Arab Monetary Fund Annual Report 2003
Contents Page Letter of Transmittal... 1 Activities of the Fund in 2003... 3 Lending... 8 Investment... 20 Arab Capital Markets... 23 Training... 25 Technical Assistance... 29 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... 41 Consolidated Financial Statements & the Auditors Report... 49 Fund Loans Tables... 67 General Tables... 76 Organization and Management... 80 ii
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 2003 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 2004 1
Activities of the Fund in 2003 In 2003, the Fund s efforts were directed towards increasing the effectiveness of its assistance to meet the development needs of its members, as defined in its Articles of Agreement. To that effect, the strategy adopted in setting the Fund s various work programs emphasized monitoring economic developments in the member countries and holding consultations with the relevant authorities as well as assessing the impact of new development in the world economy. These efforts were meant to assist member countries reform and adjustment efforts and support their development programs, in the context of unfavorable regional political developments and a difficult international environment. In this regard, the world economic environment was marked by the slow growth of major industrialized countries and intense competition due to increased globalization. The Fund thus introduced greater flexibility to its policies and programs to respond in an appropriate and timely manner to the needs of the member countries. With regards to lending activities, the Fund approved during 2003 a total of three new loans consisting of an Extended loan to Egypt and Djibouti respectively and a Structural Adjustment Facility (SAF) to Morocco. The total value of these loans is about AAD * 66.6 million, equivalent to about US $ 300 million. This constitutes a considerable increase compared to the total value of loans extended by the Fund in 2002. The Extended Loan to Egypt, with a total value of AAD 55.125 million, is to assist in financing the overall balance of payments deficit and support reform measures being implemented by the authorities to improve the performance of the Egyptian economy, which suffered lately from lagging growth rates due to unfavorable external shocks. During the past three years, Egypt has received from the Fund a total of four loans, consisting of two Structural Adjustment Facilities, an Automatic Loan and a Compensatory Loan. * One Arab Accounting Dinar (ADD) 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 4.457916 as at 31 December 2003 (compared to US $ 4.078572 as at 31 December 2002). 3
The Extended Loan to Djibouti, with a value of AAD 367.5 thousand, is to assist in financing the overall balance of payments deficit and maintain the momentum of reforms implemented by the authorities during the past few years to achieve macroeconomic stabilization and restore positive growth rates. Finally, the SAF extended to Morocco amounted to AAD 11.1 million and is the third SAF extended by the Fund to the Kingdom. The loan is to support the completion of important reforms being implemented by the authorities to promote a healthy financial sector and encourage savings and investments. The provision of new loans was preceded by consultations with the relevant authorities in the member countries to review recent economic developments and reach an agreement on reform programs to be supported by these loans. The consultations held with the authorities in Egypt and Djibouti focused on appropriate policies and measures to strengthen the macroeconomic environment, while the consultations with the Moroccan authorities discussed additional measures to sustain the momentum of financial sector reform and consolidate the positive results achieved so far. In addition, the Fund sent in 2003 the first consultation mission to the Comoros to review the economic developments, determine the extent to which it can benefit from the Fund s resources, and provide technical assistance related to a feasibility study of a new commercial bank. As part of its periodic revision of the Fund s lending policy, the Board of Executive Directors agreed in March 2003 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 installments disbursed any day during the month and remains unchanged throughout the loan maturity. With regards to investment activities, and in an environment characterized by low inflationary and interest rates levels coupled with relative improvements during the second half of the year in economic growth and stock market activity, the Fund succeeded in achieving adequate returns on its investments during 2003, taking into consideration the Fund s conservative approach to managing its investments. The Fund s total 4
investment portfolio consists of an internally managed portfolio of liquid assets, representing approximately 57 percent of the total portfolio, in addition to 43 percent of the externally managed portfolios of bonds and alternative strategies. Beyond managing its own resources, the Fund manages accounts for the Arab Trade Financing Program, the Unified Account of the Specialized Arab Organizations and the AMF Employees Pension Fund. Moreover, deposits accepted by the Fund from Arab central banks and monetary agencies increased during 2003 by about 25 percent relative to their 2002 levels. To heighten the awareness of local and foreign investors regarding potential investment opportunities, the Fund continued during 2003 to develop the Arab Capital Markets Data Base (AMDB) established in 1994 and broaden its coverage to a total of fourteen markets by including Sudan and Algeria. The Fund supplied both countries with equipment and software necessary to provide the Fund with reports and data concerning their capital market activities to be included in its quarterly bulletin. A total of thirty-six issues of the bulletin have been published so far. Furthermore, the Fund s Economic Policy Institute (EPI) continued to develop and expand specialized training provided to member country officials from ministries such as finance, economy, and planning or from central banks. A total of 107 training courses and nine workshops have been organized so far by EPI and attended by 3,577 officials. The nine training courses held in 2003 covered topics such as macroeconomic management and financial sector issues, financial programming, anti-money laundering, banking supervision, financial sector reform policies, price statistics, monetary and financial statistics, fixed-income portfolio management, and expenditure management. In addition, the EPI organized a workshop on debt management, a seminar on fiscal issues attended by members of the media, and a seminar on the financial sector and economic growth attended by high-ranking officials. With regards to the increasing technical assistance activities, and upon the request of the Central Bank of Oman, the Fund drew during 2003 on the long-standing experience of an external consultant who advised authorities in Oman on compiling and presenting balance of payments statistics and preparing related statistical surveys. The Fund also recruited external experts to conduct a feasibility study for a new commercial bank as requested by 5
Comoros authorities. In addition and upon the request of the Lebanese authorities, a technical assistance mission to Lebanon advised authorities on necessary steps to join the World Trade Organization (WTO). Finally, the Fund delegated a statistical expert to Qatar in response to the General Secretariat of the Planning Council s request for technical assistance in developing an economic and social outlook for Qatar and setting up an econometric model for its economy. In its capacity as the Secretariat of the Council of Governors of Arab Central Banks and Monetary Agencies, the Fund organized a meeting for the Council s Permanent Bureau held in the Fund s headquarters, the Council s Twenty-Seventh Annual Meeting held in Qatar during September 2003, and the Twelfth Annual Meeting of the Arab Committee on Banking Supervision (ACBS) whose members include Arab banking supervision officials. The Fund continued during 2003 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) and assumed the responsibility of its editing, publishing and timely release. The Fund also collaborated with the Fund for Economic and Social Development in organizing the fifteenth annual seminar, with the technical assistance from the World Bank (WB) and the International Monetary Fund (IMF). The theme of the 2003 s seminar was Arab Women and Economic Development. The Fund collaborated with the World Trade Organization (WTO) in organizing two training courses. The first, held in Egypt, was on Doha Development Agenda and the Effective Participation of Arab Countries in a Multilateral Trading System, while the second, held in Qatar, was on Trade Policies and the Multilateral Trading System. Moreover, the Fund organized along with the WTO and the WB a joint ministerial meeting attended by Arab Trade and Finance Ministers and participated in a number of regional and international meetings dealing with issues related to its activities and/or of concern to its member countries. In view of its interest in promoting inter-arab trade, the Fund continued during 2003 to work closely with the Arab Trade Financing Program (ATFP), which the Fund played a key role in establishing. The drawings by the ATFP to finance trade transactions totaled UD $ 545 million during 2003, thus increasing total drawings since the launch of its 6
activities in 1991 to US $ 3 billion. Furthermore, the total number of national agencies, to which the ATFP extends credit lines and through which it deals with Arab exporters and importers, increased to 138 agencies in 19 Arab countries. 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 to the quarterly bulletin on the Arab Markets Data Base (AMDB). 7
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, 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. 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 is to provide additional concessionality and align the interest rate policy with that prevailing in similar financial institutions, taking into account the 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. Types of Lending Facilities Loans extended by the Fund fall under two categories. The first category includes loans granted for balance of payments purposes, conditional, in some cases, on the implementation of policies agreed upon during the Fund s consultations with the authorities concerned. The second category of loans supports sectoral reforms and currently focuses on financial sector reforms. 8
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. 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 9
measures agreed upon. Each disbursement is repaid within seven years in four equal halfyearly 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 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. 10
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. Loans, Disbursements and Repayments In 2003, the Fund extended a total of three new loans to Egypt, Djibouti and Morocco, with a total value of about AAD 66.6 million, equivalent to around US $ 300 million. This constitutes a considerable increase compared to the total value of loans extended by the Fund in 2002. The Extended Loan to Egypt, with a total value of AAD 55.125 million, is to assist in financing the overall balance of payments deficit and support the reform measures being implemented by the authorities to improve the performance of the Egyptian economy, which suffered lately from lagging growth rates due to unfavorable external shocks. In addition, the loan aims at increasing the economy s competitiveness and strengthening its ability to face external shocks. During the past three years, Egypt has received a total of four loans, consisting of two Structural Adjustment Facilities, an Automatic Loan and a Compensatory Loan. The Extended Loan to Djibouti, with a value of AAD 367.5 thousand, is also to assist in financing the overall balance of payments deficit and to maintain the momentum of reform measures implemented by the authorities during the last few years, in cooperation with the Fund and other donors, to achieve macroeconomic stabilization and positive growth rates. Finally, the SAF extended to Morocco amounted to AAD 11.1 million and is the third SAF extended by the Fund to the Kingdom. The loan is to support the completion of important reforms being implemented by the authorities to promote a healthy environment in the financial sector to increase savings and investments. 11
Table (1) Loans Approved During 2003 (AAD Thousand) Country Type of Loan Value of Loan Egypt Djibouti Morocco Extended Extended Structural Adjustment Facility 55,125.00 367.50 11,100.00 Total 66,592.50 During 2003, the total disbursements associated with the new loans amounted to about AAD 33 million. With these new loans, the total number of loans extended by the Fund since the launch of its lending activities in 1978 reached a total of 127 loans that benefited a total of 13 member countries. The total value of these loans is about AAD 998.5 million, equivalent to around US $ 4.4 billion. As shown in Chart (1), the majority of loans provided by the Fund so far are Automatic Loans, representing around 30 percent of the total value of loans extended by the Fund since its inception, while Extended Loans and the Structural Adjustment Facilities represent about 28 and 16 percent respectively. Chart (1) Distribution of Loans by Type 1977-2003 Structural Adjustment 16% Automatic 30% Trade 6% Compensatory 10% Exte n ded 28% Ordinary 10% 12
It is worth noting that the Fund has been increasingly extending Structural Adjustment Facilities to member countries. The total number of loans provided under this facility since its inception in 1998 is about 13 out of a total of 24 loans extended by the Fund. As shown in Chart (2), the total value of these 13 loans represents around 56 percent of the total value of loans provided by the Fund since 1998. Table (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 1998-2003 Other Loans 44% Structural Adjustment Loans 56% On the other hand, the total value of loan repayments in 2003 amounted to AAD 68.4 million. These were made by Jordan, Morocco, Egypt, Tunisia, Algeria, Djibouti, Lebanon, Mauritania, Yemen and Sudan. Consequently, the value of outstanding loans to member countries at the end of 2003 reached some AAD 241 million representing 75.6 percent of the Fund s paid capital in convertible currencies and around 52.1 percent of the Fund s lending resources. In 2002, the value of the Fund s outstanding loans was AAD 276 million, or about 86.6 percent of the Fund s paid capital in convertible currencies and about 58.4 percent of the Fund s lending resources. The total value of loan commitments, which equals the value of outstanding loans plus the undisbursed installments of approved loans, reached approximately AAD 277 million 13
at the end of 2003, compared to AAD 278 million at the end of 2002. The total value of loan commitments represents 86.8 percent of the Fund s paid capital in convertible currencies and 59.8 percent of the Fund s available lending resources, compared to 87.3 and 58.8 respectively in 2002. Table (2) Disbursements and Repayments on Fund's Loans During 2003 Countries Disbursements Loans Approved in 2003 Total (AAD Thousand) Repayments Jordan - - 2,208 Morocco 5,550 5,550 9,502 Egypt 27,563 27,563 28,948 Tunisia - - 5,106 Algeria - - 15,289 Djibouti 153 153 153 Lebanon - - 1,440 Mauritania - - 1,205 Yemen - - 3,833 Sudan - - 699 Total 33,266 33,266 68,383 Consultations with Member Countries During 2003, the Fund s consultations with member countries covered macroeconomic and financial sector reforms. The purpose of these consultations was to review the implementation of previously agreed upon reform programs and the recent economic developments in member countries and/or reach an agreement on reform programs supported by new loans extended by the Fund. The consultations held with the Egyptian Authorities reviewed the economy s exposure, since the second half of 1997, to three external shocks that have adversely affected 14
tourism revenues, oil export revenues, and investment flows and, consequently, slowed down economic growth. Meanwhile, the government s fiscal position deteriorated due to an increase in investment expenditures related to major projects and a decrease in revenues due to slow economic growth. The need to finance the government s deficit resulted in an increase in net domestic debt as a percentage of GDP. Egypt s monetary situation has been affected by the developments in the government s fiscal position, and as a result, the domestic liquidity s growth rate increased to 16.9 percent during the year 2002/2003 reflecting, in large part, the increase in domestic credit resulting from the growth in credit to the government. As for the external sector, the current account and the overall balance of payments have both been running deficits, after registering annual surpluses during the period 1991/1992-1996/1997, reflecting the negative impact of the external factors mentioned above. In addition, the pressure on the foreign exchange rate has been increasing and the foreign reserves have decreased from about US $ 20 billion to about US $14 billion. In this context, it is worth noting that in January 2003, the Egyptian authorities replaced the fixed exchange rate regime with a floating exchange rate regime. This step had been preceded, since 2001, by gradual flexibility in managing the exchange rate. During the consultations, it was agreed that the fiscal position and the slow implementation of the structural reforms have also negatively impacted economic performance. It was recognized that the Egyptian economy faced major challenges, including achieving high economic growth rates and reducing unemployment. Within this framework, the reform program agreed upon with the Egyptian authorities has a medium-term time frame and gives priority to completing reforms in the exchange rate market, correcting the government s fiscal position, and adopting a tight monetary policy. The reform program set for 2003/2004 has the following objectives: - Achieving a real GDP growth rate in the range of 3-4 percent. - Containing the inflation rate in the range of 5-6 percent. - Limiting the current account deficit to a maximum of around US $ 440 million. 15
In order to achieve these objectives, the program includes a number of reform policies and measures. With regards to fiscal policy, the program aims at reducing the overall budget deficit by increasing revenues and limiting the growth of expenditures. With regards to monetary policy, the program aims at limiting the expansion of domestic liquidity and the increase in the net domestic assets of the banking system. In this context, the program calls for the continued implementation of measures that lay the ground for an inflation-targeting framework. The program also includes measures to improve the functioning of the foreign exchange market with a greater reliance on market forces to achieve a unified exchange rate. In addition, the authorities will implement trade reform measures to increase the Egyptian economy s integration in the world market in order to accelerate growth rates and improve the standards of living. With respect to Djibouti, the review of recent economic developments showed that, under successive economic reform programs, the authorities have achieved relative success in setting the basis for macroeconomic stability and restoring economic growth. The fiscal deficit has been reduced considerably in 2002 to approximately 3.5 percent of GDP, and the inflation rate has been contained at around 2 percent of GDP and the balance of payments deficit at about 6 percent of GDP. Notwithstanding these positive economic developments, Djibouti s economy still faces several challenges that include achieving high and sustainable growth rates, raising living standards, increasing jobs and alleviating poverty. Aware of the importance of facing these challenges while efforts are underway to deepen economic reforms, the authorities have adopted a long-term strategy. This strategy is based on the following core and complementary four pillars: achieving high and sustainable economic growth rates, long-term human development, implementing programs to improve the situation of the poorest segment of the population, and adopting the principles of sound fiscal management to achieve more transparency in managing fiscal resources. Within the framework of this strategy, the economic reform program for 2003 that was agreed upon during the consultations with the authorities in Djibouti has the following objectives: 16
- Achieving around 3 percent real GDP growth rate. - Keeping the inflation at around 2 percent. - Containing the current account deficit in the balance of payments (including official transfers) at around 5.1 percent of GDP. To achieve these objectives, the government will implement a number of measures to reduce the fiscal deficit, lower the inflation rate, and strengthen the external position. In addition, the authorities will continue implementing structural reforms to encourage the private sector and increase the economy s competitiveness. This will be achieved through completing the privatization of some of the state-owned enterprises, lowering the cost of production through revising labor, trade and investment laws to include appropriate incentives based on market forces. Also, the authorities will complete the banking sector s structural reforms, which include liquidating two banks, enhancing the central bank s capacity to supervise the banking sector to ensure its soundness, and normalizing relations with creditors. As for Morocco, which applied for a third SAF, it is worth noting that the authorities have implemented a series of financial sector reforms that were supported by two previous Structural Adjustment Facilities during the period 1999-2001. The reform program that was supported by the first SAF included promoting capital markets, restructuring specialized lending institutions, and enhancing secondary markets for public debt instruments. The reforms within the program supported by the second SAF included strengthening the central bank s independence and improving supervision of capital markets and of the insurance sector. As a result of these reforms, the Moroccan authorities were able to considerably improve the working environment in the financial sector. The reform process was gradual and continuous in order to bring the financial sector at par with its foreign financial and trade partners, given the country s move towards greater integration in the global economy and the increase in competitiveness that such integration requires. As a consequence, the Moroccan banking sector has become more liberalized and modernized, with greater reliance on market forces. At the same time, capital markets have undergone considerable development in their organization, functioning, and the legal and institutional frameworks that govern them. 17
In 2003, consultations with the Moroccan authorities emphasized the importance of sustaining the momentum of financial sector reform to consolidate the positive results achieved so far. The consultations also noted the importance of addressing remaining weaknesses and promoting the growth of institutions, instruments and financial markets, by implementing more measures and policies that aim at expanding and deepening structural and institutional reforms, including enhancing the efficiency of resource accumulation and allocation to achieve high and sustainable growth rates. Within this framework, an agreement was reached with the Moroccan authorities on the components of the third financial sector reform program, which covers the period July 2003 to July 2004. The following reforms were agreed upon: - Improving the management of domestic debt. - Continuing the restructuring of specialized lending institutions. - Modernizing social housing finance. - Strengthening supervision in capital markets. - Developing the process of maturity transformation of savings. In addition to the consultations with the three countries mentioned above, the Fund sent in 2003 the first consultation mission to the Comoros to review its economic conditions and determine the extent to which the country can benefit from the Fund s resources. The objective of the Fund s mission also included the provision of technical assistance related to a feasibility study of a new commercial bank. The Comoros Islands became a member country in the Fund in 1999 and has paid its share in the Fund s capital in March 2003. The consultations focused on issues related to the lagging growth rates that are mainly due to the country s political problems. Since the eighties, growth rates have remained at levels below those of population growth, leading to an increase in the number of people living below the poverty line to about 60 percent of the population. The fiscal position of the government was also affected by the unstable political situation, the weak economic performance, the limited availability of donors assistance, and the inadequate collection of custom duties, which constitute the most important source of government revenues. The fiscal deficit in 2002 was about 3.4 percent of GDP. 18
As for the external sector, it is estimated that in 2003 the overall balance of payments will run a deficit of about AAD 791 thousand, following surpluses during 2000-2002, due to an increase in the deficit of the trade balance. It is estimated that the value of exports will drop by about a third of its value in 2002 due to the lower prices of the country s major exported goods. In addition, current transfers are expected to decline by about 11 percent compared to their 2002 level, as a result of the decrease in official transfers. The consultations also highlighted the importance of reaching a political settlement that would provide an opportunity to implement a reform program supported by the international community. Within this framework, and in support of the authorities efforts to limit the deterioration of economic conditions, it was agreed that the Fund would extend an Automatic loan to the Comoros. Arrears At the end of 2003, the total overdue principal and cumulative interest payments amounted to about AAD 150.2 million. Of this total, about AAD 64.7 million are overdue payments of principal and AAD 85.5 million are overdue payments of interest, as shown in the Table (3) below. Table (3) Arrears: Principal and Interest on Arrears as at 31 December 2003 Somalia Iraq Country Principal Overdue 14,877 49,850 Interest in Arrears 29,922 55,567 (AAD Thousand) Total Arrears 44,799 105,417 Total 64,727 85,489 150,216 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, and approved by the Board of Governors in its resolution No. (7) for 2001 issued on 29 September, 2001. 19
Investments The Fund s investment activity aims at preserving and expanding its internal financial resources to ensure the support of its objectives as set forth in its Articles of Agreement. The Fund s Investment Policy is composed of the principles stated in its Articles of Agreement and is based on the Board of Governors and the Board of Executive Directors Resolutions regarding the broad Investment Guidelines. The Fund has established conservative guidelines that put the safety of principle at the forefront followed by the ease of liquidity and transferability of the selected investment instruments. Within the Fund s conservative investment policy and its role as a regional monetary institution and taking into consideration the identified acceptable investment risk parameters, it endeavors to achieve the maximum possible returns. During 2003 the investment environment has been characterized by improved international economic growth particularly during the second half of the year. The increase in the USA GDP growth rate and that of Japan, and the Asian emerging countries, in an environment of low inflation readings and continued efforts of the monetary authorities in the major industrial countries to maintain lower interest rates, has led to improved equity markets, the rise in investment flows and increase in consumer s confidence. Exchange rates development during 2003, witnessed the decline of the USA dollar vis-àvis most other major currencies. This has been attributed to a number of factors, such as the declining interest on USA dollar short-term deposits compared with other major currencies, along with the rise in the volume of the USA balance of payments deficit. The Fund continued to have its investments portfolio denominated in SDRs, being AMF effective base currency, and its component currencies in order to ensure protection from foreign exchange fluctuations. The Fund has been also keen to deal with good rated banking and financial institutions, and it is regularly monitoring these institutions to reduce the impact of investment risks on its investment assets. 20
In Percent 6 4 2 0-2 -4-6 Chart ( 3) : Change in Exchange Rates of the Four Major currencies against SDR in 2003* January February March April May June July August September October November December U.S. Dollar EURO S. Pound J. Yen * SDR rate vis-à-vis other currencies as at 31 December 2003 : 1.485972 for US $, 0.832617 for the Sterling Pound, 1.178968 for the Euro, 158.865243 for the Yen compared to the following rates as at 31 December, 2002 was as follows: 1.359524 for US $, 0.843482 for the Sterling Pound, 1.295895 for the Euro, 161.293902 for the Yen. Under these circumstances, which prevailed the financial markets, and with the continued large fall in interest rates during 2003, the Fund s investment portfolio managed to achieve good returns taking into account the Fund s adherence to the conservative approach in managing its investments. The Fund s investment activity consists of internally and externally managed portfolios representing about 57 percent and 43 percent respectively. The return on the internally managed investment portfolio, recorded an average annual rate of 2.73 percent, while for the externally managed portfolios, the annual rate of return achieved was 3.26 percent. In Percent 5 4 3 2 1 0 Chart (4) : Average Rate of Interest on Three Months Deposits during 2003 January February March April May June July August September October November December S.D.R. U.S. Dollar EURO S. Pound J. Yen 21
The investment functions of the Fund are not only limited to managing its own resources, but extend to manage funds for the Arab Trade Financing Program, the Unified Account of the Specialized Arab Organizations and the AMF Employees Pension Fund, totaling altogether US $ 137 million as at 31 December 2003. In addition, the Fund continued strengthening its activity in the acceptance of deposits from Arab central banks and monetary agencies, which amounted to US $ 1219 million as at the end of 2003, compared to US $ 972 million as at the end of 2002. Moreover, the Fund, and in the context of its cooperation with Arab central banks and monetary agencies, has continued to provide periodical reports on capital market developments, and also coordinates with major international investment institutions in the provision of specialized training programs and seminars in investment activities for officials of its member countries through its Economic Policy Institute training program. 22
Arab Capital Markets In its quest for increasing the understanding and awareness of investment culture and in availing adequate information about Arab capital markets to both local and foreign investors, the Fund took the initiative of establishing a database for Arab capital markets in 1994. The joining arrangements of the markets in Sudan and Algeria to the database was completed in 2003 to increase the number of markets already joined the Arab database to fourteen. By virtue of the memorandum of understanding signed with these two markets, the Fund provided them with the necessary equipment and the software that will allow the two markets to furnish the Fund with the necessary reports and data concerning their activities. It is worth mentioning also that the activities of the two markets were included in the quarterly bulletin of the Fund in the first quarter of 2003. The Fund continued to publish the daily data about Arab capital markets activities which particularly include market capitalization, the number of shares and value of stocks traded, the number of transactions and the number of companies listed in the market. It also contains indices calculated by the Fund in a unified methodology for each market, as well the composite index which measures collectively the performance of the participating capital markets published on the Fund s web page on the internet on daily basis. The Fund s intention in publishing these data and the information concerning the activities of the Arab capital markets on daily basis is to make it possible for the investors to take the right investment decisions. The regular publication of the Fund s quarterly bulletin about Arab capital markets continued this year. In addition to the regular analysis and performance of those markets contained in the bulletin, it also includes economic developments that might have bearings on the activities of such markets, as well the legal and institutional developments that affect the said markets. The Fund issued four issues of the quarterly bulletin during 2003 which raises the total number of issues to thirty-six. The last issue of the quarterly bulletin of 2003, indicated that the performance of Arab capital markets has improved compared to the previous year. The Fund s composite index which increased by 40.9 percent to reach 141.9 points. This has been the highest point the index had ever reached since the beginning of its calculation in 1994. The volumes of these markets also witnessed a substantial increase as the market capitalization increased 23
by 73.2 percent to reach about US$ 361.825 billion at the end of 2003 compared to US$ 208.858 billion at the end of 2002. The volume of trade also increased as the total value of shares traded increased by 252.3 percent to reach about US$ 230.417 billion in 2003, compared to US$ 65.400 billion. The number of shares traded also increased by 37.5 percent to reach about 63.4 billion shares in 2003, compared to 46.1 billion shares in 2002. In addition to these quantitative improvements, the majority of Arab capital markets have witnessed a number of developments in areas relating to the institutional and legal by-laws governing those markets. In this regard, most Arab capital markets took the right path by separating the legal and the supervisory authorities from the executive powers, and instituting a regulatory, legal and the procedural framework that is commensurate with the international criteria, which will ultimately be reflected positively on the economies of those countries, as well as facilitating privatization and enforcing further reliance on the private sector. In other related areas intended to boost the relations with regional and international institutions working in the field of capital markets, the Fund participated in the fifth forum conducted jointly by the World Bank and the OECD on The Development of Government Bond Markets which took place in Washington during June 2003. The Fund also participated in the 28th annual meeting of the Islamic Development Bank, which was held in Kazakhstan in September. Finally, the Fund participated in the specialized conference on capital markets, which was held in Jordan during December 2003 at the headquarters of the Jordanian Securities and Exchange Commission (SEC) in the collaboration with the American Securities and Exchange Commission (SEC). 24
Training The Economic Policy Institute (EPI) of the Fund organized during 2003 nine training courses in the areas of Macroeconomic Management and Financial Sector Issues, Anti- Money Laundering, Banking Supervision, Financial Sector Reform Policies, Price Statistics, Financial Programming and Macroeconomic Policies, Monetary and Financial Statistics, Fixed-Income Portfolio Management, Expenditure Management, in addition to a workshop on Debt Management, a seminar for the media on the occasion of the IMF/WB annual meetings in Dubai, and finally a seminar for high ranking officials on Financial Sector Development and Economic Growth. This brings up the number of courses and workshops organized by the EPI since its inception until end of 2003, to 107 courses and 9 workshops in which 3,577 trainees participated. Macroeconomic Management & Financial Sector Issues Under the joint Regional Training Program (RTP) with the IMF Institute this course was held in Tunisia during 21-31 January 2003 in collaboration with the Central Bank of Tunisia. The course addressed issues pertinent to macroeconomic reform policies and programs, and discussed the theoretical fundamentals and aspects of policies pertinent to capital markets and their management. Thirty-five participants from sixteen member countries attended the course. Anti-Money Laundering This course was offered under the joint RTP with the IMF Institute. It was held at EPI headquarters during 18-20 February 2003. The course dealt with core issues pertinent to anti-money laundering and the financing of terrorism through surveying the risks encountered by the financial system as a result of money laundering, the role of international and official national bodies concerned with anti-money laundering and the practices required to fight such operations. Thirty-two participants from nineteen member countries attended the course. Banking Supervision EPI organized this course at its headquarters in collaboration with the Bank of International Settlements (BIS) during 23-27 February 2003. It aimed at surveying recent methods, developments and practices in banking supervision pertinent to risk 25
management and internal controls. Thirty-seven participants from eighteen member countries attended the course. Financial Sector Reform Policies EPI organized this course in collaboration with the Bank of Algeria in Algeria during 9-13 March 2003. It surveyed aspects and methods of financial and banking sector reforms. Thirty participants from Algeria, Tunisia, Libya, Mauritania, and Morocco participated in the course. Price Statistics The course was given under the joint RTP during 27/4-8/5/2003 at EPI headquarters. The course surveyed rules and methods of price data collection. It primarily focused on consumers and producers price indices, in addition to indices pertinent to foreign trade statistics. Twenty-nine participants from nineteen member countries participated in the course. Financial Programming and Macroeconomic Policies This course was organized under the joint RTP with the IMF Institute at EPI headquarters during 15-26 June 2003. It aimed through the presentation of case studies to enable the participants 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 objectives. Thirty-seven participants from twenty member countries participated in the course. Monetary and Financial Statistics This course was organized under the joint RTP with the IMF Institute and was held during 31/8-18/9/2003. It dealt with the rules and procedures to collect and classify monetary variables and entities in accordance with the latest edition of the manual on monetary and financial statistics, together with the recent developments in this area in light of recent successive financial openness and developments. Thirty-two participants from nineteen member countries attended the course. 26
Fixed- Income Portfolio Management EPI organized this course at its headquarters in collaboration with Morgan Stanley during 12-15 October 2003. The course surveyed concepts and investment tools and techniques of managing fixed income portfolios. Special attention was given to the recent developments in this area. Thirty-five participants from nineteen member countries participated in the course. Expenditure Management EPI offered this course at its headquarters under the RTP with the IMF Institute during 28/9-9/10/2003. It dealt with the analytical aspects and applied practices pertinent to public expenditure policies and social safety nets. Thirty-four participants from nineteen member countries attended the course. Workshop on Public Debt Management Under the joint RTP, EPI organized this workshop at its headquarters in collaboration with the IMF Institute during 25-29 May 2003. The workshop defined the main issues pertinent to policies of public debt management. It surveyed the experiences of some Arab countries and the modalities followed by them in managing public debt, the problems encountered in improving the position of public debt and mitigating its burden on the economy. Thirty-five participants from fifteen member countries participated in the workshop. Seminar on International and Regional Issues EPI organized this seminar at its headquarters in collaboration with the IMF external relations department during 17-18/9/2003. The seminar aimed at identifying to the media recent regional and international issues, and the efforts that international and regional institutions are undertaking to tackle the financial and economic problems encountered by both the developed and developing countries. Twenty-two members of the media from seventeen member countries participated in the seminar. 27
Seminar on the Financial Sector Development and Economic Growth EPI organized at its headquarters in collaboration with the IMF Institute a seminar for high ranking officials during 7-8/12/2003. The seminar surveyed and discussed the correlation between financial development and economic growth. It dealt with means and policies that facilitate the effective promotion of financial instruments, institutions and markets. The seminar surveyed as well case studies of some emerging Arab and foreign economies. Forty-five Arab and foreign high ranking officials participated in the seminar. 28