Rodrigo de Rato

International Monetary Fund Managing Director Rodrigo de Rato on Monday said the US dollar was overvalued and needed to fall further.

"As the IMF looks to a medium-term stability of currencies, we still see that the dollar is overvalued," De Rato said in remarks to reporters. "We still see room for further depreciation and if you look at future markets, you will see that markets are more or less seeing the same."

De Rato, who was speaking ahead of the upcoming meetings of the IMF and World Bank, said the euro was very near an "equilibrium" value, and he repeated a call for China to allow greater flexibility in its yuan currency.

Reports said that the IMF had cut the forecast by 0.4 percentage points from its previous estimate of 5.2% in response to the credit market turmoil.

Rodrigo de Rato said that the increased vulnerability was due to financial conditions rather than the underlying evolution of imbalances, which he said had "not got worse". The IMF Managing Director said the US was slowing its external deficit but "not to the extent we would like to see".

De Rato said increased investment in the oil producing countries was helpful but added: "We still see that the rebalancing of demand in China has not occurred."

He warned that growth in Europe and Japan, which picked up relative to US growth over the past year, helping to stabilise the huge US current account deficit, would probably slow because of the credit squeeze.

De Rato said the world's big economies needed to step up their strategies to reduce vulnerability to a disorderly adjustment of imbalances, that could lead, for instance, to a sharp fall in the dollar with an accompanying rise in risk premiums and interest rates on US assets.

He urged them to implement the agenda laid out by the IMF in multilateral consultations on global imbalances, which highlights the need for more public and private savings in the US, structural reforms in the eurozone and Japan, and greater currency flexibility in China and other big emerging markets.

De Rato said the impact of the decline in the US dollar on the US deficit would be limited. He added that while the IMF was forecasting a reduction in the deficit next year, it would not be a substantial reduction.

Transcript of press briefing.

Finance ministers and central bank governors from around the world gather in Washington October 20-22 for the IMF-World Bank Annual Meetings amid conflicting signs about prospects for the global economy and renewed pressures for IMF reform.

With several stock markets nudging record highs in recent days, traders appear to have set aside August's worries about the worst credit crunch in a decade triggered by the collapse of the subprime mortgage market in the United States.

But with world oil prices at close to record highs and a falling dollar causing worries to leaders in some advanced and emerging market economies, policymakers will be anxious to discuss the outlook for the global economy, which has been clouded by recent turbulence in financial markets.

The IMF is scheduled to announce its forecast for global growth on October 17 when it releases its latest World Economic Outlook (WEO). It is expected to revise downwards its forecast for 2008. But growth is still expected to remain solid, buoyed by strong growth in emerging market and developing countries.

Wake-up call

IMF Chief Economist Simon Johnson says that the immediate impact of the market turbulence should be modest, but adds that the problems in the U.S. subprime market and elsewhere should serve as "a wake-up call."

"Weaknesses in the global financial and economic system were revealed, some clearly and some less clearly. We need to work hard to understand precisely and to fix these weaknesses now, before it is too late," he told reporters in Washington last week during the release of the WEO (World Economic Outlook) analytic chapters.

Rodrigo de Rato, who steps down as IMF Managing Director at the end of October, says he wants the meetings to include discussion about enhanced international cooperation in monitoring global financial markets and in coordinating their regulation. "The Fund, together with other international institutions, has to play a role here, as we did in catalyzing the formulation of plans by major economies to address global imbalances," de Rato told a meeting of the Club of Rome last month.

New IMFC chairman

The global outlook and ways of improving oversight of financial markets are likely to be discussed during the October 20 meeting of the IMF's International Monetary and Financial Committee (IMFC). The 24-member committee, which provides political direction and policy guidance to the IMF, will be chaired by Italian Economy and Finance Minister Tommaso Padoa-Schioppa, who was selected this month to succeed the U.K.'s Gordon Brown.

De Rato will provide the IMFC with updates on the IMF's work—including in the areas of economic surveillance and crisis prevention, reducing global payments imbalances, the use of IMF resources, IMF governance, and ways of bolstering its income while curbing expenditure.

Prospects for global growth, the impact of market turbulence, aid for low-income countries, and climate change are among the broad range of issues that will also be discussed at a series of seminars held over four days, starting on October 19. Speakers will include central bankers, private sector leaders, and prominent economists.

Impending transition

A sub-text of the meetings will be the impending transition between de Rato and Dominique Strauss-Kahn, who will take over as Managing Director on November 1. The 58-year-old former French finance minister was selected last month to succeed de Rato, who had announced his resignation in June.

Strauss-Kahn has said he will press ahead with reform of the 185-member international institution that helps oversee the global economy. Shortly after becoming managing director in 2004, de Rato had initiated a program of reform to ensure that the IMF remained attuned to the needs of members in a globalized economy. He has made substantial progress in several areas, but key issues still on the agenda that are likely to come up during the Annual Meetings include:

Improving IMF economic surveillance: As part of a number of initiatives to strengthen its surveillance framework, the IMF's Executive Board approved in June 2007 a new Decision on Bilateral Surveillance, replacing its predecessor adopted 30 years ago.

The new decision, widely endorsed by the IMF's membership, is the first comprehensive policy statement on surveillance. The IMF's Executive Board has asked for more detailed guidance on how the decision will be implemented.

Enhancing IMF lending facilities: Discussions continue on reinforcing the IMF's crisis prevention tools for emerging market countries active in capital markets. A round of consultations have been held with the membership on a new loan facility that would provide automatic high access to Fund resources. Further discussions will be needed to finalize some features of the facility and ascertain its potential demand by members.

Clarifying IMF role in low-income countries: The IMF, under scrutiny from critics and its own official watchdog over its approach to the use of aid in low-income countries, is taking steps to clarify its role in advising members in the face of high and volatile aid inflows. The Executive Board has endorsed a number of changes that modify policies to reflect experience and external feedback.

Enhancing Bank-Fund collaboration: Drawing on the recommendations of an independent panel—the Malan Report—the World Bank and the IMF will implement an action plan to improve coordination of activities with member countries and enhance collaboration on policies and other institutional issues.

Improving IMF governance. The IMF is working on a two-year package of reforms agreed to by the IMF Board of Governors at the Annual Meetings in Singapore last year to improve representation of members at the Fund. Four dynamic economies—China, Korea, Mexico, and Turkey—that were clearly underrepresented were given ad hoc increases in their quota, which determines their voting power. Other changes being discussed include agreement on a new quota formula to guide the assessment of the adequacy of members' quotas in the IMF; a second round of ad hoc quota increases based on the new formula; and work on a proposal to increase the basic votes that each member possesses—a measure that would protect representation for low-income countries.

Strengthening IMF income while reducing expenditure. Work is underway to provide sustainable sources of income for the IMF. Some recommendations made by an independent panel—the so-called Crockett Report—are being shaped into proposals for a decision by the Fund's membership. Simultaneously, the IMF is addressing the expenditure side of the ledger, with the budget projected to decline in real terms by 6 percent over the next three years.