In recent years, the issue of currency convertibility has received increasing attention in the economic literature, especially in articles from the staff of the International Monetary Fund (IMF). This has taken place in spite of the fact that the concept of convertibility and the provisions governing it in the IMF’s Articles of Agreement have been widely known for many years. A possible source of the renewed interest in convertibility may have been the transformation process now under way in the economies of many countries that once were part of the Soviet Union or had a centrally planned economic system and their increased interaction in international trade and the world economy.
Because one of the main objectives stipulated by Article I of the Articles of Agreement is to assist in establishing a multilateral system of payments between members and in eliminating the exchange restrictions that impede the growth of international trade, Article VIII calls for specific obligations to be met by member states. The obligations stipulated in Sections 2, 3, and 4 of Article VIII call for avoiding restrictions on current payments, unless IMF approval is granted or the country is subject to the provisional arrangements under Article XIV; for avoiding discriminatory currency practices and promoting their elimination; and for adhering to the convertibility of assets owned by external parties, if they have emanated from recent current transactions or if there is a need to convert the assets in order to make current payments.
Article XIV of the Articles of Agreement permits a member state to avail itself of transitional arrangements if the state’s conditions prevent it from fulfilling the obligations under Sections 2, 3, and 4 of Article VIII, provided that (1) the member maintains and adapts to changing circumstances the restrictions on payments and transfers for current international transactions that were in effect when it joined the IMF and (2) the member takes all possible steps to develop commercial and financial arrangements with the other member states so as to facilitate international payments and to achieve a stable exchange system. Article XIV actually requires each member state to suspend the enforcement of its exchange restrictions when it feels assured that it can make its external payments without the need for these restrictions and without resorting to the use of IMF resources.
To implement these obligations, many countries have announced their acceptance of the obligations regarding the convertibility of the currency for external current account transactions. In the past decade (1983 until the beginning of 1993), the number of countries that accepted the obli-gations under Article VIII rose from 57 to 80. As IMF membership rose during the same period from 146 to 178 members, the percentage of countries that accepted these obligations rose from 39 percent to nearly 45 percent. The additional countries that accepted these obligations during this period included Indonesia, Korea, Thailand, New Zealand, Spain, Portugal, Iceland, Cyprus, Greece, Turkey, Tunisia, and Morocco. Both Tunisia and Morocco declared the convertibility of their currencies for current account transactions during January 1993.
In most of these countries, the announcement of currency convertibility for current account transactions was the crowning achievement of their adjustment and economic liberalization programs. The duration of the programs was a function of the depth and complexity of these countries’ economic and external payment problems and the speed with which they developed and implemented successful solutions.
At the present time, numerous other countries continue to carry on with economic and financial programs that seek to restore their domestic and external financial balances. They seek to reach a phase in which they can declare their acceptance of the obligations under Article VIII on the convertibility of their currencies for current account transactions. These countries include Jordan and Egypt, two Arab countries that have made long strides toward achieving the convertibility of their currencies.
This paper compares the experiences of four Arab countries—Tunisia, Morocco, Jordan, and Egypt—in their efforts to achieve convertibility.
Benefits of Currency Convertibility for Current Account Transactions
Generally, currency convertibility means the freedom of individuals, companies, and public establishments to buy and sell foreign exchange and to remit it to the outside world to meet external payments obligations resulting from the movement of goods, services, and capital between countries. The IMF’s Articles of Agreement make a distinction between convertibility for current account transactions and convertibility for capital account transactions in the balance of payments, mainly because the former is strongly linked to the goal of developing international trade and world prosperity.
Calls for trade liberalization are often coupled with calls for currency convertibility because liberalization of trade and liberalization of payments have similar and complementary effects on the creation of a competitive climate between countries. These effects promote improved production efficiency and encourage investment consistent with the comparative advantages of the countries concerned. This is fostered through competition with the outside world in consumer goods and services and through increased opportunities for reaching diverse and competing sources of imported production inputs.
Convertibility, and the absence of discriminatory treatment in the exchange rates for producers and consumers, enables producers to base decisions on the relative international prices of semiprocessed and finished goods. This competitive environment encourages producers to use resources efficiently. It thus leads to increased production and reduced costs as producers satisfy consumers’ quality and price demands. The positive effect of competition, especially insofar as improving production quality and matching international standards are concerned, may be realized only in the long run. In the initial phases, loss of employment and production is a frequent consequence, followed by a process of acclimatization, reallocation, and development of the resources required to operate in an increasingly competitive climate. A drop in real wage levels can also occur if the competition entails a depreciation of the domestic currency.
The exchange rate level plays a vital role. A depreciation, however, to protect national production and the competitiveness of locally produced goods needs to be approached with caution. This is so because if the depreciation is too large, it can hurt the national economy’s development and growth, as the domestic prices of imported production inputs, such as raw materials, semiprocessed goods, services, and perhaps even capital, could be affected (Green and Isard, 1991). Many governments have, therefore, chosen a policy of gradualism in liberalizing the exchange and the trade systems, while fostering a competitive climate through adjustments in the exchange rate, thus sparing their economies the shocks resulting from sudden changes.
Preconditions for Currency Convertibility for Current Account Transactions
The idea of the gradual move to establish a given currency’s convertibility for the purpose of current account transactions, in accordance with the requirements of Article VIII, raises questions about the considerations that govern the timing of the establishment of such convertibility. In other words, what are the conditions that must be met before a decision is made to declare a currency convertible in accordance with the obligations required under Article VIII? The literature on the subject suggests that the following specific conditions should be satisfied for the establishment of the convertibility of a country’s currency for current account transactions: (1) appropriate macroeconomic policies to achieve internal balance; (2) an appropriate exchange rate to preserve external balance; (3) the availability of an adequate level of external liquidity; and (4) an incentives system involving flexibility in domestic prices (Gilman, 1990, and Mathieson and Rojas-Suárez, 1993). If one of these conditions is not satisfied, the probability that convertibility will not be sustained is increased. In such a case, there could be a loss of credibility, with negative consequences rather than the expected positive results.
Appropriate Macroeconomic Policies
The first condition, appropriate macroeconomic policies, calls for the establishment of internal financial stability through appropriate fiscal and monetary policies that reduce inflation, absorb excess liquidity, narrow the budget deficit, introduce noninflationary means to finance the budget deficit (if any), and streamline spending and taxes in ways that limit distortions and enhance productivity. The reform of public enterprises or their privatization would also help to reduce their reliance on the budget and to enhance their efficiency and productivity. Macroeconomic policies should seek to establish a balance between aggregate demand and the country’s production capabilities so as to safeguard the stability of the real exchange rate.
An Appropriate Exchange Rate
The second condition is establishing an appropriate exchange rate to maintain a viable balance of payments position. In this regard, it is important that the real exchange rate safeguard the production sector’s competitiveness vis-à-vis the outside world. This would require the introduction of flexibility in exchange rate determination. The real value of the exchange rate must not be so low that it increases the cost of imported production inputs unjustifiably and distorts the distribution of resources in favor of focusing investment on export industries to the exclusion of other industries (Green and Isard, 1991).
An Adequate Level of External Liquidity
The third condition is achieving of an adequate level of external liquidity, defined as the international reserves at the disposal of the monetary authorities, as well as any other external financing available to them to meet any sudden or anticipated shortages in foreign exchange and maintain a stable exchange rate in the short run. The adequate level of international liquidity varies from country to country, depending on the magnitude of potential sudden disturbances and on the degree of flexibility permitted in the exchange rate. This is because there is an inverse relationship between exchange rate flexibility and the needed volume of reserves. Generally, reserves that are enough to cover imports for a period of three to five months are considered adequate.
Incentives System
The fourth condition is liberalizing domestic prices to ensure appropriate incentives for producers. The fulfillment of this condition creates the climate necessary for moving factors of production between various sectors and for adapting and increasing production according to market demands. This requires the elimination of distortions in the use of resources so that prices will reflect not only production costs but also the relative scarcity and marginal returns of the factors of production. Domestic price liberalization should also be accompanied by the lifting of restrictions that shackle competition between producers and restrain free movement of the factors of production. This would help ensure that both consumers and producers respond to price incentives and that production adapts to the demands of the market.
Economic Adjustment and Currency Convertibility for Current Account Transactions
The economies of Morocco, Tunisia, Jordan, and Egypt experienced difficulties in their balances of payments in the 1980s and were thus compelled to apply (or to continue applying) some form of exchange control that varied in degree according to each country’s circumstance. They adopted adjustment programs and took numerous domestic and external steps to restore balance to their economies. They also took steps to eliminate certain restrictions previously imposed on domestic prices, external trade, and foreign exchange transactions. By the beginning of 1993, these steps enabled Morocco and Tunisia to declare their currencies convertible for current account transactions. They also led to the nearly complete practical application of convertibility in Jordan and Egypt, thus making it possible to consider their currencies de facto convertible for external current account purposes; there are, however, still some legal and economic obstacles that hinder the official announcement of convertibility.
Morocco
In Morocco, expansionary financial policies—often involving external borrowing—were pursued as of the mid-1970s. But the rise in oil prices for a second time, and the rise in interest on external loans in the early 1980s, together with the recurrent droughts experienced by Morocco, contributed to the emergence of a severe balance of payments crisis in 1983. The crisis drained the official foreign exchange reserves, and it became impossible to service the heavy foreign debt that Morocco had incurred. Consequently, the authorities restricted imports severely, tightened restrictions on external payments, and reduced government expenditures—especially capital expenditures—in order to limit the large budget deficit.
These steps reflected negatively on the performance of the production sectors, and it became necessary to launch between 1983 and 1992 a series of stabilization programs with the support of international financial institutions, Arab national and regional funds, and a number of friendly countries. These programs sought to (1) achieve fiscal stability by controlling the budget deficit; (2) contain inflationary pressures through strict fiscal and monetary policies; (3) develop and reform the tax system by establishing a modern one consisting of a value-added tax, a corporate profit tax, and a unified personal income tax; (4) reform or privatize public sector enterprises; (5) gradually phase out price subsidies; and (6) raise public utility prices so that prices would better reflect the costs.
These policies gradually reduced Morocco’s budget deficit from 7.7 percent of GDP in 1983 to 3.1 percent of GDP in 1991 and 2.1 percent of GDP in 1992. Morocco also achieved one of the lowest inflation rates in the developing countries during this period. Its inflation rate, as measured by the change in the consumer price index, dropped from 12.3 percent in 1984 to 4.9 percent in 1992. Real GDP growth was moderate, amounting to an average annual rate of 3.8 percent between 1983 and 1992, even though Morocco experienced extensive fluctuations from time to time—especially in 1987 and 1988, and again in 1992—often caused by the effects of severe weather on agricultural production (Chart 1).
The policies pursued were thus successful in achieving domestic financial stability—satisfying a condition for declaring the convertibility of Morocco’s dirham for external commercial transactions. But the fiscal situation continues to be fragile. Constant caution is required to preserve financial balances in the face of various threatening factors and pressures on the budget.
The programs implemented have also involved structural reforms, including liberalization measures, aimed at improving the balance of payments structure and fostering external balance. These reforms were intended to strengthen the private sector’s role, to increase its competitive ability by opening up to external markets, and (whenever possible) to let market mechanisms replace administrative controls on prices. Within this context, the structural programs involved the gradual liberalization of external trade, by reducing the high tariff protection (which amounted to a maximum of 400 percent in 1982) to a reasonable level that allowed for effective external competition (a maximum of 35 percent in 1993), eliminating quantitative restrictions, abolishing the requirement of advance permits for 90 percent of all imports, liberalizing exports and exempting them from restrictions and fees, and following a flexible exchange rate policy. This supplemented other domestic reforms related to incentives, prices, taxes, and so on.
Exchange rate flexibility played a significant role in maintaining or improving the competitiveness of Moroccan exports. The Bank of Morocco sets the dirham’s exchange rate against the French franc daily, depending on the developments in the value of a currency basket of Morocco’s main trading partners. Their weights are based on developments in the geographical distribution of Morocco’s external trade and in the percentage of the currencies used to settle external payments. The exchange rate against other currencies is determined on the basis of their exchange rate against the French franc in the Paris exchange market. The exchange rate was adjusted several times in the mid-1980s and was last adjusted downward by 9.25 percent in May 1990.
Morocco: Selected Economic Indicators
Sources: IMF, International Financial Statistics; and IBRD, World Debt TablesChart 2 shows that the Moroccan dirham’s real effective exchange rate had a downward trend throughout the 1980s. This reflected the fact that Morocco’s inflation rate was lower than in the other countries whose currencies were included in the basket. As such, the competitiveness of Moroccan exports was maintained. The slight tendency toward higher inflation in Morocco in the past three years may not be in the interest of its competitiveness, but the developments in the exchange rate generally throughout the period undoubtedly assisted in achieving an improvement in the external condition. The future stability of the real exchange rate is essential to prevent a deterioration of the situation.
The establishment of the proper climate for the success of the reforms undertaken was facilitated by the reduced pressure on the balance of payments through the rescheduling of external debt and a number of arrangements from the IMF. These arrangements culminated in the announcement of the dirham’s convertibility for current account transactions in 1993.
Morocco: Real and Nominal Effective Exchange Rates
(1980 = 100)
Source: International Monetary Fund.The improved external situation is clearly reflected in the reduction achieved in the external current account deficit. This deficit was reduced from 7.7 percent of GDP in 1984 to 1.6 percent of GDP in 1992 and to an annual average of 1 percent of GDP in the past three years. The improvement is also reflected in the reduction of external debt, from 128.4 percent of GDP in 1985 to 76.1 percent of GDP in 1992, and the reduction in external debt service as a ratio of exports of goods and services from 38.9 percent in 1982 to an average of 25.7 percent in the past three years (Chart 3). With the improvement in conditions of the balance of payments and the signs of success of the corrective measures and policies implemented, including exchange rate policy, it can be considered that Morocco has achieved the second condition for establishing currency convertibility.
The authorities began to reduce restrictions on external payments as part of the process of the gradual liberalization of trade transactions and invisible current payments—a process that was completed in 1992. The liberalization has also included the restrictions on capital transactions for nonresidents. Residents have been permitted to borrow from abroad and to repay their loans without advance authorization; however, invisible current remittances by residents have been kept subject to preset ceilings, depending on the objectives, but at limits that are considered adequate and reasonable. These limits prevent the fraudulent and illegal expatriation of capital.
The reduced current account deficit and the improved position of the capital account, as well as the rescheduling of external debt, have enabled the monetary authorities to build up the international reserves over the past three years from less than $0.5 billion in 1989 to more than $3.5 billion by the end of 1992. This is equivalent to more than six months of 1992 imports, a level that is considered appropriate and adequate to meet any likely external shocks, thereby safeguarding the dirham’s convertibility for current account transactions and the regular servicing of external debt. Hence, the third condition for establishing convertibility in accordance with Article VIII can be considered to have also been met.
Finally, in addition to the measures taken to liberalize external trade so as to increase external competition and to enhance the productivity of national industries, other areas of the domestic economy have also been liberalized in the context of the adjustment programs adopted by Morocco. As a result, market mechanisms have replaced administrative controls. Both domestic trade and the agricultural sector have been liberalized, and remaining producer prices increased. The government has followed a process of gradually abolishing subsidies for basic goods and for agricultural inputs and has increased the prices of services provided by public utilities and those of other goods and services subject to monopolies to better reflect the costs. Interest rates have also been partially liberalized within the framework of financial sector reforms. Thus, it can be concluded that the domestic price liberalization process and the improvement in the incentive system have increased the flexibility of the Moroccan economy, enhanced its capability to adapt to exogenous development, and fostered a more efficient use of scarce resources. As such, the fourth condition of convertibility can be considered to have been met.
Morocco: Selected Economic Indicators
Sources: IMF, International Financial Statistics; and IBRD, World Debt Tables.Tunisia
After the 1970s, which were characterized by relatively rapid growth and domestic and external financial balance, Tunisia experienced an economic decline in the mid-1980s. The reasons for this decline included (1) the drop in oil production, prices, and revenues; (2) a major deterioration in Tunisia’s terms of trade; (3) reduced savings, reflecting increased government and private consumption; (4) a recession in tourism; and (5) bad weather that affected agricultural production and exports. The government’s fiscal deficit increased to 8.3 percent of GDP in 1983 and the current account deficit to 9.6 percent of GDP in 1984. Inflation picked up to reach 8.4 percent in 1983.
The gap in external resources led to increased foreign debt, amounting to 70 percent of GDP in 1987 and to a decrease in international reserves, which amounted to the equivalent of one month of imports by the end of 1985. The increased external debt and the drop in exports led to a rise in the debt-service ratio from 19.2 percent in 1983 to 28.7 percent in 1987. To stem this deterioration, the Tunisian authorities stiffened the controls on imports, prices, and investment. This led to further distortions in relative prices, a misallocation of resources, and a further erosion of Tunisian export competitiveness.
Supported by international and regional financial institutions, the Tunisian authorities implemented stabilization policies from 1986 to 1992 that sought to restore domestic and external financial stability and fundamental structural reforms to improve competitiveness and foster exports.
These programs included a tight aggregate demand management policy involving the reduction of the budget deficit as a ratio of GDP, the adoption of tax reforms, the liberalization of interest rates, the containment of domestic credit expansion, and the reforming of the financial system to create a modern financial market. The policies implemented also included the liberalization of a large percentage of domestic prices, the reduction of subsidies for consumer goods, the privatization of a number of public sector enterprises, and the deregulation of investment.
The strict demand-management measures and the structural reforms contributed to restoring domestic financial stability. The government budget deficit declined from 8.3 percent of GDP in 1983 to 7.3 percent of GDP in 1986 and 2.5 percent of GDP in 1992. These reforms also helped reduce the inflation rate as measured by the consumer price index from 8.4 percent in 1983 to 5.4 percent in 1992. This rate was the lowest inflation rate witnessed by Tunisia during the decade and was significantly lower than the average annual inflation rate for the whole decade (7.1 percent). The reforms also contributed to an increase in the real average annual GDP growth rate from 1 percent in 1986 to 8.6 percent in 1992. During the period, the average annual real growth rate amounted to about 5.0 percent (Chart 4). Based on these indicators and on the flexibility introduced into the management of the Tunisian economy, it can be said that Tunisia has been able to regain a satisfactory degree of domestic financial stability consistent with a noninflationary economic growth rate.
Because of the importance of enhancing the Tunisian industries’ competitiveness and production efficiency, and because merchandise exports and service receipts account for 40 percent of GDP, Tunisia worked to achieve a gradual liberalization of its external trade and payments system. Imports free of quantitative restrictions now amount to nearly 87 percent of total imports. High customs tariff rates, which were as high as 236 percent at their peak in 1986, were reduced three years later to a 10–45 percent range, averaging about 26 percent.
The exchange rate of the Tunisian dinar is set by the central bank daily on the basis of a basket of currencies, using weights that reflect the importance of these currencies in Tunisia’s external trade. The central bank also sets forward exchange rates. The exchange rate was devalued in 1986 to enhance the competitiveness of Tunisian exports. Subsequently, the real effective exchange rate remained almost stable, with a tendency toward a slight depreciation, thus safeguarding the stability of the competitiveness of Tunisian exports. The real effective exchange rate, however, rose slightly in 1992 but was adjusted in the first half of 1993 (Chart 5).
The reform policies led to an increase in both the percentage of exports to GDP since 1986, with a noticeable improvement in the current account deficit between 1986 and 1991. However, the deficit increased in 1992 to 6.2 percent of GDP, reflecting the appreciation in the real and nominal effective exchange rates and other exogenous factors affecting the demand for certain exports. The external debt dropped from 70 percent of GDP in 1987 to 54.7 percent in 1992. The external debt service as a percent of the exports of goods and services also dropped from 28.7 percent in 1987 to 23.1 percent in 1992 (Chart 6). However, the increase in international reserves achieved in 1987 and 1988, the equivalent of three months of imports, was subsequently reversed, with reserves dropping to the equivalent of 1.7 months of imports in 1992. Despite the improvement in the external position and the lack of further recourse to use of Fund resources, there continues to be a need to bolster exports through continued structural adjustment.
Tunisia: Selected Economic Indicators
Sources: IMF, International Financial Statistics; and IBRD, World Debt Tables.Tunisia: Real and Nominal Effective Exchange Rates
(1980 = 100)
Source: International Monetary Fund.Generally, however, the policies pursued have contributed to the achievement of domestic and external financial balances that enabled the Tunisian authorities to undertake the obligations under Article VIII of the IMF’s Articles of Agreement on currency convertibility for current account purposes.
Jordan
Jordan’s small economy relies heavily for its prosperity and growth on economic conditions in the Arab region. The country’s geographic position and its limited resources play a major part in its fate. As regards production, the service sector has accounted in recent years for nearly two thirds of GDP. The balance is accounted for by the small and varied agricultural, industrial, and mining sectors. Jordan’s external resources rely largely on Arab countries, as evidenced by the importance of remittances of Jordanian expatriates in neighboring countries and the official grants from Arab countries to support the budget and the balance of payments. Receipts from Jordanian agricultural and industrial exports to neighboring countries and from services exported to these countries (e.g., transport, transit, and tourism services) constitute a large share of the total external receipts.
Tunisia: Selected Economic Indicators
Sources: IMF, International Financial Statistics; and IBRD, World Debt Tables.In the 1970s and through the mid-1980s, Jordan’s economy achieved rapid growth, greatly influenced by the economic prosperity of the region. The climate of economic prosperity in the neighboring Arab countries, particularly the oil producing countries, led to increased demand for Jordan’s exports and for skilled labor. This was reflected in the accelerating pace of private investment at home and in the flow of private remittances. Moreover, official Arab grants bolstered Jordan’s budget and strengthened its balance of payments. The fiscal grants also facilitated increased capital outlays in the social sectors and infrastructural projects, while contributing to the increase in the central bank’s international reserves.
The economic recession that has spread throughout the region since the sharp drop in oil prices in the mid-1980s has, however, reversed the direction of all of the factors responsible for this period of prosperity in Jordan. This has led to a fall in private remittances from expatriate Jordanians, a weakening in demand for Jordan’s exports, and a decline in official grants from the oil producing countries. As a result, Jordan’s economic activity has slowed down and the unemployment rate has grown. The structural weakness in the budget and in the balance of payments, both of which rely on external resources, has come to the surface.
Initially, the authorities tried to deal with the situation by continuing to pursue expansionary fiscal policy, subsidizing the agricultural and industrial sectors, and resorting to foreign borrowing on commercial terms, thereby increasing the country’s foreign indebtedness. As of 1987, the government resorted to increased borrowing from domestic banks; this led to a sharp increase in domestic liquidity, to mounting inflationary pressures, and to pressures on the Jordanian dinar’s exchange rate. The surplus in the balance of payments in 1985 and 1986, resulting from foreign borrowing, turned rapidly into a deficit in 1987 and 1988, as foreign debt rose. The deficit was financed by a major drawdown of official external reserves. In 1988, these developments were reflected in a negative real GDP growth, a further increase in inflationary pressures and in unemployment, an increase in the budget deficit, the virtual exhaustion of international reserves, and extreme pressure on the exchange rate.
In light of the seriousness and unsustainability of the situation, the Jordanian authorities adopted in 1989 a series of measures and policies to restore domestic and external financial stability within the framework of a medium-term adjustment program supported by international and regional financial institutions. Jordan was able to stem the deterioration in the situation rapidly, following the rescheduling of some of its commercial and official bilateral debts and receiving support in the form of official grants and bilateral loans.
The negative impact of the region’s 1990–91 crisis on the Jordanian economy, however, posed temporary problems for the adjustment and reform program and prompted a re-examination of the program and timetable. As a result, a new program covering the period 1992–98 was adopted. The program aims at raising the real growth rate to more than 4 percent annually, reducing the inflation rate to less than 5 percent, narrowing the budget deficit (excluding external grants) to 5 percent of GDP, and eliminating the external current account deficit and the need for exceptional financing.
To accomplish these goals, the budget deficit needs to be addressed and external balance restored promptly. Efforts must be made to (1) increase tax revenue; (2) streamline, reduce, and restructure budget expenditure; (3) focus attention on promoting savings and productive investment; (4) continue the sectoral structural reforms that seek to enhance and develop the production sectors; (5) enhance the efficiency of public enterprises; (6) improve competitiveness and increase exports; (7) streamline imports and develop adequate alternatives to some imports; and (8) reduce the burden of foreign debt on the budget and the balance of payments. This will require the encouragement of the private sector, the enhancement of the role of the market mechanism in determining prices (including interest rates), and the maintenance of flexibility in the exchange rate to preserve the competitiveness of Jordanian exports.
Even though foreign exchange transactions have historically been subject to fewer restrictions than in many other countries, the Jordanian authorities have abolished most of the restrictions on current transactions. Only three elements remain: (1) some unrepaid external payments arrears; (2) two bilateral trade and payments agreements with IMF member states; and (3) ceilings on some invisible payments, even though these ceilings have been loosened and have become reasonable, thus constituting no obstacle to the free conversion of the currency in practice. Jordan plans to accept the obligations under Article VIII as soon as possible.
Jordan’s investment and reform program has received the support and backing of international financial institutions and has benefited from debt rescheduling. Along with the measures taken, the rescheduling has helped to ease the immediate pressure on Jordan’s budget and balance of payments and to restore the confidence necessary to resume reforms and foster growth.
Significant progress has been made in establishing the conditions required to establish currency convertibility for current account transactions, especially in the area of domestic financial stability. The measures taken to increase tax revenue and reduce expenditure, and the rescheduling of some of Jordan’s debts, have contributed to an improved fiscal position. The fiscal position also benefited from the impact of a good growth performance (particularly in 1992) on revenue. The total budget deficit, including foreign grants, dropped from 9.3 percent of GDP in 1987 to 2.4 percent of GDP in 1991 and turned into a surplus of 7.3 percent of GDP in 1992. Excluding foreign grants, the total fiscal deficit narrowed from 21 percent of GDP in 1989 to 17.8 percent of GDP in 1991 and to nearly 4 percent of GDP in 1992.
The improved fiscal position contributed to a lower growth in bank credit and domestic liquidity, and to a drop in the inflation rate from 25.8 percent in 1989 to 4 percent in 1992. Real GDP, which had declined by 10.6 percent in 1989, recorded a growth of 4.8 percent in 1992. During the period from 1983 to 1992, real GDP growth had been relatively low (an annual 1.8 percent increase on average) and characterized by sharp fluctuations (Chart 7).
The fiscal position still needs to be reinforced, the improvement has depended on exceptional factors and measures. There is no doubt that the implementation of the medium-term structural adjustment program will affect the structure of both revenue and expenditure and will demonstrate the extent of the government’s ability to reduce its reliance on external grants. It will then be easy to judge the sustainability of the improvement in the government’s fiscal position.
The liberalization of domestic prices and incentives, as a main condition for convertibility, does not seem to have received much attention in the case of Jordan. This is because Jordan’s economy is fundamentally a free economy in which the market mechanism is the main determinant of prices. However, the government’s program envisages that public utility prices be revised and the subsidy element reduced.
Since 1989, the Jordanian dinar’s exchange rate has been set daily by the central bank based on a basket of currencies. The bank uses criteria that reflect the importance of each of these currencies in Jordan’s foreign transactions. Previously, the dinar was tied to the SDR. The dinar has fallen in value since the mid-1980s. A parallel exchange rate for the dinar emerged for a short time when the central bank refrained from supplying the market with foreign exchange during a period of extraordinary, politically motivated pressures, but rates were unified again at the beginning of 1989. The exchange rate has been flexible, as evidenced by the movements in the nominal and real effective exchange rates since 1989 (Chart 8). These movements have reflected the corrections in the exchange rate that have occurred since 1989 to safeguard the competitiveness of the economy.
Jordan: Selected Economic Indicators
(In percent)
Sources: IMF, International Financial Statistics; and IBRD, World Debt Tables.The balance of payments continues to be unstable, even though the deficit narrowed in 1989 and 1990. If foreign grants and the special remittances of expatriate Jordanian workers are excluded, the deficit has dropped from 19 percent of GDP to nearly 15 percent of GDP in 1992. This is still a high percentage and cannot be considered acceptable. It must be reduced by improving the structure of the current account of the balance of payments. Such an improvement will depend on the implementation of Jordan’s structural adjustment program. Moreover, Jordan’s foreign debt in 1990 remained high, amounting to more than twice the GDP; however, this debt has been dropping since then. The ratio of foreign debt service to exports of goods and services has declined from 31.3 percent in 1988 to 14.7 percent in 1992, reflecting the rescheduling agreements (Chart 9).
External reserves dropped continuously from the equivalent of 3.7 months of imports in 1983 to only 0.5 month in 1988. In response to the adopted steps and measures, these reserves rebounded to 2.8 months of imports in 1992. Taking into consideration the severe shocks to which Jordan may be subjected, a further increase in reserves will bolster confidence in Jordan’s ability to meet its external payments and defend the exchange rate.
Egypt
Egypt’s economy achieved high growth rates in the late 1970s and early 1980s. This growth was greatly helped by increased revenue from oil exports and from increased foreign exchange receipts from the remittances of expatriate Egyptians, the proceeds of the reopened Suez Canal, and foreign aid. The achievement of these growth rates was also supported by a considerable increase in commercial foreign debt. The international economic stagnation and the drop in oil prices in the mid-1980s, however, played a major role in ending Egypt’s economic prosperity at that time. By 1985, economic growth had slowed, while aggregate demand had increased. In 1986, the budget deficit rose to nearly 20 percent of GDP, the inflation rate climbed to nearly 24 percent, the current account deficit (excluding official remittances) reached nearly 20 percent of GDP, and the overall balance of payments position deteriorated because of increased foreign debt-servicing obligations. The increasing chronic foreign exchange shortage led to reduced imports (including industrial inputs) and to the accumulation of external payments arrears.
Jordan: Real and Nominal Effective Exchange Rates
(1980 = 100)
Source: International Monetary Fund.In light of these developments, the structural flaws in the Egyptian economy became apparent. They were characterized by (1) the public sector’s domination of economic activity; (2) widespread administrative controls; and (3) restrictions on prices, trade, exchange, and investment. These restrictions, lasting for many years and affecting the public and private sectors, interfered with the determination of relative prices and the efficient distribution of economic resources, even though some of the restrictions were justified by the achievement of noble social goals.
The structural flaws in the Egyptian economy were manifested in a number of ways, including price and cost distortions, resulting from strict price controls; negative real interest rates; multiple exchange rates; weaknesses in the budget structure, reflected clearly in a narrow and relatively inelastic tax base and in an excessive reliance on customs revenue; weaknesses in the balance of payments, emanating from the narrow non-oil export base and from the heavy reliance on workers’ remittances; an increased foreign debt-servicing burden; and the extremely complex exchange and trade laws.
As of 1987, the government implemented a number of measures and policies that sought to stem the deterioration in the situation and to restore domestic and external financial stability. The government also sought to address the structural problems confronting the economy. To this end, it adopted a phased comprehensive economic reform program. One of this program’s broad objectives was the development of a decentralized economic system that is open to the outside world and relies on market mechanisms to set prices, rather than on administrative decrees. This would enable the private sector, encouraged by a stable competitive climate, to play a major role in economic activity alongside the reduced and reorganized public sector.
Jordan: Selected Economic Indicators
(In percent)
Sources: IMF, International Financial Statistics; and IBRD, World Debt Tables.Egypt’s reform program has received the support of international institutions and the world community. Egypt has benefited from debt reduction, forgiveness, and rescheduling. Efforts to achieve further debt restructuring are under way.
In addition to the stabilization policies that have been embraced since 1987 and that have sought to reduce the budget deficit through increased revenue and reduced expenditure, the reform program also covers the exchange system. The program’s goals are to (1) unify the exchange rate system; (2) liberalize current external transactions; (3) decontrol domestic prices in a gradual and comprehensive manner; (4) increase fuel, electricity, and transportation prices; (5) eliminate subsidization of final goods and production inputs; (6) raise the prices of major agricultural commodities; and (7) reform public sector enterprises and privatize a large part of the public sector. The program further provides for (1) gradually liberalizing imports and abolishing restrictions on exports; (2) restructuring and gradually reducing customs tariffs; (3) liberalizing bank interest rates, as well as reforming the banking system, bank supervision, and the financial system in general; (4) freeing the movement of labor between sectors; and (5) establishing a social fund to cover the social costs of the adjustment process.
Long strides have been made in implementing this program. Most exchange restrictions have been abolished, and the remaining restrictions are of no practical significance. The Egyptian currency has become virtually convertible, even if it is not yet legally convertible because of some arrears in external obligations, a bilateral payments agreement with Sudan, and old payments agreements that have been suspended but not yet liquidated.
To what extent has the Egyptian economy met the four conditions for introducing current account convertibility? Regarding domestic financial balance, a review of the indicators shows that a reduction has been achieved in the budget deficit as a percentage of GDP, including foreign grants. The deficit dropped from 10.9 percent of GDP in 1986 to 6.7 percent of GDP in 1992. Moreover, the inflation rate, as measured by the consumer price index, which was at 23.9 percent in 1986, dropped to 13.6 percent in 1992. In 1986, the real GDP growth rates were at about 5.5 percent, but dropped in the past two years, amounting to 4.4 percent in 1992 (Chart 10).
These developments, however, especially the inflation rate and the budget deficit, suggest that domestic financial stability has not yet been achieved and that further steps are needed to improve the government’s financial position within the framework of the adjustment program.
Regarding domestic price liberalization and the introduction of incentives to make the production process dynamic, noticeable progress has been made. More needs to be done, however, to reform public enterprises or privatize them, liberalize prices, and reduce subsidies to ensure the necessary flexibility in the distribution of resources and the continued competitiveness of Egyptian exports.
Regarding the exchange rate, Egypt has followed a long and difficult path to rid itself of a complex multiple exchange rate system and to establish a free exchange market (Central Bank of Egypt, 1992). The first step in this direction was taken in 1976, when the law permitted the free purchase and sale of foreign exchange through accredited banks. It also permitted imports to be financed from the importer’s private foreign exchange resources. This was followed by the establishment in 1987 of a free foreign currency exchange market. This step sought to establish an exchange rate based on market mechanisms. The free bank exchange rate was set daily by a committee from the banking system. In 1991, a primary market was established alongside the free banking market to handle government and public sector transactions. Hence, the primary market rate was determined by a committee similar to the free market committee. The committee worked to prevent the difference between the two rates from exceeding 5 percent and to take into account the prevailing inflation rate. In October, the two markets were merged into a single free market, in which the rate was set on the basis of the interaction of supply and demand. Banks thus became free to determine and post the exchange rate at which they dealt. The widening gap between the real effective exchange rate and the nominal effective exchange rate from 1985 to 1989 reflects the rising inflation rate and the declining competitiveness of Egyptian products in world markets (Chart 11). However, after the devaluations introduced in 1989 and 1991 and after the establishment of the unified exchange market, the real and nominal effective exchange rates tended to become stable, and more likely to safeguard Egypt’s competitiveness.
In addition to this significant development in the exchange rate system, the external sector position improved considerably, as indicated by the decrease in the current account deficit. Expressed as a percentage of GDP, the external current account moved gradually from a deficit of 7.6 percent of GDP in 1985 to a surplus in 1989–91 that reached 8.7 percent of GDP in 1992. Imports as a percentage of GDP also fell. As a result of the debt restructuring since 1991, the foreign debt dropped from 189.4 percent of GDP in 1988 to 99.5 percent in 1992. The ratio of foreign debt service to exports of goods and services declined by one third between 1986 and 1992, reaching 20.4 percent. Thus, domestic reforms, a reduced foreign debt burden, the reform of exchange and payments system, and the open door policy have all contributed to the improvement in the external sector position (Chart 12).
Egypt: Selected Economic Indicators
(In percent)
Sources: IMF, International Financial Statistics; and IBRD, World Debt Tables.Egypt: Real and Nominal Effective Exchange Rates
(1980 = 100)
Source: International Monetary Fund.The movements in international reserves reflect the improvement in the external sector position. In the past few years, these reserves have been increasing steadily, growing from the equivalent of one month of imports in 1983–85 to the equivalent of 14.5 months in 1992. This achievement can be viewed as one of the main factors that allowed for a reduction in exchange restrictions. Against this background, it can be concluded that the second and third conditions for convertibility (those pertaining to the exchange rate and the reserves) have also been met.
Comparison of the Four Countries’ Experiences
Several difficulties are inherent in the comparison of different countries’ experiences in achieving currency convertibility. In the case of the four countries discussed above, as already noted, Morocco and Tunisia have already declared recently their acceptance of the obligations under Article VIII of the IMF’s Articles of Agreement on convertibility for current account transactions, while Jordan and Egypt have attained what could be considered de facto convertibility. A comparison based solely on these recent developments entails the difficulty, however, of isolating and defining the results that stem from convertibility, not only because of their similarity to those that arise from trade liberalization but also because the overall performance of the economy examined reflects also the effects of other liberalization measures, reforms, and policies.
Egypt: Selected Economic Indicators
(In percent)
Sources: IMF, International Financial Statistics; and IBRD, World Debt Tables.It may be possible, however, to make a comparison based on the timing of the liberalization of the exchange system (or the declaration of convertibility) and the implementation of other aspects of the adjustment programs implemented by the four countries. This comparison demonstrates the following similarities and differences.
First, each of these countries embarked on the liberalization of exchange restrictions—to reach the stage of establishing currency convertibility for current account transactions legally or de facto—within the context of comprehensive reform programs. These programs have not merely provided for restoring domestic and external financial stability and achieving flexibility in the exchange rate but have also encompassed structural reforms aimed at enhancing the growth rate, curtailing inflation, increasing investment, and improving the production and export structure, the government budget, and the balance of payments—to achieve and maintain domestic and external stability over the medium and long term.
Second, with respect to the four conditions for convertibility, each of the four countries has made tangible progress toward restoring domestic and external stability, attaining an appropriate exchange rate, building up reserves, and liberalizing domestic prices. The degree of progress toward meeting each of these conditions, however, varies among the countries.
Morocco has achieved acceptable levels in all four conditions. It established convertibility when it finished implementing its reform programs and dispensed with the use of IMF resources. The establishment of convertibility represented the culmination of Morocco’s decade-long adjustment efforts; however, to make its efforts completely successful, Morocco must continue to be vigilant, must prevent an increase in inflationary pressures, and must improve the real effective exchange rate to safeguard its export competitiveness.
Tunisia accepted the obligations under Article VIII at the end of one adjustment phase, supported by the IMF, and the start of a second one, coinciding with the launching of the fourth development plan. However, the progress Tunisia had achieved by the end of 1992 in each of the four conditions, as measured by the magnitude of the fiscal deficit, the level of the current account deficit, the level of reserves, and the extent of domestic price liberalization, was less than that achieved by Morocco. The sustainability of convertibility will therefore depend on the prompt completion of the envisaged reforms and on their success in achieving the desired results in the second phase. In this case, convertibility can be considered as one of the complementary elements of the structural adjustment program for the second phase.
Egypt and Jordan hastened to eliminate the exchange restrictions on current transactions as soon as an external balance was achieved and enough reserves had been accumulated, but before structural reforms were completed, which would guarantee a continued improvement in the domestic and external financial positions. The elimination of restrictions can be considered a complementary and facilitating element of their reform programs for future years. Egypt must still reduce its inflation rate and budget deficit as a percentage of GDP by improving its revenue and expenditure structure, by continuing the privatization process and reforming the remaining public sector enterprises, by liberalizing domestic prices, and by increasing labor mobility. Jordan is still at the beginning of its adjustment program, which seeks to increase the growth rate, to improve the production structure, and to increase exports.
Third, the liberalization of exchange restrictions occurred at different rates. In Morocco, the process took place gradually, and with a degree of tardiness, because it proceeded in tandem with the foreign trade liberalization process, which lasted nearly seven years. In Tunisia, the liberalization took place during the final years of the reform program that was implemented between 1986 and 1992; it also proceeded in conjunction with the release of trade from quantitative restrictions and advance permits. The difference in the two rates reflects a difference in assessing the importance of the socioeconomic consequences of this liberalization in both countries, and the degree to which convertibility complements future programs. In Jordan, the speed with which de facto convertibility for current account transactions and foreign investment transactions was attained resulted from Jordan’s characteristically limited control and economic openness. As the restrictions in effect were few and superficial, the cost of this step was relatively small. Moreover, convertibility will be important for completing the ongoing structural reforms, which will necessitate (among other things) an inflow of foreign investment to finance the development process and help overcome the structural constraints that hinder the economy.
In Egypt, the attainment of de facto convertibility has been the gradual result of policies adopted since 1987 to reform its exchange rate system and complete the establishment of the free exchange market and the unified exchange rate in 1991. It has also been facilitated by abundant reserves and foreign resources that have flowed into Egypt as a consequence of economic openness and liberalization, higher interest rates, and recent political conditions. The improvement in the external position alone is not likely to stabilize the situation unless it is supported by improvement in domestic financial stability.
Fourth, with regard to the timing of the announcement, Morocco announced one year before accepting the obligations under Article VIII that it would achieve convertibility at the beginning of 1993. It made this announcement in the wake of the tangible progress it had made in adjustment and reform, and the announcement became a public commitment that had to be fulfilled and could not be postponed. In effect, this announcement inspired confidence in the success of the adjustment effort and in the government’s determination to continue with the program to achieve its objectives. By contrast, in Tunisia, no advance announcement on the acceptance of the obligations under Article VIII was made. Such an announcement was considered a step to be implemented at a certain phase of the reform program to lay the ground for entering another phase. In Egypt and Jordan, such an announced commitment would have been premature for the technical reasons noted above. However, Jordan has expressed its intention to declare convertibility as early as possible. This could be accomplished when the current technical obstacles are overcome. These obstacles involve the presence of some arrears and a bilateral payments agreement with a member state. In Egypt, there is a possibility that a new foreign exchange law will be enacted that would provide greater freedom and abolish the few existing restrictions in the areas of recovering proceeds from tourism and exports and making foreign exchange payments remitted to the outside world dependent on the presence of imports.
Conclusions
From the preceding review and the comparison of the four countries’ experiences in their movement to achieve currency convertibility for current account transactions, the following conclusions can be drawn.
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Actual convertibility need not always represent the culmination or completion of adjustment and reform programs. It can also constitute a part of the adjustment and reform process, because it contributes to improved competitiveness, reduces differences between domestic and international prices, enhances the efficient use of domestic resources, and facilitates trade and production.
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A free exchange system contributes to confidence that bolsters reforms, attracts capital, revitalizes economic activity, boosts investment and growth, and increases available resources, thus helping achieve the reform objectives.
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Convertibility and a free exchange rate alone are insufficient to reform the economy and achieve the desired external balance, particularly over the medium term. They can, however, help to achieve the goals of structural reforms by eliminating price distortions, enhancing the efficient distribution of resources, increasing the incentives for and mobility of factors of production, and improving the competitiveness of exports.
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The attainment of convertibility, especially legal convertibility according to the obligations under Article VIII, presumes that there can be no reinstatement of restrictions. Therefore, a constant monitoring of comprehensive fiscal and economic developments and the observance of fiscal discipline become essential for maintaining continued domestic and external financial stability, exchange rate flexibility, and export competitiveness. Thus, the conditions for achieving convertibility are also conditions for its sustainability.
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The achievement of currency convertibility should be preceded by a thorough preparation that takes into account the circumstances of the country concerned and the difficulties it faces. Generally, achievement of the four conditions can precede or coincide with the achievement of convertibility. An official commitment to convertibility need not occur before the experimental phases are completed and before a balance is achieved in the external financial conditions—a balance that gives the assurance that this convertibility will be sustained.
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The prolonged coexistence of balance of payments problems and exchange restrictions is likely to complicate and prolong the reform process. Extraordinary political courage may be required to tackle these problems because the social costs of adjustment are high. If the problems are tackled promptly, however, there will be positive results and lower social costs.
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The gradual liberalization of the payments and exchange system, particularly in countries that have lived with strict controls for a long time, will prevent sudden changes and will provide all sectors of the economy with an opportunity to adapt gradually to the changes. On the other hand, an excessively lengthy process can sometimes result in prolonged hardship, retard the positive results of reform and liberalization, and run the risk of eroding some of these results.
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Eliminating exchange restrictions and establishing convertibility, together with liberalizing trade, could help countries to enhance competitiveness and to allocate domestic resources more efficiently. However, in view of the protectionist tendencies of the advance industrial countries and the different dimensions of these countries’ economic and technological resources and their negotiating capabilities, it is unclear whether eliminating exchange and trade restrictions will give the small countries an equal opportunity to benefit in their dealings and to trade with the giant countries and blocs from their comparative advantage. Moreover, the development of any country’s comparative advantage under these unequal conditions requires reliance on improved productivity, increased growth rates, a fundamental change in the import and export structures, and the introduction of modern technologies. All these changes require intensive foreign financing, which raises the question of whether such financing—particularly for small countries—can be secured without an exorbitant cost to national sovereignty.
Appendix
Steps to Free Exchange and Current Positions on Currency Convertibility
We have reviewed in the body of this paper the progress toward achieving the conditions necessary to attain and perpetuate currency convertibility in Morocco, Tunisia, Jordan, and Egypt. We have also noted the degree of liberalization achieved in current foreign transactions, but the details of the current situation or the steps taken in recent years regarding convertibility (IMF, 1993) were not to be considered. To make the picture complete, this appendix deals with and compares the most important features of the liberalization of payments introduced by these countries in recent years.
Morocco
On January 21, 1993, the Moroccan authorities announced Morocco’s acceptance of the obligations of Article VIII of the IMF; that is, they accepted the dirham’s convertibility for the purposes of current account transactions. From 1987 until that date, Morocco had gradually reduced the restrictions imposed on conversion (or remittance) through a gradual shift from the system of quantitative restriction and advance import permits to the system of unrestricted importation. This system is implemented by the submission of a bond or guaranty to a licensed bank, which then remits the value when the necessary documents are received. In 1992, the authorities agreed to establish the rule of importation without quantitative or value restrictions, except for three commodities that require an advance permit: pharmaceuticals, textiles, and energy (fuels). Customs protection was noticeably reduced. Hence most differences from international prices were eliminated. All exports were also liberalized, except for subsidized goods, antiquities, and live animals. The authorities also permitted the maintenance of a part of the value of export proceeds in special accounts to finance imports connected with exports.
The authorities also liberalized in the past three years most invisible payments through current account transactions. However, they maintained some reasonable and well-studied limits in light of the need for tourist travel expenses, business travel expenses, and personal expenses for citizens and students residing abroad.
With respect to capital, foreign investment has been liberalized, and invested capital enters freely and is recouped freely. Income generated by this capital is also remitted freely. This aspect is controlled through special accounts that can be opened with licensed banks. Moreover, the old accounts that froze foreign capital have been abolished and replaced by convertible dirham accounts with five-year terms. Remittances from these accounts are subject to annual limits, but domestic use of the accounts is unrestricted. Citizens residing abroad continue to be required to obtain a permit from the Exchange Bureau to remit capital to the outside world and to pledge that the income will be returned to Morocco. Morocco has established a unified exchange rate that has adequate flexibility. Transactions are conducted in any of a long list of currencies whose prices are set by the Bank of Morocco, which deals in all these currencies. The most distinguishing feature of convertibility in Morocco is that its attainment has been coupled with the full liberalization of trade (with emphasis on liberalizing most invisible payments in the past two years) and with the near attainment of the previously mentioned preconditions.
Tunisia
The authorities announced their adherence to the provisions of Article VIII of the IMF agreement on January 6, 1993. Thus, the Tunisian dinar legally became a currency convertible for current account transactions. However, unlike the experience in Morocco, this convertibility was not coupled with a large degree of progress toward import liberalization. Tunisia’s import system continues to include a segment that is liberalized and a part that is governed by a number of quantitative restrictions and various measures, depending on the import identity, the nature of the import transaction and its connection with exports, and whether the process is financed by official foreign exchange. Tunisia has the system of import with an import license (quotas for certain goods), the annual licensing system (annual sums), and the import card system for some production sectors. This system permits the importation of certain goods within certain limits. These goods are exchangeable within the same comprehensive ceiling. This system makes it possible to benefit from the system of importation with remittance from resources outside Tunisia; it encompasses the state trade establishments, which import nearly 25 percent of all imported goods. Each of these import systems has its own special payment procedures. Some of the liberalization measures adopted in recent years are tantamount to a series of reductions of customs tariffs or import taxes.
Invisible payments must be licensed by the central bank, with exceptions. Recent exceptions have included (1) interest payments and original loans; (2) reinsurance; (3) subscriptions to magazines and periodicals; (4) net profits and revenues of companies headquartered abroad; (5) expenditures connected with the activities of exporters; (6) 50 percent of the income of foreign experts and technical assistants employed by the public sector; (7) certain limited amounts of travel expenses for several purposes, such as tourism and business travel; (8) cost of living and settlement for students; and (9) pensions of nonresident citizens. These limits were increased or doubled at the beginning of the year and thus moved closer to the limits of adequacy for reasonable requirements.
Most exports (90 percent, excluding energy) have been liberalized, but their proceeds must be returned to licensed banks within ten days of the date of payment. Residents with foreign resources may benefit from convertible dinar accounts within certain limits.
With regard to capital, foreign investment laws issued since the mid-1980s offer foreign investors incentives that include the right to remit profits without restriction and to remit capital with a permit, plus other incentives.
Convertibility for the purposes of current account transactions has become actually and legally valid, but it is still tainted by some limitations on personal transactions and expenses. Significant restrictions continue to exist for capital account transactions.
Jordan
Even though its resources are limited and it is greatly exposed to foreign influences, Jordan has always had an exchange system closer to freedom than restriction. Jordan has taken advantage of its central location in the Arab East, on trade routes going in all directions and adjacent to the oil producing countries. Perhaps Jordan’s openness has been one of the reasons for the dinar’s strength and stability for a long period extending until the 1980s and for the speed with which it regained the confidence and balance it achieved last year. Another reason was perhaps the exchange rate flexibility and a reunified exchange rate, plus Jordan’s quick retreat from the few restrictions (primarily involving the requirement of advance deposits for importation) it had imposed to confront the 1987–88 crisis. The Jordanian exchange system can be summarized as follows.
The central bank exercises control over exchange and is entrusted to grant exchange permits. However, licensed commercial banks are entrusted to issue exchange permits for remittance of the value of imports and, within the permitted annual limits, remittances for invisible personal expenses. Meanwhile, the Ministry of Industry and Commerce drafts the import policy in cooperation with the other ministries concerned.
Foreign exchange permits are granted automatically to people who have import licenses. An importer is entitled to open a documentary credit or to pay in return for documents. However, the advance approval of the central bank is required to use suppliers’ credit.
Invisible payments are unrestricted if they pertain to licensed imports. Other expenses that are remitted freely and without discrimination include personal payments, such as the expenses of a family living abroad; educational, medical, and tourism expenses; pilgrimage expenses; and subscriptions to scientific magazines. The limits of these remittances (up to 20,000 Jordanian dinars) are high and comfortable by all criteria, and they greatly exceed the limits applied in Morocco and Tunisia. A comfortable ceiling is also established for cash sums that a traveler can take out of the country. Moreover, nonresidents working in Jordan are entitled to remit 70 percent of their wages if they have nonresident accounts.
Exporters are required to return the proceeds of their exports and sell them to licensed banks. They may retain 10 percent of the value of these proceeds in the form of foreign exchange deposits for the importation of production inputs. They are also required to cede the proceeds of invisible transactions. Expatriate Jordanians are entitled to deposit their savings at licensed banks in foreign exchange, regardless of their value. Upon their return from abroad, they may retain unlimited sums in this account for five years, after which they must cede any amount over JD 500,000, the maximum resident Jordanians are permitted to maintain in foreign exchange accounts.
Gold may be imported without central bank approval, but its export requires prior approval. The entry of capital is unrestricted, but its departure requires central bank approval. Investment in Arab countries is permitted if there is a bilateral agreement that deals with the provisions of such investment. The investment promotion law permits the remittance of profits and interest belonging to licensed foreign investments. Moreover, it permits capital to be re-exported after two years of investment. The law also permits foreign firms planning to invest outside Jordan to be accorded in Jordan the same treatment as nonresidents for the purpose of exchange control.
It is evident from the above that, practically speaking, Jordan is applying all that is required for free conversion for the purpose of current external transactions. But because of the presence of arrears in certain obligations as a result of the severe crisis to which Jordan was exposed recently and the presence of a payment agreement with Iraq, Jordan has not announced its legal adherence to currency convertibility for such transactions. Perhaps there is another reason, namely, the need to be deliberate and to make certain of continued improvement in the external financial position and of completion of the structural reforms already initiated.
Egypt
The establishment in 1991 of a free exchange market in Egypt notably distinguishes it from the other three countries. In Morocco, Tunisia, and Jordan, the central bank sets the exchange rate on the basis of a currency basket whose makeup and weights reflect the importance of the currencies in the country’s international dealings. In contrast, the Egyptian exchange market was created in response to an existing system of multiple exchange rates that had historically failed to deal with the chronic problem of shortage of resources, even though the rates were frequently amended. Establishment of the unified free exchange market and the full liberation of the exchange rate have helped to accelerate the liberation of exchange transactions from restrictions. The gradual and partial application of liberalization, initially through the system of importation with private resources and then through release of the freedom of acquisition and disposal in 1976 and the creation of a free banking market in 1987, constituted the beginnings of the creation of an operational exchange market.
In 1991, after the problem of the shortage of foreign exchange resources and the balance of payments deficit was overcome, two exchange markets were established: a free market for most transactions and a primary market for government and public sector resources and investments. The two markets were unified in the same year in what has come to be known as the free exchange market. Through this market, the exchange rate is determined in accordance with the forces of supply and demand. Every bank determines foreign exchange purchase and sale prices freely, provided that it publicizes them explicitly. In 1992, money-changing companies were permitted to sell and purchase foreign exchange for their own benefit through licensed active banks. Thus the components and elements of market and price unification became complete (Central Bank of Egypt, 1992).1
The current exchange system can be summarized as follows.
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Government imports and public sector imports are made at the free price within the bounds of the foreign exchange budget established at the central bank.
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Private sector imports are made freely for all goods, excluding some banned commodities, also at the free price.
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Banks are permitted to make the remittances necessary to pay the value of imports. The system of advance deposits for imports has been scrapped.
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With respect to invisible payments, banks are empowered to supply foreign currency to the government and the public sector within the framework of the foreign exchange budget.
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Banks sell foreign currency to establishments licensed to deal in foreign exchange without any restrictions when this is for the purpose of invisible payments concerning individuals, corporations, public sector corporations, and corporations founded in accordance with the current investment law.
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Travelers are permitted to take unlimited amounts of foreign currency and other means of payment out of the country.
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Nonresidents are excluded from the right to purchase flight tickets in local currency; this right is available to citizens and foreigners residing in the country for more than five years.
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No license is needed for exports, excluding certain goods. Oil, cotton, and rice exports are no longer confined to the public sector, but their proceeds must be returned to the country. The same applies to books and printed materials. It is permitted to retain the proceeds of other exports in a special account at a licensed bank, to be used for imports or invisible payments or to be sold in the free market. But these proceeds cannot be transferred to a free account.
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Invisible proceeds can be maintained abroad or deposited in a free account indefinitely, excluding tourism proceeds that must be ceded to licensed banks. However, hotels may retain 25 percent of these proceeds in special accounts, and invisible public sector corporations may keep 10 percent of their invisible proceeds.
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Travelers may bring in and dispose of unlimited amounts of foreign exchange, but not more than LE 100 in Egyptian currency may be brought in or taken out of the country.
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With respect to capital, no restrictions apply to capital transfers by emigrants or foreigners leaving the country permanently. Transfers of legal alimony to divorced wives are also unrestricted.
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Transfers in return for imports and the export of securities must be done through licensed banks that act as brokers.
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Investment abroad by government units or public sector agencies or corporations is subject to advance licensing and to compatibility with the laws in force.
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Cash assets of inheritances reverting to nonresident foreigners must be placed in an untransferable capital account at a licensed bank. The same applies to the net shares of nonresident foreign heirs. The account will be used to meet the government’s dues, legal expenses, and supplements within annual limits.
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The value of real estate purchased by foreigners in Egypt is paid in convertible currencies. The proceeds of foreigners’ sale of their real estate in Egypt are transferred within the limits of the sum converted originally into Egyptian pounds when the real estate was purchased, plus a sum calculated according to a formula that is supposed to reflect a moderate capital gain.
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The control system restricts the ability of banks to engage in foreign borrowing by tying this borrowing to the size of their foreign assets and their capital.
It is evident from the above that Egypt actually applies convertibility for current transactions. It also permits a broad space for convertibility for capital transactions, all within the framework of a free and unified exchange rate. The only factors that separate Egypt from legal convertibility are (1) its maintenance of a payments agreement with Sudan and the remnants of the balances of past agreements, considered to constitute multiplicity in the exchange rates, and (2) the presence of some arrears in repayments owed for past bilateral debts.
References
Central Bank of Egypt, “Development of Regulation of Egypt's Exchange Market,” paper presented to the meeting of governors of the Arab central banks and currency establishments, Abu Dhabi, September 1992; in Arabic.
Gilman, Martin G., “Heading for Currency Convertibility,” Finance & Development, Vol. 27 (September 1990), pp. 32–38.
Green, Joshua, and Peter. Isard, Currency Convertibility and the Transformation of Centrally Planned Economics, IMF Occasional Paper No. 81 (Washington: International Monetary Fund, 1991).
International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (Washington, 1993).
Mathieson, Donald J., and Lilians Rojas-Suárez, Liberalization of the Capital Account: Experiences and Issues, IMF Occasional Paper No. 103 (Washington: International Monetary Fund, 1993).
Director, Economic Policy Institute, Arab Monetary Fund. The opinions expressed in this paper are those of the author and do not necessarily reflect those of the management or staff of the Arab Monetary Fund.
There are still two other exchange rates. One equals LE 0.30 per U.S. dollar and is applied to transactions concluded within the framework of the valid payments agreements with Sudan. The other is a historical rate equaling LE 0.03913 per U.S. dollar, used to settle balances in old and terminated payment agreements.
