This paper discusses the operations of a wide range of central banking institutions in developing countries. The considerable diversity of economic, financial, and political conditions within the Third World has brought forth a wide variety of central banking institutions. Four polar types have been identified as providing coherent alternatives to the central bank. Historical experience certainly indicates that legislation on its own may not be enough to guarantee prudent behavior. Although many countries' central banking institutions have not yet come close to violating foreign exchange cover requirements or restrictions on government lending, in other cases the rules have simply been sidestepped by technical adjustments, altered expediently, or merely ignored. The organizational structure established by legislation probably plays a more positive part in determining a central banking institution's characteristic behavior. Operating procedures, channels of communication, and lines of command all exert some influence on where and how decisions are made in practice. The balance of power between government and monetary authority does not only depend on personality and outside support but will also be influenced by the institutional framework in which their interaction is established.
Ms. Catherine A Pattillo, Mr. Andrew Berg, Mr. Gian M Milesi-Ferretti, and Mr. Eduardo Borensztein
Recent years have witnessed an increase in the frequency of currency and balance of payments crises in developing countries. More important, the crises have become more virulent, have caused widespread disruption to other developing countries, and have even had repercussions on advanced economies. To predict crises, their causes must be clearly understood. Two competing strands of theories are reviewed in this paper. The first focuses on the consequences of such policies as excessive credit growth in provoking depletion of foreign exchange reserves and making a devaluation enevitable. The second emphasizes the trade-offs between internal and external balance that the policymaker faces in defending a peg.
This appendix outlines a procedure for calculating the cash value of “menu items” in debt-restructuring proposals, including par and non-par exchanges, with enhancements consisting of either interest or principal guarantees. Under certain plausible assumptions, interest and principal guarantees are directly equivalent to cash buy-backs. Using these assumptions, formulas to calculate the exchange ratios, resource requirements, interest rates, and net debt reduction for particular menu items are derived. It is shown that exchange discounts consistent with fair arbitrage conditions are generally not equal to cash market discounts.
There is now a free forward exchange market.26 Authorized foreign exchange dealers (banks and nonbank financial institutions) are permitted to negotiate forward exchange contracts in any currency. They may deal among themselves and with their customers, including both residents and nonresidents, at mutually negotiated rates. The Reserve Bank sets a limit for each dealer’s overall overnight foreign exchange exposure. However, in aggregate, dealers rarely use more than 25 percent of their approved limit.
This appendix sets out the nonstrategic financial analysis of debt exchanges. The analysis is nonstrategic in the sense that both creditors and debtors take decisions based on estimated probability distributions that are assumed to govern the debt-service behavior of debtors. Debt exchanges typically involve an exchange of deeply discounted old debt for new debt with various credit-enhancing features in the form of collaterals or guarantees. Credit enhancement implies that the discount on new debt will be less than that on old debt. Hence, new debt with a face value of $1 can be exchanged for old debt with a face value of more than $ 1, thus resulting in a reduction in the face value of the total debt outstanding. Alternatively, interest rate reduction can be achieved through a downward adjustment of the contractual interest rate on the new debt so as to reflect the value of the credit enhancement.
To focus on the implications of debt forgiveness, a simple probability distribution for aggregate payments is assumed. In particular, it is assumed that the present values of payoffs between zero and $100 billion inclusive are believed to be uniformly likely to occur. Thus, the mean expected payoff is $50 billion, and each dollar’s worth of contractual value sells for $0.50.21
This simulation model captures the essential features of a financially constrained developing country that has underutilized resources. The model relates macroeconomic behavior to debt reduction. Equations (35)-(47) incorporate the basic features of the macro model, while equations (50)—(59) relate debt reduction to the market price of debt. Equations (48)—(49) link the two parts together through the interrelationship between debt price, risk premiums, and debt-service payments.
With increasing frequency, the IMF has assisted middle-income countries, especially emerging economies, in adopting the types of budget reforms that have been introduced in many Organization for Economic Cooperation and Development (OECD) countries - reforms that emphasize performance and results achieved from the use of public resources. This paper examines the experience of OECD countries in introducing such reforms and assesses whether the same reform strategy be applied to non-OECD countries. It examines how emerging economies should begin such reforms, and how they should be sequenced thereafter. Based on a thorough review of the technical assistance provided by the IMF's Fiscal Affairs Department (FAD) to middle-income countries, this paper will be useful to policymakers and administrators in emerging economies who are contemplating such reforms.