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Peter J. Quirk https://isni.org/isni/0000000404811396 International Monetary Fund

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Abstract

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.

Appendix I Recent Technical Assistance in Exchange Systems

Technical Assistance

The growing liberalization of exchange restrictions has generally been part of a broader program of stabilization and financial market reforms to foster market-based instruments of exchange and monetary policies. The efficient implementation of such structural reforms, and the associated technical assistance, requires a continuing comprehensive approach that links reforms of exchange markets with the development of monetary operations, banking supervision, payments systems, and other central banking and financial market functions.

Through its technical assistance, the IMF has helped member countries reform their exchange systems. Assistance is normally provided in the context of broader programs of macroeconomic adjustment and structural reforms, which may also include extensive financial sector reforms. IMF supported adjustment programs frequently incorporate actions recommended in the foreign exchange area as performance criteria, which has resulted in synergism between technical assistance and program discussions. Assistance in foreign exchange systems is also provided in the context of comprehensive programs of reforms of central banking designed to bring about effective and efficient implementation of monetary and exchange policies.

The main objective of technical assistance on exchange systems is to improve the public’s access to foreign exchange and the efficiency of foreign exchange allocation through reforms of exchange market arrangements and exchange controls. Assistance has focused on the establishment of institutional arrangements for foreign exchange markets, the elimination of exchange restrictions on payments and transfers for current international transactions, the unification of multiple exchange rates, the liberalization of capital movements, and the establishment of multilateral cross-border payment arrangements.

The precise strategy recommended to reform exchange systems depends on country-specific circumstances. Therefore, the first priority in assisting members has been to arrive at a full understanding of the operation of the existing exchange system, the institutional capacity of the financial system, the structure of foreign exchange flows, the authorities’ objectives for the exchange regime, as well as other socioeconomic and political constraints, and the exchange regime preferences of the national authorities.

Depending on the institutional capacity of the financial system and the structure of foreign exchange receipts and payments flows, the technical assistance mission may propose different institutional arrangements for the foreign exchange market. The final objective is normally an interbank market arrangement, which is likely to be the most efficient system. However, depending on the capacity of domestic financial institutions, including the central bank, the potential volume of transactions, and the degree of concentration of export receipts or import payments, transitional arrangements have occasionally been proposed and a sequence of reforms outlined. When a foreign exchange market initially lacks volume, pricing efficiency has sometimes been improved by the central bank’s or bankers association’s offer of facilities for buying and selling orders in an organized foreign currency exchange, alongside freedom for interbank transactions. As the market becomes more developed and the volume of transactions increases, floor-based exchange trading is likely to be increasingly supplanted by competitive off-floor trading through the interbank market. Hence, the institutional arrangements have allowed for a natural evolution toward decentralized interbank arrangements, for example, by allowing authorized dealers, both banks and non-banks, to establish freely their buying and selling rates with customers outside the foreign currency exchange. One important feature of technical assistance that has helped prevent or counter collusion in a number of countries is the introduction of nonbank trading.

The transparency of any exchange arrangement is critically important in order to establish confidence in the arrangement. In many cases, technical assistance has been provided to amend exchange control regulations and procedures. The regulations and procedures may need to be simplified and made more transparent as part of the process of improving access to foreign exchange, and of minimizing interference with the allocation mechanism. In the transition to a free system, it has often been recommended that the responsibility for operating exchange control regulations be delegated to commercial banks.

Technical assistance is often provided on operational and supervisory issues, including on the central bank’s intervention procedures and policies consistent with operating an interbank foreign exchange market. The assistance has included prudential supervisory and reporting requirements for the authorized dealers, codes of conduct for the interbank market, and back-office functions at the central bank.

Experience suggests that the reforms to the exchange system can proceed rapidly when the reforms are taken as part of a broader macroeconomic effort to stabilize the economy and are accompanied by necessary structural and institutional reforms. The effectiveness of existing exchange controls in protecting the balance of payments tends to be much overestimated, and technical assistance missions have often demonstrated this with estimates of capital flight and parallel market activities. Because of the existence of parallel exchange markets, the de facto degree of liberalization is usually greater than reflected in the official system. Exchange system liberalization has thus improved confidence, reducing capital flight and strengthening the balance of payments in addition to eliminating distortions.

Appendix Table 1 (see following page) lists IMF member countries that were the main recipients of MAE technical assistance on exchange systems during 1991–93 and summarizes the main focus of this assistance. Substantial assistance has been provided in building the necessary regulatory, institutional, and operational framework in a number of former centrally planned economies, including the countries of the former Soviet Union. In other countries, the technical assistance has focused on developing foreign exchange markets, reforming exchange controls, and building institutions.

Table A1.

Main Instances of Technical Assistance on Exchange Systems, 1991–93

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Source: IMF, Monetary and Exchange Affairs Department.

Technical assistance was provided in drafting new foreign exchange regulations for Belarus, Georgia, Kazakhstan, Lithuania, Mongolia, Turkmenistan, and Uzbekistan. The aim of the legal framework was to establish a unified foreign exchange market and current account convertibility and, in the case of Lithuania, capital account convertibility as well.

To facilitate a market-based foreign exchange allocation, comprehensive reform of the foreign exchange system was the primary purpose of MAE assistance in Algeria, Burundi, Ethiopia, Madagascar, Malawi, Mauritania, Mongolia, Mozambique, Sudan, Tanzania, Tunisia, Uganda, and Zimbabwe. In most cases, advice was given on the development of interbank and dealer markets. In Ethiopia, Malawi, Mozambique, and Tanzania, the IMF mission advised the authorities to adopt an auction or a centralized fixing arrangement as a transitional part of an emerging interbank foreign exchange market. In certain cases, the technical assistance focused on convertibility for current payments and transfers (Bangladesh and Tunisia), convertibility for capital transfers (Fiji, Jamaica, and Trinidad and Tobago), improving the operation of the existing foreign exchange market (Albania. Bulgaria. China, Croatia, Islamic Republic of Iran, and Romania), and reviewing forward exchange operations (Bangladesh).

Assistance on regional payments arrangements has included advice on the design and organization of the arrangements, consistent with a multilateral system of international payments. Assistance has been provided to the countries of the former Soviet Union on establishing the Interstate Bank (ISB), which could play a transitional role while the multilateral system of payments is being developed. The assistance on the ISB emphasized developing a framework that would avoid new exchange restrictions or distortions to members’ exchange systems, including avoiding undue delays in settlements, ensuring convertibility of receipts through the ISB, strictly limiting the credit provided through the ISB, and managing ISB positions consistent with a country’s exchange arrangements and foreign exchange market development. In the context of the regional integration initiatives for southern and eastern African countries, the approach to regional integration in exchange and payments systems involves developing a liberal multilateral exchange and payments system.

Appendix II Measures Affecting Exchange and Payments Systems, 1991–92

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Source: AREAER, 1992 and 1993 editions. Note: Includes measures affecting import controls administered through both the exchange and customs systems.