Continued integration of global financial markets and parallel developments in domestic financial systems were reflected in further liberalization of IMF members’ exchange systems in the early 1990s. The trend toward open financial systems has been particularly pronounced in industrial countries, where foreign exchange market liberalization was virtually completed by 1990. Only a few of the smaller industrial countries continue to maintain any form of control on foreign exchange transactions, other than for prudential purposes. The freeing of exchange controls by individual countries was not accompanied in general by a weakening of their overall balance of payments, although it had been widely believed that this would inevitably result from liberalization in countries with weak external positions.
Currency convertibility has always been an important consideration in economic policymaking, along with monetary and fiscal policies and the exchange rate regime. In the IMF’s Articles of Agreement, particular focus is given to convertibility for trade in goods and services.
The importance of international capital movements has long been recognized. First, international capital movements provide vital support to the multilateral trading system. This support comes not only in the form of short-term trade finance, but also in the transfer of financial resources from countries with current account surpluses to ones with current account deficits. Second, capital movements play a critical role in economic development. The impact in augmenting domestic savings is most obvious when the capital is transferred in the form of foreign direct investment, although by seeking the highest rates of risk-adjusted return, portfolio investment also has potentially significant benefits for economic growth. The impact of capital movements on monetary and exchange policies is also well recognized.
International Monetary Fund. External Relations Dept.
IMF Managing Director Horst Köhler has recommended for Executive Board approval a transitional program for Argentina. The IMF said that while providing no net new financing, the arrangement would provide financial support and an extension of payment expectations to the IMF through August 2003. The Executive Board is expected to review the transitional program in the coming days.
The global trend toward lilberalization in countries international payments and transfer systems has been widespread in both industrial and developing countries and most dramatic in Central and Eastern Europe. Countries in general have brought their exchange systems more in line with market principles and moved toward more flexible exchange rate arrangements. This study updates previous studies published under the title Developments in International Exchange and Payments Systems.
In the discussions preceding the formation of the IMF, issues of convertibility and choice of exchange rate regime were closely interwoven (see Section III). A basic objective was to set up a system in which current account convertibility would be consistent with the aims of the fixed exchange rate regimes—convertibility at fixed though adjustable rates—and thus to create a favorable environment for international trade.
Bilateral or regional payments arrangements maintained between IMF members often give rise to exchange restrictions and multiple currency practices under Article VIII of the IMF’s Articles of Agreement. A basic feature of bilateral payments arrangements is that balances in the bilateral account, which is typically established to settle bilateral trade transactions, can be used only to make settlements between the two partner countries and cannot be transferred into another currency or be used to make payments to a third country. When the transferability of balances in the bilateral account is subject to undue delays, an exchange restriction within the meaning of Article VIII, Section 2(a) may be involved.53 Bilateral payments agreements may also involve discriminatory currency features.
The IMF has played an important advisory and technical role in the selection of appropriate exchange rate regimes, including helping to develop foreign exchange markets. In the 1980s, this role centered on assistance to develop the role of floating exchange rates, responding to widespread shortages of reserves and large disequilibria associated with the debt crisis. IMF missions, including a number from the former Exchange and Trade Relations Department that were fielded for this purpose,69 advised on operational aspects of setting up interbank and auction foreign exchange markets and associated macroeconomic policy steps, including unification of multiple exchange rates, liberalization of exchange and trade restrictions, foreign exchange intervention policies, and implications for the conduct of monetary policy. At a later stage of development of spot exchange markets, advice was also given on measures to develop forward foreign exchange markets.