- International Monetary Fund
- Published Date:
- September 1980
III. Press Communiqués of the Interim Committee and the Development Committee
Interim Committee of the Board of Governors on the International Monetary System
Thirteenth Meeting, Belgrade, October 1,1979
1. The Interim Committee of the Board of Governors of the International Monetary Fund held its thirteenth meeting in Belgrade, Yugoslavia, on October 1, 1979 under the chairmanship of Mr. Filippo Maria Pandolfi, Minister of the Treasury of Italy, who was selected by the Committee to succeed Mr. Denis Healey, formerly Chancellor of the Exchequer of the United Kingdom. Mr. Jacques de Larosiére, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. Gamani Corea, Secretary-General, UNCTAD; Mr. Rene Larre, General Manager, BIS; Mr. Emile van Lennep, Secretary-General, OECD; Mr. Fritz Leutwiler, President, Swiss National Bank; Mr. Olivier Long, Director-General, GATT;Mr. Robert S. McNamara, President, IBRD; Mr. Rene G. Ortiz, SecretaryGeneral, OPEC; Mr. Tommaso Padoa-Schioppa, Director General for Economic and Financial Affairs, CEC; Mr. Jean Ripert, Under-Secretary-General for International Economic and Social Affairs, UN; Mr. Cesar E.A. Virata, Chairman, Development Committee.
2. The Committee discussed the world economic outlook and the policies appropriate in the current situation.
The Committee noted that events in recent months pointed to a period of reduced economic growth in the industrial countries. Signs of a recession in the United States had become stronger, and some slowing of economic expansion in other industrial countries was in prospect. However, the continuation of a positive growth rate in these other countries should serve to limit the degree of the expected international slowdown.
The Committee observed with great concern that inflation throughout the industrial world had intensified. In view of this grave threat to economic and financial stability, the Committee emphasized that the main task of economic policy was to contain inflationary pressures and to reduce inflationary expectations. One of the immediate problems was to prevent the recent surge of price increases for oil and other primary products from adding to the strength of inflationary expectations and thus being built into underlying rates of increase in wages and prices. Accordingly, the Committee noted with satisfaction that reduction of inflation was being given priority in the economic policies of industrial countries, and it reiterated its view that in many countries progress in reducing inflation was an essential precondition for the resumption of vigorous economic growth.
On the external side, the Committee noted the very large shifts in current account balances that were occurring both among and within groups of countries. With the current account surplus of the major oil exporting countries expected to rise sharply, a corresponding deterioration in the combined current account balance of the oil importing countries as a group was obviously in prospect.
Although the industrial countries were expected to account for most of this deterioration in 1979, the problem of the distribution of current account surpluses and deficits among the major industrial countries—a matter of concern over the past few years—now appeared to be receding. This improvement in the pattern of payments imbalances was attributable in large part to off setting changes in demand conditions in the largest countries and to effects of past exchange rate changes, and was seen by the Committee as important evidence of a better working of the international adjustment process. In this connection, the Committee welcomed the closer cooperation in intervention policies in the exchange markets.
Noting that the combined current account deficit of the non-oil developing countries was expected to increase from about $32 billion in 1978 to $45 billion in 1979 and to well over $50 billion in 1980, the Committee expressed concern that this development would lead to an increase in external financial difficulties among these countries. Particularly disturbing was the prospect of a further rise in debt service charges, which in a number of developing countries were already rising faster than the rate of increase in the debt itself.
The Committee also noted with concern the fact that the worsening of the external position of the non-oil developing countries was occurring at a time of growing internal strains. While economic growth in the developing world was in general being fairly well maintained, it remained modest in relation to population growth and developmental needs. Moreover, the problem of inflation, already quite serious in many developing countries, had intensified in 1979.
The situation of the non-oildeveloping countries, the Committee observed, called in many cases for an improvement in domestic financial policies. It also underlined the need for a larger flow of external resources. It was especially important, in the Committee’s view, that the industrial countries, in the design of their economic policies, pay particular attention to the economic needs of developing countries. In this connection, a wide range of policies was seen to be relevant, including the reduction of protectionist measures; the opening of import markets to exports of manufactures and commodities from developing countries and of capital markets to outflows of funds to such countries; and measures to give new impetus to the flow of official development assistance, which had stagnated in recent years.
3. The Committee reiterated its view on the necessity of an active exercise by the Fund of its surveillance authority as a means of strengthening the adjustment process.
4. The Committee noted with satisfaction that since its last meeting there had been a number of developments that enhanced the Fund’s ability to provide balance of payments assistance to its members. It welcomed the adoption by the Executive Board of a new set of guidelines on the conditionality applicable to the use of the Fund’s general resources in the upper credit tranches and the improvements in the Fund’s compensatory financing facility, including the increase in the maximum amount of compensation that could be obtained under that facility.
The Committee also noted with satisfaction that, since the supplementary financing facility became operational in February, the Fund has begun to use the additional financial resources which have been put at its disposal to provide members experiencing difficult adjustment problems with assistance in larger amounts and for a longer period than could be made available under the regular credit tranches. In this connection, the Committee, like the Development Committee, asked the Executive Board to give attention to developing ways and means of lowering the interest costs of the supplementary financing facility.
The Committee also agreed with the request of the Development Committee to the Executive Board to give further consideration to increasing the maximum repurchase period in respect of purchases under the extended Fund facility from eight to ten years.
The Committee agreed to keep the adequacy of these measures under review.
5. The Committee recognized that there was a clear need for broad multilateral efforts to assist member countries in coping with the very difficult situation ahead. In this context the Program of Immediate Action outlined by the Group of 24 and endorsed by the Group of 77 would be kept in view.
6. The Committee noted the slow progress in the implementation of the increases in quotas approved under the Resolution of the Fund’s Board of Governors on the Seventh General Review of Quotas. In view of the importance of an early implementation of these increases in quotas, the Committee urged those members, especially those with the larger quotas, that have not yet taken action that would enable them to consent to the increases in their quotas, to do so as promptly as possible.
7. The Committee considered the report submitted by the Executive Board on the question of a substitution account in accordance with Paragraph 6 of the Committee’s communiqué of March 7, 1979. Such an account, administered by the Fund, would accept deposits of U.S. dollars from members of the Fund and certain other official holders in exchange for an equivalent amount of SDR–denominated claims. In the light of the report submitted by the Executive Board, the Committee concluded that such an account, if properly designed, could contribute to an improvement of the international monetary system and could constitute a step toward making the SDR the principal reserve asset in the system.
In order for the account to achieve widespread participation on a voluntary basis and on a large scale, among other things, it should satisfy the needs of depositing members, both developed and developing, its costs and benefits should be fairly shared among all parties concerned, and it should contain satisfactory provisions with respect to the liquidity of the claims, their rate of interest, and the preservation of their capital value.
The Committee, noting the progress that has been made and recognizing that a number of issues remain to be resolved, asked the Executive Board to continue to direct priority attention to designing a substitution account plan in accordance with the preceding paragraphs and in light of the views expressed by the members of the Committee, and to report progress to the next meeting of the Interim Committee.
8. The Committee agreed to hold its next meeting in Hamburg, Germany, on April 25, 1980.
9. The Committee expressed their warm appreciation for the hospitality of the Government of Yugoslavia and for the excellent arrangements provided for the meeting.
Fourteenth Meeting, Hamburg, April 25, 1980
1. The Interim Committee of the Board of Governors of the International Monetary Fund held its fourteenth meeting in Hamburg, Germany, on April 25, 1980 under the chairmanship of Mr. Filippo Maria Pandolfi, Minister of the Treasury of Italy. Mr. Jacques de Larosiére, 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 Division, UNCTAD; Mr. Alexandre Lamfalussy, Economic Adviser and Head of the Monetary and Economic Department, BIS; Mr. Pierre Languetin, Member of the Governing Board, Swiss National Bank; Mr. Emile van Lennep, Secretary–General, OECD; Mr. Olivier Long, Director–General, GATT; Mr. René G. Ortiz, Secretary–General, OPEC; Mr. Francois–Xavier Ortoli, Vice–President, CEC; Mr. Jean Ripert, Under-Secretary-General for International Economic and Social Affairs, UN; Mr. Ernest Stern, Vice President, Operational Staff, IBRD; Mr. Cesar E.A. Virata, Chairman, Development Committee.
2. The Committee discussed the world economic outlook and the policies appropriate in the current situation. Two aspects particularly concerned the Committe: worldwide inflation and the payments imbalances of the non-oil developing countries.
Expressing great concern at the dramatic and widespread rise in rates of inflation since its meeting in Belgrade, the Committee agreed that the top priority being given in many countries to the fight against inflation must not be relaxed.
The Committee recognized that short-term prospects for growth of the world economy, and particularly of economic activity in the industrial countries, are not good. Success in reducing inflation was considered a condition for better investment performance and resumption of satisfactory growth over the longer term.
It was recognized that efforts to contain inflation require an appropriate balance between monetary and fiscal policies. In that light the Committee stressed that more effective use of fiscal policy, with better control of government spending, is essential.
The Committee continued to attach great importance to avoiding secondary repercussions of the recent oil price increases on wages, other incomes, and prices of non-oil goods and services. The Committee noted the desirability of doing everything feasible to ensure that incomes grow at a rate which is consistent with anti-inflationary policies.
The Committee also emphasized the need to supplement fiscal and monetary policies with measures designed to improve supply conditions and promote higher levels of saving and investment. In this general context, the Committee recognized the pervasive impact of the energy situation on all aspects of economic performance and stressed the importance of measures to conserve energy and to develop new sources of energy.
With respect to the international payments situation, the Committee noted that shifts in current account balances among major groups of countries are proving even larger than was visualized at its previous meeting last October. According to the estimates of the IMF staff, the current account surplus of the oil exporting countries is now expected to reach $115 billion in 1980 and to remain very large in 1981, while the combined current account deficit of the non-oil developing countries is likely to approach $70 billion in 1980—compared with $55 billion in 1979—and to rise still further in 1981, and the deficit of the industrial countries on current account (excluding official transfers) will probably rise from $10 billion in 1979 to the range of $45–50 billion in 1980 before subsiding in 1981.
What the Committee found most disturbing about the payments imbalances now in prospect was the sharp increase in the current account deficit of the non-oil developing countries. It was feared that this adverse swing would generate external financial difficulties for many of these countries, and that a number of low-income countries in the group would face severe problems in maintaining an adequate flow of imports. To avert hardships for these latter countries, the Committee urged provision of sufficiently large amounts of aid and concessional loans.
The Committee noted that a number of developing countries, and especially those whose own manufacturing industry is most advanced, have relatively good access to international financial markets, and may be expected to cope with the sharp rise in their import bills partly through expanded international borrowing. While recognizing the need for prudential supervision, the Committee expressed concern that such supervision should not impede recycling. The Committee was concerned, never theless, about the medium-term implications of such heavier borrowing. With the escalation of outstanding debt, amortization payments and interest costs—especially those incurred on fixed terms involving high rates of interest—will make sizable claims on debtors’ export earnings and other available funds over the next few years. To minimize these burdens, the Committee urged that developing countries seek a judicious blend of adjustment and financing to meet the payments problems immediately ahead.
Recognizing that the ability of non-oil developing countries to achieve the desired objectives would depend importantly on their access to foreign markets, the Committee urged the industrial countries to keep their markets open to exports from developing countries. Avoidance of protectionist trading policies was considered of vital importance at a time of sluggish growth in world economic activity.
3. In view of the outlook for the world economy and, in particular, the prospect of large and widespread payments imbalances, the Committee agreed that the Fund should stand ready to play a growing role in the adjustment and financing of these imbalances. In this connection, the Committee endorsed the views set forth in the Managing Director’s statement on the subject and agreed with him that any such financing by the Fund should be made available in conjunction with adjustment policies appropriate to the needs and problems of members in the present economic situation.
The Committee recognized that, in view of the availability of funds under the supplementary financing facility and the expected increase in quotas under the Seventh General Review, the Fund is, under present circumstances, in a relatively liquid position. Nevertheless, in the light of the size and the distribution of payments imbalances, the necessity to phase adjustment over a reasonable period of time, and the time needed for the completion of any borrowing arrangements, the Committee encouraged the Managing Director to start discussions with potential lenders on the terms and conditions under which the Fund could borrow funds to increase its resources, if and when the need arises.
The Committee believed that, in addition to any action by the Fund, additional development assistance would need to be provided to the low-income countries that are most severely affected by the present situation and, in this connection, it endorsed the view expressed by the Development Committee on the need for such assistance. The Committee requested the Managing Director and the Executive Board to start examining in depth the relevant recommendations of the program of immediate action of the Group of 24, in light of the press communiqué of the Ministers of the Group of 24, with a view toward a substantive discussion next September.
4. The Committee expressed concern at the fact that, although the Resolution of the Board of Governors on the Seventh General Review of Quotas had been approved nearly one and a half years ago, the quota increases of SDR 19.6 billion approved under it had not yet come into effect. The implementation of these increases would enhance the ability of the Fund to serve the needs of its members in the difficult payments situation a head. The Committee stressed again the importance. of an early implementation of these increases and urged those members that had not yet consented to the increases in their quotas to do so as soon as possible, so that the increases could become effective in the course of 1980.
5. The Committee noted that the present gold sales program, which is nearing, completion, has yielded a very large amount of resources for the benefit of the developing countries—about SDR 3.9 billion—the greater part of which was used for balance of payments assistance on concessionary terms to the low–income developing countries. The Committee asked the Executive Board to study the future of the Trust Fund. This study should encompass, inter alia, the possibility of using a part of the Trust Fund repayments for ameliorating the conditions of loans to low–income developing countries.
The Fund should also explore the possibility of obtaining other resources to subsidize its lending to low–income developing countries.
6. The Committee commended the Executive Board for the progress it had made in designing a plan for a substitution account along the lines requested by the Committee in its communiqué issued in Belgrade. The Committee noted that the Board had reached, in Part II of its report, provisional agreement on a wide range of features of such an account. The Committee also noted that some issues remained to be solved, including arrangements for the maintenance of financial balance in the account. The Committee, after a discussion of these issues, expressed its intention to continue its work on this subject.
7. The Committee noted with satisfaction the steps taken to widen the uses of SDRs and welcomed the decisions taken by the Executive Board under which SDRs can now also be used in swaps, forward operations, and in making donations. The Committee also welcomed the recent decisions under which an increased number of official institutions can hold and deal in SDRs.
The Committee noted that the Executive Board had conducted an examination of the SDR valuation and interest rate baskets with a view to simplifying and enhancing further the attractiveness of the SDR. The Committee endorsed these objectives and generally expressed the view that it would be desirable for the interest and valuation baskets to be identical. The Committee asked the Executive Board to examine the matter further and to take the necessary action.
8. The Committee agreed to hold its next meeting in Washington, D.C. on Sunday, September 28, 1980. The Committee also agreed to hold a meeting in Libreville, Gabon, in the spring of 1981.
9. The Committee expressed its warm appreciation to the Government of the Federal Republic of Germany and to the Free and Hanseatic City and the people of Hamburg for their hospitality and for the excellent arrangements provided for the meeting.
Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee)
Twelfth Meeting, Belgrade, September 30,1979
1.The Development Committee held its twelfth meeting in Belgrade, Yugoslavia, on September 30, 1979 under the chairmanship of Mr. Cesar E.A. Virata, Minister of Finance of the Philippines, and with the participation of Mr. Robert S. Mc-Namara, President of the World Bank, and Mr. J. de Larosiére, Managing Director of the International Monetary Fund. Sir Richard King, Executive Secretary, took part in the meeting which was also attended by representatives from a number of international and regional organizations and Switzerland as observers.
2. The Committee considered papers prepared by the World Bank and IMF on the flow of financial resources to developing countries and the stabilization of export earnings. They also took note of the proposals contained in the Outline for a Program of Action approved by the Group of 24 and unanimously endorsed by the Group of 77.1
3. The Committee discussed current economic trends and agreed that many developing countries will face a particularly difficult situation over the next few years. The non-oil primary producers are likely to experience a slowdown in the growth of demand for their exports and adverse shifts in their terms of trade. The Committee expressed serious concern that in the context of high rates of inflation this would lead to relatively slow rates of economic growth, a further substantial deterioration in their aggregate current account deficit, and an increase in the number of developing countries encountering debt servicing problems.
4. Recognizing the increased interdependence of national economies and in particular the impact on developing countries of developments in industrialized countries, the Committee emphasized the importance of sound economic and financial policies in all countries; it reiterated the need to avoid protectionist trade measures that would adversely affect the exports of developing countries. The Committee also stressed the urgency of implementing effective policies for energy conservation and development.
5. The Committee recognized that there was a clear need for broad multilateral efforts, including an increasing role for the Bank and the Fund, to assist member countries in coping with the very difficult situation ahead. In this context the Program of Immediate Action outlined by the Group of 24 and endorsed by the Group of 77 would be kept in view. The Committee noted with satisfaction a number of recent developments that had enhanced the Fund’s capacity to assist its members, including: the Resolution of the Fund’s Board of Governors on the Seventh General Review of Quotas under which quotas in the Fund could be increased to SDR 58.6 billion; the coming into force of the supplementary financing facility; the adoption of new guidelines on conditionality; and the improvements in the compensatory financing facility, including the increase from 75 per cent to 100 per cent of quotas in the maximum amount that could be purchased under that facility. The Committee stressed the importance of an early implementation of the quota increases under the Resolution on the Seventh General Review of Quotas.
6. The Committee noted with satisfaction that over the past year agreement had been reached in the Executive Board of the World Bank to recommend to its Governors a $40 billion General Capital Increase; the Committee urged that all necessary steps be taken to make this increase effective as early as possible. The Committee welcomed the Fifth Replenishment of the Resources of the Inter-American Development Bank, the decision by the Governors of the African Development Bank for a substantial increase in the capital of that institution, and the decision of OPEC’s Ministerial Committee on Financial and Monetary Matters to approve the second replenishment of the resources of the OPEC Special Fund.
7. In considering the longer-term economic outlook, the Committee noted that low-income developing countries will continue to depend on official development assistance (ODA) for the bulk of their net capital inflows; in view of this, the Committee regretted that only a modest growth in total ODA flows is projected over the next few years. For many middle-income countries, which depend mostly on private sources for capital flows, as well as certain low-income countries, the anticipated increase in total debt and debt service over the medium term were matters for careful attention.
8. The Committee, while recognizing the difficulties facing some donor countries, stressed the importance of increasing the quantity of ODA flows, particularly from those countries which are now at relatively low levels in relation to gross national product. The Committee also called for improvements in the quality of ODA such as quick disbursing assistance, untying of aid, finance for local costs, and for greater concentration of ODA on the countries most in need. The Committee stressed the urgency of bringing the Sixth Replenishment of IDA to a prompt conclusion at a level which would enable a significant increase in commitments in real terms to continue.
9. In discussing longer-term structural adjustment problems, the Committee welcomed the willingness of the Bank to consider increasing substantially the relative importance of program lending in its overall operations. The Committee requested the Executive Directors of the Bank to explore the criteria which could govern program and sector loans in situations where external disequilibria had not yet become severe, and to consider whether in individual cases such lending should be additional to that now planned. The regional institutions were invited to review their policies and practices in light of the current prospects for developing countries. The Committee endorsed expanded collaboration between the Fund and the Bank in support of economic programs of developing countries facing severe balance of payments problems.
10. The Committee discussed the problem of medium-term financing for balance of payments adjustment. In this connection, the Committee noted that the Fund’s extended facility had proved a useful mechanism and that it had considerable potential in the future. Recognizing the difficult situation facing member countries, the Committee requested that the Executive Board of the Fund give further consideration to increasing the maximum repurchase period under the extended facility from eight to ten years.
11. In view of the heavy needs for balance of payments financing facing many countries in the years ahead, the Committee requested the Executive Board of the Fund to give attention to developing ways and means of lowering the interest costs of the supplementary financing facility.
12.The Committee recognized that in the difficult years ahead there would be a major need for recycling of funds to assist developing countries facing large balance of payments deficits and recognized that this need could not be met by official financial flows only. In this connection, the Committee stressed the important role of additional private capital flows in financing the increasing capital requirements of developing countries; such flows would be facilitated by the promotion of policies in these countries conducive to sustaining their creditworthiness. The Committee welcomed the expansion in cofinancing with the private banking sector that had been achieved by the World Bank and regional institutions to date, and suggested that capital exporting countries should explore what actions could be taken to encourage greater use of this mechanism by their banks. The Committee also requested the World Bank and the regional institutions to explore steps that could be taken further to expand cofinancing.
13. In discussing possible new approaches relating to capital flows, the Committee reaffirmed that priority should be given to exploiting the full capacity of existing institutions, including possible acceleration in the use of their resources, to meet the urgent problems of the developing countries over the next few years. The Committee considered however that the matter should be kept actively under review.
14. The Committee reviewed the question of stabilization of export earnings on the basis of a staff study. The Committee emphasized the importance of appropriate mechanisms to mitigate the effects of fluctuations in export earnings of developing countries, in particular those countries heavily dependent upon primary commodity exports, and to assist them in diversifying their exports. It recognized that, through coordinated action, the Fund and Bank had developed the capacity to meet the needs of countries suffering from shortfalls and noted in particular the progress that the two institutions had made in providing finance for medium-term commodity shortfalls and in reducing dependence on primary commodities. It requested the Executive Boards of the two institutions to keep this matter under review.
15. The Committee welcomed the recent decision of the Executive Board of the Fund to liberalize the Fund’s compensatory financing facility, in particular the increase in the limit on the amount of drawings outstanding under the facility. The changes constitute a substantial improvement in the Fund’s compensatory financing facility, making it a more effective mechanism to assist members in dealing with problems of fluctuations of export earnings. The Committee noted that in the longer run vulnerability to fluctuating export earnings would be reduced by diversifying exports, for which purpose Bank and IDA resources should continue to be made available. The Committee also welcomed the new convention replacing the Lomé Convention and the new features of the STABEX incorporated in the new convention. They also noted with satisfaction the progress made in negotiations for the setting up of a Common Fund for commodities.
16. It was agreed that the subject of export earnings stabilization would be reviewed by the Committee in a year’s time in the light of experience in operation of the recently improved compensatory financing facility, the ongoing negotiations on the Common Fund, and the further study of the matter being undertaken in UNCTAD in cooperation with Fund staff.
17. The Committee will meet again on April 24 in Hamburg.
18. The Committee expressed their sincere appreciation to the Government of Yugoslavia for their hospitality and for the excellent arrangements provided for their meeting.
Attachment: Outline for a Program of Action on International Monetary Reform
Prepared by the Group of Twenty-Four and endorsed by the Group of Seventy-Seven. Belgrade, Yugoslavia, September 29, 1979.
I. Assessment of Initial Objectives AND Developments IN International Monetary Reform
Following the monetary crisis that began during the 1960s and became acute in 1971, the international community was confronted with the urgent need to reform the international monetary system. In this connection, the Group of 77 emphasized that unless there were an effective participation of the developing countries in designing the new system, particularly in view of the preponderant influence hither to exercised by the developed countries, common objectives could not be achieved. Consequently, the Intergovernmental Group of Twenty-Four on International Monetary Affairs (Group of 24) was established for the purpose of coordinating and unifying the position of the developing countries in international monetary and financial matters. In particular, it was agreed that the Group of 24 was to:
(a) keep the international monetary situation under review;
(b) evaluate events in the monetary field, as well as any decisions which might be taken by a single country or group of countries within the framework of the International Monetary Fund, relating to the interests of the developing countries;
(c) recommend to the governments of the Group of 77 coordinated positions for use in various fora, and to consider any other action that might be necessary, including the convening of a world monetary conference within the framework of the United Nations.
The initial basic discussions and negotiations with the developed countries on the reform of the monetary system were undertaken in the forum of the Committee of the Board of Governors on Reform of the International Monetary System and Related Issues (Committee of Twenty). It was agreed that this reform had to be of a tripartite nature requiring mutually supporting arrangements in the fields of money, trade and the transfer of resources to developing countries.
Major structural changes in the world economy towards the end of 1973 and the absence of political will on the part of developed countries made it impossible to agree on an overall package of monetary reform. Agreement was, however, reached by the Committee of Twenty on the need to alter some aspects of the monetary system, particularly the exchange rate regime. Measures were proposed to deal with the most urgent aspects of monetary relations among developed countries. However, they did not deal with those aspects of the system that were of particular interest to developing countries.
Although overall reform was not considered possible, it was felt that an evolutionary process of reform, with a gradual adaptation of the legal structure, was called for. Towards this objective, two bodies were established. These were: the Interim Committee of the Board of Governors on the International Monetary System; and the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries.
The Interim Committee was to advise on the adaptation of the system, while the Development Committee was to pursue the means for promoting and improving the transfer of real resources to developing countries. Work within these two bodies along with the ongoing negotiations in UNCTAD and the multilateral trade negotiations under the auspices of GATT were expected to bring about the desired changes in the fields of money, finance and trade. However, the results so far have not met the requirements of developing countries.
In practice, no comprehensive and coherent program was agreed for bringing about a deliberate process of evolution in the system. The Jamaica Agreement and the subsequent amendment of the Articles of Agreement eliminated some features of the Bretton Woods system, and left open a future range of options, but failed to convey a sense of direction and did not incorporate certain features of basic interest to developing countries, such as: measures to control, in an effective manner, the creation of international liquidity; dispositions on asset settlement; rules to ensure symmetry in the adjustment process and promote a stable system of exchange rates; the financing by the IMF of short–term capital movements; and, particularly, arrangements to promote the transfer of real resources.
In the absence of a firm collective commitment to comprehensive reform, reliance was placed in the new Articles of Agreement on the collaboration of members with the International Monetary Fund and on IMF surveillance in the effort to ensure the proper functioning of the system, with particular emphasis on achieving orderly exchange arrangements and promoting a stable system of exchange rates. The nature of the collaboration with the Fund to be undertaken by members was, however, not precisely defined. So far as exchange rates were concerned, the Fund was not in a position to exercise significant influence except where members sought access to its resources. The effectiveness of exchange rate policies was overestimated, and it was in any case undermined by the excessive volatility of rates which itself became a powerful force adding to instability and uncertainty.
The creation of international liquidity continued to be determined largely by national policies, and inadequate progress was made towards collective management of international reserve creation or towards establishing the SDR as the principal international reserve asset, despite previous agreement on the desirability of both these objectives.
Failure to establish a new basis for the international monetary system was accompanied by a deterioration in the climate of world trade. Expectations that the introduction of flexibility into the exchange rate system would make it possible to move towards more open trading relationships failed to materialize. Indeed, in the face of business recession and inadequate industrial adjustment in the developed countries, international trade was further impaired by increasing recourse to protectionist measures.
The discussions in the Committee of Twenty resulted in a wide measure of agreement that a properly functioning international monetary system would require a considerable expansion in the transfer of resources to developing countries. However, the subsequent shelving of comprehensive reform efforts was accompanied by a decline in such transfers in real terms.
Thus the international community has failed to achieve its goals in the fields of money, trade and transfer of real resources to developing countries.
II. The Changing World Economic Environment AND THE Reform Process
Expectations for improvements in the world economy and in the working of the international monetary system following the Jamaica Agreement seem to have rested in the main on the following assumptions:
—the low growth rates and inflation in developed countries, as well as the payments imbalances among them, would be temporary and of a cyclical nature;
—flexibility in exchange rates would ensure that they reflect underlying economic conditions and would enable countries to manage with smaller reserves, thus providing greater freedom to countries in the pursuit of their own objectives, while at the same time permitting the achievement of equilibrium;
—deficits would be financed largely from capital markets and through the IMF oil facility, although the temporarily expanded credit tranches in the regular IMF facilities, the new extended facility and the liberalization of the compensatory financing facility, would be expected to play a complementary role;
—concessional flows to the countries with limited access to capital markets would increase substantially;
—repayments would be effected through the expansion of export earnings that would accompany the recovery of the world economy and further liberalization of international trade.
The above–mentioned assumptions were invalidated by events. In the first place, the problemof stagflation in developed countries proved to be much more intractable than anticipated. The policy responses of major industrial countries to stagflation varied widely. Some of them persisted in following growth policies below their potential and experienced low inflation rates and sizable current account surpluses, while others continued expansionary domestic policies that resulted in significant deficits on current account and higher inflation rates. In particular, the main reserve center followed expansionary policies and achieved higher growth rates than most 0ther industrial countries, but this was accompanied by increasing inflation and widening deficits on current account.
The above–mentioned differential economic performance of industrial countries and the lack of economic policy coordination among them gave rise to serious problems in several areas and limited the effectiveness of exchange rate changes. Firstly, sizable speculative capital movements, as well as violent swings in exchange rates, created worldwide conditions of uncertainty, discouraged investment, and complicated the implementation of economic policies. Secondly, pressures upon the main reserve currency center to defend the value of the dollar eventually induced the U.S. Government to pursue more restrictive economic policies. Furthermore, the reluctance of the surplus developed countries to reflate their economies sufficiently may well have deepened the deflationary trends in the world economy, fostered protectionism, and inhibited more basic adjustment.
Continuation of recession and inflation in developed countries resulted in a slower growth of exports of developing countries and a further deterioration in the terms of trade. In addition, the rising wave of protectionism in developed countries severely affected the export volume of developing countries and denied them a more efficient use of resources.
The effective functioning of the financial system requires the maintenance of an open and dynamic trading system. Developing countries, however, cannot—and should not—continue to bear the costs of inadequate adjustments in developed countries. Continuation of the development process requires that full employment and growth conditions be restored in the world economy; that world markets be open to the exports of developing countries; and that, in the long run, a greater proportion of the import requirements of these countries be financed through export earnings.
The current account deficits that developing countries have been experiencing and are likely to face in future are not sustainable in the light of the existing trade framework or of the terms and conditions of current financial flows.
In the case of some developing countries private capital markets did provide the necessary volume of finance to sustain activity while effecting the required structural adjustments. However, inadequacy of the terms relating to maturities and interest rates would give rise to later problems.
Contrary to expectations and, indeed, accepted objectives, the volume of ODA declined in real terms in the period 1975–78. Flows from multilateral sources through the soft loan windows of the development finance institutions, the IMF compensatory financing facility, the oil facility and the Trust Fund, made valuable contributions to the financing of deficits of the poorer developing countries, but fell far short of requirements. In the face of inadequate external financing, these countries had no choice but to cut back their development process.
Recent analyses carried out by multilateral institutions regarding the economic outlook for the coming years suggest that the international environment has deteriorated substantially for developing countries and that in many respects they will face more critical situations than after the 1974/75 crisis. The reduced growth prospects of industrialized countries will exert a further deflationary impact on economic activity in developing countries; there are prospects for an even slower growth of world trade and deteriorating terms of trade, as well as a substantial widening of current account deficits for most developing countries. The external debt situation will become more strained, and the debt service payments from accumulating debt will significantly reduce the transfer of real resources.
For developing countries that have access to private capital markets, notwithstanding certain trends in the direction of larger resources within the international commercial banking system, there is the possibility that commercial bank financing may not be forthcoming in the needed quantities or on suitable terms, so that the recycling mechanism will not operate as efficiently as in the past. For those countries that do not have effective access to capital markets, the highly inadequate flows of ODA, which have been well below the internationally agreed targets, have already meant that there is not sufficient finance to cover essential import requirements.
Consequently, developing countries are faced by a further reduction of the already highly unsatisfactory growth rates, with serious social and political effects.
It is clear from the above that, unless policies change, the world economy will continue to find itself trapped in a vicious circle of slow growth, unemployment, protectionism and instability in monetary and financial fields. In order to break this vicious circle, the international community must address itself to the question of structural adjustments in order to accommodate the growing productive potential of developing countries in the context of a growing world economy.Such adjustments are, however, difficult to implement under conditions of stagnation in developed countries and of inadequate resources for developing countries. The resumption of vigorous economic activity, investment, and trade would therefore contribute significantly towards achieving such adjustments.
The foregoing analysis underlines the vital need to take fully into account the interrelationship that exists between trade, development finance, and monetary arrangements, and the need to establish a mutually supporting action program in these three areas.
III.Towards A Fundamental International MonetaryReform
1. It will be apparent from the foregoing considerations that the basic tasks of international monetary reform have yet to be accomplished. Developing and developed countries alike have a common interest in a viable international monetary system. Such a system should foster development, employment and trade, and, in particular, support the development of developing countries in the overall context of the establishment of the New International Economic Order.
2. The principal features of a viable system should include:
(a) An effective, symmetrical and equitable adjustment process that would be consistent with the maintenance of high levels of employment and rates of growth and the dynamic expansion of world trade. This would require access to official credit facilities on terms and conditions responsive to the nature of balance of payments problems, as well as to the level of development of the countries concerned. It would also require the maintenance of free and secure access for developing countries to the goods and financial markets of developed nations.
(b) An exchange rate regime which, while flexible, is capable of promoting adequate stability.
(c) In exercising its surveillance over exchange rate and balance of payments policies, the IMF should give equitable and symmetrical treatment to surplus and deficit countries with a view to ensuring that surplus developed countries and reserve currency countries accept an equitable share of the burden of adjustment at high levels of economic growth.
(d) Arrangements should be made for the creation of international liquidity through truly collective international action in line with the requirements of an expanding world economy, and the special needs of developing countries, and with such safeguards as would ensure that the total supply and distribution of international liquidity is not unduly influenced by the balance of payments position of any country or group of countries. The SDR should become the principal reserve asset of the system.
(e) The promotion of the net flow of real resources to developing countries should be viewed as an integral element of an effectively functioning system. In this context, a link should be established between the allocation of SDRs and development assistance.
(f) Developing countries should have a greater role than presently in the decision-making process, including all phases of the studies, consultations and negotiations linked to decisions on the international monetary system.
3. Specific or interim proposals for improvements in current international monetary arrangements should be carefully examined from the standpoint of their consistency with the framework for a reformed system set forth above.
4. The Intergovernmental Group on International Monetary Affairs will continue to study and initiate the measures required in moving towards a fundamental reform of the international monetary and financial system.
5. The Group of 24 should continuously develop and strengthen its work in order to be of maximum assistance to developing countries, coordinating their positions on international monetary and financial matters in all relevant fora.
IV. The Program OF Immediate Action
The developing countries require the formulation of a program of action with specific items in which solutions may be found within the framework of a general program of reform. The Ministers of the Group of 77 at the meeting in Arusha, Tanzania, decided upon a substantial number of proposals. These give a sense of direction to our efforts to achieve a New International Economic Order.
The Group of 24 has reassessed and elaborated upon these proposals within the context of the reform of the international monetary and financial system, and considers that the following should be given priority for immediate action.
A. Measures Related to the Transfer of Real Resources
1. There is an urgent need to accelerate the flow of concessional aid to developing countries.Each developed donor country, particularly those falling behind in meeting the internationally agreed target, should establish its program and make binding commitments for the annual growth rate of ODA disbursement for each of the next three years. This should result in a general increase in real terms and an improvement in the quality of ODA flows to the developing countries; in the context of this general increase, the quantum in real terms of ODA flows to least developed countries, most seriously affected countries, and landlocked and island developing countries, should double.
2.The Group of 24 urges the early establishment of a link between SDR allocation and additional development assistance. The creation of such a link is long overdue and a positive decision to establish it should be arrived at without further delay.
3. The Group of 24 calls for an increase in program lending of the multilateral financial institutions to make it equal to at least 25 per cent of total loans, and stresses in this context that the lending programs of the multilateral financial institutions should become increasingly responsive to the overall priorities, and in particular to sectoral priorities, of the recipient developing countries. It also calls for the provision of adequate local cost financing.
4. There is a need for an effective strategy to deal with the official external indebtedness of some developing countries, designed to avert debt servicing difficulties and sustain the development process of these countries. The Group urges early conclusion of the negotiations regarding internationally agreed guidelines for debt reorganization of interested developing countries, in the light of the general principles adopted in UNCTAD Resolution 165 (S-IX). The Group also stresses the need for immediate and full implementation of part A of the same resolution regarding the retroactive adjustment of terms on past ODA in favor of the low-income countries, particularly of the least developed and the most seriously affected countries.
5. The Sixth Replenishment of IDA should be effected without delay so as to result in a significant increase in real terms. The contributions to IDA should come from a wider group of countries, provided that the additional contributions from new donors do not prejudice the increase in real terms of the contributions of the traditional donors.
6. All member countries should provide a substantial and effective increase in the capital base of the multilateral financial institutions so as to ensure that their commitments in favor of developing countries increase in real terms at a satisfactory rate consistent with the needs of these countries. In this connection, the Group of 24 urges early approval and acceptance by all member countries of the capital increase of the World Bank of the equivalent of $40 billion and the prompt payment of subscriptions when due.
B. Measures Related to the Increase in Total Resources
7. Taking into account the long-term global liquidity needs, the Group supports:
(a) an increase in the present agreed SDR allocations to meet the current difficult economic conditions;
(b) regular annual allocations of SDRs, in amounts adequate to members’ needs for reserve increases.
8. The Group urges early completion of legislative action by the member countries concerned, to make effective the Seventh General Review of Quotas. It also urges the revision of the criteria, both in terms of the variables used and the weights attached to them, for determining the quotas of the membership in the International Monetary Fund, and the advancement of the date for the Eighth General Review of Quotas. In this review, the quota share of no developing country should be reduced. Due regard should be paid to increasing the representation of developing countries in the Executive Boards of both the Fund and the World Bank. In any event, the present geographical representation by developing country regions should be preserved.
C. Measures Related to Balance of Payments Support
9. The Group of 24 attaches importance to the establishment of a medium–term balance of payments facility to respond to the adjustment needs of the developing countries. The new balance of payments financing facility should add a substantial level of additional resources and must be able to provide support that is significant in relation to present levels of deficits, should carry minimum conditionality, since it is responding to an externally induced balance of payments deficit, and should provide support on longer–term maturity. This facility should have as one of its basic characteristics an interest subsidy account for the low-income developing countries.
10. The existing IMF facilities should be reviewed to enable them to cope more adequately with the deteriorating world economic environment.
In particular, it is necessary to consider:
(a) lengthening repayment periods;
(b) modifying the quantitative restrictions on the availability of such facilities;
(c) setting conditionality with due regard to causes of deficits;
(d) reviewing the Fund’s compensatory financing facility, including a significant increase and the liberalization of access in order to compensate adequately for shortfalls in export earnings, import fluctuations and deterioration in the terms of trade of developing countries.
11. The support of the developing countries for the proposed substitution account will be considered in the light of the studies that are being carried out to analyze fully its impact and effect on the developing countries, as well as of the discussions in the IMF Board. Furthermore, the implementation of a substitution account would have to be seen within the framework of a balanced package for immediate action.
D. Measures Related to Trade
12. The establishment in the World Bank of a long–term facility to finance purchases of capital goods should be considered as quickly as possible with a view to taking a positive decision at the earliest possible date, provided it ensures additionality of resources for all developing countries and incorporates provision for a Subsidy Account to ensure broadest access by low–income developing countries. All relevant aspects of the proposal would be studied with the support of multilateral institutions.
13. The Group of 24 calls for full and strict adherence to the standstill provisions pledged by developed countries, in particular concerning imports from developing countries. Moreover, the developed countries should facilitate the development of new policies and strengthen existing policies that would encourage domestic factors of production to move progressively from the lines of production that are less competitive internationally, especially where the long–term comparative advantage favors the developing countries. Additionally, there is a need for full implementation of the commitment of developed countries undertaken in the Tokyo Declaration, which provides for special, differential and more favorable treatment for developing countries in removing protectionist barriers against the exports of these countries.
The developing countries regard the adoption of these proposals as an important step towards the reform of international monetary and financial relations. All other initiatives for changes in the system will be assessed in the light of progress towards the achievement of the above mentioned objectives and the implementation of facilities of special interest to developing countries.
V. Some Elements of the Future Work Program of the Group of Twenty-Four
1. The Group of 24 will at its subsequent meetings review the progress made in the implementation of the action program adopted by the Ministers of the Group of 24.
2. The Group of 24 will elaborate a plan of analytical work to be requested from the IMF, IBRD, UNDP/UNCTAD, and other international organizations on fundamental reform of the international monetary system and on various alternatives open for action by developing countries. The Group of 24 will also undertake, with the support of independent or governmental experts, analytical research on problems identified as timely and relevant.
3. The Group of 24 will recommend that the representatives of developing countries in the IMF/IBRD, as well as in the executive organs of GATT, ECOSOC, UNCTAD and other international fora, shall support the agreed views adopted in this document and promote the adoption of the necessary measures in accordance with the objectives underlying these views.
4. The Group of 24 reaffirms the importance of monetary and financial cooperation among developing countries as an integral part of the process of changes in the world monetary and financial order, and will seek ways and means to contribute to the elaboration of specific mechanisms through which monetary and financial cooperation among developing countries could be implemented in the light of the ECDC programs adopted by developing countries and on the basis of its own initiatives.
Thirteenth Meeting, Hamburg, April 24, 1980
1. The Development Committee held its thirteenth meeting in Hamburg, Federal Republic of Germany, on April 24, 1980 under the chairmanship of Mr. Cesar E.A. Virata, Minister of Finance of the Philippines, and with the participation of Mr. J. de Larosiere, Managing Director of the international Monetary Fund, and Mr. Ernest Stern, Vice President, Operations, of the World Bank. Sir Richard King, Executive Secretary, took part in the meeting which was also attended by representatives from a number of international and regional organizations and Switzerland as observers.
2. The Committee considered papers submitted by the World Bank on lending for structural adjustment and on cofinancing, and a progress report by the IMF on recent developments relating to IMF facilities. They also received preliminary reports from the chairmen of the two Task Forces on Nonconcessional Flows and on Private Foreign Investment. On the basis of a staff study by the Bank and the Fund, the Committee reviewed recent developments relating to the proposals of the Group of 24 for a Program of Immediate Action, which the Committee at its meeting in Belgrade had agreed to keep in view. The Committee had a preliminary discussion on the report of the Brandt Commission.
3. The Committee noted with concern that the general impact of the high level of world inflation, including the increase in energy and other prices, and the weakening of demand for LDC exports due to the slowdown of economic activity in the industrial countries, are leading to large current account deficits and placing an increasing burden of adjustment on many non-oil developing countries. Recent developments in international financial markets have made it more difficult and expensive for developing countries to secure appropriate long-term financing for their development programs. Their debt service burden could only be expected to grow further given the large dependence of the middle-income countries on nonconcessional public and private financial flows. The Committee also noted that the present flows of concessional official development assistance were inadequate to meet the essential requirements of the poorer developing countries and unless urgent action is taken their condition will further deteriorate. The Committee therefore emphasized the pressing need for an increase in ODA directed toward achieving the target of 0.7 per cent of GNP. It reaffirmed its intention to consider at its next meeting the issue of ODA flows, both present and prospective, on the basis of a staff paper. Against the background of a generally deteriorating international economic environment, the Committee re-emphasized its earlier call for a reduction of protectionist trade measures which adversely affect the exports of developing countries, and stressed the need to avoid restrictions on access to capital markets.
4. The Committee welcomed the initiative taken by the Bank to provide assistance through structural adjustment lending on appropriate terms and conditions for developing countries which face difficult medium–term prospects in their balance of payments. Members recognized the contribution that could be made through this type of nonproject and program lending both to the rapid transfer of adequate resources and to the active pursuit of appropriate structural policies in the developing countries. Governments and the Bank were urged to give prompt attention to this subject, and members agreed to review progress in this respect at their September meeting.
5. The Committee recognized that it was important to expand net private capital flows in the period ahead. It noted that while there had been substantial growth in recent years in cofinancing by the Bank with official aid agencies, export credit institutions and private lenders, the volume was still insufficient compared with the needs. Noting that the Bank was already exploring several new approaches to attract funds for cofinancing from a wider range of private sources, members urged that efforts be continued to improve the effectiveness and the volume of these financial flows in ways that would meet the objectives of the borrowing countries.
6. The Committee welcomed the recent decision by the Executive Board of the Fund to increase the maximum repurchase period under the extended facility from eight to ten years, and to reduce the number and frequency of repurchase installments; the combined effect of these measures will increase the average life of a drawing outstanding under the extended facility by almost one fifth. This action will spread the adjustment effort over a longer period and lessen the financial burden of using the extended facility. The Committee recognized that the Fund should continue to follow a flexible approach as regards the volume of drawings under the supplementary financing facility in cases where additional amounts are justified by the magnitude and nature of a member’s need for financing. The Committee expressed the hope that at an early date measures would be taken to reduce the cost of using the supplementary financing facility and in this way ease access to the facility.
7. The Committee welcomed the steps being taken by both the Bank and the Fund to adapt and expand their activities to meet the needs of countries affected by the increasingly difficult economic situation. While recognizing that each institution has its own character and function which should remain distinct, they emphasized the importance of close collaboration between the two institutions.
8. The Committee welcomed the progress that had been made toward providing additional capital resources for the World Bank and the regional development banks, and the agreements reached on the replenishment of IDA under the Sixth Replenishment. However, Committee members expressed concern that legislative difficulties now threatened a hiatus in the commitment authority of the multilateral development institutions, and urged that member governments take all necessary actions to ensure continuity in their operations. Action was particularly urgent in regard to IDA-VI, since resources available from IDA-V will be exhausted by June 30. Equally urgent are actions concerning the replenishment of the Inter-American Development Bank and the increase of the concessional funds of the Asian Development Bank. The Committee further noted that additional resources had been pledged to the OPEC Fund, and that aid commitments under the Lomé II convention had been increased.
9. The Committee noted that at the time of its next meeting there would be available a final report of the Task Force on Private Foreign Investment, and a progress report of the Task Force on Nonconcessional Flows. Members stressed the extreme importance of the review of private financial flows to determine what measures could be taken to facilitate additional flows on appropriate terms and to improve access of a wider range of developing countries to private capital markets.
10. The Committee welcomed the publication of the Brandt Commission Report and viewed its recommendations as a useful basis for consideration by the international community. The Committee noted that a number of the recommendations related to the Bank, the Fund, and the regional banks and that these institutions are currently examining these recommendations. They requested that specific papers should be prepared on those recommendations of the Commission’s report that were of particular relevance to the Committee’s work.
11. The Committee reviewed the current state of discussions relating to the Group of 24 Program of Immediate Action for International Monetary Reform.While recognizing that international agreement had been reached on some of these proposals and that some others were under discussion, they nevertheless stressed the importance of reaching early agreement on other items of a developmental character, an increase in the volume of official development assistance, completion of the processes for the Sixth Replenishment of the IDA and a significant increase in the amount of program lending.
12. The next meeting of the Committee will be held in Washington, D.C. at the time of the Annual Meetings of the Boards of Governors of the Bank and Fund in September 1980.
13. The Committee expressed their warm appreciation to the Government of the Federal Republic of Germany for their hospitality and for the excellent arrangements provided for their meeting.