Chapter

Appendix III Press Communiqués of the Interim Committee of the Board of Governors on the International Monetary System 1

Author(s):
International Monetary Fund
Published Date:
September 1978
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Press Communiqué, Ninth Meeting, Washington, September 24, 1977

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its ninth meeting in Washington, D. C., on September 24, 1977, under the chairmanship of Mr. Denis Healey, Chancellor of the Exchequer of the United Kingdom, who was selected by the Committee to succeed Mr. Willy De Clercq of Belgium as Chairman. Mr. H. Johannes Witteveen, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. G. D. Arsenis, Director, Division for Money, Finance and Development, UNCTAD; Mr. Rene Larre, General Manager, BIS; Mr. Emile van Lennep, Secretary-General, OECD; Mr. F. Leutwiler, President, National Bank of Switzerland; Mr. Olivier Long, Director-General, GATT; Mr. Robert S. McNamara, President, IBRD; Mr. Frangois-Xavier Ortoli, Vice-President, CEC; Mr. Cyrus Sassanpour, Market Research Analyst, OPEC; and Mr. Cesar E. A. Virata, Chairman, Development Committee.

2. The Committee discussed the world economic outlook and the policies appropriate in the current situation.

While welcoming progress made in many countries in achieving stabilization and growth objectives, the Committee expressed concern about the faltering of economic activity during recent months in a number of industrial countries. Sluggishness in private investment demand, the Committee stated, continued to be a major feature of the current economic situation.

The Committee noted that the slower expansion of the economic activity had been accompanied by a deceleration in the growth of world trade. The impact of this on the export earnings of developing countries was a matter of concern to the Committee, which noted that these earnings had also been adversely affected by the marked declines in primary commodity prices during recent months.

The Committee paid considerable attention to the special problems that affect the economies of the developing countries. It was particularly concerned to ensure that adjustment measures by developed countries should not reduce the transfer of real resources to the developing world.

The Committee expressed concern about the persistence of high unemployment, noting that the overall rate of unemployment for the industrial countries as a group remained close to the recession peak reached in the latter part of 1975.

Although progress has been made in many countries in countering inflation, the Committee remained concerned about current rates of inflation noting that in almost all countries these were still much too high to be considered acceptable.

The Committee reaffirmed its view that tendencies toward protectionist trade policies are unacceptable from an international point of view and should be strongly resisted. In this connection, it stressed the importance it attached to the successful outcome of the current Multilateral Trade Negotiations in Geneva, and to the early conclusion of agreements that would benefit all countries, in particular developing countries.

With respect to national economic policies, the Committee agreed on the following conclusions:

(a) All countries in relatively strong external positions should make every effort to ensure adequate growth of domestic demand compatible with containing inflation; this would not only be in the interest of those countries themselves, but also would help to ensure achievement of a satisfactory rate of growth in world trade, supporting and facilitating external adjustment efforts by deficit countries. The Committee expressed regret that growth of domestic demand in some of the larger industrial countries had lagged behind the targets and expectations of their authorities, and it welcomed the expansionary measures recently announced by several governments. Also, the Committee expressed the belief that, as the results of adjustment action become progressively more evident, an increasing number of countries will be able to bring their inflation and balance of payments problems under control and thus will be strong enough to make their contribution to growth of the world economy.

(b) Demand policies in countries with relatively high inflation or seriously weak external positions should place primary emphasis on combating inflation and improving the balance of payments. The Committee reaffirmed its belief that for these countries this was not only necessary in present circumstances but over time would yield the best results for growth and employment.

(c) The Committee noted the importance of structural problems in the economic situation of many countries and the need to develop appropriate energy policies.

(d) Policies in all countries should be directed as a minimum to avoiding a resurgence of inflation and in many countries to reducing inflation rates which are clearly excessive.

3. An important requirement of the international adjustment process relates to the provision of official financing to deficit countries. Such finance should be provided in sufficiently large amounts, and under appropriate conditions which take account of the specific problems of the borrowing countries, and permits adequate time for necessary adjustment.

The Committee welcomed the completion by the Executive Directors of their work on the establishment of a supplementary financing facility that will enable the Fund to expand substantially the resources it can make available to members facing payments difficulties that are large in relation to their quotas, and the adoption of the decisions of August 29, 1977 on the facility and related arrangements. The Committee noted that a number of members and official institutions have expressed their willingness to make available to the Fund resources for the financing of the facility of about SDR 8.6 billion, equivalent to approximately $10 billion, but that the facility will not become operative until agreements have been entered into for a total amount of financing of not less than SDR 7.75 billion, including at least six agreements each of which provides for an amount not less than SDR 500 million. The Committee welcomed the prospect that some of the initial amounts made available might be increased and noted that it would be possible for other members in strong positions to make resources available to the facility. In view of the need of some members for prompt financial assistance on the scale envisaged under the new facility, the Committee urged all potential participants in the financing of the facility to complete as soon as possible the necessary action that will bring the facility into operation at the earliest date possible. At the same time, the Committee agreed to request the Executive Directors to pursue their consideration of the possibility of a subsidy, perhaps through voluntary contributions, that would be related to the charges payable by members determined by the Fund to be in difficult circumstances.

4. The Committee noted the report of the Executive Directors on the Seventh General Review of Quotas and their intention to give priority to this matter in their work after the Annual Meeting. It asked the Executive Directors to submit appropriate proposals to the Committee for its consideration, at its next meeting, together with draft recommendations to the Board of Governors.

5. The Committee reaffirmed its request to the Executive Directors to report on the question whether a further allocation of SDRs would be advisable at the present time and to report to the Committee at its first meeting in 1978.

The Committee also reaffirmed its request to the Executive Directors to review the characteristics and uses of the SDR so as to promote the purposes of the Fund, including the objective of making the SDR the principal reserve asset in the international monetary system.

6. The Committee expressed concern at the delay in the entry into force of the Proposed Second Amendment of the Fund’s Articles of Agreement and in the increases in quotas under the Sixth General Review of Quotas. In this connection the Committee noted that it has been eighteen months since the Board of Governors completed its action on both these matters and that, although progress had been made in recent months, acceptances and consents from many more members will be needed to attain the required majorities. In view of the importance for members and the international monetary system of the entry into force of the Amendment and the increases in quotas, the Committee once again urged all members that have not yet accepted the Amendment or consented to the increases in their quotas, to do so at the earliest possible date.

7. The Committee agreed to hold its next meeting in Mexico on March 21, 1978. 2

Press Communiqué, Tenth Meeting, Mexico City, April 30, 1978

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its tenth meeting in Mexico City on April 29-30, 1978, under the chairmanship of Mr. Denis Healey, Chancellor of the Exchequer of the United Kingdom. Mr. H. Johannes Witteveen, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. G. D. Arsenis, Director of Money, Finance and Development, UNCTAD; Mr. Rene Larre, General Manager, BIS; Mr. Emile van Lennep, Secretary-General, OECD; Mr. F. Leutwiler, President, National Bank of Switzerland; Mr. Frangois-Xavier Ortoli, Vice-President of the Commission, CEC; Mr. Gardner Patterson, Deputy Director-General, Trade Policy, GATT; Mr. Cyrus Sassanpour, Market Research Analyst, OPEC; Mr. Ernest Stern, Vice President, Operational Staff, IBRD; Mr. Cesar E. A. Virata, Chairman, Development Committee.

2. The Committee noted with satisfaction the recent entry into force of the Second Amendment of the Fund’s Articles, which has brought about a modernization of the Articles and will improve the operation of the Fund in current conditions and permit its adjustment to future conditions as they develop. The Committee also welcomed the consents by the overwhelming majority of the Fund’s members to the increases in their quotas as proposed under the Sixth General Review of Quotas and expressed the hope that the rest of the members will consent in the near future.

3. The Committee discussed the world economic outlook and the working of the international adjustment process.

The Committee recognized certain favorable developments. Notable among these were the progress made by a number of countries in achieving stabilization and growth objectives, a marked reduction in the surplus of the oil exporting countries, and improved access, over the last few years, by the non-oil developing countries as a group to sources of finance for their current account deficits, even though the combined current account deficit of these countries is expected to show an increase from 1977 to 1978.

Nevertheless, the Committee noted, world economic developments over the past year or so were unsatisfactory in some important respects. In particular, the Committee expressed concern with the slow and uneven pace of recovery from the severe 1974-75 recession, the prevalence of historically high levels of unemployment, the slow growth of world trade, the continuation of high rates of inflation in many countries, the maldistribution of current account balances, and instability of exchange rates among the industrial countries. The Committee emphasized the need to assure better economic performances, especially in the industrial countries, and an improved environment for the adjustment of external trade and payments positions.

The Committee noted with concern the risk of increasing resort to protectionist action of all kinds in the wake of slow growth, low capacity utilization, and high unemployment. It was agreed that determined and broadly conceived national and international efforts, directed at the underlying causes as well as at specific protectionist measures, were urgently needed to arrest this drift toward protectionism and to reduce trade barriers. The successful completion of the Multilateral Trade Negotiations that are now well under way would do much to stop this development.

Considerable attention was given by the Committee to the special problems of the developing countries, including the need to accelerate their rates of growth as a continuing objective and a common responsibility of the international community. The vulnerability of their economies to slow growth of markets in the industrial world or to reduced access to such markets was a source of widespread concern, and the Committee stressed the desirability of measures on the part of the developed countries to assure continued expansion on an adequate scale of the flow of real resources to developing countries, which would help to promote the adjustment process.

In the course of the Committee’s discussion, a consensus was reached on the general outlines of a coordinated strategy, containing mutually supportive and reinforcing elements, designed to promote noninflationary growth of the world economy, leading to higher employment, a reduction of imbalances in international payments, and the conservation of energy. The Committee emphasized that the implementation of this strategy—geared to the medium-term, through 1980—should take due account of the wide differences in current positions of individual countries. It suggested that, among countries in the industrial world, growth policies should be related to the success achieved in reducing inflation, the strength of the external position, and the degree of current and prospective economic slack.

In view of the risk of reviving inflationary pressures, the Committee noted the utility of policies appropriate to counter the predominance of cost-push factors in the current inflation. The Committee also suggested that for those countries with strong cost-push factors fiscal stimulus provided through tax reductions might often be more appropriate than equivalent stimulus applied through increases in domestic government spending unless such spending is investment-oriented.

The Committee was convinced that the general strategy envisioned would yield a more satisfactory rate of economic expansion for the industrial and developing countries and the world economy generally, within a pattern of differentiated growth rates among countries, which would reduce external payments imbalances. The improvement in basic underlying conditions would in this way contribute to greater stability of exchange markets, which is extremely important for the health of the world economy. Greater stability in these circumstances would help to achieve the higher growth rates desired and to improve the prospects of the developing countries.

4. The Second Amendment has brought into effect the provisions of a new Article IV which stresses the objective of a “continuing development of the orderly underlying conditions that are necessary for financial and economic stability” and makes it an obligation of each member “to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.” In accordance with Article IV, the principles for surveillance shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members. The principles and procedures for surveillance over exchange rate policies endorsed by the Interim Committee and approved by the Executive Board in April 1977 have gone into operation under the Second Amendment. The Committee noted with approval that the Fund has recently adapted its consultation procedures and practices to take account of surveillance, and that particular attention will be focused on those cases in which there are questions as to whether the exchange rate policies of members are consistent with the agreed exchange rate principles. The Fund has always concerned itself with situations in which the value of a currency is not compatible with the smooth working of the adjustment process, or where disorderly conditions exist in exchange markets. The Committee noted that the Fund now has both the obligation and the means through surveillance to make a greater contribution than before to the effective working of the exchange rate system. In this context, some members asked that the Executive Board should consider whether the Council should be brought into being under the Second Amendment as a decision-making organ. Some members of the Committee do not favor bringing the Council into existence because it would not contribute to the working of the international monetary system under the Second Amendment. The Committee received suggestions for the strengthening of surveillance, including the provision of more information by both surplus and deficit countries to assure the efficient working of the surveillance process.

5. The Committee noted the report of the Executive Board on improving the characteristics and broadening the uses of the SDR under the powers of the Second Amendment and on the question of an allocation of SDRs.

The Committee agreed that in present circumstances the interest rate on the SDR should be increased from 60 percent to no more than 80 percent of the weighted average of short-term interest rates in the five member countries with the largest quotas, and asked the Executive Board to agree on a satisfactory formula for the rate of remuneration on this basis. Some members could support an increase in the interest rate only on the condition that an allocation of SDRs would be made.

The Committee requested the Executive Board to pursue its work with regard to additional types of uses of SDRs that might be permitted by the Fund in accordance with the provisions of the amended Articles, and to report to the Interim Committee on these matters at its next meeting. Some members favored the abolition of reconstitution and requested the Executive Board to review the rules for designation and reconstitution under the amended Articles.

A large number of members supported an allocation of SDRs; some of these believed that the present state of world liquidity was not such as to justify more than a modest allocation. Some members suggested that a proportion of quota increases should be paid by members in SDRs.

The Committee agreed to request the Executive Board to pursue its work on all these aspects of an allocation of SDRs and to submit appropriate proposals, together with draft recommendations, for consideration by the Committee at its next meeting.

The Committee also considered the suggestion of the Managing Director that an allocation of SDRs could be combined with a reduction in the amount of reserve currency outstanding through a Substitution Account administered by the Fund. Some members believe that agreement on a Substitution Account would facilitate an allocation of SDRs. The Committee agreed that this suggestion of the Managing Director should be considered further and that a report should be submitted by the Executive Board for consideration by the Committee at its next meeting.

6. The Committee noted the report of the Executive Board on the Seventh General Review of Quotas and considered the issues involved. Recalling that the Board of Governors in its Resolution No. 31-2 decided that the Seventh Review of Quotas should be completed by February 9, 1978, the Committee expressed concern at the delay in completing the Review. The Committee reaffirmed its view that there was a need for an increase in total quotas under the Seventh Review that would be adequate to meet the expected need for conditional liquidity over the next five years and that would strengthen the available sources of balance of payments financing by enhancing the ability of the Fund to provide such financing without heavy recourse to borrowing and by furthering the process of international adjustment. Most members of the Committee were of the view that an increase of the order of at least 50 percent of the quotas approved under the Sixth General Review would be appropriate in view of the present and prospective circumstances of the international economy. Most members of the Committee agreed that the Seventh Review should be mainly equiproportional, with at most a very small number of selective quota increases, in which case most members felt that the quota share of no developing country should be decreased except for one or two members whose quotas would remain unchanged.

Some members suggested a limited increase in the first credit tranche if quota increases were more than a modest amount, but other members considered that the first credit tranche should be enlarged if the increases were not more than a modest amount.

The Committee asked the Executive Board to give priority to these matters in its work in the coming months and to submit to the Board of Governors appropriate proposals, together with draft recommendations, for consideration by the Interim Committee at the time of the next Annual Meeting of the Board of Governors.

Several members asked that the criteria for quota increases should be reconsidered after the Seventh General Review.

7. The Committee expressed its concern at the long delay in bringing into operation the supplementary financing facility, the establishment of which was decided upon more than six months ago. In view of the need of a number of members for prompt financial assistance on the scale envisaged by the supplementary financing facility, the Committee urged that all necessary steps be taken for bringing the facility into operation at the earliest possible date. In this connection, Committee members from developing countries asked the Executive Board to review the conditionality attaching to the facility and also to drawings under regular credit tranches, and called again for an examination, as early as possible, of the establishment of a subsidy related to the rates of charges that would be payable by low-income countries. The Committee welcomed the intention of Nigeria and Guatemala to contribute to the financing of the facility SDR 220 million and SDR 30 million, respectively, and the intention of Venezuela to increase its contribution from SDR 450 million to SDR 500 million. As a result, the total financing of the facility will be approximately SDR 8.75 billion (about US$11 billion), as follows (expressed in millions of SDRs):

Abu Dhabi150
Belgium150
Canada200
Federal Republic of Germany1,050
Guatemala30
Iran685
Japan900
Kuwait400
Netherlands100
Nigeria220
Qatar100
Saudi Arabia2,150
Swiss National Bank650
United States1,450
Venezuela500

8. The members of the Committee, noting that Mr. Witteveen is about to relinquish his position as Managing Director of the Fund, expressed on their own behalf and on behalf of their constituencies their deep appreciation and gratitude for the superb manner in which he has discharged the responsibilities of his office in difficult circumstances. The members of the Committee also took the opportunity to congratulate Mr. Jacques de Larosière on his designation as Mr. Witteveen’s successor and wished him success in his important and difficult task in the years ahead.

9. The members and associates of the Interim Committee expressed deep appreciation for the welcome and hospitality extended to them in Mexico and thanked the Government of Mexico for the outstanding facilities provided for the tenth meeting of the Committee.

10. The Committee agreed to hold its next meeting in Washington, D.C., on September 24, 1978.

1No communiqués were issued by the Development Committee during 1977/78.
2This date was subsequently changed.

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