Currency convertibility—defined in the broadest sense as the right to convert freely and without limit a currency into any other at the prevailing exchange rate—is the linchpin of today’s globalized world economy. To assess the importance of convertibility, it is only necessary to point out that a system of well-managed convertible national currencies imparts to the international arena advantages analogous to those resulting from the introduction of money in a national economy, most notably, the elimination of barter (and the need for coincidence of needs) as a basis for international trade and the provision of an instrument for the development of financial markets.
It is an honor and a genuine pleasure for me to deliver the opening remarks today for this seminar on currency convertibility. I wish, first of all, to welcome you to Marrakesh, a city with a rich cultural heritage and a wealth of tourist attractions. I also wish to thank the authorities of the Arab Monetary Fund and the International Monetary Fund for choosing to hold this seminar in the Kingdom of Morocco. In addition, I would like to express our appreciation to Mr. Osama Faquih, Director General and Chairman of the Board of the Arab Monetary Fund, who has honored us by attending and participating personally in this important event, and to congratulate him on his election as President of the Islamic Development Bank. Furthermore, I wish to extend greetings to the senior officials from the participating countries. Their presence demonstrates the interest and importance that the Arab countries’ monetary authorities accord to the topics to be discussed during this seminar.
Currency convertibility has always been a fundamental notion in international economic relations. Yet, since the abandonment of the Bretton Woods par value regime, a remarkable degree of silence has until recently surrounded the subject. Possibly this silence is related to the advent and prevalence of flexible exchange rate arrangements that followed the Bretton Woods order. The reason could be that, in theory, flexible exchange rates would make exchange and other restrictions unnecessary or redundant; and, therefore, under such exchange rate arrangements currencies would be convertible by definition, so to speak. But as is often the case, what can be expected in principle does not always materialize in practice; exchange, payments, and other international restrictions have continued to prevail in the period of flexible exchange rates and, therefore, questions of currency convertibility have remained open.
In a world where goods, services, and financial markets have become increasingly integrated, it is argued that current account convertibility has become an anachronism.1 Yet, current account convertibility remains at the center of the mandate of the International Monetary Fund and constitutes for many countries an important policy objective, which is often seen as an intermediate step toward the attainment of full convertibility. A key unresolved issue is whether countries with inconvertible currencies should move directly to full convertibility or go through a transitional period of current account convertibility. While the focus of this paper will be primarily on current account convertibility, it will attempt to shed some light on the considerations involved in the move to full convertibility.