Arab Monetary Fund Annual Report 2004

Transcription

1 Arab Monetary Fund Annual Report 2004

2 Contents Page Letter of Transmittal...1 Activities of the Fund in Lending...7 Investment...20 Technical Assistance...23 Arab Capital Markets...24 Training...26 The Council of Governors of Arab Central Banks and Monetary Agencies...31 Cooperation with Arab, Regional and International Organizations...34 Cooperation with the Arab Trade Financing Program...37 Publications, Occasional Reports and Studies...39 Consolidated Financial Position...42 Consolidated Financial Statements & the Auditors Report...49 Tables...68 Organization and Management...79 i

3 Letter of Transmittal The Board of Governors of the Arab Monetary Fund I have the honor to present to your Excellencies, on behalf of the members of the Executive Board and myself, the Annual Report on the activities of the Arab Monetary Fund and its financial statements for the year ended 31 December 2004 in accordance with Article 33 of the Articles of Agreement of the Fund. Yours Sincerely, Dr. Jassim Al-Mannai Director General Chairman of the Board of Executive Directors April

4 Activities of the Fund in 2004 The activities of the Arab Monetary Fund AMF or the Fund aim, by virtue of the various areas of competence set forth in its Articles of Agreement, at assisting member countries in their endeavors to achieve sustainable growth rates and promote economic and monetary integration. To that effect, the Fund continued, during 2004, to diversify and expand the range of services it provides to its member countries, holding consultations with the relevant authorities on new developments in the world economy and supporting the consolidation and deepening of economic reforms in member countries. With regards to lending activities, the Fund approved four new loans during 2004 with a total amount of AAD* 38.8 million, the equivalent of US $ 180 million. These loans included two Structural Adjustment Facilities (SAF) with a value of AAD million and AAD million to Egypt and Tunisia respectively, and an Extended loan to the Sudan with an amount of AAD million as well as an Automatic loan to the Comoros of about AAD 184 thousand. These loans were preceded by consultations with the relevant authorities to review recent economic developments and / or reach an agreement on reform programs. In this regard, consultation missions were sent to Egypt, Tunisia, Sudan, Morocco and Djibouti. Within the framework of the Highly Indebted Poor Countries Initiative (HIPC) and in accordance with the Board of Governors resolution No (1) for 2003, the Fund approved Mauritania s debt reduction. To this end, the Fund set the modalities and terms of the debt reduction taking into consideration the country s poverty reduction strategy. With respect to the investment activities, and in the light of investment climate that dominated the capital markets in 2004, characterized by continued positive global economic activity, moderate inflation, rising energy costs, falling US$ exchange rates coupled with rising US$ interest rates, the Fund s investment portfolio managed to post returns higher than the SDR interest rates. The Investment Portfolio of the Fund consists of the liquid fund, short and medium term bond portfolios, in addition to alternative strategies funds. * One Arab Accounting Dinar (AAD) is equivalent to three Special Drawing Rights (SDR s) as defined by the International Monetary Fund (IMF). Exchange rate of AAD vis-à-vis US $ was 4.66 as at 31 December 2004 (compared to US $ 4.46 as at 31 December 2003). 3

5 In addition to managing its own resources, the investment activities of the Fund also extended to managing part of the Arab Trade Financing Program funds, the Unified Account of the Specialized Arab Organizations and the AMF Employees Pension Fund, in addition to managing bond portfolios for member countries. The Fund also continued strengthening its activity in the acceptance of deposits from Arab central banks and monetary agencies, which witnessed a noticeable increase during the year, rising in total by 27 percent at the end of 2004 compared to the end of the previous year. With regards to technical assistance activities, the Fund continued during 2004 to provide assistance to its member countries with the help of foreign experts. A mission visited Algeria to assist the authorities to implement a Real Time Gross Settlement System (RTGS). In addition, and at the request of the Central Bank of Egypt, the Fund organized a seminar in collaboration with the Egyptian Banking Institute on The Application of Inflation Targeting as a framework for Monetary Policy in Cairo during 30 May 3 June Moreover, a technical assistance mission visited Lebanon to assist the authorities in their efforts to improve public debt management. The Fund also sent a technical assistance mission to Libya to help the authorities in preparing for their negotiations on the liberalization of financial and banking sector services with the World Trade Organization (WTO). Finally, the Fund delegated an expert to Oman to consult with the concerned officials to recommend alternatives for the rehabilitation of Oman Development Bank. With respect to financial markets and in order to heighten the awareness of local and foreign investors regarding potential investment opportunities in the region, the Fund continued during 2004 to develop and expand the scope of Arab Capital Markets Data Base (AMDB) established in 1994, such that a total of fifteen Arab capital markets are presently covered by AMDB. Moreover, the Fund started in 2004 to publish, on its web page, daily market data on Abu Dhabi, Dubai, Doha and Palestine markets. In addition, it also continued to publish the composite index which measures the collective performance of all Arab Capital Markets. As to the Fund s Economic Policy Institute (EPI), it continued to develop and expand its specialized training programs delivered to member country officials from ministries of economy, finance and foreign trade. In this regard a total of 119 training courses and 12 workshops have been organized so far and were attended by 4080 participants. 4

6 In its capacity as the Secretariat of the Council of Governors of Arab Central Banks and Monetary Agencies, the Fund held in its headquarters a meeting for the Council s Permanent Bureau. It also organized the Council s Twenty-Eighth Annual Meeting held in Cairo in September 2004, and the Thirteenth Annual Meeting of the Arab Committee on Banking Supervision (ACBS), whose members include Arab banking supervision officials. With regard to regional and international cooperation, the Fund continued during 2004 to coordinate its activities with other Arab regional and international organizations. In this respect, the Fund contributed various chapters to the Joint Arab Economic Report (JAER) in addition to its editing and publication. The Fund also participated in the joint annual meetings of the World Bank (WB) and the International Monetary Fund (IMF). Meetings were held with officials of these two institutions to discuss topics covering fiscal, development of equity markets and settlement and payment systems. Meetings were also held with the staff of the IMF Fiscal Affairs Department at the Fund s request to assist in the establishment of a new facility to support the implementation of fiscal reforms in member countries. On the other hand, the Fund in cooperation with the World Trade Organization (WTO) organized two training courses which were held in Abu Dhabi and Jordan. In addition, the Fund participated with the WTO in a number of regional and international meetings dealing with issues of concern to its member countries. It also continued to manage the Unified Account of the Specialized Arab Organizations in accordance with the directives of the Arab Economic and Social Council. With respect to its relation with the Arab Trade Financing program (ATFP)**, the Fund continued during 2004 to work closely with the ATFP, providing it with a host of specialized services including technical, legal, internal auditing and library services, as well as management services for its investment portfolio. ** ATFP which is a specialized joint financial Arab institution was established in 1989 following the Fund s Board of Governors Resolution. The Fund contributed US $ 500 million to ATFP's authorized capital in addition to the contribution of 49 national and regional Arab financial and banking institutions. 5

7 Finally, the Fund published a number of studies and periodical statistical bulletins covering national accounts, money and credit, balance of payments and external public debt, foreign trade, and cross exchange rates. In addition, it also published the quarterly bulletin on the Arab Markets Data Base (AMDB), as well as a number of studies that were presented during the Fund s specialized regional seminars. 6

8 Lending The Fund achieves its objectives primarily through providing financial assistance as set forth in its Articles of Agreement. In this regard, the Fund provides eligible member countries with various types of concessionary loans defined in its lending policy and procedures, which sets the guidelines governing the use of the Fund s resources. The provision of loans is generally preceded by consultations with the authorities in the borrowing countries to reach an agreement on appropriate policies and measures to address the economic problems facing these countries. Types of Lending Facilities The Fund facilities fall within two categories. The first of these covers facilities associated with the Fund s purview in the area of assisting eligible members in financing their overall balance of payments deficits. As noted earlier, the provision of such facilities involves consultations and agreement on necessary economic adjustments within the macroeconomic framework of the concerned country. The Fund initiated this category since the inception of its lending activity in The second category of facilities, which was introduced in 1997, includes loans devised to back reforms that are sectoral in their nature. Loans in this category currently focus on supporting the endeavors of eligible borrowing members in the reform of their financial and banking sectors currently to be complemented in the forthcoming period to support reform of the fiscal sector as well. The four types of loans* under the first category vary in size, term, and maturity according to the nature and causes of the balance of payments disequilibria. The Automatic Loan is extended to assist in financing the overall deficit in the balance of payments in an amount not exceeding 75 percent of the member country s subscription in the Fund s capital paid in convertible currencies. The loan has a maturity of three years and is not conditional on the implementation of an economic reform program. If, however, the country has conditional loans outstanding, then the Automatic Loan would be subjected to terms applied to the outstanding loans, and its amount would be considered an extension to the limit of the conditional loans outstanding. * Since the inception of (ATFP) the Fund ceased in 1991 dealing with the Trade Facility within the framework of which 11 loans totaling AAD 64,730 thousand were granted. 7

9 The Ordinary Loan is extended to an eligible member country when its financing needs exceed 75 percent of its paid subscription in convertible currencies, provided it has already withdrawn its reserve tranche from similar regional and international organizations. Generally, this loan is extended up to 100 percent of the member country s paid subscription in convertible currencies and could be supplemented with the Automatic Loan to reach a maximum of 175 percent. To benefit from this loan, the borrowing member country must agree with the Fund on a stabilization program, covering a period of not less than a year, to reduce balance of payments deficits. The loan is disbursed in installments set by the Fund and the borrowing country, conditional on the successful implementation of policies and measures agreed upon. Each disbursement is repaid within five years in four equal half-yearly installments following a grace period of three and a half years. The Extended Loan is provided to an eligible member country with a sizeable and chronic deficit in its balance of payments resulting from structural imbalances in the economy. In addition to withdrawing its reserve tranche from similar regional and international organizations, a member country is required to agree with the Fund on a structural adjustment program covering a period of no less than two years. The maximum size of this loan is equivalent to 175 percent of a member country s paid subscription in convertible currencies. It can, however, be supplemented by an Automatic Loan, thereby reaching up to 250 percent of the member country s paid subscription. The loan is disbursed in installments subject to the successful implementation of policies and measures agreed upon. Each disbursement is repaid within seven years in four equal half-yearly installments following a grace period of forty-two months. The fourth type of loan is the Compensatory Loan, extended to assist a member country experiencing an unanticipated balance of payments deficit resulting from a shortfall in export earnings of goods and services and/or an increase in the value of agricultural imports due to a poor harvest. This loan s limit is equivalent to 50 percent of a member s paid subscription in convertible currencies, has a maturity of three years and is repayable in four half-yearly installments following a grace period of 18 months. The second category of loans falls under the Structural Adjustment Facility (SAF). Its introduction, in 1998, was in response to the changing needs, demands and priorities of the member countries. The aim of this facility is to support structural reforms at the sectoral level, currently limited to the financial sector, in order to further improve the 8

10 utilization of resources and consolidate the economic stabilization achieved by some member countries. In light of the increasing importance of financial sector reform, this loan has received broad acceptance as evidenced by the growing interest of member countries in it. To benefit from the SAF, a member country is required to have achieved some progress in macroeconomic stabilization and to agree on the implementation of a financial sector reform program monitored by the Fund. The limit of this loan was initially set at 75 percent of a member country s paid subscription in the Fund s capital in convertible currencies. However, in view of the interest in this loan, the Board of Governors agreed, in April 2001, to increase its limit up to 175 percent of a member country s paid subscription. Furthermore, to facilitate its use, the Board of Executive Directors agreed, in March 2001, to change the loan terms. Accordingly, each disbursement is now considered a loan to be repaid in four years, instead of repaying the total value of the loan in four years from the date of the first disbursement. Finally, the SAF is considered complementary to other loans and, as such, a member country benefiting from it keeps the right of availing itself to other loans in accordance with the guidelines of the lending policy. The overall ceiling of the Fund s resources available to a member country is currently equivalent to 425 percent of its subscription to the Fund s capital paid in convertible currencies. Furthermore, a member country may benefit from an additional 50 percent of its paid subscription if it becomes eligible for a Compensatory Loan, thereby bringing the maximum overall ceiling to 475 percent of its paid subscription. Within the framework of the (HIPC) Initiative and by virtue of the Board of Governor s resolution No (1) for 2003, the Fund has approved Mauritania s debt reduction as stipulated by the initiative. To this end, the Fund has approved the modalities and terms of the initiative to Mauritania in its reform efforts. Interest Rates Since its inception in 1978, the Fund has applied a fixed interest rate on its loans. However, in March 2003, and as part of its periodic revision of the Fund s lending policy, the Board of Executive Directors agreed to change the interest rate policy. The aim of the change was to provide additional concessionality and align the interest rate policy with that prevailing in similar financial institutions, taking into account the 9

11 soundness of the Fund s financial position. Accordingly, the Board agreed to replace the fixed interest rate with market related variable rates on new loans and allow member countries to choose between two types of variable rates. The first is a floating rate based on the six-month interest rate on the SDR as determined on the first working day of each month. The second is an active fixing rate calculated on the first working day of each month based on the swap rate of the SDR for the corresponding loan maturity. The active fixing rate is applied to the installments disbursed any day during the month and remains unchanged throughout the maturity of the loan. Loan Commitments The Fund extended four loans with a total value of AAD 38.8 million, equivalent to about US $ 180 million in These loans consisted of two loans within the SAF to Egypt and to Tunisia respectively, and one Extended Loan to the Sudan as well as an Automatic loan to the Comoros. The loan granted to Egypt,, with a total value of AAD million, represented the third loan within the SAF. It aimed at assisting the authorities to keep the momentum of reforms implemented to improve and modernize the banking sector and to further strengthen its ability to respond to the growing needs of a more oriented market economy. The loan to Tunisia which amounted to AAD million, also represented the third loan within the SAF and aimed to support the consolidation of the positive results achieved in terms of development and modernization in the banking sector. The Extended Loan to the Sudan with a total value of AAD million aimed at financing the overall balance of payments deficit and supporting the macroeconomic stabilization and the achievement of high and sustainable growth rates. Finally, the Fund extended an Automatic loan to the Comoros, to help finance a balance of payment deficit recorded in The total value of loan commitments, which equals the value of outstanding loans plus the undisbursed installments of approved loans, reached approximately AAD 280 million at the end of 2004, compared to AAD 277 million at the end of The total value of loan commitments in 2004 represents 87.8 percent of the Fund s paid capital in convertible currencies, compared to 86.8 percent in

12 Table (1) Loans Approved During 2004 (AAD Thousand) Country Type of Loan Value of Loan Egypt Tunisia Sudan Comoros Structural Adjustment Facility Structural Adjustment Facility Extended Automatic 23,625 5,175 9, Total 38,784 As of end of 2004, the number of loans extended by the Fund reached 131 loans benefiting some fourteen member countries. The total value of the loans amounted to about AAD 1,037.2 million, or the equivalent of US $ 4.8 billion. Appendix (A-1) shows the distribution of those loans by years and member countries. As shown in chart (1), the majority of loans provided by the Fund consisted of Automatic Loans, representing around 28.4 percent of the total value of loans followed by Extended Loans and Structural Adjustment Facilities with 27.8 and 17.9 percent respectively. Chart (1) Distribution of Loans by Type Structural Adjustment 17.9% Trade Facility 6.2% Compensatory 9.6% Extended 27.8% Automatic 28.4% Ordinary 10.1% 11

13 It is worth noting that the period over , the Fund has been extending to member countries more Structural Adjustment Facilities. The total number of loans provided under this facility since its inception in 1998 reached 15 out of a total of 28 loans extended by the Fund. As shown in Chart (2), the total value of these loans represented around 58.4 percent of the total value of loans provided by the Fund since Appendix (A-2) details the number and value of loans provided to each country according to the type of loan. Chart (2) : Percentage of SAF of Total Loans during ( ) Other Loans 41.6% S tructural Adjustment Loans 58.4% Loan Disbursements and Repayments The total value of disbursements of Fund s loanable resources amounted to AAD 46.8 million in 2004, consisting of disbursements on new loans with a value of AAD 24.4 million and disbursements on previously granted loans with a value of AAD 22.4 million. On the other hand, the total value of loan repayments in 2004 amounted to AAD 75.3 million. These were made by Jordan, Morocco, Egypt, Tunisia, Algeria, Djibouti, Lebanon, Mauritania, Yemen and Sudan. As a result of disbursements and repayments, and taking into consideration the debt restructuring agreement signed with Sudan on 24 March 2004, and the consolidated principal of AAD 39,870 thousand, outstanding loans with borrowing member countries amounted by end 2004 to AAD 253 million equivalent to 79.2 percent of the Fund s paid capital in convertible currencies compared to AAD 241 million, equivalent of 75.6 percent at the end of

14 Table (2) Disbursements and Repayments on Fund's Loans During 2004 Countries Loans Approved in 2004 Jordan - Disbursements Previous Loans Total (AAD Thousand) Repayments - - 2,585 Morocco - 5,550 5,550 4,351 Egypt 14,175 16,538 30,713 37,422 Tunisia 5,175-5,175 4,430 Algeria ,750 Djibouti Lebanon ,278 Mauritania ,101 Yemen ,401 Sudan 4,900-4,900 1,869 Comoros Total 24,434 22,400 46,834 75,260 Consultations with Member Countries The Fund s consultation missions were held with the authorities in borrowing member countries. The purpose of these consultation missions was to review recent economic developments and follow-up on the implementation of on-going reform programs and/or agree on reform programs to be supported by new loans. Two consultation missions visited Egypt. The first was a response to a request for a third loan within the SAF to support the reform of the financial and banking sector. In this regard, it is worth mentioning that reform of the financial sector in Egypt started in the early nineties, and were implemented in a gradual manner and aimed at reducing progressively the direct role of the government in the allocation of resources to strengthen and expand the scope of market forces in the economy. The reforms also aimed at modernizing the banking sector, increasing its efficiency, enhancing intermediation, strengthening the capacities of the banking and financial institutions, 13

15 and reinforcing competition within the sector. In addition, it involved the improvement of monetary policy tools and framework, and the enhancement of the Central Bank s capabilities for managing monetary policy and carrying out banking supervision, as well as the development of financial markets. The Fund has supported the above mentioned reforms through the first and second SAF for the financial and banking sector. To help sustain the momentum of reforms adopted by the Egyptian authorities and to strengthen and widen the scope of reforms in the financial and banking sector in Egypt, and to create a favorable environment for the development of financial institutions, instruments and markets; a new banking and financial sector reform program was agreed upon with the concerned authorities. The reform program covered the period December 2004 December 2005, and included the following objectives : Restructuring of the banking sector, Enhancing the monetary policy process, Modernizing and increasing the efficiency of the payment system. The reform program included a package of measures, among which were those related to the restructuring of the banking sector which constituted the main pillar of the program in view of the importance of the sector in the mobilization and allocation of resources in the economy. The program also included other measures related to monetary policy, and payment system infrastructure, which would support the process of financial sector development and facilitate the implementation of monetary policy. The second consultation mission to Egypt reviewed the implementation of the macroeconomic adjustment program agreed upon for the fiscal year 2003/2004, and reached an agreement on a complementary program covering the fiscal year 2004/2005, thus allowing for the disbursement of the second installment of the loan. The results of the review showed that most of the measures included in the program were implemented, and the performance of a number of key targets was satisfactory or even better than expected in the program. These targets included the growth rate, the fiscal deficit, as well as the current account and the overall position of the balance of payments. However, some of the program targets were not met, particularly the inflation rate which was higher than targeted, due to the depreciation of the exchange rate that occurred following the decision to float the currency. In addition, domestic liquidity 14

16 target was also not met due to the higher than anticipated increase in net foreign assets, reflecting the improvement of the external payment position. In this context, and in view of the positive results achieved, and the new policy decisions adopted by the Egyptian government, an agreement was reached regarding a complementary adjustment program covering the fiscal year 2004/2005. The new economic policy decisions aimed at increasing competition, improving the investment climate, and encouraging the participation of the private sector in the economy as well as further integrating the economy into the world economy. They involved major reforms in areas of tax and customs, privatization, liberalization of the foreign exchange market and a comprehensive restructuring plan for the banking sector. Accordingly, the program included following targets : Achieving 5.5 percent growth rate of GDP, Containing the inflation rate of 7.0 percent, Achieving a surplus in the balance of payment s current account to around US$ 3.3 billion. The program included, a number of policy measures in areas of fiscal policy, monetary policy, banking sector, the external sector and trade policies. With respect to Tunisia, the Fund s consultation mission came as a response to the request of the authorities for a third loan within the framework of the SAF to complement the reforms adopted earlier in the financial and banking sector. In this regard, it must be noted that, the Fund previously provided support to this sector through the first and the second loans extended within the SAF. The reforms supported by the two previous loans included the settlement of the nonperforming loans of public companies towards the banking sector and the restructuring of public banks. In this regard, the authorities adopted a strategy aimed at encouraging bank merger, and a new banking law centered around the concept of comprehensive banking, as well as a unified licensing system for the banking institutions. The reforms also included the reduction of the government s shares in the capital of the financial institutions, the establishment of an automated clearing system, a central database for banking information covering returned checks, credit risks, companies balance sheets, borrowers positions, personal loans, as well as classified assets and loans eligible for 15

17 refinancing. In addition, the reforms covered the insurance sector, in view of its crucial role in mobilizing long term savings, increasing their capital base in order to improve their financial position and establishing new procedures and regulations to organize their activities in accordance with best practices. In order to strengthen the competitiveness of the economy, and to increase its integration into the world economy, the Tunisian authorities recognized the importance of further improving the financial and banking sector. To this effect, several steps towards the gradual liberalization of the capital account and the adoption of a floating exchange rate regime were taken. Such steps required, in turn, strengthening of the monetary policy framework and the maintenance of price stability. The mission reached an agreement with the Tunisian authorities regarding the monetary policy measures to be implemented during 2004, thus setting some of the required infrastructure, an inflation targeting, and monetary policy framework. The measures dealt with the overall monetary policy framework and instruments as well as improvement of the forecasting capabilities and liquidity analysis, combined with the deepening of the inter-bank market. They also aimed at enhancing the transmission of the monetary policy signals to the market and allowing market forces to determine the interest rate, rendering monetary policy operation more transparent. With respect to Morocco, the Fund s mission aimed at reviewing the implementation of the reform program of the financial and banking sector. The Moroccan authorities succeeded, with the reforms that have been implemented, in improving the business environment of the financial and banking sector, which became more market oriented and exhibited important modern legal and institutional developments. The review showed that the measures included in the reform program for the period July 2003 July 2004, were implemented. These measures consisted of the following: Strengthening domestic debt management, Developing the process of saving transformation, Modernizing social housing finance, Sustaining the restructuring of the specialized lending institutions, Enhancing supervision in the securities market. With respect to the Sudan, the Fund s mission was to study the request of the authorities for an extended loan to support their reform efforts. In this regard, it should 16

18 be noted that since 1997, the Sudanese authorities have implemented, a comprehensive economic reform programs aimed at reducing inflation, containing the deterioration in the external payment position, as well as unifying and stabilizing the exchange rate. In so doing, they also worked towards the settlement of their outstanding arrears towards creditors institutions thus paving the way for the normalization of their relations with regional and international financial institutions. The reforms were implemented in a favorable context marked by good weather conditions, the start of oil exports in 1999 that led to large foreign direct investments in the sector, thus helping macroeconomic stability and economic growth. The average real growth rate recorded was 6 percent during the last three years, and the inflation rate came down to an average of 7 percent coupled with a decline in fiscal deficit to less than 1 percent of the GDP. In addition, the deficit of the current account of the balance of payments shrank, and official foreign reserves increased resulting in stability of the exchange rate. In order to consolidate the positive gains achieved, the authorities adopted a medium term reform strategy aimed at deepening the scope of the reforms constituting the framework within which a macroeconomic adjustment program was agreed upon with the Fund. The program included the following objectives: Achieving an annual real growth rate of the GDP of 7 percent during 2004 and Containing the annual inflation rate to about of 7 percent during 2004 and Limiting the deficit of the current account of the balance of payment to about 4.7 percent and 4.3 percent of the GDP during 2004 and To achieve these objectives, the program included a number of coherent policies and measures, ranging from fiscal policy measures to reduce the fiscal deficit, to monetary policy measures to limit the expansion of the domestic liquidity and net domestic assets of the banking system. The program also included structural measures to strengthen the monetary policy framework and its indirect tools directed towards developing and modernizing the banking system while increasing its efficiency in financing the economy and mobilizing and allocating the resources. Additional measures were also included to gradually liberalize the foreign exchange market and the foreign trade sector, as well as speeding up the negotiations for membership to the WTO. 17

19 As to Djibouti, the mission s objective was to follow upon the implementation of the reform program of the financial and banking sector as well as the macroeconomic adjustment program that was supported by the second extended loan. In this regard, the reform program of the financial and banking sector included three main reform areas namely the settlement of domestic government arrears, the strengthening of the financial positions of the pension funds, as well as the central bank s capacity to supervise the banking system. The results of the mission showed that the reforms were, in general, satisfactorily implemented. On the other hand, and with respect to the macroeconomic adjustment program, the objectives set were as follows: achieving a real growth rate of 3.0 percent, containing the inflation rate to about 2.0 percent, maintaining a deficit of the current account of the balance of payments of about 5.1 percent, and additional performance indicators related to the budget, domestic arrears, and net official reserves. The results of the follow up mission revealed that the authorities had successfully achieved the targets in terms of growth rates, inflation rate, overall budget position, domestic arrears and overall net official reserves. However, they were less successful in containing growth rate of domestic liquidity and achieving the increase in net foreign assets, as well as the deficit of the current account of the balance of payments. Arrears At the end of 2004, the total overdue principal and cumulative interest payments amounted to about AAD million. Out of this total, about AAD 64.7 million are overdue payments of principal and AAD 91.3 million are overdue payments of interest, as shown in the Table (3) below. Table (3) Arrears: Principal and Interest at 31 December 2004 Somalia Iraq (AAD Thousand) Country Principal Interest Total 14,877 49,850 31,503 59,747 46, ,597 Total 64,727 91, ,977 18

20 Total arrears do not include AAD 18.4 million that were set aside in accordance with a memorandum of understanding agreed upon by the Fund and the Sudanese Authorities for exemption at a later stage due to the restructuring conditions, and approved by the Board of Governors resolution No. (7) for

21 Investments The Fund s Investment Policy is composed of the principles stated in its Articles of Association and the resolutions passed by its Board of Governors and Board of Executive Directors that have put in place conservative policies and guidelines that govern the investment activities. This Investment Policy aims at preserving the Fund s capital and built up reserves, and at the growth of these resources to generate returns that will sustain the Fund s expenditure and enhance these resources, to enable it to achieve the goals it was set up for. The Fund s Investment Policy takes into consideration the safety of selected investment instruments through the maintenance of the overall risk of the portfolios within acceptable levels, and ensures as well the ease of liquidity of these instruments whenever required, and the transferability of invested currencies, while attempting to generate the maximum returns within these considerations. The Fund also ensures the proper distribution of the investments among instruments denominated in the components of the Special Drawing Rights (SDR) and its underlying currencies, achieving almost a full compliance with the weights of the components of the SDR, in order to hedge currency fluctuations and the associated forex risks of the value of investments. Chart ( 3) : Change in Exchange Rates of the Four Major currencies against SDR in 2004 In Percent January February March April May June July August September October November December U.S. Dollar EURO S. Pound J. Yen 20

22 Among the main distinctions of the general investment climate for 2004 was the continued global economic growth, which has surpassed earlier expectations, mainly due to certain economies such as the United States of America, Japan, China and some emerging countries in Asia, achieving good rates of growth. Foreign exchange markets were affected by the fall of the value of the U.S. dollar against most major currencies as a result of the huge deficit in the trade balance and the growing deficit in the American government budget, and demands for the Chinese to participate in shouldering the burden for the global correction of the major currencies were raised, after the pegging of the Chinese Yuan against the U.S. dollar became a source of increasing international disputes. The low Yuan exchange rate, has been an increasing source of worry to the Europeans especially in light of the big jump in the value of the Euro against the U.S. dollar during the year also witnessed moderating levels of inflation and a huge increase in the value of energy, where the price of oil rose above U.S. dollars 50 per barrel and reached record levels. Most major monetary authorities continued to adopt accommodative monetary policies and kept interest rates low except for the U.S.A. where the Federal Reserve raised rates by 125 basis points during the year reach 2.25% by year-end. The Fund s investment portfolios consist of the liquidity portfolio, short and medium term bonds in addition to the alternative strategies funds. In Percent January February Chart (4) : Average Rate of Interest on Three Months Deposits during 2004 March April May June July S.D.R. U.S. Dollar EURO S. Pound J. Yen August September October November December In addition to managing its resources, the Fund extends its investment activities to managing portfolios for the Arab Trade Financing Program, the AMF employees 21

23 Pension Fund, the unified account of the Specialized Arab Organizations in addition to managing bond portfolios for member states. Managed funds on behalf of the above have amounted to US $ 200 million as at 31 December In addition, the Fund continued to strengthen its activity in the acceptance of deposits from Arab central banks and monetary agencies, which witnessed a material growth during the year, amounting to US $ 1,544 million at the end of 2004 compared to US $ 1,219 million at the end of the previous year. And in the context of cooperation with Arab central banks and monetary agencies, the Fund regularly prepares and provide periodical reports on capital markets developments, and coordinates as well with international organizations and major investment institutions in the provision of periodic specialized training programs and seminars in investments to staff of these banks and agencies, through the training programs of the Fund s Economic Policy Institute. 22

24 Technical Assistance The scope of the technical assistance extended by the Fund has expanded in response to the growing needs of its member countries. EPI training activities have expanded and so has the Fund s technical advice within the framework of its consultation missions at the macroeconomic and sectoral levels. Within this framework, and in response to a request from the Bank of Algeria, the Fund provided technical assistance by delegating a payment system expert in March 2004 to assist the authorities in the implementation of an electronic payments system for large value commonly known as Real Time Gross Settlement System (RTGS). The objective of the technical assistance response was to evaluate the project specifications, organize the management structure of the division entrusted with payment system in the Central Bank of Algeria, and help in selecting of the suitable software as well as in the follow up and evaluations of the project during the experimental operating stage. The Fund has also provided technical assistance in the preparation of a study on upgrading of the financing process of the Algerian economy. Moreover, in response to a request from the Central Bank of Egypt, the Fund organized a seminar at the Egyptian Banking Institute in Cairo during 30 May 3 June 2004 on The Application of Inflation Targeting as a Framework for Monetary Policy. The seminar which addressed high ranking officials of the Central Bank and the Ministry of Finance, was organized by AMF experts, the European Central Bank, Central Bank of Sweden and Central Bank of the Philippines. A technical assistance mission was sent in August 2004 to Lebanon in response to a request from the Lebanese authorities to assist in the improvement of public debt management. To this effect, the expert assisted the authorities in the area of institutional, organizational and legal requirements for the debt management unit at the Ministry of Finance. The Fund delegated in September 2004 a technical assistance mission to Libya to consult with officials on the nature of technical assistance required from the Fund to assist the authorities in preparing for negotiations for WTO membership. The Sultanate of Oman has also benefited from the Fund s technical assistance in November 2004 through the engagement of an expert to assist the concerned authorities in the rehabilitation of Oman Development Bank and to recommend the best alternatives needed for such a process. 23

25 Arab Capital Markets To increase awareness of investment opportunities in the Arab region and make available information about Arab Capital Markets, the Fund completed in 2004 the linking of Palestine Securities Exchange Market to its database thus increasing the number of participating capital markets to fifteen. Moreover, data concerning the activities of the Arab Capital Markets of Abu Dhabi, Dubai, Doha and Palestine as well as other markets was published on the Fund s web page on daily basis. The Fund s composite index which measures collectively the performance of the thirteen participating markets was also published on daily basis as well. The Fund also pursued, in 2004, its efforts in publishing the quarterly bulletin on the Arab capital market members of its database, by publishing four new issues. By the end of the year, the number of issues published reached 40 issues. The last issue of the bulletin showed that Arab capital markets witnessed noticeable improvements in 2004 compared to 2003 performance, with the AMF composite index surging from points to a record of points, since the Fund initiated the index in This performance is due to three positive factors, namely, oil price increases, which strengthened the market liquidity; the performance of individual capital markets as expressed by the encouraging results of the listed companies which, in turn, affected positively the demand for securities; and finally, the continued low level of interest rates which helped shift savings from bank deposits to securities. The last issue of 2004 showed that capitalization and trading volume also reached record levels. The combined capitalization of the stock exchanges of the AMF database increased by 72.0 percent in 2004, to reach US $ billion. As for the combined traded volume, it reached US $ billion in 2004 compared to US $ billion in 2003, recording a percent increase over the year. Arab financial markets also experienced positive developments in 2004 especially in the legal and institutional aspects that will strengthen their capabilities, transparency and performance. These new developments included new trading rules implemented by most Arab capital markets, especially the professional ethics of the intermediaries in order to ensure that clients interests are preserved and that the clients themselves get a fair treatment. 24

26 These markets also introduced listing requirements in line with international standards which, in turn, led to the classification of trading activities into primary market and secondary market on the basis of shareholders rights, listed companies own shares, realized profits, the number of shareholders, liquidity criteria and disclosure criteria. Concerning the disclosure aspect, the respective stock exchanges required listed companies to supply them with audited quarterly reports in order to strengthen the accuracy and credibility of the data. In the field of cooperation with regional and international organizations and institutions dealing with financial markets, the Fund participated in the conference held in Oman on The Role of Gulf Stock Exchanges in Promoting and Activating Economic Development Potentials in the Gulf Countries. The Fund also submitted a paper on Reforms and Developments in Arab Financial Markets to the workshop held at its headquarters on Reforming and Modernizing the Financial Sector in the Arab Countries. 25

27 Training The Economic Policy Institute (EPI) of the Arab Monetary Fund continued to develop its training activity aimed at enhancing the capacity of economic policy formulation and implementation. EPI s activities consist of specialized technical training attended by participants and trainees from the economic institutions of member countries together with workshops and seminars also attended by relevant high ranking officials. These activities are carried out in cooperation with regional and international institutions with a view to exchanging expertise and knowledge on topics of mutual interest. EPI organized during 2004 twelve training courses and three workshops. This brings up their total since its inception until end of 2004 to 119 courses and 12 workshops, in which 4080 trainees participated. Training Courses EPI releases an annual program of its training courses within the framework of the Joint Regional Training Program (RTP) with the IMF. Some of these courses recur regularly and are aimed at developing and strengthening the technical capabilities of trainees. In view of the success of the RTP, the number of joint training courses increased from six in 2003 to ten in EPI training program within the RTP covered the following courses : Government Finance Statistics This course was held during the period 11 to 29 January, 2004 at AMF headquarters. It aimed at assisting government officials in the compilation and presentation of government finance statistics in accordance with the methodology of the new IMF manual on Government Finance Statistics. Thirty-four participants from 17 member countries attended this course. Anti-Money Laundering This course was offered under the joint RTP with the IMF Institute, and held at AMF headquarters during 9 to 11 March, The course dealt with core issues pertaining to anti-money laundering and the financing of terrorism through surveying the risks 26

28 encountered by the financial system as a result of money laundering, the role of international and national bodies concerned with anti-money laundering and the practices required to fight such operations. Thirty-eight participants from nineteen member countries attended the course. Macroeconomic Management and Policies This course was conducted at the Fund s headquarters during 21/3-1/4/2004 in collaboration with the IMF Institute. It was designed for the Iraqi officials from the Central Bank of Iraq and the ministries of finance and planning. It was attended by 37 participants and consisted of an intensive review of linkages among the major four macroeconomic sectors, in addition to the most important methods of macroeconomic analysis. Financial Soundness Indicators EPI conducted this course at its headquarters in collaboration with the IMF Institute during 25 to 29 April, It aimed at increasing the exposure of the participants and widening their knowledge of concepts, definitions, sources and techniques of compilation of the financial soundness indicators within the framework of the IMF manual on The Financial Soundness Compiling Indicators. Thirty-one participants from sixteen member countries attended the course. Value Added Tax : Design and Implementation This course was organized by EPI and the IMF Institute and was held at AMF headquarters during 11 to 13 May, It aimed at broadening and deepening the participants knowledge of the value added tax system and its management. The course covered topics relating to the design and management of value added tax policy. Thirtytwo participants from fifteen member countries attended the course. Financial Programming and Macroeconomic Policies This course was organized under the joint RTP with the IMF Institute in Damascus during 23/5-3/6/2004. It was designed for the Syrian officials. The objectives of the course were to enable the participants to study appropriate stabilization and reform policies within an integrated financial program, analyzing the impact of these policies 27

29 on internal and external balances, on growth objectives and on financial and economic stability. Thirty-three Syrian participants attended the course. Financial Programming and Macroeconomic Policies This course was organized under the joint RTP with the IMF Institute at AMF headquarters during 13 to 24 June, It aimed at enabling the participants from all member countries, based on case studies, to select appropriate stabilization and reform policies within an integrated financial program. It also aimed at analyzing the impact of these policies on internal and external balances and on growth and stabilization objectives. Thirty-seven participants from eighteen member countries participated in the course. External Sector Policies EPI and in collaboration with the IMF Institute organized this course during 5 to 16 July, 2004 in Rabat. It dealt with the techniques and processes of designing and analyzing external sector policies, as well as recent issues and developments in this respect. Thirty-seven participants from sixteen Arab countries participated in this course. National Accounts Statistics This course was organized in collaboration with the IMF Institute and was held during 5 to 16 September, 2004 at AMF headquarters. It aimed at familiarizing the participants with the concepts relating to national accounts system issued in 1993, as well as studying the topics required for the preparation of the accounts by virtue of the new system. Thirty-five participants from twenty member countries attended the course. Macroeconomic Management & Financial Sector Issues Under the Joint Regional Training Program (RTP) with the IMF Institute, the EPI held this course during 5 to 16 December, 2004 at AMF headquarters. The course addressed issues related to macroeconomic reform policies and programs and aspects of policies pertinent to capital markets and their management. Thirty-four participants from twenty member countries attended the course. 28