G7 finance ministers last night identified oil prices as the main risk to the global economic outlook, while US Treasury Secretary John Snow declared that 'supply disruptions that raise prices put a damper on growth.'
The ministers also made a new commitment to fully fund costs of the Gleneagle debt relief proposals.
The cloud hanging over the meeting was Hurricane Rita, which has sent oil prices soaring and raised the spectre of inflation. But Snow insisted that there was a silver lining: that the immediate slowdown in the US economy entailed by these natural disasters should mean that 'rebuilding activities are likely to boost growth in early 2006.'
The ministers called for significant investment in exploration, production, energy infrastructure and refinery capacity. 'Oil producing countries should ensure a favourable investment climate, open markets with transparent business practice and stable regulatory frameworks,' they said. They called for 'improved timeliness, quality and transparency of oil market data and increased medium term energy supplies and efficiency.'
The G7 ministers issued their usual warning about 'excess volatility and disorderly movements in exchange rates', but offered a tribute to China for its latest move on the yuan. 'We welcome the recent decision by Chinese authorities to pursue greater flexibility in their exchange rate regime' which should Òimprove the functioning and stability of the global economy and the international monetary system,' they said.
The seven ministers urged action on the G8 debt reduction proposals agreed at Gleneagles, and made a new commitment to debt relief and to funding shortfalls in the World Bank's International Development Association that might result from the initiative.' We call upon all shareholders of IDA, African Development Fund and IMF to expeditiously complete and implement this historic initiative,' the ministers said in their statement.
In a letter to World Bank president Paul Wolfowitz, G8 finance ministers and central bank governors (including Russia) promised to make funds available 'immediately' to cover the cost of debt reduction.
Ministers will 'cover the full cost' during the current IDA replenishment period (IDA-14). They also made clear that such funds would be 'additional to the resources already agreed during the IDA-14 replenishment.'
The letter said: 'For the period after IDA-14, we are committed to cover the full costs for the duration of the cancelled loans and we will make contributions additional to regular replenishments of IDA. The G8 has committed, as a whole, to the contribution it made under IDA-13 ( 70.19%).'
The G7 statement also noted that the G8 will provide $150 million to the IMF's Interim Poverty Reduction and Growth Facility (PRGF). 'The Fund should move forward immediately to implement the shocks window in the PRGF and Policy Support Instrument. We invite oil producing countries to contribute to the shocks window that would help poor countries respond to commodity shocks, including oil prices.'
The commitment was not without conditions, however. In future replenishment rounds, G8 ministers asked that 'in order to create transparency and accountability . . . the costs of the debt relief initiative and the associated donor contributions be reported separately.'
The statement also made clear that the G7 governments were committed to cover the costs of countries that may enter the HIPC process based on their end-2004 debt burdens.
The G7 took a pioneering step of inviting finance ministers from China and four other non-member countries (India, Russia, Brazil and South Africa) to join them at lunch. This initiative was welcomed by Snow, although Chinese central bank governor Zhou Xiaochuan told Emerging Markets that the meeting was too short to be meaningful.