Chapter

6. Article XI, Section 2: Restrictions Against Non-Members

Author(s):
International Monetary Fund
Published Date:
January 1966
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The discussion so far has dealt with the obligations of the Articles and the extent to which they have been brought to bear on non-members. In this and some of the succeeding sections of this paper the subject will be the extent to which the benefits of the Articles have been accorded to or withheld from non-members.

Article XI, Section 2, is an explicit application of the principle that the benefits of a treaty are not extended to non-parties:

  • Restrictions on transactions with non-member countries.—Nothing in this Agreement shall affect the right of any member to impose restrictions on exchange transactions with non-members or with persons in their territories unless the Fund finds that such restrictions prejudice the interests of members and are contrary to the purposes of the Fund.

The intention of this provision is to make it clear that non-members are not entitled to insist that the regime of a multilateral and non-discriminatory system of payments and transfers for current international transactions shall extend to them or to their residents.34 The words “exchange transactions” are a little puzzling because elsewhere in the Articles (e.g., Article IV, Sections 3 and 4) they mean the exchange of one currency for another. In Article XI, Section 2, they must be given a wider meaning and must include payments and transfers as well. This follows from Article I (iv), which declares that one of the purposes of the Fund is to “assist in the establishment of a multilateral system of payments in respect of current transactions between members.…”

Article XI, Section 2, contains a caveat which limits the freedom of members which is recognized by the provision. It is true that freedom to take action against non-members is limited only if the restrictions against non-members or their residents are harmful to members and contrary to the purposes of the Fund. Nevertheless, if the Fund finds that these effects have been produced, non-members will get the benefits of the regime of multilateral payments that the Articles establish for the welfare of members.

By Rules and Regulations adopted on September 25, 1946 the Fund established certain procedures for giving effect to Article XI, Section 2. Under Rule M-3 a member is required to inform the Fund “promptly and in detail of any restrictions which it imposes on exchange transactions with non-members or with persons in their territories.” This Rule is drafted on the assumption that a member can impose restrictions on exchange transactions with non-members without the necessity for that prior approval which is required where the restrictions are on payments and transfers for current international transactions with members or their residents. Under Rule M-4, a complaint procedure is established:

  • Any member may notify the Fund of restrictions imposed by a member on exchange transactions with non-members or with persons in their territories which are deemed to prejudice the interests of members and to be contrary to the purposes of the Fund.

Rule M-5 provides that if the Fund makes a “finding” of the kind referred to, it shall present to the member imposing restrictions against non-members a report setting forth the Fund’s views and may request the abolition or modification of the restrictions.35

A case that occurred in 1951 shows that the complaint procedure of Rule M-5 is not the only available procedure. In the case referred to, a member informed the Fund that it had entered into a payments agreement with a non-member. As is usual with such agreements, restrictions were imposed on payments and transfers between residents of the two parties. For this reason, the member regarded the case as covered by Article XI, Section 2. The member explained why in its special circumstances it felt the agreement to be necessary and expressed the view that the Fund would find that it did not prejudice the interests of other members or conflict with the purposes of the Fund. The Fund noted the agreement and decided to take no further action. The case is authority for the conclusion that a member imposing restrictions against a non-member may take the initiative in seeking the guidance of the Fund and need not await a possible complaint and its outcome.

The 1951 case is interesting for another reason. In the course of the Fund’s consideration of it, the question was raised whether it would have been more appropriate to examine the case under Section 1 of Article XI instead of Section 2. The problems of classification may be even more complex. For example, if a payments agreement between a non-member and a member discriminates by means of some exchange technique against other members, should the agreement then be regarded as a “discriminatory currency arrangement” under Article VIII, Section 3; or as a practice falling under Article XI, Section 1; or if there are restrictions against the non-member, as an exercise of the member’s authority under Article XI, Section 2? Or does the case fall under various provisions? There are differences among them. For example, under Article VIII, Section 3, the member must seek approval before entering into a discriminatory arrangement. Under Article XI, Section 2, there is no such requirement, although it will be seen that the Fund can establish it.36 Under Article XI, Section 1, there is no express provision for approval. For the reasons already mentioned,37 it has not yet been necessary to clarify these jurisdictional questions.

There is yet another jurisdictional aspect of the payments agreement between a member and a non-member. The member may feel that, in order to make it effective, certain restrictions on payments and transfers to other members are necessary. For example, if the non-member’s currency is inconvertible and a clearing procedure is established between the parties with payments in the currencies of the parties, the member may feel that it cannot afford to permit its residents to pay convertible currencies to other members for goods originating in the non-member country. If the member wishes to impose restrictions of this kind, it must seek the prior approval of the Fund under Article VIII, Section 2, whatever may be the application of the various provisions of the Articles to the payments agreement itself.

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