Omar Kabbaj^*

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.

While I will leave to the distinguished experts participating in this conference the comprehensive discussion and analysis of the various theoretical and practical issues related to currency convertibility, I wish, nevertheless, to share with you a few key ideas on the matter, and some lessons in this regard that can be drawn from the Moroccan experience.

Convertibility represents a far-reaching instrument to facilitate integration into the global economy. The worldwide adoption of market economies, the development of world trade, and the increasing mobility of capital flows have led to the globalization of the international economy and exchange system. In these circumstances, domestic economies cannot play a role in this process and benefit fully from its advantages unless they introduce the necessary instruments and mechanisms, including the establishment of the convertibility of their currencies, thereby eliminating all exchange restrictions. Convertibility is also necessary for domestic economies to achieve an optimal allocation of their resources.

While structural reforms are designed to eliminate sectoral distortions and to strengthen the rules of the market, they will remain limited in scope if they are not supported by currency convertibility. Indeed, convertibility makes it possible for economic transactors to choose freely between the domestic market and external markets and promotes price formation through the free interplay of market forces, which is conducive to the efficient allocation of resources and the stimulation of competitiveness within an economy.

With respect to the Arab world, I must stress the important role that convertibility can play in enhancing cooperation among the countries, especially in the commercial, economic, and financial spheres. There is no doubt that the spread of convertibility within the Arab world can open up new prospects for the economies through the development of inter-Arab investment flows, increased trade among Arab countries, and the enhancement of complementarity in production structures.

It is important to emphasize that convertibility should not be limited purely to international current account operations. Rather, it should be introduced gradually to encompass capital account transactions and should be accompanied by the establishment of a foreign exchange market. In my view, full convertibility should be the final objective, supported by the required structural reforms and a viable macroeconomic framework.

You will certainly have the opportunity during the seminar to learn more about the Moroccan experience with convertibility. Let me stress, however, a number of issues related to that experience that I consider as crucial. The introduction of convertibility in Morocco is the crowning achievement of an economic restructuring and adjustment process that began in 1983. This effort has led to clear progress in correcting domestic and external imbalances, liberalizing the economy, notably through the development of market mechanisms and the promotion of private initiative, and opening up the Moroccan economy to the outside world. Based on these achievements, Morocco was able, effective January 1993, to introduce the convertibility of the dirham for international current account operations and to end the cycle of rescheduling by resuming regular payments for its external debt service.

The latter two actions were taken in a particularly unfavorable international environment and in the midst of a two-year drought. The economy, however, had become sufficiently robust and, thus, able to enter into a new phase of integration into the world economy. At the same time, an appropriate fiscal and monetary stance was maintained and further structural reforms were pursued. Capital inflows have continued, the external current account deficit has been held to acceptable levels, and net international reserves are growing. We can, therefore, say that, nearly one year after its introduction, the impact of convertibility on Morocco’s economy has proved to be largely positive. We have cleared the hurdle of introducing convertibility, while avoiding many of the potential risks inherent in such an operation.

The widening of the scope of convertibility was pursued in 1993, particularly with the liberalization of access to external financing for economic operators and the authorization for exporters and Moroccans residing abroad to hold convertible foreign exchange accounts. We intend to persevere in this direction and to establish a foreign exchange market. This task is already listed among the priorities set by the Government of His Majesty, the King, as recently described before the House of Representatives within the framework of the government’s program.

Before closing, I would like to suggest that the eminent experts from the international organizations and representatives of the Arab countries’ monetary authorities participating in this seminar provide greater enlightenment on two factors I consider current and of great interest in conducting financial policy. I refer, first, to an analysis of the relationship between convertibility and the modernization of financial systems and the development of capital markets, and, second, to an examination of the impact of convertibility on both direct and portfolio foreign investment. Given the significance of the topics to be discussed and the caliber of the speakers, I feel certain that the deliberations will be rich and extremely useful for policymakers in the Arab world.

Osama J. Faquih^*

I am delighted to welcome you to this historical and beautiful city of Marrakesh, well known for its deeply rooted Arab and Islamic background. I am pleased to inaugurate with you today this important and specialized seminar on currency convertibility, which has been placed under the auspices of the Moroccan Ministry of Finance and jointly sponsored by the Institute of the International Monetary Fund (IMF) and the Arab Monetary Fund’s Economic Policy Institute.

The seminar has been designed to address a number of substantive issues that are both theoretically and empirically related to economic adjustment. In that context, it aims at providing an opportunity for a general review of the adjustment efforts in certain Arab countries and a close assessment of the experiences of Morocco and Tunisia, which announced at the beginning of this year the establishment of current account convertibility of their national currencies. Both are considered to be pioneers in that area.

As many of the papers before you emphasize, currency convertibility had been one of the central concepts that the founding fathers of the Bretton Woods system had intensively debated and sought to codify in the wake of World War II. It constituted a key pillar underlying efforts to establish a multilateral system of payments in respect of current transactions among nations and to eliminate foreign exchange restrictions that impede the growth of international trade. As a matter of fact, Article VIII of the IMF’s Articles of Agreement sets out in detail the rules and behavior to be observed by countries that accept the obligations of its provisions.

Five decades have elapsed since then, and the benefits of convertibility for the promotion of free international trade, allocative efficiency, competitiveness, savings and investment flows have been clearly established and the risks for an individual country well identified. Yet, until recently many nations around the world, including some Arab countries, have been unable to establish convertibility.

It is against such a background that the Arab Monetary Fund (AMF) and the IMF, which is in charge of surveillance over exchange arrangements worldwide, have joined in organizing this seminar. They have invited a distinguished group of eminently qualified experts, practitioners, academicians, and Arab officials to meet and exchange ideas and views on the various notions of convertibility, the benefits and risks associated with the concept, the conditions for its successful application, and its role in structural economic adjustment and growth.

The importance that the AMF attaches to currency convertibility is a mirror image of the high priority accorded to its action program for economic stabilization and structural adjustment in Arab countries. Alongside this pursuit, the AMF program currently seeks to foster linkages among Arab economies; to actively contribute to efforts aimed at mobilizing savings and resources and their channeling into productive investments; to enhance the technical capabilities of the staff of official Arab monetary, banking, and financial agencies; and to promote closer cooperation with regional and international financial institutions.

Indeed, the early 1980s witnessed a heightened international interest in macroeconomic adjustment policies and their implications. That period was characterized by a rapid deterioration of domestic and external financial imbalances, a dramatic increase of indebtedness and debt service, and poor economic growth performance in many developing nations. These included several Arab countries that courageously initiated and implemented, at painful costs, comprehensive adjustment programs.

Interest in the adjustment process was not restricted only to indebted Arab countries confronting fiscal and external deficits. In fact, the Arab oil producing countries have also realized in the past few years the importance and urgency of timely adjustment in the face of declining terms of trade associated with falling oil prices. As a result, these countries voluntarily proceeded to rationalize government budgets and adopted prudent monetary policies as part of their strategy to contain inflationary pressures. They concomitantly sought to diversify the sources of their revenues and to actively promote non-oil industries and exports. Reflecting these endeavors, macroeconomic adjustment efforts and structural reform programs in many Arab countries began to bear fruit.

In Morocco, substantial progress was achieved as policies pursued contributed to the resumption of growth, the diversification of the productive and export base, the containment of inflation, and a considerable strengthening of the external sector position. These achievements enabled the country to announce the establishment of current account convertibility of the dirham. In this context, I should like to address a special tribute to His Majesty King Hassan II and the wise Moroccan Government, who should be fully credited for steering the economy of Morocco in the right direction.

In this connection, a particular word of appreciation is due to His Excellency Mohamed Barrada, former Minister of Finance, for his relentless efforts and resolute determination in carrying out over a number of years a series of macroeconomic adjustment and reform programs. These aimed at enabling Morocco to enter a new era of increased self-reliance. There is no doubt in my mind that his successor, Professor Mohamed Saghu, who has contributed significantly to the design and elaboration of those programs before assuming his current post, will seek to consolidate the progress achieved by staying the course. I therefore wish him every success in this pursuit.

In Tunisia, the adjustment efforts deployed and reform programs implemented during the past eight years have been met with equal success. The policies pursued have led to the revitalization of economic activity, the reduction in the rate of inflation, and the strengthening in the external sector position. These achievements enabled Tunisia to establish the convertibility of the dinar of current account transactions at the beginning of 1993.

In Egypt, a multiphase reform program was initiated in 1987. Its implementation has yielded a number of positive economic developments, including an improvement in the government’s financial position and a strengthening in the balance of payments and international reserve positions. During 1991, the Egyptian authorities canceled the system of multiple exchange rates and floated the national currency. Many restrictions on external trade and exchange were removed, paving the way for full liberalization of the exchange system. The authorities are currently actively engaged in further action in that direction, while concurrently endeavoring to expedite the reform, restructuring, and privatization of public sector enterprises.

Since 1989, Jordan has embarked on a major macroeconomic adjustment program and geared its policies toward restoring domestic and external financial balance. Notwithstanding the detrimental repercussions of the 1990–91 crisis in the region, Jordan continued its adjustment efforts, which included, inter alia, the reduction of exchange restrictions, thereby putting the country close to achieving convertibility of the Jordanian dinar for current account transactions.

In Mauritania, the authorities started in 1985 to implement successive adjustment programs, which included several policy measures aimed at liberalizing the trade and exchange system. In that connection, a series of actions were taken to review, simplify, and reduce custom tariffs. Import licensing was dismantled, and some flexibility was introduced in the exchange rate system.

In a number of other Arab countries facing domestic and external difficulties and imbalances, the authorities have been responding to the situation by adopting, in varying degrees, adjustment policies and measures. Broadly, these aim at restoring financial balance, reforming the price system, and promoting greater private sector participation in economic activity and growth. The results achieved by these countries are encouraging. They provide scope for hope and optimism in the willingness and ability of the authorities to maintain the adjustment momentum within the framework of comprehensive programs geared toward moving their economies to the path of sustainable growth, strengthening their balance of payments position, and improving their creditworthiness.

As you all know, the world economy is becoming increasingly interdependent and globalized. In view of this, the ability of developing nations—including Arab countries—to successfully safeguard the hard-won fruits of their comprehensive economic adjustment programs and far-reaching liberalization of their trade and payment systems critically depends on the openness of markets in industrial countries and the removal of barriers to international trade and payment restrictions. However, it is to be feared that, as a result of growing protectionist tendencies, the expected benefits from the grouping of industrial countries into gigantic regional economic and trading blocs might be limited to member states only. If so, this would constitute a serious blow to the adjustment process in developing countries, which have made major strides in the past few years. Indeed, developing countries have completed at a socially painful cost the requisite wide-ranging structural reforms and have thus succeeded in raising the level of the production of competitive exportables. Such countries, however, are set to face considerable difficulties in marketing their exports. It, thus, becomes evident that, if it is incumbent upon developing countries facing imbalances to take timely corrective action, then industrial countries—both old and new—should at the same time expedite the removal of obstacles to the flows of trade. More important, it is the responsibility of industrial countries to endeavor to establish a more liberal, open, and equitable international economic and trading system. The revitalization of their own economies and the provision of adequate financial support on appropriate terms remain key factors for the success of economic adjustment and growth in developing countries.

Once again, I would like to welcome you and to reiterate my thanks and appreciation to the officials of the Moroccan Ministry of Finance for hosting this seminar and for the excellent facilities and arrangements they have put in place. Special thanks are due to the International Monetary Fund for its instrumental cooperation in the organization and conduct of this seminar and for the valuable papers prepared by its staff. I would also like to thank the participants for their attendance and willingness to share with us and among themselves their knowledge, experience, and views on the various aspects and issues of the seminar’s central theme.