Oil fears cloud G7 outlook as finance ministers meet

The high price of oil will be one of the main concerns of finance ministers and central bankers meeting in Prague next weekend for the G7 and International Monetary Fund meetings. At the weekend, Gerhard Schröder, the German chancellor, said the leading industrial countries would call on Opec to "reconfigure" the price.

The high price of oil will be one of the main concerns of finance ministers and central bankers meeting in Prague next weekend for the G7 and International Monetary Fund meetings. At the weekend, Gerhard Schröder, the German chancellor, said the leading industrial countries would call on Opec to "reconfigure" the price.

The IMF's official outlook for the world economy, due to be published tomorrow, will forecast the best global growth rate for 12 years. But there is growing concern that the oil price will lead to slower growth and higher inflation unless it starts to decline soon.

Most economists think the impact of the increased cost of oil is unlikely to be dramatic, as long as the price declines by around $10 from its $34-plus by next year. If this happens, world growth is likely to be around 0.5-1.0 per cent slower than it would be otherwise, only a modest impact given such a healthy background.

Nevertheless, the widespread political protests have focussed the minds of G7 ministers on the issue, downgrading the rest of the agenda.

Protesters demonstrating on the streets of Prague will, however, keep debt relief and the war on poverty in the spotlight. The G7 meeting on Saturday is expected to repeat a pledge given recently by Horst Köhler, the new IMF chief, that by the end of this year the number of poor countries granted improved debt relief will have doubled from 10 to 20.

New reports this morning from campaigners Jubilee 2000 and aid agency Oxfam both urge an even better package of debt relief. The Oxfam report notes that some of the countries qualifying under the present IMF scheme will still be spending far more on interest payments than they spend on health and education.

Meanwhile, Jubilee 2000 argues that the IMF could afford to write off all the debt owed by the very poorest countries, rather than the third it proposes cancelling under the current scheme. It calculates that poor countries made net payments of $5.7bn to the arm of the World Bank that makes long-term loans and $1.06bn to the IMF in the period 1992-98.

The meetings in Prague are expected to result in a series of announcements on reform of the "international financial architecture", a process under way since the global crisis of 1997-98. Both the IMF and World Bank have updated their loan arrangements, and great progress has been made on improving transparency and standards, for example in banking, in the emerging and developed markets alike.

However, two important questions will probably remain unresolved. One is how to involve private sector banks in the resolution of future crises. The G7 governments are determined that commercial lenders should get the message that there will be no automatic bail-out from public funds in future but have been unable to agree on what the rules for rescheduling private sector debt ought to be.

A second issue is the management of the IMF itself. While the new managing director has made it clear he is determined to reform the organisation, making it focus on core activities and work better with the World Bank, officials believe he will need strong support from the leading governments to modernise the IMF in the face of a deeply entrenched bureaucracy.