Back Matter

Back Matter

Author(s):
International Monetary Fund. Independent Evaluation Office
Published Date:
October 2009
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    Annex 1 Data and Methods

    1. The evaluation essentially covers the period since the establishment of the WTO—1996 through 2007—but goes back further for some questions and focuses on the more recent past for others. The main instruments of the evaluation are: (i) desk reviews of policy documents and guidelines issued to staff, IMF Executive Board minutes, Article IV and program documents, and advocacy and outreach items; (ii) interviews of current and former IMF, WTO, and World Bank staff and government and nongovernment representatives; and (iii) surveys of IMF staff and country authorities. This annex describes the first two sources of evidence; Annex 2 describes the surveys and their main findings. Annex Table A1.1 summarizes the data sources for the various components of the evaluation.

    Table A1.1.Data Sources Used in the Evaluation
    Surveillance DocumentsProgram Documents
    Board

    Papers

    and

    Minutes
    Staff

    reports

    for 1996,

    2000,

    and 2006
    SIPsAll

    Article IV

    documents,

    1996–2007
    Initial

    request

    docu-

    ments plus

    MONA

    data
    All

    program-

    related

    documents
    Other Fund

    Documents1
    External

    Documents2
    InterviewsSurvey
    Evaluation reportXXXXXXXXXX
    Background documents
    “The Legal Mandate”XX
    “Cooperation Between the IMF and the WTO”XXXX
    “Guiding the IMF’s nvolvement in International Trade Policy”XXX
    “IMF Involvement in Trade Policy Issues in Low-ncome Countries: Seven Case Studies”XXXX
    “Trade Conditionality in MF-Supported Programs in Emerging Market Countries: Five Case Studies”XXXXX
    “IMF Surveillance of Trade Policies: General Observations and Case Studies of Advanced Countries”XXXXX
    Background papers
    “Preferential Trade Agreements in IMF Economic Work 1996—2007: An Assessment” (de Melo)XXXXXXX
    “The IMF’s Trade Restrictiveness Index” (Krishna)XXXX
    “What Determines IMF nvolvement in Trade Policy Issues?” (Yang and Yoon)XXX
    “Re-evaluating the Effectiveness of Trade Conditions in Fund-Supported Programs” (Yoon)X
    “Trade in Financial Services: Has the IMF Been nvolved Constructively?” (Stern)XXXXXX

    Including FSAP reports, IMF working papers, IMF publications (including the WEO and REOs), management speeches, and internal memoranda and notes on trade policy issues.

    Including reports by the WTO Secretariat, WTO TPRs, minutes of relevant WTO meetings, World Bank reports (including the 2004 evaluation of World Bank support for trade), academic papers, and media reports drawn from Factiva.

    A. Executive Board Papers, Minutes, and Guidelines to Staff

    2. The evaluation used Executive Board papers and minutes of discussions reviewing the Fund’s work on, and role in, trade policy (including surveillance and conditionality reviews) and related topics (e.g., IMF-WTO cooperation, trade liberalization in Fund-supported programs, revenue implications of trade liberalization, market access for developing country exports, PTAs, and the Doha Development Agenda). The evidence gathered from these sources was used to consider how the IMF Board viewed trade issues and the Fund’s role in these issues over time. Sum-mings up from these Board discussions and guidance notes issued by PDR were used to consider how staff were instructed to approach trade policy issues.

    B. Surveillance Documents

    3. The evaluation examined Article IV documents (including staff reports, internal briefing papers and back-to-office reports for staff missions, background papers, minutes of relevant Board discussions, and press releases) to assess the IMF’s coverage of trade policy issues in bilateral surveillance. This evidence was drawn from the following (overlapping) samples:

    • For the entire IMF membership, we reviewed all bilateral Article IV staff reports for 1996, 2000, and 2006.1 If a country did not have an Article IV consultation in one of these years, the staff report from the closest earlier year was used. This yielded a total of 180 staff reports for 1996, 185 staff reports for 2000, and 190 staff reports for 2006. Each staff report was reviewed for its coverage of 11 trade policy topics: tariffs, nontariff barriers, export restrictions, antidumping/countervailing measures, export subsidies, state trading monopolies, customs administration, trade in services, PTAs, WTO, and trade liberalization in general. The coverage of each topic was given a rating from 0 to 3, where 0 indicated no coverage; 1 indicated factual reporting only; 2 indicated that the staff expressed a view or took a position on the issue but without apparent supporting analysis; and 3 indicated the staff expressed a view or took a position on the issue with some supporting analysis including, but not limited to, an SIP or recent economic developments (RED) chapter with substantive quantitative or qualitative analysis. These data were used to assess the scope and depth of trade policy coverage in bilateral surveillance across countries and over time.

    • For the entire Fund membership, we reviewed all trade policy-related SIPs, REDs, and other background papers prepared for Article IV consultations for 1996 through 2008. Papers were considered trade policy-related if they contained substantive quantitative or qualitative analysis of a trade policy issue. This gave us a total of 152 papers for the whole period. These data were used to assess the depth of trade policy coverage in bilateral surveillance.

    • For regional surveillance, we reviewed staff reports and background papers for four currency unions (CEMAC, the ECCU, the euro area, and WAEMU) that had regular formal or informal consultations and for other regions (e.g., Central America and the Caribbean region) for which occasional Board reports were prepared during the evaluation period.

    • For 15 case study countries, which were selected for a more in-depth examination of IMF involvement in trade policy issues, we reviewed, in addition to staff reports and background papers, other documents related to Article IV consultations including internal briefing papers and memoranda, back-to-office reports, minutes of Board discussions, and public information notices and other press releases. The case study countries, which were drawn from a range of income levels and geographical regions, were: Bangladesh, Brazil, Ghana, Guyana, Indonesia, Japan, Kenya, Korea, Mozambique, Norway, Tanzania, Turkey, Ukraine, United States, and Vietnam. They were chosen to cover a diversity of experience in the trade policy dialogue with the IMF, ranging from minimal/shallow to extensive/deep engagement.

    C. Program Documents

    4. The evaluation examined program documents (including staff reports, internal briefing papers and back-to-office reports for staff missions, background papers, minutes of relevant Board discussions, and press releases) to assess the IMF’s coverage of trade policy issues, including trade conditionality, in Fund-supported programs. This evidence was drawn from the following (overlapping) samples:

    • For the entire Fund membership, we reviewed all program requests (comprising letters of intent, memoranda of economic and financial policies (MEFPs), and associated staff reports) from 1996 through 2007.2 Altogether a total of 226 programs was considered (including 88 Stand-By Arrangements, 19 Extended Arrangements, 113 ESAF/PRGF arrangements, and 6 Policy Support Instruments) for 93 countries. Each program request was reviewed for the inclusion of conditionality (in the form of prior actions, structural performance criteria, or structural benchmarks) in 11 trade policy areas: tariffs, nontariff barriers, export restrictions, antidumping/countervailing measures, export subsidies, state trading monopolies, customs administration, trade in services, PTAs, WTO, and trade liberalization in general. To supplement this information, we used PDR’s Monitoring of Fund Arrangements (MONA) database to identify trade conditions that were added after the initial request for all the programs in our sample. Taken together, these data were used to assess the incidence and scope of trade conditionality during the evaluation period.

    • For 12 case study countries, we reviewed all program documents starting from 1996 (or earlier in some cases) through 2008. The case study countries were Bangladesh, Brazil, Ghana, Guyana, Indonesia, Kenya, Korea, Mozambique, Tanzania, Turkey, Ukraine, and Vietnam. The documents included staff reports, letters of intent, MEFPs, internal briefing papers and memoranda, back-to-office reports, ex post assessments, minutes of Board discussions, and press releases. The case study countries were chosen to cover varied experiences and outcomes, ranging from minimal to substantial trade conditionality.

    D. Other Documents

    5. Other IMF outputs used in this evaluation include: FSAP reports, IMF working papers, IMF publications (including the WEO and REOs), management speeches, and internal memoranda and notes on trade policy issues.

    6. The evaluation also used various external documents, including reports by the WTO Secretariat, WTO TPRs, minutes of relevant WTO meetings, World Bank reports (including the 2004 evaluation of World Bank support for trade), academic papers, and media reports drawn from Factiva.

    E. Interviews

    7. As part of the evaluation, we interviewed 79 current and former IMF staff and held five focus group meetings with 26 participants from the A14-B4 level staff. We also interviewed current and former officials from 21 countries and staff of five international and regional institutions, and representatives from six civil society organizations.

    Including three territories (Hong Kong SAR, Aruba, and Netherlands Antilles) and four currency unions (CEMAC, the ECCU, the euro area, and WAEMU) that had Article IV consultations with the IMF during the evaluation period; excluding Montenegro and Somalia, which had no Article IV consultations during the evaluation period.

    Programs that began before 1996 were not included. For multi-year ESAF/PRGF programs, only the first-year request was reviewed.

    Annex 2 Surveys

    1. The IEO conducted surveys of IMF staff and member country officials in November 2008. The surveys were administered by ICF International. All survey recipients were advised that their responses were confidential and that individual country and staff respondents would not be identified. The survey questionnaires are included at the end of this annex.

    2. The trade policy issues covered in the surveys comprised the design and implementation of trade policies narrowly defined (i.e., policies that directly and primarily aim to influence the quantity and/or value of a country’s imports and exports of goods and services—exchange rate policy was not considered) and the assessment of the macroeconomic effects of these narrowly defined trade policies. Specifically, the surveys considered six different trade policy issues:

    • (i) Liberalization of trade in goods, including agricultural;

    • (ii) Liberalization of trade in services, including financial;

    • (iii) Preferential trade agreements (PTAs), e.g., free trade agreements, customs unions, partnership agreements, and preferential schemes;

    • (iv) Customs administration;

    • (v) Effects of a country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position, or balance of payments;

    • (vi) Effects of a country’s trade policies on other countries’/regional/global trade (including market access issues).

    A. Survey of IMF Staff

    3. The objective of the survey was to obtain staff views on the motivation for IMF missions to cover trade policy; cooperation with other institutions on trade policy; how well informed IMF missions were about the trade policy issues on which they took sub-stantive positions; the effectiveness of their trade policy advice; and the role of the IMF with regard to trade policy.

    Sample and response rate

    4. The survey was sent to 678 staff members, grades A14 and above, in the five area departments (African (AFR), Asia-Pacific (APD), European (EUR), Middle East and Central Asia (MCD), and Western Hemisphere (WHD)) and four functional departments (FAD, Monetary and Capital Markets (MCM), PDR, and RES). Survey recipients were asked to fill out the survey whether or not they were actively involved in trade policy issues.

    5. Respondents were asked to answer questions with respect to their experience in a single country based on at least two missions (surveillance, UFR, or TA) during 2005–07. Respondents who had been on the IMF staff for less than a year, who had been on fewer than two missions to a single country, or who worked on an EU member country during 2005–07 were directed to a subset of questions that were not country-specific.

    6. The overall response rate was 56 percent (383 responses). The response rate was fairly even among area departments, but varied across functional departments (Figure A2.1). There were 308 country-specific responses in total: 281 based on missions to emerging and developing countries and 27 based on missions to advanced countries.1 The breakdown of respondents by grade was: 178 A14 staff members, 96 A15 staff members, 86 B1–B3 staff members, and 23 B4 staff members. No B5 staff members answered the survey.

    Figure A2.1.Survey Response Rate by IMF Department

    (Percent of survey recipients in each department)
    Main findings
    IMF missions considered macroeconomic/ systemic implications as the main criterion for covering a trade policy issue

    7. Where trade policy issues were discussed, respondents were asked to characterize the reason(s) their mission covered each issue (Question 8), choosing from among the following options: macroeconomic or systemic implications; request from the authorities; request from the World Bank or other institution; request from management; request from an Executive Director of another country; and other reasons. More than one reason could be specified for each issue covered. The first reason—“macroeconomic or systemic implications”—was cited most often for all trade policy issues, followed (substantially behind) by “request from the authorities” and “other reasons” (Figure A2.2).

    Figure A2.2.Reasons for Covering Trade Policy Issues

    (Percent of respondents for each issue)

    8. Where there were trade policy issues that were not discussed, respondents were asked to characterize the reason(s) their mission decided not to raise the issue (Question 9), choosing from among the following options: there were no obvious macro-linkages or systemic implications; the mission lacked time, expertise, or resources; the World Bank took the lead on the issue; there was a potential conflict with WTO commitments or negotiations; management gave instructions not to raise the issue; a Board member requested the issue not be raised; and other reasons. As before, more than one reason could be specified for each issue not covered. The most frequently cited reason for not covering a trade policy issue was that it had no obvious macro linkages or systemic implications (Figure A2.3). “Other” reasons were chosen almost as frequently but were not elaborated. (In focus group interviews, some staff members noted that word counts in staff reports could have been a constraining factor.)

    Figure A2.3.Reasons for Not Raising a Trade Policy Issue

    (Percent of respondents for each issue)
    IMF staff cooperated quite closely with the World Bank on trade policy issues but less so with other institutions

    9. Respondents were asked to rate their cooperation with staff from other institutions with regard to trade policy issues in the country on which they were working (Question 12). Cooperation with the World Bank was quite close, with at least 50 percent of respondents characterizing the contact as frequent to occasional in surveillance, UFR, and FSAP work and around 25 percent in TA and research (Table A2.1). In contrast, no respondents reported close cooperation and fewer than 10 percent reported occasional cooperation with the WTO across all areas of trade work. This likely reflects the much smaller size and different institutional setup of the WTO Secretariat compared to the IMF. There are no country economists in the WTO Secretariat with whom IMF area department staff could naturally interact. Instead, area department staff and mission teams usually directed their trade policy questions to PDR’s Trade Policy Division, which served as the Fund’s main channel of communication with the WTO Secretariat. The majority of respondents also reported negligible cooperation on trade work with staff from other institutions, such as the OECD and regional development banks. In focus group interviews, IMF staff indicated that their interactions with staff from these organizations tended to be based on personal rather than institutional contacts.

    Table A2.1.Cooperation with the World Bank and Other Institutions(Percent of respondents)
    Surveillance

    (186 respon-

    dents)
    UFR

    (127 respon-

    dents)
    TA

    (50 respon-

    dents)
    FSAP

    (20 respon-

    dents)
    Research

    (308 respon-

    dents)
    Vis-à-vis the World Bank, percent of respondents reporting:
    Close/frequent cooperation223520305
    Occasional cooperation333162019
    Negligible cooperation271816533
    Cooperation not applicable922156
    Vis-à-vis the WTO, percent of respondents reporting:
    Close/frequent cooperation00000
    Occasional cooperation92603
    Negligible cooperation6165325545
    Cooperation not applicable192041512
    Vis-à-vis other institutions (e.g., OECD, regional development banks, etc.), percent of respondents reporting:
    Close/frequent cooperation771002
    Occasional cooperation191641010
    Negligible cooperation4750244544
    Cooperation not applicable171461012

    10. Respondents were then asked how often they drew on resources from other institutions, such as country-specific reports on trade policy, research papers, and trade policy data (Question 13). Again, respondents were most familiar with World Bank resources—53 percent used country-specific reports by the World Bank on trade policy, 45 percent used World Bank research papers on trade policy, and 44 percent used World Bank trade data or indicators at least sometimes (Table A2.2). Around 40 percent of the respondents reported having sometimes or always referred to the WTO’s TPR for their country. 56 percent of the respondents said they drew on in-house (IMF) research. A major portion of the respondents did not use resources from other agencies. This could reflect the fact that some institutions that work on trade only cover certain countries or regions. For example, of the respondents who worked on an advanced country, 71 percent said they always or sometimes used country-specific reports from the OECD and 62 percent said they always or sometimes used research from the OECD.

    Table A2.2.Use of Resources from the World Bank and Other Institutions(Percent of respondents)
    World BankWTOOECDRegional

    Development

    Banks
    UNCTADOther
    Percent of 308 respondents reporting using:
    Country-specific re ports on trade policy
    Always201125N/A3
    Sometimes33281327N/A19
    Never11183525N/A17
    Research (e.g., working papers) on trade policy
    Always11322N/A2
    Sometimes34151524N/A16
    Never12303125N/A21
    Trade policy data or indicators
    Always1571N/A41
    Sometimes292014N/A1716
    Never152533N/A2922
    IMF staff considered their missions reasonably well informed on trade policy issues

    11. For each trade policy issue covered by their mission, respondents were asked the basis for the mission’s specific position on the issue, choosing one or more from among the following options: analytical/empirical studies (in-house or external) specific to the country; analytical/empirical studies not specific to the country (e.g., based on cross-country panel-data analyses); views of other agencies (e.g., the World Bank, WTO, OECD); pressure from another IMF member; the “Washington consensus”; or other grounds (Question 14). Across the six trade policy issues, the most common basis was analytical/empirical studies, followed by views of other agencies (Figure A2.4). Interestingly, 12 percent of respondents (across all grades) cited the Washington consensus as the sole basis for their mission’s position on each trade policy issue that was covered.

    Figure A2.4.Basis for the Mission’s Specific Positions on Trade Policy Issues

    (Percent of respondents for each issue)

    12. For missions that covered one or more trade policy issues, respondents were asked to characterize the relevant trade policy qualifications of their mission team (Question 17). Fully 75–90 percent of respondents rated their team’s qualifications as strong or fair, meaning that at least one member of the team had clear expertise or had some analytical or operational background in the area (Figure A2.5). Only 6–21 percent considered their team’s trade policy expertise to be weak or superficial. In focus group interviews, several staff members pointed out that PDR’s Trade Policy Division provided more than adequate backstopping on trade policy issues even if no trade economist was on the mission team.

    Figure A2.5.Qualifications of the Mission Team to Take Positions on Trade Policy Issues

    (Percent of respondents for each issue)
    IMF staff felt that their trade policy advice was on average well received by country authorities and at least somewhat effective in promoting good policies

    13. For missions that covered one or more trade policy issues, respondents were asked to characterize the extent of the authorities’ agreement with the mission’s position on each issue (Question 18). For the most part, respondents felt that there was strong to moderate agreement by the authorities with the mission’s position (Figure A2.6). This was reflected across all trade policy issues, with the strongest agreement in customs administration, an area where the IMF advice is often provided through TA. Fewer than 10 percent of respondents reported little to no agreement on any one policy issue.

    Figure A2.6.Extent of the Authorities’ Agreement with the Mission’s Position on Trade Issues

    (Percent of respondents for each issue)

    14. Respondents were then asked to rate the effectiveness of their mission’s trade policy advice. For missions that covered one or more trade policy issues, respondents were asked, to the best of their knowledge, how the authorities responded to the mission’s advice on each issue (Question 21). 57–69 percent of respondents reported that their mission’s advice was largely or partially implemented (Figure A2.7). The results were similar for advanced and developing country missions.

    Figure A2.7.How the Authorities Responded to the Mission’s Trade Policy Advice

    (Percent of respondents for each issue)

    15. Respondents were also asked if, on average, their mission’s advice on trade policy issues—regardless of whether the authorities implemented or agreed with them—was effective in enhancing the debate on trade-macro linkages, promoting change in the right direction and/or preventing change in the wrong direction (Question 22). The majority of respondents believed that their mission’s advice was highly or somewhat effective (Figure A2.8).

    Figure A2.8.Perceived Effectiveness of the Mission’s Trade Policy Advice

    (Percent of respondents for each issue)
    The IMF has a role to play in trade policy issues

    16. Finally, all survey respondents were asked what the IMF’s role in trade policy should be, given the IMF’s institutional mandate and putting aside any resource constraints that the IMF may face (Question 23). Respondents were asked to choose one or more options among the following: advising on how to liberalize trade policies; calling attention in Article IV consultations to instances when countries change trade policies in a protectionist direction; assessing effects of trade policy changes on fiscal revenues, the balance of payments, growth, and (for trade in services) financial sector stability; occasional coverage of global or regional trade policy issues in the WEO or REOs; advocating multilateral trade liberalization through public outreach efforts; other activities; or no role at all. Only 2 percent of the 383 respondents said that the IMF should have no role in trade policy. The majority of respondents felt that the IMF has some role to play, especially in assessing the effects of trade policy changes on fiscal revenues, the balance of payments, growth, and financial sector stability; calling attention in Article IV consultations in instances where countries change policies in a protectionist direction; and occasionally covering global/regional trade policy issues in the WEO or REOs (Figure A2.9).

    Figure A2.9.What Should the IMF’s Role in Trade Policy Be?

    (Percent of respondents)
    B. Survey of Country Officials

    17. The objective of the survey was to obtain IMF member country officials’ views on: the motivation for IMF missions to cover specific trade policy issues; the quality of IMF work on trade; the effectiveness or usefulness of IMF trade policy advice; and the role of the IMF with regard to trade policy.

    Sample and response rate

    18. Two surveys were sent to every IMF member country: one to the ministry of finance and one to the ministry of trade (or their equivalent agencies).2 In total, 326 surveys were sent out. Country officials were asked to answer the survey questions based their experience with the IMF during 2005–07. If their ministry/government agency did not have active discussions with the IMF on trade policy during that period, they were directed to a subset of questions that were not country-specific. The survey was open from November 2008 to April 2009.

    19. A total of 71 completed responses was received. Most of these (51) were from finance ministry officials (including two responses from central bank officials)—the Fund’s traditional interlocutors. 20 responses came from trade ministry officials. Most of the responses (58) were from emerging and developing countries; only 12 responses came from advanced countries. The breakdown of responses by region (based on IMF area departments) was: 27 percent from the Asia-Pacific region, 21 percent each from Africa and the Western Hemisphere, 20 percent from Europe, and 11 percent from the Middle East and Central Asia.

    20. The response rate was extremely low—less than 20 percent on average (28 percent for finance ministry officials and 12 percent for trade ministry officials). The low response rate is itself an indication of the extent to which the Fund has disengaged from trade policy issues in the last few years—many officials declined to participate in the survey on the grounds that they did not discuss trade policy with the IMF.

    21. Among those officials who did answer the survey, 34 percent did not recall discussing any of the six trade policy issues with IMF missions during 2005–07. When trade policy issues were discussed, it was usually in the context of Article IV consultations. No trade ministry respondent recalled having had discussions with IMF TA or UFR missions. The trade policy issues that officials said they most commonly discussed with IMF missions were the effect of the country’s trade policy changes on its macroeconomic variables (e.g., GDP growth, fiscal position, or balance of payments) and PTAs. (There was no appreciable difference between the types of trade policy issues discussed with the ministry of finance and the ministry of trade.)

    22. Because of the low response rate, the results of the survey may not be representative of IMF membership as a whole and should be interpreted with caution.

    Main findings
    Macroeconomic and/or systemic effects seemed to be the main motivation for IMF missions to raise trade policy issues

    23. When trade policy issues were discussed with the IMF mission, respondents were asked what they thought motivated the mission to raise the issue(s), choosing one or more from among the following options: the mission believed that the trade policy issue had important implications for the country’s growth, fiscal, or balance of payments outcomes; the mission believed that the country’s trade policies had systemically and/or regionally important effects; the mission had been asked by another IMF member country to raise the issue; the mission was supporting the World Bank or other international institution which was taking the lead (Question 3). Most of the 48 respondents felt that the primary motivation for the IMF mission to raise the issue was that the issue had macroeconomic implications (Figure A2.10). This is consistent with the finding from the staff survey.

    Figure A2.10.Perceived Motivation of the Mission to Raise Trade Policy Issu Figure A2.10. Perceived Motivation of the Mission to Raise Trade Policy Issues

    (Percent of respondents for each issue)
    The IMF’s trade policy advice was largely consistent with the World Bank’s advice but not always consistent with the views of other institutions

    24. For each trade policy issue discussed with the IMF, respondents were asked if IMF advice/conditionality/TA took into account their country’s commitments to and ongoing negotiations in the WTO (Question 7) and if IMF advice was consistent with that from other institutions, including the World Bank (Question 8). More than 30 percent of the 25–32 respondents said the IMF took into account their WTO commitments most of the time (Table A2.3). The majority of respondents viewed the advice from the IMF and the World Bank as fully consistent across all trade policy issues. However, with regard to other institutions, the responses were split three ways among “fully consistent,” “at times inconsistent,” and “don’t know.” These findings suggest that interinstitutional cooperation may not be working as well as it could be but the small number of responses precludes a firm conclusion.

    Table A2.3.Comparison of IMF Advice with Advice from the World Bank and Other Institutions(Percent of respondents for each issue)
    Liberalization of Trade

    in Goods, Including

    Agriculture

    (26 respondents)
    Liberalization of

    Trade in Services,

    Including Financial

    (25 respondents)
    Preferential Trade

    Agreements

    (32 respondents)
    Customs

    Administration

    (30 respondents)
    Vis-à-vis the World Bank’s trade policy advice, percent of respondents reporting:
    IMF advice was fully consistent42363853
    IMF advice was at times inconsistent8467
    IMF advice was mostly inconsistent0000
    Don’t know15121913
    World Bank did not discuss trade policy35363527
    Vis-à-vis trade policy advice from other institutions, percent of respondents reporting:
    IMF advice was fully consistent23241627
    IMF advice was at times inconsistent23242530
    IMF advice was mostly inconsistent0400
    Don’t know31242823
    Other institutions did not discuss trade policy15162217
    Vis-à-vis commitments to or negotiations at the WTO, percent of respondents reporting:
    IMF advice took these into account most of the time31403137
    IMF advice took these into account sometimes27202827
    IMF advice rarely took these into account4493
    Don’t know15201620
    Country is not a WTO member23162210
    Respondents generally found IMF missions to be open-minded and adequately qualified to discuss trade policy issues

    25. Based on their experience during 2005–07, respondents were asked to characterize the main approach of the IMF mission to trade policy issues in their country (Question 4). Almost two-thirds of the 48 respondents believed that the IMF was open-minded (Figure A2.11).

    Figure A2.11.Main Approach of the Mission to Trade Policy Issues

    (Percent of respondents)

    26. Respondents were then asked to rate the IMF mission’s expertise on the trade policy issues that were discussed: strong (at least one member of the IMF team had clear expertise in the area); fair (at least one member of the IMF team had some analytical or operational background); or weak (no member of the IMF team seemed to have more than a superficial background) (Question 5). More than three-fourths of respondents for each issue rated the IMF mission team’s qualifications as strong or fair. Again, the small number of responses for each issue precludes any firm conclusions; however, the findings here broadly reflect the findings from a similar question in the staff survey.

    27. Next, for each trade policy issue discussed with the IMF, respondents were asked to rate the quality of the IMF mission’s analytical assessment of the macroeconomic effects of trade policy changes it advocated (Question 9). The results vary across trade policy issues. For customs administration, most of the 29 respondents rated the quality of the IMF’s analysis as high (Figure A2.12). For the other issues, 30–40 percent of respondents (the majority in the case of PTAs and trade in services) said that no assessment was provided by the IMF mission for the trade policy changes it advocated. For the more traditional goods trade liberalization issues, almost 40 percent of the 26 respondents rated the quality of the mission’s analysis as high.

    Figure A2.12.Quality of the Mission’s Analytical Assessment of the Macroeconomic Effects of Trade Policy Changes It Advocated

    (Percent)

    28. Respondents were also asked if they thought the IMF was evenhanded in its trade policy advice or if it pressed most strongly in a particular group of countries (advanced, middle-income, or less-developed) for removing restrictions on trade (Question 11). More than a third of the respondents said they did not know (Figure A2.13). Of the rest, the largest proportion felt the IMF pressed less-developed countries most strongly on trade liberalization. Only 17 percent of respondents felt that the IMF showed no bias.

    Figure A2.13.Which Group of Countries Did the IMF Press More Strongly for Removing Restrictions on Trade?

    (Percent of respondents)
    The IMF’s trade policy advice mostly met with agreement and was found to be at least moderately effective in promoting good policies

    29. For each trade policy issue discussed with the IMF mission, respondents were asked to characterize the extent of their ministry’s agreement with the mission’s position (Question 12). In general, across all issues, respondents felt that there was strong to moderate agreement with the mission; very few believed there was little or no agreement (Figure A2.14). These findings broadly matched those from the staff survey.

    Figure A2.14.Extent of the Authorities’ Agreement with the Mission’s Position on Trade Issues

    (Percent of respondents for each issue)

    30. For each trade policy issue discussed with the IMF mission, respondents were asked how effective the mission’s recommendations/conditionality/TA was in enhancing the debate—within or outside the government—and/or promoting a change of policy (Question 15). For issues related to the liberalization of trade in goods and services and to customs administration, more than half of the respondents considered the IMF’s advice to be moderately to very effective. For PTA issues, the majority of respondents were unable to provide a view on the Fund’s effectiveness in enhancing the policy debate (Figure A2.15).

    Figure A2.15.Effectiveness of the Mission’s Trade Policy Advice in Enhancing the Debate and/or Promoting a Change of Policy

    (Percent)

    31. As to whether the IMF’s advocacy of multilateral trade liberalization (e.g., through speeches and press statements by high-level IMF staff and through IMF publications such as the WEO and REOs) was worthwhile, more than three-fourths of all respondents answered “yes” or “probably so.” Only 14 percent felt that the IMF’s advocacy was not or probably not worthwhile (Figure A2.16).

    Figure A2.16.Is the IMF’s Advocacy of Multilateral Trade Liberalization Worthwhile?

    (Percent of respondents)
    The IMF has a role to play in trade policy issues, but it is not the only player

    32. All survey respondents were asked what the IMF’s role in trade policy should be, choosing one or more possibilities from the same options as provided in the staff survey (Question 19). None of the respondents thought that the IMF had no role to play. Three-fourths of the respondents felt that the IMF had a role to play in assessing the effects of trade policy changes on fiscal revenues, the balance of payments, growth, and financial sector stability (Figure A2.17). The responses were similar to those from the staff survey, except that a much higher proportion of the surveyed staff (82 percent) than of the surveyed country officials (41 percent) felt that the IMF should call attention in Article IV consultations to instances when countries changed trade policies in a protectionist direction.

    Figure A2.17.What Should the IMF’s Role in Trade Policy Be?

    (Percent of respondents)

    33. Finally, all respondents were asked whether another institution would have been well placed to fill the gap if the IMF had not addressed the trade policy issues it did (Question 20). Across all trade policy issues, the overwhelming majority of respondents said that another institution possibly could have addressed the issue in the absence of the Fund; only 6–13 percent felt that no other institution could have filled the gap (Figure A2.18).

    Figure A2.18.Would Another Institution Have Been Well Placed to Fill the Gap if the Mission Had Not Addressed the Trade Issue?

    (Percent of respondents for each issue)
    STAFF SURVEY QUESTIONNAIRE

    This survey gathers information on your views on the IMF’s involvement in international trade policy issues during 2005–07. Conclusions and recommendations from the evaluation are dependent on receiving high participation rates from A14–B5 staff in functional and area departments—regardless of whether you personally were actively involved in trade policy issues.

    The survey should take no more than 20 minutes to complete. The survey is constructed to direct you to parts that are relevant to your experience as revealed by your specific responses to questions early in the survey. Information provided will be strictly confidential: it will be used only by ICF International (ICF) and the Independent Evaluation Office (IEO) of the IMF to evaluate the IMF’s approach to international trade policy issues. Findings will be published only in summary form without attribution to any individual, mission, or department.

    Trade policy issues referred to in this survey comprise:

    • (i) the design and implementation of trade policies narrowly defined (policies that directly and primarily aim to influence the quantity and/or value of a country’s imports and exports of goods and services—exchange rate policy is not considered in this survey);

    • (ii) the assessment of the macroeconomic effects of these narrowly defined trade policies.

    A. QUESTIONS FOR CLASSIFICATION PURPOSES

    1. Did you make more than one visit during 2005–2007 to a single country as a member (including head) of a surveillance, use of Fund resources (UFR), or technical assistance (TA) mission?

    a—“Yes (go to questions 2a, 3a, and 4),” b—“No (go to question 2b)”

    2a. Of the countries that you visited more than once during 2005–;07, which did you visit most recently? Please answer all of the questions in this survey with respect to your experience working on this country.

    [Drop-down menu of countries]

    2b. Were you a Fund staff member for more than one year during 2005–07?

    a—“Yes (go to question 3b),” b—“No (go to questions 6 and 23)”

    3a. Which department were you in the first time you visited the country specified above?

    a—“AFR,” b—“APD,” c—“EUR,” d—“MCD,” e—“WHD,” f—“PDR,” g—“FAD,” h—“MCM,” i—“RES”

    3b. Please indicate the department in which you spent the most amount of time during 2005-07. Please then answer the remaining questions on the basis of your average overall Fund experience over the past three years.

    a—“AFR,” b—“APD,” c—“EUR,” d—“MCD,” e—“WHD,” f—“PDR,” g—“FAD,” h—“MCM,” i—“RES”

    4. Please indicate the purpose(s) of the missions to the specified country. (Please check all that apply.)

    a—“Article IV surveillance,” b—“Use of Fund resources (UFR),” c—“Technical Assistance (TA),” d—“FSAP”

    5. Do you recall ever having had discussions with [Country] during 2005–07 in any of the following areas?

    (Please check all that apply.)

    a—“Yes,” b—“No”

    • (i) Liberalization of trade in goods, including agriculture (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g. free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    B. YOUR EXPERTISE ON TRADE POLICY ISSUES

    6. On which trade policy issues do you feel that your expertise is strong enough to provide substantive advice to countries on trade policy issues and respond confidently to any critics? (Please check one for each issue.)

    a—“Fully confident,” b—“Reasonably confident,” c—“Not confident”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    C. ADEQUACY OF GUIDANCE ON HOW/ WHEN TO COVER TRADE POLICY ISSUES

    7. Overall, do you feel you understood the circumstances in which your mission(s) should and should not have covered the following trade policy issues in [Country] during 2005–07? (Please check one for each issue.)

    a—“Mostly,” b—“Sometimes,” c—“Rarely”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    8. How would you characterize the reasons your mission(s) covered the following trade policy issues in [Country] at any point during 2005–07? (Please check all that apply for each applicable issue.)

    a—“Macroeconomic/systemic implications,” b—“Request from authorities,”c—“Request from World Bank/other institution,” d—“Request from management,”e—“Request from othercountry’s ED,” f—“Other,” g—“Don’t know,”h—“N/A (Mission did not address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    9. How would you characterize the reasons your mission(s) decided not to raise one or more trade policy issues in [Country] during 2005–07? (Please check all that apply for each applicable issue.)

    a—“No obvious macro linkages/systemic implications,”b—“Mission lacked time/expertise/ resources,” c—“World Bank took the lead on the issue,”

    d—“Potential conflict with WTO commitments/negotiations,”

    e—“Management instruction not to raise issue,” f—“Board member requested not to raise issue,”

    g—“Other,” h—“Don’t know,” i—“N/A (Mission did address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g. free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    10. In 2005, the Board encouraged staff to increase attention to the impact of trade restrictions in services, including financial services. Were you aware of this guidance during 2005–07?

    a—“Yes,” b—“No (go to question 12)”

    11. How would you characterize your response in [Country] during 2005–07 to the request for greater involvement in trade in services (including financial) issues? (Please check one.)

    a—“Active,” b—“Moderate,” c—“None,” d—“Don’t know”

    D. COOPERATION BETWEEN IMF AND OTHER INSTITUTIONS

    12. How would you describe your cooperation on trade policy issues for [Country] with staff from other institutions during 2005–07? (Please check one for each row.)

    a—“Close/frequent,” b—“Occasional,” c—“Negligible,”

    d—“N/A ([Country] does not get advice from this institution)”

    World Bank staff

    • (i) Surveillance

    • (ii) UFR work

    • (iii) TA

    • (iv) FSAP

    • (v) Research

    WTO Secretariat staff

    • (vi) Surveillance

    • (vii) UFR work

    • (viii) TA

    • (ix) FSAP

    • (x) Research

    Other (e.g., OECD, BIS, regional development banks)

    • (xi) Surveillance

    • (xii) UFR work

    • (xiii) TA

    • (xiv) FSAP

    • (xv) Research

    13. Which of the following resources did your mission(s) to [Country] draw upon at some point during 2005–07?

    (Please check one for each row.)

    a—“Always,” b—“Sometimes,” c—“Never,” d—“Don’t know,” e—“N/A”

    Country-specific reports on trade policy by:

    • (i) WTO (Trade Policy Review)

    • (ii) World Bank (Country Focus/Economic Sector Work)

    • (iii) OECD

    • (iv) Regional development banks

    • (v) Other

    Research (e.g., working papers, occasional papers) on trade policy by:

    • (vi) IMF

    • (vii) WTO Secretariat

    • (viii) World Bank

    • (ix) OECD

    • (x) Regional development banks

    • (xi) Other

    Trade policy data/indicators compiled by:

    • (xii) WTO Secretariat

    • (xiii) World Bank (e.g., overall trade restrictiveness indices)

    • (xiv) OECD

    • (xv) UNCTAD

    • (xvi) Other

    E. TOOLS AND RESOURCES DEVOTED TO ANALYSIS OF TRADE POLICY

    14. What was the basis for the mission’s specific positions on trade policy issues in [Country] during 2005–07?

    (Please check all that apply for each applicable issue.)

    a—“Analytical/empirical studies (in-house or external) specific to [Country],”

    b—“Analytical/empirical studies not specific to [Country] (e.g., panel-data analyses),”

    c—“Views of other agencies (e.g., World Bank, WTO, OECD),”

    d—“Pressure from another IMF member,” e—“Washington Consensus,” f—“Other,”

    g—“Don’t know,” h—“N/A (Mission did not address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    15. How much did you use the Trade Restrictiveness Index (TRI) compiled in PDR as background for the work on [Country] during 2005–07? (Please check one.)

    a—“Often,” b—“Occasionally,”c—“Rarely,” d—“Never,” e—“Don’t know”

    16. Based on your experience in [Country] during 2005–07, how difficult was it for the mission to identify trade policy changes that moved [Country] in a protectionist direction? (Please check one.)

    a—“Not difficult,” b—“Somewhat difficult,” c—“Very difficult,” d—“Don’t know/didn’t try”

    17. How would you describe the qualifications your mission team to [Country] had during 2005–07 to take positions on the following trade policy issues? (Please check one for each applicable issue.)

    a—“Strong: at least one member of the team had clear expertise in this area,”

    b—“Fair: at least one member of the team had some analytical background,”

    c—“Weak: no member of the team seemed to have more than a superficial background,”

    d—“Don’t know,” e—“N/A (Mission did not address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    F. DIALOGUE WITH AUTHORITIES

    18. How would you characterize the extent of the authorities’ agreement with the mission’s positions on the following trade policy issues in [Country] during 2005–07? (Please check one for each applicable issue.)

    a—“Strong agreement,” b—“Moderate agreement,” c—“Little or no agreement,” d—“Don’t know,” e—“N/A (Mission did not address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    19. How would you characterize the reasons for any disagreements some or all of the authorities had with the staffs position on the following trade policy issues in [Country] during 2005–07? (Please check one for each applicable issue.)

    a—“Difference in basic economic analysis,” b—“Domestic political considerations,” c—“Administrative constraints on implementation,”

    d—“Conflicts with broader trade policy strategy (e.g., WTO negotiations),”

    e—“Other,” f—“Don’t know,” g—“N/A (Mission did not address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of the country’s trade policy changes (actual or proposed) on its own GDP growth, fiscal position or balance of payments

    • (vi) Effects of trade policies on other countries’/regional/global trade (including market access issues)

    20. How would you characterize any domestic resistance in [Country] from outside the government to the thrust of the mission’s advice during 2005–07 in the following areas on trade policy? (Please check one for each applicable issue.)

    a—“Strong and broadly based in the population,” b—“Strong, but concentrated in certain groups,”

    c—“Moderate,” d—“Little or none,” e—“Don’t know,”

    f—“N/A (Mission did not address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    G. EFFECTIVENESS

    21. When the mission(s) discussed trade policy issues in [Country] during 2005–07, to the best of your knowledge, how did the authorities respond? (Please check one for each applicable issue.)

    a—“Largely implemented,” b—“Partially implemented,” c—“Largely not implemented,” d—“Don’t know,” e—“N/A (Mission did not address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    22. On average, do you think the positions of your mission(s) on trade policy issues in [Country] during 2005–07 (regardless of whether the authorities implemented or agreed with them) were effective in enhancing the debate on trade-macro linkages, promoting change in the right direction and/or preventing change in the wrong direction? (Please check one for each applicable issue.)

    a—“Highly,” b—“Somewhat,” c—“Not at all,” d—“Don’t know,” e—“N/A (Mission did not address this issue)”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    H. OPTIMAL ROLE FOR IMF IN TRADE POLICY ISSUES

    23. Putting aside resource constraints that the IMF may face but recognizing the IMF’s institutional mandate (“to promote the expansion and balanced growth of world trade”), what do you think the IMF’s role in trade policy should be? (Please check all that apply.)

    a—“Advising on how to liberalize trade policies,”

    b—“Calling attention in Article IV consultations to instances when countries change trade policies in a protectionist direction,”

    c—“Assessing effects of trade policy changes on fiscal revenues, the balance of payments, growth, and (for trade in services) financial sector stability,”

    d—“Occasional coverage of global or regional trade policy issues in the WEO/REO,”

    e—“Advocating multilateral trade liberalization through public outreach efforts,”

    f—“No role,” g—“Other,” h—“Don’t know”

    GOVERNMENT OFFICIALS SURVEY QUESTIONNAIRE

    This survey relates mainly to any discussions you had on trade policy issues with IMF missions [Article IV surveillance, use of Fund resources (UFR), and technical assistance (TA)] during 2005–07. It also includes some general questions on your views about the IMF’s role in trade policy issues.

    The survey should take no more than 20 minutes of your time to complete. The information requested will be strictly confidential: it will be used only by ICF International and the Independent Evaluation Office (IEO) of the IMF to evaluate the IMF’s approach to international trade policy issues. Findings will be published only in summary form without attribution to any individual or country.

    The electronic version of this survey is constructed to direct you to parts of the survey that are relevant to your experience as revealed by your specific responses to questions early in the survey. If you are using the hard copy (either because you prefer it or you are using a translation) boxes where you can indicate that a question is not applicable to you are included.

    The survey has been sent to two ministries/government agencies—the finance ministry and the trade ministry (or their functional equivalents)—in each country that is a member of the IMF. ICF will collect responses from each ministry in your country separately. As the head of one of these two ministries/government agencies, your input is essential to this evaluation whether or not your ministry/government agency was actively involved in discussions on trade policy with IMF staff.

    Trade policy issues referred to in this survey comprise:

    • (i) the design and implementation of trade policies narrowly defined (policies that directly and primarily aim to influence the quantity and/or value of a country’s imports and exports of goods and services—exchange rate policy is not considered in this survey);

    • (ii) the assessment of the macroeconomic effects of these narrowly defined trade policies.

    If your country had a lending arrangement with the IMF during 2005–07, please answer the questions based on your overall experience with IMF missions during the period, taking into account that trade policy issues may have been discussed or TA received even when no trade policy conditionality was finally agreed. If your country did not have a lending arrangement, please answer the questions based on your overall experience during 2005–07 with surveillance and/or TA missions. If trade policy was discussed on only one occasion during 2005–07, please answer the questions with respect to that single occasion.

    A. QUESTIONS FOR CLASSIFICATION PURPOSES

    1. Which ministry/government agency do you represent?

    a—“Ministry of Finance (or equivalent government agency),”

    b—“Ministry of Trade (or equivalent government agency),” c—“Other (please specify)”

    2. Do you recall ever having had discussions with any type of IMF mission during 2005–07 in the following areas?

    (Please check all that apply.)

    a—“Article IV Surveillance,” b—“Use of Fund Resources (UFR),” c—“Technical Assistance (TA),” d—“None”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of your country’s trade policy changes (actual or proposed) on its growth, fiscal position and balance of payments

    • (vi) Effects of your country’s trade policy on other countries (including market access issues)

    B. IMF STAFF EXPERTISE ON AND APPROACH TO TRADE POLICY ISSUES

    3. When an IMF mission raised trade policy issues with your ministry/government agency during 2005–07, what do you think motivated the IMF mission to raise them? (Please check all that apply.)

    a—“Mission believed the trade policy issue had important implications for growth, fiscal, or balance of payments outcomes in my country,”

    b—“Mission believed my country’s trade polices had systemically/regionally important effects,”

    c—“Mission had been asked by another IMF member country to raise [a] particular issue[s],”

    d—“Mission was supporting the World Bank or other international institution, which was taking the lead,” e—“Don’t know”

    4. The IMF’s mandate is to “promote the expansion and balanced growth of world trade.” Within this mandate, from your experience during 2005–07, how would you characterize the main approach of the IMF missions to trade policy issues in your country? (Please check one.)

    a—“Open-minded,” b—“Doctrinaire,” c—“Don’t know”

    5. How would you characterize the IMF mission’s expertise on trade policy issues you discussed with them during 2005–07? (Please check one for each issue listed.)

    a—“Strong: at least one member of the team had clear expertise in this area,”

    b—“Fair: at least one member of team had some analytical or operational background,”

    c—“Weak: no member of the team seemed to have more than a superficial background,” d—“Don’t know,”

    e—“My ministry/government agency did not discuss this issue with the IMF mission”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of your country’s trade policy changes (actual or proposed) on its growth, fiscal position and balance of payments

    • (vi) Effects of your country’s trade policy on other countries (including market access issues)

    6. How would you characterize the IMF mission’s contribution to the discussions of each of the following trade policy issues with your ministry/government agency any time during 2005–07? (Please check one for each issue listed.)

    a—“Mission’s own views featured at least once,”

    b—“Mission sought information, but did not express views,”

    c—“Mission only repeated views of other institutions (such as the World Bank),”

    d—“No mission covered this issue with my ministry/government agency”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • v) Effects of your country’s trade policy changes (actual or proposed) on its growth, fiscal position and balance of payments

    • (vi) Effects of your country’s trade policy on other countries (including market access issues)

    C. COOPERATION BETWEEN IMF AND OTHER INSTITUTIONS CONCERNED WITH TRADE POLICY ISSUES

    7. In your experience during 2005–07, did IMF advice/conditionality/TA on trade policies adequately take into account your country’s commitments to and ongoing negotiations in the WTO? (Please check one for each issue listed.)

    a—“Most of the time,” b—“Sometimes,” c—“Rarely,” d—“Don’t know,” e—“Not a WTO member”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    8. In your experience during 2005–07, how did IMF advice/conditionality/TA on trade policy relate to that of other international institutions? (Please check one for each issue listed.)

    a—“Fully consistent,” b—“At times inconsistent,” c—“Mostly inconsistent,” d—“Don’t know,” e—“We did not discuss trade policy with this institution,” f—“No mission covered this issue”

    World Bank

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    Any other institution

    • (v) Liberalization of trade in goods, including agriculture

    • (vi) Liberalization of trade in services, including financial

    • (vii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (viii) Customs administration

    D. QUALITY OF TRADE POLICY ADVICE FROM IMF MISSION

    9. How would you rate the quality of the IMF mission’s analytical/quantitative assessment of the macroeconomic effects (on the balance of payments, fiscal position, or GDP growth) of the trade policy changes it advocated during 2005–07? (Please check one for each issue listed.)

    a—“High,” b—“Moderate,” c—“Low,” d—“No assessment provided,” e—“Mission did not advocate any trade policy changes”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    10. How would you rate the quality of the IMF mission’s analytical/quantitative assessment of the macroeconomic effects (on the balance of payments, fiscal position, or GDP growth) of any trade policy changes your country implemented during 2005–07—whether the IMF mission supported or did not support them? (Please check one for each issue listed.)

    a—“High,” b—“Moderate,” c—“Low,” d—“No assessment provided,”

    e—“No trade policy changes with potential macro effects were made”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    11. A key aim of the IMF is to be even-handed in its advice to countries. In your opinion, in which group of countries did the IMF press most strongly for removing restrictions on trade (in merchandise, agriculture, or services, including financial services) during 2005–07?

    a—“Advanced countries,” b—“Middle-income countries,” c—“Less-developed countries,”

    d—“The IMF has shown no bias,” e—“Don’t know”

    E. EFFECTIVENESS OF IMF MISSION’S ADVICE ON TRADE POLICY

    12. How would you characterize the extent of your ministry/government agency’s agreement with the IMF mission’s positions on trade policy? (Please check one for each issue listed.)

    a—“Strong agreement,” b—“Moderate agreement,” c—“Little or no agreement,” d—“Don’t know,” e—“Mission did not provide advice on this aspect of trade policy”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of your country’s trade policy changes (actual or proposed) on its growth, fiscal position and balance of payments

    • (vi) Effects of your country’s trade policy on other countries (including market access issues)

    13. How would you characterize the reasons for any disagreements your ministry/government agency had with the IMF mission’s position on the following trade policy issues during 2005–07? (Please check all that apply.)

    a—“Difference in basic economic analysis,” b—“Domestic political considerations,”

    c—“Administrative constraints on implementation,”

    d—“Conflicts with broader trade policy strategy (e.g., WTO negotiations),” e—“Other,”

    f—“Don’t know, g—“No disagreement/Mission did not provide advice on this issue”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    • (v) Effects of your country’s trade policy changes (actual or proposed) on its growth, fiscal position and balance of payments

    • (vi) Effects of your country’s trade policy on other countries (including market access issues)

    14. How would you characterize any resistance from outside your government to the thrust of the IMF mission’s advice during 2005–07 in the following areas of trade policy? (Please check one for each issue listed.)

    a—“Strong and broadly based in the population,” b—“Strong, but concentrated in certain groups,” c—“Moderate,” d—“Little or none,” e—“Don’t know,” f—“Mission did not provide advice on this aspect of trade policy”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    15. How effective was the IMF mission’s trade policy recommendations/conditionality/TA in enhancing the debate—within or outside the government—and/or promoting a change of policy on trade policy issues? (Please check one for each issue listed.)

    a—“Very effective,” b—“Moderately effective,” c—“Not effective,”

    d—“Counterproductive,” e—“Don’t know,” f—“IMF mission did not address this issue”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration

    16. In 2004 the IMF introduced the Trade Integration Mechanism (TIM) to augment lending to countries suffering from preference erosion as a result of multilateral trade liberalization. Regardless of whether your country participated in this mechanism, how would you characterize its contribution to increasing support for multilateral trade liberalization? (Please check one.)

    a—“Not aware TIM existed,” b—“Very important,” c—“Somewhat important,” d—“Not important,” e—“No views on its contribution”

    17. Do you think that the IMF’s advocacy of multilateral trade liberalization (e.g., through speeches and press statements by high-level IMF staff and IMF publications such as the World Economic Outlook and Regional Economic Outlooks) is worthwhile? (Please check one.)

    a—“Yes,” b—“Probably so,” c—“Probably not,” d—“No,” e—“Don’t know”

    F. OPTIMAL ROLE FOR IMF IN TRADE POLICY ISSUES

    18. Putting aside resource constraints that the IMF may face and recognizing the IMF’s institutional mandate, what do you think the IMF’s role in trade policy should be? (Please check all that apply.)

    a—“Advising on how to liberalize trade policies,”

    b—“Calling attention in Article IV consultations to instances when countries change trade policies in a protectionist direction,”

    c—“Assessing effects of trade policy changes on fiscal revenues, the balance of payments, growth, and (for trade in services) financial sector stability,”

    d—“Occasional coverage of global or regional trade policy issues in the WEO/REO,”

    e—“Advocating multilateral trade liberalization through public outreach efforts,”

    f—“No role,” g—“Other,” h—“Don’t know”

    19. In your view, if the IMF mission (surveillance, UFR, or TA) had not addressed the trade policy issues that it did during 2005–07, would another international institution (e.g., the WTO, World Bank, OECD) or regional institution (e.g., regional development bank) have been well placed to fill the gap? (Please check one for each issue listed.)

    a—“Yes,” b—“Maybe,” c—“No,” d—“IMF did not address this issue in my country”

    • (i) Liberalization of trade in goods, including agriculture

    • (ii) Liberalization of trade in services, including financial

    • (iii) Preferential trade agreements (e.g., free trade agreements, customs unions, partnership agreements, preferential schemes)

    • (iv) Customs administration (v) Effects of your country’s trade policy changes (actual or proposed) on its growth, fiscal position and balance of payments

    • (vi) Effects of your country’s trade policy on other countries (including market access issues)

    Based on the most recent WEO classification of advanced and emerging and developing countries.

    Surveys were not sent to individual EU member countries. Instead, surveys were sent to the European Commission: one to the Directorate-General for Economic and Financial Affairs and one to the Directorate-General for Trade.

    Background Documents

    Background Document 1 The Legal Mandate1
    A. Introduction

    1. The legal mandate for the IMF’s involvement in international trade policy issues is articulated in Article I(ii) of the Articles of Agreement, which specifies that a purpose of the IMF is:

    …to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

    2. This mandate is broad and less specific about the precise nature of the IMF’s role in trade policy issues than about its role in exchange rate policy. The term “facilitate” in Article I(ii) encompasses any actions or policies that will encourage or ease the expansion of international trade.2 And, unlike the IMF’s mandate for exchange rate policy, this general mandate for the promotion of international trade is not spelled out in much more detail in other provisions of the Articles of Agreement.

    3. Though the IMF has a broad mandate to facilitate the expansion of trade, it does not have regulatory jurisdiction over international trade.3 Thus, though it can prohibit exchange restrictions on payments and transfers for current international transactions, the Fund cannot prohibit its members from imposing trade restrictions. As noted by Siegel (2002), “while a restriction on payments for particular imports is covered by Fund jurisdiction, an outright ban on the imports (i.e., the underlying transaction) is not. Fund members are obliged to avoid restrictions that are not maintained consistently with the Fund’s Articles, but the Articles impose no such obligation with respect to trade restrictions.”

    4. Distinguishing between trade and exchange restrictions was central to delineating the jurisdiction of the IMF. The IMF has interpreted the concept of restrictions on payments and transfers for current international transactions, as set out in Article VIII, Section 2(a), using a technical criterion, rather than by considering the motive or economic effect of the restrictions.4 By contrast, an interpretation that considered the authorities’ motivation (such as for balance of payments reasons) would have encompassed trade restrictions. Likewise, since trade and exchange restrictions can have comparable effects on the balance of payments, an interpretation that considered their economic effect would have extended IMF jurisdiction to trade restrictions. In the event, the Fund has defined “restrictions” in Article VIII, Section 2(a) by a technical principle that applies to the financial aspect of “whether it [the restriction] involves a direct governmental limitation on the availability or use of exchange as such,” making a clear distinction between the exchange and the underlying trade transaction.5

    5. Despite acceptance inside and for the most part outside the IMF that the IMF has a mandate to engage in trade policy issues, some external critics have argued otherwise. Akyüz (2005) views the IMF’s trade-facilitating role as relating to its function of promoting “a stable system of exchange rates and payments” as a means of ensuring “a predictable trading environment.” He therefore argues that the IMF is “trespassing in trade policy” when it engages in trade policy issues, which are “a matter for multilateral negotiations elsewhere in the global system.” Woods (2006) and Saner and Guilherme (2007b) contend that trade liberalization is beyond the core legal mandate of the IMF.

    6. The broad mandate for the IMF’s role in trade policy issues has largely been interpreted within key modalities for specific activities of the IMF: Article IV, which governs surveillance; Article V, which requires that IMF financial support and technical assistance be consistent with its purposes as delineated in Article I; and Article X, which governs IMF cooperation with other international organizations.

    B. Surveillance

    7. The mandate for trade policy advice in surveillance is also quite general. Article IV (Obligations Regarding Exchange Arrangements) requires the IMF to oversee the international monetary system and monitor members’ compliance with the general obligations specified in Article IV, Section 1. These obligations include that each member “direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability” and “seek to promote stability by fostering orderly economic and financial conditions.” This comes alongside obligations related to exchange and exchange rate policies, also specified in Article IV.

    8. From an economist’s perspective, this mandate involves both a passive and an active role in the surveillance of trade policy issues. The passive role, suggested in the 1977 and 2007 Surveillance Decisions, is that the IMF should consider the implications of trade policies in assessing the appropriateness of a country’s exchange rate regime and its macroeconomic and financial prospects.6 The active role, suggested in Article IV, Sections I(i) and I(ii), involves inter alia the provision of advice on trade policies that will promote growth and external stability.7

    9. Surveillance of trade policy in practice has also aimed to discourage actions that entail adverse crosscountry spillovers. The Executive Board has called for surveillance of trade policies of systemically important countries if these policies have a global or regional impact, even if they do not hamper the country’s own macroeconomic prospects. Article IV does not call for assessing such direct cross-country impacts of a country’s trade policies; specifically, the Article does not specify obligations to conduct economic and financial policies in a manner that does not adversely impact another member’s economy. (This contrasts with the Article IV obligations on exchange rate policies, where members have “a duty not to manipulate exchange rates in order to gain a competitive advantage” (IMF, 2004: Appendix I). However, Article XII, Section 8 and Article I(i) permit the IMF to discuss issues that are important for the IMF, but do not fall within the scope of surveillance. “Stated differently, while they [such spillover effects] are discussed in the context of an Article IV consultation, they are not the subject of surveillance under Article IV” (IMF, 2004).8

    10. The IMF’s interpretation of the mandate for surveillance of trade policy is not without its critics. Saner and Guilherme (2007a) argue that Article IV suggests a narrow role for IMF surveillance of trade policy issues. They note that IMF “surveillance activities ought to fall under the microcosm of exchange measures and policies taken by the Fund membership.” Therefore, “generic trade measures,… unless specifically enacted for balance of payments reasons, fall totally outside of the scope of Article IV” and are “an objectionable legal amplification of the Fund’s mandate under Article IV.”

    C. Conditionality

    11. The mandate for applying conditionality to trade policies is somewhat more direct. Article V, Section 3 (Conditions Governing Use of the Fund’s General Resources) empowers the IMF, consistent with the purposes outlined in Article I, to adopt policies on the use of its resources to help members resolve balance of payments difficulties. Article I(v) states that the IMF should make its resources temporarily available to members, subject to adequate safeguards, to provide them “with the opportunity to correct maladjustments in their balance of payments, without resorting to measures destructive of national or international prosperity.”9 Some external commentators interpret these articles as mandating conditions to prevent the intensification of trade restrictions, but not conditions with other objectives.

    12. The IMF, however, interprets this mandate as providing the basis for two types of trade policy conditionality: a continuous performance criterion prohibiting trade restrictions for balance of payments reasons and structural trade policy reforms. The IMF has noted that trade measures that are “destructive of national or international prosperity” are more likely to worsen maladjustments in the balance of payments and less likely to restore the external viability that is the objective of the IMF’s financial support. Such trade measures also make it more likely that the use of IMF resources will not be temporary (IMF, 2005). Gold (1986) states that “the IMF would not be observing the injunction to apply adequate safeguards if it concentrated exclusively on the measures and policies that were within its regulatory authority [such as exchange restrictions] and ignored other measures and policies [such as trade restrictions] that had comparable effects on the balance of payments.”

    13. Some external commentators have criticized the IMF’s imposition of structural trade policy conditions as extending beyond its mandate. Buira (2003) argues that structural trade policy measures are outside the IMF’s core areas of competence and that the IMF should “keep itself within its original simplified mandate by giving advice and technical assistance within its areas of competence.” Saner and Guilherme (2007a, 2007b) assert that “the establishment of ‘adequate’ solvency safeguards does not bear the same meaning as a legal carte blanche to demand all-encompassing structural reforms from a Fund member” particularly those beyond its core legal mandate. Therefore, they contend that “adequate solvency safeguards to address balance of payments problems should not extend to trade policies” and that the “Fund usurps its legitimacy [when it] engage[s] in much broader reforms that include trade liberalization.”

    References

      Akyüz, Yilmaz,2005, “Reforming the IMF: Back to the Drawing Board,”G-24 Discussion Paper No. 38 (Geneva: United Nations Conference on Trade and Development).

      Buira, Ariel,2003, “An Analysis of IMF Conditionality,”G-24 Discussion Paper No. 22 (Geneva: United Nations Conference on Trade and Development).

      Gold,Joseph,1975, “Recent International Decisions to Prevent Restrictions on Trade and Payments,”Journal of World Trade Law,Vol. 9, pp. 6978.

      Gold,Joseph,1986, “Some Legal Aspects of the IMF’s Activities in Relation to International Trade,”Osterreichische Zeitschrift fur Offentliches Recht und Volkerrecht, Vol. 36, pp. 157218.

      International Monetary Fund (IMF), 2004, “Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision—Overview,”SM/04/212 (Washington).

      International Monetary Fund (IMF)2005, “Review of Fund Work on Trade,”SM/05/57 (Washington: International Monetary Fund).

      International Monetary Fund (IMF)2006, Selected Decisions of the International Monetary Fund and Selected Documents, Thirtieth Issue (Washington).

      International Monetary Fund (IMF)2008, “Protecting IMF Resources: Safeguards Assessments of Central Banks,”IMF Factsheet.Available via the Internet: www.imf.org/external/np/exr/facts/safe.htm.

      Saner,Raymond, andRicardoGuilherme,2007a, “The International Monetary Fund’s Influence on Trade Policies of Low-Income Countries: A Valid Undertaking?”Journal of World Trade,Vol. 41, No. 5, pp. 93181.

      Saner,Raymond, andRicardoGuilherme,2007b, “IMF Conditionalities for the Least Developed Countries,”G-24 Policy Brief No.19 (Washington: G-24 Secretariat)

      Siegel,DeborahE.,2002, “Legal Aspects of the IMF/WTO Relationship: The IMF’s Articles of Agreement and the WTO Agreements,”American Journal of International Law, Vol. 96 (July), pp. 56199.

      Woods,Ngaire,2006, The Globalizes: The IMF, the World Bank, and Their Borrowers (Ithaca: Cornell University Press).

    This chapter has benefited from the insights in Annex I in IMF (2005). However, it reflects entirely the views of the IEO and not those of the Executive Board or Legal Department of the IMF.

    As noted by Gold (1986), “[t]he nuance of the word…‘facilitate’ in Article I expresses the idea of encouraging or easing and not controlling” the expansion of international trade as a purpose of the IMF.

    Regulatory jurisdiction or authority is “understood in the sense of requiring, proscribing, validating and invalidating practices” (Gold, 1986), “with the consequence that a member is in violation of its obligations if it applies a measure that the organization fails to approve or expressly disapproves” (Gold, 1975).

    Article VIII, Section 2(a), which gives the IMF regulatory jurisdiction over restrictions on payments and transfers of current international transactions, states that “…no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions.”

    IMF (2006), Decision No. 1034 (60/27). Gold (1986) discusses the debate surrounding the interpretation of the restrictions on payments and transfers for current international transactions.

    The 1977 Decision on Surveillance Over Exchange Rate Policies and the 2007 Decision on Bilateral Surveillance over Members’ Policies (which replaced the 1977 Decision in June 2007) note that “[i]n its surveillance…the Fund shall consider the following developments as among those which would require thorough review and might indicate the need for discussion with a member: [one such development is] the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments.”

    As noted in Gold (1986), “‘economic policies’ and ‘economic conditions’ [for promoting growth and stability] in Article IV, Sections I(i) and I(ii) could be taken to imply concern with trade policies.”

    This discussion of the mandate for IMF surveillance notes that the legal basis for the discussion of issues outside the scope of surveillance is Article I(i), which states that one of the purposes of the IMF is “to promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.” Further, it notes that Article XII, Section 8 permits the IMF “to communicate its views informally to any member on any matter arising” under the Articles. Also see Annex I in IMF (2005).

    “These safeguards take various forms, such as limits on how much can be borrowed, conditions on the loans, measures to deal with misreporting or arrears, or ‘safeguards assessments’ of central banks” (IMF, 2008).

    Background Document 2 Cooperation Between the IMF and the WTO
    A. Background

    1. The creation of the WTO at the end of the Uruguay Round prompted the IMF to examine its role in trade policy issues and its relationship vis-à-vis this new institution. The Fund had developed an informal collaborative relationship with the secretariat of the General Agreement on Tariffs and Trade (GATT), focusing mainly on consultations about import restrictions that were adopted for balance of payments reasons. But the WTO’s mandate extended beyond the agreement on trade in goods embodied in the GATT to agreements on trade in services and on intellectual property rights, as well as policies on dispute resolution and trade policy surveillance (Box 1).

    2. Both institutions had a mandate for cooperation. Article X of the IMF’s Articles of Agreement—which predated the WTO and, indeed, the GATT—called on the Fund to cooperate with “any general international organization and with public international organizations having specialized responsibilities in related fields.” Article III:5 of the WTO Agreement was more specific, calling on the WTO to cooperate with the Fund (and the World Bank Group) “with a view to achieving greater coherence in global economic policymaking.” The challenge was how to strengthen the collaboration that had existed between the Fund and the GATT, so as to avoid potential inconsistencies and conflicts.

    3. After the creation of the WTO, the IMF refocused its existing infrastructure for liaising with the GATT to examine cooperation issues with the WTO. The Executive Board’s Committee on Liaison with the Contracting Parties to the GATT (CGATT), which had been formed in 1950 to advise the Board on issues relating to the IMF’s relationship with the GATT, was renamed the Committee on Liaison with the WTO (CWTO), and charged with helping to establish arrangements for the IMF’s relationship with the WTO and advising the Board on issues relating to that relationship. The IMF’s Office in Geneva, set up in 1965 to forge closer relations with the GATT and the United Nations Conference on Trade and Development (UNCTAD), was charged with liaising with the WTO (and other Geneva-based international organizations) in conjunction with the then Policy Development and Review Department (PDR) and the Legal Department. The Board saw no need, at the time, to create new institutional structures within the Fund to liaise with the WTO (IMF, 1995a).

    Box 1.Scope of the WTO Agreement

    The Agreement Establishing the World Trade Organization (or the WTO Agreement) mandated the WTO to “provide the common institutional framework for the conduct of trade relations among its members” in matters related to the following areas, included as annexes to the agreement:

    • Trade in goods (Annex 1A: Multilateral Agreements on Trade in Goods)—incorporating the GATT 1994 plus agreements in 12 areas: (i) agriculture; (ii) sanitary and phytosanitary measures; (iii) textiles and clothing; (iv) technical barriers to trade; (v) trade-related investment measures (TRIMS); (vi) antidumping; (vii) customs valuation; (viii) preshipment inspection; (ix) rules of origin; (x) import licensing; (xi) subsidies and countervailing measures; and (xii) safeguards.

    • Trade in services (Annex 1B: General Agreement on Trade in Services (GATS)).

    • Intellectual property rights (Annex lC: Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)).

    • Dispute settlement (Annex 2: Dispute Settlement Understanding).

    • Trade policy review (Annex 3: Trade Policy Review Mechanism).

    • Civil aircraft, government procurement, dairy, and bovine meat (Annex 4: Plurilateral Trade Agreements)—only for WTO members that have accepted those agreements.

    4. Both institutions defended their respective jurisdictions, but grey areas and areas of conflict emerged. The IMF’s Geneva Office and Legal Department worked to preserve the clarity of the legal relationship that had existed under Article XV of GATT 1947, specifically with regard to exchange measures, on which it was expected that the WTO would defer to the IMF’s findings and its jurisdiction.1 Nonetheless the possibility remained—especially given the strengthened dispute settlement procedures of the WTO—that exchange measures consistent with the IMF’s Articles could be subject to countermeasures under the WTO (IMF, 1994c).2 More generally, there were issues of jurisdictional consistency that remained unresolved from GATT days, and had their roots in different approaches to distinguishing between trade and exchange measures. Whereas the IMF used a technical criterion to delineate between trade and exchange measures, the GATT had at times favored a different approach based on the effect on trade of the measure in question; this opened the door for exchange measures that had trade effects to fall under the WTO’s jurisdiction as well (IMF, 1994c). IMF staff favored seeking an early resolution to these issues, but the Board was divided and left the matter for further discussion with the WTO (IMF, 1995a). A case involving China’s accession to the WTO soon illustrated how conflicts of jurisdiction could arise and how problematic they could be (Box 2). The inclusion of certain capital transfers within the jurisdiction of the WTO was also potentially problematic: the General Agreement on Trade in Services (GATS) was “the first agreement of universal (as opposed to regional) application” that took a step toward liberalization of capital movements—a tendency that was not yet reflected in the IMF’s Articles of Agreement (IMF, 1994c).3

    Box 2.Conflict of Jurisdiction: The Draft Protocol on China’s Accession to the WTO

    At issue was the unprecedented inclusion (by the United States) in the draft protocol on China’s accession to the WTO of obligations relating to the exchange system. Specifically, the draft protocol required that China bring its foreign exchange regime into conformity with the obligations of Article VIII of the IMF by an agreed date, and limited its rights to use foreign exchange restrictions in the future.

    Fund staff objections, which were communicated to the Board in a statement in March 1995, were several (IMF, 1995b). For a start, the draft protocol contravened the ministerial declaration in the Uruguay Round Final Act that recognized explicitly the IMF’s jurisdiction over exchange matters. Further, Article XV 9 of the GATT 1994 recognized the right of a WTO member that was also an IMF member to maintain exchange controls/restrictions in accordance with the IMF’s Articles. By removing that right for China, the protocol would effectively create two classes of IMF members—an outcome inconsistent with the IMF’s principle of uniformity of treatment of its members.

    At the Board discussion of China’s Article IV consultation in March 1995, the U.S. Executive Director exhorted the Fund to take a more activist stance in encouraging countries to accept Article VIII and to state its claims more strongly in the area of exchange restrictions lest it lose its jurisdiction by default (IMF, 1995c). The following year, the Managing Director sent the staff statement and a formal request to the WTO’s Working Party on China’s Accession to drop all references to exchange measures under IMF jurisdiction from the draft protocol. There was considerable tension regarding this matter at the WTO. Although the IMF was invited to attend the working party’s meeting in March 1996, the Fund representative was told that his intervention at the meeting would be unhelpful; the IMF statement was not read at the meeting but submitted in written form and entered as part of the working party’s formal report. The language of the draft protocol was not modified at that time.

    China accepted Article VIII in December 1996. But the language of the accession protocol was not resolved for another five years, involving discussions among Fund staff, the U.S. administration, the Chinese authorities, and the WTO working party. China acceded to the WTO in December 2001.

    B. Cooperation in Principle

    5. Absent a legal solution to the problem of overlapping jurisdictions, both organizations agreed that enhanced cooperation was key. To start, PDR issued two guidance notes to staff on the topic (Table 1). The first (IMF, 1995e) covered aspects of collaboration with the WTO such as balance of payments consultations, consistency of policy advice and obligations, staff contacts, and exchange of documents, research, and information. The second (IMF, 1995f) dealt specifically with the consistency of IMF advice with WTO rules (“WTO consistency”), highlighting various WTO rules that Fund staff needed to be aware of in the course of program design, surveillance activities, and technical assistance. As explained in the latter note, the role of staff was to be familiar with the issues so that potentially inconsistent policy advice could be identified at an early stage and alternatives explored. PDR’s Trade Policy Division and the Geneva Office would assist missions in identifying potential inconsistencies and consult informally with the WTO Secretariat if necessary. Once a potential inconsistency was identified, the mission was to advise the national authorities to clarify the issue directly with the WTO; it was not to enforce WTO rules or the country’s obligations under the WTO.

    Table 1.IMF Guidelines on WTO Cooperation
    Date
    Board discussions on trade
    The Relationship of the WTO with the Fund:

    Institutional and Legal Aspects of the WTO—Concluding Remarks
    January 1995
    The Fund-WTO Cooperation Agreement—Summing UpJuly 1996
    Fund Support for Trade-Related Balance of Payments Adjustments—Summing UpApril 2004
    Review of Fund Work on Trade—Summing UpMarch 2005
    Doha Development Agenda and Aid for Trade—Summing UpNovember 2005
    Doha Development Agenda and Aid for Trade—Summing UpSeptember 2006
    Aid for Trade: Harnessing Globalization for Economic Development—Summing UpSeptember 2007
    PDR guidance memos to area departments
    Collaboration with the WTOApril 1995
    Reference Note on WTO ConsistencyNovember 1995
    WTO Committee on Balance of Payments RestrictionsOctober 1996
    Note on Import SurchargesJanuary 1999
    Developments in World Textiles Markets: Implications for Fund SurveillanceAugust 2003
    Operational Guidelines for Fund Support for Trade-Related Balance of Payments AdjustmentsSeptember 2004
    Other guidelines
    Agreement between the IMF and the WTODecember 1996
    Report of the Managing Director, President, and Director-General on CoherenceOctober 1998
    Source: IMF.

    6. Guidance to staff was clear about how far IMF trade policy advice and conditionality could go. The guidance provided that while the IMF could not recommend policies that would violate a country’s WTO commitments, it was “perfectly valid” for Fund advice and program design to encompass unilateral trade liberalization that went beyond a country’s WTO commitments so long as there was no “cross-conditionality” (i.e., as defined by the guidance, so long as the country was not required to make a binding commitment to the WTO on trade liberalization undertaken in the context of a Fund-supported program). For example, Fund staff could not, in the context of a comprehensive tax reform, ask a country to increase some tariffs above their WTO bindings. But staff could—and were encouraged to—ask a country to lower some (applied) tariffs below their WTO bindings in order to “improve economic efficiency,” as long as the country was not made to bind its tariffs in the WTO at the lower level (IMF, 1995f).

    7. Explicit arrangements for IMF-WTO cooperation were set out in the Cooperation Agreement signed by the two institutions in December 1996 (IMF, 1996d). These included arrangements for staff from each institution to attend the meetings of the others’ governing bodies and procedures for the exchange of documents and other information (Box 3). The agreement largely formalized the collaboration mechanisms that had existed between the Fund and the GATT, and most of its elements were uncontroversial.4

    8. The most debated item had to do with the IMF’s voice in WTO dispute settlement panels. The IMF had requested the ability to communicate its views at dispute settlement panels in the WTO in cases that the Board determined directly involved the Fund’s mandate. The WTO was disinclined to allow IMF participation in the panels, arguing that the Fund needed to maintain an impartial role in the proceedings. In the end it was agreed that in cases where the IMF’s jurisdiction was involved and where the measure in dispute was covered by the IMF’s Articles, written submissions by the Fund would suffice to inform the panel and such submissions would be incorporated in the formal record of the panel proceedings. However, it remained unclear as to whether the panel was required to receive, and treat as authoritative, the IMF’s information on the consistency of exchange measures with the IMF’s Articles (IMF, 1996c).

    9. The concept of coherence in global economic policymaking took longer to flesh out. The idea first emerged in the early stages of the Uruguay Round negotiations, when the focus was on exchange rate and trade policies; Ostry (1999) noted that “the term ‘coherence’ was essentially a euphemism for curbing extreme swings in exchange rates.”5 But in the Declaration on the Contribution of the World Trade Organization to Achieving Greater Coherence in Global Economic Policymaking that was attached to the Uruguay Round Final Act, the concept of coherence was widened to include “consistent and mutually supportive policies” among the international institutions with responsibilities in “structural, macroeconomic, trade, financial and development aspects of economic policymaking.” In 1995, a High Level Working Group on Coherence (HLWGC), consisting of senior staff from the IMF, the World Bank, and the WTO, was formed to recommend ways of achieving coherence in economic policymaking. The working group’s report—the Report of the Managing Director, President, and Director-General on Coherence (or the 1998 Coherence Report)—identified several issues that fell under this rubric, noting that the list would be flexible and subject to regular review by the HLWGC (IMF, 1998e) (Box 4). Exchange rate and debt issues were not on the list—the WTO Secretariat had sought to include them but Fund (and Bank) staff had argued forcefully against their inclusion and won.

    Box 3.Key Arrangements for IMF-WTO Cooperation Specified in the 1996 Cooperation Agreement

    Balance of payments consultations

    • The IMF will participate in consultations carried out by the WTO Committee on Balance of Payments Restrictions on measures taken by a WTO member to safeguard its balance of payments.

    Representation

    • The IMF will invite the WTO Secretariat to send an observer to Executive Board meetings on trade policy issues and matters of common interest. The WTO will invite the IMF to send an observer to meetings of its Ministerial Conference, General Council, and certain committees, working groups, and bodies.

    Information and document exchange

    • The IMF and the WTO will make available to each other in advance the agendas and relevant documents for the meetings to which they are invited. In addition, the IMF will make available to the WTO Secretariat the agendas of the Executive Board meetings at the time of their circulation in the Fund, and the WTO will make available to the Fund the agendas of the Dispute Settlement Body at the time of their circulation in the WTO.

    • The IMF must inform the WTO of any decisions approving restrictions on the making of payments or transfers for current international transactions, decisions approving discriminatory currency arrangements or multiple currency practices, and decisions requesting a Fund member to exercise controls to prevent a large or sustained outflow of capital.

    • The IMF and WTO must share their reports with each other (staff reports and related background staff papers on Article IV consultations and on use of Fund resources from the IMF; trade policy review reports, summary records and reports to/of various WTO councils, bodies, and committees from the WTO), subject to a confidentiality constraint.

    Informal consultations

    • IMF and WTO Secretariat staff must consult with each other on issues of possible inconsistency between measures under discussion with a common member and that member’s obligations under the WTO Agreement or the IMF’s Articles of Agreement.

    Dispute settlement

    • The IMF will inform in writing the relevant WTO body (including dispute settlement panels), considering exchange measures within the Fund’s jurisdiction, as to whether such measures are consistent with the Articles of Agreement of the Fund.

    10. Ideas on how to achieve coherence in global economic policymaking did not extend far beyond the mechanisms outlined in the Cooperation Agreement. The principle behind the IMF-WTO Cooperation Agreement and a similar agreement between the WTO and the World Bank was that regular communication and information sharing would ensure that the three institutions were formulating consistent and mutually supportive policies in their respective areas of responsibility. The 1998 Coherence Report highlighted that regular meetings would take place among the three institutions at the management, senior staff, and technical levels to discuss issues of common interest.

    11. Criticism of the coherence objective came from both ends of the spectrum. Schott (1998) criticized the recommendations in the Cooperation Agreement and 1998 Coherence Report as insufficient. He suggested that the WTO open a small office in Washington to facilitate high-level contacts with the IMF and the World Bank and that the two institutions do more to induce countries to implement and sustain trade liberalization—the IMF by making its trade conditionality binding in the WTO, and the WTO by devising a system for providing credit in current or prospective negotiations for trade reforms to be undertaken in the context of Fund-supported programs. Civil society organizations, on the other hand, saw the IMF, the World Bank, and the WTO as “ganging up to force countries to comply with liberalization policies” (Bretton Woods Project, 1999; Rowden, 2001; Caliari, 2003).

    Box 4.Coherence Issues Highlighted in the 1998 Coherence Report

    Common policy issues

    • Trade liberalization as the outcome of WTO-based negotiations versus unilateral trade reforms in the context of programs supported by the IMF (and the World Bank).

    • Transitory adverse implications of trade liberalization on the balance of payments, fiscal accounts, and certain social indicators.

    Operational issues

    • Consultations on trade restrictions imposed for balance of payments reasons.

    • Trade policy surveillance of the world economy and individual countries.

    • Helping interested countries prepare for WTO accession.

    • Preferential trade agreements.

    • Building human and institutional capacity in developing countries to design and implement efficient reform policies and to facilitate their integration into the global economy.

    Issues to be addressed at both policy and operational levels

    • Trade prospects for developing countries.

    • Efficiency versus revenue aspects of tariffs.

    • Potential effects of agricultural trade liberalization on net food importers and least developed countries.

    C. Cooperation in Practice

    12. In practice, IMF-WTO cooperation has been shaped by important institutional and operational differences between the two institutions. Aside from their distinct albeit overlapping legal jurisdictions noted earlier, the two institutions differ in the nature of their obligations, their organizational structure, and their domestic governmental constituencies (Siegel, 2002). WTO rules stem from negotiations among WTO members and are enforced by the members; unlike the IMF, the WTO itself has no power to oversee/enforce the compliance of each member with its obligations.6 And while the IMF has an Executive Board, the WTO’s decisions are made by the WTO membership as a whole—by ministers or by their ambassadors or delegates. In the IMF, staff and management play an important role by making recommendations to the Executive Board on the Fund’s daily activities. In the WTO, delegations conduct much of the work on the trade obligations in their capacity as representatives of their countries; the staff of the WTO, who number only about a quarter those of the IMF, perform a secretariat role (Jackson, 2006).7 The two institutions represent different domestic governmental constituencies—finance ministries in the IMF, and trade, commerce, or foreign ministries in the WTO. The two institutions also have different memberships—not all IMF members are WTO members and vice versa—though the difference narrowed during the evaluation period (Figure 1).

    Figure 1.IMF and WTO Membership

    (Percent)

    Sources: IMF and WTO.

    13. On the IMF side, all interactions with the WTO were channeled through a small group of staff. The Fund’s representative to the WTO, based in the Office in Geneva (which was closed in 2008), was the primary point of contact. The representative worked closely with, and reported to, the Trade Policy Division in PDR. The Office in Geneva was responsible for day-to-day working relations with the WTO, including monitoring various WTO standing and negotiating bodies and reporting on their meetings. It reported to PDR’s Trade Policy Division on a daily/weekly basis. Senior PDR staff members participated in the HLWGC, which met on an ad hoc basis through 2001. In 2003, Fund staff suggested new mechanisms for IMF-WTO cooperation to handle consultations at the institutional level, such as the establishment of a permanent body that would meet on demand, but management did not take up these suggestions.

    14. The effectiveness of the Cooperation Agreement has not been reviewed regularly. The only review to take place was conducted by PDR and the Office in Geneva in 1998 (IMF, 1998c). The review, which was requested by the Executive Board at the time of approval of the agreement, concluded that IMF-WTO cooperation had proceeded smoothly—the cooperation mechanisms had been implemented as envisaged, there had been management and staff contacts at all levels, and no inconsistencies had been reported—with only modest budgetary implications for the Fund.

    Balance of payments consultations

    15. The most widely known form of IMF-WTO cooperation took place in the context of the WTO’s Committee on Balance of Payments Restrictions (CBR). Under WTO rules, subject to specified conditions, a country facing balance of payments difficulties may apply import restrictions to “safeguard its external financial position” (GATT Article XII) and/or, if it is a low-income developing country, to “ensure a level of reserves adequate for the implementation of its program of economic development” (GATT Article XVIIIB). Similar rules apply to restrictions on trade in services (GATS Article XII). The rules require that import restrictions imposed for balance of payments purposes be reviewed by the CBR, in consultation with the IMF.8

    16. The IMF’s role was to provide the CBR with input with which to decide each case. This input consisted of an update of recent economic developments in the consulting country and, in countries engaged in full consultations, a statement focusing on the country’s current and prospective balance of payments situation. The IMF statement was prepared by the relevant area department in consultation with PDR; approved by the Board, usually on a lapse-of-time basis; and delivered to the committee by the Fund’s representative to the WTO. Fund staff preparing this statement were directed by three PDR guidance notes: the 1995 note on WTO consistency (IMF, 1995f), a 1996 note on WTO CBR consultations (IMF, 1996b), and a 1999 note on import surcharges (IMF, 1999a) (Table 1).

    17. PDR guidance to staff was unequivocal about the IMF’s position on trade restrictions used for balance of payments reasons. Staff were instructed to “discourage the use of trade restrictions as a tool for balance of payments management” in their trade policy advice (IMF, 1995f). Although WTO rules allowed for import surcharges under certain circumstances, and surcharges had had “a limited impact on the macroeconomy” in practice, “the Fund oppose[d] surcharges in the great majority of cases” because they created distortions, hindered structural change, and ran counter to the Fund’s “goal of promoting open international trade” (IMF, 1999a). Furthermore, the GATT Articles allowing trade restrictions for balance of payments reasons had been drafted in the 1940s, when fixed exchange rates were the norm. Under flexible exchange rates, trade restrictions such as import surcharges were seen to be “redundant and inefficient in addressing the balance of payments situation” (IMF, 1999a).

    18. But the guidance was less consistent with regard to how far the IMF statement could go. According to the 1996 guidance note on CBR consultations, the IMF statement had to: (i) identify, through “an evaluation of a country’s reserve position and policies,” whether there was a balance of payments need at the time the trade restrictions were introduced; (ii) address the question of whether the country still had a balance of payments problem, based on assessments of its reserve adequacy and “the gamut of macroeconomic and structural policies” as described in staff reports and summings up; and (iii) determine the macroeconomic policy combination that would be needed to restore a sustainable balance of payments and how long this would take (IMF, 1996b). The guidance note warned staff not to make a direct judgment on the trade restrictions in question (“This is the jurisdiction of the WTO…”) but encouraged staff to comment on whether the trade restrictions were assisting the balance of payments adjustment and, if not, to “call for their early or phased removal, with some indication of a reasonable timetable for such action” (IMF, 1996b). The 1999 guidance note on import surcharges was more circumspect—the IMF statement, it noted, should present the available information on the level and evolution of reserves, as well as on potential risk factors, and avoid even a “direct judgment on the adequacy of a country’s reserves,” let alone a judgment of whether the surcharge was justified (IMF, 1999a).

    19. In practice, the IMF statements almost always called for an early removal of the import restrictions. During 1995–2007, the CBR held 41 consultations with 16 countries (Table 2).9 Of these, 28 involved a statement from the Fund. A spate of consultations with transition countries (Romania, Hungary, Bulgaria, and the Czech and Slovak republics) in the late 1990s mainly involved import surcharges imposed under GATT Article XII. Most of the other cases involved a handful of developing countries—notably India, Pakistan, Bangladesh, and Nigeria—invoking GATT Article XVIIIB. In more than 80 percent of the cases, irrespective of the assessment of the balance of payments situation, the IMF statement said the import restrictions were inappropriate and should be eliminated. Only in two cases—Pakistan and Bangladesh—did the IMF statements not comment on the restrictions under consideration. The CBR agreed with the IMF’s view on the trade measure(s) in roughly half of the cases.10 The most notable case of disagreement was India’s, which could not be resolved by the CBR, escalated into a trade dispute, and called into question the IMF’s role in the CBR consultations (Box 5).11

    Table 2.WTO CBR Consultations, 1995–2007
    Number of ConsultationsCountries
    YearWith no Fund

    statement
    With Fund

    statement
    (An * indicates continuation of earlier consultation(s); the number in parentheses denotes

    the number of consultations in that year)
    199536South Africa*, Egypt*, Hungary, Slovak Republic*, Turkey*, Brazil, Sri Lanka* Philippines*, India*
    199605Nigeria*(2), Tunisia*, Slovak Republic*, Hungary*
    199738lndia*(2), Nigeria*(2), Pakistan (2), Bangladesh*, Tunisia*, Czech Republic, Bulgaria, Slovak Republic
    199811Nigeria*, Bulgaria*
    199912Romania, Bangladesh*, Slovak Republic
    200024Bangladesh*(2), Pakistan*(2), Romania*, Slovak Republic*
    200110Bangladesh*
    200220Bangladesh*(2)
    200300
    200401Bangladesh*
    200500
    200600
    200701Bangladesh*
    Total1328
    Source: WTO.

    20. Fewer CBR consultations took place after 2000. The last new case considered by the CBR within the evaluation period was the Slovak Republic’s introduction of a temporary import surcharge in 1999. By the beginning of 2001, that surcharge had been eliminated, as had the restrictions imposed by Romania and Pakistan, leaving only one country—Bangladesh—that still maintained trade restrictions for balance of payments reasons. Bangladesh’s case was concluded in 2007.12

    21. Was IMF-WTO cooperation responsible for the drop in the use of the balance of payments provision? As noted earlier, IMF staff had long had misgivings about the use of trade restrictions for balance of payments reasons, but went along with the WTO in deference to the latter’s jurisdiction.13 It is possible that IMF advice could have led some countries to decide against invoking the balance of payments provision during the evaluation period, although evidence on this would be difficult to uncover. For countries that did decide to invoke the balance of payments provision, however, there is no evidence that the IMF helped to hasten the removal of the restrictions.14

    Document/information exchange and informal consultations

    22. The exchange of documents and data between the IMF and the WTO proceeded smoothly during the evaluation period. The procedures for the exchange of documents, agendas, and databases and for the IMF to inform the WTO of exchange restrictions approved were as described in the 1998 PDR review of the Cooperation Agreement.

    23. However, the extent to which both institutions internalized the information received was uneven. By end-2007, 111 countries that were members of both the IMF and the WTO had had at least one trade policy review (TPR), and more than three-quarters of these TPRs drew on the country’s recent IMF Article IV or use of Fund resources (UFR) report(s). By contrast, fewer than three-fifths of these TPRs were cited in IMF reports.15 According to WTO Secretariat staff, TPRs used IMF reports and data as definitive sources particularly on exchange rate and macroeconomic issues, but it was not evident that IMF staff used TPRs to nearly the same extent in their coverage of trade policy issues. In a survey of Fund staff (grades A15–B4), one-quarter of the respondents reported never having read a TPR and only 15 percent reported always reading TPRs.

    Box 5.India and the IMF’s Role in CBR Consultations

    India consulted in the WTO’s CBR in 1995 and 1997 over its use of quantitative restrictions on a range of imports. At the consultations, the IMF representative stated that India’s gross official reserves were comfortable and that India’s external situation could be well managed using macroeconomic policy instruments alone, without recourse to quantitative restrictions. The Indian representative argued that account had to be taken of the large share of volatile capital inflows and short-term liabilities in India’s balance of payments as well as the “developmental aspect” of removing the restrictions (WTO, 1997). A few (developing country) committee members agreed with India, but a larger number of (advanced country) members disagreed and seconded the IMF’s view. The CBR failed to reach an agreement, leaving the matter open for dispute settlement.

    Two weeks later, the United States filed a formal complaint at the WTO against India’s quantitative restrictions. The dispute settlement panel requested, and received in July 1998, written input from the IMF on a number of questions regarding India’s external position. The Fund explained that its assessment of reserve adequacy was based on the size of existing and potential claims on reserves—in the case of India, the sum of outstanding short-term liabilities (by remaining maturity) and potential outflows of portfolio investment (as proxied by the stock of portfolio investment after marking to market) (IMF, 1998b). The panel ruled against India in April 1999; the ruling was upheld by the Appellate Body in August 1999.

    In the meantime, India pushed to include as an implementation issue in the Doha Round a complete review of GATT Article XVIII, including the way in which reserve adequacy was assessed for developing countries, the IMF’s role in the CBR consultation process, and the nature of the Fund’s input (WTO, 1999b). It argued that the Fund had overstepped its boundaries when it prescribed a timetable for the removal of India’s trade restrictions during the 1997 consultations with the CBR (WTO, 2002c). To facilitate the WTO’s discussions of this implementation issue, Fund staff assisted the WTO Secretariat in preparing two background notes on the determination of reserve adequacy (WTO, 1999a and 2002b), and also wrote a specially commissioned piece on the subject (IMF, 2003c). Despite numerous rounds of discussions at the WTO, no consensus could be reached on the appropriate role and analytical input of the Fund; the issue remains unresolved.

    24. Informal consultations between IMF and WTO Secretariat staff were the preferred avenue for information exchange. The informal consultations typically were channeled through PDR’s Trade Policy Division and/or the Office in Geneva. Some 17 such consultations took place in the first half of 1996 (on topics as varied as Guinea-Bissau’s tariff bindings, Argentina’s export rebates, and Bahrain’s GATS commitments), though IMF staff members indicated that their frequency declined to approximately 10–12 a year after that.16 On a handful of occasions, IMF staff members visited the WTO for informal consultations en route to/from their mission site.

    25. Known cases of inconsistency were few, suggesting that IMF-WTO information exchange, while imperfect, was satisfactory overall. During the evaluation period, there were only two cases where IMF advice/conditionality was challenged in WTO disputes: Argentina’s statistical tax on imports (1996–98) and Korea’s corporate restructuring measures (2002–05) (Box 6). Even in the best of circumstances, inconsistencies were not unlikely, since the WTO Secretariat was not authorized to provide definitive interpretations of WTO rules; only the dispute settlement panels were. The panels occasionally sought, and received, information from the IMF to aid their deliberations, but, as illustrated in the two dispute cases in Box 6, they were not obliged to do so.17 It should be noted that there is, in any case, no exception under the WTO’s obligations for measures taken in the context of a Fund-supported program.

    Box 6.WTO Disputes Involving IMF Advice/Conditionality

    In 1996, the United States brought a dispute against Argentina concerning, inter alia, the latter’s imposition of a statistical services tax on selected imports. Argentina argued that the tax was part of a policy package agreed in an IMF-supported program and to challenge it was a case of “cross-conditionality.” Indeed, the memorandum of economic policies for an extension of Argentina’s IMF arrangement included the tax as one of the fiscal measures that the government had approved to achieve its programmed fiscal surplus (IMF, 1995d). However, this argument was rejected by the panel (and by the Appellate Body), and the case was decided in favor of the United States. The dispute panel(s) did not seek the IMF’s view on the tax, even though both parties to the dispute supported such consultation. Although the final outcome of the case was “not objectionable” to the Fund, Fund staff considered the lack of consultation “regrettable” and, at the April 1998 meeting of the Dispute Settlement Body, stated for the record that the Fund was always ready to be consulted by dispute panels in such cases (IMF, 1998c).

    In 2002, the European Union brought a dispute against the Republic of Korea concerning subsidies to the latter’s shipbuilding industry, including, inter alia, corporate restructuring measures in the form of debt forgiveness, debt and interest relief, and debt-to-equity swaps provided through government-owned and government-controlled banks. Korea argued that these restructuring measures had been agreed with the Fund under a Stand By Arrangement in 1997, and that they were taken on a strictly commercial basis and were not specific to a company or industrial sector. As in the earlier Argentina case, the dispute settlement panel did not seek the Fund’s view on the measures. But Fund staff were invited to respond to a statement made by the Korean delegation at a meeting of the WTO Working Group on Trade, Debt, and Finance; the staff’s statement supported Korea’s position (IMF, 2003a). In 2005, the panel rejected the EU’s claims that the debt restructurings of Korean shipyards involved subsidization.

    Representation and research cooperation

    26. Attendance by IMF and WTO staff at each other’s meetings proceeded largely as planned. During 1997–2007, WTO Secretariat staff attended on average one to five IMF Executive Board meetings each year as observers. The meetings included certain World Economic Outlook (WEO) discussions and CWTO meetings and one country-specific meeting. The IMF was granted observer status in almost all WTO bodies (Figure 2).18 Staff of the Geneva Office attended the working level meetings and reported back to PDR’s Trade Policy Division; these reports were distilled into periodic updates for the Board (or the CWTO) on WTO activities of interest to the Fund.19 IMF staff sometimes contributed sub-stantively to WTO meetings either through oral statements or briefings or through analytical notes circulated in advance (see Table 3 for the main examples). Records of meetings of the HLWGC are sketchy; according to IMF and WTO Secretariat staff, those meetings stopped after 2001. The first—and only—joint IMF-World Bank-WTO seminar was held in Geneva in June 1999 on the topic of regionalism. Plans to hold such tripartite seminars at regular intervals did not materialize, although once every few years IMF staff presented seminars or participated in workshops at the WTO.20

    Figure 2.WTO Structure

    Source: WTO.

    Square brackets denote committees/working parties in which the IMF does not have observer status.

    Plurilateral committees (denoted by*) inform the General Council or Goods Council of their activities although these agreements are not signed by all WTO members. The Trade Negotiations Committee is in charge of negotiations of new trade agreements. All other committees and councils are in charge of implementing existing trade agreements.

    Table 3.Main Examples of IMF Contributions to the Work of WTO Bodies
    Committee on Agriculture (CAG)
    1996–2007Each year as part of the annual monitoring exercise mandated by the WTO Ministerial Decision on the possible negative effects of the Uruguay Round reform program on least-developed countries (LDCs) and net food importing developing countries (NFIDCs), Fund staff presented a statement to the CAG discussing trends in world food prices and outlining Fund resources to meet the needs of its low-income members.
    September 1996Fund staff presented a statement at the CAG meeting on September 25-26, 1996, outlining how existing Fund facilities could help LDC/NFIDCs cope with higher food prices and how those facilities had been used by such countries during the recent rise in world food prices.
    December 2001The Fund’s representative to the WTO participated in an interagency panel to explore ways and means for improving access by LDC/NFIDCs to multilateral programs and facilities and to consider the establishment of a revolving fund. The panel’s report, released in June 2002, contained suggestions for modifying the Fund’s Compensatory Financing Facility (CFF) and concluded that an ex post revolving fund would not be useful.
    Working Group on Trade and Investment (WGTI)
    October 1997Fund staff prepared a note, “Implications of the Relationship Between Trade and Investment," summarizing Fund publications on trade and investment and related issues. The note was discussed in the WGTI meeting on October 6-7, 1997, during which the Fund representative updated the WGTI on the proposed amendment of the IMF’s Articles of Agreement to include capital account liberalization as one of the Fund’s purposes.
    November 1998Fund staff prepared a note on the IMF’s definition of foreign direct investment (FDI) in response to a WGTI request. The note was discussed in the WGTI meeting on November 25-26, 1998, where no agreement was reached as to whether the WGTI should adopt the Fund’s definition of FDI.
    General Council
    May 1999Fund staff made a presentation at the General Council’s informal meeting on coherence on May 27, 1999, about the results of the Interim Committee meeting of the previous month and work being undertaken in the Fund that could be of interest in the context of preparations for the Seattle Ministerial Conference.
    June 1999Fund staff assisted the WTO Secretariat in preparing a note on “The Treatment of ‘Monetary Reserves’ in WTO Balance-of-Payments Committee Consultations.”
    January 2001The paper, “Revenue Implications of Trade Liberalization" by Fund staff (Ebrill, Stotsky, and Gropp, 1999) was discussed at the General Council’s informal meeting on coherence on January 18, 2001.
    January 2003Fund staff prepared four notes in response to the WTO’s request for the Fund’s analytical perspective on some of the proposals made by developing countries for special and differential treatment. The notes were on: (i) “Trade Restrictions for Balance of Payments Purposes”; (ii) “Financing of Losses from Preference Erosion”; (iii) “Export Financing and Duty Drawbacks”; and (iv) “Liberalizing Trade and Safeguarding Public Revenues.” Fund (FAD) staff gave an informal seminar on (iv) at the WTO for developing country delegations on January 23, 2003.
    Working Group on Trade, Debt and Finance (WGTDF)
    April 2002Fund staff briefed the WGTDF on the Fund’s financing facilities, the IMF-World Bank Heavily Indebted Poor Countries (HIPC) Initiative, and Fund initiatives to strengthen the international financial architecture.
    September 2002Fund staff sent two chapters from the September 2002 WEO (“Essays in Trade and Finance” and “Trade and Financial Integration”) to the WGTDF. In the WGTDF meeting on September 30, 2002, the joint IMF-World Bank paper on “Market Access for Developing Country Exports—Selected Issues" was highlighted during the discussion on trade and debt.
    May 2004Fund staff briefed the WGTDF on the main results of the Fund seminar on “Trade Finance in Financial Crises,” held in Washington in May 2003.
    October 2004Fund staff prepared a paper on “Exchange Rate Volatility and Trade Flows—Some New Evidence,” updating a 1983 study that the Fund had prepared for the GATT. The paper, which concluded that exchange rate volatility was “probably not a major policy concern” from the perspective of enhancing trade, was discussed in the WGTDF meeting on October 4, 2004. (Clark, Tamirisa, and Wei, 2004).
    Committee on Trade in Financial Services (CTFS)
    July 2002Fund staff briefed the CTFS on the Fund’s Financial Sector Assessment Program (FSAP).
    April 2003Fund staff prepared a note on “Financial Sector Stability, Reform Sequencing and Capital Flows,” including an annotated list of key IMF publications on capital account liberalization.
    Committee on Balance-of-Payments Restrictions (CBR)
    October 2002Fund staff gave a statement in the CBR meeting on October 2, 2002 summarizing the Fund’s views on reserve adequacy and capital account vulnerabilities and the evolution of the indicators used by the Fund in assessing reserve adequacy.
    Committee on Agriculture—Subcommittee on Cotton (SCC)
    April 2005Fund staff informed the SCC about the Fund’s cotton seminar, to take place in Cotonou on May 18, 2005. The seminar would assess the macroeconomic consequences of cotton price developments and consider steps toward achieving the Millennium Development Goals in the African region.
    July 2005Fund staff reported on the Fund’s cotton seminar held in Cotonou on May 18, 2005.
    WTO Secretariat—Development and Economic Research
    December 2005Fund staff sent the WTO’s Chief Economist two notes providing an analytical perspective on Doha Round issues in the run-up to the 2005 WTO Ministerial Conference: “Will the Doha Round Lead to Preference Erosion?" and “Does Import Protection Discourage Exports?”
    Sources: IMF and WTO.

    27. Regular visible interaction took place at the management level. The WTO Director-General attended most IMF-World Bank Spring and Annual Meetings and used these opportunities to address the International Monetary and Financial Committee (IMFC) and/or the Development Committee and press for their support in advancing the WTO’s agenda.21 The IMF Managing Director or his First Deputy attended and addressed all but one of the WTO Ministerial Conferences; s/he also attended three WTO General Council meetings—one in 2003 and two in 2004—where coherence was the topic of discussion. There was also significant informal or less visible communication between IMF management and the WTO Director-General, the extent of such communication depending to some extent on the personal interests of, and relationships between, the individuals involved. For example, the First Deputy Managing Director and Economic Counselor made a special visit to the WTO in August 2002 to discuss possible new areas of cooperation (IMF, 2002a). Box 7 illustrates one instance of high-level IMF-WTO cooperation.

    28. These contacts provided opportunities to explore other, ad hoc forms of cooperation but the partnership was asymmetric. Cooperation was typically initiated by a WTO request for IMF research/ analysis or policy-related support. For example, in 2002, the WTO asked the IMF to (re)visit the issue of the revenue implications of trade liberalization and to provide an analytical perspective on some of the proposals made by developing country delegations for special and differential treatment in the WTO (IMF, 2002a). Overlaps in IMF and WTO efforts were rare; Box 8 illustrates one such instance. There were no instances of the IMF requesting WTO support. The asymmetry is not surprising, given the disparity in staff size between the IMF and the WTO Secretariat.

    29. IMF staff provided research and analysis but this rarely served as the basis for WTO decisions. Table 3 lists some examples of IMF research/analysis provided to the WTO. By all accounts, the WTO Secretariat was highly appreciative of the IMF’s work and valued the ability to call on the Fund for such support. But the IMF’s research/analysis did not seem to have had much impact on final outcomes in the WTO. In most (but not all) cases, the Fund’s input was used as a basis for discussion but few discussions led to any definite conclusions (Box 9).

    Financial support

    30. Until 2004, the IMF declined to create new lending facilities to support coherence objectives. The first such request came in 1995 when the WTO Director-General asked the IMF (and the World Bank) to consider providing special assistance for net food-importing developing countries (NFIDCs), whether by establishing a new facility to help them cope with a terms of trade deterioration caused by agricultural trade liberalization, or by giving them priority in access to existing facilities, or by softening their program conditionality.22 The IMF maintained that its existing facilities—notably the Compensatory Financing Facility (CFF) and, to a lesser extent, the Enhanced Structural Adjustment Facility (ESAF), which was the forerunner of the Poverty Reduction and Growth Facility (PRGF)—were sufficient to help NFIDCs cope with higher food prices (WTO, 1995).23 NFIDCs demurred, noting that the CFF had been of limited use to them, partly because of its limited product coverage (cereals only), conditionality (if drawn in conjunction with an upper-credit-tranche-type arrangement), and nonconcessional terms. The IMF Board reviewed the CFF in 2004 in conjunction with its review of instruments and financing options for low-income countries. The Board acknowledged that the CFF, because of its nonconcessional nature, was not an attractive option for low-income countries facing temporary shocks, and recommended subsuming its function in the PRGF, but put off the decision to eliminate the CFF for another three years (IMF, 2004a). The CFF was eliminated in 2009.

    Box 7.IMF-WTO Cooperation to Forestall Protectionism in the Wake of the Asian Financial Crises

    The financial crises that began in Asia in 1997 were a major test of coherence in global economic policymaking. While the immediate focus and primary concern of the IMF was to restore financial and macroeconomic stability in the affected countries, it soon became clear that a lasting solution had to involve the global system: with exports from East Asia expected to rise significantly partly as a result of currency devaluations, there was concern that protectionist pressures in importing and export-competing countries could lead to a downward spiral of worldwide recession.

    The IMF and the WTO were mindful of this risk. The heads of the two institutions and the World Bank issued joint statements in October 1998 and November 1999 emphasizing the importance of policy coordination and the need to keep markets open (IMF, 1998f and 1999d). The IMF made a special effort to press home those points in its Article IV surveillance of the United States, where the steel industry was lobbying for protection (IMF, 1998d and 1999b).

    The WTO regarded the cooperation as successful in forestalling a rise in protectionism. The 1999 WTO Annual Report noted that there was “no evidence of a return to protectionist measures” in 1998 and 1999 and that some crisis-hit countries even further liberalized their trade regimes (a number of them in the context of Fund-supported programs) (WTO, 1999c). The IMF’s 1999 World Economic Outlook was somewhat more guarded, noting that there were some protectionist reactions in Asia, Latin America, and the transition economies (e.g., selective tariff increases) and in large importing countries (e.g., antidumping actions), although the reactions were relatively limited and did not cause major disruptions to global trade flows (IMF, 1999c).

    Box 8.IMF-WTO Cooperation on Trade Finance in Financial Crises

    During the Asian financial crises, many countries found that trade financing dried up along with other forms of short-term capital flows, disrupting trade and hindering the recovery of economic growth and the balance of payments. The WTO Director-General raised the issue with the heads of the IMF and the World Bank in October 1998 (WTO, 1998a), and the HLWGC discussed it in November 1998 when the three institutions agreed to “monitor the situation closely” (WTO, 1998b).

    In October 2002, WTO staff made a direct appeal to the IMF for help in putting together a response on this issue for WTO members ahead of the 2003 Ministerial Conference (IMF, 2003b). Meanwhile, PDR—the Official Financing Division, not the Trade Policy Division—made preparations for a seminar on the topic to be held at IMF headquarters in May 2003, with participants from the private and public sector, academia, and research institutions, but not the WTO. The IMF Managing Director announced the seminar at the WTO General Council meeting on coherence two days before it took place (Köhler, 2003).

    The IMF seminar identified various solutions involving the private sector, the government, regional development banks, and official bilateral credit agencies, but only a supporting role for the Fund, limited to seeking out and/or coordinating efforts to address trade finance declines. (IMF, 2003f). The seminar served as a basis for discussions in the WTO’s Working Group on Trade, Debt and Finance (WGTDF). In January 2004, the WTO invited the same group of participants from the IMF seminar to its own seminar in Geneva to examine how the WTO could contribute to the solutions that emerged from the earlier seminar (WTO, 2004).

    Although the problem of trade finance in financial crises fell squarely within the “coherence” rubric, IMF-WTO cooperation in this case was hardly ideal. Neither institution was instrumental in ameliorating the problem at the time—perhaps because other players stepped in quickly in various ways. And when it came to putting together the lessons from the experience and formulating a framework for the future, both institutions seemed to be working in parallel, leading to a duplication of efforts by PDR and the WGTDF.

    Box 9.Five Examples of IMF-WTO Research Cooperation

    In 2002, IMF (Research Department and FAD) staff prepared four notes in response to a request by the WTO for help in analyzing proposals made by developing countries on its “special and differential treatment” provisions. The notes were circulated to WTO members in early 2003 (IMF, 2003c).

    The note on “Trade Restrictions for Balance of Payments Purposes” addressed the proposal by India for a complete review of GATT Article XVIII including the implications of capital account mobility on the assessment of reserve adequacy and justification for import restrictions (see Box 5). The note summarized IMF (and other) work underlying the shift from current to capital account considerations in the assessment of reserve adequacy since the late 1990s. It argued that trade restrictions were not the first-best policy for achieving a targeted reserve growth rate during normal times or for dealing with reserve losses during a current or capital account crisis. There is no evidence that this note was used by the CBR or Trade Negotiations Committee in their subsequent deliberations on the proposal (which remains in abeyance).

    The note on “Financing of Losses from Preference Erosion” addressed the proposal by least developed countries (LDCs) that they be compensated for the loss of export preferences resulting from a reduction of most-favored-nation (MFN) tariff rates under the Doha Round. The note estimated that a 40 percent cut in MFN tariffs by the so-called Quad (Canada, the European Union, Japan, and the United States) would lead to losses from preference erosion of less than 2 percent of exports for LDCs as a group and more than 5 percent of exports for only five LDCs. In light of this and the fact that the losses were anticipated, permanent, and spread out over time, the note argued that financing could be done in the context of existing IMF facilities. As it represented one of the few serious attempts to quantify the problem of preference erosion, the note attracted much attention within and outside the WTO.

    The note on “Export Financing and Duty Drawbacks” addressed proposals by developing countries that: (i) they be allowed to provide export financing at the London interbank offered rate or on terms offered by developed-country credit agencies; and (ii) they be allowed to provide uniform duty drawbacks to all exporters and that duty drawbacks be extended to all inputs, including capital goods. On (i), the note argued analytically and empirically that the proposals would amount to export subsidization, which was not the first-best policy to overcome distortions in domestic capital markets. On (ii), the note argued that the attractiveness of the proposals in practice would depend on the strength of the country’s tax administration, for example, countries with relatively strong tax administrations (including a value-added tax crediting mechanism) should not favor the uniform drawback scheme and could be allowed to extend duty drawbacks to capital goods. There is no evidence that this note was discussed in the WTO.

    The note on “Liberalizing Trade and Safeguarding Public Revenues” did not address a specific proposal but spoke to concerns expressed by many developing countries regarding the revenue impact of trade liberalization. The note largely reinforced the conclusions of an earlier IMF paper (Ebrill, Stotsky, and Gropp, 1999) that was circulated and discussed in the WTO General Council and the Trade Negotiations Committee. It stressed that the impact of trade policy reform on fiscal revenue need not be significant (if tariff cuts were directed at bound rates and peak rates) and in any case could be ameliorated via accompanying measures such as a reduction in exemptions and special regimes, modernization of customs administration, and measures to strengthen the domestic tax system. The note formed the basis for an informal seminar by IMF staff for developing country delegations at the WTO in January 2003.

    In 2004, after repeated requests by the WTO, IMF (Research Department) staff prepared a paper on “Exchange Rate Volatility and Trade Flows—Some New Evidence” (Clark, Tamirisa, and Wei, 2004). The paper, which updated a 1983 IMF study for the GATT (IMF, 1983), addressed concerns expressed by several WTO members that exchange rate volatility could undo the effects of price-based trade restrictions and generate pressure for additional protection (or reduce their incentive for further trade liberalization). The paper covered a broader group of countries than the 1983 study (which focused exclusively on advanced countries) and used different volatility measures and up-to-date estimation techniques. But the main conclusion was similar to that of the 1983 study, that is, that the negative correlation between exchange rate volatility and trade was empirically small and not robust. The paper was (briefly) discussed at a meeting of the WTO’s Working Group on Trade, Debt and Finance in October 2004.

    31. The IMF stayed its ground as requests grew for financial support to offset developing countries’ expected loss of preferences associated with trade liberalization under the Doha Round. In a research note prepared for the WTO, IMF staff estimated that the upper-bound aggregate and individual country-level impact of preference erosion as a result of most-favored-nation (MFN) tariff reductions by the Quad (Canada, the European Union, Japan, and the United States) would probably be “very small” (IMF, 2003c; see Box 9). Given the special characteristics of the problem—losses from preference erosion were a permanent shock, they could be anticipated, and their actual impact was spread out over time—and that only a handful of developing countries were expected to be seriously affected, the paper argued convincingly that any financing could be channeled through existing IMF medium-term adjustment facilities.

    32. Then, in a turnabout in 2004, the IMF created the Trade Integration Mechanism (TIM), its most visible coherence initiative. The TIM was designed to assist countries facing balance of payments shortfalls that resulted from trade liberalization measures undertaken by other countries. (Examples included preference erosion due to MFN tariff reductions, adverse changes in food terms of trade caused by the elimination of agricultural subsidies, and loss of export markets caused by the expiration of quotas under the WTO Agreement on Textiles and Clothing (ATC).)24 The TIM is not a lending facility; it cannot be accessed on a stand-alone basis but only in the context of a Stand-By Arrangement (SBA) in the upper credit tranches, or arrangements under the Extended Fund Facility (EFF) or the PRGF.25 TIM financing is determined under the access policies applicable to the underlying facility, with the possibility of an augmentation of up to 10 percent of quota per arrangement if the actual balance of payments impact turns out to be worse than expected (IMF, 2004b). In announcing the TIM at the WTO, the First Deputy Managing Director emphasized that very few countries were expected to use it, likening it to an “insurance policy” that would provide “reassurance” to governments and policymakers and “make it easier for them to embrace the Doha Development Agenda” (Krueger, 2004).

    33. Critics were unimpressed. Civil society commentators saw the creation of the TIM as a superficial attempt to rescue the Doha Round and urged developing countries to think carefully about it before making any changes in their trade positions. The main criticisms of the TIM were that: (i) it did not provide additional resources; (ii) it was not concessional (unless activated in the context of a PRGF) or free of conditionality; (iii) it did not provide easy and fast access to financing—IMF staff had first to forecast the impact of the trade measure(s) on the affected country’s balance of payments; (iv) it only covered (partially) balance of payments shortfalls and not the broad spectrum of trade-related adjustment costs; and (v) it was likely to be scrapped in a few years or subjected to more stringent requirements, as the CFF had been before it (Caliari and Williams, 2004).26

    34. Demand for the TIM was low. Only three countries—Bangladesh, Madagascar, and the Dominican Republic—had taken advantage of the TIM by the end of the evaluation period, all citing adverse impacts of the termination of the WTO ATC in January 2005 (Box 10). A 2003 PDR guidance note had identified 16 countries as “highly vulnerable” to the phase-out of textile and clothing quotas (IMF, 2003e).27 A 2005 PDR memo to management identified a further five countries as likely to suffer a significant macroeconomic impact from the reform of the EU sugar sector (IMF, 2005c). Fund missions explored the TIM option with several IMF members including Albania, Fiji, Lesotho, Mauritius, and countries in the Caribbean region but there were no takers; few of those countries had a Fund-supported arrangement at the time and the others were not keen to begin one. Fund staff saw two reasons for the low demand for the TIM: the trade liberalization proposed under the Doha Round had not yet taken place, and several countries that might have accessed the TIM after the ATC expired did not experience balance of payments problems, given other mitigating factors. Staff dismissed the idea that conditionality may have made the TIM unattractive, arguing that the conditionality in the three programs that included recourse to the TIM was unlikely to have been very different without the TIM (IMF, 2006a). However, at least a few countries were clearly put off by the need to request a full-blown Fund-supported program just to obtain TIM insurance. Mauritius, for example, eschewed this option in favor of assistance under the Aid for Trade initiative (IMF, 2006a); Fiji, Lesotho, and countries in the Caribbean region also declined TIM assistance as they did not have a Fund program in place (IMF, 2004d, 2005e, 2007b).

    35. The TIM did not seem to help much to advance the Doha Round. Although it was hailed by some (including the WTO) as a concrete and timely response to the difficulties faced by the Round after the collapse of the WTO’s Cancun summit, its contribution was marginal—and the Doha Round is not much closer to a conclusion.

    36. The IMF also introduced other policies to assist low-income countries; though not undertaken as part of Fund-WTO cooperation, these were considered to contribute to the coherence objective. Two such initiatives introduced in 2005 were the Exogenous Shocks Facility (ESF) and the Multilateral Debt Relief Initiative (MDRI). The ESF was established to provide concessional financing to low-income members facing sudden adverse events such as terms of trade shocks, natural disasters, or sudden declines in demand for their exports.28 The ESF carries the same interest rate and repayment terms as the PRGF and is open to low-income IMF members without a PRGF arrangement. Under the MDRI, the IMF agreed to cancel its debt claims on a group of low-income countries. Financial resources from the IMF’s MDRI were counted as part of the WTO’s Cotton Development Assistance, and the ESF was considered as part of the IMF’s Aid for Trade strategy (see below) (WTO, 2006a; and OECD, 2007). The ESF was not used until 2008, after it was modified to increase and speed up access and to streamline its requirements.

    Box 10.Implementing the TIM

    The first step in implementing the TIM was identifying those countries that were likely to need it. A 2003 PDR guidance note had identified 16 countries as “highly vulnerable” to the phase-out of textiles and clothing (T&C) quotas. However, the list was based on simulations using 1997 data, and missed many countries whose T&C sectors did not take off until the late 1990s. For the 16 “highly vulnerable” countries, staff were instructed to monitor and evaluate the impact of quota removal (IMF, 2003e). In practice, this was done (through a dedicated selected issues paper and/or a separate T&C export line in the balance of payments table) for fewer than half of those countries and the identification process ended up being somewhat random.

    Once a country was identified as a serious TIM candidate, Fund staff were required to prepare three balance of payments projections: (i) showing how the balance of payments would have evolved in the absence of the trade event; (ii) incorporating the trade shock(s) and assuming no policy adjustment; and (iii) incorporating an adjustment effort. The so-called baseline impact—the difference between (i) and (ii)—formed the basis of a policy discussion with the authorities. The revised trade performance—the difference between (i) and (iii)—was factored into the access levels granted under the arrangement via its impact on the overall balance of payments and the associated financing gap.

    In July 2004, Bangladesh became the first country to avail itself of the TIM to cope with balance of payments pressures stemming from the phase-out of T&C quotas under the Agreement on Textiles and Clothing (ATC). Bangladesh had had a PRGF arrangement in place for a year when it requested an additional SDR 53.3 million (about US$78 million) of financing in accordance with the TIM, bringing its total PRGF amount to SDR 400.3 million (about US$583 million). To calculate the baseline impact, the Fund team drew on a thorough in-house study using the Global Trade Analysis Project (GTAP) model to simulate the effects of the ATC quota phase out (Mlachila and Yang, 2004).

    In January 2005, the Dominican Republic requested activation of the TIM in parallel with a Stand-By Arrangement totaling SDR 437.8 million (about US$665 million). As in the case of Bangladesh, the TIM was needed to mitigate the possible adverse effects of the phase-out of T&C quotas under the ATC. Fund staff prepared the TIM balance of payments table that was required to be attached to the authorities’ memorandum of economic and financial policies, but did not explain the basis for their projections and were not asked about them during the Board discussion. The policy adjustment endorsed by the staff (and a majority in the Board) involved the implementation of the Dominican Republic-Central America Free Trade Agreement.

    In July 2006, Madagascar requested activation of the TIM in parallel with a three-year PRGF arrangement with the Fund totaling SDR 55.0 million (about US$81 million). The TIM was requested to address the balance of payments impact of the termination of the ATC in early 2005 and the expected termination in 2007 of the third party provision under the U.S. African Growth and Opportunity Act (AGOA). The TIM balance of payments table that was attached to the request contained judgmental forecasts; an earlier selected issues paper had discussed the difficulty of quantifying the impact of the T&C shock and provided a qualitative assessment of the impact of the ATC and AGOA III termination based on interviews with and a survey of T&C exporters (Khemani, 2005).

    Technical assistance

    37. The IMF joined the WTO and other multilateral agencies in the Integrated Framework for Trade-Related Technical Assistance for Least Developed Countries (IF), though its role was relatively limited.29 The IF was designed to facilitate the coordination of trade-related technical assistance and to promote an integrated approach to help least-developed countries (LDCs)—as designated by the United Nations (UN)—to enhance their trade opportunities. IMF staff played a catalytic role in the early years of the IF (when the initiative was encountering various difficulties and showing little tangible progress) by offering concrete suggestions for improvement; many of those suggestions were endorsed in a subsequent independent review of the IF (IMF, 2000a). The new approach defined the IF management structure, the sources of its financing, and the role of each agency, with the WTO managing the IF, the World Bank leading the “mainstreaming” process (i.e., the process of integrating trade policies into country-led poverty reduction strategies), and the UNDP administering the IF Trust Fund. The IMF’s role was largely limited to supporting the World Bank in the mainstreaming process, through contributions on macroeconomic and exchange rate developments to Bankled diagnostic trade integration studies (DTISs).30 Almost all of the Fund’s technical assistance that was applied in the IF context was for customs administration and tariff reform. By the end of the evaluation period, FAD had fielded customs administration missions to about three-quarters of the IF countries.

    38. The IMF’s role in the Aid for Trade initiative, too, was peripheral. The IMF and the World Bank jointly developed the original proposal and organized a consultation process with the WTO and other stakeholders in 2005 (IMF, 2005b).31 Aid for Trade comprises technical assistance; capacity building; institutional reform; investments in trade-related infrastructure; and assistance to offset adjustment costs, such as fiscal support to help countries make the transition from tariffs to other sources of revenue (IMF, 2005d). Aid for Trade is open to all developing countries, unlike the IF, which is open only to UN-designated LDCs. The IMF Board endorsed the Fund and Bank staffs’ proposals to operationalize Aid for Trade, including enhancing and redesigning the IF and exploring new financial mechanisms as appropriate, but it noted that the Fund’s involvement should be limited to “selective interventions within its mandate and core areas of competence, including the macroeconomic implications of changes in trade policies and in the global trade environment, and tax and customs reform advice” (IMF, 2005f and 2006b). The Board saw no need for the Fund to offer financial support beyond what was available under existing Fund facilities.

    39. IMF (FAD) staff nevertheless played an important supporting role in the WTO’s trade facilitation negotiations. These negotiations sought to codify key customs practices in a binding agreement; negotiation modalities required WTO members to “undertake a collaborative effort” with the IMF, World Bank, UNCTAD, the Organization for Economic Cooperation and Development (OECD), and the World Customs Organization, “to make technical assistance and capacity building more effective and operational and to ensure better coherence.”32 One FAD staff member was closely (but not directly) involved in the trade facilitation negotiations, explaining technical details and providing practical information to negotiators so that they could formulate their positions. The same FAD staff member also played a prominent role in joint work on a needs assessment tool and process for LDCs to assess what they needed to do to comply with the technical measures that were likely to be in the trade facilitation agreement, and even facilitated in one such assessment (for Bangladesh in October 2007).

    40. Overall during the evaluation period, the IMF (Board, management, and staff) struck the right balance in its involvement in trade-related technical assistance and capacity building. The Board’s decision to limit the IMF’s involvement to its areas of core competence was reasonable. Fund staff stayed within the boundaries prescribed by the Board: they made useful, practical contributions in their areas of expertise (e.g., customs administration) and did not get involved in work outside their areas of core competency, despite the WTO’s appeals for deeper involvement in the IF and Aid for Trade.33

    D. Overlap in IMF-WTO Cooperation

    41. The IMF and the WTO have fundamentally different—and possibly inconsistent—approaches to trade liberalization. The WTO’s approach involves reciprocal liberalization in a multilateral setting; the IMF’s approach involves unilateral liberalization. The WTO’s approach provides more leeway for developing countries, especially LDCs (for example, by allowing them to phase in trade policy reforms more gradually and to make use of exceptions for development purposes); the IMF’s approach is to apply economic principles uniformly across its membership.

    42. Some developing countries have complained that the IMF’s trade policy advice/conditionality disregarded the policy space they are entitled to under WTO rules. Several such complaints were heard at the WTO during the evaluation period. For example, in 1999, India argued that the IMF’s trade policy advice and statements to the CBR did not make special considerations for developing countries as required under WTO rules (Box 5). In 2001, Mongolia appealed (unsuccessfully) to the WTO to intervene after the Fund—in the conditionality associated with the 1997 ESAF-supported arrangement—refused to allow the Mongolian government to impose a 30 percent export duty on raw cashmere that had been approved as part of Mongolia’s WTO accession commitments (Tsogtbaatar, 2005; IMF, 1997a). In 2002, a representative of the African Group at the WTO noted that Malawi was unable to “use its tariff flexibility negotiated under the WTO because its applied rates had been lowered more rapidly and bound [sic] under the IMF and the World Bank lending conditionalities” despite the fact that Malawi was an LDC “entitled to certain exceptions and transitional periods within the WTO” (WTO, 2002a).

    43. IMF staff have taken the view that because the IMF’s trade policy advice/conditionality is designed to improve economic efficiency it can—and indeed, often should—encompass reforms that go beyond a country’s WTO commitments. This notion is heavily emphasized in guidance notes to staff, with the caveat that countries should not be required to make binding commitments to the WTO on the trade liberalization undertaken in the context of a Fund-supported program. Table 4 shows that during 1996–2007, tariff conditionality featured in the Fund-supported programs of more than a quarter of the IMF member countries that were also members of the WTO. Tariff conditionality typically took the form of a requirement to lower the maximum or average tariff rate to a particular figure. Although Fund staff have been careful in their programs to avoid cross-conditionality in the strict legal sense, countries have on occasion committed to bind in the WTO trade reforms (other than tariff reductions) undertaken as part of a Fund-supported program.34

    Table 4.Tariff Conditionality in IMF-Supported Programs, 1996–2007
    Number of

    Countries
    Number of

    Countries with

    Fund-Supported

    Programs During

    1996–20071
    Number of

    Countries Subject

    to IMF Tariff

    Conditionality

    During

    1996–20072
    Proportion of

    Countries Subject

    to IMF Tariff

    Conditionality

    During

    1996–2007

    (Percent)
    Proportion of

    Program Countries

    Subject to IMF Tariff

    Conditionality During

    1996–2007

    (Percent)
    WTO members314677402752
    High-income countries4301000
    Middle-income countries45726152658
    Low-income countries45950254250
    Of which: LDCs53227134148
    WTO accession countries62814105071
    Middle-income countries13532360
    Low-income countries5974778
    WTO nonmembers7100000
    Sources: IMF, WTO, and IEO.

    Includes only programs that started between January 1, 1996 and December 31, 2007.

    Includes only tariff measures specified as prior actions, performance criteria, or structural benchmarks.

    IMF members that were also WTO members as of December 31, 2007.

    Based on WEO classification. Low-income countries are PRGF-eligible countries.

    IMF members that were WTO observers (in the process of accession to the WTO) as of December 31, 2007.

    IMF members that were nonmembers of the WTO as of December 31, 2007.

    44. The relationship between multilateral trade liberalization and unilateral trade reform was the first item on the coherence agenda. During the Uruguay Round, many developing countries maintained that their bargaining power in trade negotiations had been weakened by unilateral trade reforms that they had undertaken in the context of Fund-supported programs without reciprocal concessions from their trading partners. They were loath to undertake any further trade liberalization unless a system was devised whereby they could receive credit in future trade negotiations for previous “autonomous” (unilateral) trade liberalization.35 Fund staff rejected this argument on the grounds that IMF conditionality related to applied rather than bound tariffs; they argued that since WTO negotiations covered the latter, cuts on the former imposed by a Fund-supported program should not affect the country’s negotiating advantage at the WTO (IMF, 2003d).

    45. The IMF’s position on unilateral trade liberalization is by and large based in economic theory. It is well understood in theory that under perfect competition the optimum tariff for a small economy is zero, and that hence such an economy would have nothing to lose and everything to gain by unilateral tariff liberalization. A theoretical first-best case for trade policy (such as an import tariff or export tax) can be made for a large economy that can affect its terms of trade with such a policy, or under imperfect competition, but these arguments are normally considered to have insufficient general applicability to warrant departing from free trade. Bhagwati (2007) puts it plainly: “The truth of the matter is that free trade is alive and well among economists, their analytical arguments in favor of it, developed with great sophistication in the postwar theory of commercial policy, having hardly been dented by any original arguments by the few economists…arrayed against it.”

    46. But the political economy aspects of trade policymaking are important too. Indeed, the accepted riposte to the theoretical first-best case for trade policy—the optimum tariff argument—is a political economy argument: namely, the possibility of retaliation (Bhagwati, 2007). The academic literature has shown that the (perceived) optimum tariff may be positive even for a small economy once political economy considerations come into play (such as differential weights attached to the welfare of different groups in the economy).36 In a world with positive optimum tariffs—whether based on market power or political economy factors—Bagwell and Staiger (2002) show that the WTO’s system of reciprocity and enforcement rules is an efficient route to trade liberalization. While IMF staff should not be expected to factor political economy considerations into their trade policy advice, they should be aware that country authorities (and the multilateral trading system) do take such considerations into account. It is entirely appropriate for IMF staff to remind country authorities of the economic arguments behind trade policy in the surveillance context. But it is less appropriate for the IMF to use its leverage to push the economic arguments ahead of all other trade policymaking considerations in a program context.

    47. By requiring unilateral trade liberalization through program conditionality, the Fund may have complicated the process of multilateral trade liberalization. To Fund staff, only actual tariffs mattered, not tariff bindings. But tariff bindings were not irrelevant—they determined the parameters for trade policy within the multilateral framework. Program conditionality to lower a country’s actual tariffs—but not its bound tariffs—increased the country’s so-called binding overhang (i.e., the gap between bound and applied tariffs). Table 5 shows average bound and applied tariff rates in 2007 for IMF members that are also WTO members: while the rates are not directly comparable because of less than full binding coverage in most cases, they suggest that binding overhang can be substantial in developing countries, particularly LDCs. The Fund cannot compel or impel all countries to maintain low applied tariffs at all times. Baldwin (2008) likens tariff bindings that greatly exceed applied tariffs to options whose value to the WTO member increases with volatile (domestic and global) economic conditions. During bad times, a member may choose to raise its tariffs up to their bindings without breaching its WTO commitments—as was done, for example, by some Asian and Latin American countries in the late 1990s. The WTO’s TPRs usually draw attention to large and/or increasing gaps between a member’s bound and applied tariff rates, because these gaps create uncertainty in trade policy-making. Hence the Fund’s practice of using program conditionality to lower but not bind tariffs has not much advanced the WTO’s goal of creating a freer and predictable multilateral trading system.

    Table 5.IMF-WTO Members: Average Tariffs and Tariff Bindings, 2007
    Binding Coverage1 (Percent)Average Bound Tariff2Average MFN Applied Tariff2
    All products
    IMF-WTO members382.535.09.2
    High-income countries495.97.95.2
    Middle-income countries492.530.08.7
    Low-income countries466.053.511.8
    Of which: LDCs558.061.613.0
    Nonagricultural products
    IMF-WTO members79.826.18.2
    High-income countries95.24.93.4
    Middle-income countries91.426.07.6
    Low-income countries60.836.911.2
    Of which: LDCs51.642.712.7
    Agricultural products
    IMF-WTO members100.051.716.2
    High-income countries100.026.417.6
    Middle-income countries100.046.116.3
    Low-income countries100.070.015.5
    Of which: LDCs100.076.015.1
    Source: World Tariff Profiles, 2008 (http://www.wto.org/english/res_e/reser_e/tariff_profiles_e.htm).

    Share of Harmonized System (HS) six-digit subheadings containing at least one bound tariff line.

    Simple average of the ad valorem or ad valorem-equivalent HS six-digit duty averages.

    IMF members that were also WTO members as of December 31. 2007.

    Based on WEO classification. Low-income countries are PRGF-eligible countries.

    E. Gaps in IMF-WTO Cooperation

    48. Gaps remain in cooperation between the two institutions. Three issues that can have, and have had, macroeconomic implications are worth highlighting: exchange rate manipulation, trade in financial services, and preferential trade agreements (PTAs).

    Exchange rate manipulation

    49. The two institutions did not come to grips with the potential jurisdictional overlap between trade and exchange rate measures. As noted earlier, the IMF considers exchange rate measures to fall solely within its jurisdiction but there is a possibility that exchange rate measures with significant trade effects may fall within the WTO’s jurisdiction as well. The question of exchange rate misalignment and trade was too sensitive for inclusion in the coherence agenda.37 Instead, the WTO couched the issue in more neutral terms of exchange rate volatility and trade and commissioned the Fund to prepare a study on this topic. The IMF study (Clark, Tamirisa, and Wei, 2004), however, concluded that exchange rate volatility was “probably not a major policy concern” for trade flows (Box 9). The issue resurfaced during the Asian financial crises of the late 1990s, when large currency devaluations by some crisis-hit countries (in certain cases under IMF programs) generated pressure for trade policy responses in some of their main trading partners (Box 8). It came up again more recently in the context of U.S. allegations that China was undervaluing its currency in order to gain an export advantage.

    50. The potential jurisdictional overlap has been viewed by outsiders as a serious flaw in IMF-WTO cooperation. In September 2004, an alliance of American manufacturing companies and labor unions petitioned the U.S. government to take legal action against China at the WTO for keeping the value of its currency fixed against the dollar.38Schwartz (2005) noted that although it was the IMF’s responsibility to forestall currency manipulation, “the petitioners asserted that they had turned to the WTO for a remedy because the IMF was not doing its job.” The Bush administration rejected the petition but the issue received the support of many politicians. According to Hufbauer, Wong, and Sheth (2006), “[s]ome 20 out of 25 China bills introduced between 2003 and 2005 alleged an unfair Chinese trade advantage from the undervalued renminbi.” In June 2007, a group of U.S. legislators introduced the Currency Exchange Rate Oversight Reform Act to establish a stronger approach to identifying currency manipulation and imposing consequences including requesting the Fund to engage the offending country in special consultations over its misaligned currency and, in serious cases, requesting dispute settlement consultations in the WTO. Brainard (2007) suggested that the proposed legislation was necessary because “the WTO and especially the IMF [had not been] up to the task of grappling with China’s undervalued yuan.”

    51. In June 2007, the IMF adopted a new Surveillance Decision, which, inter alia, aimed to clarify the concept of exchange rate manipulation. According to the 2007 Surveillance Decision, an IMF member country would be considered to be “acting inconsistently with Article IV, Section 1(iii)”—that is, “manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members”—if the Fund determines that: (i) the country is engaging in policies targeted at, and actually affecting, the level of its exchange rate; and (ii) the country is doing so “for the purpose of securing fundamental exchange rate misalignment in the form of an undervalued exchange rate” in order “to increase net exports” (IMF, 2007a). To date, the Fund has not declared any member to be in violation of Article IV, Section 1(iii).

    52. The new Surveillance Decision has not satisfied the critics. Sanford (2008) argued that IMF-WTO cooperation could be strengthened to resolve their “disparate treatment of currency manipulation,” whereby the Fund has no capacity to enforce its prohibition of exchange rate manipulation while the WTO has the capacity to adjudicate trade disputes but it is unclear whether currency disputes fall within its jurisdiction. Along the same lines but more concretely, Mattoo and Subramanian (2008) argued that the IMF has not been effective in addressing currency manipulation “[f]or reasons of inadequate leverage and eroding legitimacy” and that the two institutions should thus cooperate “with the IMF providing the essential technical expertise in the WTO enforcement process” under “new rules in the WTO to discipline cases of significant undervaluation that are clearly attributable to government action.”

    53. The possibility of a case of exchange rate manipulation being adjudicated by both the Fund and the WTO could be problematic. It is beyond the scope of this evaluation to assess the IMF’s 2007 Surveillance Decision. However, it is worth noting that one cannot rule out the possibility of a WTO member bringing a dispute or countervailing case to the WTO regarding exchange rate manipulation, or the WTO panel arriving at a different judgment than the Fund. As noted earlier, there is no guarantee that an exchange rate measure sanctioned by the IMF will be immune from challenge at the WTO; no legal precedent has been set to date.

    54. Neither institution has openly discussed how such a scenario could play out. Understandably, neither is anxious to take on this thorny issue but their silence has been interpreted as a lack of cooperation. In fact, at the technical level, IMF and WTO Secretariat staff have discussed the issue on several occasions. They are clear about how they would work together if an exchange rate manipulation case were brought before the WTO, though they are less clear about what would happen if a WTO panel reached a different decision than the Fund. The closest public statement on this issue was by WTO Director-General Lamy when he said in an October 2007 speech that it was up to the IMF, not the WTO, to decide whether China or any other country was following an appropriate currency policy.39

    Trade in financial services

    55. Trade in financial services is an obvious area of potential IMF-WTO overlap, but during the evaluation period little collaboration took place between the two institutions to clarify the main issues. In 2005, the IMF Board noted “the possible overlap between services trade negotiations and traditional areas of Fund advice relating, for example, to financial sector liberalization and financial vulnerabilities” but simply encouraged the staff to “increase the coverage of trade in services” (IMF, 2005a).

    56. There is significant debate concerning regulation versus liberalization of trade in financial services. The GATS contains a number of provisions allowing countries to regulate financial services in the general interest, particularly in the case of balance of payments difficulties or for prudential reasons.40 The interpretation of “prudential reasons” has turned out to be quite contentious, with the debate centering on the tension between the need for appropriate prudential measures and restrictions on market access for foreign providers of financial services. While most advanced economies are pushing at the WTO for greater and faster financial services liberalization, many developing countries, drawing from the lessons of the Asian financial crises, prefer a slower pace of liberalization commensurate with their development of financial supervisory capabilities.

    57. Fund staff could have lent their expertise to this debate much as FAD staff assisted the WTO’s trade facilitation group in customs administration issues. By the end of the evaluation period, no financial services negotiations had taken place at the WTO since the first round of negotiations ended in December 1997, and the WTO’s Committee on Trade in Financial Services (CTFS), which was established as a negotiating group for the financial services agreement, had lain dormant for ten years. But even if no opportunity arose to assist in negotiations, the Fund could have found a way to share its financial sector expertise more effectively with WTO members needing informational support. The two presentations made by Fund staff at the CTFS (Table 3)—one describing the main features of the Financial Sector Assessment Program (FSAP) and the other analyzing the link between financial sector reform and capital account liberalization—were too general in content to be of much help to the delegations.

    Preferential trade agreements

    58. The question of how the IMF and the WTO should respond to PTAs was recognized early on as an important item on the coherence agenda. PTAs—mostly in the form of free trade agreements and partial scope agreements—have grown exponentially in number since the early 1990s and are now a prominent feature of the global trading system. According to the WTO, more than 200 are currently in force and their number is expected to double by 2010. Many PTAs go well beyond merchandise trade liberalization to areas such as trade in financial and other services, investment flows, and other disciplines. Though the WTO has formal jurisdiction over them, PTAs are typically negotiated and implemented outside the active involvement of any of the major international organizations.41 The 1998 Coherence Report called for a coherent approach by the Fund, the World Bank, and the WTO “to ensure that these arrangements contribute to a liberal and more integrated trading system and facilitate the process of multilateral liberalization” (IMF, 1998e).

    59. The economics of PTAs is complex. While PTAs can be trade liberalizing, they are discriminatory and some observers therefore fear that their proliferation could lead to trade diversion and jeopardize progress toward global free trade. Nonetheless, given that PTAs are here to stay, the focus of multilateral institutions like the WTO should be, and increasingly has been, on how to design them to make them building blocks rather than stumbling blocks for multilateral trade liberalization. In December 2006, the WTO established (on a provisional basis) a transparency mechanism that provides for timely notification of any PTA to the WTO and for a factual presentation by the WTO Secretariat describing the features of the PTA. The plan is for the WTO to release a complete list of PTAs that have been agreed, along with data on trade flows under them. This will enable researchers to look systematically at the characteristics and design of PTAs and perhaps identify best practices for designing PTA architecture.

    60. The IMF has not been involved in this important discussion. The only contribution by the Fund was a descriptive paper presented at a joint IMF-WTO-World Bank seminar on regionalism in June 1999. Since then, the WTO has organized three high-level seminars on PTAs—in April 2002, November 2003, and most recently on “Multilateralizing Regionalism” in September 2007—with substantive participation from the World Bank, OECD, regional development banks, think tanks, and academia, but not the IMF. In reviewing the Fund’s work on trade in 2005, the Board “emphasized that regional trade agreements, if appropriately structured, can provide immediate economic benefits and can be complementary and compatible with multilateral liberalization” (IMF, 2005a). Yet during the evaluation period Fund staff made minimal contributions to the active and ongoing discussions at the WTO and elsewhere on how to structure PTAs to ensure their compatibility with multilateral liberalization.

    F. Summary and Conclusions

    61. IMF-WTO cooperation during the evaluation period was mostly low-key, sometimes close, and often lopsided. The Cooperation Agreement was implemented as envisaged and close cordial working relationships were cultivated between Fund staff (the Office in Geneva and PDR’s Trade Policy Division) and staff in the WTO Secretariat. Fund management maintained regular contact with the WTO Director-General. The intensity of IMF-WTO interaction varied, from high during the WTO’s formative years (1995–96) and following the Doha and Cancun ministerial meetings (2001–04) to low in the more recent past. Statutory cooperation (CBR consultations on trade restrictions for balance of payments purposes) dwindled after 2000. Ad hoc cooperation mainly took the form of WTO requests for IMF analysis/research (which the Fund always satisfied) and financial support (which the Fund mostly tried to resist).

    62. Conspicuous joint initiatives were largely absent. Due to limitations of capacity, the IMF remained a minor partner in the IF and Aid for Trade initiatives. The IMF’s only attempt at an exclusively trade-related initiative—the TIM—received a limited response.

    63. Due to organizational and other differences between the two institutions, there was negligible duplication of work. In the early days of the WTO there were concerns that its trade policy surveillance would duplicate some of the Fund’s Article IV work, but those concerns were not borne out. Unlike IMF surveillance documents, WTO TPRs are prepared on a much longer cycle, up to once every six or more years for developing countries. The macroeconomic information in TPRs was drawn from Fund documents, though Fund staff did not much use TPRs as a resource.

    64. Cooperation was sufficient to prevent any major inconsistencies or disputes between the two organizations. Inconsistencies (i.e., Fund advice or conditionality that violates a country’s WTO commitments) are difficult to detect unless they are brought for dispute settlement at the WTO. Only two such cases occurred during the evaluation period, and the verdicts in both cases were favorable to the Fund though the dispute panels did not consult the Fund in either case.

    65. Since the mid-2000s the IMF has steadily cut down on resources and time spent on WTO cooperation. The staff complement of the Geneva Office was reduced from five (a director, a senior economist, and three administrative assistants) to two (a senior economist and an administrative assistant) in 2002, and the office was closed in 2008. Also in 2008, PDR’s Trade Policy Division was subsumed into a new division (of about the same staff size) with responsibility for trade, institutions, and policy review. The Research Department’s trade unit (later the trade and investment division) was eliminated in 2007. The CWTO stopped meeting after 2004 and was not reconstituted in 2006. In 2008, it was replaced by the Committee on Liaison with the World Bank and Other International Organizations, which has the broader mandate to liaise with international organizations including the WTO. As of the time of writing, the new committee has not met.

    66. This move is questionable given the gaps that remain in cooperation between the two institutions. The two institutions have yet to satisfactorily address how they will cooperate on important issues that affect their work and/or mandates. PTAs are a prime example of an issue with far-reaching implications for the work of both the WTO and the IMF, yet during the evaluation period the two institutions did not collaborate to develop a coherent approach to PTAs. The situation is similar regarding the liberalization of trade in financial services—where comparative advantage suggests that the IMF could play a bigger role in the debate—and regarding the question of exchange rate manipulation—where it remains untested and hence unclear whether the WTO dispute settlement mechanism would defer to the Fund.

    67. The two institutions need to reconcile the fundamental differences in their approaches to trade liberalization. The IMF’s position on unilateral trade liberalization has a sound economic basis. This makes the IMF a valuable voice in advising countries on trade policy in the surveillance context because it brings an objective macroeconomic perspective that the WTO cannot provide. But problems arise when the IMF imposes unilateral trade liberalization on a country in a program context. Doing so does not help multilateral trade liberalization much (because the IMF does not affect tariff bindings) and it could even hurt (if the country refuses to make further concessions in multilateral negotiations). To resolve this, the IMF should either work with the WTO to make its trade conditionality bind and to develop a framework for granting negotiating credit for such liberalization (like the one for the GATS) or—a simpler solution—the Fund should eschew trade conditionality altogether.

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    Their concern was with an interpretative note in Annex lA of the draft WTO Agreement. The note indicated that in the event of an inconsistency or conflict between the GATT 1994 text containing Article XV and one of the other 12 multilateral agreements on trade in goods, the latter would have precedence. Their intervention led to the insertion of a Declaration on the Relationship of the WTO with the IMF in the Uruguay Round Final Act reaffirming that the relationship established in the GATT agreement be carried into the WTO except as otherwise provided (IMF, 1994a).

    In contrast to the IMF staff’s interpretation, it was “apparently the understanding in some GATT circles” that the Declaration on the Relationship of the WTO with the IMF would not suffice to protect a measure consistent with the Fund’s Articles from a finding of violation under one of the other multilateral agreements on trade in goods (IMF, 1994c).

    Article VI of the IMF’s Articles of Agreement allows IMF members to impose capital controls and allows the Fund to request a member to do so in certain situations. The GATS, on the other hand, proscribes the application of restrictions on any capital transactions inconsistently with WTO members’ specific commitments regarding such transactions, except in case of the need to safeguard the balance of payments or “at the request of the Fund” (GATS Articles XI and XII).

    The new elements included the transmittal to the WTO of the summings up of Article IV consultation discussions and of Article IV consultation reports of Fund members seeking accession to the WTO, and the issue of WTO observer status in selected Board meetings. The idea of participation by WTO staff in Article IV missions had been discussed early on but the Board agreed that it was not a priority (IMF, 1994b).

    The issue of greater policy coherence and closer interagency collaboration was discussed in the 1980s by the Uruguay Round negotiating group on the Functioning of the GATT System. Interest in the issue was motivated by persistent current account imbalances that had emerged, notably between the United States and Japan, and that tended to generate protectionist pressures (Ostry, 1999; Auboin, 2007).

    WTO members’ obligations to the institution are limited to such matters as participation in trade policy reviews and fulfillment of administrative responsibilities.

    The responsibilities of the WTO Secretariat include providing administrative and technical support for WTO delegate bodies (councils, committees, working parties, and negotiating groups) for negotiations and the implementation of agreements; providing technical support for developing countries; undertaking trade policy analysis and reviews; assisting in the interpretation of WTO rules and precedents in the resolution of trade disputes; and dealing with accession negotiations for new members and providing advice to governments considering membership.

    Under Article XV:2 of GATT 1994, the CBR is required to “consult fully” with the IMF and to “accept the determination of the Fund as to what constitutes a serious decline in the contracting party’s monetary reserves, a very low level of its monetary reserves or a reasonable rate of increase in its monetary reserves, and as to the financial aspects of other matters covered in consultation in such cases.” GATS Article XII:5(e) contains similar language, requiring that the CBR’s conclusions “be based on the assessment by the Fund of the balance-of-payments and the external financial situation of the consulting Member.”

    During the transition from the GATT to the WTO in 1995, the WTO CBR held consultations jointly with the GATT CBR. There have been no consultations under GATS Article XII.

    In the other cases, the CBR either called for further consultations or judged the import restriction(s) to be in compliance with the relevant GATT provision. The CBR was bound by GATT Article XV to accept the IMF’s view on the country’s balance of payments situation, but not on the trade measure(s) in question. The 1999 guidance note on import surcharges noted that the CBR’s decisions were “based on precedent and interpretation of the rules and the consensus of the Committee members, rather than economic efficiency” (IMF, 1999a).

    The only other case where the CBR was unable to reach a conclusion was Nigeria’s (1996–98). Nigeria subsequently revised its timeframe for elimination of its import restrictions from five years to three; no dispute was filed.

    In the first new case in a decade, Ecuador in early 2009 invoked GATT Article XVIIIB to impose various import restrictions for one year. The IMF was invited to consult with the CBR in April 2009.

    Anjaria (1987) noted that GATT Article XVIIIB was frequently abused by developing countries. The IMF was not alone in its disapproval of trade restrictions for balance of payments reasons; trade economists such as Irwin (2000) have characterized the balance of payments exception as “bad trade policy” that should not have been built into international trade rules.

    Although IMF staff were told to discourage the use of trade restrictions for balance of payments reasons, in Fund-supported programs they were not to “directly link the use of Fund resources to (or call directly for) the disinvocation by the country of GATT Articles XII or XVIII: B or GATS Article XII,” to avoid stepping into the WTO’s jurisdiction (IMF, 1995f). When Pakistan abolished its import restrictions ahead of schedule, its delegate made clear to the CBR that the move was not part of the Fund-supported program in place at the time (WTO, 2000).

    But IMF staff regularly commented on draft TPR reports. Up to a few years ago, IMF staff commented on WTO Accession Working Party reports as well.

    There is no systematic record of informal consultations with the WTO Secretariat on consistency issues, though PDR made an effort to collect this information in 1995 and part of 1996.

    In 1998, the WTO panel requested information and the IMF’s views on India’s external position (Box 5). In 2004, the WTO panel requested information and the IMF’s views on the Dominican Republic’s “foreign exchange commission,” in the context of a dispute brought by Honduras concerning measures imposed by the Dominican Republic on the importation and internal sale of cigarettes (IMF, 2004c). In 2007, the WTO panel requested information on Antigua and Barbuda’s gambling services data, in the context of a dispute brought by Antigua and Barbuda against the United States concerning measures affecting the cross-border supply of gambling and betting services (IMF, 2007c).

    The exceptions were the Trade Negotiations Committee (TNC), the Dispute Settlement Body (DSB), the Accession Working Parties, and the Committee on Budget, Finance and Administration. The IMF’s request for observer status in the TNC and its subsidiary bodies was not granted because of a political impasse that was unrelated to the Fund, although IMF staff were invited on an ad hoc basis to meetings of the Negotiating Group on Trade Facilitation. IMF staff were also invited as observers to some accession working party meetings and to meetings of the DSB at which matters of jurisdictional relevance to the Fund were discussed (see Box 6). The IMF did not seek access to the Committee on Budget, Finance, and Administration.

    After mid-2005, PDR took over the job of updating the Board on WTO activities.

    For example: Fiscal Affairs Department (FAD) staff participated in a WTO workshop on technical assistance and capacity building in trade facilitation in May 2001 and a WTO seminar on technical assistance in customs valuation in November 2002; Research Department staff presented papers on the growth implications of WTO accession for developing countries and the effectiveness of trade conditions in Fund-supported programs at the WTO in May 2006. WTO staff participated in a Fund seminar on trade reforms and regional integration in Africa in December 1997.

    Senior WTO staff attended and addressed the IMFC deputies’ meetings.

    The 1995 WTO ministerial decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries noted that those countries could be “eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of adjustment programmes, in order to address such financing difficulties” (http://www.wto.org/english/docs_e/legal_e/35-dag_e.htm).

    The CFF was established in 1963 to assist countries experiencing either a sudden shortfall in export earnings or an increase in the cost of cereal imports, often caused by fluctuating world commodity prices. The CFF has not been used since 1999 (IMF, 2004a).

    Although the creation of the TIM stemmed from concerns raised by developing countries in the WTO’s Doha Round negotiations, any Fund member—whether or not a member of the WTO—is eligible for TIM assistance.

    Designed to help countries address short-term balance of payments problems, SBAs typically last one to two years. The EFF is designed to help countries address longer-term balance of payments problems requiring fundamental economic reforms; EFF arrangements typically last three years. Both arrangements are nonconcessional and subject to surcharges at high access levels.

    The economies were Bangladesh, Cambodia, Cape Verde, Egypt, Macedonia, Macao SAR, Maldives, Mauritius, Mongolia, Morocco, Nepal, Pakistan, Romania, Sri Lanka, Tunisia, and Turkey.

    Shocks due to known erosions in trade preferences (which the TIM was designed to address) were to be considered on a case-by-case basis but were unlikely to qualify for the ESF. Shocks to NFIDCs from deterioration in food terms of trade would qualify for the ESF.

    The other institutions were the World Bank, the United Nations Conference on Trade and Development (UNCTAD), the United Nations Development Program (UNDP), and the International Trade Centre. The IF was inaugurated by the six agencies at the WTO’s high-level meeting on integrated initiatives for least developed countries’ trade development in October 1997.

    Staff from area departments and PDR’s Trade Policy Division commented on draft country DTISs and technical reviews. Staff from PDR’s Trade Policy Division and/or the Office in Geneva represented the IMF in the IF’s interagency steering committee and management board.

    The proposal was developed in response to a call by G-7 finance ministers at their meeting of February 5, 2005 for additional assistance to countries to ease adjustment to trade liberalization and to increase their capacity to take advantage of more open markets. The call was echoed by the Development Committee and the IMFC at their 2005 Spring and Annual Meetings and by the G-8 in Gleneagles in July 2005.

    Annex D of the Decision Adopted by the General Council on August 1, 2004 (http://www.wto.org/english/tratop_e/dda_e/draft_ text_gc_dg_31july04_e.htm#annexd).

    The limited role of the IMF (vis-à-vis the other IF agencies, for example) is evident from the agency profiles and data on Aid for Trade commitments that are reported in the joint OECD-WTO review of Aid for Trade (OECD, 2007).

    The most frequently cited examples are Korea and Indonesia during the Asian financial crises. Indonesia’s 1997 program included commitments by the government to implement ahead of schedule the ruling of the WTO dispute panel in a case involving its automobile industry; to phase out its local content program for motor vehicles in line with its WTO commitment; and to lift restrictions on branching of foreign banks and on foreign investment in listed banks as part of its WTO GATS negotiations (IMF, 1998a). Korea’s 1997 program included a commitment to make binding under the WTO liberalization of financial services as agreed with the OECD (IMF, 1997b). See Background Document 5 for more on these two cases.

    In the Uruguay Round negotiations, credit for tariff bindings was given, and other autonomous liberalization measures were recognized, through a bilateral request-and-offer approach, but no common multilateral approach or formula was found. In 2003, the WTO adopted modalities for the treatment of autonomous liberalization in the area of trade in services (WTO, 2003), but no framework has been agreed for trade in goods.

    See Rodrik (1996) for a survey of political economy models.

    Auboin (2007) notes that such wording would have “created acrimony” amongst WTO members. A 1989 meeting of the Director-General of GATT and the heads of the Bretton Woods institutions concluded there was not enough evidence to link exchange rate misalignment and protectionism and that in any case such problems were the “least amenable to improvement through action by the international agencies themselves” (Sampson, 1998).

    “Leave currency surveillance to IMF—WTO head,” Reuters, October 22, 2007.

    Article XII of the GATS allows a WTO member to “adopt or maintain restrictions on trade in services on which it has undertaken specific commitments, including on payments or transfers for transactions related to such commitments” in the event of serious balance of payments and external financial difficulties (or threat thereof), provided, among other things, that such restrictions do not violate the Fund’s Articles of Agreement (http://www.wto.org/ english/docs_e/legal_e/26-gats_01_e.htm). Paragraph 2 of the GATS Annex on Financial Services states that a WTO member “shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system” (http://www.wto.org/english/tratop_e/serv_e/10-anfin_e.htm).

    WTO members are required to notify the WTO when entering into a PTA such as a customs union or free trade area. The WTO’s Committee on Regional Trade Agreements (CRTA) is responsible for examining individual agreements. However, the committee’s work has been hampered by a lack of agreement among WTO members on how to interpret the criteria for assessing the consistency of such agreements with WTO rules (WTO, 2006b). As a result, only a handful of agreements have been considered by the CRTA to date.

    Background Document 3 Guiding the IMF’s Involvement in International Trade Policy
    A. Introduction

    1. The IMF stepped up its trade policy advice in the wake of the balance of payments crises of the 1970s and 1980s. The crises demonstrated the flaws in the inward-oriented industrial development strategies, based on import substitution, that many developing countries had pursued. Through surveillance and conditionality, the IMF stepped up its role in guiding changes in trade policy that would help countries to achieve a greater outward orientation and to reduce their reliance on compressing domestic demand to restore a sustainable balance of payments position. Trade liberalization gained pace in the 1990s as many developing countries, including most previously centrally planned economies, embarked on tariff and nontariff reforms, often in the context of IMF-supported programs. During 1987–93, structural trade policy conditionality ranked third behind financial sector/exchange system and fiscal structural conditionality across a broad spectrum of IMF arrangements (IMF, 2001b).1

    2. By the mid-1990s, IMF advice on trade policies of developing countries was very active, and Executive Directors were urging greater attention to spillover effects of advanced countries’ policies as well. In discussing the 1994 Comprehensive Trade Paper (IMF, 1994a), Directors generally agreed that staff coverage of trade policy was “broadly appropriate,” but several of them saw scope for increased study and analysis in two areas: (i) the macroeconomic implications of trade policies, including the impact of protectionist actions both on the domestic economy and on trading partners (subsidies and discriminatory taxation in industrial countries were especially highlighted); and (ii) the spillover effects of regional trade integration on regional partners and third countries, given the trend toward preferential trade agreements (PTAs), primarily by industrial countries. Directors reiterated that the design of effective trade reforms in IMF-supported programs should give due consideration to the revenue impact and to complementary macroeconomic policies, particularly the appropriate exchange rate policy. They emphasized the importance of close collaboration with the World Bank in the design of trade liberalization. Directors requested that the implications of the Uruguay Round for individual countries, especially net food importers and countries facing erosion of trade preferences, be monitored to ascertain any needs for transitional adjustment and financing (IMF, 1994b, 1994c).

    3. This paper evaluates whether guidance on the IMF’s role in trade policy issues during 1996–2007 was timely, clear, well focused, and comprehensive. This guidance was set by the IMF Executive Board and management with input from the then Policy Development and Review (PDR) and Legal Departments. General guidance was primarily contained in: Board summings up of periodic reviews of bilateral surveillance and conditionality and associated PDR operational guidance notes; summings up of periodic reviews of the IMF’s work on trade and joint IMF-World Bank policy papers; and trade-specific PDR guidance notes (Annex Table 1). Within this broad framework of guidance, views on specific trade policy issues were established in Board meetings on bilateral surveillance, the use of Fund resources, and trade-related policy papers.

    Annex Table 1.Guidance on the IMF’s Approach to International Trade Policy Issues, 1996–2007
    The IMF’s

    Role in

    Trade Policy
    Surveil-

    lance
    Condition-

    ality
    Tariffs

    and

    NTBs
    Trade in

    Services
    PTAsEffects

    of Trade

    Policy
    Surveillance reviews: Summings up and operational guidelines
    Summing Up by the Chairman—Biennial Review of the Implementation of the Fund’s Surveillance over Members’ Exchange Rate Policies and of the 1997 Surveillance Decision (SUR/95/24)February 1995
    Surveillance Review—Staff Operational Guidance Note (SM/9S/22 Supplement 3)April 1995
    The Chairman’s Summing Up at the Conclusion of the Biennial Review of the Implementation of the Fund’s Surveillance over Members’ Exchange Rate Policies and of the 1997 Surveillance Decision—Outstanding Issues (SUR/95/39)April 1995
    Summing Up by the Chairman—Biennial Review of the Implementation of the Fund’s Surveillance over Members’ Exchange Rate Policies and of the 1997 Surveillance Decision; and Transmittal of Fund Documents to Other International Organizations (SUR/97/38)April 1997
    Staff Operational Guidance Note Following the 1997 Biennial Surveillance Review (SM/97/178)July 1997X
    Summing Up by the Acting Chairman—Biennial Review of the Implementation of the Fund’s Surveillance and of the 1997 Surveillance Decision (SUR/00/32)March 2000
    Summing Up by the Chairman—Biennial Review of the Implementation of the Fund’s Surveillance and of the 1997 Surveillance Decision (SUR/02/42)April 2002XX
    Summing Up by the Chairman—Biennial Review of the Implementation of the Fund’s Surveillance and of the 1997 Surveillance Decision: Follow Up (SUR/02/81)July 2002
    Operational Guidance Note for Staff Following the 2002 Biennial Surveillance Review (SM/02/292)September 2002XXXX
    The Chairman’s Summing Up—Biennial Review of the Implementation of the Fund’s Surveillance and of the 1997 Surveillance Decision (SUR/04/80)August 2004X
    Surveillance Guidance Note (SM/05/156)May 200SXXXXX
    Conditionality reviews: Summings up and operational guidelines
    Concluding Remarks by the Acting Chairman—Conditionality Review: Distilling the Main Messages and Direction for Further Work (SUR/94/129)November 1994
    Streamlining Structural Conditionality—Interim Guidance Note (IMF, 2000f)September 2000
    Concluding Remarks by the Chairman—Conditionality in Fund-Supported Programs (BUFF/01/36)March 2001
    Summing up by the Chairman—Streamlining Structural Conditionality: Review of Initial Experience; IMF-World Bank Collaboration on Program Conditionality; and Conditionality in Fund-Supported Programs—External Consultations (BUFF/01/122)August 2001
    Concluding Remarks by the Chairman—The Modalities of Conditionality: Further Considerations (BUFF/02/13)February 2002
    Summing Up by the Acting Chair—Lessons from the Real-Time Assessments of Structural Conditionality (BUFF/02/S9)April 2002
    2002 Conditionality Guidelines (SM/02/276)September 2002X
    Operational Guidance on the New Conditionality Guidelines (IMF, 2003a)May 2003X
    The Acting Chair’s Summing Up—Review of the 2002 Conditionality Guidelines (BUFF/05/59)January 2005
    Operational Guidance Note on the 2002 Conditionality Guidelines (SM/06/14)January 2006X
    Board discussions on trade
    The Acting Chairman’s Summing Up at the Conclusion of the Discussion on the Comprehensive Trade Paper (BUFF/94/82)August 1994XXXXX
    Summing up by the Acting Chairman—Regional Trade Arrangements (BUFF/94/93)October 1994X
    Summing up by the Acting Chairman—Trade Liberalization in Fund-Supported Programs (BUFF/97/108)October 1997XXXXX
    Concluding Remarks by the Acting Chairman—Revenue Implications of Trade Liberalization (BUFF/99/22)February 1999XXXX
    Concluding Remarks by the Acting Chair—Trade Issues: Role of the Fund (BUFF/01/43)September 2001XXXXX
    Concluding Remarks by the Acting Chairman—Market Access for Developing Country Exports (BUFF/02/165)September 2002XXXX
    The Acting Chair’s Summing Up—Fund Support for Trade-Related Balance of Payments Adjustments (BUFF/04/72)April 2004XXX
    The Acting Chair’s Summing Up—Review of Fund Work on Trade (BUFF/05/45)March 2005XXXXXX
    The Acting Chair’s Summing Up—Doha Development Agenda and Aid for Trade (BUFF/05/187)November 2005X
    The Acting Chair’s Summing Up—Doha Development Agenda and Aid for Trade (BUFF/06/143)September 2006X
    The Acting Chair’s Summing Up—Aid for Trade: Harnessing Globalization for Economic Development (BUFF/07/133)September 2007X
    PDR trade-related guidance memos to area departments
    Reference Note on WTO Consistency (IMF, 1995)November 1995XX
    Note on Import Surcharges (IMF, 1999a)January 1999XX
    Guidelines on Designing and Implementing Trade Policy Reforms (IMF, 1999c)July 1999XXXX
    Developments in World Textile Markets—Implications for Fund Surveillance (IMF, 2003b)August 2003X
    Other guidance referenced in the text
    Revenue Implications of Trade Liberalization—Overview (SM/98/254)November 1998XXX
    Surveillance over the Monetary and Exchange Rate Policies of the Members of the Euro Area (SM/98/257)November 1998X
    Operational Guidance Note on Financial Sector Surveillance in Article IV Consultations (IMF, 2004c)May 2004X
    Operational Guidelines for Fund Support for Trade-Related Balance of Payments Adjustments (SM/04/343)September 2004
    Fund Surveillance over Members of Currency Unions (SM/05/429)December 2005X
    Financial Programming and Policies (IMF Institute, 2008)X

    4. This paper is structured as follows. The next section discusses guidance on the objectives and coverage of trade policy issues in IMF activities. The following three sections assess guidance on specific trade policy issues: tariff and nontariff reforms, trade in services, and PTAs. The section after that briefly reviews the guidance on assessing the effects of changes in trade policy, in particular on fiscal revenue, the balance of payments, growth and poverty; it also discusses guidance on complementary policies for effective trade reforms. The final section concludes.

    B. Objectives and Coverage of IMF Involvement in Trade Policy Issues

    5. The Executive Board laid out general objectives, especially early in the evaluation period, for the Fund’s advice on trade policy through surveillance or conditionality. In 1997, in discussing a staff paper on trade liberalization in IMF-supported programs, Directors observed that “trade liberalization, as a complement to appropriate macroeconomic and other structural policies, should play an increasingly important role in the context of Fund-supported medium-term adjustment programs designed to foster sustainable high quality growth.” They pointed also to a “need to promote trade liberalization in non-program countries in the course of the Fund’s surveillance activities.” An important goal of trade reforms was to promote “transparency and good governance by reducing incentives for lobbying for protection and opportunities for rent-seeking, and by eliminating administrative discretion” (IMF, 1997). In 2002, the Board reaffirmed the IMF’s objective in trade policy in the statement that the IMF “has an important role to play in promoting and actively supporting trade liberalization among its members” (IMF, 2002e). The Board has not explicitly changed this underlying objective, although the effort to streamline structural conditionality has implied taking a less activist approach to trade reform than previously.2

    6. Despite the absence of an explicit change in objective, the Board progressively broadened the scope of its requests for IMF involvement in trade policy issues. Guidance to staff in the initial years of the evaluation period focused on the traditional trade policy issues of tariff and nontariff barriers to trade in goods. Thereafter, the Board began to emphasize the systemic impact of developed country trade policies and an explicit extension of the IMF’s advice to trade in services. Toward the end of the evaluation period, the Board requested a further broadening of the IMF’s involvement in trade policy issues to cover countries’ views on multilateral trade negotiations, for countries that were key players.3

    7. As the scope of IMF involvement in trade policy issues widened, Directors called for greater selectivity of coverage in surveillance. Thus, the 2002 Surveillance Guidance Note (IMF, 2002c) advised that coverage of trade policy was essential in (i) “countries where serious trade distortions hamper macroeconomic prospects,” and (ii) “countries whose trade policies have systemic (global or regional) implications.” In 2004, Directors again requested greater selectivity of coverage in trade policy issues, to focus on “issues that have an important influence on stability and growth prospects” (IMF, 2004d). Consequently, the 2005 Surveillance Guidance Note (IMF, 2005e) further clarified and elaborated on the selectivity criteria. It noted that the level of coverage should range “from substantial to none, depending on the staff’s judgment on the relevance of trade developments for macroeconomic prospects.” The 2005 note added to the existing two criteria a third one, specifying that coverage is expected for “countries where the balance of payments or fiscal accounts are vulnerable to trade developments.”

    8. A parallel process occurred for conditionality on trade policy. The effort to streamline Fund conditionality established a greater burden of proof of need for trade policy conditionality. In 2000, at the start of the streamlining initiative, the Executive Board called for a more parsimonious application of structural conditionality in IMF-supported programs. Accordingly, the current conditionality guidelines (IMF, 2002f) advise that “conditions will normally consist of macroeconomic variables and structural measures that are within the Fund’s core areas of responsibility.”4 Conditions outside the Fund’s core areas of responsibility require a “more detailed explanation of their critical importance.”

    9. It took substantial time to clarify criteria for selecting which trade policy issues to cover, however, and the discussion made more progress with regard to surveillance than conditionality. Soon after the streamlining effort began, several Directors observed that the distinction between core and noncore areas of the IMF’s responsibility could be blurred and confusing (IMF, 2000a). In the context of surveillance, in 2000 the Board moved away from a core/non-core distinction of the IMF’s areas of responsibility to a “hierarchy of concerns” (IMF, 2000b). PDR—responding to continued uncertainty among staff about when to cover trade policy issues—prepared a 2005 Board paper (IMF, 2005a) that outlined “key considerations” for the selection of trade policy topics (Table 1). These operational considerations signaled priorities for staff in choosing trade policy issues in surveillance and provided focus to Directors’ views. Directors agreed that there was “additional scope for more selectivity in the coverage of trade issues” and endorsed these considerations as “helpful in guiding individual country teams in decisions on the selection of topics” (IMF, 2005d).5 This discussion did not explicitly distinguish core from noncore responsibilities. Indeed, by the time of the 2007 Surveillance Decision the use of the terms “core” and “non-core” had been discontinued in surveillance except in a colloquial sense.

    Table 1.Coverage of Trade Issues in Article IV Reports—Operational Considerations
    Trade IssuesWhen to Cover in Staff Report?
    Reform of trade regime
    Merchandise tradeDecision to report based on degree of restrictiveness/distortion of trade regime and importance of policy changes during reporting period; staff could use benchmark levels, e.g., of average tariff rates or an index of the trade policy stance, to determine a “presumption” of coverage.
    Services tradeIn principle as for merchandise trade reform; special attention to financial services trade, and to trade negotiations at the regional and global level that might affect the regulatory framework for services.
    Fiscal aspects and customs administrationCriteria as for other fiscal revenue sources; cover if significant enough to require adjustment in other revenues or in public expenditure.
    Spillover effectsCover where measurable impact on world prices or exports of other countries; prima facie evidence includes prominence in trade disputes or negotiations.
    Multilateral agenda
    WTO negotiationsReport on initiatives in which country plays a central role, either as a proponent or defensively; report on overall strategy if country is a leading player in the multilateral negotiations.
    Macro vulnerabilitiesPresumption that should be covered if country meets certain criteria related to vulnerability to preference erosion, food terms of trade changes, or the expiry of textiles quotas.1
    Regional trade initiativesNo easy benchmarks, but presumption that should report where trade creation/diversion is significant, the agreement entails regulatory changes in areas of importance from a growth/ stability perspective, or there are significant changes in institutions (e.g., the ability of a country to set tariffs or collect customs duties).
    Source: IMF (2005a), Table 4.

    The criteria actually used include cut-off points of, respectively: (i) an estimated 2 percent or larger decline in export unit values associated with a 40 percent erosion of preferences; (ii) a larger than 20 percent ratio of net food imports over total exports; (iii) a composite measure of vulnerability based on the concentration of textiles exports, quota utilization and capacity for adjustment. See also IMF (2004a).

    10. In conditionality discussions, however, the core/noncore distinction persisted. The conditionality guidelines still in force at end-2007 (IMF, 2002f) note that the IMF’s core areas of responsibility comprise “macroeconomic stabilization; monetary, fiscal, and exchange rate policies, including the underlying institutional arrangements and closely related structural measures; and financial system issues related to the functioning of both domestic and international financial markets.” Given the many interactions between trade policies and each of these core issues, it has remained quite unclear when trade policy should be considered core. Together with the general streamlining of structural conditionality, this has left a considerable lack of clarity about when trade policy issues should be covered.

    11. An update of the conditionality guidelines would be useful, particularly in light of the mixed experience with trade policy conditionality (its technical merits, extent of explicit assessment of macroeconomic effects, compatibility with countries’ positions in the World Trade Organization (WTO), and effectiveness). Moreover, with several countries having significantly liberalized their traditional trade policy restrictions, consideration of guidelines for deeper trade reforms to tackle behind-the-border restrictions is needed.

    12. Cyclicality in signals from both the Board and management about their expectations for the IMF’s role in trade policy was another source of confusion to staff. In interviews for this evaluation, senior staff noted that in some instances the Board and management had encouraged and subsequently discouraged a trade agenda. As an example of the waning of Board interest in trade policy issues, staff pointed to the discontinuation of the Comprehensive Trade Paper following the last such paper in 1994. This paper (IMF, 1994a) provided a “periodic major review of international trade policy issues and their implications for the work of the Fund.” Though staff interpreted the discontinuation of the paper as an expression of diminished interest in trade issues, several instances subsequently arose in which Directors appeared to want staff to be involved, for example in trade conditionality in some of the large late 1990s emerging market programs and in market access for developing country exports. Interest in the Doha Round negotiations went through a similar cycle, with spikes in 2003 and 2005 and limited-to-no interest at other times. A strong emphasis on trade policy issues was signaled in 2003, with the formation of the Trade Unit in the Research Department (renamed the Trade and Investment Division in 2005), but this group was disbanded in 2006.

    C. Tariff and Nontariff Barriers

    13. Much of the IMF’s advice on trade policy has focused on traditional forms of tariff and non-tariff barriers to trade. At least until 2000, most of this advice was directed at trade liberalization in developing countries in the context of IMF lending arrangements. The approach to trade policy in that context carried over to surveillance of trade policies in developing countries that did not have IMF lending arrangements. In about 2000, responding to requests from many sources for greater emphasis on spillover effects, the IMF stepped up its surveillance of trade policy issues in advanced countries. This section reviews guidance for both of these activities.

    Tariff and nontariff policies in highly protected countries

    14. Guidance on tariff and nontariff reforms in the more highly protected countries focused on the appropriate scope, sequencing, and pace of trade reforms. Directors addressed these issues in detail in their 1997 discussion of trade liberalization in Fund-supported programs. The 1999 guidelines by PDR for designing and implementing trade policy reforms (IMF, 1999c) restate and elaborate on this guidance; they have not been substantively updated since then.

    • Scope. The 1999 guidelines contain a comprehensive list of trade policies that discriminate between domestic and foreign goods and that should be addressed in a trade reform program: tariffs, nontariff barriers (NTBs), export restrictions, tax exemptions, trade-related subsidies, and behind-the-border trade barriers such as nontransparent customs administrative procedures. The guidelines provide focused guidance on key aspects of a trade reform program such as the tariffication of quantitative restrictions and steps to attain low and uniform tariff levels.6 They recommend changing domestic policies and structures that “foster anticompetitive practices which could negate the benefits of trade liberalization” and ensuring that the advice given is consistent with a member’s WTO commitments.7

    • Sequencing. The guidelines call for early elimination of the most distortionary aspects of a trade regime such as quantitative restrictions and other NTBs, export restrictions, and exemptions prior to embarking on a tariff reform program. However, they advise that tariff reforms need not wait for the full elimination of NTBs. This sequencing of trade reforms (together with an early elimination of trade-related subsidies) should address fiscal concerns, particularly because the tariffication of NTBs is likely to increase revenues.

    • Pace. The guidelines advise that the speed of trade reform should be adapted to specific country circumstances, including the “initial degree of trade restrictiveness, the country’s administrative capacity and likely short-term adjustment costs.” They recommend a “phased reduction” for most countries, with a front-loading of trade liberalization measures, and a “pre-announced timetable for implementing further reforms.” The experience of successful reformers that completed trade liberalization in around seven years is noted as instructive.

    15. At the time the 1999 guidelines were prepared, Directors differed on the extent to which fiscal concerns should affect the pace of trade liberalization. Discussing the revenue implications of trade liberalization, some Directors cautioned against downplaying the revenue losses from trade liberalization and the difficulties in developing alternative revenue sources (IMF, 1999b). They noted that these considerations necessitated a “more pragmatic approach” to trade liberalization. However, most Directors felt that trade reform should not be “unduly delayed,” since often the revenue impact of trade reforms had not been “overly burdensome.” The 1999 PDR guide-lines combine both positions and advise that “fiscal considerations necessitate a more pragmatic approach to trade reform.… At the same time [they] should not unduly delay trade reform” (IMF 1999c).8

    16. After several developing (especially transition) countries had resorted to import surcharges during the 1990s to correct fiscal and balance of payments problems, PDR issued a note broadly opposing such a response. The note (IMF, 1999a) outlined a case against “the great majority of” import surcharges since, even as second-best policies, these were a “poor way of addressing macroeconomic imbalances.” It encouraged staff to oppose the introduction of import surcharges and, in the event these were imposed, to recommend that they be “uniform across all imports, on a temporary basis and subject to a preannounced timetable for elimination.”

    17. For the most part, these pieces of guidance provided a clear, comprehensive, and focused framework for the design and implementation of effective trade reforms. The guidance encompassed the major issues for trade liberalization (pace, scope, and sequencing) and identified priorities. It appropriately focused on eliminating the most restrictive trade barriers, with some (though limited) attention to behind-the-border policies, especially customs administration. The generality of the framework provided for customizing trade reforms to country-specific circumstances and avoided a one-size-fits-all approach.

    18. This guidance remains relevant. The global wave of trade reform in the 1990s largely focused on first-generation trade reforms—eliminating quantitative restrictions and rationalizing tariff structures. But while many countries have reduced tariff and nontariff restrictions quite significantly, many others are still tackling these issues. The guidance, with its general and best-practices framework that accommodates various stages of a country’s trade reform, therefore remains relevant.

    Surveillance of advanced country tariff and nontariff barriers

    19. In the early 2000s, the Executive Board began to place greater emphasis on surveillance of trade policies of advanced countries and their systemic implications. During 2001–05, Directors consistently emphasized bilateral and multilateral surveillance of the global or regional impact of advanced country trade policies, in addition to coverage of the domestic implications of trade restrictions. By 2002, Directors elevated (and in 2004 reaffirmed) the systemic impact of advanced country policies to among the issues at “the apex of the IMF’s hierarchy of concerns” in surveillance (IMF, 2002b, 2004d).9 And in 2005, Directors asked that coverage of the spillover effects of trade policy be extended to “larger middle-income countries” (IMF, 2005d).

    20. Particular emphasis was placed on surveillance of the systemic implications of trade-distorting subsidies. In 2002, Directors noted the importance of surveillance of domestic trade-distorting subsidies, not only where these significantly hindered macroeconomic prospects but also where they hampered developing country growth and poverty reduction. In 2005, a few Directors requested assessments of debt sustainability for those developing country agricultural exporters that absorbed most of the impact of advanced country agricultural subsidies. Because “Fund policy advice is in the direction of reduction of subsidies,” inconsistencies with WTO obligations were unlikely (IMF, 1995).

    21. The Board’s attention to market access in advanced countries complemented the Doha Development Agenda, which raised the status of these issues. In 2002, Directors noted that eliminating advanced country trade barriers (market access restrictions) will “improve [developing country] prospects for durable growth and poverty reduction and ensure their successful integration in the globalized economy.” They stressed that the IMF should systematically raise “awareness of the benefits of free trade and of the costs imposed by market access restrictions in the Fund’s bilateral and multilateral surveillance activities” (IMF, 2002e).

    22. Another motivating factor behind the increased emphasis on advanced country trade policies was the importance of symmetry in IMF surveillance. During various Board discussions, several developing country Directors pressed for evenhandedness in the coverage of trade policy issues in and pressures for trade liberalization on developing and developed countries (IMF, 2002a, 2003c, 2005c).

    23. That said, Directors from both advanced and developing countries have, over time, attached differing priorities to market access issues, sometimes at the expense of clarity in the guidance the Board provided. Based on minutes of various Executive Board meetings, developed/developing country viewpoints have differed on three aspects related to spillover effects of trade policies:

    • Several developing country Directors stressed that multilateral surveillance and IMF research should focus on the systemic costs of trade barriers in industrial countries (IMF, 2000a, 2002a, 2004e, 2005c), while several advanced country Directors pushed for extending the IMF’s focus to market access in large developing countries (IMF, 2001e, 2002a, 2002d, 2005c).

    • In 2005, some developing country Directors pressed for a more proactive role for the IMF in restraining trade-distorting measures in industrial countries. They encouraged staff to provide specific recommendations for trade policy reforms in Article IV reports and to give these issues more emphasis in the policy dialogue with country authorities. A few advanced country Directors, however, were wary of a heightened role for the IMF in this area and cautioned against impinging on the work of the WTO (IMF, 2005c).

    • Some developing country Directors stressed that market access was an integral component of strategies to promote the supply response and growth prospects of developing countries (IMF, 2001e, 2002d). Some advanced country Directors, however, placed particular emphasis on supportive domestic reforms to engender supply responses and growth in developing countries (IMF, 2002d). This difference in emphasis was forcefully illustrated in the 2005 Article IV consultation for Mali (IMF, 2005h).

    24. Only in 2005 did the Executive Board lay out clear guidelines for when surveillance should cover trade policies because of their spillover effects. Prior to 2005, various Directors had pointed to several circumstances when trade restrictions that impede developing country exports should be covered. In 2005, the Board specified that trade policy spillover effects of large industrial and middle-income countries should be covered “where [there is a] measurable impact on world prices or exports of other countries; prima facie evidence includes prominence in trade disputes or negotiations” (IMF, 2005a).

    D. Trade in Services

    25. Trade in services entered the IMF policy agenda rather recently. In several respects this is not surprising. Trade in services moved on to the global trade policy agenda only with the establishment of the WTO and creation of the General Agreement on Trade in Services in 1995. Moreover, trade in services is a complex subject to analyze given its heterogeneity and the paucity of information on barriers to trade in services. Nevertheless, trade in financial services in particular lies at the heart of the IMF’s mandate on financial stability. Keeping up with the pace of events in this area should have been a priority for the IMF.

    26. Explicit Board attention to trade in services issues started only in 2002. PDR’s operational guidance note following the 2002 biennial surveillance review briefly noted that coverage of “policies on services … is essential in countries where serious trade distortions hamper macroeconomic prospects” (IMF, 2002c).10 In 2005, Directors “noted the growing importance of trade in services, and the possible overlap between [WTO] services trade negotiations and traditional areas of Fund advice relating, for example, to financial sector liberalization and financial vulnerabilities. They encouraged the staff to increase the coverage of trade in services, as more information [became] available” and noted that collaboration with the World Bank, Organization for Economic Cooperation and Development, and WTO would be necessary (IMF, 2005d).

    27. Despite the encouragement to increase surveillance of services trade, little effort was made to identify criteria for selecting the aspects that surveillance should cover. The operational guidance (IMF, 2005e) states in general terms that “[s]taff is encouraged to pay increased attention to the impact of trade restrictions in services (including financial services)”. Further operational guidelines similarly focus on financial services (Table 1 above). Without specific criteria for when or which nonfinancial services fall within the IMF’s interest, conflicting views by some Directors during Board discussions were a source of confusion to staff. Specifically, in 2006, a few Directors eschewed staff work in the Article IV consultation with Korea on trade in educational services, arguing that this was a topic beyond the IMF’s core competency (IMF, 2006h). On the other hand, a few Directors requested discussion and analysis of trade in wholesale and retail services in the euro area and cross-border labor mobility (IMF, 2006f).

    28. Guidance on key issues such as the appropriate pace, scope, and sequencing of services trade liberalization was also scant, particularly for financial services. Guidance in connection with the Financial Sector Assessment Program (IMF, 2004c) notes the importance of institutional preconditions, such as adequate banking supervision and prudential regulation, as well as attention to the impact of competition on domestic financial institutions. But, in contrast to guidelines on reform of trade in goods, guidelines for advice on the pace and scope of financial services liberalization and coordination with financial account liberalization were not well developed.

    E. Preferential Trade Agreements

    29. The Board has mostly taken a cautious line on PTAs that has, by holding strictly to the ideal, stymied IMF involvement in this potentially systemically important issue. In 1994 in the wake of the completion of the Uruguay Round, Directors noted that the “first-best policy [is that] of most-favored-nation liberalization and the goal of global free trade.” Though they felt that PTAs had not hindered multilateralism, they cautioned that “unfettered regionalism was not without risk.” They saw the role of the IMF as emphasizing that PTAs be developed as “building blocks” rather than “stumbling blocks” to multilateral trade liberalization (IMF, 1994d). The 1999 PDR guidelines (IMF, 1999c) elaborated on the Board’s guidance, outlining Board recommendations on best practices for design and implementation of PTAs: at a minimum, PTAs should be consistent with obligations under GATT Article XXIV;11 include transparent and liberal rules of origin and access provisions for new members; and be accompanied by multilateral liberalization. But the guidelines went beyond the Board’s guidance: they advised that PTAs should not merely meet WTO-consistency requirements but should also be “all-encompassing, applying to virtually all trade between partners without exempting any sectors,” and have a transitional phase “preferably significantly less than the maximum ten years set out in the WTO.”

    30. Criteria for determining when PTAs should be addressed in surveillance were not clarified until 2005. In 1994, the Board noted that “Article IV consultations might benefit from more analysis of the implications of regional trading arrangements for members and nonmembers alike” (IMF, 1994d). Not until 2005 were operational considerations brought to bear, resulting in the advice that PTAs should be covered “where trade creation/diversion is significant, the agreement entails regulatory changes in areas of importance from a growth/stability perspective, or there are significant changes in institutions (e.g., the ability of a country to set tariffs or collect customs duties)” (Table 1). The 2005 Surveillance Guidance Note (IMF, 2005e) advises staff to report on official views on PTAs “if the member has a central role in these initiatives.” It does not specifically advise on priorities for coverage of the implications of PTAs for nonmembers.

    31. The Board has not explicitly addressed the potentially important implications of the evolving scope of PTAs for the IMF’s work. PTAs, once mainly covering merchandise trade only, now frequently include provisions on investment and services (including financial services). This creates the risk that financial services liberalization may occur faster under PTAs than regulators deem prudent. Provisions for capital restrictions among PTA partners may limit the use of capital controls in times of financial stress and may be inconsistent with IMF obligations for nondiscrimination (Siegel, 2004). These types of issues indicate the need for guidance on PTA-related issues that overlap with the work and mandate of the IMF.

    32. Neither has the Board provided clear guidance on how the IMF’s advice on trade policy should handle the logistical complexities of PTAs. The proliferation of PTAs implies a loss of national autonomy in aspects of trade policy formulation, and important aspects of the question of how IMF surveillance or indeed conditionality should interface with PTA commitments have not been addressed. In 1997 and 2005, the Board advised staff to complement bilateral surveillance of PTAs with “discussions at the regional level on the occasion of staff visits to countries where regional trade organizations are located” (IMF, 1997, 1999c, 2005d).12 In 1998 and 2005, frameworks were outlined for surveillance over the common trade polices of countries that were members of the euro area, Central African Economic and Monetary Community, Eastern Caribbean Currency Union, and West African Economic and Monetary Union (IMF, 1998a, 2005i). But for other countries, the question of the modalities of surveillance over PTAs was left open. Also, the guidance did not address how to handle conditionality when trade policy measures are outside a country’s full control.

    33. These complications overlaid substantial cyclicality in Board views on PTAs. In 1994 and 1999, the Board adopted a largely cautionary stance on PTAs, but in several subsequent Article IV consultations, Directors were more positive and commended countries’ PTA initiatives as providing benefits and complementing multilateralism (IMF, 2000e, 2001c, 2005b, 2006a, 2006b, 2006c, 2006d, 2006h, 2006k). Indeed, in the 2005 Board review of Fund work on trade, several Directors explicitly disagreed with staff concerns that the proliferation of PTAs posed a systemic risk and observed that staff were overly negative about PTAs (IMF, 2005c).13 In the summing up, Directors recognized that multilateralism was the preferred course, but emphasized that “appropriately structured” PTAs “could provide immediate economic benefits and could be complementary and compatible with multilateral liberalization” (IMF, 2005d). But the following year, after the suspension of WTO trade negotiations in mid-2006, Directors viewed the systemic impact of PTAs less favorably. During the 2006 euro area Article IV consultation, several Directors expressed concern that the proliferation of PTAs threatened multilateralism, and a few Directors urged restraint on PTAs by major trading blocs (IMF, 2006f). This sentiment was also reflected in the summing up of a discussion on trade policy developments in late 2006, which noted that though well designed PTAs can benefit members, “excessive proliferation of PTAs can undermine the non-discrimination principle on which the multilateral trading system is based” (IMF, 2006g).

    34. An informal Board seminar paper sought unsuccessfully to clarify the IMF’s message on PTAs. The paper (IMF, 2006i) took a strong position on PTAs, acknowledging that countries that engaged in PTAs experienced both costs and benefits but noting that excluded countries typically suffer adverse economic consequences. It proposed that Article IV reports would “benefit from a more qualified approach to PTAs, contrasting the potential gains to a participant with possible costs to third countries.” The paper underscored the systemic implications of PTAs, and advised that bilateral discussions should highlight the importance of designing PTAs to complement multilateralism, including committing to a complementary reduction of trade barriers on a most-favored-nation (MFN) basis. It noted that the IMF should “call on members to reflect individually and collectively on ways to protect the multilateral trade system from the effects of a proliferation of such agreements.” The Board did not endorse the positions espoused in this paper, and the paper was not published. In interviews, senior IMF staff indicated that they felt the opinions in the paper were politically sensitive, particularly the proposal on committing to complement PTAs with MFN-based liberalization.

    F. Assessing Domestic Effects of Trade Policy

    35. The Executive Board consistently emphasized the role of the IMF in helping countries to assess the macroeconomic effects of trade policies. The emphasis here has been on the potential adjustment costs of trade reforms, specifically for the balance of payments and fiscal revenue; the impact of trade liberalization on growth and poverty; and complementary policies for maximizing benefits from trade reforms. Even as the Board urged staff to be more selective in covering trade policies, Directors noted that the “Fund will continue to have a major role to play in helping members address the potential adjustment costs and any associated financing needs arising from more open international trade” (IMF, 2005g).

    Balance of payments impact of trade policy

    36. Directors noted that the balance of payments impact of trade liberalization was an important consideration for IMF financing. In 1999 and 2004, Directors reaffirmed that the IMF should support members’ trade reform efforts by providing resources for short-term balance of payments adjustment needs (IMF, 1999b, 2004b). However, operational guidance on how to evaluate the balance of payments impact of a country’s own trade reforms has been scant. The guidance on financial programming (IMF Institute, 2008) provides a framework for assessing the balance of payments that centers on estimating exports and imports as a function of price competitiveness and income.14 It notes that changes in the trade policy regime can affect trade and foreign direct investment flows, and should be considered as an additional determining factor, but does not explicitly discuss how to do so.

    37. Directors have highlighted that in surveillance and in determining financing needs, the Fund should consider the balance of payments impact of trade policy actions taken by other countries (external trade policies). In 2002 and 2005, Directors noted that IMF surveillance should assess macro-vulnerabilities “stemming from shifts in trade flows or changes in the rules of the world trading system.” They specifically highlighted the impact on “low-income countries most susceptible to terms of trade shocks or the erosion of trade preferences” (IMF, 2002e, 2005d). In 2003, the Board urged staff to discuss in Article IV consultations the balance of payments impact of the removal of quotas on textiles and clothing, where relevant (IMF, 2003c). The creation of the Trade Integration Mechanism in 2004 explicitly endorsed the consideration of the balance of payments impact of external trade policies in decisions on IMF financing.

    38. The operational guidance on assessing the balance of payments impact of external trade policies in surveillance was clear. PDR guidance notes identified specific external trade policies that should be assessed (“vulnerability to preference erosion, food terms of trade changes, or the expiry of textiles quotas”) and provided detailed criteria for determining coverage in surveillance (Table 1 above, footnote 1). A 2003 guidance note (IMF, 2003b) provided further criteria and rules of thumb for assessing the balance of payments impact of the elimination of textile and clothing quotas. This guidance also identified countries highly vulnerable to the removal of quotas as well as those likely to benefit.15

    Fiscal impact of trade policy

    39. Directors noted that though the revenue impact of trade reforms need not be adverse, trade liberalization could entail fiscal costs. In 1997 and 1999, Directors emphasized that the fiscal impact of trade reforms depends on country-specific circumstances and the design of the reform, and need not be adverse (IMF, 1997, 1999b). In 1999, several Directors noted that in most circumstances a short-term revenue loss was acceptable, given the potential for trade reforms to “bolster the supply side of the economy and hence enlarge the revenue base over the medium term” (IMF, 1999b). In 2005, Directors observed that several low-income and some middle-income countries had had difficulty offsetting losses of trade tax revenues. However, they were encouraged by the experiences of other countries that had recovered lost tariff revenues by developing alternative domestic revenue measures (IMF, 2005d).

    40. Guidance on the revenue consequences of trade liberalization was clear and provided focused advice on generating compensating revenues. In 1997 and 1999, Directors noted the importance of the appropriate sequencing of trade liberalization for addressing fiscal costs (IMF, 1997, 1999b). They stressed that the domestic tax system should be reformed in the initial stages of trade liberalization, given the “long gestation period” of many of these reforms. They advised that broad-based domestic consumption taxes, notably value-added taxes (VATs) and stronger tax and customs administrations, were key for addressing the loss of tariff revenues. Directors also noted that tax reform recommendations should be adapted to the country’s economic structure. Operational guidance on the revenue implications of trade liberalization (IMF, 1998b) further elaborated on best practices for introducing or strengthening a VAT and for modernizing and simplifying tax and customs administrations systems and procedures in developing countries.16

    41. Directors encouraged the use of fiscal technical assistance in addressing any fiscal costs of trade liberalization. In 1997, Directors gave “high priority” to technical assistance to help countries implement revenue-enhancing or revenue-neutral trade reforms or—when trade reforms had adverse revenue effects—to help countries develop compensating revenue sources (IMF, 1997). In 1999, Directors noted that the IMF “should stand ready to provide additional technical assistance” to address the revenue impact of trade reforms, particularly in countries whose administrative capacity was limited and which had not made enough progress in identifying alternative revenue measures (IMF, 1999b). In 2001, Directors observed that tax and customs administration and tax reforms have often been “essential in facilitating a smooth transition to more liberal trade regimes, with minimal impact on fiscal revenue.” They encouraged technical assistance to “continue to play a vital role in laying the groundwork for successful trade liberalization” (IMF, 2001d). During 2004–07, Directors reiterated their support for intensified technical assistance in tax and customs reforms, including within the Integrated Framework (IF) and Aid for Trade initiatives (IMF, 2004b, 2005g, 2006g, 2007).

    Growth and poverty impacts of trade policy

    42. Directors saw trade liberalization as good for growth and poverty alleviation, but noted its potential short-term output and social costs. Among the benefits of trade reforms, Directors routinely noted favorable effects on economic efficiency, growth, and poverty. In 1999 and 2001, they also noted that trade reforms could entail short-term output and employment costs (IMF, 1999b; 2001d). In 2005, some Directors encouraged staff to produce research on the relationship between trade and growth and poverty alleviation (IMF, 2005d). In 2007, several Directors called for “further recognition” in both the IMF’s and World Bank’s work “of the importance of trade for poverty reduction—the benefits for growth and living standards” (IMF, 2007).

    43. Directors favored “mainstreaming” trade issues into the Poverty Reduction Strategy Paper (PRSP) process. In 2001, 2002, and 2005, Directors pressed for systematic integration of trade policy issues into the PRSP framework, asserting that trade policies should be an integral component of low-income countries’ overall development strategies (IMF, 2001e, 2002d, 2005c). In 2005, 2006, and 2007, Directors noted that a full-fledged trade development strategy was often missing from the PRSP process, and anticipated that an enhanced IF and Aid for Trade framework would help remedy this problem (IMF, 2005g, 2006g, 2007). Directors also repeatedly noted the importance of addressing the social costs of trade liberalization in IMF activities—an objective that they felt would best be reached through collaboration with the World Bank. The 2005 Surveillance Guidance Note (IMF, 2005e) recommended that “staff should be especially cognizant of the large scope for drawing on World Bank information” on social and related issues.

    Complementary policies

    44. Directors repeatedly underscored the importance of a sound macroeconomic framework for the success of trade liberalization efforts. In 1997, 1999, and 2001, guidance emphasized that trade liberalization “works best when appropriately sequenced with macroeconomic and structural reforms in the context of a clearly formulated medium-term framework” (IMF, 1997, 1999c, 2001d). In 1999 and 2001, Directors identified the appropriate exchange rate policy as a crucial supportive policy for ensuring the success of trade liberalization efforts (IMF, 1999c, ).

    45. The Board, however, left substantial scope for discretion in defining an appropriate exchange rate policy for supporting trade liberalization. The general guidance on trade policy (for example, the 2005 Surveillance Guidance Note (IMF, 2005e)) notes that an appropriate exchange rate policy is a necessary complement to a successful trade reform, but it does not provide specifics or even factors for consideration in determining what exchange rate policy is appropriate during liberalization. A selective review of 29 Article IV Board discussions (Annex Table 2) identified occasional specific, but in some cases conflicting, views on this subject. In the 2000 Article IV consultation for India, Directors noted that exchange rate “flexibility would be needed in the period ahead to allow the real effective exchange rate to adjust to changing circumstances, including progress toward trade liberalization” (IMF, 2000d). But during the 2000 Article IV consultation for Morocco, Directors were divided on the appropriate exchange rate policy. Several of them advised a more flexible exchange rate policy to enhance competitiveness, given the “added competitive pressures” from trade liberalization. Others considered the current fixed exchange rate as appropriate “when viewed against the strength of external accounts and the need for preserving financial stability, [and given that] productivity gains realized as structural reforms take hold would improve competitiveness” (IMF, 2000c).17

    Annex Table 2.Selected Review of Board Discussions Referenced in the Text
    Minutes of Executive Board Meeting 99/100—Lebanon: 1999 Article IV Consultation (EBM/99/100-3)September 1999
    Minutes of Executive Board Meeting 99/133—Kenya: 1999 Article IV Consultation (EBM/99/133-1)December 1999
    Minutes of Executive Board Meeting 00/26—Monetary and Exchange Rate Policy of the Euro Area (EBM/00/26-1)March 2000
    Minutes of Executive Board Meeting 00/57—Morocco: 2000 Article IV Consultation (EBM/00/57-2)June 2000
    Minutes of Executive Board Meeting 00/60—India: 2000 Article IV Consultation (EBM/00/60-2)June 2000
    Minutes of Executive Board Meeting 00/60—West African Economic and Monetary Union: Recent Developments and Regional Policy Issues in 1999 (EBM/00/60-3)June 2000
    Minutes of Executive Board Meeting 00/73—Vietnam: 2000 Article IV Consultation (EBM/00/73-3)July 2000
    Minutes of Executive Board Meeting 00/107—Syrian Arab Republic: 2000 Article IV Consultation (EBM/00/107-2)November 2000
    Minutes of Executive Board Meeting 00/116—Brazil: 2000 Article IV Consultation (EBM/00/116-1)November 2000
    Minutes of Executive Board Meeting0l/13—Tunisia: 2000 Article IV Consultation (EBM/0I/I3-2)February 2001
    Minutes of Executive Board Meeting 01/28—South Africa: 2000 Article IV Consultation (EBM/01/28-3)March 2001
    Minutes of Executive Board Meeting 05/87—Dominica: 2005 Article IV Consultation, Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Requests for Waiver of Nonobservance of Performance Criterion, Financing Assurances Review, and Extension of Repurchase Expectations (EBM/05/87-3)October 2005
    Minutes of Executive Board Meeting 05/106—Mali: 2005 Article IV Consultation, Second and Third Reviews Under the Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of Performance Criteria; Poverty Reduction Strategy Paper—Implementation Report for 2003 and 2004 (EBM/05/106-1)December 2005
    Minutes of Executive Board Meeting 06/4—Nicaragua: 2005 Article IV Consultation, Seventh, Eighth, and Ninth Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Financing Assurances Review, and Requests for Rephasing, Waiver of Performance Criteria, and Extension of the Arrangement; Poverty Reduction Strategy Paper; Joint Staff Advisory Note (EBM/06/4-4)January 2006
    Minutes of Executive Board Meeting 06/4—Nepal: Report on Noncomplying Disbursement and Recommendation for Waiver of Nonobservance of Performance Criterion; 2005 Article IV Consultation (EBM/06/4-5)January 2006
    Minutes of Executive Board Meeting 06/6—Ecuador: 2005 Article IV Consultation (EBM/06/6-4)January 2006
    Minutes of Executive Board Meeting 06/48—Canada: 2006 Article IV Consultation (EBM/06/48-l)May 2006
    Minutes of Executive Board Meeting 06/49—Tunisia: 2006 Article IV Consultation (EBM/06/49-l)May 2006
    Minutes of Executive Board Meeting 06/50—Brazil: 2006 Article IV Consultation; Ex Post Evaluation of Exceptional Access in 2002-05 Stand-By Arrangement (EBM/06/50-3)May 2006
    Minutes of Executive Board Meeting 06/63—Central African Economic and Monetary Community: Staff Report on Common Policies of Member Countries (EBM/06/63-l)July 2006
    Minutes of Executive Board Meeting 06/65—Bolivia: 2006 Article IV Consultation (EBM/06/65-l)July 2006
    Minutes of Executive Board Meeting 06/68—El Salvador: 2006 Article IV Consultation (EBM/06/68-4)July 2006
    Minutes of Executive Board Meeting 06/69—Euro Area Policies (EBM/06/69-2)July 2006
    Minutes of Executive Board Meeting 06/82—Korea: 2006 Article IV Consultation (EBM/06/82-3)September 2006
    Minutes of Executive Board Meeting 06/86—Morocco: 2006 Article IV Consultation (EBM/06/86-3)October 2006
    Minutes of Executive Board Meeting 06/101—Pakistan: 2006 Article IV Consultation (EBM/06/101-1)November 2006
    Minutes of Executive Board Meeting 06/107—India: 2006 Article IV Consultation (EBM/06/107-1)December 2006
    Minutes of Executive Board Meeting 07/4—Eastern Caribbean Currency Union: Report for the 2006 Regional Discussions (EBM/07/4-l)January 2007
    Minutes of Executive Board Meeting 07/33—West African Economic and Monetary Union: Common Policies of Member Countries (EBM/07/33-l)April 2007

    46. Directors also pressed for complementary structural and institutional reforms for fostering a strong supply response to trade liberalization. In 1997, the Board called for ensuring “an appropriate overall policy mix and a critical mass of complementary structural measures including financial sector reform, privatization, and other external reforms” (IMF, 1997). Structural policies were also considered important for the success of the Aid for Trade initiative and for taking advantage of any improvements in market access stemming from ongoing WTO negotiations. Thus, in 2002, in discussing market access issues, Directors identified as priority areas the removal of anti-export biases, infrastructure development, efficient financial services, and institutional and legal reforms crucial for attracting foreign direct investment (IMF, 2002d). In 2007, they pointed to governance issues as an additional factor determining the success of Aid for Trade efforts (IMF, 2007).

    47. Guidance appropriately encouraged collaboration with the World Bank. In 2004, Directors underscored the need for close collaboration with the World Bank in providing policy advice on complementary structural reforms (IMF, 2004e). Directors also welcomed Aid for Trade and the IF as mechanisms for facilitating a supply response to fully exploit trade opportunities in developing countries.

    G. Findings and Recommendations

    48. Although the underlying objectives for IMF involvement in trade policy were clear and consistent, support for actual involvement was less than uniform across constituencies and over time. Directors broadly agreed that trade liberalization, taking into account governments’ ownership and appropriate support from other policies, was beneficial for economic efficiency and long-term growth and stability. But their signals as to the importance of trade policy issues for the work of the IMF varied over time. Flexibility in directing the activities of the IMF is important, but this cyclicality at times became a source of frustration and confusion to staff and affected their ability to plan.

    49. Guidance on the coverage of trade policy issues was for the most part timely and reflective of key developments in global trade policy. During the evaluation period, the Board broadened the range of trade issues on which the IMF should engage—from an initial focus on trade in goods and tariff and nontariff reforms to an eventual focus on trade in services, countries’ positions in multilateral trade negotiations, and the systemic impact of developed-country trade policies. This broadening reflected the evolving global trade policy agenda following the creation of the WTO and, after 2001, key issues in the Doha Development Agenda. The single most obvious and important exception to this pattern of timeliness concerned trade in financial services, where IMF coverage lagged behind that of both the WTO and many PTAs.

    50. The weakest point in the guidance on coverage concerned the Fund’s involvement in trade policy issues in lending arrangements. Though conditionality on trade policy all but vanished in the past few years, it is not clear that this is well justified by an absence of macro-critical trade policy issues. The vague (and therefore rather confusing) distinction between “core” and “noncore” areas of the Fund’s responsibility formally remains a consideration in decisions on trade policy coverage in lending arrangements, and it has remained quite unclear when trade policy should be considered “core.” The equally vague “macro-criticality” criterion is also at play. An updating of the conditionality guidelines is needed—with clear indications of how these terms should be interpreted in the context of trade policy conditionality. And, with several countries having significantly liberalized their traditional trade policy restrictions, consideration of guidelines for deeper trade reforms to tackle “behind-the-border” restrictions is also needed.

    51. On traditional trade policy issues of tariff and nontariff reforms, guidance on the IMF’s role was generally clear, comprehensive, and focused. It provided a general framework drawing on best practices for the pace, scope, and sequencing of trade reforms, that could be tailored to country-specific circumstances. As regards advanced countries’ trade policies, however, differing emphases by developing and advanced country Directors clouded the consistency of the guidance provided. In particular, there was a broad divide between developing and advanced country Directors on priorities for surveillance and the role of the IMF, as well as on the relative importance of market access for the growth prospects of developing countries.

    52. On the newer trade policy issues of trade in services and PTAs, guidance was less comprehensive, clear, and focused. Board guidance on services trade is clearly at a nascent stage; it does not yet identify what areas, except for financial services, are relevant to the IMF’s work. And, even in the area of trade in financial services—at the heart of the Fund’s mandate on financial stability—it does not address the appropriate pace and scope of liberalization or how such liberalization should be coordinated with other policies such as financial account liberalization. A thorough consideration of the IMF’s approach to trade in financial services is needed. The guidance on PTAs has sent conflicting and changing signals on the Fund’s position and on how and whether staff should address any systemic risks posed by the proliferation of such agreements. Guidance has also been limited on the implications of the evolving scope of PTAs for the work of the IMF and on the logistical difficulties of advising on trade policies that are outside a country’s full control. Clearer guidance is needed on PTA-related issues that overlap with the work and mandate of the IMF.

    53. On the assessment of effects of trade policy, the clarity, focus, and comprehensiveness of the guidance were mixed. Guidance on the revenue impact of trade reforms was clear, comprehensive, and focused. Though guidance on the growth and poverty impacts of trade liberalization was general, it appropriately relied on collaboration with the World Bank for specificity. Guidance on the balance of payments impact of trade policies, while clear on objectives, was less clear about how to evaluate the balance of payments impact of a country’s own trade reforms. Surprisingly, very little guidance was given on considerations behind exchange rate policy during trade reforms. Even as the IMF gradually reduces its involvement in conditionality on trade reforms, clear positions on optimal exchange rate policy during trade liberalization should be explored.

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      International Monetary Fund (IMF), 2004e, “Committee on Liaison with the World Trade Organization Meeting 04/1—Recent Decisions on the WTO’s Doha Work Program and Selected Issues of Interest to the Fund,”EB/CWTO/Mtg/04/1 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005a, “Review of Fund Work on Trade,”SM/05/57 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005b, “Minutes of Executive Board Meeting 05/15, Canada—2005 Article IV Consultation,”EBM/05/15-1 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005c, “Minutes of Executive Board Meeting—Review of Fund Work on Trade,”EBM/05/19-1 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005d, “The Acting Chair’s Summing Up—Review of Fund Work on Trade,”BUFF/05/45 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005e, “Surveillance Guidance Note,”SM/05/156 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005f, “EU Sugar Sector Reforms—Impact on Developing Countries” (unpublished; Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005g, “The Acting Chair’s Summing Up—Doha Development Agenda and Aid for Trade,”BUFF/05/187 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005h, “Minutes of Executive Board Meeting 05/106—Mali: 2005 Article IV Consultation; Second and Third Reviews Under the Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of Performance Criteria; Poverty Reduction Strategy Paper Implementation Report for 2003 and 2004,”EBM/05/106-1 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005i, “Fund Surveillance over Members of Currency Unions,”SM/05/429 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2005j, “IMF Managing Director Rodrigo de Rato Welcomes Progress on Doha Round,”IMF Press Release 05/281 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006a, “Minutes of Executive Board Meeting 06/4—Nicaragua: 2005 Article IV Consultation, Seventh, Eighth, and Ninth Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Financing Assurances Review, and Requests for Rephasing, Waiver of Performance Criteria, and Extension of the Arrangement; Poverty Reduction Strategy Paper; Joint Staff Advisory Note,”EBM/06/4-4 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006b, “Minutes of Executive Board Meeting 06/6—Ecuador: 2005 Article IV Consultation,”EBM/06/6-4 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006c, “Minutes of Executive Board Meeting 06/49—Tunisia: 2006 Article IV Consultation,”EBM/06/49-1 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006d, “Minutes of Executive Board Meeting 06/68—El Salvador: 2006 Article IV Consultation,”EBM/06/68-4 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006e, “Trade in Textiles and Clothing After the Elimination of MFA Quotas” (unpublished; Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006f, “Minutes of Executive Board Meeting 06/69—Euro Area Policies,”EBM/06/69-2 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006g, “The Acting Chair’s Summing Up—Doha Development Agenda and Aid for Trade,”BUFF/06/143 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006h, “Minutes of Executive Board Meeting 06/82—Republic of Korea: 2006 Article IV Consultation,”EBM/06/82-3 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006i, “Preferential Trade Agreements—Issues for the Fund,”SM/06/383 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006j, “Extension of Certain U.S. Unilateral Trade Preference Programs” (unpublished; Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006k, “Minutes of Executive Board Meeting 06/107—India: 2006 Article IV Consultation,”EBM/06/107-1 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007, “The Acting Chair’s Summing Up—Aid for Trade: Harnessing Globalization for Economic Development,”BUFF/07/133 (Washington: International Monetary Fund).

      Köhler,Horst,2003, “Cooperation in Trade and International Financial Integration,”speech delivered at the WTO General Council Meeting on Coherence, Geneva, May.

      Siegel,DeborahE.,2004, “Using Free Trade Agreements to Control Capital Account Restrictions: Summary of Remarks on the Relationship to the Mandate of the IMF,”ILSA Journal of International and Comparative Law,Vol. 10 (Spring), pp. 297304.

    Structural conditionality comprises performance criteria, structural benchmarks, and prior actions.

    The initiative to streamline structural conditionality began in September 2000 with the Managing Director’s interim guidance note on the topic (IMF, 2000f).

    In 2005, staff were asked to report on the authorities’ views on major initiatives in the World Trade Organization if the country had a central role in these initiatives (IMF, 2005e).

    The guidelines note that conditions should be applied parsimoniously and should be “(i) of critical importance for achieving the goals of the member’s program or for monitoring the implementation of the program, or (ii) necessary for the implementation of specific provisions of the Articles or policies adopted under them.” The prohibition on import restrictions for balance of payments reasons, a continuous performance criterion in lending arrangements, falls within this latter category.

    The extent of dissemination of these operational considerations outside of PDR is unclear as they are not included in the current guidelines on surveillance (IMF, 2005e).

    The guidelines advise that “specific tariffs should be converted to ad valorem rates,” that “other duties and charges should be amalgamated into the tariff structure at the outset of the tariff reform program,” and that “ideally the program should aim to unify the tariff structure at rates of between 5 and 10 percent” (IMF, 1999c).

    The guidelines state that trade policy advice should be guided by efficiency considerations and as such, trade reforms may need to proceed at a faster and deeper pace than required under WTO obligations. However, IMF staff should be careful to ensure “WTO consistency” of any recommended policies; a reference note on “WTO consistency” (IMF, 1995) should guide such concerns.

    The advice to design trade reforms with due regard to the revenue impact was also emphasized in 2001 (IMF, 2001d).

    Though spillover effects of policies of systemically important countries were highlighted in guidance prior to 2001, the specific and consistent emphasis on surveillance of trade policy spillovers was stepped up in 2001.

    The precedent for the explicit mention of trade policies on services in the operational guidance note is unclear.

    Namely, the formation of a PTA must not result in trade barriers toward nonmembers higher than those prior to the formation of the PTA, trade barriers should be eliminated or reduced on substantially all trade among members, and there should be a schedule for implementation within a reasonable period.

    Also, the 2005 Surveillance Guidance Note (IMF 2005e) states that the “Trade Policy Division of PDR is available to advise … when Article IV missions to countries that are host to important regional trade institutions are expected to meet with these institutions.”

    The views of these Directors on the complementarity of PTAs with multilateralism also differed from management views, which rather consistently underscored the systemic risk posed by PTAs (e.g., Köhler, 2003; IMF, 2005j).

    Financial programming is a quantitative approach utilized by IMF economists for assessing macroeconomic developments.

    PDR also issued several other notes discussing specific trade events likely to cause significant macroeconomic adjustment costs and identified affected countries (IMF, 2005f, 2006e, 2006j). Though these notes were issued to inform management, they also benefited country teams identifying macro-vulnerabilities stemming from external trade policies.

    For example, the paper notes that the VAT should involve a “single rate and minimal exemptions, and a threshold to exclude the smaller enterprises.” Typical tax and customs administration reforms should include computerization, “strengthening of audit,” and “adoption of effective procedures for a national system of unique taxpayer identification numbers.” Directors endorsed the analysis in this paper as “providing useful guidance for Fund-supported programs and surveillance” (IMF, 1999b).

    Also, during the 2000 Tunisia Article IV Board discussion, “Directors observed that the (CPI-based) real exchange rate…will become a less reliable indicator of competitiveness in the context of trade liberalization.” They “supported the central bank’s recent decision to broaden the set of indicators used to guide exchange rate policy” but did not elaborate (IMF, 2001a).

    Background Document 4 IMF Involvement in Trade Policy Issues in Low-Income Countries: Seven Case Studies
    A. Introduction

    1. This paper examines the IMF’s involvement in trade policy issues in low-income countries. The Fund’s involvement has occurred through surveillance, conditionality, and other advice in the context of lending programs under the Enhanced Structural Adjustment Facility (ESAF) and its successor, the Poverty Reduction and Growth Facility (PRGF), and through technical assistance. Because of their medium-term horizon and emphasis on growth and poverty reduction, ESAF/PRGF-supported programs have tended to feature stronger structural adjustment components (including trade reform) than those typical of short-term lending arrangements, and often the structural measures have been designed in cooperation with the World Bank. A number of low-income countries also qualify for IMF assistance in the form of debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. Low-income countries that do not want or need IMF financial assistance may make use of the Policy Support Instrument (PSI), a nonfinancial mechanism under which the Fund provides advice, monitoring, and endorsement of their economic programs.1

    2. The paper focuses on the IMF’s trade policy advice and program conditionality in seven case study countries: four African (Ghana, Kenya, Mozambique, and Tanzania), one Caribbean (Guyana), and two Asian (Bangladesh and Vietnam).2 All seven countries had arrangements under the ESAF and/or PRGF during 1996 to 2007. Tanzania and Mozambique began programs under the PSI in 2007. In the African countries and Guyana the Fund had a relatively continuous program involvement over the period, while in the Asian countries, lending arrangements were interspersed with stretches of surveillance only (Table 1).

    Table 1.Seven Case Study Countries: History of IMF Arrangements
    Amount ApprovedAmount Drawn
    Type of ArrangementDate of ArrangementExpiration Date(SDR million)(SDR million)
    Tanzania (date of Fund membership: September 10, 1962)
    SAF1October 30, 1987October 29, 199074.9074.90
    ESAFJuly 29, 1991July 28, 1994181.9085.60
    ESAFNovember 8, 1996February 7, 2000181.59181.59
    PRGFApril 4, 2000August 15, 2003135.00135.00
    PRGFAugust 16, 2003February 26, 200719.6019.60
    Kenya (date of Fund membership: February 3, 1964)
    SAFMay 15, 1989March 31, 199371.0071.00
    ESAFDecember 22, 1993December 21, 199445.2345.23
    ESAFApril 26, 1996April 25, 1999149.5524.93
    PRGFAugust 4, 2000August 3, 2003190.0033.60
    PRGFNovember 21, 2003November 20, 2007150.00150.00
    Mozambique (date of Fund membership: September 24, 1984)
    SAFJune 8, 1987June 7, 199042.7042.70
    ESAFJune 1, 1990December 31, 1995130.05115.35
    ESAFJune 21, 1996June 27, 199975.6075.60
    ESAF/PRGFJune 28, 1999June 28, 200387.2078.80
    PRGFJuly 6, 2004July 5, 200711.3611.36
    Ghana (date of Fund membership: September 20, 1957)
    SAFNovember 9, 1988March 5, 1992102.25102.25
    ESAFNovember 9, 1988March 5, 1992286.30286.30
    ESAFJune 30, 1995May 2, 1999164.40137.00
    ESAF/PRGFMay 3, 1999November 30, 2002228.80176.22
    PRGFMay 9, 2003October 31, 2006184.50184.50
    Guyana (date of Fund membership: September 26, 1966)
    SAFJuly 13, 1990December 20, 199334.4434.44
    ESAFJuly 13, 1990December 20, 199347.0847.08
    ESAFJuly 20, 1994April 17, 199853.7653.76
    ESAF/PRGFJuly 15, 1998December 31, 200153.7624.88
    PRGFSeptember 20, 2002September 12, 200654.5554.55
    Vietnam (date of Fund membership: September 21, 1956)
    SBA2October 6, 1993November 11, 1994145.00108.80
    ESAFNovember 11, 1994November 10, 1997362.40241.60
    PRGFApril 13, 2001April 12, 2004290.00124.20
    Bangladesh (date of Fund membership: August 17, 1972)
    SBADecember 2, 1985June 30, 1987180.00180.00
    SAFFebruary 6, 1987February 5, 1990201.25201.25
    ESAFAugust 10, 1990September 13, 1993345.00330.00
    PRGFJune 20, 2003June 19, 2007400.33316.73

    Structural Adjustment Facility.

    Stand-By Arrangement.

    3. The seven countries had widely varying ratings on the Fund’s Trade Restrictiveness Index (TRI) during the evaluation period. Table 2 shows the TRI ratings from 1997, when the index began to be systematically compiled, to 2005, when staff were instructed to stop using it in their reports.

    Table 2.Seven Case Study Countries: Trade Restrictiveness Index (TRI)
    199719981999200020012002200320042005
    Tanzania776655555
    Kenya666666666
    Mozambique322222222
    Ghana555565555
    Guyana555555555
    Vietnam889999999
    Bangladesh888888776

    4. All but one of the seven countries have been members of the World Trade Organization (WTO) since 1995. Vietnam acceded to the WTO in 2007, the end of the evaluation period. As developing countries, all seven are entitled to so-called special and differential treatment under certain WTO rules, for example, longer transition periods to implement certain WTO agreements, higher priority in developed-country commitments on access to their markets, more opportunities to benefit from developed-country preferential tariff schemes, and technical assistance. Three of the seven—Tanzania, Mozambique, and Bangladesh—have been designated as least developed countries (LDCs) by the United Nations (UN). As such, they are entitled to benefit from the Integrated Framework for Trade-Related Technical Assistance to Least-Developed Countries (IF). Tanzania and Mozambique have completed the first phase of the (revamped) IF process—the preparation of a diagnostic trade integration study (DTIS)—while Bangladesh has not applied to be included (Table 3).

    Table 3.Seven Case Study Countries: WTO Relationship and IF Status
    Date of MembershipTrade Policy Review (TPR)Integrated Framework (IF) status
    Tanzania (LDC)January 1, 1995February 2000; October 20061DTIS completed (2005)
    KenyaJanuary 1, 1995January 2000; October 20061Not eligible
    Mozambique (LDC)August 26, 1995January 2001DTIS completed (2004)
    GhanaJanuary 1, 1995February 2001Not eligible
    GuyanaJanuary 1, 1995October 2003Not eligible
    VietnamJanuary 11, 2007n.a.Not eligible
    Bangladesh (LDC)January 1, 1995May 2000; September 2006No DTIS

    Joint TPR for Kenya, Tanzania, and Uganda.

    5. The IMF became involved in a wide range of trade policy issues in these countries, with varying degrees of conditionality and effectiveness. Programs in all seven countries included plans for tariff reductions and simplifications and/or reform of customs administration. Most of the programs included some conditionality on these issues, mainly before 2001 when the IMF began streamlining its conditionality. Beyond these traditional trade policy issues, other issues such as subsidies, trade in services, export taxes, and preferential trade agreements (PTAs) were addressed in some of the programs. Increasing attention was paid—typically quite expertly—to fiscal, trade, and structural aspects of preference erosion. The treatment of trade policy issues was backed by varying degrees of Bank-Fund cooperation and of inhouse Fund expertise. The correlation between the success of trade policy components of programs and the degree of depth of either Fund expertise or Bank-Fund collaboration was high.

    6. The case studies assess Fund advice/conditionality on trade policy issues with respect to its quality and effectiveness. Specifically:

    • Were staff recommendations based on a coherent theoretical framework and sufficiently detailed knowledge of micro-macro linkages to allow a reasonable assessment of their implications?

    • In cases where trade policy conditionality was used, was it well designed, and were its scope and scale commensurate with the macroeconomic effects of trade policy distortions?

    • How effective was the collaboration between the Fund and the World Bank (and/or other agencies)?

    • Were trade policy recommendations implemented in a timely manner with approximately the effects intended? Were the implemented policies sustained?

    We define favorable outcomes as those where IMF support and analysis appear to have contributed to changes in trade policy that are likely to have increased economic efficiency, and growth, or to have better positioned countries to offset the revenue impact of trade liberalization. Poor outcomes are those where no policy changes occurred, or where changes occurred but were later reversed, or where IMF advice or conditionality prompted serious and high-profile objections.

    B. Tanzania
    Background

    7. Tanzania’s trade regime was liberalized significantly starting in the 1980s but was still considered restrictive in the mid-1990s. During 1988–95, most import restrictions were removed, as were virtually all taxes and restrictions on exports. Several tariff reforms were implemented during this period, and by 1996 the number of tariff bands had been reduced to five (with rates ranging from zero to 40 percent), though the average nominal tariff rate still exceeded 20 percent. Duty exemptions and remissions, mainly on industrial inputs, were granted to selected importers including the public sector (Kanaan, 1999).

    8. In the mid-1990s, Tanzania belonged to two overlapping regional organizations: the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA).3 Under the COMESA treaty, members agreed to reduce tariffs for one another by 80 percent by 1998 and by 100 percent—thus establishing a free trade area—by 2000. The SADC protocol on trade also envisaged intraregional preferences, to be established over eight years beginning in 2000, with the creation of a free trade area by 2008, a customs union by 2010, a common market by 2015, monetary union by 2016, and a single currency by 2018.

    9. Tanzania signed the Cross-Border Initiative (CBI) in 1993, setting the direction for its trade reform program for the rest of the decade.4 The CBI was a common policy framework that aimed to facilitate cross-border activities among 14 participating countries in Eastern and Southern Africa and the Indian Ocean through a coordination of ongoing reform programs, including those with IMF and World Bank support. The CBI was not a PTA even though its objectives were generally consistent with those of COMESA, SADC, and other regional PTAs, and had been endorsed by those organizations.5 A set of core measures was adopted in August 1993, and a road map for further trade liberalization was endorsed in March 1995 that included the elimination of tariffs on intraregional trade and the convergence of external tariffs to a trade-weighted average of 15 percent, both by October 1998 (IMF, 1996c).

    Policy dialogue and trade conditionality

    10. Tanzania had three back-to-back arrangements with the IMF during the evaluation period, all containing some form(s) of trade conditionality: an ESAF-supported program from 1996–2000, followed by two PRGF-supported arrangements (2000–03, 2003–07). A PSI-supported arrangement began in 2007. The IMF’s trade policy dialogue with Tanzania was conducted against a backdrop of a weak revenue base and active involvement in regional PTAs.

    11. The 1996 ESAF-supported program incorporated a plan for tariff reform derived largely from the CBI’s road map for trade liberalization. The signatories to the CBI had committed voluntarily to put in place by October 1998 a common external tariff with three nonzero tariff bands and a 20–25 percent maximum tariff. This was an ambitious plan for Tanzania given its starting point of a five-tier system with a maximum tariff of 40 percent. Aware that the reform would have major fiscal consequences, the ESAF-supported program planned for measures in the customs area to raise the revenue ratio, such as the closure of most owner-operated bonded warehouses (a prior action) and an audit of the bonded warehouses and establishment of a monitoring system by end-December 1996 (structural benchmarks) (Annex Table 1). Alongside these initiatives, the program also pursued (i) a reform of the state monopoly on petroleum products through measures (subject to a prior action and subsequent structural benchmarks) on pricing and importation and (ii) measures to harmonize import taxes (structural benchmark) and tax administration (prior action and structural benchmark) in mainland Tanzania and Zanzibar.

    Annex Table 1.Tanzania: Key Trade Measures in the 1996 ESAF-Supported Program
    TariffsExport Taxes/

    Restrictions
    State Trading

    Monopolies
    Customs AdministrationTrade-Related

    Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, October 25, 1996 (IMF, 1996j)
    • Harmonize import taxes between the mainland of Tanzania and Zanzibar by end-December 1996. [Structural benchmark]*

    • Reduce the maximum tariff from 40 percent to at most 30 percent by July 1997.

    Complete by March 1997 a study of possible new tax measures (directed mainly at the agriculture and mining sectors) to replace the temporary tax on traditional exports introduced in the 1996/97 budget under the CBI initiative.Announce that all companies, including the Tanzania Petroleum Development Corporation, will be able to import refined petroleum products. [Prior action]*
    • Extend the jurisdiction of the Tanzania Revenue Authority (TRA), including the operations of the preshipment inspection companies, to include Zanzibar. [Prior action]*

    • Close all owner-operated bonded warehouses except those used for the storage of petroleum, motor vehicles, and production inputs. [Prior action]*

    • Complete an audit of the bonded warehouses by end-December 1996. [Structural benchmark]*

    • Establish a monitoring system for bonded warehouses by end-December 1996 prior to computerization of the system in end-March 1997. [Structural benchmark]*

    Memorandum of Economic and Financial Policies, November 19, 1997 (IMF, 1997e)
    • Further simplify the tariff structure with a maximum rate of 25 percent at the beginning of 1998/99, following a review of the tariff system to be undertaken with technical assistance.

    • Prepare for the introduction of parallel VAT systems in Zanzibar and mainland Tanzania.

    Fully decontrol petroleum product pricing and importation by June 1998. [Structural benchmark]**
    • Introduce a new preshipment inspection contract, including provision for the sealing of containers, with effect from January 1998.

    • Implement an action plan for strengthening the Customs Department in light of the comprehensive review of procedures, including as key steps establishing targets for clearance times, implementing the Automated System for Customs Data (ASYCUDA) at the Dar es Salaam port, and producing timely and accurate trade statistics.

    Memorandum of Economic and Financial Policies, January 19, 1999 (IMF, 1999a)
    • Obtain government approval for reform of the import duty and exemptions regime by March 1999. [Structural benchmark]*

    • Adopt a reform of the tax system, including changes in import duties and exemptions by June 1999. [Structural benchmark]*

    • Revise duty rates in the 1999/2000 budget in line with Tanzania’s undertakings under the CBI. [Condition for completion of mid-term review]*

    Remove controls on petroleum product prices by February 1999*; pending removal of controls, increase price ceilings in line with any increase in import costs when it occurs and refrain from any reduction in price ceilings. [Structural benchmark]^Introduce preshipment inspection for private sector imports to Zanzibar by January 1999. [Structural benchmark]^Review the structure and level of tax incentives, such as the differential treatment of investments depending on whether or not they are approved by the Tanzania Investment Centre, as well as the tax treatment of NGOs and the public sector.
    Memorandum of Economic and Financial Policies, July 13, 1999 (IMF, 1999h)
    • Keep import duty and VAT rates under review, in consultation with the governments of neighboring countries, with a view to achieving greater harmonization.

    • Phase out over time suspended duties on some of Tanzania’s imports from its partners in COMESA.

    • Phase out over time the temporary sugar regime including suspended duties on sugar imports from other countries and the assumed dutiable value that is higher than the world price.

    • Apply the standard preshipment inspection fee to imports coming in through Zanzibar, in view of the latter’s failure to extend preshipment inspection to private sector imports.

    • Study the merits of introducing mechanisms for improving coordination of exemption control among the departments of the TRA and of introducing a refund system under which duties are payable upon importation, but refundable to exempt parties.

    • Establish a new duty drawback system within three months of provision of IMF technical assistance.

    • Begin pro forma recording of customs duties and VAT liabilities of the public sector by July 1999, in preparation for the elimination of the exemption of such imports in future.

    • Review statutory exemptions from customs duty payment.

    • Amend the Import Duty Act to centralize in the Income Tax Department of the TRA the certification of the status of NGOs eligible for exemptions.

    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    indicates commitment was delayed or modified subsequently.

    indicates commitment was not met.

    ^^ indicates no information on compliance.

    12. Several compromises were made in implementing the tariff reform that, from the IMF’s viewpoint, made the tariff system more complex. A technical assistance mission by the IMF’s Fiscal Affairs Department (FAD) in 1998 looked more deeply into the tariff situation and concluded that there were so many anomalies in the duty structure and complexities in the exemption regime that a more comprehensive reform was needed. Such a reform could not be prepared in time for the revised CBI deadline of December 1998, but a comprehensive policy package (a structural benchmark) was eventually agreed with the authorities and a new import duty structure with rates of 5 percent, 10 percent, 20 percent, and 25 percent was announced in June 1999. However, the proposed tariff reductions provoked a sharp protectionist response from local producers, and the government compromised on some of the proposals, including by creating split rates (lower rates on certain commodities when imported as raw materials rather than finished products), imposing a range of minimum dutiable values above world market prices, and introducing so-called suspended duties (import surcharges) to protect certain domestic industries (IMF, 2000a).

    13. The PRGF arrangement that was approved in June 2000 aimed to address some of the new complexities in the tariff system but by then the authorities had lost much of their appetite for unilateral trade liberalization. IMF staff noted that “substantial liberalization of the external trade regime over the course of the last four years [had] exacerbated protectionist pressures in Tanzania” (IMF, 2000a), but continued to press strongly for trade reform that would lower Tanzania’s rating on the IMF’s TRI from 6 (in 2000) to 3 (IMF, 2000a). Staff also noted the observation in the WTO’s trade policy review (WTO, 2000b) that Tanzania’s nontariff barriers were a problem.

    14. In the event, the trade reforms in the 2000 PRGF-supported program were far less ambitious. In the review process, the IMF’s then Policy Development and Review Department (PDR) pressed for a more rapid lowering of tariffs, including an attempt to incorporate a specific tariff reduction target as a condition for reaching the HIPC floating completion point (although the mission was unable to prevail on this point in the HIPC negotiations). In the first-year program, one structural benchmark committed the authorities to base dutiable values on international prices (except for sugar) and another to establish a new duty drawback system. Other stated goals in the authorities’ memorandum of economic and financial policies entailed a review of the tariff structure. Subsequently, however, staff criticized tariff changes in Tanzania’s 2001/02 budget as nontransparent and unpredictable. The budget proposed, alongside a reduction in the number of tariff bands and the average tariff rate, the imposition of suspended duties of 10–50 percent on 12 categories of imports to counter perceived “dumping.” The authorities explained that the reason for many of the additional measures was that the pace of reform required by the Fund had been too rapid and that a more gradualist approach would have led to a smoother implementation and given rise to less protectionist initiatives from the business lobby. But in the March 2002 program review, the mission, after consulting with the WTO, stressed the need to eliminate all suspended duties and introduced a structural performance criterion on committing to a timetable for their elimination (IMF, 2002a) (Annex Table 2).

    Annex Table 2.Tanzania: Key Trade Measures in the 2000 PRGF-Supported Program
    TariffsExport Taxes/

    Restrictions
    State Trading

    Monopolies
    Customs AdministrationTrade-Related

    Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, March 9, 2000 (IMF, 2000a)
    • Eliminate the suspended duty on sugar by July 1, 2002.

    • Review the tariff structure and correct anomalies in the classification of goods in the intermediate bands in the 2000/01 budget.

    • Subject to the performance of domestic revenue sources and progress of negotiations within the frameworks of agreements with regional trading partners (particularly in SADC and EAC), carry out further reductions in the top rate over the 3-year program period.

    Consider establishing an antidumping law.Eliminate the sole remaining export duty (on scrap metal) by July 1, 2000.
    • Base minimum dutiable values on international prices (except sugar) by July 2000. [Structural benchmark]*

    • Refrain from imposing minimum dutiable values on any other commodities. Review the existing list on a quarterly basis, with the aim of phasing them out.

    • Eliminate the remissions recently provided on 25 commodities when used as intermediate goods rather than for final consumption by assigning the goods to single rates by the 2001/02 budget.

    Establish a new duty drawback system by March 2000. [Structural benchmark]*
    Memorandum of Economic and Financial Policies, July 18, 2000 (IMF, 2000e)
    Under the 2000/01 Finance Bill, unify the rates for a number of the 25 commodities that had been given split rates last year. Unify the rates for the remaining items in the 2001/02 budget. Refrain from adding new items to the existing list.Request technical assistance from the WTO to introduce a law on antidumping and countervailing measures that is WTO-consistent.Fully implement the WTO’s import valuation methodology by January 2001.
    Memorandum of Economic and Financial Policies, February 24, 2001 (IMF, 2001a)
    • Harmonize the split import duty rates for all goods by July 1, 2001. [Structural benchmark]*

    • Review the tariff structure further in the 2001/02 budget with the aim of reducing the number of nonzero bands from the current four to three, and to rationalize the rates on inputs by, inter alia, eliminating all the remaining split rates.

    • Continue to reform the system of trade protection, including through a further reduction of external tariffs in line with regional initiatives under the SADC and the EAC. Begin implementing the tariff reduction schedule agreed within SADC from July 2001.

    Have legislation on dumping, subsidies, and countervailing measures in place by June 2002, with assistance from the WTO.Revise the contract under which TRA receives preshipment inspection services to reflect a new role of preshipment inspection, particularly in training and developing, maintaining, and making available price databases to TRA.Eliminate all remaining tax exemptions for the government (except those constituting contractual obligations) by July 1, 2001. [Structural benchmark]**
    Memorandum of Economic and Financial Policies, August 31, 2001 (IMF, 200ld)
    Start implementing a program of tariff reduction in the context of the SADC whereby import tariffs on 11 percent of total trade with the member countries will be eliminated effective November 2001.
    Gradually reduce the top import tariff rate beginning with next year’s budget, in harmony with regional partners.
    Keep under review the justification for suspended duties on sensitive import items.
    Memorandum of Economic and Financial Policies, March 29, 2002 (IMF, 2002a)
    Gradually eliminate the suspended duties (import surcharges) imposed in the budget for 2001/02 on 13 product groups, starting with a significant step in the budget for 2002/03.
    Announce a timetable for the elimination of the remaining suspended duties by July 2002. [Performance criterion]*
    Reduce the top tariff rate from its current level of 25 percent in the framework of the EAC trade protocol expected to be concluded by end-2002.
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    indicates commitment was met with a delay or subsequently modified.

    ^ indicates commitment was not met.^^ indicates no information on compliance.

    15. By that time, the authorities had started to shift their attention to regional PTAs including Tanzania’s membership in the newly recreated East African Community (EAC). The EAC treaty was signed in November 1999, and gave its members—Kenya, Tanzania, and Uganda—four years to formulate a protocol specifying the steps to be taken toward trade integration. Work on the technical aspects of a regional customs union began in 2000. Around the same time, Tanzania announced that it would withdraw from COMESA in September 2000, citing concerns that COMESA’s plans to form a free trade area by October 2000 would harm Tanzania’s industrial development. IMF staff reported but did not comment on this controversial decision (IMF, 2000a).6 Tanzania retained its membership in SADC, which it claimed incorporated a more gradual timetable for reduction of internal and external duties and placed greater emphasis on investment in regional infrastructure.

    16. The authorities also turned toward other organizations for trade policy advice and technical assistance. Tanzania was among the 12 countries that went through the first IF process in 1999–2000. That process led to a multi-donor funded program of legal and regulatory reforms to improve the environment for private sector development, whose implementation began in December 2003.7 Tanzania was subsequently approved for the second IF process under which a DTIS was prepared under the leadership of the World Bank (IF, 2005). The Fund’s involvement in Tanzania’s IF was limited to a contribution on Tanzania’s macroeconomic developments and prospects in the DTIS.

    17. In the discussions for the 2003 PRGF and 2007 PSI arrangements the authorities presented Tanzania’s commitments to PTAs as the binding constraint on trade policy. During the discussions for the 2003 PRGF-supported program, the authorities stated that further tariff reform would only be possible if agreed by all three EAC member states. Thus, no conditionality on tariff reform was included in that arrangement or thereafter. To curtail tax exemptions, the 2003 PRGF-supported program included a structural benchmark limiting the issuance of licenses for the newly established export processing zones to companies that produced exclusively for the U.S. and EU markets under the Africa Growth and Opportunity Act and Everything But Arms Initiative. Measures to streamline and strengthen customs administration, developed with the help of technical assistance from FAD, were incorporated as structural benchmarks throughout the 2003 PRGF- and 2007 PSI-supported programs.

    18. The IMF continued to cover trade policy in Article IV consultations and, to some extent, program reviews, focusing on Tanzania’s overlapping PTA memberships. In March 2004, the trade protocol was signed establishing an EAC customs union with a three-band common external tariff of 0, 10, and 25 percent. Implementation of the protocol was delayed to January 2005, and transitional arrangements were put in place allowing surcharges to be levied on “sensitive” products, the list of which was specific to each member country. Staff reckoned that the EAC customs union could have a “moderate revenue-losing impact” (IMF, 2004c) but urged the authorities to “deepen integration” in the EAC by lowering the maximum tariff, rationalizing overlapping memberships in PTAs, and harmonizing standards and investment incentives (IMF, 2006e).8 Those issues were raised again in the 2007 Article IV consultation when staff recommended bringing “sensitive” products into the common external tariff and lowering the top rate (IMF, 2007f). Staff drew on a joint selected issues paper (SIP) prepared for the EAC countries (Everaert, Palmason, and Sobolev, 2006). That paper argued forcefully that overlapping PTA memberships (Tanzania’s EAC partners, Kenya and Uganda, belonged to COMESA but not to SADC) would prevent the EAC from becoming a fully functioning customs union and would be impossible to maintain once COMESA and SADC also became customs unions, unless all three customs unions adopted the same common external tariff.9 The authorities responded that harmonization efforts were under way and that the EAC common external tariff would be reviewed by 2010. The SIP also argued that—unless they led to a rationalization of PTAs—the ongoing negotiations on economic partnership agreements (EPAs) with the European Union could complicate the overlapping membership problems and lead to further trade diversion if not accompanied by most-favored-nation (MFN) tariff reductions.10 No staff reports commented on the EPA until 2008 (after the EAC members signed an interim agreement with the European Union) when the mission drew attention to the modestly negative medium-term revenue impact (IMF, 2008b).

    Assessment

    19. For the most part, the IMF’s trade policy advice to Tanzania covered the right issues and was consistent with general guidance to staff. Staff took account of the initial degree of restrictiveness of the trade regime, which was high by most standards, and the programs had trade liberalization objectives that were set in a medium-term framework.

    20. But the IMF’s approach to trade liberalization clashed with the authorities’ approach. Given the starting point of a 40 percent maximum tariff and a very complex, nontransparent system in 1996, the CBI objective of a three-tier system with a 20–25 percent maximum tariff by October 1998 was always going to be an ambitious target, as regards both the impact on local businesses and the low tax ratio (14 percent of GDP) alongside high dependence on trade taxes (about 30 percent of tax revenues). According to the authorities, the Ministry of Finance and Ministry of Trade had made recommendations for gradualism in the phasing of tariff reforms, but IMF staff had disagreed, pressing instead for sharp reductions in tariffs and duty exemptions. The two sides approached the issue of tariff reform from different perspectives. To the IMF, the overall aim of tariff reform was to reduce protection and move toward a less distortionary, more uniform, tariff system, while the authorities—particularly the Ministry of Trade—believed that each industry needed to be examined separately and individual circumstances taken into account in deciding on the appropriate level of protection. The two approaches were difficult to bridge, particularly as staff lacked the expertise to conduct a sector-by-sector analysis. In one instance, the authorities argued that the mission team had no technical analysis to support their policy recommendation, but staff decided to take the issue directly to the President, who decided in their favor. From the authorities’ viewpoint, a more gradualist approach would have led to a smoother implementation of the tariff reform and less protectionist pressure from the business lobby.

    21. With hindsight, the pace of tariff reform in the 1996 ESAF-supported program was probably too ambitious. While it is not clear that slower phasing of the tariff reform would have aroused less opposition from business groups, it could arguably have allowed the authorities to deal better with the fiscal implications of lower tariff rates. The authorities claim that staff should have shown greater awareness of the fiscal constraints, including the fundamental point that tax reform was a laborious process that would take time to bear fruit. Tax revenue projections during the period of trade liberalization did tend to be overoptimistic, though revenue slippages were in part a result of delays in implementing other reforms. Indeed, consistent with its recommendation for quickening the pace of tariff reform, PDR pressed the mission to negotiate a stronger revenue effort. In 2006, a Fund technical assistance mission found that the tariff reductions in the ESAF-supported program had, despite customs reforms, led to a sharp decline in revenues from import taxes (from 1.84 percent of GDP in 1996/97 to 0.82 percent of GDP in 2004/05) and to a decline in the overall tax-to-GDP ratio, which did not start to recover until 2002/03. In its ex post assessment of Tanzania’s ESAF- and PRGF-supported programs, the IMF called the revenue target under the ESAF-supported program “unrealistic” because “tax collection and administration did not keep pace with the rationalization of the tax system and tariff reform” (IMF, 2006c).

    22. The IMF’s efforts to improve customs administration were necessary if somewhat belated. The programs incorporated many measures to improve the effectiveness of customs administration. But despite some early efforts under the 1996 ESAF-supported program, critical areas of customs administration reform only started to be addressed during the 2003 PRGF-supported program, more than a decade after the major tariff reforms were implemented.11 Substantial amounts of technical assistance on customs administration—largely coordinated by FAD—were provided to Tanzania from 2004 onwards. The recommendations of technical assistance missions were incorporated into the later part of the 2003 PRGF-supported program as a series of structural benchmarks relating to a detailed plan of action for customs reform. Virtually all of those benchmarks were observed. At the conclusion of the 2003 PRGF-supported program, staff reported that revenues as a share of GDP had increased by about 2.5 percentage points without any increase in tax rates (IMF, 2006c), and the WTO noted “significant customs reforms in Tanzania since its last [trade policy review].” (WTO, 2006b.) But more remained to be done and the agenda was carried into the 2007 PSI-supported program.

    23. The programs succeeded in lowering Tanzania’s average tariff rate but not in discouraging the authorities from protectionism. The tariff reforms in the 1996 ESAF-supported program simplified the tariff system and significantly lowered the unweighted average tariff rate from 22 percent in 1997 to 16 percent in 1999. After that, the authorities reconsidered their strategy and decided to protect certain domestic industries by using other measures such as high minimum dutiable values and suspended duties. The authorities did observe the structural performance criterion (introduced in the fourth review of the 2000 PRGF-supported program in March 2002) to prepare a timetable for the elimination of all suspended duties, but the six-year phase-out period was long.

    24. The IMF largely stayed away from the issue of Tanzania’s overlapping PTA memberships. The Fund had supported the CBI and integrated it into the 1996 ESAF-supported program, but according to the authorities, the mission did not actively advise them on the subject of PTAs.12 Tanzania formally withdrew from COMESA in September 2000, a year after announcing its intention to do so. Various reasons were given for the withdrawal, including burdensome membership fees and administrative costs and overlapping/duplication of objectives with EAC and SADC (which may have resonated with IMF staff) and the need to protect domestic industries (which staff could have countered had they chosen to do so). According to internal memoranda, staff were concerned that Tanzania’s trade regime would become more unstable and vulnerable to lobbies after the withdrawal from COMESA. Staff were, therefore, careful to oppose any new trade policy changes that would backtrack from previous trade liberalization. The government did not change its decision to stay out of COMESA (and in SADC) despite periodic protests by the local business community that Tanzania was losing out by not rejoining COMESA, and frustration on the part of other EAC members (and the European Union) over Tanzania’s indecision as to how to approach the EPA negotiations (whether to negotiate as part of the SADC group or as part of the COMESA group). The Fund’s reluctance to get involved in bilateral/regional politically charged issues is understandable. Nevertheless, staff could have contributed usefully to the debate by providing unbiased analyses of the macroeconomic ramifications of various options that were on the table.13 In October 2008, the EAC, COMESA, and SADC held their first tripartite summit in which they agreed to merge the three trading blocs into a single free trade area.14 In December 2008, COMESA launched its own customs union with the same common external tariff structure as the EAC. SADC plans a customs union in 2010.

    C. Kenya
    Background

    25. At the beginning of 1996, Kenya had a moderately restrictive trade system. Though tariff reforms had been implemented under earlier ESAF-supported programs, the tariff schedule still had six primary bands and a maximum rate of 40 percent. There were also numerous surcharges and various nontariff barriers. IMF staff had become increasingly concerned with Kenya’s repeated imposition of import bans on food products, such as grains and dairy products, which could be authorized by the Ministry of Agriculture. Corruption and inefficiency in the customs administration was also believed to be a significant problem. At this point also, Kenya was a member of COMESA and had endorsed the CBI.

    Policy dialogue and trade conditionality

    26. During the evaluation period, Kenya entered into three arrangements with the IMF, but none proceeded smoothly. Under the April 1996 ESAF arrangement, only one review was completed. Similarly, the program supporting the August 2000 PRGF arrangement suffered major setbacks soon after it was initiated and only the first tranche of the arrangement was drawn. Three reviews of the November 2003 PRGF arrangement were completed, but with considerable delays; that arrangement expired in November 2007.

    27. In discussions for the 1996 ESAF arrangement, the trade issue that received the most attention was the alleged dumping of subsidized cereal imports by neighboring countries. A sharp increase in cereal imports in 1995 had led the authorities to impose temporary import bans on maize, rice, wheat, and sugar. These prohibitions were subsequently converted into suspended (i.e., supplementary) duties, but IMF staff were concerned that Kenya would revert to the use of quantitative restrictions on agricultural imports, and a continuous structural performance criterion committed the authorities to avoid direct controls on prices and external trade. Staff also sought to clarify the authorities’ charges of dumping by referring the authorities to the WTO, which subsequently provided technical assistance to Kenya in the preparation of antidumping legislation. The plan was to replace the suspended duties on cereal imports with WTO-consistent antidumping duties by the end of 1996. The authorities also agreed to eliminate discriminatory elements of a supplementary levy on sugar by the end of that year (IMF, 1996f) (Annex Table 3).

    Annex Table 3.Kenya: Key Trade Measures in the 1996 ESAF-Supported Program
    TariffsNontariff BarriersTrade-Related Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, April 12, 1996 (IMF, 1996f)
    • Further rationalize the import tax structure, with the objective of achieving a maximum tariff rate of 30 percent, and no more than 4 rates (including zero as one of the rates) by July 1997.

    • Eliminate the discriminatory elements of the supplementary levy on sugar by December 1996.

    • Abolish the specific duties on cereal imports by end-1996.

    • Eliminate the suspended duty on petroleum imports that was introduced in November 1994 to provide temporary protection to the refinery, by October 1996, contingent on the completion of the liquefied petroleum gas import unloading pipeline.

    • Abstain from reimposition of direct controls on prices, marketing, and foreign trade (throughout 1996). [Performance criterion]*

    • Establish an appropriate antidumping mechanism with technical assistance from the WTO, to be presented to parliament by end-1996.

    Stop granting discretionary import duty exemptions from February 1, 1996.
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    **indicates commitment was met with a delay or subsequently modified.^indicates commitment was not met.^^indicates no information on compliance.

    28. When the ESAF-supported program went off-track, Kenya’s trade system became increasingly complex. Tariff reform was not a major focus of the ESAF-supported program, but Kenya’s ongoing commitments to lower tariffs under the CBI were included in the authorities’ memorandum of economic policies (IMF, 1996f).15 Immediately after the program went off-track, the authorities followed the CBI plan for tariff reduction as envisaged under the program. But they also raised the suspended duties on basic food imports to very high levels in an effort to increase domestic food supply capacity (IMF, 1998c). Then, in the 1998/99 and 1999/00 budgets, nominal tariffs were raised and the scope of the suspended duties was widened to cover a range of manufactured goods with rates (5–20 percent) set at the discretion of the Minister of Finance. During the 1999 Article IV consultation, staff strongly recommended reversal of the tariff increases and called for the suspended duties to be phased out. Staff argued that the proliferation of suspended duties had made Kenya’s trade regime more distortionary and less predictable and transparent, created opportunities for rent seeking, and contravened the “standstill” provisions of the COMESA treaty (IMF, 1999l).

    29. Conditionality for the 2000 PRGF arrangement included the formulation of a tariff reform plan based on Kenya’s commitments under the CBI. In discussions for the arrangement (in July 2000), staff stressed the need to address issues in the trade system, which they believed had become “opaque and unpredictable” (IMF, 2000d). The WTO’s 2000 trade policy review for Kenya, released earlier that year, also criticized the use of suspended duties (WTO, 2000a). The authorities agreed to work with Fund and World Bank staff to develop a plan by March 2001 that would rationalize import duties in line with Kenya’s commitments under the CBI (structural performance criterion (Annex Table 4)). The aim of the plan was, over a four-year period, to lower the maximum tariff (except on sugar) from 40 to 25 percent and to reduce the number of tariff bands from nine to four. Staff reported that Kenya was rated 6 on the Fund’s TRI but did not indicate if and how the rating would change after the tariff reform. The authorities initially welcomed the agreement because it gave reasonable time for implementation and was designed to pave the way for Kenya’s adoption of a regional common external tariff, either within COMESA or in the new EAC, which was formed in November 1999 (IMF, 2000d).

    Annex Table 4.Kenya: Key Trade Measures in the 2000 ESAF-Supported Program
    TariffsTrade-Related Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, July 12, 2000 (IMF, 2000d)
    Complete the development of a tariff reform program by March 31, 2001, with a view to implementing it under the 2001/02 (July–June) budget. [Performance criterion]*Prepare by March 31, 2001 a plan for the elimination of major import exemptions awarded to the public sector, with a view to implementing the plan under the 2001/02 budget. [Structural benchmark]^^
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    **indicates commitment was met with a delay or subsequently modified.^indicates commitment was not met.

    indicates no information on compliance.

    30. The 2000 PRGF-supported program also went off-track. The 2002/03 budget included several trade measures that staff saw as policy reversals. These included the exemption from duties of all capital equipment, increased tariff protection for certain local industries (the most important being steel), and continued discriminatory tariffs on wheat and sugar imports from Kenya’s COMESA partners to counter allegedly “unfair trading practices” (IMF, 2003a).

    31. Kenya’s trade policy became increasingly oriented toward regional integration. Staff noted that Kenya’s membership in two overlapping PTAs—COMESA and the EAC—could be problematic. In October 2000, Kenya joined eight other COMESA members to form a free trade area which granted a 60–90 percent preferential tariff to other COMESA members on a reciprocal basis.16 Both COMESA and the EAC planned to establish customs unions by 2004. The authorities saw no inconsistency—they described the EAC as an “inner grouping” of COMESA that would go on a “fast track” to achieve the COMESA customs union. Staff, however, pointed to potential complications insofar as other EAC members had different arrangements: Tanzania was no longer a member of COMESA and Uganda was a member of COMESA but not the free trade area (Kozack, 2002).

    32. In the 2003 PRGF arrangement, no trade conditionality was stipulated for the first year of the arrangement. The authorities indicated that they had agreed with EAC members to establish a common external tariff, and that as a step toward this goal they intended to reduce the maximum tariff rate from 35 to 25 percent in the next budget. Staff reported that Kenya was (still) rated 6 on the Fund’s TRI. Staff and the authorities recognized at this time that the need for trade liberalization had also to be balanced against concerns about the revenue impact of possible tariff changes. To support the budget, modernization of the customs administration and reform of the duty drawback system were viewed as essential elements of fiscal adjustment. It was partly for this reason that structural conditionality on trade reforms was not specified upfront, but was expected to be negotiated in the context of the first program review.

    33. By the time of the first review (in December 2004), Kenya had moved forward and ratified the EAC customs union protocol. The introduction in January 2005 of a common external tariff for Kenya, Tanzania, and Uganda with three rate bands (0 percent, 10 percent, and 25 percent) was very difficult for Kenya, which had previously maintained the highest rate of protection among the member countries.17 However, a five-year transitional period was agreed under which the EAC countries could charge supplementary duties in excess of 25 percent on a list of “sensitive” products. The transitional period was expected to pave the way for the abolition of supplementary duties and for the complete elimination of tariffs on intraregional trade. The tariff reforms under the EAC customs union protocol were projected to result in revenue losses of 0.3 percent of GDP (IMF, 2004f). Trade-related attention in the program thus turned to revenue mobilization (including through the improvement of customs administration) to make up for the anticipated losses. The introduction, by end-March 2005, of simplified customs processing procedures for import and export, supported by verifiable performance indicators in a pilot office, was a structural benchmark for the second review (IMF, 2004f).

    34. In subsequent missions, staff urged the authorities to work with their EAC partners to lower the common external tariff and to rationalize their overlapping PTAs. Staff considered the introduction of the EAC three-band tariff structure a “step in the right direction” for Kenya (IMF, 2004f); an SIP for the 2004 Article IV consultation (McIntyre, 2004) presented results from a trade simulation model suggesting that the EAC customs union would bring positive trade benefits for Kenya through increased flows of cheaper extraregional imports.18 The 2006 Article IV mission urged the authorities to lower the top tariffs and bring “sensitive” products within the common external tariff.19 The mission drew on a joint SIP prepared for the EAC countries (Everaert, Palmason, and Sobolev, 2006) that used the same trade simulation model; this paper showed that lowering the top common external tariff rate would lead to trade creation, improved efficiency of resource allocation, and welfare gains.20 The authorities agreed that tariffs should be lowered but not immediately, noting the scheduled review of the common external tariff in 2010 (IMF, 2007b). Based on the arguments in Everaert, Palmason, and Sobolev (2006), the mission also advocated the rationalization of Kenya’s PTAs which, it argued, gave rise to potentially conflicting commitments and hindered tariff reduction.

    Assessment

    35. Trade policy formed only a small part of the Fund’s program discussions with Kenya, which were dominated by concerns about governance and other structural reforms. Staff (justifiably) viewed trade liberalization as critical for future sustained growth (IMF, 1996f; IMF, 2003f), and most of the relevant trade issues—e.g., the relatively high level and dispersion of tariffs, overlapping PTAs, and protection of selected sectors—were raised by staff in surveillance discussions. Yet in the staff’s own assessment, “[t]rade policy advice and regional issues were not prominent under Fund arrangements” (IMF, 2008c). In designing the 2000 and 2003 PRGF-supported programs, staff reported Kenya’s TRI rating at 6 (“moderately restrictive”) but did not indicate whether or not, or explain why, a reduction under the program would be necessary or desirable.

    36. There was minimal analysis by staff of the authorities’ stated objectives in selectively increasing levels of protection. Kozack (2002) observed that support for trade liberalization in Kenya was being hampered by perceptions of unfair competition (i.e., dumping by neighboring countries) and the adverse impact on some local industries. However, no sector-specific study was done of the industries where protection was being increased, nor any analysis of the food security arguments that the authorities used to justify the continued high protection of cereal production and sugar processing. Further attention particularly to this latter topic might have helped staff build greater support for reducing protection levels. The staff’s approach was very much from a macroeconomic perspective, wherein the benefits of trade liberalization derived from reducing distortions: specific costs and benefits from removal of supplementary duties, for example, were not explored in any depth.

    37. The postponement of trade reforms from the first year of the 2003 PRGF arrangement represented a missed opportunity to place the staff’s surveillance recommendations in a program context. In line with Board guidance, staff needed to be selective in determining the coverage of structural conditionality, given that many competing and important structural reforms and governance measures were candidates for inclusion in the program. However, given Kenya’s poor record in completing reviews on time, staff could perhaps have given more consideration to including some key trade measures at the beginning of the program. The deferral of trade conditionality until the first review may have helped in securing agreement with the authorities. But by the time the review went to the IMF Executive Board, a common external tariff was virtually in place, and trade policy had been effectively removed from the list of issues that could be dealt with in a program context.

    38. The authorities and staff interpreted the agreement to adopt the EAC common external tariff as effectively placing the tariff regime beyond program conditionality. With an agreement in place on a customs union, it would have been unrealistic to expect a commitment from any one member on the common external tariff, which required agreement from all members of the customs union. Discretionary elements of Kenya’s tariff structure, such as the supplementary duties, were still legitimate policy issues for bilateral discussion and unilateral action. Yet it seems that the elimination of supplementary duties, as urged by Fund staff during the 2006 Article IV consultation/second review of the 2003 PRGF-supported program, was not considered for inclusion in the program. The stance taken appears to reflect a view even by staff that, with the increasing importance of PTAs, Kenya’s trade policy had moved beyond the IMF’s immediate concern.

    39. Indeed, even the limited trade policy conditionality in IMF-supported programs in Kenya did not produce much lasting result. For the most part trade conditionality during the period under review was either not met fully or was later reversed. The reversals occurred especially when the Fund-supported programs were off-track. For example, staff succeeded in convincing the authorities to avoid direct controls on food imports in the 1996 ESAF arrangement. However, the authorities replaced the import prohibitions with very high supplementary duties which continued to be levied throughout the period, including under the special arrangements of the EAC customs union. The four-year tariff reform program, formulated in 2001 with help from World Bank and IMF staff, was only partly implemented. The measures to simplify customs processing procedures (a structural benchmark for the second review of the 2003 PRGF-supported program) were not implemented.21

    D. Mozambique
    Background

    40. During the 1990s, the Mozambican government was largely sympathetic to arguments for trade liberalization. In particular, it viewed an open trade system as critical for attracting badly needed foreign investment to rebuild the war-ravaged economy. In 1991, emerging from many years of civil conflict, Mozambique implemented a comprehensive trade reform with IMF technical assistance, eliminating most nontariff barriers and simplifying the tariff schedule from 34 to 5 bands (ranging from 5 percent to 35 percent). Subsequent policy changes during 1991–96 resulted in a somewhat more complex tariff regime—with widespread use of import duty exemptions, for new and existing investments, as well as for political parties and nongovernmental organizations (NGOs), and a classification of imports within the tariff structure that was subject to ad hoc adjustments—but the trade system in general was considered relatively open (IMF, 1996k).22

    41. Customs administration was a weak point. At the beginning of the evaluation period, Mozambique’s tax ratio was very low (about 10 percent of GDP), with trade taxes accounting for about 2 percent of GDP. The customs administration was generally viewed as highly inefficient and corrupt, and prolonged discussions had been held on the merits of privatizing the customs service. The World Bank had recommended improvements in customs procedures, and an FAD technical assistance mission in February 1995 had drawn up a work program to help improve customs administration (IMF, 1995a).

    42. In the mid-1990s, Mozambique, like Tanzania, belonged to SADC and COMESA but planned to withdraw from the latter. Mozambique signed the COMESA treaty in 1993 but never ratified it; it suspended its participation in COMESA in 1996 and formally withdrew at the end of 1997. Unlike its neighboring countries, Mozambique was not a signatory of the CBI.

    Policy dialogue and conditionality

    43. During 1996–2007, Mozambique had three financial arrangements with the Fund: two back-to-back ESAF-supported arrangements—the first from 1996 to 1999 and the second from 1999 to 2003—followed by a three-year PRGF-supported arrangement starting in 2004. All three programs were completed. A three-year PSI arrangement was put in place in June 2007.

    44. The 1996 program targeted customs reform as a key element in the structural policy agenda. In the first-year program (May 1996) a structural benchmark was placed on signing a contract for a private company to take over the management of customs. (This led, in August 1996, to the signing of a three-year agreement with Crown Agents of the United Kingdom (IMF, 1996g)). FAD fielded two technical assistance missions on customs administration and provided a long-term consultant to assist with the implementation of customs reform during the program period. Several technical assistance recommendations from FAD were incorporated in subsequent program conditionality throughout the 1996 and 1999 ESAF arrangements (Annex Table 5 and Annex Table 6). FAD technical assistance continued to ensure the effective operation of the customs administration after management support from the Crown Agents expired in mid-2003.

    Annex Table 5.Mozambique: Key Trade Measures in the 1996 ESAF-Supported Program
    TariffsExport Taxes/RestrictionsCustoms AdministrationTrade-Related Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, May 30, 1996 (IMF, 1996g)
    Simplify the current tariff structure by reducing the number of rates and their maximum levels by mid-1996.Gradually eliminate the tax and avoid any quantitative restrictions on exports of unprocessed cashew nuts.Sign a contract for the private management of customs by end-June 1996. [Performance criterion]*Complete the study of the legislation on tariff exemptions and take measures to substantially curtail them. [Prior action]*
    Combine preshipment inspection with the full reconciliation of duties due and paid to help the strict enforcement of customs laws, starting in March 1996.
    Further streamline the licensing of exports, ensuring that its use for statistical purposes does not entail an unnecessary burden on exporters.
    Make efforts to redirect illegal exports of gold and precious stones through normal commercial channels by increasing border control.
    Memorandum of Economic and Financial Policies, June 9, 1997 (IMF, 1997b)
    Introduce a standard customs form for clearance of exempted goods by end-June 1997. [Structural benchmark]*
    Approve a program for redeploying current customs personnel and recruiting new staff by end-April 1997. [Structural benchmark]*
    Memorandum of Economic and Financial Policies, August 10, 1998 (IMF, 1998e)
    Lower the top import tariff rate from 35 percent to at least 30 percent by April 30, 1999. [Structural benchmark]*Implement the Trade Information Management System customs software in at least four sites by October 1998. [Performance criterion]*
    Review the role of preshipment inspection in the context of the introduction of the single administrative document for customs clearance planned for October 1, 1998.
    Prepare laws on setting special tribunals and regulations for resolving disputes concerning customs matters, and submit to the Assembly of the Republic in June 1999.
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    **indicates commitment was met with a delay or subsequently modified.^indicates commitment was not met.^^indicates no information on compliance.
    Annex Table 6.Mozambique: Key Trade Measures in the 1999 ESAF-Supported Program
    TariffsExport Taxes/RestrictionsCustoms AdministrationTrade-Related

    Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, June 10, 1999 (IMF, 1999g)
    • Complete an assessment of the remaining import surcharges (cement, steel plates and tubes, sugar) by September 1999. [Structural benchmark]^

    • Refrain from adopting new import surcharges or increasing existing general import surcharges.

    • Further reduce the level and dispersion of import tariffs during the period of the new three-year ESAF arrangement.

    • Reduce the top import tariff rate from 30 to 25 percent, effective in January 2002.

    Refrain from adopting new export taxes/restrictions or increasing existing export taxes/restrictions.
    • Complete computerization of at least ten customs clearance points by September 1999. [Performance criterion]*

    • Adopt new procedures governing customs warehousing and transit trade by September 1999. [Structural benchmark]*

    • Complete redeployment of 500 redundant customs personnel December 1999. [Structural benchmark]*

    • Submit revised customs legislation to the National Assembly (basic customs act; customs code; and law on customs tribunals) by December 1999. [Performance criterion]**

    • Provide the necessary financial and other support to customs to ensure that the management company completes its scheduled work by end-1999.

    Review the tax and tariff system and adopt a position toward rationalizing the exemptions regimes by March 2000. [Structural benchmark]*
    Memorandum of Economic and Financial Policies, March 17, 2000 (IMF, 2000b)
    Complete a review of sugar sector policy, with a view to determining (i) whether support for the sector is warranted, and (ii) the amount, duration, and form of any such support by August 2000. [Structural benchmark]*
    • Attain a target level of customs personnel (1,100 staff) by April 2000. [Structural benchmark]**

    • Implement adequate physical controls around the industrial free zones and adopt a mechanism of tax and customs surveillance to prevent leakages, by April 2000. [Structural benchmark]*

    Complete a review of the system of tax and customs exemptions by August 2000. [Performance criterion]**
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    indicates commitment was met with a delay or subsequently modified.

    ^Implement adequate physical controls around the industrial free zones and adopt a mechanism of tax and customs surveillance to prevent leakages, by April 2000. [Structural benchmark]*^^indicates no information on compliance.

    45. Tariff reforms were initially designed to simplify and enhance customs revenue collection. From the outset of the 1996 program, staff identified tariff exemptions as a serious problem; completion of a study on tariff exemptions and taking measures to curtail them was a prior action for the first-year program. Difficulties in addressing this issue made it a recurring theme throughout the evaluation period. After studying the revenue impact of alternative tariff structures, the authorities modified the tariff structure in November 1996, lowering the unweighted average tariff rate from 18 percent to 11 percent. However, staff were concerned that the tariff reform—by lowering tariffs on imported inputs while raising the average tariff on consumer goods—may have increased the effective rate of protection (IMF, 1997b). Staff pressed the authorities to lower “excessively high” tariffs, narrow the range of tariffs, and curtail tariff exemptions, particularly those that were discretionary. The government agreed to lower the top import tariff rate from 35 percent to 30 percent by end-April 1999 (a structural benchmark for the third-year program, August 1998) but would not countenance further immediate reductions, citing, the continued weakness of government revenue (IMF, 1998e). Staff expected that the reduction in the maximum import tariff rate would lower Mozambique’s TRI from 2 (in 1998) to 1 (IMF, 1999b).

    46. In the 1999 ESAF/PRGF-supported program, Fund (and Bank) staff pushed harder for tariff reforms as the authorities began to express some reservations about the pace and content of their trade liberalization program. After lowering the top import tariff rate to 30 percent in April 1999, the authorities were reluctant to make further cuts under the new ESAF/PRGF-supported program. They also noted that future tariff reduction would need to be considered in the context of their membership in the SADC, which was preparing a trade protocol that envisaged progress toward a free trade area and a customs union. But under pressure from Fund and Bank staff, the government committed to cut the top tariff rate to 25 percent by January 2002, toward the end of the program period. The government also agreed to reassess the justification for existing surcharges on imports of cement, steel plates and tubes, and sugar (a structural benchmark for the first-year program) and—in response to IMF and World Bank staff concerns about the possible reinstatement of the ban on raw cashew nut exports—promised not to introduce (new) or increase (existing) import surcharges or export restrictions (IMF, 1999g) (Annex Table 6). (Box 1 describes the evolution of Mozambique’s cashew nut export policy from 1992 to 1999.)

    47. Toward the end of 1999, the authorities reversed their policy of trade liberalization in the cashew and sugar sectors. In the cashew sector, the export ban on raw cashew nuts was not reinstated but instead, parliament passed a bill in September 1999 raising the export tax on raw cashew nuts from 14 percent to 18–22 percent (the exact rate to be set by the government each year) and offering domestic processors priority in the purchase of raw nuts. Concerned about the efficiency costs of these measures and their adverse impact on the many poor rural households who depended on cashew nuts for cash income, IMF staff proposed, and the authorities agreed to carry out, a study evaluating and rationalizing policies for the sector. In the sugar sector, in September 1999 the government raised the variable import surcharge to 25 percent—a level representing a 60 percent nominal level of protection for the industry—in an attempt to foster the rehabilitation of the local sugar industry. The heightened protection was strongly opposed by Fund staff, who considered the policy unwise (given the presence of more efficient sugar producers in the region and distortions in the world market), costly for domestic consumers, and likely to encourage smuggling. The authorities, however, were not convinced. Staff therefore suggested that a comprehensive review of the sugar policy be undertaken and that, if the review justified the granting of temporary support to the sector, the government provide such support in the form of direct budget subsidies to the producers while phasing out protection via import surcharges. The authorities agreed to undertake the review in collaboration with the World Bank (IMF, 2000b).

    48. Following intervention by the Managing Director in 2000, staff backed down from their stance on sugar sector protection. Their call to remove protection for the sugar sector had been seen by the authorities, the local public, and some NGOs as a repeat of the World Bank’s unpopular—and what many considered to be discredited—policy for the cashew sector.23 The then-newly appointed IMF Managing Director, on a tour of Africa in July 2000, assured the authorities that the IMF would not impose conditions and policies on countries against their interests.24 The study of the sugar sector (a structural benchmark under the 1999 ESAF/ PRGF arrangement) was undertaken by the UN Food and Agriculture Organization (FAO) and released in October 2000. It came out in support of the government’s position. Staff, with little alternative but to accept its conclusions, expressed the opinion that the import surcharge should at least have a sunset clause and be rolled back over time. The authorities, however, stated only that they would review the surcharge on an annual basis (IMF, 2000h). The Fund received some favorable press for being flexible on this issue. (Box 2 provides further detail on the sugar controversy.)25

    Box 1.Mozambique: Cashew Sector Policy

    Following the long civil war in Mozambique, which ended in 1992, the cashew growing and processing industries were in total disrepair. Exports of raw cashew nuts were initially banned, then heavily restricted, in an effort to ensure cheap supplies to local processing factories. In 1994, the state-owned processing plants were sold to the private sector which began rehabilitation. In the following year, however, the World Bank, which was supporting Mozambique’s economic reforms through its concessional loan window, recommended liberalizing raw cashew exports. The Bank’s recommendation was based on an in-house study which concluded that Mozambique would be better off exporting raw nuts to India for processing as its own processing factories were not efficient (McMillan, Rodrik, and Welch, 2004). On the Bank’s advice, the government replaced the export restriction on raw cashew nuts with an export tax of 26 percent, subsequently lowered to 20 percent in 1996 and 14 percent in 1997, with the expectation of elimination by 2000.1

    The planned phase-out of the export tax touched off protests from the cashew processors, who claimed that they had been guaranteed a longer period of protection when they purchased the factories from the state. Furthermore, the Mozambican processors claimed that India’s processing industry was subsidized. The export tax phase-out led to some processing plant closures and the unemployment of thousands of cashew factory workers. In the face of sustained criticism, the World Bank agreed to leave the export tax at 14 percent while a new study was prepared on the impact of liberalization on the cashew sector (McMillan, Rodrik, and Welch, 2004).

    The new study, conducted by Deloitte and Touche and funded by the World Bank, was released in September 1997. It cast doubt on the evidence that the liberalization policy had raised farmgate prices, acknowledged that Indian subsidies tilted the playing field, and concluded that foreign exchange earnings could be higher if cashew nuts were exported in processed form rather than raw. The report recommended keeping the 14 percent export tax for three or four years to give the industry time to adjust.2 In light of the recommendation, no further reductions were made to the export tax. However, the widespread view was that the Mozambican cashew nut industry had already been seriously, and possibly irreparably, damaged. In September 1999, a draft bill was sent to the parliament proposing that the export ban on raw cashew nuts be reinstated for 10 years.3

    “Mozambican bosses and workers united on cashews,” Reuters, August 7, 1997.

    “Study finds World Bank wrong on Mozambique’s cashew industry,” Pan-African News Agency, September 5, 1997.

    “Liberalization of cashew exports to be reversed,” BBC, September 21, 1999.

    Box 2.Mozambique: The Sugar Surcharge Controversy

    Like the cashew industry, the sugar industry was all but destroyed during Mozambique’s civil war. In the early 1990s, the government invited private investors to take over sabotaged or moribund sugar mills, with the assurance that the industry would be protected against cheaper imports until it was able to regain international competitiveness. The protection took the form of a minimum reference price for imported sugar: imports of sugar below the reference price were subject to a surcharge equal to the price difference. The infant industry protection (and an export quota for the U.S. market at a guaranteed price) proved attractive to private, mainly foreign, investors. Prominent investors included the Sena Company, a Mauritian consortium planning a US$100 million rehabilitation of the Marromeu sugar mill and Ilovo, a South African company planning a US$240 million investment in the Maragra sugar plantation with financing from the International Finance Corporation (IFC). When the IMF urged that the surcharge should be phased out, the investors protested that they would be unable to recoup their investments and threatened to pull out if the government followed the Fund’s recommendation.

    Fund staff presented the standard arguments against infant industry protection: “If the viability of the enterprises can only be assured at the present with very high protection levels, with no prospect of future reductions, then perhaps they’re not very good projects.”1 The government disagreed, painting the Fund as dogmatic and arguing that historically “all governments have done this.”2 IFC staff noted that sugar was one of the few agricultural industries that had been able to attract foreign investment and supported the government’s policy. The controversy was sharpened by the perception that the Fund was not even-handed in its advice. NGOs such as Oxfam pointed out that other countries subsidized or protected their sugar producers hence it was “dogmatic and ideological” for the Fund to advise Mozambique not to protect its “low-cost sugar producers” if did nothing about the United States and European Union protecting “high-cost sugar producers.”3

    The Fund surprised observers by backing down on the sugar protection issue. The decision came at a time when the Fund was streamlining conditionality and reshaping its approach to low-income countries. The Managing Director was credited with the decision—“his reasoning was simple: given that removing sugar tariffs was not essential to promoting economic stability, there was no need to insist on it”—and Oxfam cheered, “This time, the IMF listened to reason.”4

    “Mozambique faces sugar-industry debate—World Bank invests in commodity, while IMF would see it shrink,” Wall Street Journal, June 20, 2000.

    “Mozambique to urge U.S. backing in IMF, World Bank,” All Africa, June 16, 2000.

    “Mozambique faces sugar-industry debate—World Bank invests in commodity, while IMF would see it shrink,” Wall Street Journal, June 20, 2000.

    “The listening approach to development,” Financial Times, January 12, 2001.

    49. Subsequent programs (the 2004 PRGF-supported program and the 2007 PSI-supported program) touched on trade policy only briefly, mainly in the context of Mozambique’s PTAs. In line with the SADC trade protocol (which Mozambique ratified in December 1999), the authorities lowered the maximum tariff rate to 25 percent in January 2003 and committed to lower it further to 20 percent in 2006 for SADC members and subsequently on an MFN basis. In Article IV discussions, staff continued to urge the authorities to liberalize trade on a multilateral (MFN) basis and to limit infant industry protection. Mozambique also received substantial trade policy advice and technical assistance from the World Bank and from other donors under the IF.26 A DTIS prepared by the United States Agency for International Development was released in late 2004; that study incorporated work on transport and trade facilitation by the World Bank but no substantive input from the Fund (USAID, 2004). IMF staff broadly endorsed the recommendations in the DTIS except in the area of PTAs where they urged the authorities to rethink the strategy of pursuing more bilateral/ regional agreements (Kvintradze, 2007). Within the IF, the World Bank provided advice and assistance on PTA issues such as membership in the Southern African Customs Union (SACU) and the EPAs that were evolving with the European Union.

    Assessment

    50. The focus on customs reform at the outset of the 1996 ESAF arrangement was appropriate. Given that Mozambique’s trade regime was already relatively open, staff were right to concentrate on customs reform which was a pressing concern. The approach of using a private firm to take full management control during a three-year period, followed by use of the same firm in an advisory capacity for a further three years, appears to have been well thought-out and staff reported that sufficient progress had been made for the authorities to resume full control from 2003 onward. The technical assistance provided by FAD contributed substantially to this outcome and there was good use of program conditionality to ensure that key steps were implemented on time. Almost all customs reform conditionality was met on time.

    51. The focus shifted justifiably to tariff policy when staff detected an increase in trade protection. Staff developed reservations about the impact of the 1996 tariff reform and called attention to their concerns. A general problem with the description of tariff reforms in Fund reports has been the tendency to focus only on maximum and/or average tariff rates; in this case, however, staff went beyond the basics and looked more deeply into the tariff structure, concluding that the tariff changes may have implied higher effective protection rates for certain industries. On that basis, they urged the authorities to review and simplify the tariff structure. Similarly in 1999, staff were alert to the protectionist swing that was implied by increases in the export tax on raw cashew nuts and the import surcharge on sugar, and discouraged the moves. In that regard, staff’s actions were in line with the objectives of Fund trade policy advice as set out in the internal guidelines (IMF, 1999j).

    52. The sugar controversy, however, underscored the need for technical analysis in evaluating and arbitrating on sector-specific tariff issues. The staff’s general arguments against infant industry protection were supported by a substantial amount of research and evidence in the existing literature.27 But without sector-specific knowledge, staff could not put context and specificity in their arguments and thus could not persuade the authorities to their view. The call for an independent technical study to resolve the issue was an appropriate compromise, but lacking sector-specific knowledge, staff were unable to challenge the conclusions of the FAO report. Writing much later, Kvintradze (2007) indicates that the protection did facilitate large-scale foreign investment in sugar estates located in remote areas with few other income opportunities, and that the production capacity and output of sugar mills has increased significantly in recent years. But the efficiency of Mozambican sugar production, and the question of whether the industry will eventually be able to operate profitably in the absence of the surcharge are still open issues.

    53. The introduction of the Fund’s streamlining initiative defused the sugar controversy.28 After the high-profile disagreement with the World Bank over cashew sector policy, the authorities had hardened their position on infant industry protection, and the Fund needed to tread carefully in going over the same area. The Fund’s acceptance of the government’s position was consistent with the macro-criticality criterion for structural conditionality. Indeed, the Mozambican sugar surcharge became the standard illustration of the concept: a senior PDR staff member explained to the media that while the Fund did not consider Mozambique’s sugar strategy “efficient or proper,” the Fund would not press the issue because the economic cost was not so large as to cause macroeconomic imbalances.29

    54. Fund and World Bank staff saw eye-to-eye on cashew sector policy, but less so on sugar sector policy. In the cashew debate, IMF staff supported the Bank’s view and strongly opposed the increase in the export tax on raw cashew nuts. IMF staff expressed concern about the efficiency costs of the increased protection and the adverse impact on cashew farmers. But, as in the sugar case, the lack of sector-specific knowledge limited their effectiveness and led them to suggest an independent study to evaluate and help rationalize policies for the sector. The completed study recommended the liquidation of several nonviable processing plants, but it also found that newer factories, using more labor-intensive technology, needed no special assistance. In the event, the government decided to retain the 18 percent export tax, and the country’s cashew industry did not subsequently perform well enough to re-establish itself as a significant player in world markets. In the sugar debate, the Fund was largely alone in arguing against infant industry protection; the World Bank Group had by then apparently changed its stance and was even financing the rehabilitation of one sugar mill through the IFC.

    55. The Fund’s retreat from trade policy issues after the mid-2000s was understandable but may have gone too far. There has been no shortage of trade-related advice and technical assistance available to Mozambique from other sources, particularly under the IF umbrella. While trade policy issues no longer featured in Fund-supported programs in Mozambique after 2003, staff continued to discuss trade issues in their biennial Article IV consultations during this period. Regional and bilateral trade agreements, including the EPA with the European Union, have become increasingly important; while Mozambique is not yet caught in the problems of overlapping PTAs, this could be a major issue for the period ahead, especially in light of some of the DTIS’s recommendations. Kvintradze (2007) outlines some of the complexities of regional integration options for Mozambique, but further analytical and empirical work on the macroeconomic implications of various trade policy choices facing Mozambique could have been useful ahead of upcoming decisions.

    56. The tax and customs reforms took time to have an effect. Through 2005, the tax-to-GDP ratio stagnated in the range of 10–12 percent, despite the substantial FAD technical assistance provided and the fact that the conditionality associated with the customs improvement project was generally observed with only a few delays in certain measures.30 The review of duty exemptions (a structural benchmark in the 1999 ESAF/PRGF program) was eventually completed in August 2000. Based on the results, the government took some actions to limit exemptions.31 Since 2005, as a result of the earlier fiscal revenue reforms and some discretionary tax measures, Mozambique has made progress in raising the tax ratio, and this facilitated the further reduction of the maximum tariff rate in 2007.

    E. Ghana
    Background

    57. In 1996, Ghana was generally regarded as ahead of its neighbors in trade liberalization. Following several reforms of the trade system since the early 1980s, 1994 saw a new effort to simplify the tariff regime. This resulted in a relatively simple three-tier system, with rates of 0 percent, 10 percent, and 25 percent. The unweighted average tariff rate stood at below 15 percent. Cocoa, historically Ghana’s key economic sector, was subject to relatively high export taxation and a state export monopoly.32

    58. Ghana is a member of the Economic Community of West African States (ECOWAS), a regional group of 15 West African countries.33 ECOWAS was founded in 1975 with the aim of establishing an economic union in West Africa, but progress toward this goal was very slow. In 1994, eight ECOWAS members—not including Ghana—formed the West African Economic and Monetary Union (WAEMU), a customs and monetary union.

    Policy dialogue and trade conditionality

    59. Ghana had three back-to-back ESAF/PRGF arrangements during the period under review. Structural conditionality in the first program (1995–99) focused on cocoa sector reform, energy sector reform, and divestiture from the public sector. The later programs (1999–2002 and 2003–06) focused on fiscal issues and financial sector reform as macro-critical areas for structural conditionality (IMF, 2007c). The third PRGF-supported program paid very limited attention to trade policy.

    60. The IMF and the World Bank advised Ghana to liberalize its cocoa sector. Under the 1995 ESAF-supported program, the government had indicated its desire to remove the Cocoa Marketing Company’s monopoly over the export of cocoa. But an independent study by a U.K.-based consultancy that had been commissioned by the government and financed under a World Bank credit recommended the continuation of the state monopoly of cocoa exports to ensure quality control and the reliability of deliveries while the rest of the cocoa sector was being deregulated and restructured (IMF, 1996h). Fund staff also urged the authorities to reduce, if not eliminate, the export tax on cocoa as part of the restructuring/deregulation of the cocoa sector (IMF, 1996h). Their advice was backed by an SIP (Bulir, 1996) that evaluated various theoretical and practical arguments for cocoa taxation, estimated a model of cocoa supply, and concluded that a modest reduction in the export tax need not harm government revenue. The Fund (and the World Bank) continued to work with Ghana on reforming the cocoa sector through the 1995 ESAF-supported program and its successor program, using conditionality to establish benchmarks for various steps in the liberalization process.34

    61. Fund surveillance during 1996–98 covered trade policy issues largely in relation to their revenue aspects. In the 1997 Article IV consultation, staff noted a steady decline in effective import duty rates resulting from an expanding range of nontransparent tariff exemptions and problems in customs administration (IMF, 1997d). An SIP (Arjona-Gracia, Pellechio, and Crego, 1998) prepared by IMF and World Bank staff for the 1998 Article IV consultation highlighted Ghana’s widespread use of zero rates and exemptions and “the relatively high top rate of 25 percent” and examined the implications of various tariff reform options for the effective tariff rate and tariff revenues.

    62. Tariff reform took a more prominent role in the 1999 program supported by the ESAF/PRGF-supported program. The authorities announced that in January 2000 they would reduce the maximum tariff from 25 percent to 20 percent which represented a target for the region set by the WAEMU customs union. The authorities presented this tariff reduction as a means of deterring smuggling; it was incorporated in the program as a structural benchmark. The expectation was that this move would reduce Ghana’s TRI from 5 to 4. The program also included a structural benchmark on the completion of a comprehensive review of the tariff structure to assess the prospects for further tariff reductions (by September 1999) (Annex Table 7). The government’s plan was to shift, over the medium term, from reliance on trade taxes—both import tariffs and cocoa export taxes—toward taxation of domestic consumption. An analysis by Fund staff of medium-term fiscal sustainability (Pellechio, 1999) provided the basis for discussion of this strategy—specifically, the measures needed to compensate for the revenue losses from tariff and cocoa tax reform.

    Annex Table 7.Ghana: Key Trade Measures in the 1999 ESAF-Supported Program
    TariffsExport Taxes/RestrictionsState Trading

    Monopolies
    Customs AdministrationTrade-Related

    Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, April 14, 1999 (IMF, 1999c)
    • Reduce the top tariff rate to 20 percent by January 1, 2000. [Structural benchmark]*

    • Complete a comprehensive review of the tariff regime by end-September 1999. [Structural benchmark]*

    • Gradually reduce the average tariff rate over the next three years to less than 10 percent.

    • Increase the producer price to 60 percent of the f.o.b. cocoa price for the 1999/2000 crop year by end-June 1999. [Performance criterion]*

    • Increase the producer price by at least 2 percentage points in each of the next two years and reduce the share of the Cocoa Board and the tax on cocoa to allow for increases in the farmers’ share of the f.o.b. price.

    • Review surrender requirements once the licensed buying companies (LBCs) begin exporting cocoa.

    Memorandum of Economic and Financial Policies, November 3, 1999 (IMF, 1999k)
    Accelerate the increase in farmers’ share in the f.o.b. price of cocoa starting in 1999/2000 crop season to at least 62 percent in 2000/2001.Allow LBCs to export at least 30 percent of their cocoa purchases.Provide an assessment of the factors that led to the loss of merchandise from bonded warehouses, together with an estimate of the resulting revenue losses, steps to identify and prosecute those responsible, and measures taken to prevent recurrence of such incidents in the future. Indicate the measures to be taken to strengthen customs. [Prior action]*Monitor exemptions and report them on a quarterly basis by Harmonized System code.
    Memorandum of Economic and Financial Policies, June 25, 2000 (IMF, 2000f)
    • Complete a study on Ghana’s tariff structure that assesses the prospects to further reduce tariff rates, by end-October 2000. [Structural benchmark]*

    • Ask parliament to eliminate the special import tax or replace it with antidumping measures if justified according to existing domestic legislation, by end-March 2001. [Structural benchmark]**

    Impose an ad valorem tax projected at 17.8 percent on cocoa exports. A producer price will remain in effect whereby farmers will receive an estimated 67 percent of the f.o.b. export price.Inform Fund staff of the cocoa policies for the 2000/01 crop, and issue regulations to allow qualified LBCs to export 30 percent of cocoa purchases. [Prior action]*Tighten controls over bonded warehouses by requiring computerization of inventory, conducting unannounced audits, limiting warehousing time and type of commodities allowed, and requiring breakage reports to be filled with customs not more than 48 hours after the goods reach the warehouse.
    • Refrain from introducing new tax incentives, particularly those contingent on export and import performance, until the revenue impact of the existing incentives has been assessed.

    • Tighten tariff exemptions by allowing only NGOs specifically exempted by parliament to import goods free of duty.

    Memorandum of Economic and Financial Policies, June 11, 2001 (IMF, 2001c)
    • Submit to parliament those supplementary tax measures requiring parliamentary approval (including a 5 percent import duty on certain items on the mining list and on materials for processing timber). [Prior action]*

    • Eliminate the special import tax in the 2002 budget effective immediately (end-March 2002). [Performance criterion]*

    • Formulate plans for broader tariff reform by the end of 2001, so that implementation can begin with the 2002 Budget.

    Submit to parliament those supplementary tax measures requiring parliamentary approval (including a 10 percent levy on exports of lumber). [Prior action]*Submit to parliament those supplementary tax measures requiring parliamentary approval (including a 1 percent customs processing fee on tariff-exempt imports and a limitation of tariff exemptions on imports by NGOs). [Prior action]*
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    indicates commitment was met with a delay or subsequently modified.

    ^indicates commitment was not met.^^indicates no information on compliance.

    63. The 1999 ESAF/PRGF-supported program also addressed the continuing problem of import exemptions and customs irregularities. Staff reported a serious breakdown in controls on bonded warehouses that led to significant revenue losses (IMF, 1999k). The government undertook to investigate these incidents and identify measures to strengthen customs as a prior action for the first review of the program in November 1999. FAD provided technical assistance in this area: two reports, on “Reform of Tariff and Exemption Policies” (March 2001) and “Revenue Administration and Tariff Policy Reform” (October 2001) set out an agenda, inter alia, to deal with exemptions and combat corruption in the bonded warehouses and free zone facility. Measures to curtail import tariff exemptions were included in a supplementary package of revenue measures that was sent to parliament in June 2001 as part of the government’s plan to close the fiscal financing gap for 2001 (prior action for the third review).

    64. IMF staff were critical of a special import tax that Ghana introduced in 2000 to protect local producers against alleged dumping by other countries. The 20 percent import tax was imposed on about 50 selected products at the same time as the maximum tariff was reduced to the WAEMU target of 20 percent. The tax effectively raised the maximum tariff to 40 percent and increased the average nominal tariff rate by about two percent. Staff argued strongly against this measure, which they considered to be “contrary to the spirit of the tariff reform” (IMF, 2000f).35 In the second program review in June 2000, staff added a structural benchmark to the effect that the authorities would request parliament to eliminate the special import tax or “replace it with antidumping measures if justified according to existing domestic legislation” by end-March 2001 (IMF, 2000f).

    65. Staff were also critical of import and export tax increases planned by the government in 2001, but they accepted these as necessary to close the budget shortfall. The fiscal situation had deteriorated during 2000 (an election year) and the incoming government had to devise revenue and expenditure measures to shore up the public finances. A number of trade tax measures were included among the revenue measures to be submitted to parliament in June 2001 (prior action for the third review), namely a 5 percent import duty on certain items; a 1 percent customs processing fee on tariff-exempt imports; and a 10 percent levy on exports of lumber. Staff advised against the export tax on lumber and urged the authorities to explore “alternative nondistortionary measures to raise revenue and promote environmental conservation” in the following year’s budget. Staff were, however, reassured by the authorities’ plan to formulate a broader agenda for tariff reform by end-2001 (IMF, 2001c).

    66. The government announced further tariff increases in 2003, just as a new PRGF arrangement was due to be considered by the Executive Board.36 Staff were not consulted about these measures, which were designed to protect certain local industries, notably, poultry. The Ghanaian authorities believed that higher tariffs on poultry were justified because the industry, which had taken many years to establish, was unable to compete with subsidized products from the European Union and the United States. Staff viewed the measures as damaging to the government’s growth and poverty-reduction strategy, stressing the impact on the poor of raising prices for two staple foods, rice and chicken. Despite initial assurances to the contrary, the authorities reported that the tariff legislation had inadvertently been given presidential assent.

    67. Staff moved quickly to avert the tariff increase. In order to allow the PRGF-supported program to go forward, the finance minister had to order a public retraction and commit not to implement the tariff measures. The retraction of the tariff measures gave rise to much negative public and press comment. Attention centered on the issue of poultry tariffs (Box 3) and sparked a debate on the theoretical/ideological underpinnings of the Fund’s trade liberalization policies.37

    68. After the poultry tariff episode, the Fund had little or no involvement in trade policy issues in the 2003 PRGF-supported program or in the following period of surveillance. Ghana’s trade policy became increasingly geared toward regional integration and bilateral trade agreements. The government indicated that its medium-term plans for tariff reforms were firmly linked with those of its neighboring ECOWAS member countries. In December 2004, the government launched its National Trade Policy, aimed at expanding access to regional and global markets. Staff agreed with the main elements of the National Trade Policy and noted that the government had ruled out the use of high tariffs to protect domestic industries. There was little further mention of trade liberalization. In an interview for this evaluation, Ghanaian authorities said that most of their recent interactions on trade policy had been with the World Bank, bilateral donors, and the WTO, and that the discussions had usually covered sector-specific topics which were outside the Fund’s core area of expertise. The authorities observed that the Fund had been silent on the evolving EU-Ghana EPA.

    Assessment

    69. The Fund’s coverage of trade policy issues in the earlier part of the evaluation period was appropriate. Although Ghana’s trade regime was considered to be only moderately restrictive in the mid-1990s, trade policies (e.g., tariff reform and reduction of the cocoa export tax) were integral to the medium-term strategies to reform the tax system and the cocoa sector, and hence clearly both relevant and critical to the overall macroeconomic outlook.

    70. In the later part of the evaluation period, the Fund appears to have missed some opportunities to contribute constructively to Ghana’s trade liberalization. On more than one occasion, the authorities justified (proposed or actual) tariff increases as being necessary to counter dumping by Ghana’s trading partners. Staff firmly opposed the tariff increases but did not follow up when Ghana failed to implement WTO-consistent antidumping legislation. By pressing for unilateral trade liberalization but not acknowledging Ghana’s possible difficulties in responding to alleged dumping in a manner consistent with WTO rules, the Fund came across as rigid and doctrinaire.38 Moreover, the Fund may have missed an opportunity to improve its policy coherence with the WTO (and the World Bank). After 2003, the Fund moved significantly away from trade policy issues and passed up further opportunities to advise Ghana’s authorities on trade liberalization. Staff had little to say about the authorities’ National Trade Policy in late-2004, or about the EU-Ghana EPA. The latter, especially, was an important and highly debated trade policy issue in Ghana and an area where the authorities have indicated that some macroeconomic analysis by the Fund could have been helpful.

    71. The Fund’s views on tariff and cocoa sector reform were carefully thought out. Although the Fund was not the main initiator of the tariff reforms or the lead agency behind the cocoa sector reforms, staff were well informed about the issues. The Fund’s discussion on tariff reform was supported by detailed knowledge of Ghana’s tariff system and tariff exemptions, and by a quantitative analysis of the implications of different tariff reform options for average and effective tariff rates and revenue collection (Arjona-Gracia, Pellechio, and Crego, 1998). Similarly, the Fund’s advice on cocoa taxation was based on a thorough understanding of the cocoa sector and policies in Ghana (and in competing exporting countries) and the international cocoa market (Bulir, 1996; Kanai, Pellechio, and Leite, 1998; Leite and others, 2000). When a sharp decline in international cocoa prices in 1999 accelerated the government’s cocoa reform agenda, staff revised their medium-term fiscal sustainability analysis to quantify the measures needed to bring the economy back to its original medium-term course (Pellechio, 1999).

    Box 3.Ghana: The Poultry Tariff Controversy

    Ghana’s poultry industry, which had grown strongly behind tariff barriers since the 1950s, suffered after tariff protection was reduced in 1994. From meeting virtually all domestic consumption demand in the early 1990s, domestic poultry production slowed and then declined until it supplied less than half of the domestic market in 2003. The price of imported frozen poultry (which was subject to a 20 percent tariff) was reportedly about 30–40 percent lower than that of locally produced poultry.

    The Ghanaian authorities and NGOs such as Corporate Watch and Christian Aid, argued that with the lowering of protection, the Ghanaian market was being flooded by cheap subsidized frozen chicken parts from the European Union and the United States. It was feared that prolonged “dumping” of this nature would soon lead to the dismantling of the domestic poultry industry and jeopardize Ghana’s food security, leaving the country vulnerable to potential shortages of staple foodstuffs.

    Staff’s reaction to the proposed supplementary duty on poultry was driven in large part by the standard view that a lower level of protection would allow cheaper goods for domestic consumption and (where domestic industries had higher costs) a more efficient reallocation of resources. Staff argued that higher protection would increase the prices of staple foods and would be counter-productive to poverty reduction efforts. From available information about the sector, staff understood that poultry production had been rising hence they did not see a strong prima facie case for higher protection from a sectoral viewpoint. Furthermore, staff believed that about 50 percent of Ghana’s domestic production capacity related to one privately-owned agro-business poised to dominate the entire West African market and that there had been strong lobbying with the President from the owners of this large firm. Staff thus reportedly characterized the poultry tariff controversy as “a storm in a teacup.”1

    NGOs strongly objected to the Fund’s “bullying” of Ghana. They saw the Fund as being heavy-handed (the head of a local NGO asked: “What remains of the sovereignty of Ghana, if laws enacted by parliament can be suspended by a mere call from the IMF?”) and unfair (by forcing Ghana to backtrack on a tariff increase that was well within its WTO bindings whilst allowing the European Union and the United States to continue subsidizing their agricultural sectors).2 In April 2005, a coalition of local and international NGOs organized a series of activities in Accra and other cities around the world to draw international attention to the “obnoxious world trade regime” allegedly perpetrated in part by the IMF.3

    “A fine trade policy at last,” All Africa, February 21, 2005.

    “IMF bullying of Ghana over poultry and rice tariffs criticized,” Liquid Africa, September 30, 2004; “IMF/World Bank overriding democracy in Africa,” All Africa, January 31, 2005.

    “Campaign against unfair trade gathers momentum,” All Africa, February 28, 2005.

    72. The poultry tariff incident was an unfortunate exception. Unlike with cocoa, staff did not have background knowledge of Ghana’s poultry sector. They were caught unawares by the tariff increase and felt compelled to respond quickly as the (2005 PRGF-supported) program was about to be discussed at the Board. In internal discussions, staff took the position that the poultry sector appeared strong enough to compete against imports and that there was not a prima facie case for additional protection. In this judgment, staff seem to have had insufficient current information about the sector’s finances to fully appraise the measure. With the benefit of hindsight, the poultry sector was at that time much more vulnerable to competition from imports than staff had believed. This is not to say that the decision to block the proposed tariff increase was necessarily incorrect—there was a wide gap between domestic costs of production and import prices, and this gap had widened over time—but the rationale that staff used to deny protection for the sector was not supported by the evidence.

    73. The cocoa reforms received broad support, though their implementation was slower than the Fund would have preferred. Following the recommendations of the 1996 independent study, the government began to formulate a medium-term cocoa development strategy through a participatory process of consultation with farmers, traders, foreign importers, civil society organizations, and the World Bank (Leite and others, 2000). The strategy, adopted in April 1999, proposed to reduce the cocoa export tax gradually by increasing the producer price to 60 percent of the f.o.b. price of cocoa for the 1999/2000 crop (a structural performance criterion for the 1999 ESAF/PRGF-supported program in April 1999), and thereafter by at least 2 percentage points in each of the next two years, and to allow qualified licensed buying companies to export at least 30 percent of their domestic purchases starting in 2000/01 (a prior action for the second review of the 1999 ESAF/ PRGF-supported program in August 2000). The strategy was accelerated in June 1999 when the international cocoa price plummeted and the government chose to keep the producer price unchanged, raising the producer’s share to 74 percent of the f.o.b. price. In the same month, the government abolished the Cocoa Marketing Company’s monopoly over cocoa exports, introduced regulations to allow licensed buying companies to export cocoa and changed the cocoa tax from an implicit tax to an explicit ad valorem tax (IMF, 2000f).39 In 2001, staff reported that the cocoa sector reform stalled after all the eligible licensed buying companies relinquished their right to export cocoa that year to the Cocoa Marketing Company, claiming that they lacked the necessary technical capacity (IMF, 2001c).

    74. The Fund was able to check the use of tariff protection, but its approach could have been more constructive. The nominal average tariff rate remained at just below 15 percent and Ghana’s TRI rating of 5 in 1999 remained basically unchanged. There were two instances where tariff increases were introduced without prior discussion with staff:

    • When the government levied a 20 percent special import tax on various products in the 2000 budget, staff gave the authorities until end-2000 to “ask parliament to eliminate the special import tax or replace it with antidumping measures if justified according to existing domestic legislation” (IMF, 2000f). Those actions (a structural benchmark added during the second review of the 1999 ESAF/PRGF-supported program) were observed, but with a delay: the government lowered the top rate for this tax and reduced its coverage in the 2001 budget; the tax was eventually eliminated in July 2002. Staff did not look into the reason for the delay; the authorities had claimed that they needed more time to prepare WTO-consistent antidumping measures.

    • In the second instance, staff reacted more immediately to the tariff increases announced in the 2003 budget. The authorities’ retraction of the announced measures (particularly the increase in poultry tariffs) was effective but highly controversial. In August 2004, the National Poultry Farmers’ Association went to court to compel the government’s revenue agency to implement the new (40 percent) tariff. The high court ruled in favor of the farmers but the government had moved to repeal the act legitimizing the tariff increase before the court made its ruling and in the end, the tariff increase was not implemented.40

    75. Lasting improvements in customs administration proved difficult to achieve. Only some of the recommendations of the FAD technical assistance reports were implemented. The same problems of growing revenue losses from import duty exemptions and weak customs administration reemerged in 2007. An SIP for the 2007 Article IV consultation (Akitoby, 2007) returned to many of the issues that were being considered in 1996–98, recommending that customs procedures be strengthened by remedying customs valuation procedures and minimizing abuses in the bonded warehouses and the free zone facility. In the authorities’ fiscal package to correct for budget slippages in 2007, a reduction in import duty exemptions appeared once more as an important revenue measure (IMF, 2007d).

    F. Guyana
    Background

    76. In the mid-1990s, Guyana’s trade regime was thought to be substantially liberalized. An IMF review in 1996 of the history of the trade system (IMF, 1996i) described wide-ranging trade reforms since 1988 that had transformed the trade regime from a highly protectionist, complex, and opaque system into a simpler one where import licenses were automatically issued and no longer tied to the availability of foreign exchange (except for fuel imports), and import bans applied only to 20 items related to health, medicine and firearms. The state sugar import/export monopoly Guysuco was being restructured (Box 4). Concrete steps had been taken to lower import tariffs.

    77. Guyana has been a member of the Caribbean Community (CARICOM) since the Community was founded in 1973. In 1991, Guyana passed legislation to bring its import duties in line with the common external tariff of CARICOM, and the following year, it agreed along with other CARICOM member states to a phased reduction in the common external tariff from the existing rates of 0–45 percent to 5–20 percent by January 1997 (IMF, 1996i).

    Policy dialogue and trade conditionality

    78. During the period under review, Guyana had ESAF arrangements beginning in 1994 and 1998 (later converted to a PRFG arrangement but not fully drawn) and a PRGF arrangement beginning in 2002. Though trade policy conditionality played no major role in any of these programs, three reasonably strong trade policy efforts pervaded the program: bringing Guyana’s trade policies into conformity with CARICOM; improving customs administration; and reducing, removing, or making more transparent the exemptions from customs tax.

    79. The CARICOM tariff reduction schedule was incorporated into Guyana’s ESAF-supported program in 1994. Fund staff had understood that Guyana had carried out the first stage of the required reduction in the maximum common external tariff rate, from 45 percent to 30 percent, in January 1994. Implementation of the second stage of the tariff reduction by February 1995 was specified as a structural benchmark in the 1994 ESAF-supported program; the target date was subsequently pushed to June 1995 (IMF, 1995b) (Annex Table 8). In March 1996, staff reported that the maximum common external tariff rate had been reduced from 30 percent to 25 percent in September 1995 (IMF, 1996d). The final phase—reduction of the maximum common external tariff rate from 25 percent to 20 percent—was specified as a structural performance criterion in the third-year ESAF arrangement with a target date of June 1997. Staff reported that the condition was met (with a delay) in November 1997 and that Guyana had thus “completed the third and final phase of [common external] tariff reductions—as agreed under CARICOM” (IMF, 1997f).

    Annex Table 8.Guyana: Key Trade Measures in the 1994 ESAF-Supported Program
    TariffsNontariff BarriersExport Taxes/

    Restrictions
    State Trading MonopoliesTrade-Related

    Subsidies/ Exemptions
    Memorandum of Economic and Financial Policies, June 30, 1994 (IMF, 1994b)
    Implement the second phase of the common external tariff reduction by February 1995. [Structural benchmark]**Review the remaining import prohibitions in the context of changes implemented by other CARICOM member countries.Eliminate remaining export taxes by December 1995. [Structural benchmark]*Cease the issuance and renewal of discretionary waivers of consumption taxes and import duties to eliminate them over time.
    Memorandum of Economic and Financial Policies, May 26, 1995 (IMF, 1995b)
    Implement the second phase of the reduction of the common external tariff by June 1995. [Structural benchmark]*Submit to the International Development Association (IDA) the proposed regulatory framework for Guysuco by September 1995. [Structural benchmark]**
    Memorandum of Economic and Financial Policies, March 18, 1996 (IMF, 1996d)
    Observe the CARICOM schedule of tariff reduction and further cut the maximum common external tariff from 25 percent to 20 percent in early 1997.Agree with IDA on a regulatory framework for Guysuco by June 1996. [Structural benchmark]**
    Memorandum of Economic and Financial Policies, April 2, 1997 (IMF, 1997a)
    Reduce the maximum import duty from 25 percent to 20 percent in line with CARICOM’s common external tariff policy by June 1997 [Performance criterion]**
    • Agree with IDA on a regulatory framework for Guysuco by June 1997. [Condition for completion of mid-term review]^

    • Establish the regulatory framework for Guysuco by September 1997. [Structural benchmark]^

    • Establish the remaining steps for restructuring Guysuco by June 1997. [Structural benchmark]^

    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    indicates commitment was met with a delay or subsequently modified.

    indicates commitment was not met.

    ^^ indicates no information on compliance.

    80. But staff had misunderstood Guyana’s trade policy and accordingly the structural performance criterion on tariff reduction for June 1997 had been misspecified. It turned out that the tariff reduction undertaken in November 1997 was, in fact, the penultimate step in the CARICOM schedule, that is, a lowering of the maximum common external tariff rate from 30 to 25 percent, and not from 25 percent to 20 percent as staff had reported to the Executive Board. The authorities explained that the CARICOM agreement had been revised to make the final step (the reduction of the maximum tariff to 20 percent) voluntary and thus they believed that they were still in compliance with the CARICOM agreement and with the performance criterion under the 1994 ESAF arrangement.

    81. Following the misreporting, further investigation of the trade system revealed substantial new information. While the focus had been on the maximum common external tariff rate, a number of goods were actually taxed at higher rates. For example, agricultural goods, including sugar, drew a tariff of 40 percent, motor vehicles were taxed at 45 percent, and luxury goods (principally alcohol) had a tariff of 100 percent. Export taxes were levied on a range of products including sugar, while export allowances—inconsistent with WTO rules—applied to nontraditional exports. A significant number of nontariff barriers existed, such as nonautomatic restrictive licensing of sugar and rice imports and restrictive quality standards. And while imports from CARICOM members were thought to be duty-free, there were several exceptions to this rule (IMF, 1999e). To reflect the new information, Guyana’s TRI was revised from a rating of 2 (“liberal”) to 5 (“moderately restrictive”).

    Box 4.Guyana: Sugar Industry Restructuring Prior to the Evaluation Period

    The sugar sector is Guyana’s main export sector. It is dominated by the Guyana Sugar Corporation (Guysuco), which was created in 1976 when the government nationalized and merged the two large sugar estates. Guysuco is the only producer of sugar in Guyana; it operates sugar estates and factories, and exports all cane products other than rum. It is the largest employer in Guyana. Guyana is a high-cost sugar producer compared with other countries. As such, the industry has traditionally depended heavily on its preferential access to foreign markets, primarily the European Union, the United States, and CARICOM countries.

    According to IMF (1996i), inappropriate government policies had hampered the development of Guysuco. Examples of such policies were foreign exchange restrictions; a relatively high and volatile “sugar levy” that was tied to the differential between the EU price and the world market price for sugar; and stringent wage guidelines. Starting in the late 1980s, the government attempted to rationalize, liberalize, and privatize the industry with the support of the World Bank and the IMF. In 1993, the government agreed to develop with the World Bank a new regulatory framework that would, inter alia, remove foreign exchange restrictions, implement a flat sugar levy, and eliminate Guysuco’s monopoly in the importation and sale of sugar in Guyana. However, by mid-1996, there had been still no work on the new regulatory framework although the foreign exchange surrender requirement had been reduced.

    82. The 1998 ESAF-supported program included measures to address some of the trade distortions that had come to light. Revisions of the sugar levy (to make it more transparent) and the import regime for Guysuco’s inputs (to align it with that for other enterprises) were prior actions for the approval of the program. Reduction of the maximum import duty rate from 25 percent to 20 percent was added as a prior action during the mid-term review of the first-year program in April 1999 (Annex Table 9).

    Annex Table 9.Guyana: Key Trade Measures in the 1998 ESAF-Supported Program
    TariffsNontariff BarriersExport Taxes/

    Restrictions
    Customs AdministrationTrade-Related

    Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, June 16, 1998 (IMF, 1998d)
    Revise the sugar levy to make it more transparent. [Prior action]*Bring the import regime for inputs to Guysuco in line with other enterprises. [Prior action]*
    Memorandum of Economic and Financial Policies, April 28, 1999 (IMF, 1999d)
    Reduce the maximum import duty from 25 percent to 20 percent. [Prior action]*Increase the customs valuation exchange rate by 7 percent on April 30, 1999 (estimated yield of 0.7 percent of GDP).
    Memorandum of Economic and Financial Policies, November 1, 2000 (IMF, 2000g)
    Review trade policies to ensure consistency with CARICOM and WTO requirements.Shift to an automatically adjusted market-based custom valuation exchange rate. [Prior action]*
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    ** indicates commitment was met with a delay or subsequently modified.^ indicates commitment was not met.^^ indicates no information on compliance.

    83. Fund technical assistance was provided to bolster falling customs revenues. It was found in 1999 that Guyana’s declining customs revenues reflected not only tariff reductions, but also the use of a nonmarket exchange rate for customs valuation and an expansion of nontransparent exemptions. On the basis of FAD technical assistance, a new market-based mechanism for the exchange rate used in customs valuation was introduced as a prior action for the second year of the ESAF/PRGF arrangement in November 2000. On exemptions, an FAD technical assistance mission in May 2002 found that discretionary tax and customs duty exemptions were extensive. The mission observed that there were no published guidelines or criteria for the granting of exemptions, and that the Minister of Finance was not required to notify parliament, the cabinet, or the public on exemptions granted.

    84. The 2002 PRGF-supported program tried to tackle the problem of discretionary tax exemptions but ran into strong resistance (Annex Table 10). Amendments to the Customs Act to reduce exemptions were made a prior action for the first program review in August 2003. But the amendments were later found to have codified existing discretionary tax exemptions and to have expanded, rather than limited, the scope of exemptions (IMF, 2004a). The authorities held that eliminating tax exemptions would adversely affect employment (IMF, 2004a). Two subsequent technical reviews (both structural performance criteria) were not carried out satisfactorily. The (first) review of existing exemptions and their revenue impact—a structural performance criterion for November 2004, inserted during the second program review in July 2004—was submitted late and only partly met the condition (IMF, 2005a). The (second) study, of the economic cost of existing exemptions, to be undertaken with assistance from the Fund’s Caribbean Regional Technical Assistance Center (CARTAC)—a structural performance criterion for June 2005, inserted during the third program review in January 2005—was completed with a lag. Based on the findings of that study, the mission again urged the authorities to reduce existing tax exemptions, but the authorities saw little scope for making incremental changes in the system (IMF, 2006a).

    Annex Table 10.Guyana: Key Trade Measures in the 2002 PRGF-Supported Program
    Customs AdministrationTrade-Related Subsidies/Exemptions
    Memorandum of Economic and Financial Policies, August 30, 2002 (IMF, 2002d)
    Formally agree to allow technical work to begin on a comprehensive review of the tax system and its administration with a view to designing a reform that would broaden the tax base and increase tax revenue, while taking into account Guyana’s commitment under regional trade/WTO arrangements. [Prior action]*
    Memorandum of Economic and Financial Policies, August 22, 2003 (IMF, 2003d)
    Amend Section 12 of the Customs Act with a view to eliminating discretionary powers to grant exemptions to commercial undertakings or individuals. [Prior action]*
    Enact legislation so that income tax holidays are granted only to new firms that create new employment located in depressed areas or that conduct economic activity in specific fields. [Prior action]*
    Memorandum of Economic and Financial Policies, July 7, 2004 (IMF, 2004a)
    Strengthen tax administration to include extension of ASYCUDA to off-site locations and implementation of ASYCUDA++ or equivalent system for the modernization of customs administration.
    • Adopt regulations defining guidelines and criteria for the implementation of the Customs Order Act, by end-July 2004. [Performance criterion]*

    • Review the Customs Duties (Amendment) Order and draft amendments where necessary, by end-November 2004. [Performance criterion]^

    • Adopt the necessary amendments to the Customs Duties (Amendment) Order and send to parliament by end-Jan 2005.

    • Publish tax exemptions granted (during September to December 2003) by end-July 2004. [Performance criterion]*

    • Continue to publish tax exemptions annually (including the amounts), by end June each year, in relation to the preceding fiscal year.

    Memorandum of Economic and Financial Policies, January 12, 2005 (IMF, 2005a)
    With the support of the Inter-American Development Bank, extend ASYCUDA to off-site locations and implement the ASYCUDA++ or equivalent system for the modernization of customs administration by end-March 2006.
    • Undertake a study, with the support of CARTAC, on the economic costs and benefits of the existing exemptions, focusing on how the exemptions affect the critical economic sectors, by end-June 2005. [Performance criterion]**

    • Adopt revisions to Customs Duties (Amendment) Order by end-January 2005 [Structural benchmark]*

    • Publish by end-June 2005 tax exemptions granted (including the amounts), specifying the recipients by categories (companies by name), as well as new or revised contracts signed that give rise to exemptions under Section 11 of the Custom Duties (Amendment) Order in relation to the preceding fiscal year.

    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    indicates commitment was met with a delay or subsequently modified.

    ^ indicates commitment was not met.^^ indicates no information on compliance.

    85. Following completion of the PRGF arrangements, staff shifted their trade-related attention to the erosion of preferences for Guyana’s sugar exports. In 2005, the European Union announced a four-year, 36 percent, phased reduction of internal sugar prices, implying a cut of a similar magnitude for import prices from African, Caribbean, and Pacific (ACP) countries with preferential access to the EU sugar market.41 Staff reckoned that Guyana would be the most significantly affected among the sugar-exporting Caribbean ACP countries. According to their calculations, Guyana’s implicit assistance from the sugar regime had averaged nearly 10 percent of both GDP and export receipts. The decline in EU sugar prices was estimated to lead to a cumulative output decline of up to 6.5 percent of GDP for Guyana by 2010, with attendant implications for the fiscal and external balances (Dyczewski, 2007; Cashin, Gold, and Mlachila, 2007). In the 2006 Article IV consultation, staff analyzed Guysuco’s restructuring plan which was developed with the help of the World Bank and featured the construction of a new modern large-scale factory (Dyczewski, 2007).42 Staff urged greater private sector participation in the sugar sector to mitigate risk and cautioned that the viability of the new factory depended on the maintenance of the 40 percent CARICOM common external tariff on sugar imports (IMF, 2007a). In the 2007 Article IV consultation, however, staff noted that the just-concluded EPA between Caribbean countries and the European Union would not deepen the sugar preference erosion and described the plan to build a new sugar factory with private sector financing as a positive step (IMF, 2008a).

    Assessment

    86. The Guyana case study illustrates the problems that can be encountered in obtaining up-to-date and reliable information for formulating trade policy conditionality. The country’s trade regime was initially believed to be liberal and open. But as additional information became available, staff came to realize that it was actually nontransparent and moderately restrictive. In 1997, lack of accurate information on trade policy changes led to the misspecification of a structural performance criterion. While these deficiencies may have been due to lack of cooperation, or even misreporting, on the part of the authorities, problems may also have reflected staff resource constraints. Gathering data on trade policy changes is a resource-intensive activity and the task has often fallen upon a mission member (usually from PDR) who faces many other demands during mission. Data issues have, therefore, mostly surfaced through the review process or from PDR presence on a mission. While closer interagency cooperation, e.g., drawing on the WTO’s trade policy reviews, could help in such resource-constrained situations, in Guyana’s case no trade policy review existed before 2003.

    87. Data problems aside, Fund staff made a valuable contribution on the issue of preference erosion in sugar. They helped to frame the problem in macroeconomic terms by quantifying the amount of implicit assistance that Guyana had been receiving under the EU sugar protocol and estimating the impact of preference erosion (modeled as various possible shocks to implicit assistance) on the trade balance, output growth, and the overall fiscal balance. The research made a unique contribution to the debate and effectively showcased the staff’s ability to undertake macro-relevant trade-related work. Beyond that, the Fund was unable to offer much by way of adjustment assistance or advice as the authorities were not interested in the Trade Integration Mechanism (TIM), and the details of sugar sector reform were being handled by the World Bank and other developmental agencies.

    88. In the area of tariff protection, it is unfortunate that Guyana’s membership in CARICOM was viewed, inappropriately, as effectively circumscribing the Fund’s ability to press for tariff reform. Guyana is a highly trade-dependent economy yet minimal dialogue took place between the Fund and the authorities on trade policies. This was largely the result of Guyana’s membership in CARICOM—which staff interpreted as making important aspects of trade policy off-limits even for substantive advice. In 1998, while allowing (erroneously) that Guyana’s average tariff was low and nontariff barriers were few, the Fund mission noted that Guyana could have benefited from further efforts to liberalize its trade, particularly by reducing tariff dispersion. This would have been possible given the relatively wide scope of exceptions under the CARICOM common external tariff (WTO, 2003). However, “recognizing the limitations for further trade liberalization deriving from Guyana’s membership in CARICOM,” the mission did not pursue the issue (IMF, 1998d). Guyana’s reduction of its maximum common external tariff in line with the CARICOM plan had little impact on its unweighted average tariff rate which in fact rose slightly during 1997–2007.

    89. The CARICOM filter through which the IMF’s trade policy advice implicitly passed constrained other aspects of IMF advice as well. For example, a major focus of Fund–and World Bank–supported programs was the restructuring of Guysuco, which was sheltered by a 40 percent CARICOM tariff on imports of raw sugar, and benefited from preferential arrangements in the EU and U.S. and markets. Starting in the early 2000s, the restructuring of Guysuco was reinvigorated and given priority to help Guyana prepare for the reduction of preferential access to the EU market. Yet to try to improve Guysuco’s efficiency by reducing its tariff protection and exposing it to foreign competition was basically out of the question, because this would have involved changes in the CARICOM tariff schedule.

    90. The Fund made little headway in reducing discretionary tariff exemptions. Staff eventually realized that the issue of tax incentives was best addressed at the regional level, because Guyana was not alone in offering such incentives.43 In a 2007 informal Board seminar on selected Caribbean regional issues, staff explained that the perception of increased global capital mobility had prevented Caribbean governments from unilaterally reducing existing incentive schemes, out of fear that other regional and extraregional competitors would attract away much-needed foreign direct investment. At the close of the seminar, Directors encouraged governments in the region to “weigh carefully the costs and benefits of tax exemptions and consider reducing them if possible”; they noted that “regional cooperation and coordination could play a particularly useful role” in this regard but acknowledged that regional tax harmonization treaty could be difficult to negotiate and enforce (IMF, 2007h).

    G. Vietnam
    Background

    91. Vietnam had a highly restrictive trade system in the mid-1990s. Although market-oriented reforms had begun in the late 1980s, import and export quotas continued to be used and import permits were still required for many commodities; import shipment licensing was still universal; import certification procedures were still used as nontariff barriers; and some export licensing requirements and export duties still remained. Trade barriers protected an inefficient state-owned enterprise sector through which the authorities still used direct levers to affect economic activities. Private sector involvement in international trade was strictly limited. By 1995, little progress had been made in tariff rationalization, with tariff rates reaching 120 percent for some luxury goods.

    92. Trade in financial services featured prominently in Vietnam’s trade policy agenda. Since 1988, a two-tier banking system had been established, with a central banking role for the State Bank of Vietnam; state-owned banks had been transformed into multipurpose commercial banks; and a large number of nonstate banks—including representative offices and branches of foreign banks—had been licensed (IMF, 1994a). Foreign banks, however, faced restrictions: the State Bank of Vietnam was selective in allowing foreign banks to conduct full banking operations, and branches of foreign banks were restricted to accepting no more than 20 percent of their capital in local currency (dong) deposits from Vietnamese individuals and firms who did not also borrow from them. In practice, however, foreign banks tended to operate mainly in foreign currencies and concentrated on trade finance and lending that carried an explicit or implied government guarantee (IMF, 1996m).

    93. In the mid-1990s, Vietnam began a process of opening to foreign trade, seeking membership in the WTO and regional trade arrangements. As part of the WTO accession process, Vietnam was expected to negotiate bilateral market access deals with all interested WTO members. At the same time, Vietnam joined the Association of South East Asian Nations (ASEAN) and signed on to the ASEAN Free Trade Area (AFTA) agreement. The AFTA agreement laid out a comprehensive schedule for the elimination of intraregional tariffs and nontariff barriers. The goal of the scheme was to reduce tariffs on all manufactured goods to 0–5 percent by 2003 (originally 2008); as a new member, Vietnam was given a longer transition period, up to 2006.

    Policy dialogue and trade conditionality

    94. During the evaluation period, Vietnam had two widely-spaced Fund-supported programs that incorporated different approaches to trade liberalization. The 1994 ESAF-supported program included a substantial role for unilateral trade liberalization in the package of structural reforms to transform the economy into a market economy. The 2001 PRGF-supported program included a more modest role for trade liberalization based on Vietnam’s PTA commitments. Neither program was completed.

    95. The 1994 ESAF-supported program aimed to move away from import substitution by lowering tariff and nontariff barriers. Staff recognized that, to avoid any adverse social or political impact, removing trade restrictions and lowering tariffs would need to go hand-in-hand with reforms of the state enterprise sector. In the first annual arrangement (October 1994) three of the seven structural conditions were in the area of trade liberalization: these were the replacement of tariffs on luxury goods and petroleum products by excise duties and a reduction in the maximum import tariff rate to 60 percent (a performance criterion); elimination of import permits for at least five commodities (a performance criterion); and a reduction in the number of commodities requiring an import shipment license (a structural benchmark) (IMF, 1994c) (Annex Table 11).

    Annex Table 11.Vietnam: Key Trade Measures in the 1994 ESAF-Supported Program
    TariffsNontariff BarriersTrade in Services
    Memorandum of Economic and Financial Policies, September 22, 1994 (IMF, 1994c)
    Replace tariffs by excise duties and reduce the maximum import tariff rate to 60 percent by April 1, 1995 [Performance criterion]*Eliminate import permits for at least 5 commodities by April 1, 1995. [Performance criterion]**
    Rationalize the import tariff schedule into 6 rates by October 1995.Reduce the coverage of imports requiring an import shipment license by April 1, 1995. [Structural benchmark]**
    Lift the import prohibition on cigarettes.
    Simplify registration procedures for exporters and importers during 1995. Once a commercial law has been promulgated, simplify the registration procedure further with only one administrative step required to fulfill all the conditions necessary to conduct international trade.
    Memorandum of Economic and Financial Policies, June 1, 1995 (IMF, 1995c)
    Remove import shipment license requirements for at least half of imports (measured in terms of value, excluding the imports that require import permits) by August 1, 1995. [Prior action for mid-term review]**
    Reduce the number of commodity groups requiring import permits to 5 by April 1, 1996. [Structural benchmark].**
    Propose a plan for eliminating the remaining requirements for import permits during the discussions for the second annual ESAF arrangement.
    Abolish the requirement for import shipment licenses.
    Memorandum of Economic and Financial Policies, December 18, 1995 (IMF, 1996a)
    Submit to the National Assembly draft legislation incorporating tariff reforms to (i) further reduce the maximum rate of import tariff; (ii) reduce the number of import tariff rates; and (iii) apply excises uniformly to goods whether produced domestically or imported by October 1996. [Structural benchmark]^Remove the requirement for shipment licenses for about half of imports (in value terms, excluding imports that require import permits) in early 1996. [Prior action]*Reduce restrictions on local currency business imposed on foreign banks, before June 30, 1996.
    Phase out half of the remaining import shipment licenses during 1996 [Structural benchmark]* and eliminate the remainder in 1997.
    Reduce the number of commodity groups requiring import permits to a maximum of 5, by July 1996. [Performance criterion]*
    Agree on a timetable for the removal of the remaining permits at the time of discussions for the midterm review.
    Memorandum of Economic and Financial Policies, October 28, 1996 (IMF, 1996l)
    Eliminate sugar from the list of commodities that require import permits by the end of 1996.Relax the limit on local currency lending by foreign bank branches. [Prior action]*
    Reduce the coverage of import licensing through the issuance of a complete list of consumer goods that require import licenses at the beginning of 1997.
    Allow all licensed exporters (including private sector enterprises) to export commodities outside of the scope of their license with the exception of certain major products from the beginning of 1997.
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    indicates commitment was met with a delay or subsequently modified.

    indicates commitment was not met.

    ^^ indicates no information on compliance.

    96. Two years into the ESAF arrangement, the authorities’ enthusiasm for unilateral trade liberalization dimmed, and the program soon went off-track. Entering the second year of the arrangement, the authorities indicated that further trade measures would be considered in October 1996 for discussion during the midterm review in November 1996. By the time of that review, however, the authorities clearly and forcefully made known their reluctance to move ahead immediately with another round of tariff reform, citing concerns over domestic industry and employment. Staff argued that postponing the anticipated reduction in the maximum tariff would send misleading signals to foreign investors, and that once investments had been made and industries established the high tariffs would become increasingly difficult to remove (IMF, 1996m). The authorities emphasized their longer-term plans to reduce and eventually eliminate intra-ASEAN tariffs under AFTA. After the midterm review, structural reforms slowed, agreement could not be reached on a third-year program, and the ESAF-supported arrangement was allowed to lapse in 1997.

    97. As Vietnam’s economic performance deteriorated during the Asian crisis, the authorities intensified trade and exchange controls. Output growth slowed markedly and, from early 1998, foreign direct investment flows and exports fell substantially, in part because of Vietnam’s extensive trade and investment links with the region but also because of emerging domestic weaknesses, notably the poor performance of the state enterprise sector and stresses in the banking system. As the real effective exchange rate appreciated, the authorities responded by imposing “temporary” import bans on selected products and a foreign exchange surrender requirement. Staff expressed disapproval over the additional import controls, arguing that the Asian crisis instead lent greater urgency to trade liberalization. In the short run, staff argued, converting quotas to tariffs would help offset the potentially substantial revenue shortfall that was expected from lower import duty collections and lower profits and turnover tax receipts. In the medium term, Vietnam risked a lasting loss of export competitiveness if it could not keep pace with other countries in the region—including those most affected by the crisis, such as Thailand, Korea, and Indonesia. These countries, according to staff, were undertaking deep and comprehensive reforms to enhance the flexibility and competitiveness of their economies (IMF, 1998a).

    98. Staff continued to press for unilateral trade liberalization but at the same time became more open to alternative approaches. In the 1999 Article IV consultation, they again urged the authorities to eliminate nontariff barriers and phase down tariffs, pointing to Vietnam’s (“restrictive”) TRI rating of 9 and highlighting the various costs of protection that were manifested in the industrial, agricultural, and services sectors (IMF, 1999f; Winglee, 1999). The authorities reiterated their preference for the more gradual pace of trade liberalization embodied in their AFTA commitments in order to ease the transition for state enterprises (IMF, 1999f). In the 2000 Article IV consultation, staff advanced the argument that since AFTA members were relatively efficient producers of manufactured goods, “liberalization under AFTA rules would strengthen Vietnam’s external competitiveness.” At the same time, staff argued that because Vietnam’s manufacturing and agro-based industries were similar to those of other AFTA members, Vietnam’s main export potential was likely to be outside AFTA. Hence, they argued, a bilateral trade agreement with the United States was “essential for a more competitive economy and for eventual WTO accession.” Staff also recommended that the elimination of quantitative restrictions “be applied on a multilateral basis” (IMF, 2000c).

    99. Fund staff saw the liberalization of trade in financial services as a key to reforming banks. The banking sector was dominated by four large state-owned banks, which had developed a large stock of nonperforming loans—mainly to state enterprises. In an early effort to enhance competition in the banking sector, the 1994 ESAF program had required the authorities to relax the limit on local currency lending by foreign bank branches as a prior action for the midterm review of the second-year program (in November 1996). To address long-standing problems in the state-owned commercial banks (which had worsened during the Asian crisis), staff urged the authorities to consider twinning arrangements with reputable foreign banks and to allow domestic and foreign private investment in the banks. The authorities were not keen on twinning arrangements, but were prepared to consider foreign equity participation in one small regional state-owned bank as a pilot case (IMF, 1999f).

    100. In July 2000, after nearly five years of negotiations, Vietnam signed a bilateral trade agreement with the United States (USBTA).44 The USBTA, which came into effect in December 2001, was a major step toward fully normalizing U.S.-Vietnam commercial relations. It restored reciprocal (temporary) MFN treatment between the two countries and committed Vietnam to undertake a wide range of market-oriented economic reforms such as eliminating a range of nontariff barriers to U.S. exports, significantly cutting tariffs on many U.S. exports, especially agricultural items, and opening Vietnam’s market to U.S. financial and other services providers (Thacker, 2001) (Box 5).

    101. In March 2001, after prolonged discussions, the Fund approved a PRGF arrangement with a trade agenda that was based on Vietnam’s commitments under AFTA and the USBTA. The timing of the program was significant. In a briefing memorandum for the program negotiations, staff noted that Vietnam was still feeling the impact of the Asian crisis and that the political environment for reform was fragile, but they pointed to the conclusion of the USBTA in July 2000 as a positive sign that had resulted in a renewed focus on concluding discussions for the PRGF-supported program.45 The tariff reforms that were envisaged under the program comprised the AFTA commitment to reduce intra-ASEAN trade tariffs to 5 percent or less (except for some sensitive products) by 2006, and the reduction of tariffs on agricultural imports from the United States under the USBTA (Annex Table 12). Staff noted that with full implementation of the schedule of quota removal and the elimination of state monopolies on trading, only two items (petroleum products and sugar) would remain subject to quantitative restrictions. Vietnam’s TRI rating would fall from 9 to 6 by 2003 (IMF, 2001e). Staff further noted that trade policies relating to petroleum products and sugar had “medium-term macroeconomic implications” but were omitted from the program because staff lacked expertise in those areas (IMF, 2001e). Drawing on World Bank research and their own calculations, staff argued that Vietnam’s AFTA and USBTA commitments would enhance trade and investment flows, improve state-enterprise efficiency, and lower domestic costs (IMF, 2001b). The trade component of the program proved to be uncontroversial.

    Annex Table 12.Vietnam: Key Trade Measures in the 2001 ESAF-Supported Program
    TariffsNontariff BarriersExport Taxes/

    Restrictions
    Trade-Related

    Subsidies/Exemptions
    Trade in Services
    Memorandum of Economic and Financial Policies, March 14, 2001 (IMF, 2001b)
    Reduce AFTA tariffs on the majority of tariff lines of products subject to the tariff reduction road-map of AFTA, to at most 20 percent by the start of 2003, and further to 0–5 percent by the start of 2006.
    • Adopt and announce a program with annual targets for phasing out quantitative restrictions, on a multilateral basis, on 6 items (cement and clinker, remaining steel products, construction white glass, paper, vegetable oil, and granite tiles and ceramic tiles) during 2001–03. [Prior action]*

    • Free foreign trading rights for business-registered domestic firms, by allowing them to import all kinds of goods except banned and conditional imports. [Prior action]*

    Lift restrictions on enterprises permitted to export rice and rice export licensing, and adopt a more liberal regime.Cease granting any new and phase out all existing ad hoc (case-by-case) exemptions on import tariffs during 2001–;03.Secure for one of the state-owned commercial banks strategic equity participation with a reputable foreign partner by end-2003.
    Memorandum of Economic and Financial Policies, November 7, 2001 (IMF, 2001e)
    Implement the 2001 tariff reductions under AFTA.Replace quantitative restrictions for three items (steel, vegetable oil, and construction glass) with tariffs.
    Auction at least 25 percent of the garment export quota while continuing to improve the auction process.
    Memorandum of Economic and Financial Policies, June 3, 2002 (IMF, 2002c)
    Effect tariff reductions already announced under the AFTA roadmap.
    • Adopt a timetable to establish the proper legal framework to implement the USBTA.

    • Remove quantitative restrictions on three out of five remaining items (cement, motorcycles, and passenger vehicles up to nine seats) by end-December 2002.

    • Assess the potential impact of global integration on the most vulnerable sectors, drawing on donor technical assistance.

    Prepare regulations to further open to foreign investors areas in the services (including most retail sales and distribution), agribusiness, and fishery sectors, in advance of the timeframes under the USBTA.
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    ** indicates commitment was met with a delay or subsequently modified.^ indicates commitment was not met.^^ indicates no information on compliance.

    Box 5.Vietnam: Key Financial Services Provisions in the USBTA

    Banking services

    • Allow U.S. equity in joint ventures (up to 49 percent stake). After nine years, allow 100 percent U.S.-owned subsidiary banks.

    • Allow U.S. equity in privatized Vietnamese banks at the same levels as Vietnamese investors.

    • Phase in the right of U.S. banks to accept local currency deposits on the same basis as domestic banks over eight years for business clientele and ten years for retail depositors.

    Nonbank financial services

    • Allow 100 percent U.S. equity in financial and other leasing services after three years.

    Insurance

    • Allow U.S. joint ventures in three years and 100 percent U. S. equity in five to six years.

    102. The PRGF-supported program ended after the second review (in July 2002) but the Fund continued to support Vietnam’s trade liberalization efforts, which focused increasingly on WTO accession. No further mention was made of unilateral trade liberalization except in 2006 when staff noted that the average tariff rate was still high and urged the authorities to “continue to liberalize trade on an MFN basis” (IMF, 2006d). Rather, in successive Article IV consultations, the Fund strongly supported Vietnam’s objective of securing WTO accession and urged the authorities to take all necessary steps, including putting in place needed legislation, to meet that goal. When Vietnam acceded to the WTO in January 2007, staff estimated that consumer surplus gains of 1.5–1.7 percent of GDP annually could be expected in the short and medium term and reckoned that dynamic gains arising from higher productivity and more foreign direct investment could be expected over the long run. At the same time (but in less detail), staff identified a number of challenges that could arise from WTO membership including the need to compensate for revenue losses from tariff reduction, the need to expedite reforms in state-dominated sectors and institute appropriate safety nets as the economy adjusted to freer trade, and the potential risks to macroeconomic stability with increasing financial integration (IMF, 2007g; Tumbarello, 2007).

    103. Mindful that WTO accession would involve commitments to open the financial sector, IMF staff pressed with greater urgency for bank reform. Staff reiterated calls to speed up the equitization of the large state-owned banks and to provide greater scope for participation by foreign strategic investors (IMF, 2003e, 2004d, 2005d, 2006d). They drew on experiences of other transition countries to assert that opening the banking sector to foreign private investors was key to successful banking reform (Unteroberdoerster, 2003; Aitken, 2004; Unteroberdoerster, 2004). During 2001–06, the then Monetary and Finance Department fielded more than 10 technical assistance missions to Vietnam on state-owned bank restructuring and bank supervision.

    Assessment

    104. The Fund’s coverage of trade liberalization was extensive, extended, and entirely appropriate given Vietnam’s highly restrictive starting point. From 1993, when the Fund restored its lending to Vietnam, the policy dialogue with Vietnam focused on removing the remaining impediments to a market-oriented system and developing policies for growth. Trade liberalization was one of the key systemic reforms that were required and it was clear from Vietnam’s highly restrictive trade regime in the early 1990s that there was much work to be done. Staff paid close attention to trade policy developments and issues in Vietnam: almost every Article IV consultation from 1996 onward included a background paper on trade policy issues. Staff advice on unilateral trade reform—to target the least transparent and most restrictive elements (e.g., quantitative restrictions and import licensing) first; aim for low and relatively uniform tariffs; and use tariff quotas or auction licenses to obtain revenue during the transition—was in line with best practice.46

    105. The Fund and the authorities diverged on the optimal pace of trade liberalization; this helped to derail the 1994 ESAF-supported program. The Fund (and the World Bank) pushed for a relatively speedy phase-out of nontariff barriers and reduction of tariff rates, but the authorities were not ready to remove trade protection so rapidly. In their view, the dismantling of trade barriers should only be completed gradually, in conjunction with improved retraining facilities and a more comprehensive social safety net (Shishido, 1998). In the ex post program review discussion with staff, the authorities argued that “Fund conditionality should have better reflected actual conditions in Vietnam and been more flexible in adjusting to implementation challenges.” They regarded the Fund’s call for a combination of rapid quota elimination and tariff reduction during the ESAF-supported program as “in conflict with WTO principles and an impediment to their negotiations on multilateral and bilateral trade agreements.” In this context they saw it as a driving factor behind the suspension of the arrangement (IMF, 2004d).

    106. After the breakdown of the ESAF arrangement, the IMF adjusted its approach to trade liberalization, prompting greater program ownership and compliance. The trade component of Vietnam’s 2001 PRGF program differed from that in the 1994 ESAF-supported program (and from those in other case study countries) in that it largely focused on preferential rather than MFN tariff reductions. By the time of the first review of the PRGF program, staff reported that progress had been made in implementing the AFTA agreement. Outside of the AFTA framework, the removal of quantitative restrictions proceeded faster than anticipated. Although the PRGF arrangement was de facto suspended in late 2002 (due to noncompliance with the Fund’s safeguards policy), the authorities pushed ahead with quota tariffication and the anticipated trade liberalization measures were realized under the AFTA agreement and other preferential arrangements. In the ex post assessment, staff characterized the progress made in trade liberalization as impressive: “program targets were exceeded; import quantitative restrictions (QRs) were reduced more rapidly than programmed, most export QRs were eliminated, commitments under USBTA and AFTA were implemented as scheduled, and active preparations began for WTO entry” (IMF, 2004e).

    107. But staff support of preferential trade liberalization under the AFTA was based on expedience rather than analysis. The staff’s main argument—that the AFTA partners were efficient producers of manufactured goods and thus that the promised preferential liberalization was unlikely to result in trade diversion—was not formulated in any rigorous way. In fact, a 2005 SIP (Tumbarello, 2005) noted two important aspects that cast doubt on the staff’s assumption about limited trade diversion under AFTA: (i) ASEAN’s MFN tariffs were higher than those in other regional groupings; and (ii) intra-AFTA trade was not always carried out at preferential rates because of complicated rules of origin regulations and bureaucratic procedures. The case for preferential liberalization in Vietnam was thus not strongly presented. Rather, it would seem, and staff involved concur, that in 2001, it was the authorities’ refusal to reduce MFN tariffs, combined with political pressure to establish an arrangement with Vietnam after the conclusion of the USBTA, that led staff to move ahead opportunistically on the basis of preferential rather than multilateral tariff reduction.

    108. Resource constraints prevented staff from covering all potentially important trade policy issues. Staff noted that trade policies for petroleum and sugar may have had medium-term macroeconomic implications but were not addressed in the PRGF-supported program for lack of expertise (IMF, 2001e). There was no further elaboration on what the macroeconomic implications could have been or how they could have come about, and no indication of whether the World Bank or other institution was/would be looking into the issue in the Fund’s stead.47

    109. Notwithstanding the steps taken in the PRGF arrangement, Vietnam’s trade system remained highly restrictive. Trade was liberalized compared with the regime in 1996, through the conversion of many (but not all) quantitative restrictions into tariffs, the widening of private sector access to international trade, and the lowering of preferential tariffs within AFTA and other PTAs. Yet Vietnam’s rating on the Fund’s TRI did not budge from 9. The (unweighted) average tariff rate rose from 16.3 percent at the start of the PRGF-supported program to 18.5 percent by the time of WTO accession.48 Important nontariff barriers remained: according to the WTO, many products that were subject to state trading were also subject to additional measures such as quantitative restrictions, surcharges and import licensing (WTO, 2006c). Vietnam became a WTO member in January 2007 with an agreement, inter alia, to lower binding tariff rates over a twelve-year transitional period.

    110. The Fund’s advice to open the banking sector to foreign participation emphasized only the benefits of that strategy. According to staff, cross-country experience showed that foreign ownership by a reputable bank was associated with greater performance improvement because foreign owners had more expertise and tended to be bound by regulations in their home country to make more prudent lending decisions (IMF, 2004d; Aitken, 2004). Staff highlighted the cases of Hungary, Mexico, Pakistan, and Poland, where foreign ownership was seen to have played a key role in improving bank performance (Aitken, 2004). Vietnam’s banking reform situation was likened to that of China’s, and even China, staff pointed out, was giving thought to privatizing a large state-owned bank by seeking a strategic foreign equity partner (Unteroberdoerster, 2004). The staff’s position represented well the potential positive effects, but did not convey the balance of risks laid out, for example in Mathieson and Schinasi (2000) and more recent research (Moreno and Villar, 2005; Cull and Martínez Peria, 2007). In interviews for this evaluation, staff indicated that the authorities’ cautious approach reflected their full understanding of the potential risks involved in opening the banking system, and thus no further caveats were warranted.

    111. Vietnam eventually went along with the Fund’s (and World Bank’s) advice to liberalize trade in financial services though at least with the benefit of hindsight it is not clear that the authorities were properly prepared. The authorities initially insisted on retaining full ownership and control of the state-owned commercial banks and not relying on any outside agents of change, such as strategic foreign investors (Unteroberdoerster, 2004). Their position evolved, however, as they came to recognize that competition would intensify in response to the market-opening measures under the terms of the USBTA and, subsequently, WTO accession. In 2003, under a World Bank-sponsored project, two of Vietnam’s four large state-owned banks entered into twinning agreements with foreign banks; one more state-owned bank followed suit in 2005.49 In September 2007, a long-awaited equitization plan for Vietcom-bank (one of the four large state-owned banks) was approved with up to 20 percent to be allocated initially to foreign strategic investors (IMF, 2007g). The liberalization of foreign entry into the banking sector in 2007 and anticipation of intensified competition brought a flood of domestic and foreign applications for banking licenses. Concerned about the possible impact on banking soundness, the central bank tightened the criteria for granting new domestic licenses in August 2008. In the 2008 Article IV consultation, staff reported “significant shortcomings in financial transparency and banking supervision” and “gaps in the Vietnamese accounting standards with regard to valuation of financial instruments and fixed assets.” Staff again warned about the risks to asset quality of Vietnamese banks (IMF, 2009).

    H. Bangladesh
    Background

    112. Bangladesh’s trade regime in the mid-1990s was restrictive, complex, and nontransparent. A wide range of trade reforms had been implemented beginning in 1990, including the relaxation of numerous quantitative restrictions and a reduction in the level and dispersion of tariffs. But by the mid-1990s, the pace of trade liberalization had practically halted, as the authorities began to feel that they might have been “too hasty” and, as a result, caused “undue damage” to some industrial sectors (IMF, 1997c). Quantitative restrictions (including outright bans) still applied to more than 100 items and tariffs were still relatively high and dispersed: there were seven tariff rates ranging from zero to 50 percent. Imports with values above a relatively low threshold were subject to a license fee of 2.5 percent on top of the applicable tariffs. Several of the trade restrictions were maintained under GATT Article XVIII and Bangladesh was required to consult with the WTO Committee on Balance of Payments Restrictions (CBR) every other year. Export restrictions (including outright bans) existed for about 20 product categories, some of them—such as flour products and wet blue leather—in order to ensure the supply of the domestic market. Garment exports were subject to Multi-Fiber Arrangement (MFA) quotas, which were set to expire on January 1, 2005, under the terms of WTO’s Agreement on Textiles and Clothing (ATC) (IMF, 1996e).

    113. Bangladesh’s commitments under the Uruguay Round were minimal. Bangladesh agreed to bind only 0.7 percent of all six-digit Harmonized System tariff lines for industrial products—there were no bound tariffs prior to the Round—and almost all tariff bindings were set well above applied rates. Almost all agricultural tariffs had a ceiling binding of 200 percent plus other duties and charges. Most of the bindings came into effect on January 1, 1996. On trade in services, Bangladesh’s specific commitment was limited to allowing foreign direct investment in the five-star hotel and lodging service subsector and the employment (in connection with this investment) of foreigners in higher management and specialized jobs (Ibrahim, 1996).

    Policy dialogue and trade conditionality

    114. Trade liberalization has a long and highly controversial history in Bangladesh. Against a background of a very restrictive trade system, import substitution, and high dependence on trade taxes, the IMF and World Bank have continuously advocated liberalization. Equally, there has been determined opposition to liberalization from business interests and politicians. Over the evaluation period, the Fund was involved from a surveillance-only perspective during 1996–2002 and in the context of a PRGF arrangement approved in 2003.

    115. During the surveillance period (1996–2002), the Fund emphasized that Bangladesh’s growth prospects hinged on removal of the anti-export bias of the trade system (Box 6).50 The policy advice was to reduce the restrictiveness of the system in stages, focusing on substituting tariffs for quantitative restrictions, reducing the level and dispersion of tariff rates, phasing out export subsidies, and streamlining customs procedures. Trade issues were covered quite regularly in background papers for the Article IV consultations, mainly descriptively (Lee, 1998; Dalsgaard, 2000) but sometimes analytically (Ibrahim, 1996). The authorities were loath to liberalize unilaterally as they did not consider the trade system to be restrictive compared with those of other South Asian economies. Staff responded that even if Bangladesh’s trade system was broadly in line with those of neighboring countries, it was still restrictive relative to those of faster-growing economies such as Indonesia, Korea, Malaysia, and Thailand, and that cross-country experience showed that import-substituting protectionist policies tended to be associated with an overvalued exchange rate and an anti-export bias (IMF, 1997c, 1999m). Staff also noted that Bangladesh’s exports were too narrowly based (with a concentration in textiles and clothing) and were overly dependent on preferential access to the European Union (IMF, 1997c, 2002b).

    Box 6.Bangladesh: IMF Advice on Trade Policy in the Context of Surveillance (1996–2002)

    1995/96 Article IV consultation (IMF, 1996b)

    • Eliminate the remaining trade-related quantitative restrictions (mainly in the textile sector).

    • Announce an ambitious timetable for further reduction in the level and dispersion of tariffs, including a reduction in the maximum tariff rate to 30 percent in 1996/97 with further reductions thereafter, a reduction in the number of tariff bands, and a move away from the system of official assessment of tariff values.

    • Disavow import controls and exchange restrictions—even temporary—to protect the balance of payments.

    1997 Article IV consultation (IMF, 1997c)

    • Formulate a clear and ambitious program of medium-term trade liberalization, including the removal of remaining quantitative restrictions and a reduction in the level and dispersion of tariffs.

    • Find ways to prevent the misuse, and enhance the effectiveness, of the pre-shipment inspection so as to help streamline customs procedures.

    1998 Article IV consultation (IMF, 1998f)

    • Adopt a program of action, including removal of the remaining quantitative restrictions early in the reform process and a phased reduction in the level and dispersion of tariffs aimed at reducing the number of tariff bands to four, and at bringing the current maximum and average tariff rates to about 25 percent and 15 percent, respectively, over a four-year period.

    • Take measures to reduce corruption in the customs administration such as publishing a single tariff book, speedy clearance of imports, strengthening of post audits, and setting up a special customs surveillance unit.

    1999 Article IV consultation (IMF, 1999m)

    • Design and announce a medium-term trade reform strategy including plans for tariff reduction and compression, tariffication of quantitative restrictions, and phasing out of export subsidies.

    • Make the preshipment inspection system fully operational.

    2001 Article IV consultation (IMF, 2002b)

    • Develop a plan for moving expeditiously toward a more simplified tariff structure, with a much lower average import tariff and minimal reliance on nontariff barriers.

    116. The World Bank was also involved in trade issues in Bangladesh during the period and provided substantial support to the government. In 1999, the Bank launched an export diversification technical assistance project aimed, inter alia, at building analytical capacity within the Tariff Commission and at modernizing and automating the customs administration. During 1998–99, FAD also fielded technical assistance missions on revenue reform and tax/ customs administration. To address the criticism that trade reforms had moved too fast during the early 1990s, the Bank published a detailed study of the pace and impact of trade liberalization in Bangladesh based on an analysis of formal and informal trade patterns and survey data collected from a large sample of domestic firms (World Bank, 1999). This found that the pace of Bangladesh’s trade liberalization was comparable to that of many Asian and Latin American countries, and that trade liberalization had positively affected the manufacturing sector. However, it noted that there still remained a considerable anti-export bias in the economy, and that the ideal trade liberalization agenda was far from complete. The study was discussed at a high-level seminar in Dhaka in September 1999.

    117. In June 2003, a PRGF arrangement was approved at the same time as a World Bank Development Support Credit (DSC). It was agreed that the Bank would take the lead in trade reform, while the Fund would focus on providing fiscal advice to create room for further trade liberalization. In contrast to the advice they had given during previous Article IV consultations, Fund staff recommended a “cautious approach to trade reform” in the program and made it clear that the heavy dependence on trade taxes (about 37 percent of revenue) and the need to develop alternative sources of revenue necessitated a “moderate pace” of tariff reduction (IMF, 2003b). Within the PRGF-supported program and the DSC, therefore, the extent of planned trade liberalization was directly tied to prospects for revenue mobilization. During the three-year program period—beyond compensating for tariff-related losses—the program targeted an increase of 1.5 percentage points in the revenue-to-GDP ratio.

    118. In line with the division of responsibilities agreed with the World Bank, the PRGF-supported program included very little trade conditionality. Nevertheless, the envisaged trade reforms (which were closely coordinated with the DSC) were included in the memorandum of economic and financial policies and could thus be considered an integral part of the program the IMF was supporting. The trade reforms in the first year of the program involved a rationalization of the tariff structure to a four-tier system with a maximum rate of 30 percent. The number of items subject to quantitative restrictions was almost halved and confined to products that were covered by WTO waivers.51 It was thought that the reforms would reduce Bangladesh’s TRI rating from 8 to 7. With advice from the World Bank (in consultation with the IMF mission and an FAD technical assistance mission on tax and customs administration), the authorities introduced further tariff reforms before the second program review (in July 2004) (Annex Table 13).

    Annex Table 13.Bangladesh: Key Trade Measures in the 2003 PRGF-Supported Program
    TariffsNontariff BarriersCustoms AdministrationTrade in Services
    Memorandum of Economic and Financial Policies, June 4, 2003 (IMF, 2003b)
    • Rationalize the tariff structure by moving to a four-tier tariff rate in FY04, with a maximum rate of 30 percent.

    • Reduce the effective average tariff rate in tandem with efforts to broaden the customs tax base in order to protect revenue.

    Reduce the list of goods subject to control (ban, or with quantitative restrictions) from 134 to around 70.
    • Complete revamping the bonded warehouse system, including requiring bank guarantees for all imports going through the system, by end-December 2003. [Structural benchmark]*

    • Continue automation of customs and other modernization measures.

    Memorandum of Economic and Financial Policies, July 8, 2004 (IMF, 2004b)
    • Adopt in the FY05 budget a three-tier customs duties structure with a maximum rate of 25 percent [Prior action]*

    • Reduce the number of supplementary duty rates from 7 to 3 and the maximum rate to 30 percent.

    • Further phase out quantitative restrictions for reasons other than environmental, security, and religious, except for poultry, fishing net, and salt, and replace them with appropriate tariff duties.

    • Streamline import licensing requirements to improve the investment climate.

    • Reduce restrictions on the import of textiles.

    Agree on action plans with the managements of Sonali, Janata, and Agrani Banks covering the period to Jun 2006 to operationalize the resolution strategies for each bank, with key benchmarks including timelines for necessary legal changes to eliminate limits on foreign ownership in the banking sector, by end-November 2004. [Performance criterion]**
    Memorandum of Economic and Financial Policies, May 26, 2005 (IMF, 2005c)
    Replace all remaining quantitative restrictions by tariffs by end-June 2005, in the context of DSC III, except those on grounds of health, national security, religion, and environmental protection.Further strengthen the preshipment inspection, customs valuation process, and the postclearance audit, with World Bank assistance.
    Continue to monitor the functioning of the bonded warehouse system; make further efforts to ensure that inspectors are well trained.
    Memorandum of Economic and Financial Policies, January 9, 2006 (IMF, 2006b)
    Further reduce average tariffs (including any surcharges) by at least two percentage points in the context of the FY07 budget.Further reduce the number of regulatory stages involved in the clearance of imports and exports.
    Italics denote prior actions, performance criteria, and structural benchmarks.

    indicates commitment was met.

    indicates commitment was modified subsequently.

    ^ indicates commitment was not met.^^ indicates no information on compliance.

    119. In July 2004, the PRGF arrangement was augmented through the Fund’s newly created TIM. The expiration of MFA textile quotas by January 2005 was expected to lead to a decline in foreign exchange earnings as Bangladesh’s exports of ready-made garments met increased competition from countries such as India and China. Bangladesh was the first recipient of funding from the TIM, which the Fund created in April 2004 to help member countries meet balance of payments shortfalls that could result from multilateral trade liberalization such as the elimination of quotas under the ATC. To justify the use of the TIM, staff estimated the magnitude of the anticipated shock, concluding that Bangladesh would likely face significant pressures on the balance of payments, output and employment, though there were scenarios under which Bangladesh would likely be able to hold its market share (IMF, 2004b). The Fund team drew on an in-house study (Mlachila and Yang, 2004) which used the Global Trade Analysis Project (GTAP) model to simulate the effects of the quota phase-out.

    120. Banking sector reform was a major structural component of the PRGF-supported program but liberalization of trade in financial services was not the focus. According to Abdelati (2007), foreign banks have been generally welcomed in Bangladesh since the 1990s.52 However, Bangladesh was not considered an attractive market for foreign banks; a joint IMF-World Bank Financial Sector Assessment Program (FSAP) mission in 2003 characterized the banking sector as having “one of the highest levels of corruption in the world” (IMF, 2003c). Foreign banks in Bangladesh held a small market share (less than 5 percent of banking system assets in 2004) and concentrated principally in trade finance (Berezin, 2005; WTO, 2006a). The banking system was dominated by four state-owned (“nationalized”) commercial banks that were poorly managed, subjected to directed lending and continued political interference, and basically insolvent. The PRGF-supported program included steps to develop detailed resolution strategies for each state-owned bank (a structural performance criterion) with the eventual goal of their partial or complete privatization.53 In the second review of the PRGF-supported program (July 2004), the authorities agreed to allow qualified foreign investors to own shares in a privatized bank in excess of the statutory ceiling of 10 percent, on a case-by-case basis (IMF, 2004b).

    Assessment

    121. The IMF’s trade policy advice to Bangladesh during the 1996–2002 surveillance period was in line with the prevailing wisdom. Advice on unilateral trade reform followed the best-practice recommendations of targeting quantitative restrictions as a first priority and aiming for low and relatively uniform tariffs. Staff identified potential weak points (e.g., the concentration of exports, the dependence on preferential access to foreign markets, and the low tax effort) early on and urged the authorities to address them through trade liberalization, export diversification, and tax and customs administration reforms. Staff at times had difficulty obtaining a clear picture of whether and how the restrictiveness of the trade regime had evolved prior to the PRGF-supported program (various staff reports put the TRI at 7, 6, and 8 during 1996–2002, while PDR data had the rating at 8 through the period), but their efforts were backstopped by solid analytical and empirical work from the World Bank.

    122. At the operational level, Fund-Bank cooperation during the 2003 PRGF-supported program was highly effective. The conditionality of the PRGF-supported program was closely coordinated with that of the DSC. The division of labor was appropriately clear—the Bank took the lead in trade reform, while the Fund focused on fiscal revenue mobilization—and there was no perceived conflict between the objectives of the two institutions. At both the local level and at headquarters, IMF and World Bank staff reported that cooperation on trade issues in Bangladesh was close and mutually supportive.

    123. Substantively, however, tensions between trade reform and revenue mobilization and restructuring came to the fore. By the second program review (July 2004), the tariff structure had been streamlined to three rates, with a top rate of 25 percent, with accompanying reductions in the level and dispersion of supplementary duties and in the number of products subject to quantitative restrictions (IMF, 2004b). According to PDR, Bangladesh’s TRI dropped from 7 in 2003 to 6 by the end of the PRGF program.54 The 2006 WTO trade policy review reported “[s]ignificant progress” in shortening the list of items subject to quantitative restrictions (WTO, 2006a). In its most recent WTO CBR consultation (May 2007), at which the Fund was represented, Bangladesh committed to remove its remaining three import restrictions maintained for balance of payments reasons (quantitative restrictions on salt, chicks, and eggs) by December 2008 (WTO, 2007). On the fiscal revenue side, however, staff regarded the overall increase in the revenue-to-GDP ratio over the PRGF-supported program period—less than half a percentage point—as disappointing. This poor showing was attributed to deficiencies in overall tax design and a slower-than-anticipated pace of administrative reforms—including customs administration improvements to limit revenue losses associated with trade liberalization—that reflected institutional rigidities. In the 2007 Article IV consultation, staff noted that Bangladesh’s revenue collection was still “among the lowest in the world” and insufficient to support desired further reductions in tariffs and supplementary duties (IMF, 2007e).

    124. The IMF’s work on preference erosion in connection with the use of the TIM, though it did not fully assuage fears of a painful post-MFA adjustment, was well done. This episode gave an opportunity to increase understanding of the impact of global trade policy developments. Mlachila and Yang’s (2004) results were widely cited in the local and international press.55 The augmentation of the PRGF under the TIM in July 2004 also received media coverage.56 Yet shortly after the TIM was approved, in October 2004 Bangladesh joined six other developing countries in an appeal to the WTO. The group of countries sought—unsuccessfully—to delay the ATC deadline until the WTO Secretariat had studied the (country-level) adjustment-related issues and costs resulting from the expiration of MFA quotas and had identified trade-related solutions and adjustment measures that would mitigate the impact of the quota phase-out (WTO, 2005).57

    125. Although the TIM was well received, it did not contribute substantively to adjustment in Bangladesh’s textile and clothing sector. The TIM involved no conditionality beyond that already contained in the PRGF arrangement nor did it include adjustment measures specifically linked to the external trade liberalization shock. In the event, the immediate impact of the ATC quota expiration was minimal and Bangladesh’s garment exports grew in the subsequent period. This growth was partly due to the imposition of safeguard quotas on China through 2008 by the United States and the European Union, which provided some temporary breathing space for Bangladesh’s garment sector (Moers, 2005; Dunn, 2007). In addition, Bangladesh still benefits from preferential access to its major export markets for garments under the EU’s Everything But Arms Initiative, the U.S. Generalized System of Preferences, and the Canadian Market Access Initiative (Dunn, 2007). The evidence to date indicates that Bangladesh has not fully adjusted to the post-MFA world: its exports are still highly concentrated in the garment sector, and longstanding barriers to competitiveness (e.g., generally inadequate infrastructure—especially port infrastructure, low labor skills, and an unattractive business climate) remain unresolved (Dunn, 2007; Davies and Dunn, 2008).

    I. Overall Evaluation

    126. During 1996–2007, the IMF’s involvement in trade policy issues in the seven countries examined went through the full swing of the pendulum. From 1996 until approximately 2001, the Fund was actively involved in a rather wide range of trade policy issues. By far the greatest involvement was in tariff and quota policy and customs administration, but involvement also occurred episodically in subsidies, PTAs, trade in financial services, and state trading monopolies for traded goods. After 2001, the IMF shifted to a generally hands-off mode, at times skirting even trade policy issues with macroeconomic relevance. Fund-supported programs in low-income countries have been increasingly less likely to contain trade-related components. Even in the surveillance of low-income countries for which trade policies are relevant, if not critical, for growth and/or resilience to shocks, missions have been less willing to address trade policy issues. Part of the reason for this change lies in the Fund’s streamlining of conditionality and a perception that trade policy is generally not critical to macroeconomic objectives. For low-income countries, particularly in Africa, the introduction of the criterion that the Fund’s structural conditions must be macro-critical—exemplified by the softening of the Fund’s stance with regard to Mozambique’s sugar sector protection in 2000—marked a welcome change in the Fund’s approach to trade liberalization, which had frequently gone beyond the IMF’s primary areas of interest.

    127. In general, the IMF’s positions on trade policy reflected a rather broad consensus in the academic and public policy literature on the merits of liberal trade regimes. Indeed, governments for the most part were interested in changing their trade policies broadly in the direction advocated by the IMF, though important differences arose on the pace of change. IMF advice and conditionality tended to press hard for a rapid pace of reform, at times in consonance with governments’ preferences, but at other times zooming in on issues even of questionable macroeconomic relevance and pressing countries to unilaterally liberalize faster than their intrinsic commitment supported. Some of these differences arose because governments wished to continue to protect some sectors or industries, others because governments were concerned about fiscal or adjustment costs of rapid change.

    128. In many of the cases, staff underestimated the effects of trade liberalization on fiscal revenue. Country authorities often cited revenue concerns as a reason for slowing the pace of tariff reduction. Staff, however, tended to push for speedier trade liberalization in conjunction with tax reforms (such as the introduction of a VAT and a rationalization of tax and tariff exemptions), and for improvements in customs administration to compensate for anticipated revenue losses. In most cases, FAD provided extensive technical assistance in these areas. However, tax and tariff exemptions proved difficult to remove, usually because they were perceived to be important for attracting and retaining foreign investment, and customs administration reforms were lengthy processes that took time to bear fruit, if they ever did. According to Baunsgaard and Keen (2005), low-income countries in general have recovered, at best, no more than about 30 cents of each dollar of trade tax revenue lost from trade liberalization; IMF (2005b) came to a similar pessimistic conclusion.

    129. Interagency cooperation was not always present on trade policy issues but worked reasonably well when it was. The World Bank was active in all seven case study countries but was not always involved in trade reforms. The Bank took the lead in trade reform in some cases, and worked jointly on trade reform with the Fund team in others. In general, Bank-Fund cooperation worked well when the work was clearly delineated and both teams were in close and constant contact. This was the case in Bangladesh, for example. Of course, the success of such cooperation is also rather dependent on personalities and compatible priorities. When Fund and Bank staff diverged on a particular trade policy issue (such as sugar sector protection in Mozambique), the IMF had either to get involved substantively, so that it was in a position to defend its position to critics, or drop the issue altogether. IMF-WTO cooperation was episodic and generally low-key. The Fund staff’s trade policy advice was usually in line with observations in the WTO’s trade policy reviews, although for low-income countries, these reviews were not frequent. Where cases of alleged dumping arose, Fund staff appropriately discouraged the use of ad hoc trade measures and pointed the country authorities to the WTO; in doing so, however, staff should have been more careful to understand whether or not low-income countries could follow antidumping procedures that were consistent with WTO rules.

    130. The effectiveness of the IMF’s involvement in trade policy issues during the first part of the evaluation period was mixed and seems to have depended on several key factors. Typically, favorable outcomes (that is, outcomes where IMF support and analysis seem to have contributed to changes in trade policy that are likely to have increased economic efficiency and growth, or to have better positioned countries to offset the revenue impact of trade liberalization) occurred when the IMF worked closely with the World Bank or itself became substantively invested in the analysis of a specific issue, almost regardless of its nature. Usually, these outcomes occurred when the government was interested in, or at least not inherently resistant to, trade liberalization. Poor outcomes (that is, outcomes where no policy changes occurred, or where changes occurred but were later reversed, or where IMF advice or conditionality prompted serious and high profile objections) usually arose when the IMF’s advocacy and pressure exceeded the government’s intrinsic commitment to liberalization or when advocacy went beyond the depth of the underlying analytical work and the IMF found itself unable to defend a position on which it had taken a very strong stand.

    131. The IMF’s general withdrawal from trade policy issues since the early 2000s may have led to its missing, or only belatedly recognizing, some important issues with clear macro relevance. In almost all of the case study countries, a significant trade policy development has been a shift toward PTAs. In some cases, PTAs added complexities to individual members’ trade regimes, such as the introduction of supplementary/suspended duties or high common external tariff rates on certain items. Yet membership in a (potential) customs union basically took trade liberalization, especially tariff reform, off the table in IMF programs and also, to some extent, in surveillance discussions with the Fund. Fund staff were noticeably reluctant to be drawn into PTA issues. In some sense this was understandable, as PTAs tend to be driven by political, as well as economic, motives, and staff were unwilling to get involved in bilateral/ regional relations. Also, the IMF Board had sent quite mixed signals on what it expected the staff’s involvement in PTA issues to be. But staff were also slow to analyze the macroeconomic impact of preferential arrangements, or to form views on the extent to which such arrangements could hinder or facilitate the process of trade liberalization in an individual country. For example, formal EPA negotiations between the European Union and African countries began in 2003–04 but Fund missions only started to analyze their impact in the four African case study countries in 2008, if at all. (It is true, however, that the negotiations were, and still are, evolving, and that some of the countries were receiving advice and technical assistance on the negotiations from other sources under the IF.) Only in one of the case studies (Vietnam) did bilateral and regional trade liberalization form a component of a Fund-supported program; even in this case, staff made no attempt to systematically assess the macroeconomic implications of the PTAs that were incorporated in the program.

    132. Some of the IMF’s strongest work on trade came in connection with the erosion of trade preferences. Analyzing the macroeconomic impact of trade preference erosion on the most vulnerable low-income countries was a task that staff were well equipped to handle and an area where the IMF could make a unique and constructive contribution to international trade policy discussions. The individual country analyses were carefully done and important for macroeconomic policy and planning: they helped to reassure countries when domestic macroeconomic effects were not projected to be large and to spur the authorities to formulate plans for action when they were. The analyses were also important from a systemic point of view, as they pointed to how broad trends in the advanced countries’ trade policies affected smaller players on the global stage.

    133. Accurate, timely, and sufficiently informative trade policy indicators are prerequisites for any meaningful involvement by the IMF in trade policy issues. The Fund’s TRI had little operational usefulness. Staff were instructed to incorporate the TRI in all medium-term programs starting in early 1998 (IMF, 1998b) but they had little idea as to what would have been a reasonable change in the index to target over the course of a given program. As a result, projected reductions in TRI ratings were not meaningful and were rarely realized. Compounding the problem in low-income countries was the difficulty in obtaining reliable and up-to-date information on trade policy changes. While other agencies have made great strides over the past several years in compiling cross-country data on trade barriers and trade preferences, large information gaps remain, especially in low-income countries that will be costly to fill. Discontinuing the use of the TRI was right in light of its many shortcomings, but one or more well-grounded summary measures of trade policy would have been useful both for staff (to obtain a clearer idea of the extent of a country’s trade restrictiveness or trade distortions relative to other countries, as a basis for dialogue) and for the IMF at large (to be seen to be involved in trade policy issues in an even-handed way).

    Annex. Case Study Countries: Key Trade Measures in IMF-Supported Programs
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      International Monetary Fund (IMF), 2005d, “Vietnam—Staff Report for the 2005 Article IV Consultation,”SM/05/351 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006a, “Guyana—Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criteria,”EBS/06/9 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006b, “Bangladesh—Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria,”EBS/06/13 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006c, “United Republic of Tanzania—Ex Post Assessment of Longer-Term Program Engagement,”SM/06/117 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006d, “Vietnam—Staff Report for the 2006 Article IV Consultation,”SM/06/327 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2006e, “United Republic of Tanzania—Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for a Three-Year Policy Support Instrument,”EBS/06/149 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007a, “Guyana—Staff Report for the 2006 Article IV Consultation,”SM/07/92 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007b, “Kenya—2006 Article IV Consultation and Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Requests for Extension and Rephasing of the Arrangement, Reduction in Access, and Waiver of Performance Criteria,”EBS/07/30 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007c, “Ghana—Ex Post Assessment of Longer-Term Program Engagement,”SM/07/155 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007d, “Ghana—Staff Report for the 2007 Article IV Consultation,”SM/07/156 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007e, “Bangladesh—Staff Report for the 2007 Article IV Consultation,”SM/07/194 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007f, “United Republic of Tanzania—Staff Report for the 2007 Article IV Consultation and First Review Under the Policy Support Instrument,”EBS/07/63 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007g, “Vietnam—Staff Report for the 2007 Article IV Consultation,”SM/07/308 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2007h, “The Acting Chair’s Concluding Remarks: Caribbean—Selected Regional Issues,”SUR/07/126 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2008a, “Guyana—Staff Report for the 2007 Article IV Consultation,”SM/08/44 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2008b, “United Republic of Tanzania—Third Review Under the Policy Support Instrument,”EBS/08/55 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2008c, “Kenya—Ex Post Assessment of Longer-Term Program Engagement,”SM/08/263 (Washington: International Monetary Fund).

      International Monetary Fund (IMF), 2009, “Vietnam—Staff Report for the 2008 Article IV Consultation,”SM/09/61 (Washington: International Monetary Fund).

      Kanaan,Oussama,1999, “Trade Policy Reform,” Chapter VII in “Tanzania—Recent Economic Developments,”SM/99/20 (Washington: International Monetary Fund).

      Kanai,Tatsuya,AnthonyPellechio, andSergio PereiraLeite,1998, “Trends in Cocoa World Markets and Options to Strengthen Ghana’s Competitive Position,” Chapter V in “Ghana—Selected Issues,”SM/98/255 (Washington: International Monetary Fund).

      Khandelwal,Padamja,2004, “COMESA and SADC: Prospects and Challenges for Regional Trade Integration,”IMF Working Paper 04/227 (Washington: International Monetary Fund).

      Kozack,Julie,2002, “Trade and Regional Integration Policies in Kenya,” Chapter IV in “Kenya—Selected Issues,”SM/02/72 (Washington: International Monetary Fund).

      Krueger,AnneO.,1997, “Trade Policy and Economic Development: How We Learn,”American Economic Review,Vol. 87 (March), pp. 122

      Kvintradze,Eteri,2007, “Trade Policy in Mozambique: An Overview,” Chapter III in “Republic of Mozambique—Selected Issues,”SM/07/197 (Washington: International Monetary Fund).

      Lee, Il Houng,1998, “Export Performance and Prospects,” Chapter IV in “Bangladesh—Selected Issues,”SM/98/241 (Washington: International Monetary Fund).

      Leite,Sergio Pereira, and others,2000, Ghana: Economic Development in a Democratic Environment,IMF Occasional Paper 199 (Washington: International Monetary Fund).

      Mathieson,Donald, andGarry J.Schinasi, (ed)eds.,2000, “The Role of Foreign Banks in Emerging Markets,” inInternational Capital Markets: Developments, Prospects and Key Policy Issues (Washington: International Monetary Fund).

      McIntyre,Meredith,2004, “Trade Integration in the East African Community,” Chapter V in “Kenya—Selected Issues,”SM/04/418 (Washington: International Monetary Fund).

      McMillan,Margaret,Karen HornWelch, andDaniRodrik, (ed)2004, “When Economic Reform Goes Wrong: Cashew in Mozambique,”in Brookings Trade Forum: 2003,ed. byDaniRodrik andSusanCollins (Washington: Brookings Institution).

      Mlachila,Montford, andYongzhengYang,2004, “The End of Textiles Quotas: A Case Study of the Impact on Bangladesh,”IMF Working Paper 04/108 (Washington: International Monetary Fund).

      Moers,Luc,2005, “The RMG Sector and External Competitiveness in the Post-MFA World,” Chapter III in “Bangladesh—Selected Issues,”SM/05/217 (Washington: International Monetary Fund).

      Moreno,Ramon andAgustinVillar,2005, “The Increased Role of Foreign Bank Entry in Emerging Markets,” inGlobalisation and Monetary Policy in Emerging Markets, BIS Papers No. 23 (Basle: Bank for International Settlements).

      Peiris,Shanaka J.,2003, “Reform of State-Owned Enterprises,” Chapter V in “Vietnam—Selected Issues,”SM/03/305 (Washington: International Monetary Fund).

      Pellechio,Anthony,1999, “Medium-Term Fiscal Sustainability Analysis,” Chapter III in “Ghana—Selected Issues,”SM/99/269, Supplement 1 (Washington: International Monetary Fund).

      Shishido,Hisanobu,1998, “External Trade Liberalization,” Chapter IV in “Vietnam—Selected Issues,”SM/98/6 (Washington: International Monetary Fund).

      Thacker,Nita,2001, “Trade Reforms and Export and Import Performance,” Chapter IV in “Vietnam—Selected Issues and Statistical Appendix,”SM/01/334 (Washington: International Monetary Fund).

      Thomas,Vinod, andJohnNash, (ed)eds.,1991, Best Practices in Trade Policy Reform (Washington: World Bank).

      Tumbarello, Patrizia,2005, “Does Vietnam Overtrade with Its Neighboring Countries? A Regional Investigation Using a Gravity Model,” Chapter II in “Vietnam—Selected Issues,”SM/05/358, Supplement 1 (Washington: International Monetary Fund).

      Tumbarello, Patrizia,2007, “Vietnam’s WTO Accession: Opportunities and Challenges,” Chapter I in “Vietnam—Selected Issues,”SM/07/341 (Washington: International Monetary Fund).

      Unteroberdoerster,Olaf,2003, “Reform of State-Owned Commercial Banks—Achievements and Challenges,” Chapter VI in “Vietnam—Selected Issues,”SM/03/305 (Washington: International Monetary Fund).

      Unteroberdoerster,Olaf,2004, “Banking Reform in the Lower Mekong Countries,”IMF Policy Discussion Paper PDP/04/5 (Washington: International Monetary Fund).

      United States Agency for International Development (USAID), 2004, Removing Obstacles to Economic Growth in Mozambique: A Diagnostic Trade Integration Study (Washington: United States Agency for International Development).

      Winglee,Peter,1999, “Trade Policy Developments and the Need for Reform,” Chapter V in “Vietnam—Selected Issues,”SM/99/104 (Washington: International Monetary Fund).

      World Bank, 1999, Bangladesh Trade Liberalization: Its Pace and Impacts,World Bank Report No. 19591-BD (Washington: World Bank).

      World Trade Organization (WTO), 2000a, Kenya—Trade Policy Review (Geneva: World Trade Organization).

      World Trade Organization (WTO), 2000b, Tanzania—Trade Policy Review (Geneva: World Trade Organization).

      World Trade Organization (WTO), 2001, Ghana—Trade Policy Review (Geneva: World Trade Organization).

      World Trade Organization (WTO), 2003, Guyana—Trade Policy Review (Geneva: World Trade Organization).

      World Trade Organization (WTO), 2004, “Committee on Balance-of-Payments Restrictions—Report on the Consultations with Bangladesh,”WT/BOP/R/76 (Geneva: World Trade Organization).

      World Trade Organization (WTO), 2005, “Minutes of the Meeting of the Council for Trade in Goods, 1 October 2004,”G/C/M/75 Add.1 (Geneva: World Trade Organization).

      World Trade Organization (WTO), 2006a, Bangladesh—Trade Policy Review (Geneva: The World Trade Organization).

      World Trade Organization (WTO), 2006b, Kenya, Tanzania, and Uganda—Trade Policy Review (Geneva: World Trade Organization).

      World Trade Organization (WTO), 2006c, “Report of the Working Party on the Accession of Viet Nam,”WT/ACC/VNM/48 (Geneva: World Trade Organization).

      World Trade Organization (WTO), 2007, “Committee on Balance-of-Payments Restrictions—Report on the Consultations with Bangladesh,”WT/BOP/R/86 (Geneva: World Trade Organization).

    The PSI is not a lending arrangement but a form of technical assistance.

    Trade-related technical assistance will be noted where applicable but an assessment of its content and implementation is beyond the scope of this evaluation.

    At the beginning of 1996, SADC members were Angola, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe; and COMESA members were Angola, Burundi, the Comoros, Eritrea, Ethiopia, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, Somalia, Sudan, Swaziland, Tanzania, Uganda, Zaïre, Zambia, and Zimbabwe (IMF, 1996c).

    Besides Tanzania, the other CBI participants were Burundi, the Comoros, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Swaziland, Uganda, Zambia, and Zimbabwe. The CBI was cosponsored by the Fund, the World Bank, the European Union, and the African Development Bank.

    According to IMF (1996c), differences existed between the CBI and regional integration efforts of organizations such as COMESA and SADC: (i) the CBI was a policy framework, not an organization or institution; (ii) the CBI was “outward looking” in the sense that the reduction in barriers to cross-border flows among participating countries was accompanied by a reduction of most-favored-nation tariff rates; (iii) the CBI’s focus was not on creating a PTA such as a customs union or common market but on policies to lower transactions costs and enhance efficiency gains from trade; and (iv) the CBI’s goals were relatively flexible, generally calling for a harmonization across participants while allowing scope to accommodate differences in needs of individual countries.

    However, a 1999 Fund update on the CBI had suggested that “excessive” PTA membership may have interfered with the pace of trade liberalization under the CBI by imposing “conflicting obligations, different and uncoordinated strategies, inconsistent external liberalization goals, and different and conflicting rules and administrative procedures” on the signatory countries (IMF, 1999i).

    The donors were the governments of the Netherlands, the United Kingdom, Denmark, and Sweden.

    The EAC customs union was expected to lower Tanzania’s average tariff by almost 2 percentage points to 12.5 percent (IMF, 2004c).

    Everaert, Palmason, and Sobolev (2006) noted that while EAC market access benefits were not extended to non-EAC SADC and COMESA partners, EAC members were allowed to continue with their existing obligations to SADC and COMESA. This meant that border controls had still to be maintained and rules of origin enforced within the EAC to prevent “trade deflection,” for example, the possibility of SADC members using Tanzania as a transit route to Kenya and Uganda. They argued furthermore that overlapping PTA memberships added considerable complexity and costs to the trading process (due to the need to administer multiple rules of origin schemes) and impeded the harmonization of standards and technical regulations within the EAC. The same points were raised in IF (2005).

    Everaert, Palmason and Sobolev (2006) noted that, because at that time Tanzania was negotiating the EPA as a member of the SADC group while Uganda and Kenya were under the COMESA group, the EAC members could face different commitments vis-à-vis the European Union unless the two groups’ negotiations with the European Union were closely coordinated.

    A November 2005 FAD technical assistance mission on tax policy estimated Tanzania’s tax revenue potential and tax effort to be lower than those for most of its neighboring countries. The Fund’s 2006 ex post assessment (IMF, 2006c) listed “poor customs systems and procedures” as one of the constraints that the ESAF and PRGF programs had been unable to address effectively.

    The CBI was succeeded in 2000 by the Regional Integration Facilitation Forum, a nonbinding and voluntary arrangement to facilitate the flow of investments into member countries and improve their trade regimes.

    In a working paper issued by PDR, Khandelwal (2004) computed bilateral product complementarity indices for COMESA and SADC member countries and concluded that there was asymmetric complementarity in both PTAs, meaning that the more developed economies of Egypt, Kenya, and South Africa were in a much better position to market their exports in COMESA/SADC than were the less developed members (including Tanzania). The paper found little evidence of trade diversion in COMESA and SADC and “encouraging” growth in total exports from COMESA and SADC since 2000 (though the impact the PTAs may have had on that growth could not be determined). There is no evidence that the results of the paper were discussed with the authorities.

    “Twenty-six African leaders resolve to form single market,” BBC, October 23, 2008.

    The commitments were to reduce the number of tariff bands to four and the maximum tariff to 30 percent by July 1997.

    The other members of the COMESA free trade area were Djibouti, Egypt, Madagascar, Malawi, Mauritius, Sudan, Zambia, and Zimbabwe.

    The tariff structures in the three EAC members were very different. Kenya had eight tariff bands ranging from zero percent to 35 percent; Tanzania had four bands ranging from zero percent to 25 percent; and Uganda had three bands ranging from zero percent to 15 percent (IMF, 2003a).

    The simulation was based on a static, partial equilibrium model—SMART—developed jointly by the UN Conference on Trade and Development and the World Bank and widely used by negotiators of bilateral and multilateral trade agreements.

    The same concerns were echoed in the WTO’s 2006 joint trade policy review of Kenya, Tanzania, and Uganda (WTO, 2006b).

    Everaert, Palmason, and Sobolev (2006) argue that the level of trade protection and tariff dispersion associated with the EAC common external tariff gave significant potential for trade diversion. In contrast, McIntyre’s (2004) simulations showed “negligible” trade diversion from the EAC common external tariff. However, McIntyre (2004) noted that his results could be affected by the lack of data on informal cross-border trade within the EAC. Everaert, Palmason, and Sobolev (2006) noted that robust evidence of trade diversion would be hard to obtain given the short time since the introduction of the common external tariff.

    The measures were later incorporated in a customs modernization project that began in 2007.

    In 1997, Mozambique’s aggregate score on the Fund’s TRI was 3 (“liberal”), based on a tariff rating of 3 (“moderate”) and a nontariff barrier rating of 1 (“open”).

    “IMF targets Mozambican sugar,” Pan-African News Agency, November 24, 1999; “IMF pressure may force investors to pull out of Mozambique,” Pan-African News Agency, May 26, 2000; “Mozambique to urge U.S. backing in IMF, World Bank,” All Africa, June 16, 2000.

    “IMF will not impose conditions on African governments: Koehler,” Agence France Presse, July 7, 2000; “IMF head says government ‘free’ to adopt protectionist policy,” BBC, July 22, 2000; “Kohler demonstrates a reformist zeal,” Financial Times, September 14, 2000.

    “IMF eases economic reform pressure,” All Africa, December 6, 2000; “The listening approach to development,” Financial Times, January 12, 2001; “IMF, World Bank, on listening tour,” All Africa, February 8, 2001.

    Bilateral donors included the European Union, Switzerland, the Netherlands, the United States, and Canada.

    See Krueger (1997) for an overview and references.

    The IMF’s streamlining initiative, reflected in its 2002 Conditionality Guidelines, aimed at reducing the volume and scope of the Fund’s structural conditionality by requiring “parsimony” in the use of conditions, and stipulated that conditions must be “critical” to the achievement of the program goals.

    “IMF aiming for new loan guidelines in second half of 2001,” Dow Jones, March 21, 2002; “The softer side of the IMF,” Business Week, November 19, 2001.

    This observation has been partly attributed to inaccurate GDP data.

    Some of the reductions in duty exemptions were reversed in recent years.

    The Cocoa Board paid farmers a pre-set price in domestic currency and retained the export proceeds; the difference between the international price and the price paid to farmers, less administrative and other costs, thus formed an implicit (and variable) export tax on cocoa (Bulir, 1996). The Cocoa Marketing Company, a subsidiary of the Cocoa Board, negotiated and sold all exports of cocoa (Kanai, Pellechio, and Leite, 1998).

    The other ECOWAS members are Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, The Gambia, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Togo.

    A 1998 SIP (Kanai, Pellechio, and Leite, 1998) continued the discussion on options for cocoa sector reform, including a comparison with the cocoa sector in Côte d’Ivoire, Ghana’s neighbor and the world’s leading producer of cocoa.

    The WTO agreed. In Ghana’s 2001 trade policy review, the WTO noted that special import taxes had been a common feature of Ghana’s tariff system and that the reintroduction of the tax in February 2000 contradicted the government’s policy objective of tariff reduction, and urged the government to specify a time limit for the removal of the tax (WTO, 2001).

    Tariffs were proposed to be increased for a range of finished products (from 10 percent to 15 percent) and for rice imports (from 20 percent to 25 percent). For poultry a supplementary duty of 20 percent was proposed.

    See “IMF bullying of Ghana over poultry and rice tariffs criticized,” Liquid Africa, September 30, 2004; “IMF/World Bank overriding democracy in Africa,” All Africa, January 31, 2005; “Playing Chicken: Ghana versus the IMF,” Corpwatch, June 14, 2005 (http://www.corpwatch.org/article.php?id=12394).

    Hoekman (2002) points out that some WTO rules, including the antidumping agreement, have “significant direct implementation costs” and making them work in low-income countries could require “wholesale reform and strengthening of a variety of institutions.”

    The producer price mechanism was retained for the 2000/01 cocoa season to cushion farmers during the transition to the new system. It was expected that the farmer’s share of the f.o.b. export price of cocoa would increase by 1 percent every year, rising from 66 percent in 1999/2000 to 70 percent by 2004/05 (IMF, 2000f). In the event, the farmgate price fell below the target level in 2000 (IMF, 2001c).

    “Court orders CEPS to implement new tariffs on imported poultry,” All Africa, April 18, 2005.

    Under the EU’s Sugar Protocol, ACP countries—including Guyana—were granted an individual country-specific quota to export sugar duty-free at EU internal prices, and an additional special preferential sugar quota to export sugar to the European Union at preferential tariff rates.

    The Guysuco restructuring was part of Guyana’s National Action Plan for coping with preference erosion in the sugar industry, which was prepared through a consultative process with a broad range of stakeholders. The plan was partially financed by the European Union.

    Bauer and others (2007) observed that special investment incentives had proliferated throughout the Caribbean region, typically in the form of generous tax holidays that provided exemptions from corporate income taxes and import duties.

    Vietnam officially exchanged MFN treatment with the European Union in 1995, and with Japan in 1999.

    At the same time, the World Bank launched a program of advisory and technical assistance in various areas of structural reform including trade, banking, and state enterprise reform under its Poverty Reduction and Support Credit.

    See, for example, Thomas and Nash (1991) and IMF (1999j).

    Winglee (1999) provided some background information on Vietnam’s sugar policy, and Peiris (2003) noted that the sugar sector was experiencing financial distress with state enterprises accumulating large debts, but neither paper was referred to when the statement was made.

    Part of this was due to the tariffication of quantitative restrictions.

    “Twinning to reform,” Far Eastern Economic Review, September 25, 2003; “ING wins second advisory mandate in Vietnam,” The Asian Banker, October 15, 2005.

    In 1999/2000, Fund staff reported that Bangladesh had a TRI score of 6 (“moderately restrictive”), down from 7 during 1995/96–1998/99 (Dalsgaard, 2000). In 2001, the TRI score was revised upward to 8 (“restrictive”) (IMF, 2002b).

    Four items (eggs, chicks, salt, and carton packaging/paper bags) remained subject to quantitative restrictions for balance of payments reasons. In a November 2004 meeting (at which the Fund was represented), the WTO CBR granted Bangladesh until 2007 to submit a timetable for removal of the remaining restrictions (WTO, 2004).

    According to WTO (2006a), foreign banks are allowed to open branches (with permission from the central bank); there is no minimum domestic equity requirement; they are free to take deposits from and grant loans to domestic companies and residents and are generally allowed to conduct the same business as local banks; and they have full access to credit from the central bank, local financial markets, deposit insurance, and clearing facilities.

    The reform strategy drew on the recommendations of the FSAP mission, with technical assistance and funding from the World Bank’s Enterprise Growth and Bank Modernization Project.

    On the World Bank’s trade restrictiveness index, Bangladesh ranks 113 out of 125 countries (Davies and Dunn, 2008).

    “Bangladesh faces shock when textile quotas end—IMF,” Reuters, July 15, 2004; “IMF warns of impact on Bangladesh of quota removal,” Global Insight, July 16, 2004; “Post-MFA tidings for Bangladesh,” Financial Express, July 19, 2004; “Social upheaval feared when end of import quotas hits Bangladesh,” Financial Times, July 24, 2004; “The looming revolution,” The Economist, November 21, 2004; “Fear surrounds end to textile quotas,” South China Morning Post, December 14, 2004; “The end is nigh,” Economist Intelligence Unit, December 23, 2004.

    “IMF approves $72 million loan disbursement to Bangladesh,” Dow Jones, July 29, 2004; “IMF approves $72 mln payment to Bangladesh,” Reuters, July 29, 2004; “World Bank, IMF only ready for case-by-case help to poor textile exporters,” Agence France Presse, October 22, 2004.

    Earlier in 2004, Bangladesh was one of the first Asian countries to sign the so-called Istanbul declaration seeking a two-year extension of the ATC deadline. The October 2004 appeal to the WTO was opposed by larger exporters such as China, India, and Brazil.

    Background Document 5 Trade Conditionality in IMF-Supported Programs in Emerging Market Countries: Five Case Studies
    A. Introduction

    1. This paper evaluates the IMF’s trade conditionality in five emerging market programs during the capital account crises of the late 1990s: Indonesia (1997), Korea (1997), Ukraine (1998), Brazil (1998), and Turkey (1999). These programs, supported by IMF Stand-By Arrangements (SBAs) or the Extended Fund Facility (EFF), were particularly high profile as they exemplified the Fund’s response to a new type of balance of payments crisis that involved massive reversals of short-term capital flows and contagion. The arrangements were also high-access, involving hitherto unprecedented loan amounts for the Fund. Brazil, Korea, and Turkey drew on the IMF’s new Supplemental Reserve Facility (SRF), which had been created expressedly to provide very short-term financing on a very large scale. Table 1 summarizes the history of IMF arrangements in the five countries.

    Table 1.Indonesia, Korea, Ukraine, Brazil, and Turkey: History of IMF Arrangements
    Type of ArrangementDate of ArrangementExpiration DateAmount Approved

    (SDR million)
    Amount Drawn

    (SDR million)
    Indonesia (date of Fund membership: February 21, 1967)
    SBANovembers, 1997August 25, 19988,338.243,669.12
    EFFAugust 25, 1998February 4, 20005,383.103,797.70
    EFFFebruary 4, 2000December 31, 20033,638.003,638.00
    Korea (date of Fund membership: August 26, 1955)
    SBAJuly 8, 1983March 31, 1985575.78575.78
    SBAJuly 12, 1985March 10, 1987280.00160.00
    SBADecember 4, 1997December 3, 200015,500.0014,412.50
    Of which: SRFDecember 18, 1997December 17, 19989,950.009,950.00
    Ukraine (date of Fund membership: September 3, 1992)
    SBAApril 7, 1995April 6, 1996997.30538.65
    SBAMay 10, 1996February 23, 1997598.20598.20
    SBAAugust 25, 1997August 24, 1998398.92181.33
    EFFSeptember 4, 1998September 3, 20021,919.951,193.00
    SBAMarch 29, 2004March 28, 2005411.600.00
    SBANovember 5, 2008November 4, 201011,000.003,000.00
    Brazil (date of Fund membership: January 14, 1946)
    SBAAugust 23, 1988February 28, 19901,096.00365.30
    SBAJanuary 29, 1992August 31, 19931,500.00127.50
    SBADecember 2, 1998September 14, 200113,024.809,470.75
    Of which: SRFDecember 2, 1998December 1, 19999,117.366,512.40
    SBASeptember 14, 2001September 5, 200212,144.4011,385.37
    Of which: SRFSeptember 14, 2001September 5, 20029,950.879,950.87
    SBASeptember 6, 2002March 31, 200527,375.1217,199.64
    Of which: SRFSeptember 6, 2002September 5, 20037,609.697,609.69
    Turkey (date of Fund membership: March 11, 1947)
    SBAApril 4, 1984April 3, 1985225.00168.75
    SBAJuly 8, 1994March 7, 1996610.50460.50
    SBADecember 22, 1999February 4, 200215,038.4011,738.96
    Of which: SRFDecember 21, 2000December 20, 20015,784.005,784.00
    SBAFebruary 4, 2002February 3, 200512,821.2011,914.00
    SBAMay 11, 2005May 10, 20086,662.046,662.04
    Source: IMF Finance Department.

    2. This paper focuses only on the trade policy aspects of these programs. The programs have been evaluated elsewhere—notably in IEO (2003), Stone (2002), IMF (2005a), IMF (2006a), and IMF (2008b)—but not from the trade policy angle. Hence, this paper will cover some familiar ground, but it will also bring a fresh perspective because the five case study countries had very similar trade regimes and trade policy issues before the onset of their crises yet widely differing experiences with trade conditionality under their IMF-supported programs. The evaluation questions addressed are:

    • Did the trade conditionality conform to and carry out well a reasonable interpretation of the Fund’s mandate? Internal memos and guidance notes set out parameters for the inclusion and design of trade conditionality; key guidelines relevant for this evaluation are listed in Table 2.

      Table 2.Key IMF Guidance on Trade Conditionality
      DateGuidanceKey Point(s)
      November 17, 1994Concluding Remarks by the Acting Chairman: Conditionality Review—Distilling the Main Messages and Direction for Further Work (IMF, 1994b)“[F]rom the start, Fund supported programs should give high priority to a coherent set of structural measures, institution building, and removal of distortions that will stimulate supply responses and investment.”
      November 1, 1995Reference Note on WTO Consistency (IMF, 1995b)Fund staff should identify policy measures that are potentially inconsistent with WTO rules at an early stage; encourage the authorities to clarify the issue directly with the WTO; and explore alternative measures with the authorities.
      Fund program design can (and should) encourage countries to improve economic efficiency by undertaking unilateral trade liberalization beyond their commitments under the WTO, but must avoid “cross conditionality,” meaning that “while program conditionality can be applied to trade liberalization, the program cannot require the member to make a binding commitment to the WTO on the new liberalization undertaken in the context of the Fund-supported program.”
      October 30, 1997Summing Up by the Acting Chairman: Trade Liberalization in Fund-Supported Programs (IMF, 1997h)Trade liberalization should be pursued as part of a broad-based adjustment program, i.e., staff should ensure an appropriate overall policy mix and a critical mass of complementary structural measures, including financial sector reform, privatization, and other external reforms.
      Greater emphasis on clearly defined, quantifiable, and monitorable medium-term policy objectives is crucial for enhancing prospects for success of trade reform. Programs should also emphasize intermediate targets to measure progress and supporting policies, and should be accompanied by an early public announcement of the medium-term targets.
      Trade liberalization efforts must continue to be undertaken in close cooperation with the World Bank and the WTO.
      April 2, 1998Index of Aggregate Trade Restrictiveness—Operational Implications (IMF, 1998f)Staff should begin to assess the trade reforms of program countries by including in staff reports on new medium-term (two or more years) adjustment programs the estimated Trade Restrictiveness Index (TRI) at the outset of programs, and after the implementation of program measures.
      January 8, 1999Note on Import Surcharges (IMF, 1999a)In line with the Fund’s mandate, and consistent with WTO principles, the Fund opposes surcharges in the great majority of cases. In the event they are introduced, the surcharge should be uniform across all imports, on a temporary basis, and subject to a pre-announced timetable for elimination.
      July 20, 1999Guidelines on Designing and Implementing Trade Policy Reforms (IMF, 1999f)Trade reform should first target the least transparent and most restrictive elements of the trade regime, particularly nontariff barriers, export restrictions, and exemptions. Thereafter, emphasis should be placed on attaining low and relatively uniform tariff protection, but commencement of tariff reduction need not wait until the elimination of nontariff barriers is complete.
      Fund advice should be guided by considerations of efficiency in resource allocation. Thus, trade reform programs will typically need to be more ambitious than is required under the WTO. However, such reforms should not contravene countries’ obligations under the WTO.
      Fund staff should stress that trade reforms need to be accompanied by complementary policies, because of the strong mutual and supporting links between trade policy and macroeconomic and structural policies.
      September 18, 2000Streamlining Structural Conditionality—Interim Guidance Note (IMF, 2000c)Fund structural conditionality should cover only reforms that are relevant for a program’s macroeconomic objectives. The assessment of macro-relevance should be established on a case-by-case basis and made explicit in program documents.
      Structural reforms that are macro-relevant and critical for the achievement of the program’s macroeconomic objectives must be covered by Fund conditionality.
      Structural reforms that are macro-relevant but not macro-critical and within the Fund’s core areas of responsibility may be covered by Fund conditionality. However, the presumption would be that structural performance criteria would not be used in these cases, and that prior actions or structural benchmarks would be used sparingly and would require justification.
      September 20, 2001Concluding Remarks by the Acting Chair: Trade Issues—Role of the Fund (IMF, 2001b)Any conditionality pertaining to trade measures should be consistent with the guidelines and evolving practice for streamlining conditionality.

    • Was the trade conditionality appropriate in scope? In other words, were trade issues identified and analyzed in sufficient detail and included in program conditionality when they were critical to macroeconomic outcomes and vulnerabilities, and omitted when they were not? Such an assessment needs to be balanced against the internal guidelines prevailing at the time (Table 2).

    • Was the trade conditionality sufficiently well thought out? Did it adequately reflect country-specific analysis of institutional frameworks, supply capacity, and spillovers within the economy, and was it embedded in a framework for macroeconomic policy and strategies?

    • Was the Fund evenhanded and balanced in its application of trade conditionality? Were there systematic factors underlying the decision to include or exclude trade conditionality?

    • Was the trade conditionality effective? Were the Fund’s views clear, persuasive, and apparently consistent with overall macroeconomic advice and the country’s other commitments, such as ongoing/future negotiations with the World Trade Organization (WTO) and regional trade agreements? Did the conditionality help spur debate and develop political consensus for change? Was it implemented, and were the reforms sustained?

    B. Indonesia
    Trade policy regime and IMF advice before the 1997 program

    3. In the late 1990s, Indonesia’s trade regime was rated by the IMF as “moderately restrictive.” A series of reform packages beginning a decade earlier had sought to shift the economy away from an inward-looking import substitution strategy by reducing tariffs and other trade restrictions and liberalizing investment regulations in some sectors (Box 1). But the liberalization was not complete. In 1997, Indonesia scored 5 on the IMF’s 10-point aggregate Trade Restrictiveness Index (TRI), based on a “relatively open” tariff rating of 2 (out of 5) and a “moderate” nontariff barrier rating of 2 (out of 3). The unweighted average tariff rate was 13 percent. About one-fourth of imports were subject to non-tariff barriers including quantitative restrictions and exclusive import rights. There were export taxes and bans on a range of commodities, including palm oil and logs. Production and marketing monopolies and other privileges existed in some industries, notably cement, paper, fertilizer, plywood, steel, and refined oil products. The state agency, Badan Urusan Logistic Nasional (Bulog) controlled five important agricultural commodities—rice, wheat and wheat flour, sugar, soybeans, and garlic—through price controls, production controls, and import and distribution monopolies.

    Box 1.Indonesia: Trade Liberalization During 1985–96

    A series of reform packages beginning in 1985 aimed to shift the Indonesian economy away from a heavy dependence on oil exports and import substitution (Fane, 1996; Feridhanusetyawan and Pangestu, 2003). During 1985–90, tariffs were rationalized and reduced across the board to an unweighted average rate of around 20 percent and some nontariff barriers (such as import licensing and import monopolies) were removed. Other important reforms included transferring customs inspection duties to a private Swiss surveying company, improving the duty drawback scheme for exporters, and relaxing restrictions on foreign direct investment. Reform fatigue set in 1991—a few more nontariff barriers were abolished (e.g., import bans on certain steel products and export bans on copra and palm oil were abolished) but average tariff reduction was minimal. Trade liberalization was reinvigorated in 1994, the year Indonesia hosted the Asia-Pacific Economic Cooperation (APEC) summit and signed the Bogor Declaration to achieve free trade and investment within APEC by 2020. In May 1995, the unweighted average tariff was lowered to 15 percent and a comprehensive program of tariff reductions was announced to lower most tariffs to 0–5 percent by 2003, in line with Indonesia’s WTO commitments and the accelerated ASEAN Free Trade Area (AFTA)’s common effective preferential tariff scheme. This was followed by a trade liberalization package in January 1996, with further (relatively small) tariff reductions, reductions in import licensing, and measures to enhance export competitiveness (e.g., extending the duty drawback facility, easing import and export restrictions on foreign-owned exporting firms, and removing a number of export taxes) and another package in June 1996, which lowered the unweighted average tariff rate to 13 percent and included measures to simplify export procedures (e.g., eliminating export inspections and reducing documentation requirements).

    Several preferential policies also emerged during the 1990s. Among the most controversial were the establishment in 1990 of a Clove Marketing Board run by one of the President’s sons; a 20 percent tariff surcharge on propylene and ethylene imports in 1993 to protect a petrochemical complex owned by another of the President’s sons; and preferential tax and duty arrangements for the national car, the Timor, in 1996. But Fane (1996) notes that these interventions were “of less quantitative importance than the very large reductions in trade and investment barriers which [had] occurred since the mid-1980s.”

    4. Indonesia’s national car project came under dispute in the WTO in 1996. The project, launched by President Soeharto in February of that year, gave a three-year exemption from import duties and luxury taxes (averaging 20 percent) to Indonesian companies that manufactured cars locally using an Indonesian brand name and predominantly local parts. Only one company qualified for this privileged tax treatment—the automobile manufacturing company in the Timor Putra National (TPN) group, a holding company created and owned by the President’s youngest son. However, the national car, the Timor, was actually produced abroad by a Korean company, Kia Motors, in a joint venture with TPN, and imported duty-free into Indonesia. The special advantages given to TPN and the national car project were widely criticized, especially by competing automobile manufacturing companies. In October 1996, Japan, the European Union, and the United States filed suits with the WTO’s Dispute Settlement Body against Indonesia’s national car program, claiming that the tax and tariff exemptions were in violation of Indonesia’s obligations under various WTO agreements.1 A dispute settlement panel was established in June 1997.

    5. Indonesia’s financial system had undergone significant liberalization by the mid-1990s, although restrictions remained on foreign entry. Major reforms over the previous decade and a half had included deregulation of interest rates, reduction in the coverage of directed credit schemes, granting of licenses for new private banks and a decline in the role of the state banks. The 10 foreign banks operating in Indonesia in 1997 obtained their licenses in the late 1960s. Since then, the entry of foreign banks was limited through the requirement either to form joint ventures (with a maximum of 85 percent foreign ownership) or to buy shares of domestic banks on the stock exchange, where the maximum foreign holding was set at 49 percent (Gulde, 1997).

    Box 2.Indonesia: Trade and Industrial Liberalization Issues Listed in the 1997 Article IV Staff Report

    1. External trade restrictions

    • Domestic protection is still high and variable, with an effective rate of protection for the import-competing sector of 28 percent.

    • Nontariff barriers affect 23 percent of imports, including quantitative restrictions on certain goods and exclusive import rights.

    • Export bans and export taxes affect key products (especially palm oil, rattan, and other agricultural and forestry products) and levies are extensive.

    Staff recommendations:

    • Lower all tariffs that are above 25 percent.

    • Complete WTO and AFTA commitments, including lowering most tariffs to 0 percent or 5 percent and others to 10 percent by 2003.

    • Eliminate nontariff barriers especially restrictions on wheat, rice, sugar, and oilseeds.

    • Abolish export taxes, licensing requirements, and levies, and simplify administrative procedures.

    2. Marketing regulations

    • Exclusive licensing rules grant monopoly distribution rights for rice, cloves, soybeans, and flour.

    • Forestry concessions are restricted to existing processors. Cartels dominate cement, plywood, and paper sectors.

    • Price controls exist for rice, sugar, cement, petroleum products, bus and rail transportation, gas, and electricity.

    Staff recommendations:

    • Open industries to competition.

    • Establish and enforce competition law which prohibits anticompetitive practices, including cartels.

    • Eliminate remaining price controls.

    3. Foreign investment restrictions

    • Six sectors are closed to foreign direct investment including taxi and bus transportation and local shipping, and another 17 sectors are restricted (including milk, saw milling, plywood, and aircraft).

    Staff recommendations:

    • Liberalize restrictions on foreign direct investment.

    6. The IMF’s trade policy advice to Indonesia during 1996–97 emphasized further reduction of all forms of trade protection. During the 1996 and 1997 Article IV consultations, IMF staff urged the Indonesian authorities to eliminate nontariff barriers, lower tariffs, remove export controls, dismantle private and public import and export monopolies in key commodities, and abolish ad hoc tax exemptions and privileges (Box 2) (IMF, 1997c). The IMF argued that eliminating the remaining structural rigidities in the economy was essential for improving productivity, efficiency, and economic governance (IMF, 1997d); it stressed that the existence of monopolies and cartels and the granting of special privileges to individual firms undermined investor confidence. The 1997 Article IV mission also proposed an easing of the regulations that limited the entry of new foreign banks.

    7. The IMF mission drew on econometric work by staff suggesting that further trade liberalization would improve Indonesia’s medium-term prospects for export growth. A selected issues paper (SIP) for the 1997 Article IV consultation (McDermott, 1997) estimated that trade liberalization measures (specifically, the reduction of import tariffs and export taxes) during 1980–94 accounted for 40 percent of the expansion of Indonesia’s manufactured exports over that period.2 Counterfactual simulations indicated that more trade liberalization would have resulted in even better performance, and that future liberalization would lead to further improvements in export performance. But there was no analysis by staff, or reference to analysis by others, of the costs of specific policies highlighted in the 1997 staff report, such as the import and distribution monopoly in agricultural products and the export restrictions in forestry products. And while a separate SIP (Gulde, 1997) identified concentrated bank ownership as one of the main problems of the Indonesian banking sector, that paper did not include measures to liberalize financial services trade (such as easing the entry of foreign banks) in its proposed agenda for strengthening Indonesia’s banking sector.

    8. The authorities agreed in principle with the desirability of further trade liberalization but were noncommittal about removing special concessions.3 Indonesia already had commitments to the WTO and the ASEAN Free Trade Area (AFTA) for further trade liberalization. Under those agreements, most tariffs would be reduced to within the range of 0–10 percent, with an estimated average unweighted tariff rate of 7 percent, by 2003. With regard to the elimination of marketing monopolies and special privileges, the authorities indicated only that those issues “would be addressed in a phased manner”4 (IMF, 1997c). The authorities did not think it necessary to relax entry requirements for foreign banks, pointing to the large growth in the number of foreign institutions operating in cooperation with local enterprises as evidence that the existing regulations were not a major constraint.

    The 1997 SBA-supported program

    9. Not long after the conclusion of the 1997 Article IV consultation, Indonesia was severely affected by market contagion in the region. The rupiah, which had been allowed to float in August 1997, came under intense pressure in the wake of the Thai baht crisis, forcing the authorities to raise short-term interest rates to very high levels. The rupiah depreciation and high interest rates created difficulties for the banking and corporate sectors, precipitating a financial crisis. The loss of market confidence surprised the IMF, which had considered Indonesia’s macroeconomic policies to be sound.5 In October 1997, after several weeks of intensive consultations with Fund staff and management, the Indonesian authorities sought, and received, financial support for a three-year program under the SBA. The SBA-supported program was jointly funded by the World Bank and the Asian Development Bank.

    10. With no ready explanation for the cause of the crisis, IMF staff homed in on the economy’s underlying structural problems. The theory was that these problems, such as banking sector weaknesses, trade distortions, and poor governance, were masked by Indonesia’s strong fundamentals before the crisis but came to the fore once the crisis hit. According to the staff, the weak banking system exposed the country to a shift in financial market sentiment; the lack of transparency in decisions affecting the business environment increased uncertainty and adversely affected investor confidence; and long-standing rigidities in the form of domestic trade regulations and import monopolies impeded economic efficiency and competitiveness. Although a few Executive Directors were unconvinced by this theory, the IMF Board endorsed the wide-ranging adjustment program, whose key planks included restructuring the financial sector and eliminating impediments to foreign and domestic trade.6

    11. From the start, IMF management instructed staff to take a demanding stance on structural measures, including various trade-related policies. Targeted for elimination were import restrictions, various monopolies, and some large national projects linked to the President’s family and friends. IMF staff and management were advised by the “Berkeley mafia,” a group of U.S.-educated Indonesian economists, that cronyism and corruption (“the family”) were at the root of Indonesia’s problems and were scaring off much-needed foreign investment. The IMF staff worked closely with the Indonesian economic team, a group of reform-minded ministers who were themselves anxious to deal with some of those problems and wanted the Fund’s help to counter opposition from other ministers who favored active industrial policies. The IMF staff were also told to draw on the World Bank, which had a field office and a large presence in Jakarta.

    12. Obtaining agreement on a critical mass of structural reforms proved to be the most difficult part of the program negotiations. Once in the field, the IMF mission found it could get little traction in this area with the President. The national car program, Bulog’s trading monopoly on food products, the plywood cartel, and strategic industries were particularly contentious issues. The mission was under pressure from IMF headquarters to do more; even though the national car case was concurrently being deliberated