Developments in Controls on Import Payments

Comprehensive foreign exchange budgets, including budgets for imports, have traditionally represented the strictest form of exchange restriction.³ As a result of the divergent trends described above, such budgets were in operation in only eight developing countries at the end of 1993.⁴ In contrast, nearly all IMF members, both industrial and developing, maintained some form of import-licensing requirement other than exchange controls, indicating that virtually all quantitative restrictions on imports now fall under the heading of trade rather than exchange policy. Import controls are maintained for a variety of reasons and lake the form of either a “negative” list (that is, all imports are permitted unless specifically prohibited or are subject to prior approval) or a “positive” list (that is, all imports are prohibited unless specifically approved). Nearly three-fourths of the members administer a negative list regime⁵ or an open general license (OGL) regime, under which import licenses are issued automatically for a range of products; few of these, however, involve exchange restrictions.

There was a clearly discernible trend toward continued liberalization of quantitative import controls during 1991–93. Of 73 countries, including both industrial and developing countries that modified their import-control regimes, the vast majority (46) liberalized or eliminated specific quantitative controls on imports, whereas only 10 tightened them. Seventeen countries introduced measures both liberalizing and tightening the quantitative controls on imports during this period.

Quantitative import controls administered through the foreign exchange system are supplemented by other exchange-based measures in some developing countries. Such measures include multiple exchange rates for imports and other exchange-based import taxes and subsidies, advance import deposit requirements, and various administrative measures and ad hoc restrictions on provision of foreign exchange for imports reflected in external payments arrears.

Multiple exchange rate systems are used in relatively few countries specifically to tax or subsidize imports—in about one-third of the 32 countries maintaining multiple exchange rates at the end of September 1994.⁶ In all but two cases, Tanzania and Uganda, the relatively appreciated official exchange rate was applied to a particular category of imports, usually so-called essential or priority imports. The multiple rates were therefore used largely to subsidize certain imports, not as quantitative import controls. Most of these systems have represented a transitional stage in exchange rate adjustment, and a number of multiple exchange rate practices have been eliminated recently, including those maintained by Angola, Cambodia. Nepal, and, very recently. Suriname and Zimbabwe.

The use of advance import deposit requirements has declined further in recent years (Chart 1). No industrial countries require such deposits, and the number of developing countries imposing the requirements declined from 21 at the end of 1990 to 9 by the end of 1993. Administrative measures intended to control import transactions were in force in 68 members as of the end of 1993. The measures include a prior authorization requirement for certain types of imports; pre-shipment inspection of imports with respect to invoice price, quality, and quantity of imports: and controls on the methods of import settlement—that is, regulations on the use of letters of credit, minimum financing requirements, use of suppliers’ credits, and domestic bank domiciliation requirements. Although not necessarily involving exchange restrictions, the measures often have a restrictive or taxing effect on imports, owing to cumbersome administration compared with that of relatively simple customs and payments procedures used elsewhere.

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Restrictive Measures on Current Account¹

(Number of measures)

Source: IMF, AREAER (various issues).¹These trends do not purport to indicate the economic significance of the measures taken over the period; however, they can provide an overall sense of whether member countries are taking more or less restrictive measures.²Figures in national currencies are converted to SDRs using annual average rate; in some instances, figures are calculated from flow data.

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Controls Affecting Transactions in Invisibles

Restrictions on invisible payments and transfers are diverse, covering limits on foreign exchange that can be purchased for cross-border transport and freight charges; tourism and business travel; medical expenses; educational expenses; subscriptions to magazines and periodicals; advertising expenses: royalties; insurance premiums; services provided by banks and other financial institutions; family maintenance: repatriation of earnings from investments, including profits and dividends from foreign direct investments; and interest payments on external debt.⁷

Invisible payments and transfers that are associated with trade-related transactions (such as insurance and freight) are relatively easy to monitor, and they are usually treated in the same way as their physical counterparts for purposes of exchange control. Others, relating to nontrade transactions, are more difficult to control because documentation for foreign exchange applications can more easily be falsified and provide channels for capital flight. Because of their dependence on foreign exchange mechanisms and documentation, controls on invisible cross-border transactions most often involve exchange restrictions subject to the IMF’s Article VIII. Liberalization of exchange controls on invisibles has been less extensive, reflecting continuing concerns with their impact on the balance of payments and with capital flight. At the end of 1993, 79 IMF members maintained restrictions on current invisible payments and transfers. In most cases, quantitative limits were established for the main forms of transaction, such as travel, but in a few countries foreign exchange was provided on a case-by-case discretionary basis. For example, the limits established on medical expenses were usually not quantitative, as only 11 member countries imposed quantitative limits, and provision of foreign exchange was considered on a case-by-case basis in 62 countries.

Transfers of profits and dividends earned on foreign direct investments are subject to control in only 18 members. The limitations take the form of either a maximum annual percentage of the original investment or limitations arising from the phasing of transfers. These controls are intended mainly to ensure that illegal capital transfers are not involved and that required tax payments are made. However, they can involve undue delays and thus have an unintended chilling effect on inward direct investment and an adverse impact on the balance of payments and imports of needed technology.

As Chart 1 shows, measures liberalizing current invisible payments and transfers have continued to outnumber measures tightening them by a wide margin since 1989. During 1991–93, 42 countries modified foreign exchange regulations to liberalize these controls, in most cases to raise the limits on the allowances, but in 8 countries to eliminate quantitative limits on some or all invisible payments and transfers. It is noteworthy that there was only one instance in which controls on invisible payments and transfers were tightened during 1991–93. During 1991–93, 27 countries liberalized outward payments and transfers for services rendered by nonresidents, including the remittances of profits and dividends. Three countries either unambiguously tightened the controls or took a mix of both tightening and liberalizing measures. Controls affecting imports and exports of bank notes, and the holding of foreign bank notes domestically, were liberalized in 27 countries and tightened in 18.⁸ Measures both tightening and liberalizing controls at the same lime were introduced in four countries.

External Payments Arrears

External payments arrears grew rapidly in the early 1980s with the onset of the debt crisis. Payments arrears are a particularly severe form of exchange restriction because of their disorderly and often discriminatory nature, which impairs the effectiveness of the international system of contracts and payments. Payments arrears are considered evidence of an exchange restriction subject to the IMF’s jurisdiction when they result from limits imposed by government, or from government interference with the availability of foreign exchange to make payments for current international transactions when they fall due or with the timely transfers of the proceeds of such transactions.

The IMF has paid close attention to the policies of members that have been responsible for the emergence of payments arrears. The organization has consistently followed the practice of not approving, under its Article VIII, exchange restrictions evidenced by arrears, unless the members put in place a satisfactory program to reduce or eliminate them through cash payments, rescheduling, or a combination of the two.

Overall external payments arrears of IMF members are estimated to have increased substantially during 1988–91, before leveling off in 1992 and declining sharply in 1993.⁹ They are estimated to have totaled SDR 82 billion at the end of 1991, more than twice the amount recorded in 1987. However, the total amount of external payments arrears at the end of 1993 is estimated at SDR 61 billion, representing a substantial decline with respect to preceding years, which may indicate a reversal of the trend.

The number of IMF members with external payments arrears continued to increase during the period 1991–92, totaling 66 in 1992. By comparison, when arrears peaked previously in 1986, the number of countries with arrears was 57. Eleven countries recorded large increases in their arrears from the mid-1980s through 1992 and are largely responsible for this rising trend in arrears. These countries are Angola, Bulgaria. Ecuador, Nicaragua, Panama, Peru (cleared in March 1993), Poland, the Russian Federation, Sudan. Viet Nam, and Zaïre, with the largest increase in Sudan. Brazil had the highest level at the end of 1991, although it has since fully eliminated the arrears. Up to 1992, significant reductions in Argentina, Brazil. Ecuador. Egypt, Nigeria. Peru, South Africa, and Venezuela tended to be offset by the accession to IMF membership of large countries with serious balance of payments problems.

The number of countries with arrears dropped sharply, to 52 members, in 1993. The outstanding stock of arrears declined largely on account of the elimination of arrears in twenty countries, including Argentina, Brazil, Ecuador. Nigeria, Peru, and South Africa, which had had large arrears.

Progress in Acceptance of Article VIII Obligations

Members may accept the obligations of Article VIII, Sections 2, 3, and 4 at any lime. However, when a member contemplates accepting these obligations, the practice is for the IMF staff to examine all aspects of the member’s exchange system to ascertain whether the restrictive exchange measures maintained under Article XIV have been eliminated, whether the member maintains any exchange measures that would become subject to the jurisdiction of the IMF under Article VIII, and the member’s balance of payments outlook.¹⁰ Normally, before accepting Article VIII obligations, a member would be encouraged to eliminate all restrictive exchange measures that would require IMF approval. If any such measures are not to be eliminated, the IMF’s policy has been that maintenance of the measures would be approved for a short period, provided that the authorities in the country concerned have established a firm and realistic time limit for their elimination.

The IMF staff also analyzes the member’s prospective balance of payments position in order to be satisfied that the member is not likely to need recourse to restrictive exchange measures in the foreseeable future following the acceptance of the obligations of Article VIII. When all issues relevant to the country’s exchange system have been examined, the member is formally notified, and it may then advise the IMF of its acceptance of the obligations of Article VIII. The Executive Board adopts a decision noting the action taken by the member. By accepting the obligations of Article VIII, members give confidence to the international financial community that they will pursue sound economic policies to obviate the need for restrictions on current international transactions and will thereby contribute to the objective of a multilateral payments system.

Although IMF members are expected to avail themselves of transitional arrangements under Article XIV, Section 2 only on a temporary basis and to accept the obligations of Article VIII status as soon as conditions permit, members have been reluctant historically to abandon transitional status under Article XIV and to accept the obligations of Article VIII. They have done so at the rate of less than two members a year since the inception of the IMF. In January 1993, the Chairman’s summing up at the conclusion of the biennial review of the IMF’s surveillance policy accordingly called for an acceleration of Article VIII acceptances. Since the staff began to intensify its efforts in early 1993, the rate of Article VIII acceptance has gone up six times. An additional 24 members have accepted Article VIII obligations, bringing the total of Article VIII members to 98 by December 31, 1994.¹¹

As a result of these efforts, 9 of the 19 Article XIV members whose systems were virtually free of restrictions on payments or transfers for current international transactions at the end of 1992 have now accepted Article VIII obligations (Barbados, Estonia, The Gambia, Lithuania, Mauritius, Federated States of Micronesia, Paraguay, Trinidad and Tobago, and Western Samoa). To date, those countries using the CFA franc, as well as Coromos, have not. Another 15 members (Bangladesh, Ghana, Grenada, India, Israel, Kenya, Latvia, Lebanon, Malta, Morocco, Nepal, Pakistan, Sri Lanka, Tunisia, and Uganda) eliminated exchange restrictions in the process of accepting Article VIII obligations. As of December 1994, members that have accepted the obligations of Article VIII, Sections 2, 3, and 4 represented 55 percent of the total membership. This ratio is somewhat higher (that is, 60 percent) when the countries of the former U.S.S.R. that have joined the IMF since 1992 with restrictive exchange control regimes are excluded from the total number of members. By comparison, at the end of 1985, members that had accepted Article VIII obligations numbered 60, or 40 percent of the total membership.

Implementation of the IMF’s policies in the area of exchange restrictions on current international payments and transfers addresses the following three important questions: (1) what transactions are to be treated as constituting current transactions, as opposed to capital transactions, and what measures are to be considered as restrictive exchange practices; (2) under what conditions should a restrictive exchange measure be approved; and (3) how much time is considered reasonable, or what circumstances are deemed appropriate, for a member to cease to avail itself of the transitional arrangements under Article XIV?

With regard to the first question, Article XXX(d) lists the following four categories of transactions that are considered to constitute payments and transfers for current transactions for purposes of Article VIII: (1) all payments due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities; (2) payments due as interest on loans and as net income from other investments; (3) payments of moderate amount for amortization of loans or for depreciation of direct investments; and (4) moderate remittances for family living expenses. Certain types of transaction that are treated as capital transactions in normal balance of payments compilations are therefore considered to be current account transactions under the IMF’s Articles.¹² However, these categories are simply examples, because the IMF can, after consultation with a member, determine whether certain specific transactions are to be considered current or capital account transactions. As regards the measures that are deemed to give rise to an exchange restriction under Article VIII, the IMF’s policies are guided by the principle that a direct governmental limitation on the availability or use of foreign exchange for current international transactions would constitute a restrictive exchange measure.¹³

The main issues the IMF considers in deciding whether to grant temporary approval of a restrictive exchange measure are (1) the seriousness of the member’s balance of payments position and the prospects for improvement; (2) the discriminatory nature of the measure; (3) how long the measure has been in effect (and in instances where approval has been granted, how long approval has been outstanding), and the member’s intentions and specific plans for simplifying or eliminating the measure. In all cases, approval is granted on a temporary basis—that is, up to the end of a specified calendar date or completion of the next Article IV consultation or program review. Approval of a restrictive exchange measure would imply that the IMF recognizes that the member needs the measure to deal with a balance of payments problem. The IMF does not normally approve exchange restrictions that are maintained for nonbalance of payments reasons or those that are administered discriminatorily between members, except in the case of exchange restrictions that are introduced solely to preserve national or international security.¹⁴

The IMF has not established a policy on how long a member can maintain Article XIV status. However, members are expected to avail themselves of the transitional provisions of this Article only temporarily and to withdraw restrictions maintained under the Article as soon as possible by implementing macroeconomic policies that will obviate the need for them.

Policies to Accelerate Progress Toward Current Account Convertibility

Previous papers in this biennial series have noted the limited progress in moving from the transitional arrangements of Article XIV to the obligations of the IMF’s Article VIII. The general liberalization of exchange systems that has accelerated since the mid-1980s has led to an improved environment for accepting the obligations of Article VIII in a number of countries. Increased experience with liberalized systems in developing countries played a role in the staff’s adoption in early 1993 of the strategy to encourage members toward Article VIII acceptance. Although the view that exchange restrictions are inefficient has been a basic tenet of the IMF’s Articles, it is increasingly thought that the developments in the international payments mechanisms, particularly over the last decade, have strengthened the rationale for more rapid elimination of exchange restrictions and shorter Article XIV transition. A growing number of developing countries have eliminated all exchange restrictions as part of a comprehensive package of macroeconomic adjustment and have experienced a rapid turnaround in capital flows generated by greater confidence in their economic policies as well as by the liberalization itself (see Section III).

Restrictions on trade are now effected mainly by customs mechanisms rather than by exchange mechanisms so that remaining exchange controls subject to Article VIII are almost exclusively limited to transactions related to services, which are relatively minor in most developing countries. This trend implies that, in accordance with the fundamental assumption of the IMF’s Articles, members should normally be able to settle their balance of payments without recourse to exchange restrictions. Removal of exchange restrictions on services has been accomplished in two ways. The first, and simplest administratively, has been to eliminate exchange controls on both current and capital account transactions simultaneously. This confers on the country the full efficiency benefits of exchange market liberalization.

In the second approach, where capital controls are retained, there is a technical question of how to segment the exchange control system—with current account restrictions defined according to the IMF’s Article XXX on the one side, and all other restrictions on the other. A number of countries have accomplished this task by adopting a so-called bona fides approach to service transactions. Under this approach, authorized foreign exchange dealers are delegated to approve foreign exchange automatically up to certain limits but to check requests above those limits to ensure that they are not being used to avoid controls on capital transfers (with “capital” defined for this purpose by Article XXX). Thus, a number of members that administer exchange controls on current payments or transfers that involve such “indicative limits” on foreign exchange have been considered to have an exchange system that is free of restrictions on current international transactions and have accepted Article VIII obligations. The members have stated that requests for purchases of foreign exchange in excess of indicative limits are approved or authorized without delay under the existing exchange control regulations when the bona fide character of such requests is verified (illegal capital transactions are considered not to be involved). Having made this official statement, the country authorities are responsible for implementing the policy, and the staff must assume that the bona fide test is in practice applied objectively unless information to the contrary becomes available.

A key aspect of the strategy to accelerate Article VIII acceptances has been to sharpen the focus of Article IV consultation discussions on the issue of Article VIII restrictions. It has been emphasized that members that no longer maintain exchange restrictions under the transitional arguments of Article XIV, Section 2 cannot benefit from continuing to avail themselves of such transitional arrangements. Whether or not members have formally accepted the obligations of Article VIII, any exchange restriction they impose after the date of membership is subject to IMF approval under Article VIII. Accordingly, these countries are encouraged to accept the obligations of Article VIII immediately after the staff reviews their exchange system to verify that no exchange restrictions remain in existence because their status under the Articles would he represented more accurately if they were to accept the obligations of Article VIII.¹⁵

Complementarity of the IMF Articles and the General Agreement on Tariffs and Trade (GATT) in dealing with restrictions in the external sector, coupled with the recent developments in the Uruguay Round of multilateral trade negotiations, is another reason for the progress in a number of developing countries that are members of both organizations, or intend to be.¹⁶ Restrictions maintained through both the customs and exchange systems can represent forms of protectionism that have been widely shown to adversely affect global output growth and development of trade relations.

Article XIV, Section 3 provides that the IMF may, if it deems the action necessary in exceptional circumstances, make formal representations to any member that conditions are favorable for the withdrawal of any particular restriction. However, the IMF has thus far preferred instead to seek the elimination of exchange restrictions through the consultation and technical assistance processes and by applying conditionality in IMF-supported programs. In all cases, the staff discusses with the country a timetable for the elimination of restrictions consistent with the implementation of macroeconomic policies, including appropriate exchange rate policies, which would place the country in a position to accept the obligations of Article VIII without resorting subsequently to exchange restrictions. Staff reports contain a summary description of the member’s exchange system, including a brief listing of exchange restrictions that are maintained under the provisions of Article XIV or are subject to approval under Article VIII. In most instances, the staff appraisal section of the reports also discusses the basis for approval or nonapproval. Under existing guidelines, assessments in staff reports should suggest a time frame for eliminating Article XIV and VIII restrictions and the member’s acceptance of Article VIII. In cases where it is not judged feasible to provide a specific time frame, the assessment notes the outcome of discussions and the reasons for the delay.