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[Title] Strengthening the International Financial System and the Multilateral Development Banks (Report transmitted by G7 Finance Ministers to the Heads of State and Government)

[Place] Rome, Italy
[Date] July 7, 2001
[Source] http://www.esteri.it/g8/index.htm
[Full text]

Strengthening the International Financial System and the Multilateral Development

(Report transmitted by G7 Finance Ministers to the Heads of State and Government)

A. Introduction

1. The international financial system is central to the functioning of the global economy. It provides a framework that facilitates the exchange of goods, services and capital, and that sustains sound economic growth. A central objective for us, the Finance Ministers of G7 countries, is to foster the continuing development of the conditions necessary for financial and economic stability, which in turn are essential if the benefits of global economic integration are to be sustainable and broadly shared.

2. The financial crises in emerging market countries over the past decade have underscored both the costs of financial instability and the speed with which problems in one country can spread to others. Finding ways to limit the occurrence of financial crises, and the severity of those that do occur, has been central to our work agenda in recent years.

3. We identified, at the time of the Cologne Summit, in June 1999, a number of proposals aimed at promoting stability of the international financial system and improving its capacity to withstand the challenges of future crises, including reforming the Bretton Woods institutions, and adopting the appropriate policies to reduce systemic risks.

4. Last year in Fukuoka, we reviewed the major steps taken to further the principles and recommendations outlined in Cologne, in particular efforts by many developing countries to promote financial stability, including the adoption of appropriate foreign exchange regimes and of internationally agreed standards and codes, and the strengthening of domestic financial sectors. We also discussed improvements of the governance and efficacy of activities of the International Financial Institutions (IFIs) including the progress by the International Monetary Fund (IMF) in the assessment of standards and codes, the involvement of the private sector in the prevention and resolution of financial crises, and the enhancement of transparency and accountability in all areas of IFIs operation.

5. In Fukuoka we agreed to continue our efforts to strengthen the international financial architecture by focusing on the reform of the IMF and of the Multilateral Development Banks (MDBs), on responses to the challenges posed by Highly Leveraged Institutions (HLIs), Offshore Financial Centers (OFCs) and cross-border capital movements, and on regional cooperation.

6. Since last year, substantial progress has been achieved in a number of key areas:

a) A major review of IMF lending facilities has been completed, to enable a more efficient use of resources and to enhance the catalytic role of official financing. The reform of the IMF contingent credit line facility is aimed in particular at strengthening the Fund's role in crisis prevention.

b) The IMF has undertaken important initiatives to strengthen financial sector surveillance. We welcome, in particular, the recent establishment of the International Capital Markets Department,and of the Capital Markets Consultative Group to develop a constructive dialogue with the private sector.

c) The IMF has resolved to put crisis prevention at the heart of its activities, and to intensify its efforts in developing vulnerability indicators and an early warning system. We also appreciate the ongoing work to prioritize and focus conditionality and enhance countries' ownership.

d) The Fund and the World Bank (WB) have considerably intensified their efforts to increase collaboration in the financial sector. In particular, we stress the importance of the joint IMF and WB efforts to assess the strength of the financial sector through the Financial Sector Assessment Program (FSAP) and welcome the increased use of FSAP and ROSC (Report on the Observance of Standards and Codes) as essential instruments to identify countries' vulnerabilities.

e) The Fund and the Bank have also started collaborating in the poorest countries to fight poverty and make progress towards the international development goals.

f) We welcome the progress that has been made at the IMF in making operational a framework for private sector involvement, with a view to reinforce market discipline and provide orderly adjustment.

g) Significant measures to enhance the transparency and accountability of the Bretton Woods institutions have been put in place. In particular, an independent Evaluation Office (EVO) has been established at the IMF, and will help the Fund to increase the effectiveness of its work and enhance accountability. We look forward to its future work. We also note the need for further discussion on quotas at the IMF Executive Board.

7. Against this background, we reaffirm our commitment to step up our efforts to reduce volatility and improve the functioning of the international financial system. In this respect, we will continue to foster international consensus and action on:strengthening transparency in both the public and private sector; improving prudential regulation and supervision and fighting against abuses of the international financial system; implementing the strategy laid down last year by the International Monetary and Financial Committee (IMFC) for preventing and managing financial crises, including through private sector involvement.

8. Strong and effective crisis prevention and resolution remains a top priority in our agenda and substantial work remains to be done to further strengthen the international financial system. In this respect, this report focuses on private sector involvement, on the implementation of internationally agreed standards and codes,and on the process of opening access to international capital markets.

9. The report also addresses the reform of the MDBs to make their activities more selective and focused on poverty eradication, an issue which was raised last year in Fukuoka.

10. We will work in cooperation with the other members of the international community to ensure the implementation of these measures.

B. Private Sector Involvement in Crisis Prevention and Resolution

11. Private sector involvement in the prevention and resolution of financial crises is an integral part of our efforts to strengthen the international financial architecture. While the IMF has an essential role to play, official resources are limited in relation to private financial flows. The engagement of private investors is thus essential for the resolution of payments imbalances in crises and for the restoration of medium-term sustainability. To strengthen market discipline and promote a stable flow of finance to emerging markets, the official sector needs to avoid creating expectations that private creditors and investors will be protected from losses. At the same time we reaffirm that our aim in crisis management is not to encourage default, but rather to promote agreement between debtors and creditors on cooperative, voluntary steps to help the debtor overcome its payments difficulties.

12. We welcome the progress that has been made recently to involve the private sector in the resolution of financial crises and underscore the need for further progress. We agree on the need for further efforts to implement a range of measures, in particular:

- we stress the importance of information sharing and enhancing the dialogue between countries and their private creditors, both during normal periods and when addressing emerging pressures in the external account. We encourage countries to establish mechanisms to support a dialogue with creditors and call on the Fund to support this process;

- we also agree on the importance of collective action clauses to facilitate orderly crisis resolution. The IFIs should encourage the use of such clauses through their operations.

13. We welcome the agreement by the IMF to take forward further work on the framework for private sector involvement with a view to achieving greater clarity, taking into account the need for operational flexibility. In particular, further efforts are needed to:

- review the requirements and procedures used to determine access to IMF financing, including clarifying and strengthening them as necessary in order to reinforce the exceptional character of large official rescue packages. Exceptional financing, through any IMF facility, requires extensive justification. For instance, there should be evidence that the country has experienced a sudden, disruptive loss of confidence; that an early correction of difficulties is expected; and that there is a risk of contagion that could pose a wider threat to the stability of the international financial system. It should also take into account efforts by the debtor country to secure participation by private investors.

- enhance the analytical basis for the Fund's assessment of a country's financial position. Programmes should include thorough analysis of the country's medium-term debt and balance of payments profile, and prospects for regaining market access. To this end, the Fund should also provide detailed information and programme assumptions about sources of private financing and reinforce the monitoring and assessment, as appropriate of private flows during programme implementation;

- review the experience with the Fund's policy for lending into arrears;

- strengthen the relationship and increase coordination between the IMF and the Paris Club in the process of assessing the level and scope of participation of private creditors in debt restructuring cases, especially concerning comparability of treatment; and

- ensure that all programmes are subject to transparent ex-post monitoring and evaluation, with a view to assess the involvement of the private sector against the assumptions made in the programme.

14. We will review progress on this issue early next year.

C. Surveillance and Implementation of Standards and Codes

15. We reaffirm our commitment to promote the implementation and surveillance of internationally agreed codes and standards, in particular the 12 key standards identified by the Financial Stability Forum (FSF). Their implementation is in the economic interest of all countries, and ownership is an important element in this process. We welcome the contributions of the many different actors, including the IMF, the WB and the FSF, in making it possible for countries to implement codes and standards and in assessing their compliance. These efforts should be continued and coordination among the relevant institutions (IFIs and standard-setting bodies) strengthened to ensure that all inputs are effectively integrated.

16. We underscore the importance of continuing to identify market and official incentives to encourage compliance with international codes and standards as well as the need to continue raising market awareness of the significance of codes and standards and their relevance to private sector pricing and allocation decisions. In this respect, we welcome the ongoing work of the FSF working group on incentives and call on the IMF to continue analyzing the benefits associated with implementing codes and standards.

17. Technical assistance and support is crucial to ensure that no country is left behind in the global effort to raise standards. We welcome the important contribution of the IMF, the WB and national authorities toward addressing resource constraints to implementing standards by providing advice and assistance. The IFIs should catalogue and assess these technical assistance resources and demands to ensure that support is channeled effectively. We agree to make every effort, working together with the IFIs, the FSF and the international regulatory and supervisory bodies, to consider ways to supplement the amount of human, technical and financial resources available to assist countries to implement codes and standards. In this respect, we welcome the commitments that have been made so far. We also welcome the work of the G20 in promoting dialogue on the importance of codes and standards, the appropriate pace of implementation, as well as technical assistance.

18. Significant progress has been made in producing assessments of countries' observance of international codes and standards. IMF-led ROSCs and the joint IMF-WB FSAPs should continue to be the principal and permanent tools for providing independent, authoritative and consistent assessments of individual countries' compliance with codes and standards. We welcome the fact that 133 ROSC modules have now been prepared for 47 countries and that around 52 countries have now completed or committed to undertake an FSAP. Given the importance of enhanced disclosure and transparency in international surveillance, we are encouraged by the fact that 93 ROSC modules have now been published and urge all countries that complete ROSC modules to consider publishing them.

19. We look forward to further participation in ROSC and FSAP initiatives by a range of industrial and developing countries, including G7 countries. In this respect we welcome the commitments made by the Finance Ministers and Central Bank Governors of the G20 to undertake the completion of ROSCs and FSAPs and to promote wider public articulation of commitments to adopt key standards and action plans for compliance.

20. Authoritative information on observance of codes and standards should be fully integrated into enhanced IMF surveillance under Article IV, increasing its effectiveness as a tool for crisis prevention. This is a critical step, and the IMF should work expeditiously to implement it. The work being taken forward in the Fund on the modalities for using codes and standards information to guide and inform surveillance is an important step in this direction and we encourage its early completion.

21. Work to assess compliance with, and to implement, codes and standards needs to take full account of each country's unique development and reform priorities and institutional characteristics. We agree that countries and the Fund should continue to work, together with standard-setters as appropriate, to set priorities and establish action plans for compliance, within the framework of individual economic reform programs. The existing process for assessing compliance, which allows for progressiveimpl ementation of key codes and standards according to country-specific economic circumstances, provides an appropriate mechanism for facilitating prioritization.

22. Since combating money laundering is central to protecting the stability and integrity of the international financial system, we welcome the decision of the IMF and WB to recognize the Financial Action Task Force (FATF) 40 Recommendations as the appropriate international standard for anti money laundering and call on the IFIs,working in collaboration with the FATF, to incorporate the relevant FATF 40 Recommendations into a ROSC module on money laundering as soon as possible.

D. Opening access to capital markets

23. In the Report on Strengthening the International Financial Architecture submitted to the Cologne Summit in 1999, we encouraged the IMF to continue its work on the appropriate pace and sequencing of capital account liberalization. In Fukuoka we re-stated the importance of well-sequenced capital account liberalization, and the need for countries to adopt appropriate macroeconomic, structural and domesticprudential and financial policies. This year, in our report to the Genova Summit, we propose concrete measures to progress in this direction.

24. Mobilizing capital, both domestic and international, is essential for growth. Foreign direct investment (FDI) and productive use of equity flows and borrowed resources are hallmarks of countries that have successfully integrated into the world economy.Capital account liberalization offers the prospect of considerable benefits to emerging market economies, but also poses policy challenges. Countries that wish to pursue the opportunities offered by international capital markets should be encouraged to do so, and should also upgrade their capacity to manage the risks associated with a more open capital account, including the potential volatility of short-term capital flows.

25. Capital account liberalization is an important component of the broader process of financial liberalization. In this context, capital account liberalization should be undertaken as part of an integrated strategy comprising a stable macroeconomic environment (including a sustainable exchange rate policy), a strong prudential framework in the financial sector (including the adoption of relevant standards and codes), appropriate monitoring of statistical data, sound risk and liquidity management practices both in the public and private sectors, and complementary structural (including social sector) reforms, to ensure that liberalization does not create new areas of vulnerability.

26. Opening access to capital market is a complex process that cannot be addressed by a standardized, one-size-fits-all approach. The goal of the international community should be to help countries adopt the appropriate policies towards gaining sustained access to global capital markets, while the final responsibility for adopting those policies rests with individual countries.

27. We call on the Bretton Woods institutions to provide support and expertise to countries seeking access to international capital markets. In order to address effectively these issues, the IFIs may rely on a broad range of tools, including:

a) Policy advice. We welcome the IMF's efforts to provide policy advice on financial sector and capital market issues through the Article IV surveillance process. We encourage the Fund to continue these efforts. We also stress the importance of building on past experience: the country studies that are being undertaken by the G20 should provide important information for countries that are in the process of developing their own strategy towards capital account liberalization. We welcome the recent establishment of the International Capital Markets Department within the IMF. It should enable the Fund to play a leading role in assisting member countries to adopt policies that help them gain or expand access to international capital markets, in close collaboration with the WB and regional development banks.

b) Technical assistance. We encourage the IFIs to further co-ordinate and extend technical assistance on liberalization-related topics, including deepening and broadening domestic financial markets, managing public assets and liabilities, and building capacity to manage the risks associated with capital flows. In this respect, the ROSC and FSAP could provide a useful platform for identifying potential problems, prioritizing and organizing technical assistance and coordinating with other donors.

c) Financial assistance. The WB should strengthen its assistance to countries committed to reform their domestic financial system,including through a Financial Sector Adjustment Loan (FSAL). The IMF should stand ready to support programs which include financial sector reforms relevant to the objectives of the Fund, and which can lay the foundations for successful capital account liberalization.

28. We emphasize the contribution of FDI to economic growth and recognize that it is intrinsically more stable than portfolio and lending flows. We agree that the lack of a proper investment environment, due in particular to weak governance as well as to political and economic uncertainty, is one of the deterrents to foreign capital accumulation and needs to be addressed. The sequencing of reform and liberalization should thus give priority to creating a transparent and solid framework for attracting FDI and harnessing its developmental advantages. In this respect, the credibility of host countries' commitment to liberalization could greatly benefit from the development and implementation of policies promoting non-discriminatory practices,transparency and investor protection. At the multilateral level, a stable and non-discriminatory investment regime could be brought about and maintained through the establishment of a high-standards framework of investment rules. To this end we encourage further work in relevant international institutions, on ways to enhance the predictability and stability of investment regimes in support of liberalization and sustainable development.

29. Competitive and healthy financial markets are essential to build confidence and induce long-term investment. In this respect, financial services liberalization relying on sound prudential regulation is of prime importance in strengthening financial sector efficiency and soundness. We recognize the value of binding commitment to financial services liberalization within the multilateral framework of the GATS. We encourage WTO members to move ahead with progressive financial services liberalization in future negotiations.

30. Concerns for excessive capital flow volatility experienced in the 1990s have revived public interest in restrictions of international capital flows, e.g. in the form of a Tobin tax on international currency transactions. Support for such types of transaction tax generally rests on the belief that it can promote greater financial stability. Several difficulties prevent such a proposal from being a workable tool:

a) By tightening market liquidity, the tax may actually increase, rather than reduce, volatility.

b) Even a high level of taxation is unlikely to constitute a credible deterrent to sudden capital outflows in the face of expectations of large devaluations.

c) It is impossible to differentiate between speculative capital movements and other flows, including short-term trade financing. Hence, the Tobin tax would entailsignificant distortions in international capital flows, leading to lower rates of capital formation and growth.

d) Since it is prone to avoidance and is unlikely to be globally enforced, the Tobin tax could cause capital flows to be directed to less regulated institutions and jurisdictions, thus adding to the instability in the international financial system.

31. The pursuit of further trade liberalization in the context of a broad-based new WTO round of trade negotiations can also contribute to strengthen markets and improve growth prospects, particularly in the developing world. Protectionist and trade-distorting policies must be resisted as they would only accentuate economic and financial uncertainties. We welcome the opportunity of the meeting in Qatar next November to launch a new WTO round, and we emphasize the importance of multilateral trade liberalization for sustainable development of the world economy.

E. The Multilateral Development Banks (MDBs) 1

32. The Multilateral Development Banks are an essential component of the development architecture and have an important role to play in ensuring that the benefits of increasing global prosperity are shared by all countries. In our report for the Okinawa Summit (Fukuoka Report, July 2000), we underscored the importance of strengthening the Multilateral Development Banks to best adapt them to the new challenges. We are committed to moving ahead with this agenda. We stressed that "accelerating poverty reduction in developing countries must be the core role of the Multilateral Development Banks (MDBs). An increased focus on poverty reduction work, including in programs of policy reform,investment projects and capacity building". We also underscored that "economic growth is the primary determinant of a country's ability to raise incomes and reduce poverty and inequality".

33. The MDBs must continue to play a crucial role in combating poverty and supporting equitable and sustainable economic development. Their operations should concentrate on core social and human investment (in particular health and education), enhancing productivity growth and raising income per capita. It is therefore paramount to ensure that the MDBs are fully equipped to effectively fulfill their institutional mandate in a continuously changing international environment. Hence, we have a strong interest in further strengthening MDBs' development impact and their capacity to effectively meet new challenges. Selectivity, accountability and a focus on results are key principles. Important progress has been made by the MDBs over the last few years in sharpening their focus on poverty reduction, improving their effectiveness in supporting development and achieving results, and making their internal governance more accountable and transparent. Work is underway in all these areas at each MDB. We are committed to work with these institutions and the other shareholders to build on these efforts.

34. In order to maximize their development impact, it is crucial that the MDBs concentrate on the basic development priorities that they can best achieve, and work collaboratively among themselves and with other donors to ensure a development framework that is consistent and efficient. This is essential to avoid waste or dilute the impact of scarce development funds. A more selective approach needs to be adopted by the MDBs on the basis of their respective comparative advantages and by better developing synergies and complementarities. They have recently taken important steps in this direction, especially at the country level, in the context of the Comprehensive Development Framework (CDF) and in the context of country-owned development strategies, such as Poverty Reduction Strategy Papers (PRSPs). More could be achieved at the institutional level through an ex ante sharing of tasks in specific areas.

35. We reaffirm that the MDB reform should focus on the following management and operational areas: coordination, internal governance, good governance in borrower countries, pricing issues, global public goods and financial sector reform. The recommendations of this Report are addressed to all the MDBs. At the same time, we recognise that differences in mandate, role and progress already achieved in the different institutions imply that the priorities for reform may differ 2. However, the adoption of best practice everywhere should be the rule.

36. MDB Management has been kept informed of the contents of this report and kept abreast of its development through an open and frank dialogue. We have also held informal consultations with the other MDB shareholders and NGOs/civil society in order to explain the objectives and the contents of the reform effort.

37. Coordination-Improving coordination among MDBs, at the country and institutional level, is essential in order to achieve a more selective approach to development issues, while promoting greater complementarity and avoiding undue overlapping or duplication of efforts. Positive developments at the country level through the establishment of PRSP and CDF processes increase the momentum for pursuing further progress. In this regard we ask the MDBs to:

- strengthen the links between their Country Strategies and country-owned poverty reduction and development strategies under CDF principles to ensure a consistent development framework;

- ensure greater coordination and consistency in substance and timing among their Country Strategies for the same country.

- report to their own Boards by Spring 2002 on the progress towards the alignment of country strategies, indicating when a full alignment will be achieved.

Memoranda of Understanding between the World Bank and the Regional Development Banks (RDBs) are a crucial tool to improve collaboration and efficiency at the institutional level. To this end it is paramount to:

- further strengthen such agreements by identifying the relevant comparative advantages and the Institutions that will coordinate or take the lead in specific areas or sectors;

- conduct periodic independent reviews of the effectiveness in the implementation of the Memoranda of Understanding. The goal would be to continuously identify areas for further improvement, particularly on issues of selectivity and comparative advantages,justify any overlap, and regularly update such Memoranda.

Closer coordination can also be achieved by pursuing harmonization, wherever possible, at the highest appropriate standards, of the key operational policies and procedures, fiduciary and environmental safeguards, financial management and procurement rules among the MDBs. It is therefore vital, as stated by the Development Committee in April 2001, to prioritise and accelerate the harmonization process.

- A progress report on harmonization of procurement and financial management will be prepared by the World Bank, in consultation with the other MDBs, for the Development Committee in Fall 2001. We propose that the MDBs build on this by agreeing on an Action Plan indicating the steps needed to pursue the objective of harmonization. This Action Plan could be a part of the MDBs' contribution to the ongoing OECD/DAC process of harmonization.

38. Internal governance-Enhancing internal governance, accountability and transparency is crucial to enable the MDBs to strengthen their role in the fight against poverty and retain institutional credibility. Over the last few years, significant progress towards greater transparency and openness has been made. However, there is still scope for further improvement. To this end, we call upon the MDBs to:

- strengthen project design and evaluation, to attain clear development goals and objectives and measurement of development effectiveness and results; ensure that all Evaluation Departments also report directly to the Board. The MDBs should consider the preparation of periodic reports on development/transition effectiveness to be submitted to Governors;

- establish or improve existing mechanisms, fully independent from staff responsible for project preparation, to ensure compliance of project proposals with policies and procedures prior to submission to the Board. We look forward to an assessment of the measures taken so far and further proposals being presented by the World Bank and by the RDBs by Spring 2002;

- strengthen or establish inspection mechanisms reporting directly to the Board;

- adopt a more open policy on information disclosure by making draft and final key policy and strategy documents available to the public;

- as a matter of operational urgency, establishing a more transparent budget process by better linking institutional priorities, as agreed upon by shareholders, to the resources allocated in the budget;

- reviewing their internal organisation and take concrete steps to improve their operational effectiveness. In particular, we encourage the World Bank to continue evaluating its internal organisational structure in order to address critical aspects. We look forward to the results of the reorganisation efforts being conducted by the African Development Bank and the Asian Development Bank.

39. Good governance-Good governance is a broad concept, which entails several crucial areas, such as legal and regulatory framework, judicial systems, etc. Over the last few years, the MDBs have put good governance on the top of their agenda and have committed themselves to mainstream it in all their activities. Although the specific nature of governance issues may vary from country to country, strengthening public sector management, accountability and anti-corruption measures should be priorities in all countries. Strengthening public expenditure and budget management, and improving promotion and enforcement of safeguard and fiduciary policies in recipient countries should be the MDBs' principal goals. Adjustment and programmatic lending approaches particularly require sound, acceptable and reliable public expenditure management. We agreed that the MDBs should:

- include in every Country Strategy a review of the country's governance (issues, progress made, reforms underway, commitment to reform and poverty reduction, etc.) with particular focus on public sector management, accountability and anti-corruption measures;

- produce an Action Plan, by Spring 2002, identifying capacity-building needs in the area of public sector management in borrowing countries and assessing their in-house capacity in this field and possible actions to upgrade it, while taking into account the work of other development institutions;

- strengthen analytical and diagnostic work on fiduciary and safeguard policies, developing common methodologies and carry out joint assessments where possible.

40. Lending Instruments and Pricing review-The need for the MDBs to focus on operations targeted at poverty reduction, to be selective in countries with access to private capital, and to enhance the development impact of the resources available, calls for a thorough review of the MDBs' lending instruments and pricing policies. The MDBs are invited to assess whether there is scope for rationalising and streamlining existing instruments within and across the MDBs, especially in the area of adjustment lending and guarantees, to achieve greater coherence and consistency, and to avoid price competition. Pricing reviews-to be undertaken by all the MDBs-should take into account the feasibility, and related financial implications and implementation issues, of price differentiation by instrument, the development impact, and stage of borrower development. They should also take into account the issue of conditionalities across the MDBs. Ongoing work on a comprehensive and new approach to Middle Income Countries (MICs) needs to address the pricing issue, with a view to enhancing the development impact of MDB lending.

We note the current discussions at the Asian Development Bank on the introduction of more favourable terms on Ordinary Capital Resources(OCR) loans targeted to poverty. We also note the ongoing review exercise on IDA pricing, including the increased use of grants within IDA-13, and encourage the World Bank to carefully explore the related financial implications and practical implementation issues.

- The comprehensive review of lending instruments and pricing-to be carried out in the aforesaid terms, and covering all the MDBs-should be completed by the 2002 Spring Meetings of the World Bank.

- As part of this process we note that the World Bank has started working on a comprehensive pricing and instruments review, on which it will report to the Board by the end of 2001. We encourage the early completion of this exercise so that relevant decisions can be taken before the next Spring Meetings.

41. Provision of Global Public Goods (GPGs)-Some development issues both benefit and require the participation of the entire global community. GPGs have a strong impact on development and poverty reduction. In becoming more involved in the provision of GPGs, the MDBs' main priorities should be fighting infectious diseases,promoting environmental improvement, facilitating trade and supporting financial stability. Each MDB should:

- define more explicitly its role in the provision of these GPGs on the basis of its comparative advantages and effective capacity. Each MDB's activity in these fields should be grounded in its core business and country work. The MDBs should work in close collaboration with other UN Agencies, bilateral donors and civil societies, exploiting synergies and effective partnerships. The World Bank should generally play a more active and a coordinating role-vis-a vis the RDBs-given its global mandate.

- show how its engagement in the provision of these GPGs is reflected in its budget allocation and identify the most appropriate modalities for GPG financing. We ask the World Bank in collaboration with the RDBs to prepare a report on these issues by the end of 2001.

42. Financial sector reform-Strong, transparent and well functioning financial sectors are an essential condition for development. The MDBs have an important role to play in helping borrowing countries strengthen their financial sector consistently with their in-house expertise and comparative advantages in this field. The World Bank, where appropriate, should continue developing an active role operating in closest partnership with the RDBs. We welcome efforts to enhance the collaboration between the IMF and the World Bank in supporting financial sector reform in developing countries. In particular, we call on the MDBs to:

- ensure that by the end of 2002 all Country Strategies incorporate financial sector issues;

- play a more proactive role in assisting borrowers, especially low-income countries, in developing institutional capacity and appropriate strategies to meet international codes and standards,including FATF anti-money laundering standards. A joint MDB report, including an Action Plan, on their role in supporting implementation of codes and standards, should be prepared by the end of 2001;

- increase their due diligence relating to transactions and dealings with entities located in Non Cooperative Countries and Territories.

43. Our meeting with the MDBs' Presidents is a tangible expression of our commitment to work with MDB Management and other shareholders to continue strengthening the development effectiveness of these important institutions on the basis of these recommendations. We welcome the proposal made by the MDBs' Presidents that a senior MDB liaison group will monitor progress on these issues and regularly report to the respective Heads and Executive Boards.

44. We will review the progress made for the 2002 Summit in Canada.