the fiscal cost of
any future government support to the
financial sector. Given the global
reach of financial institutions, the
IMF has also proposed an enhanced
crossborder coordination framework
for resolution to eliminate moral
hazard while preserving financial
stability. The first step is to focus
now on making this approach
operational among a small set of
countries that are home to most
cross-border financial institutions.
Such an agreement is critical to
address the problem of “too
important to fail.”
 Establish a comprehensive
macroprudential framework.
Success in achieving financial
stability will depend critically on
complementing microprudential
regulations, which aim to improve
the resilience of individual
institutions, with effective
macroprudential regulations that
strengthen the resilience of the
financial system as a whole. This
will require identifying, monitoring,
and addressing systemic risks
generated by the individual and
collective behavior of firms.
 Cast a wide net. Reforms must
address emerging exposures and
risks in the entire financial system,
not just the banks. Absent a broader
perspective, there is a danger that
riskier activities and products will
migrate to the less (or un-) regulated
segments of the system, as occurred
with off balance-sheet investment
vehicles during the recent crisis.

While the focus of this paper is on

the authorities’ responses to the
crisis, private sector ownership of
the financial reforms will be key to
the successful implementation of the
new rules. Business models and
practices will need to be aligned
with the new financial structure laid
out by public policy, risk
measurement and management will
need to be improved, and boards of
directors will need to be equipped
with powers to rein in excessive risk
taking and be held accountable for it.
Source:
http://www.imf.org/external/pubs/ft/spn/201
0/spn1015.pdf