y v reddy : the global economy and financial markets - sustaining the recovery statement by dr y v reddy, governor of the reserve bank of india and leader of the indian delegation on behalf of bangladesh, bhutan, india and sri lanka, to the international monetary and financial committee ( imfc ), washington, dc, 24 april 2004. * * * mr. chairman the global economic environment has improved significantly since we met last september in dubai when the outlook for the global economy was weighed down by some uncertainties and risks. the recent strengthening of the global recovery process has been led by buoyant growth in emerging asia, especially china and india and, of course by a robust turnaround in the us. incipient recovery appears to have set in in the euro area while the economic activity in japan has exceeded expectations. the resurgent growth in many emerging market economies ( emes ) is now accompanied by significant resilience and emes are now positively contributing to the world growth. the determinants of global growth and the policy requirements for sustaining the present momentum, both at regional and multilateral levels, need to be evaluated in the light of this beginning of a significant rebalancing of economic strengths and activity. the improved global recovery has been accompanied by a strong acceleration in world merchandise trade, particularly from emerging asia, japan and euro area. with renewed improvement in sentiment, investment has also picked - up in most regions, which should in the normal course augur well for sustaining the recovery process. reflecting improved investment opportunities and receding systemic risks, capital flows to emerging markets have also improved. at the same time, the risk of deflation in several industrial countries has begun to subside with growing recovery and rising commodity prices. risks have been mitigated by improved liability management through readjustment of maturity structure of external debt, build up of foreign exchange reserves, and improved credit quality. the domestic bond market has also received added fillip in many countries. international financial markets have remained orderly and buoyant. while resilience against shocks in emes has strengthened, it is still an open question whether the anecdotal “ herding behaviour ” of investors is tempered by the “ maturation process ” of the investing community across the globe. this factor continues to be a critical issue for policy - makers in emes. although overall global growth prospects have improved markedly, uncertainties still remain. significant challenges and risks which still persist include possibilities of disruptive global currency adjustments, continued

banks to take additional capital. i find it to some extent peculiar that host supervisors and subsidiaries of banks headquartered in the eu, as a part of the vienna initiative, agreed regarding the carrying out of stress testing, and if necessary, recapitalization. but such an exercise is not foreseen in the home country. in addition to that, lending should be revived as well, but for this, i admit, i do not have a ready made formula how to do it. third, the vienna initiative should be extended to the entire region as i in belgrade could sleep much more calmly if the majority of the countries would have such an agreement. once we have finalized our deal, i hope in a matter of days, the deal makers should focus on all other countries as spill over effect is very large : a rumor regarding any bank in serbia or croation circulates in the region in matter of hours and could cause irreversible damages. fourth ifis ’ money should start rolling – as we are entering a crucial time period of the crisis in the second half of this year. time of statements, commitments, letters of intent etc. is over ; banks, investors, debtors need nothing more but money. the proof of the pudding is in eating, and this is now the time to proof what do the ifis stand for. last but not least, politicians in the region must manage realistic expectations and get ahead of the curve. this cannot and should not be done by brussels ( eu ) or washington ( imf / wb ). politicians in most of the countries do look down to the local population although they are pretty much aware how this crisis will affect them. it is finally time to be proactive, serious and stop spreading false expectations. the situation today in the region, to some extent, is even more serious than at the beginning of the transition process : this time tough reforms must be made just for, in the best case, to maintain the current standard of living!