Chapter

Appendix II Principal Policy Decisions of the Executive Board

Author(s):
International Monetary Fund
Published Date:
September 1985
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A. Policy on Enlarged Access to the Fund’s Resources: Charges on Holdings Outstanding, Amendment of Rule 1-6(5)

Rule 1-6(5) shall be amended as indicated below:

  • (5) The rate of charge on holdings of a member’s currency acquired as a result of the member’s purchases of borrowed currency under the policy on enlarged access to the Fund’s resources (Executive Board Decision No. 6783-(81/40))1 during a six-month period ending June 30 or December 31 shall be equal to the total, expressed as a percentage per annum, of:

  • (i) the net cost of borrowing by the Fund under that policy for the period, calculated in accordance with (a), (b), and (c) below and

  • (ii) the imputed borrowing cost of the amount of the ordinary resources being used to finance purchases of borrowed currency calculated in accordance with (d) below, plus 0.2 percent per annum.

  • (a) The net cost of borrowing for a six-month period ending June 30 or December 31 shall consist of the actual gross cost of borrowing to finance purchases under the policy assignable to the period less net income during the period from the temporary employment of the borrowed funds.

  • (b) Actual gross costs of borrowing shall comprise:

    • (i) interest paid or accrued to lenders on the average daily amount of balances borrowed; and

    • (ii) fees, commissions, and any other primary costs directly payable to lenders or incurred in order to secure the borrowed funds, prorated for six-month periods ending June 30 and December 31 in proportion to the duration of the borrowing arrangements to which such costs relate, or to the period covered by these costs.

  • (c) Net income from temporary employment of borrowed funds pending disbursement shall be determined by taking into account:

    • (i) income received and income accrued from investments or other operations to secure a rate of return;

    • (ii) operational expenses (paid and accrued) incurred directly by the Fund in order to obtain this income, prorated over the period to maturity of the investment; and

    • (iii) any net gain or loss, calculated to the end of each six-month period ending June 30 or December 31, resulting from exchange valuation adjustments of currency balances and investments representing the undisbursed proceeds of borrowing in terms of the SDR.

  • (d) (i) The imputed borrowing cost of the use of ordinary resources being used to finance purchases of borrowed currency shall be the product of the daily amount of such resources as determined in accordance with

    • (ii) below multiplied by the rate of interest for the weekly period commencing each Monday calculated in accordance with the method set forth in Rule T-1(b) and (c) for determining the rate of interest on holdings of SDRs except that, in place of the rates or yields for the preceding Friday on the instruments listed in Rule T-1(c), the yields for the preceding Wednesday on the instruments specified under paragraph 3(b) of Annex A to the letter referred to in Executive Board Decision No. 6843-(81/75),2 adopted May 6, 1981, shall be used.

    • (ii) The amount of ordinary resources being used to finance purchases of borrowed currency is equal to the amount of the Fund’s holdings of currency resulting from members’ purchases of borrowed currency under the policy on enlarged access less the outstanding amount of currency borrowed by the Fund to finance such purchases after deducting the amounts of currency held in the Borrowed Resources Suspense Accounts.

Decision No. 7710-(84/84)

May 30, 1984

B. Policy on Enlarged Access to the Fund’s Resources: Extension of Period, and Access Limits for 1985

The Fund, having reviewed the decisions on the policy on enlarged access and the limits on access to the Fund’s resources under that policy and under the special facilities of the Fund (No. 6783-(81/40),3 No. 7599-(84/3),4 No. 7600-(84/3),5 and No. 7602-(84/3)),6 decides that:

1. In paragraph a. of Decision No. 7599-(84/3),4 “1984” shall be replaced by “1985.”

  • 2. (a) The following sentence shall be added after the first sentence of paragraph a. of Decision No. 7600-(84/3):5 “Access by members to the Fund’s general resources under arrangements approved under Decision No. 6783-(81/40)3 during 1985 shall be subject to annual limits of 95 or 115 percent of quota, three-year limits of 280 or 345 percent of quota, and cumulative limits of 408 or 450 percent of quota net of scheduled repurchases, depending on the seriousness of the member’s balance of payments need and the strength of its adjustment effort.”

  • (b) In paragraph b. of Decision No. 7600-(84/3),5 “1984” shall be replaced by “1985.”

Decision No. 7841-(84/165)

November 16, 1984

C. Misreporting and Noncomplying Purchases Under Fund Arrangements: Guidelines on Corrective Action

In a few cases, it has been found that a member has made a purchase under a stand-by or extended arrangement which it was not entitled to make by the terms of the arrangement (a “noncomplying purchase”). The purchase was permitted because, on the basis of the information available to it at the time, the Fund was satisfied that all performance criteria that were applicable to the purchase under the arrangement, or other conditions applicable to purchases under the terms of the decisions on the arrangement, had been observed, but this information later proved to be incorrect. When such a case arises in the future, the member will be called upon to take corrective action regarding a noncomplying purchase, to the extent that it is still outstanding, either by repurchase or by the use of its currency in transactions and operations of the Fund, unless the Fund decides that the circumstances justify the member’s continued use of the purchased resources. Steps should also be taken to improve the accuracy and completeness of the information to be reported to the Fund by the member under the arrangement and to define performance criteria and other applicable conditions in a manner that would facilitate accurate reporting.

The Fund adopts the following guidelines, which shall apply to purchases made after the date of this decision:

1. Whenever evidence comes to the attention of the Fund indicating that a performance criterion or other condition applicable to an outstanding purchase made within the previous two years under a stand-by or extended arrangement may not have been observed, the Managing Director shall promptly inform the member concerned.

2. If, after consultation with the member, the Managing Director finds that, in fact, the criterion or condition was not observed, he shall promptly notify the member of his finding. At the same time, he shall submit a report to the Executive Board together with his recommendations, which may include a recommendation that the member be called upon to take corrective action pursuant to paragraph 3 or that the nonobservance be waived pursuant to paragraph 4. The recommendations of the Managing Director shall be submitted to the Executive Board on a lapse-of-time basis giving Executive Directors a period of at least 10 days during which they could ask that the matter be placed on the agenda of the Executive Board for consideration.

3. Unless the decision of the Executive Board is to grant a waiver pursuant to paragraph 4 or to take other action, the member shall be expected to repurchase from the Fund the outstanding amount of its currency resulting from the noncomplying purchase normally within a period of 30 days from the date of the Executive Board decision referred to in paragraph 2. Instead of repurchasing, the member may request the Fund to use an equivalent amount of its holdings of the member’s currency in the Fund’s transactions and operations, but if such use cannot be made within 20 days from the date of the Executive Board decision the member shall be expected to make a repurchase in accordance with this paragraph.

4. A waiver will normally be granted only if the deviation from the relevant performance criterion or other condition was minor or temporary, or if subsequent to the purchase the member had adopted additional policy measures appropriate to achieve the objectives of the program supported by the arrangement under which the purchase was made.

5. If a repurchase pursuant to the expectation under paragraph 3 has not been effected, the Managing Director shall submit promptly a report to the Executive Board accompanied by a proposal on how to deal with this matter, in which he may recommend that the Fund initiate action under Article V, Section 5 of the Articles.

6. Provision shall be made in Fund arrangements for the suspension of further purchases under an arrangement whenever a member fails to meet a repurchase expectation pursuant to these guidelines.

7. Nothing in these guidelines shall limit the power of the Fund to take, in cases of noncomplying purchases, other action that could be taken pursuant to the Fund’s Articles and Rules.

Decision No. 7842-(84/165)

November 16, 1984

D. Extended Fund Facility and Guidelines on Conditionality: Review

The Executive Directors then took the following decision:

1. Pursuant to Decision No. 7558-(83/156),7 adopted November 16, 1983, the Fund has reviewed the programs supported by stand-by and extended arrangements, as well as the appropriateness of the provisions of the extended Fund facility, and of the guidelines on conditionality, and decides that the provisions of the extended Fund facility and the guidelines on conditionality remain appropriate in the present circumstances.

2. The Fund will again review the programs supported by stand-by and extended arrangements, and the appropriateness of the provisions of the extended Fund facility, and of the guidelines on conditionality, not later than December 31, 1985.

Decision No. 7857-(84/175)

December 5, 1984

E. Overdue Payments to the Fund: Member’s Right to Purchase Under Stand-By and Extended Arrangements

1. The following paragraph shall be included, as paragraph 5, in the form of the stand-by arrangement in Attachment A to Decision No. 6838-(81/70),8 April 29, 1981, as amended, with an appropriate reference to this paragraph to be included in paragraph 1 and the subsequent paragraphs of the form to be renumbered accordingly: “(Member) will not make purchases under this stand-by arrangement during any period of the arrangement in which the member has an overdue financial obligation to the Fund or is failing to meet a repurchase expectation pursuant to the Guidelines on Corrective Action9 in respect of a noncomplying purchase.”

2. The following paragraph shall be included, as paragraph 5, in the form of the extended arrangement in Attachment B to Decision No. 6838-(81/70),10 April 29, 1981, as amended, with an appropriate reference to this paragraph to be included in paragraph 1 and the subsequent paragraphs of the form to be renumbered accordingly: “(Member) will not make purchases under this extended arrangement during any period in which the member has an overdue financial obligation to the Fund or is failing to meet a repurchase expectation pursuant to the Guidelines on Corrective Action8 with respect to a noncomplying purchase.”

3. Other stand-by or extended arrangements granted by the Fund after the date of this decision shall include also the provision in 1 or 2 above.

4. The provision in 1 and 2 above shall be included also in an existing stand-by or an extended arrangement when the Fund and the member reach understandings regarding the circumstances in which further purchases may be made under the arrangement.

5. Decision No. 7678-(84/62),11 April 20, 1984, shall cease to apply in respect of a stand-by or an extended arrangement that includes the provision in 1 or 2 above.

Decision No. 7908-(85/26) February 20, 1985

At the same meeting the Executive Board agreed that, if a member were failing to meet a repurchase expectation pursuant to the Guidelines on Corrective Action9with respect to a noncomplying purchase, the Fund would not negotiate or approve either a stand-by or extended arrangement for the member or the use of the Fund’s general resources outside an arrangement, as in the case of an overdue financial obligation to the Fund.

F. Overdue Payments to the Fund: Amendment of Rule G-4

Rule G-4 shall be amended to include the following provision as paragraph (e):

“Instructions for the transfer of currency for any purchase, other than a reserve tranche purchase, shall be rescinded, to the extent that it is feasible, during the period between the issuance of the instructions and the value date for the purchase if, during that period, the member requesting the purchase has any overdue financial obligation to the Fund or is failing to meet a repurchase expectation pursuant to the Guidelines on Corrective Action12 with respect to a noncomplying purchase.”

Decision No. 7909-(85/26)

February 20, 1985

G. Relationship Between Performance Criteria and Phasing of Purchases Under Fund Arrangements: Operational Guidelines

(1) As a general rule, every effort should be made to limit the lag between the beginning of the annual program period and the date of discussion by the Executive Board of supporting annual arrangement (or the annual segment of a multiyear arrangement) to a minimum. This would facilitate the inclusion of quarterly performance criteria throughout the program period and of purchases throughout the period of the arrangement, thereby strengthening the link between Fund financing and adjustment.

(2) Particular attention should be given to minimizing lags in reporting of data relating to performance criteria without loss of reliability of data. It would be reasonable for the Fund to expect that all members seeking the Fund’s support should be able to limit reporting lags to two months. In very exceptional cases where reporting lags exceed two months, the staff will explain the reasons for such lags as well as the steps being taken to reduce them.

(3) Every effort should be made to limit the period between the approval of an adjustment program by management and the date when the supporting arrangement is discussed by the Executive Board to no more than three months. Should the period be exceeded, the staff would confirm before the Board discussion of the arrangement that the program as originally proposed remains generally appropriate. In those exceptional cases where the delay indicates a significant slippage in the implementation of the agreed program, the staff would renegotiate the program, including the performance criteria and phasing of purchases.

(4) There would be no fewer than four purchases during a 12-month period of the arrangement, five being the preferred course of action. The purchase dates would also be distributed as evenly as possible throughout the arrangement. However, problems have often been experienced in this regard because of a bunching of the first two purchases under an arrangement and/or the last purchase occurring unduly early before the end of the arrangement. In order to avoid such problems, as a general rule, the date of the second purchase would not be earlier than two months from the initial purchase on approval of the arrangement and the date of the last purchase would not be earlier than two months before the end of the arrangement. One possible exception would be the case where initial Executive Board approval has been only in principle and final approval follows later by up to 30 days.

(5) The test dates for performance criteria would also be distributed as evenly as possible through the period of the arrangement. Normally the date of the first performance test would not be earlier than the date on which the arrangement becomes effective, and the date of the last performance test would not be earlier than three months from the end of the arrangement.

(6) Every effort should be made to include performance criteria initially for as much of the 12-month period of the Fund arrangement as possible. However, it may not be possible always to establish in advance one or more performance criteria for part of the period of the arrangement because of substantial uncertainties about major economic trends and normal time lags between the completion of negotiations on the arrangement and Board discussion of the arrangement. Taking into account both sets of factors, as well as the actual experience in recent years, it would be reasonable to expect that, as a normal rule, performance criteria would be included initially which would govern purchases over a period of at least six months of the arrangement. This would normally involve at least two sets of performance criteria. Where this minimum period is not met, the staff report would include a full explanation of the underlying reasons.

(7) As a general rule, indicative targets would be included at the outset for that part of the 12-month arrangement for which performance criteria are yet to be established. Provision will also be made for a review in order to replace these indicative targets later with performance criteria. Indicative targets will also be included for the last month of the arrangement period.

(8) In the case of segments within the framework of a multiyear arrangement, normally performance criteria would be set up to the end of each underlying annual program period. The purchase after the end of the underlying annual program (which may be the last purchase under the preceding segment of the arrangement or the first purchase under the subsequent segment) would be contingent both on understandings being reached with the Fund on the next year’s underlying program and on observance of performance criteria for the end of the preceding program period or established in the context of the member’s new program, or on a waiver being approved by the Board in the case of nonobservance of these performance criteria.

Decision No. 7925-(85/38)

March 8, 1985

H. Accounting for Charges from Members with Overdue Obligations

The Executive Board decides that henceforth charges on the use of Fund resources from members that are overdue in meeting financial obligations for six months or more will not be included in accrued income unless a member, though overdue in other obligations to the Fund, has remained current in settling charges as they fall due. Charges that are not included in accrued income will instead be reported as deferred income.

Decision No. 7930-(85/41) March 13, 1985

I.Reporting by the Fund of Overdue Obligations

The Executive Board decides that overdue financial obligations to the Fund of members having obligations overdue for six months or more will be reported in aggregate by category of obligation but without identifying the members involved, in the Fund’s Annual Report, quarterly Financial Statements of the General Department and the SDR Department, yearbook issue of Balance of Payments Statistics, and International Financial Statistics.

Declarations of ineligibility to use the Fund’s general resources will be reported in the Fund’s Annual Report and will identify the members concerned, beginning with the 1985 Annual Report.

Decision No. 7931-(85/41) March 13, 1985

J. Developing Countries’ Indebtedness to Commercial Banks and Official Creditors, and Export Credit Cover Policies

Chairman’s Concluding Remarks at Executive Board Meeting

General Remarks

In their overall assessment of the present situation in indebted countries and of policy objectives for the period ahead, Executive Directors agreed that encouraging progress has been made in managing developing countries’ debt-servicing difficulties. But they cautioned against complacency, noting that the debt problems in some countries have not yet been solved.

The clear progress over the past two and a half years has been due to major adjustments by debtor countries and to concerted action by debtors and creditors, and it has undoubtedly been helped considerably by the strength of the economic recovery, and particularly by the upturn in the U.S. economy. However, Directors noted that the progress of individual countries in restoring a viable payments position and real growth has been uneven. Directors stressed that balanced growth of the world economy, open trading systems, appropriate adjustment policies by the debtor countries, and continued collaboration between debtors and creditors are the keys to solving external debt problems.

Appropriate adjustment policies in debtor countries are clearly needed to foster what Directors called the normalization of debtor-creditor relationships, which in turn would encourage the restoration of debtors’ creditworthiness, greater spontaneous bank lending, official credit flows, and official development assistance. In this connection, several Directors underscored the serious nature of the many problems facing sub-Saharan African countries. A number of Directors also stressed that adjustment policies could pave the way for a return of flight capital and for an increase in direct foreign investment and related non-debt-creating flows and transfers of technology.

Several Directors, however, expressed their concern about the social and human costs of the adjustment efforts in developing countries. In their view, the costs were not stressed sufficiently in the staff papers. They thought that greater emphasis should be placed on mobilizing additional financing, especially official development assistance, in order to strengthen the growth potential of debtor countries, especially low-income countries, which have very limited resources or access to bank credit. Those Directors noted in particular the low level of bank lending to debtor countries in the recent past and the additional debt-servicing burden due to high real international interest rates, the present trends in the exchange markets, and the effect of protectionism in a number of industrial countries.

Executive Directors generally observed that the progress in reducing debt-servicing difficulties could be endangered by adverse developments in the world economy, particularly developments in trade, interest rates, and exchange rates. Directors stressed that appropriate policies in major industrial countries could greatly reduce this danger. In this connection, a number of Directors, noting that policy responses to adverse developments would of course have to be made by both industrial and developing countries—in close collaboration with financial institutions—reiterated the importance they attach to effective and evenhanded Fund surveillance.

Directors commented favorably on commercial banks’ readiness to enter into multiyear restructuring arrangements (MYRAs) for certain countries that have made significant progress in correcting the imbalances in their economies. They thought that MYRAs could play a useful role in facilitating a return to more normal capital market access by removing the “hump” in future amortization payments. The ability of the countries concerned to forgo concerted lending would help to set the stage for normalizing creditor-debtor relationships. A number of Directors urged official creditors also to agree to multiyear rescheduling.

Directors agreed that countries at an early stage in solving their payments problems needed to maintain comprehensive and convincing adjustment efforts, supported by Fund arrangements where appropriate. Financial flows, including debt relief and concerted lending, should be tailored to each country’s prospects and adjustment effort. A number of Directors considered that smaller and medium-sized countries making strong adjustment efforts must be given the same close and active attention by creditor countries and institutions as countries having greater influence on international economic and financial developments. Some Directors emphasized the need to ensure that financial flows would be sufficient to finance not only immediate balance of payments gaps, but also growth and development. In that context, the roles of official development assistance and cofinancing through the World Bank were stressed. Directors observed that banks and official creditors might need to be flexible, perhaps within a longer-term framework, in dealing with the problems of countries experiencing severe and protracted debt-servicing difficulties, especially low-income countries, which generally have little or no access to commercial lending and depend heavily on development assistance. Several Directors emphasized that, as a monetary institution, the Fund should limit its role in those low-income countries to that of a catalyst, providing advice on adjustment that was perhaps as important, or more important, than financing.

Directors generally stressed the appropriateness of continuing the case-by-case approach of tailoring the mix between adjustment and financing to a country’s circumstances and prospects, and they considered that the Fund would continue to have a major role to play in this field. In this regard, debt restructuring and concerted lending, where necessary, would appear to be a pragmatic and appropriate approach to securing additional financing, despite the sometimes admittedly arduous process of assembling financing packages. Developing countries were strongly encouraged actively to promote non-debt-creating capital inflows, particularly direct investment.

While some Directors believed that the problem of external indebtedness required a more integrated approach than the one suggested in the staff papers, I have not discerned today a trend in favor of what some Directors have called generalized debt relief.

Developing Countries’ External Indebtedness to Commercial Banks

A large number of Directors agreed that enhancing Fund surveillance on a case-by-case basis could make an important contribution to supporting continuing adjustment by countries that were no longer using Fund resources. While noting that the provision of semiannual consultation reports reviewing countries’ progress toward a more viable balance of payments position would assist banks in making the transition toward more market-based credit decisions, most Directors stressed that Fund reports should not take a position on the appropriateness of continuing restructuring or additional bank lending. Directors felt strongly that it was up to the banks to utilize the information given to them by the countries concerned; the banks should make their own judgments. Furthermore, Fund reports should be viewed as only one element of the banks’ information and monitoring procedures. Directors encouraged the banks to develop their own risk assessment and monitoring capabilities, a process in which the Institute for International Finance might play a useful role. In addition, some Directors said, banks should not take enhancement of Fund surveillance as a signal that they could relax their own monitoring.

Many Directors commented on the need to reinforce the soundness of the international banking system in order to improve the medium-term prospects for lending. They observed that bank supervisors have generally sought improvement in banks’ balance sheets in a judicious manner, weighing the need to move rapidly against the risk that an excessively stringent approach could be highly counterproductive. Directors also stressed that more forward-looking risk assessment by banks was an important factor in assisting developing countries to regain more normal market access. These Directors felt that improved risk assessment would be essential to ensure that, over time, the recurrence of cycles of overlending and underlending to individual countries would be avoided, and that financial innovations would be made in a sound manner. Close Fund surveillance of developing and developed countries’ economic policies would also support the strengthening of the financial system.

Export Credit Cover Policies

Directors welcomed the opportunity to discuss export credit cover policies in the belief that official export credit agencies would have an important role to play in coming years. The role of official credit insurance agencies was particularly important in helping to maintain vital short-term trade credits, especially in periods in which debtor countries pursued adjustment efforts supported by Fund resources. The recent maintenance of short-term credit insurance by virtually all major agencies—when the appropriate conditions were met—was welcomed by Directors.

As to officially supported commercial credits of longer maturity, Directors believed that the activities of export credit agencies would be crucial in coming years, with the resumption of the growth of capital goods imports in developing countries. The efforts of those countries that make adjustments to restore balance of payments viability over the medium term should be supported by a timely resumption of official export credit and cover. In this way, official export credit agencies could help certain borrowers to gradually regain access to commercial credit. Directors stressed, however, the need to ensure that official export credits were used for productive purposes. In this context, they welcomed the efforts made by official export credit agencies to strengthen their country risk assessment and project appraisal procedures. They noted that lending by those agencies was likely to be most effective and secure when it was part of a well-designed and carefully appraised investment program. In this respect, the role of the World Bank was stressed.

Directors thought that debtors would gain the greatest possible benefit from financial assistance from export credit agencies by being fully aware of the variety of practices and procedures of these institutions. In particular, they should be aware of the linkages between rescheduling and new credit cover.

Developing Countries’ Indebtedness to Official Creditors

Directors welcomed the efforts by official creditors to respond to the financing needs of countries that were undertaking adjustment programs. They noted in particular the flexibility that had been shown by the Paris Club creditors in reaching agreements that reflected the particular circumstances of individual countries. This case-by-case approach had enabled creditors to deal with each country’s immediate financing difficulties while bearing in mind the impact of any rescheduling agreement on a country’s access to new export credits and export credit insurance. Given the importance of maintaining or restoring such access, a number of Directors emphasized that rescheduling must continue to be viewed as a response to exceptionally difficult circumstances, and not as an alternative form of balance of payments financing or development assistance.

Some Directors said that, while the Paris Club’s activities were welcome, official creditors had responded less flexibly than other creditors. A number of Directors stressed that it would be appropriate for official creditors to take a somewhat longer-term approach to a country’s debt-servicing difficulties. A number of other Directors, while being receptive in principle to this suggestion, stressed that MYRAs by official creditors should remain the exception, and that MYRAs by banks and by official creditors should not necessarily go hand in hand and need not have identical terms. They also stressed the severe budgetary constraints in a number of creditor countries.

Although Directors differed in their views on when a longer-term approach to a country’s debt-servicing difficulties would be appropriate, some of them felt that the key question was whether or not multiyear rescheduling by official agencies would facilitate access to new credits and the restoration of normal debtor-creditor relationships. There was agreement that multiyear rescheduling could be a useful response to countries that had made major progress in their domestic and external adjustment efforts but faced a hump in their amortization payments that could not be refinanced through normal market mechanisms. Even in those cases, however, care would have to be taken to ensure that the rescheduling exercise did in fact pave the way for the opening of new export credits and cover. The Fund and the Paris Club will be examining these matters further.

A number of Directors considered that a longer-term approach was also called for in the case of countries—particularly the low-income countries—experiencing prolonged debt-servicing difficulties. They believed that the year-by-year approach did not realistically address the situations in these countries, which obviously required very long-term debt restructuring on highly concessional terms. However, other Directors noted the generous terms the Paris Club had been granting such countries and emphasized that these countries’ difficulties could only be addressed by strong adjustment efforts supported by appropriate development assistance, which, in their view, should be kept separate from rescheduling policies. Without a firm reorientation of economic and financial policies, even the most generous rescheduling terms were unlikely to generate an increased level of net lending to such countries.

Directors noted the importance attached by all creditor groups to comparability of treatment among creditors and nondiscrimination. For countries experiencing debt-servicing difficulties, careful coordination was necessary not only to achieve equitable burden sharing among creditors, but also to ensure an appropriate balance between financing and adjustment.

March 20, 1985

K. Surveillance over Members’ Exchange Rate Policies: Review of Implementation of Procedures

The Executive Board has reviewed the general implementation of the Fund’s surveillance over members’ exchange rate policies, as required by paragraph VI of Procedures for Surveillance attached to Decision No. 5392-(77/63),13 adopted April 29, 1977, including the procedures for the conduct of consultations under Article IV, which consultations shall comprehend the consultations under Article VIII and Article XIV, and approves the continuation of the procedures as described in SM/85/65, in the light of the Managing Director’s summing up, until the next annual review, which shall be conducted not later than April 1, 1986.

Decision No. 7939-(85/49)

March 25, 1985

Attachment to Decision No. 7939-(85/49) Managing Director’s Summing Up

Directors once again emphasized the great importance that they attach to the role of the Fund in the area of surveillance. They welcomed the emphasis of this year’s review on questions related to the effectiveness of surveillance, particularly in view of the current international economic environment. Directors stressed in particular the need for a continued evolution of surveillance procedures to enhance the ability of the Fund to carry out its responsibilities in this area in an effective and evenhanded way, and made a number of suggestions for improvements in the way surveillance is implemented.

1. The Effectiveness and Evenhandedness of Surveillance

The discussion of the question of the effectiveness of surveillance was wide-ranging and we have heard some very thoughtful comments on this subject. The views expressed on the extent to which surveillance can be considered to be evenhanded in its implementation were particularly noteworthy, and I shall begin with an attempt to draw together the common threads of that discussion.

Directors all agreed that evenhandedness was essential to the effectiveness of surveillance. They noted the widely held view that the Fund was much stricter in its oversight of the policies of deficit developing countries than of those of other countries. Several Directors indicated their support for this view, but most agreed with the staff paper that this interpretation resulted from an insufficient distinction between the function of surveillance and other functions of the Fund, such as those involved in conditionality and jurisdiction over exchange restrictions. It was true that conditionality did involve particularly detailed attention to the policies of member countries engaged in Fund-supported adjustment programs. When countries faced financial crises, however, it was clear that policies needed to be corrected immediately, and, in any case, the Fund was obliged to see that appropriate use was made of its resources. Most Directors thus agreed that surveillance, as such, had been evenhanded in its application. They stressed, however, that surveillance also needed to appear to be evenhanded, and for that to be the case it must be seen to be effective with respect to the large industrial countries. Given the effects that developments in such countries had on the rest of the world economy, moreover, it was particularly important that it be effective for those countries.

Directors considered that surveillance in fact had been much less effective than it should have been. Directors did note the important role that surveillance had played in bringing key policy issues to the attention of the authorities and keeping them under active discussion. It was also possible to cite many instances where policy decisions in member countries clearly had taken account of the views expressed by the international community through the Fund’s surveillance process.

More generally, however, it was clear that there remained substantial divergences between the policies actually pursued by some member countries and those advocated by the Fund membership collectively. A number of references were made by Directors to the fact that fiscal policy in the United States continues to diverge from what in the view of those Directors would be optimal in terms of its effects on the world economy, as well as on the U.S. economy itself. The continuing inadequacy of corrective policies in other industrial countries and in many developing countries was also stressed. Some Directors expressed the view that what was needed was more explicit guidance for members on the types of exchange rate and other policies that were consistent with the objectives of the Fund than was provided in the surveillance decision or, indeed, in the Articles themselves. Directors underlined the fact that while we must continually endeavor to sharpen our analysis and to improve our procedures, the basic issue was not procedural. Rather it was the willingness of member countries to adapt their policies in light of the views expressed by the international community.

Before turning to Directors’ views on the major ideas for enhancing the effectiveness of surveillance in this area noted in Section VI of the staff paper, I will sum up the discussion of various issues emerging from the experience in 1984 with the implementation of surveillance.

2. Issues Arising from the Implementation of Surveillance in 1984

(i) The analytical basis of surveillance

Directors considered that the analytical framework provided by the world economic outlook exercise continued to be an extremely useful basis for evaluating the global impact of the economic policies of the major countries. They welcomed the increasing emphasis, both in the world economic outlook and in Article IV consultations, on the medium-term implications of members’ policies. Directors also noted the desirability of further development of analytical techniques in the key policy areas. In this connection, they stressed the need for more comprehensive analysis of the international implications of country policies. They also noted the need for a better understanding of the ways in which financial policies and problems of structural adjustment interacted internationally to affect exchange rates.

(ii) Article IV consultations

Directors considered that Article IV consultations were the key element of the surveillance process. They welcomed the increased coverage in Article IV staff reports, both of important policy issues and of technical aspects, such as the quality of statistics and relations with the World Bank. They nonetheless encouraged the staff to be economical in reporting, to avoid blurring the focus of staff reports on the key issues. Many Directors felt that, given the heavy work load, the staff should be free to experiment with abbreviated reports on recent economic developments (REDs) in some cases.

Directors welcomed the improvement in consultation scheduling that has occurred since the implementation in 1983 of the system of advance specification of consultation cycles. In this connection, Directors considered it important that the Fund focus its efforts on those situations most in need of attention, and suggested that more differentiation in specification of cycles would be appropriate. In particular, all of the largest countries (several figures have been mentioned to define this group, and on that basis, I would say at least the 25 largest members) should be on the standard cycle. On the other hand, for small countries (other than countries with programs with the Fund or where there were questions about balance of payments viability), longer cycles up to two years would generally be appropriate, although where such members valued annual discussions with the Fund, they should be entitled to request the standard cycle. Some Directors suggested that informal staff visits for policy discussions midway between full consultations might be a useful way to accommodate the preferences of some members in such cases, while still keeping the work load within manageable proportions.

(iii) Monitoring of exchange rates

Directors considered that experience had been broadly satisfactory with the system of monitoring exchange rate developments through notifications to the Executive Board of changes in exchange arrangements and through information notices relating to large movements in real effective exchange rate indices, although some Directors cautioned against the temptation to rely too heavily on mechanical indicators of that sort. Many Directors felt that exchange rate developments in large industrial countries deserved perhaps more frequent attention, and a number of Directors supported a reduction in the threshold for information notices for such countries. But after having looked at the tally, I would conclude that the Board has not called at this point in time for a change in the information notice system.

3. Suggestions for Improving the Effectiveness of Surveillance

I turn now to the discussion of the major ideas described in Section VI of the staff paper. In general, Directors believe that we should explore every possible avenue for improving the effectiveness of surveillance.

First, while some Directors were quite negative with regard to the use of objective indicators, there was a broad-based interest in exploring the idea of making greater use of objective indicators as an instrument of Fund surveillance, particularly vis-à-vis major industrial countries. Most Directors stressed, however, that there would be considerable difficulty in establishing such indicators and agreeing with members on appropriate values for them. Directors therefore urged the staff to take an experimental approach in terms both of further development in the conceptual approach to be followed and of exploration of the concept with interested authorities. I conclude that, for the time being at least, the use of such indicators in particular cases where they might be appropriate and acceptable would be limited to providing a basis for reviewing, in the course of an Article IV consultation, developments against the background of the conclusion of the previous one.

Second, most Directors reacted negatively to the idea of a major move toward greater publicity in connection with Article IV consultations. They emphasized that the confidential relationship between the Fund and its members has been one of the most important elements of the consultation process, and they believed that publicity would involve a change in that practice that could have serious consequences for the candor and frankness of the policy discussions between the Fund and its members.

In the same vein, most Directors expressed reservations—although some of them were very interested in the idea—about the release of staff reports, and were concerned that such a practice could adversely affect the frankness and usefulness of these reports. For, I think, similar reasons, the reaction was negative at this point in time to the idea of the Managing Director making public statements following the conclusion of Article IV consultations. At the same time, I noted the Board’s general support for the manner in which I have been expressing my views and positions on matters of Fund concern in my public addresses. I should also note that most Directors were open to the wider release, including publication, of REDs with the approval of the member concerned.

Third, Directors believed that there was considerable scope for expanded follow-up to consultations on the side of both the Fund and country authorities. They considered that the current practice in Article IV staff reports of including reviews of developments against the background of the previous consultation should be further developed as a means of assessing the effectiveness of the consultation process, by giving indications of the weight the authorities attached to the views of the Fund. Directors strongly supported more “internal publicity” among the authorities of member countries themselves for the findings of the Fund. It was noted approvingly that in many member countries authorities at the ministerial level participate in the final policy discussions with the mission. The staff will continue the practice of listing in its reports the principal representatives of the member country taking part in the discussions.

It was also considered desirable that management communicate directly with ministers of finance regarding the outcome of the Fund’s review, but only in carefully selected cases where the Executive Board felt high-level consideration to be particularly important because of the urgency of the policy views expressed. In that context, it was noted that the Managing Director frequently has contacts with the highest authorities of member countries, in Washington or abroad, as well as through exchanges of communications and telephone conversations, which will of course continue.

Fourth, Directors encouraged the use of supplemental consultations with member countries in selected circumstances. A wide range of detailed views were expressed on this subject. Several Directors suggested that supplemental consultations might be appropriate for members in arrears to the Fund, members without current programs but with large financial obligations to the Fund, or members making prolonged use of Fund resources. Supplemental consultations could, in the view of several Directors, also be triggered as a result of major policy actions by members. At their discussion on March 18 on trade policies, Directors asked that the Board be notified of major new developments in that area, and such notifications, as with the current exchange rate information notices, could well lead to supplemental consultations if Directors so requested. They could also take place some time following the conclusion of an Article IV consultation that left serious doubts about the appropriateness of a member’s policies.

Finally, there was a wide-ranging discussion of various issues involved in enhanced surveillance of the policies of member countries involved in multiyear rescheduling arrangements. Directors believed that the Fund should be selective in acceding to requests for enhanced surveillance, and some Directors cautioned against the involvement of the Fund in such arrangements for too long a period of time. A number of them considered that in practice the procedure would be appropriate mainly for countries where strong adjustment policies were well under way. Otherwise, the Fund would continue to consider the endorsement of the country’s adjustment program in the context of a stand-by or an extended arrangement as the normal means of providing the necessary signal to commercial banks and other sources of finance. Most Directors considered that release of staff reports to banks in such cases would be acceptable if the country requested it and if it was necessary for the restructuring to take place. Directors emphasized that staff reports provided to commercial banks in cases of enhanced surveillance should not be, and should not be seen to be, of such a character as to provide on/off signals from the Fund. Directors, moreover, reiterated the view expressed during the Board’s discussion on March 20 of external indebtedness that commercial banks should take full responsibility for their country-risk assessments. More generally, Directors cautioned that, under enhanced surveillance, the Fund should not be seen as either formally endorsing the member’s policies or intervening too deeply in the relations between debtor countries and commercial banks. We have taken very careful note of the many issues raised by Directors regarding the access to and procedures for enhanced surveillance. The staff will reflect on them and we will return to these matters as experience is gained on a case-by-case basis.

In the course of their discussion, Directors indicated their awareness of the difficulties of embarking on new procedures at a time when Board, management, and staff all face very heavy work loads, and urged that ways be found to mitigate the burden. Some of the ideas supported by the Board today could be implemented without too much difficulty, but others would involve some considerable effort. What I would propose is that over the next few months management and staff consider Directors’ ideas both to gain experience with how they could be implemented in practice and to explore their implications for the work load and for the budget.

The Executive Board will return to the matter of surveillance, taking stock of all the ideas that have been explored and of suggestions put forward by Directors, including the issue of publicity.

L. Level of Fund’s SDR Holdings

In determining the amounts of SDRs to be transferred in purchases under the operational budgets, the Fund will be guided by the aim of reducing the Fund’s SDR holdings to a level of approximately SDR 2.5 billion by May 31, 1986. Prior to April 30, 1986, the Fund will review the level of its SDR holdings to determine whether and to what extent they should be reduced further.

Decision No. 7941-(85/50) S

March 29, 1985

M. Compensatory Financing of Fluctuations in the Cost of Cereal Imports: Renewal of Decision

Decision No. 6860-(81/81),14 adopted May 13, 1981, as amended by Decision No. 7602-(84/3),15 adopted January 6, 1984, shall be further amended as follows:

1. In paragraph 1, the words “For an initial period of four years...” shall be replaced by the words “For a period of eight years...”

2. Paragraph 17 shall read: “The Executive Board will review this Decision not later than May 13, 1987.”

Decision No. 7967-(85/69)

May 3, 1985

N. Suspension of Transfers to the Supplementary Financing Facility Subsidy Account and Retransfer of Surplus

In accordance with Section 4(b) of the Instrument establishing the Supplementary Financing Facility Subsidy Account ((Decision No. 6683-(80/185) G/TR)),16 transfers from the Special Disbursement Account to the SFF Subsidy Account shall be suspended as soon as arrangements can be made for the investment of resources retained in the Special Disbursement Account. Any resources of the SFF Subsidy Account above the amounts necessary to meet its future liabilities shall be promptly retransferred to the Special Disbursement Account as soon after the date of this decision as possible and as they may be received in the future.

Decision No. 7989-(85/81) SBS

May 28, 1985

O. Special Disbursement Account—Investment

Pending their use, the Managing Director shall place in investments, denominated in SDRs, with the Bank for International Settlements, the currencies received by the Special Disbursement Account as a result of the termination of the Trust Fund, unless the Managing Director considers that the terms offered by the BIS on an intended deposit denominated in SDRs are not sufficiently attractive. In that event the Managing Director shall inform the Executive Board promptly and make other proposals to it for investment in SDR-denominated obligations in accordance with Article V, Section 12(h).

Decision No. 7990-(85/81)

May 28, 1985

P. Review of the Fund’s Income Position for the Financial Years 1985 and 1986

(a) Amendment of Rule l-6(4)(a)

Rule l-6(4)(a) is amended, effective May 1, 1985, by replacing in the second sentence “3 percent” with “5 percent.”

Decision No. 7997-(85/90)

June 5, 1985

(b) Rate of Charge Effective May 1, 1985

In accordance with Rule l-6(4)(a), the Fund determines that, effective May 1, 1985, the rate of charge on the Fund’s holdings of currency covered by Rule 1-6(4) shall be 7 percent per annum.

Decision No. 7998-(85/90)

June 5, 1985

Q. Publicity Upon Declaration of Ineligibility

Effective following the publication of the Annual Report for 1985, the Fund shall issue a press release upon the declaration of a member’s ineligibility to use the general resources of the Fund and thereafter upon the restoration of the member’s eligibility to use the Fund’s general resources, and shall also include the information contained in such press releases, where pertinent, in the Annual Reports for the year concerned.

Decision No. 7999-(85/90)

June 5, 1985

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