Chapter 2 Policies and Activities of the Fund
- International Monetary Fund
- Published Date:
- September 1986
The policies and activities of the International Monetary Fund extend over a wide range of functions. These include overseeing the operation of the international monetary system; exercising surveillance over the exchange rate policies of members; monitoring developments in the field of international liquidity and managing the SDR system; providing temporary balance of payments assistance, on appropriate conditions, to members in external difficulties; and a variety of other functions, including, in particular, technical assistance, designed to promote effective cooperation in international financial relations.
This chapter reviews these various functions, focusing attention on the ways in which the Fund has been responding to some of the key issues facing the world economy. A series of appendices provide more detailed background information on the Fund’s activities, including quantitative information on lending and technical assistance activities, as well as information related to administrative operations.
FUNCTIONING OF THE INTERNATIONAL MONETARY SYSTEM
The Articles of Agreement state (Article IV, Section 3 (a)) that “The Fund shall oversee the international monetary system in order to ensure its effective operation. . . .” By the early 1980s concerns had arisen that the international monetary system was functioning less effectively than might be possible. In particular, exchange rates among major currencies were continuing to exhibit considerable variability, and the prolonged appreciation of the U.S. dollar against most other major currencies was leading to growing trade and current account imbalances. In addition, heavily indebted countries experienced acute difficulties in servicing their external obligations, especially after 1982. Official development assistance remained stagnant in real terms and protectionist pressures grew. Many developing countries were unable to respond to the deterioration in their external environment in a sufficiently timely fashion to prevent a serious disruption in the momentum of their development.
As a response to these various concerns, studies of the functioning of the international monetary system were conducted by the Group of Ten and the Group of Twenty-Four, and subsequently discussed in the Interim Committee of the Board of Governors. The report of the Deputies of the Group of Ten arose out of the Williamsburg Summit Declaration of 1983. It was forwarded to ministers and governors and made public in June 1985. It covered four major subjects: the functioning of floating exchange rates, strengthening multilateral surveillance, the management of international liquidity, and the role of the International Monetary Fund.
The Group of Twenty-Four prepared two reports. The first, “A Revised Program of Action Towards Reform of the International Monetary and Financial System,” was issued in September 1984. The second report, which parallels more closely the subject matter of the report by the Group of Ten, was entitled “The Functioning and Improvement of the International Monetary System” and was prepared by a working group established for the purpose in May 1985 by the Chairman of the Group of Twenty-Four. The report was released in August 1985. It covers each of the subject areas dealt with in the report of the Group of Ten and also deals with the subjects of debt and the transfer of resources.
The report of the Group of Ten and the second report of the Group of Twenty-Four were presented to the Interim Committee at its meeting in Seoul in October 1985. The Committee welcomed the work that had been undertaken and asked the Fund’s Executive Board to study the documents and report to it at its next meeting. In response to this request, the Executive Board held a series of meetings early in 1986, the conclusions of which were reported to the Interim Committee. The Committee itself had a substantive initial exchange of views on the various issues in its meeting of April 1986.
The reports of both the Group of Ten and the Group of Twenty-Four recognized that the various issues related to the working of the international monetary system, and the Fund’s role in regard to them, were closely interconnected. For example, any changes in the operation of the exchange rate system, whether achieved through modifications in the system itself or through improvements in the mechanisms of policy coordination, would be reflected in the implementation of surveillance. More generally, the role of the Fund, as the central institution in the international monetary system, would be conditioned by the membership’s view of how the system as a whole is expected to function and evolve.
With respect to the functioning of the exchange rate system, the two reports agreed that the variability of exchange rates, in the form of both short-term volatility and longer-term misalignments, had been a source of concern. The report of the Group of Ten concluded that fundamental changes in the exchange rate system were not called for, but that members should strive for better cooperation, involving both the commitment to stable domestic policies and the willingness to give greater weight to international considerations in the formation of domestic policies. Some Deputies of the Group of Ten also saw merit in a system of target zones for the major currencies. The report of the Group of Twenty-Four argued for according exchange rate stability a greater and more explicit priority and suggested that target zones for the major currencies could be helpful in this regard.
In the discussions that took place in the Executive Board, it was recognized that flexibility in the working of the exchange rate system was essential, as it had helped to preserve an open trading system and had contributed to making the financial system more resilient in the face of exogenous disturbances. However, floating rates among the major currencies had not functioned without substantial problems. Large payments imbalances had developed, there had been excessive short-run exchange rate volatility and, more importantly, significant and persistent misalignments in exchange rates had appeared. There was general agreement that potential improvements in the functioning of the system would depend heavily on the existence of the political will to pursue internationally consistent policies.
At its April 1986 meeting, the Interim Committee agreed with the Executive Board’s conclusion that the flexibility with which the system had operated had enabled the world economy to adapt to a number of major disturbances. The Committee also agreed that the variability of exchange rates and the longer-term misalignments that had emerged remained a source of concern. The Committee felt that, if better exchange rate performance were to be achieved on a durable basis, it would be essential for economic policies to be conducted in a sound and mutually consistent way, and for exchange rate considerations to play their part in the formation of these policies. The Committee asked the Executive Board to consider further possible modifications in the exchange rate system that would contribute to enhancing exchange rate stability and the mutual consistency of economic policies without sacrificing the essential flexibility of the system.
The reports of both the Group of Ten and the Group of Twenty-Four agreed that surveillance was central to the role of the Fund, but that it had not yet been as effective as was desirable. The reports put forward a number of procedural and substantive proposals for enhancing the effectiveness of surveillance, which were discussed in depth by the Executive Board and subsequently by the Interim Committee. These proposals, and the discussions concerning them, are reviewed in some detail in the following section of this chapter.
On the subject of liquidity and the SDR, both reports recognized that the management of the present system of international reserves had not been entirely satisfactory, although the Group of Ten report noted that the process of liquidity creation had been made more flexible in certain respects. Nevertheless, the uneven expansion of international credit and sharp shifts in the terms and conditions on which international liquidity was made available had not always been conducive to a gradual adjustment toward steady noninflationary growth. The reports made proposals for improving the system, either through strengthening the international liquidity system in general or through adapting the particular role played by the SDR. The discussion of these proposals in the Executive Board revealed general agreement that the functioning of the present system of reserve creation has shown some shortcomings. Periods of excessive expansion of liquidity had been followed by periods of excessive contraction, producing an uneven pattern of reserve growth. There was also agreement that the quality of the SDR should be improved and the asset made more usable.
The role of the SDR was reviewed by the Interim Committee in April 1986. The Committee considered that the SDR, which is an owned reserve asset, could play a useful role as a component of international reserves and as a unit of account. It also recognized the potential use of the SDR mechanism as a “safety net” against unexpected contingencies. The Committee stressed the monetary character of the SDR, which should not be a means of transferring resources, and recommended that the Executive Board study possible improvements in the monetary characteristics of the SDR that would increase its attraction and usefulness as a component of monetary reserves. On the question of an allocation of SDRs, it was determined that, although most members of the Committee favored an allocation, the broad support needed for an allocation was lacking at that time.
The proposals made in the reports with respect to the role of the Fund covered a number of specific areas. These included conditionality in the use of the Fund’s resources, policies related to access limits in the use of resources, prolonged use and arrears, collaboration between the Fund and the World Bank, concessionality in Fund lending, and quotas and voting rights. The report of the Group of Ten stressed the revolving character of the Fund’s resources and the need for prompt and effective adjustment measures in the face of balance of payments difficulties. The report of the Group of Twenty-Four, on the other hand, argued for making larger amounts of financing available for longer program periods, and for a reorientation of conditionality to give higher priority to growth-oriented structural adjustment. The two reports agreed on the importance of effective collaboration with the World Bank and on the need to address the problems of arrears and prolonged use of the Fund’s resources.
The Interim Committee reaffirmed the key role of the Fund in assisting countries in designing adjustment policies and in providing balance of payments financing. In this context, the Committee welcomed the decisions taken by the Executive Board establishing the Structural Adjustment Facility, which is discussed later in this chapter. The decision establishing the new facility calls for close collaboration between the Fund and the World Bank with a view to assisting members in developing medium-term policy frameworks. The Committee emphasized that, in furthering their collaboration, the Fund and the Bank should maintain their respective areas of responsibility, avoid cross-conditionality, and ensure that the policy advice they give is consistent.
The debt situation and the transfer of real resources was the subject of a chapter of the report of the Group of Twenty-Four. It was noted there that the external debt situation of the developing countries had been deteriorating for several years before a number of exogenous factors combined to precipitate the debt crisis in mid-1982. The effect of these factors was compounded by significant shortcomings in the policies of many developing countries, and the tightening of regulations by bank supervisory authorities in industrial countries also has had an impact on the availability of bank finance. The Fund has continued to play an active role in the handling of the debt situation. This role has included the commitment of the institution’s own resources in support of growth-oriented adjustment programs and helping to mobilize other sources of finance. The Fund’s role in developing and implementing the debt strategy is described in more detail later in this chapter.
GENERAL ASPECTS OF SURVEILLANCE
The Second Amendment to the Articles of Agreement requires that the Fund “shall exercise firm surveillance over the exchange rate policies of members.”6 In order for the Fund to perform its functions in this regard, the Executive Board adopted the principles and procedures for surveillance set forth in the document entitled “Surveillance Over Exchange Rate Policies.”7
Article IV, Section 1 (iii) requires each member to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members. . . .” The decision on surveillance specifies a number of developments that might indicate a need for discussion between the Fund and a member. These include protracted large-scale intervention in exchange markets in one direction, as well as certain actions taken for balance of payments reasons. Specifically, these are an unsustainable level of official borrowing or lending; the introduction, intensification, or prolonged maintenance of restrictions on current or capital transactions; and the pursuit of domestic financial policies that provide abnormal incentive or disincentive to capital flows. In addition, broader aspects of surveillance are also reflected in specific references in the Articles themselves. In particular, Article IV, Section 1 not only requires each member to avoid manipulating exchange rates, but also obliges the member to collaborate with the Fund and other members to promote a stable system of exchange rates, highlighting the need for each member to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability and to seek to promote stability by fostering orderly underlying economic and financial conditions.
Procedurally, the two main vehicles for the exercise of the Fund’s surveillance responsibilities are the periodic Article IV consultations with individual members and the broader reviews of economic developments and policies from a multilateral perspective in the context of the regular Executive Board discussions of the world economic outlook. In addition, Board discussions occasionally deal in more detail with specific issues related to surveillance. In particular, during the past year, continuing concerns with the external debt situation of developing countries were reflected in several related Board discussions, including discussions of developments in commercial and official lending, the structure of financial markets, and the debt strategy. Also, several discussions of trade issues served to reaffirm serious concerns about the continued drift toward protectionism.
PROPOSALS TO IMPROVE SURVEILLANCE
When the decision on surveillance was adopted in April 1977 it was recognized that it would not be possible to produce a comprehensive set of guidelines applicable to all situations that might arise. Accordingly, the decision that established the principles of surveillance also specified that they should be reviewed at two-year intervals, or more frequently. A recurrent theme of each subsequent review has been the need to make surveillance effective. The most recent review, concluded on February 12, 1986, focused on several proposals made recently to improve the functioning of the international monetary system and to enhance the implementation of surveillance procedures, most prominently in the reports of the Group of Ten and the Group of Twenty-Four.
These reports agreed on a number of key points regarding the implementation of surveillance: first, the function of surveillance is central to the role of the Fund; second, surveillance should be evenhanded and symmetrical; third, the achievement of this symmetry requires particularly close scrutiny of the policies of countries that are important in the international financial system; and fourth, surveillance has so far been less effective than would be desirable in influencing national policies and in promoting economic and financial conditions conducive to exchange rate stability.
The Executive Board endorsed these broad conclusions of the two reports. It noted that the shortcomings highlighted in these reports—in particular the concerns about evenhandedness and effectiveness—had in large measure been rooted in the fundamental changes that had occurred in the international economic and financial environment since the widespread adoption of floating exchange rates. They also reflected the difficulty that individual countries had in fully appreciating the benefits to be gained from framing their domestic policies in the light of a set of consistent international objectives. The perceived asymmetry in the effectiveness of Fund influence—meaning that conditionality in the use of Fund resources had significantly affected developing countries, while surveillance had had little practical effect on the countries with a major impact on the world economy—had increased since the adoption of floating exchange rates by several major countries. The Board felt that an essential requirement for effective surveillance was a willingness on the part of all members to implement policies in a way that took full account of both their interdependence within the international monetary system and their mutual self-interest in the improved operation of the system.
Part of the responsibility for shortcomings in the functioning of the system might, in the Executive Board’s view, also be attributed to the way in which the surveillance mechanism has operated. Particular importance was thus attached to reviewing possible means of improving the surveillance mechanism. The Executive Board considered a number of proposals, including some that focused on improvements in the procedures through which surveillance was implemented.
First, the scope of surveillance could be widened to include the broader principles of oversight by the Fund over members’ economic policies, thus recognizing explicitly that exchange rate movements that cause international concern are more often than not the unintended result of divergences and inadequacies in domestic policies rather than the deliberate consequences of policies aimed at influencing conditions in the foreign exchange market. Second, indicators—not necessarily quantified, rigid indicators, but more systematic guidelines than those specified in the existing surveillance decision—could be used to characterize a stance of policies and to help the detection of inconsistencies and deviations from appropriate policies. Third, the implementation of existing surveillance procedures could be strengthened along the lines of some of the detailed proposals in the reports of the Group of Ten and Group of Twenty-Four. These proposals, summarized in Table 13, can be grouped broadly into three categories: those aimed at improving the analytical basis of surveillance, those designed to enhance the multilateral setting of surveillance, and those intended to strengthen the influence of the consultation process.
|Group of Ten||Group of Twenty-Four|
|Analytical basis of surveillance|
|Data||Identify necessary improvements in scope, quality, and timeliness.|
|Policy coverage||All policies affecting trade, capital movements, external adjustment, and the effective functioning of the international monetary system, including mi-croeconomic policies and structural features that could weaken performance and induce exchange rate instability.||Thorough assessment of the national economic policies of major industrial countries.|
|Time horizon||Analysis and recommendations should be viewed in a medium-term framework. Improve techniques to analyze medium-term external debt and debt service scenarios.||Seek to establish a consistent set of targets that appear to be sustainable in the medium term.|
|Policy assessments||Provide more candid assessments, making clear the empirical and analytical basis of policy judgments. Differences of view with the authorities should be spelled out and discussed.|
|Policy recommendations||Provide precise suggestions for policy changes.||Identify policies to achieve agreed objectives and appropriate measures when actual outcomes deviate from agreed objectives.|
|Multilateral setting of surveillance|
|Separate chapter of World Economic Outlook, for review by ministers and governors of the Group of Ten, providing a framework to discuss international repercussions and interactions of national policies of member countries of the Group of Ten.||Two-stage procedure:
|Strengthening the influence of the consultation process|
|Follow-up to consultations||Review implementation and effects of policy recommendations in subsequent reports.||References to previous policy recommendations and related measures undertaken.|
|Request members to indicate measures introduced or considered to address problems identified, and respond to specific policy suggestions.|
Confidential (selective) exchange of views between the Managing Director and the finance minister.
|Information notices on deviations in implementing suggested policy changes.|
Following Board consideration of reasons for deviation, discussion between the Managing Director and the member’s authorities. Further Board consideration.
|Publicity||Basic confidentiality should be preserved. Some Deputies supported certain forms of greater publicity, in particular, public statements by the Managing Director at the end of the consultation process and the release of consultation documents at the member’s request.||Confidentiality should be preserved. No statement or document should be released.|
|Supplemental consultations||Review existing arrangements with a view to making greater use of supplemental surveillance.||Greater use of supplemental surveillance.|
As regards the analytical basis of surveillance, a number of proposals met with widespread support. It was agreed that there was a need to broaden the coverage of policies subject to surveillance and to integrate further the assessment of exchange rates and domestic policies within a medium-term framework. Specifically, exchange rate developments should be viewed in the context of an assessment of fiscal, monetary, trade, and structural policies. Moreover, a medium-term framework was seen as essential to assess the consistency and sustainability of members’ policies. In this context, regular consultations provide a useful opportunity to assess the adequacy of available data and to stress the main areas of needed improvement. Finally, it was emphasized that staff reports for Article IV consultations should provide candid appraisals of members’ policies, making clear the analytical basis of policy judgments; when the staff disagreed with a member’s policies, precise suggestions for policy change should be made.
Considerable support was also expressed for proposals to strengthen the multilateral setting of surveillance. While the basis for an overall assessment of international economic developments and prospects is provided by the twice-yearly world economic outlook exercise, it was felt that the usefulness of this review could be enhanced by a more explicit analysis of economic interactions among major countries. The inclusion of a separate chapter in the World Economic Outlook devoted to an analysis of the international repercussions of policies and developments in the larger countries should improve the framework for reviewing policy issues in a multilateral setting.
A suggested means for strengthening the conduct of Article IV consultations was through direct contact, at the conclusion of certain Article IV consultations, between the Managing Director of the Fund and the finance minister of the country concerned. This could be helpful in those cases where high-level consideration was thought to be particularly necessary because of the importance of the issues involved or the urgency of the need for policy action. Second, the continuity of the consultation process could be strengthened through a review in subsequent reports of policy recommendations made by the Fund in the course of a consultation. Third, the coverage of information notices used to monitor key developments in the period between Article IV consultations could be broadened. At present, these notices cover only significant changes in real effective exchange rates and in trade policies. Fourth, greater use could be made of the supplemental surveillance procedure, whereby the Managing Director can initiate an informal and confidential discussion if he considers that a modification in a member’s exchange arrangements or exchange rate policies, or the behavior of the exchange rate for its currency, may be important or may have important effects for other members.
These various issues related to surveillance, together with a report by the Managing Director of their initial consideration by the Executive Board, were reviewed by the Interim Committee in April 1986. The Committee reaffirmed the key role that Fund surveillance needs to play in the functioning of the international monetary system. The need to strengthen the multilateral framework of surveillance, which had been a particular focus of the reports of the Group of Ten and the Group of Twenty-Four, was also a central element of the Committee’s review of means to improve surveillance. The Committee noted in this context that increased emphasis would be given in the world economic outlook exercise to policy interactions among industrial countries in order to strengthen the basis for assessing the international repercussions of the policies and objectives of the major industrial countries, and to help promote the further development of recent initiatives to enhance policy coordination among these countries.
The Interim Committee asked the Executive Board to consider ways in which its regular reviews of the world economic situation could be further adapted to improve the scope for discussing external imbalances, exchange rate developments, and policy interactions. The Committee suggested that an approach worth exploring was the formulation of a set of objective indicators related to policy actions and economic performance, having regard to a medium-term framework. Such indicators might help identify a need for discussion of countries’ policies.
Subsequently, at the Tokyo Economic Summit in May 1986, participants reaffirmed their undertaking made in 1982 to cooperate with the Fund in strengthening multilateral surveillance, particularly among the countries whose currencies constitute the SDR basket. They requested that, in conducting such surveillance and in conjunction with the Managing Director of the Fund, their individual economic forecasts should be reviewed, taking into account such indicators as GNP growth rates, inflation rates, interest rates, unemployment rates, fiscal deficit ratios, current account and trade balances, monetary growth rates, reserves, and exchange rates.
SURVEILLANCE IN 1985/86
As already noted, the world economic outlook exercise provides the basic analytical framework for the Fund’s review of the world economy and the exchange rate system, and thus for the assessment of the exchange rate policies of members in an international context. Recent innovations in the staff’s analysis include, in addition to the special chapter on policy interactions in industrial countries mentioned above, the preparation and presentation of medium-term scenarios. The latter have provided the basis for a discussion of the global debt problem and, more generally, for a systematic assessment of the medium-term implications of a number of policy strategies in the various groups of Fund members. In the Executive Board discussion of the world economic outlook in September 1985, and subsequently in the Interim Committee meeting, concern was expressed about the weakness of economic activity in the industrial world and the effect of this weakness on the growth of world trade and on primary commodity prices. Without significant growth in the export earnings of developing countries, the management of the debt situation was likely to become much more difficult. It was felt that the overall economic outlook had become more uncertain during the course of 1985, and that there were greater downside risks in the projections. On the other hand, the considerable progress that had been made in reducing inflation in the industrial countries had been an important improvement in the outlook.
The Board and the Interim Committee broadly endorsed the policy strategy of the industrial countries, especially the framing of policies in a medium-term context and the emphasis that was being given to the preservation of financial stability. Particular stress was placed on the need for substantial and sustained reductions of budget deficits by those countries where they were excessive. In addition, the need to broaden further the basis of expansion in the world economy was emphasized. In this connection, countries that had strong external positions and good inflation records were considered well placed to contribute to growth in the world economy.
As for the handling of the debt situation, three key requirements for a durable solution were emphasized, namely, adequate access for developing countries to growing markets in industrial countries, firm measures of adjustment by the developing countries themselves, and an appropriate supply of finance to ease the process of adjustment. In this context as well as in others, the persistence of protectionist pressures was seen as a major problem. The importance of resisting continuing pressures for trade restrictions was stressed, but it was also noted that a lasting solution to the threat required an improved setting of macroeconomic policies.
By the time of the discussion of the world economic outlook that took place in the spring of 1986, a number of major developments had occurred, including the sharp decline in oil prices, the continued depreciation of the U.S. dollar, a further decline in interest rates, the increased determination of the United States to deal effectively with its fiscal deficit, and the evidence of more coordinated attention by the major countries to issues such as exchange rates and the debt situation. Although the growth of output in the industrial countries had slowed in 1985, and the terms of trade of developing countries had deteriorated sharply, the more recent developments just referred to had contributed to an improvement in the outlook for most countries.
Against that background, the Fund’s Executive Board and the Interim Committee noted some specific ways in which economic performance could be strengthened in the period ahead. The current and prospective reduction in the U.S. fiscal deficit was welcomed. In respect of those countries whose economies were operating below capacity, where the balance of payments was in strong surplus, and where inflation had been largely eliminated, it was noted that there might be room for more growth-oriented policies in the short term, while preserving the credibility of the authorities’ medium-term policy stance. The decline in interest rates that had occurred was welcomed, and it was hoped that further progress in reducing fiscal pressures and inflation would allow this process to continue. This would help capital formation and the growth of output and employment and would alleviate the debt burden of developing countries. Attention was also drawn to the central importance of structural policies in improving the efficiency of resource allocation.
Particular note was taken of the fact that developing countries continued to face a number of serious problems. The exceptionally difficult economic conditions, especially in Africa, were a matter of special concern. In 1985, world trade had been sluggish, commodity prices had fallen significantly, the external financing situation remained very tight, imports had declined in real terms in many countries, and the growth of output had slackened. Nevertheless, some progress had been made by developing countries in coping with their economic problems. On the whole, with some notable exceptions, the rate of inflation had been contained and a number of countries had adopted particularly bold anti-inflationary policies. Also, current account deficits remained well below their peak figures of the early 1980s. It was noted, however, that much remained to be accomplished, and the importance of effective domestic policies for promoting noninflationary growth was stressed.
While discussions of the world economic outlook provide the opportunity for members to review prospects and policies in the world economy at large, it is periodic Article IV consultations that provide the primary means for the exercise of firm surveillance over the exchange rate policies of individual members. Article IV consultations normally take place annually but there can be a longer interval—up to two years—for some members, and shorter cycles may be requested in some circumstances. The annual cycle is employed for countries whose policies have a substantial impact on other members, for countries with Fund stand-by or extended arrangements, and for countries for which there are questions concerning balance of payments viability. A standard 12-month interval had been specified for 127 countries as of the end of 1985, while longer intervals between consultations (ranging from 16 to 24 months) had been specified for 19 countries. In the 1985/86 financial year a total of 124 consultations were concluded involving 83 percent of the Fund membership. In addition, large movements in real effective exchange rates were brought to the attention of the Executive Board under the information notice system on 42 occasions.
The evolving nature of the consultation process has been reflected over the years both in the focus of Executive Directors’ discussions in concluding consultations with individual members and in the content of staff reports. In particular, international economic linkages and issues related to trade and protectionism as well as capital flows have been increasingly emphasized. In order to keep the Executive Directors informed of important trade policy actions by major countries between reports on Article IV consultation discussions, a procedure for issuing special trade information notices to the Board has been introduced. Two such notices were issued during the past financial year.
Article IV consultations have also increasingly reflected the need to discuss with member countries the medium-term implications of their policies. Consultation reports for almost all countries for which external indebtedness is a significant issue have included an analysis of the medium-term external debt outlook. The practice of including medium-term balance of payments scenarios has also been extended to countries where external indebtedness is not seen as a major issue, including many industrial countries.
Economic developments and policies in the major industrial countries have been discussed by the Executive Board on a number of occasions throughout the year, in the context both of the Article IV consultations with individual countries and of the semiannual discussion of the world economic outlook. These discussions have afforded the opportunity for the Board to express its views on policies in individual countries and their interaction with developments in the world economy at large.
The United States, in the period since late 1982, has succeeded in combining a strong economic recovery and a further decline in inflation. This achievement has helped to promote world economic recovery and to facilitate the adjustment efforts of developing countries. Over time, however, serious imbalances have emerged in the U.S. economy, and the growth of economic activity has slowed. In particular, large federal government deficits have become a pressing issue of economic policy. The increase in the federal deficit has contributed to a sharp widening of the U.S. current account deficit. The capital inflows that are needed to finance the external deficit have given rise to concerns about the resulting use of world savings and have constituted a worrisome development in the external debt position of the United States. Against this background, the recent evidence of renewed determination by the U.S. authorities to deal with the fiscal problem is an especially heartening development.
Monetary policy in the United States has been instrumental in bringing down inflation from the high levels of the early 1980s. In view of the continued moderation of inflation and the recent sluggishness of output, the recent stance of monetary policy—in which faster monetary growth has been associated with a substantial decline in U.S. interest rates—can be considered to be broadly appropriate. The emphasis that the U.S. Administration has placed on the role of market forces in the design of economic policies is also appropriate. Lastly, it remains essential that the Administration stand fast in its resolve to resist protectionist pressures.
The Federal Republic of Germany has maintained a steady and consistent stance of policies for a number of years. These policies have succeeded in reducing the rate of inflation to a very low level; output growth, however, has remained relatively moderate and until recently has relied to a considerable extent on foreign demand. Steps have been taken to reduce labor market rigidities. Nevertheless, there is room for further improvements. While the medium-term orientation of financial policies is clearly appropriate, and a shift toward more stimulatory short-term demand management would not be warranted, it has been argued that there may be scope within this framework for directing policies toward a strengthening of domestic demand. The halving of the general government deficit in proportion to GNP since 1981 has been a major achievement that may permit greater priority to be given to reducing tax rates than to a further reduction in the overall deficit. In this connection, the reductions in income tax rates implemented at the beginning of 1986 and planned for 1988 are to be welcomed.
The economy of Japan continued to perform well in 1985; even though growth receded from the high rate of 1984, economic activity was broadly in line with its medium-term potential. Prices continued to be virtually stable. For the future, the continuation of strong growth in Japan is in the vital interest of the international community, and the large withdrawal of stimulus from the external sector in response to the shift in exchange rates during 1985 and the early part of 1986 will have to be taken into account in formulating policies. The Japanese authorities have generally conducted their fiscal management in a flexible manner, and this approach remains appropriate in current circumstances, though without prejudice to medium-term objectives. The authorities permitted a significant tightening of monetary conditions in the final months of 1985 in order to consolidate the strengthening of the yen. With a substantial appreciation of the yen apparent by early spring 1986, there emerged scope for monetary policy in Japan to be directed toward promoting a strengthening of domestic demand.
In spite of the appreciation of the yen during 1985 and the early months of 1986, sizable current account surpluses are expected to continue in Japan over the medium term, reflecting fundamental saving and investment relationships, particularly the continued high rate of private sector saving. Japan’s surpluses have provided savings to the rest of the world and thus have helped to hold down international interest rates, but it is nonetheless important for Japan and the other major industrial countries to pursue appropriate and compatible policies in order to promote harmonious external economic relationships. In this connection, measures taken by Japan during 1985, along with other steps in the direction of liberalization, privatization, and deregulation of the economy, should prove helpful. The Action Program announced by Japan in 1985 promises important progress in the direction of reducing inhibitions to imports and should be implemented with determination.
Further progress has been achieved in France in reducing inflation, improving profitability, and strengthening the external account. New procedures for wage settlements have introduced more flexibility into the economy, and wage moderation has been central to the progress made in all three areas. Additional measures were taken in the second quarter of 1986 to reduce structural rigidities, including a reduction of controls on capital flows and on domestic prices and interest rates. These measures should help to restore market incentives and improve employment prospects. The continued success of incomes policy depends on the support of adequately constraining financial policies. In view of the need for an increase in the share of private sector investment in GDP, and the already high burden of taxes and social security contributions, priority should continue to be given to the reduction of government expenditures.
The United Kingdom has experienced an uninterrupted expansion of output since mid-1981, reflecting a fundamental transformation in the economy since 1979 and the continued commitment of the authorities to price stability through adherence to a medium-term financial strategy. On the other hand, despite the persistence of a very high level of unemployment, unit labor costs have continued to rise faster than in the other major industrial countries and have even shown some tendency to accelerate. There is therefore a need for further action to reduce rigidities in the labor market. Growth of the monetary aggregates has become difficult to interpret, perhaps reflecting changes in the financial structure. In these circumstances, the exchange rate can sometimes provide useful additional signals on monetary conditions. The ratio of the public sector borrowing requirement to GDP— adjusted for the effects of transitory factors—has hardly declined; it is therefore especially important for fiscal policy to be sufficiently restrained to sustain confidence in financial markets and, if possible, permit a reduction of interest rates.
The improvement in economic performance in Italy since 1984 has resulted from a strengthened cohesive-ness of economic policies. However, some of the momentum toward fiscal correction has recently been lost. A sustained reduction in the fiscal deficit remains an essential condition for the maintenance of balanced growth over the medium term. The Italian authorities have pursued a monetary policy that is consistent with a deceleration of inflation, and the continuation of that course is essential. The shift away from quantitative ceilings on bank credit to a market-oriented system requiring more flexible and positive real interest rates has also had beneficial consequences, as has the adoption of measures aimed at reducing wage indexation. There remains, however, an urgent need to reduce other labor market rigidities and to promote the continued containment of labor costs.
The growth of economic activity in Canada has continued to be strong, and the recovery has not been associated with any significant upward pressure on prices or costs. It is encouraging that the expansion has become more balanced, as business fixed investment has picked up and has been accompanied by a high personal saving rate. The major challenge facing the Canadian authorities is to achieve a lasting reduction of unemployment while extending the progress made toward price stability. The strategy to achieve these objectives will have to involve a substantial improvement in the federal fiscal position and a monetary policy aimed at consolidating the gains made in reducing inflation, coupled with continued efforts to improve the efficiency of resource allocation, such as the move to liberalize energy price determination.
Article IV consultations with smaller industrial countries and with developing countries covered a broad range of issues and reflected the varying circumstances facing individual member countries. The Board’s consideration of these issues has continued to focus on emerging problems faced by members and to reflect concerns related to the evolution of the international economy. In particular, close attention has been paid to the appropriateness of exchange rate policies, domestic financial policies, and trade policies, as well as to issues of structural adjustment.
In most countries, key factors highlighted in the analysis of exchange rate policies were the position of the overall balance of payments and its structure, and trends in the real effective exchange rate index. In developing countries that are heavily dependent on one or a few sectors, the analysis of these broader indicators was often supplemented by a discussion of the competitiveness or profitability of particular tradable goods industries. Other areas that received prominent attention were the restrictiveness of exchange and trade systems and developments in parallel exchange markets. In cases where questions were raised regarding the appropriateness of exchange rate policies, the most common reason was the maintenance of an unchanged peg against the U.S. dollar at a time when the dollar was undergoing sizable fluctuations.
Great importance was also attached to the reduction of fiscal deficits. Fiscal deficits have remained large in many countries following marked increases in the late 1970s. Where deficits were judged to be too large, a reduction in expenditures was typically recommended. The use of complementary revenue measures was also suggested in many cases. In a few instances, mostly in nonindustrial countries, specific recommendations were made to strengthen the tax base. These recommendations included measures to strengthen tax administration and, in oil producing countries, to broaden the coverage of taxation with particular reference to non-oil activities.
Discussions of monetary policies, as in past years, typically focused on whether the stance of policy was consistent with the objective of reducing, or keeping down, the rate of inflation, and on the impact of credit expansion on the balance of payments. For developing countries that operate with fixed or less than fully flexible exchange rates, the primary focus usually was on the growth of credit rather than on monetary aggregates. The allocation of credit was also a concern, notably the share of credit expansion pre-empted by the financing needs of the public sector.
For a number of developing countries, policy or institutional changes were recommended in response to analyses of the adequacy of monetary statistics and the instruments of monetary policy. These recommendations included improving the timeliness and accuracy of statistics, broadening the range and effectiveness of policy instruments, and tightening control over the lending activities of specialized banks. In a number of cases where interest rates are set administratively, the adequacy of the level of interest rates was questioned.
The increasing recognition in recent years of the adverse effects of structural rigidities on economic activity, employment, and trade has led to a greater emphasis on structural issues in the conduct of surveillance. Discussions of structural issues during the past year have addressed a range of problems, including inefficiencies in markets for labor, goods, and financial assets. For example, policy recommendations for labor markets included greater wage flexibility; the modification of indexation practices; the reduction of employment-based taxes; the adjustment of minimum wages; more flexible hiring or management of the work force; and improved work incentives or labor mobility.
An increased emphasis has also been given to trade policies in recent years. The importance of resisting protectionist pressures and, where possible, rolling back existing restrictions has been a recurrent theme in Article IV consultations with a broad spectrum of Fund member countries, developing and developed alike. Particular attention has been drawn to the need for developing countries to have adequate access to markets in industrial countries if they are to be successful in a growth-oriented adjustment strategy based on comparative advantage. Recommendations in the area of trade policy have included liberalizing the system of licensing and controlling imports and phasing out reliance on quantitative controls and other nontariff barriers.
INTERNATIONAL LIQUIDITY AND THE SDR
One of the principal activities of the Fund involves monitoring developments in international liquidity and managing the SDR system. As noted earlier, the reports of the Group of Ten and the Group of Twenty-Four recognized that the functioning of the present international monetary system had not been entirely satisfactory in recent years, and both reports set forth proposals for improving the system.
LIQUIDITY AND THE FUNCTIONING OF THE INTERNATIONAL MONETARY SYSTEM
These proposals included suggestions for strengthening the international monetary system in general, as well as proposals for changing or expanding the role of the SDR in particular. The report of the Group of Ten made a number of general suggestions. First, an improvement in the operation of private credit markets could be sought through the encouragement of the collection and dissemination of data used in the assessment of creditworthiness, through deregulation of capital markets and liberalization of capital movements, and through strengthened supervision of banks operating in international markets. Second, the integration of surveillance over members’ exchange rate policies and surveillance over international liquidity could contribute to a better functioning of the international monetary system. And third, the provision of official financing on appropriate terms to countries with limited access to private capital markets could help restore the creditworthiness of those countries.
The report of the Group of Twenty-Four also supported stricter surveillance over exchange rate and macroeconomic policies, as well as surveillance of international liquidity, because the ability of the developing countries to rebuild reserves had been “limited by the willingness of major countries to consider the international impact of their policies and to respond to the urgings made in the representative international fora.”
The report emphasized that the improvement of creditworthiness, like the acquisition of reserves without borrowing, depends on the ability of countries to strengthen their balance of payments positions; it is therefore strongly influenced by the domestic policies of the major industrial countries, which in recent years have generated slow growth of demand and declining relative prices for the exports of developing countries. Moreover, because creditworthiness had not been restored despite vigorous adjustment policies and sizable improvements in the current account positions of the developing countries, the report argued that market processes alone could not be relied on to correct an inadequate amount or an uneven distribution of international liquidity. Accordingly, the report urged that “the Fund should be enabled to influence the liquidity needs of the world economy through a more efficient SDR creation and distribution than it has so far been able to do.”
In addressing the issues that the two reports raised about the general function of the present international monetary system, the Fund’s Executive Directors differed in the nature and the strength of their concerns. Many Directors argued that, to a greater or lesser degree, the shift of emphasis from owned to borrowed reserves had created certain difficulties. The stock of international reserves and the terms and conditions on which they are supplied depend mainly on decisions made by private financial institutions, which are in turn influenced importantly by the policies of the key-currency countries. Private markets could not, in this view, be relied on to provide an adequate amount of reserves, to distribute reserves efficiently, or to avoid sudden limitations on (or abrupt changes in the terms and conditions of) access to reserves.
Other Directors, however, while agreeing that the private market system had shown some deficiencies, argued that for the most part the international financial markets had functioned effectively. In this view, the need to repay or refinance debt to maintain or reestablish creditworthiness imposed a useful discipline. Any country or group of countries without access to private financial markets was likely to be in need not of borrowing on commercial terms, but rather of concessional assistance in support of structural adjustment. Accordingly, these Directors felt that the U.S. debt initiative was the appropriate type of approach for meeting the financing requirements of countries that had not regained access to markets despite having undertaken adjustment measures.
The Executive Board also focused on the evolving role of the SDR in the international monetary system. The Board took note of a number of major structural changes that had occurred in the system since the creation of the SDR: the suspension of the convertibility of official U.S. dollar balances into gold; the advent of greater exchange rate flexibility; the emergence of a multicurrency reserve system; and the expansion and integration of international credit markets. These changes were felt to have had implications for the principal role of the SDR of alleviating the shortage of international liquidity as well as reducing the perceived asymmetries in the reserve-currency system. They may also have made obsolete one of the original functions of the SDR, which was to shore up confidence in the convertibility of the U.S. dollar into gold.
In addition to considering the original purposes of the SDR, it was noted that the SDR now serves—or could serve—other purposes: it constitutes an owned component of reserves; it may help diversify official portfolios; and it serves as a unit of account. Many Executive Directors considered that a more extensive role for the SDR could improve the system by increasing the proportion of owned reserves in total reserves. Some Directors felt that the stability of the system would be enhanced if the SDR were used more extensively to provide effective diversification of reserve holdings without reliance on exchange market transactions. Other Directors felt that greater stability of the system depended on better economic policies and closer international cooperation and that the SDR could not significantly contribute to this goal.
THE ADEQUACY OF INTERNATIONAL RESERVES
An adequate level of reserves is essential to the smooth functioning of the international economy. International reserves allow countries to avoid undertaking abrupt adjustments in their economic policies in response to unanticipated disturbances that may adversely affect or threaten to affect their international payments positions. International reserves provide buffers that countries can draw down and replenish as their international receipts fluctuate relative to their payments needs. Moreover, since an adequate stock of reserves helps to assure private savers and investors that countries will be able to smooth their import and absorption streams when confronted with fluctuations in their international receipts, it also reduces the incentives for capital flight that might arise if there were the anticipation that countries might be forced to make abrupt policy adjustments in response to unpredicted shocks.
An evaluation of the adequacy of international reserves requires consideration of the factors influencing the demand for and the supply of reserves. The reports of the Group of Ten and the Group of Twenty-Four both noted that the demand for international reserves has not been significantly reduced by the advent of floating exchange rates. Countries have continued to hold reserves as a precaution against unanticipated shocks, as a means of demonstrating creditworthiness, and for exchange market intervention. The existence of a persistent long-term demand for reserves is reflected in both the relative stability of the ratios of non-gold reserves to imports for most country groups and the willingness of countries to rebuild reserve holdings even under adverse circumstances. During the 1980s, the industrial countries as a group have maintained their reserves at close to 17 percent of their imports, while the developing countries, as a group, following a decline in the ratio of their reserves to imports to 26½ percent in 1982, have recently rebuilt that ratio to more than 30 percent.
In their efforts to maintain reserves, countries have faced different terms and conditions at which reserves are being supplied. Creditworthy countries have been able to borrow reserves at competitive terms in international financial markets. The net cost of these borrowed reserves has equaled the difference between the cost of borrowed funds and the return earned on reserve assets. By contrast, the external payments difficulties of many developing countries since 1982 have severely limited their access to private capital markets. This experience has made it evident that for some countries the opportunity to acquire or augment reserves by borrowing may not exist when needed most; even where indebted countries have pursued strong adjustment programs, access to financial markets has not been restored quickly. In this situation, many developing countries have been able to rebuild reserves only through using official capital flows or through current account surpluses generated by compressing imports and restraining economic growth. The necessity for a large number of countries to rely heavily on import compression to increase reserves has been seen as incompatible with the expansion of world trade, or with the general growth-oriented strategy for dealing with the international debt problem.
Such perspectives underscore the difficulty of assessing the adequacy of the global stock of reserves without taking account of the distribution of reserves among countries and the terms and conditions under which additional reserves can be acquired. In recent years, concern has been expressed that countries perceived to be most in need of additional reserves may face adverse terms and conditions for obtaining them. It has been argued that, in these circumstances, the supply of reserves generated by international agreement takes on special importance. The strength of that concern has not, however, produced general agreement on either the need or the appropriate means for an increase in international reserves.
Despite the willingness of most Executive Directors to support a new allocation of SDRs, sufficient support for an SDR allocation has not emerged during the fourth basic period, which will end in December 1986. Those Directors who did not favor an SDR allocation indicated that they were not convinced of a long-term global need for reserve supplementation. They argued that most of an SDR allocation would be received by countries without a strong need for reserve supplementation; that experience has shown that SDRs tend not to be held by the very group of countries whose need is cited as justification for an allocation; and that the persistent tendency of these countries to deplete their SDR holdings, if repeated following a new allocation, would constitute a permanent transfer of resources and would thus be contrary to the purpose of the SDR.
The issues raised by these objections to an SDR allocation have received considerable attention in the work program of the Fund. In recent years, various proposals have been put forward for arrangements that could be used, in effect, to redistribute an SDR allocation toward countries with the strongest need for additional reserves. In addition, the Executive Directors have recently, at the request of the Interim Committee, studied proposals to achieve a more balanced and stable proportion of SDR holdings in members’ reserves. Work on these issues is continuing.
DEBT SITUATION AND STRATEGY
An important aspect of the Fund’s activities in the past several years has been the handling of international debt problems. The strategy adopted in late 1982 for the resolution of the debt-servicing difficulties of developing countries has been based on a case-by-case approach involving coordinated efforts by debtor and creditor countries, commercial banks, and multilateral financial institutions. Since then, considerable progress has been made. The aggregate current account deficit of the capital importing developing countries was reduced from about $100 billion in 1981 to an average of some $25 billion in 1984—85. On the whole, external debt has been serviced and principal has been restructured in an orderly fashion, while total external payments arrears were reduced in 1985 for the first time in recent years. The adjustment that has been achieved by many developing countries, together with the substantial strengthening of the balance sheets of international banks resulting from increases in loan-loss provisioning and growth in bank capital, has increased the resilience of the international financial system in the face of potential adverse developments.
Notwithstanding the considerable progress that had been achieved by 1985, developing countries remained highly vulnerable to a number of disturbing developments in the world economy. The expansion in world trade slowed in 1985 with the deceleration of growth in industrial countries and the increased protectionism in those countries. The decline in oil prices and other key commodity prices reduced the export earnings of developing countries, and new commercial bank financing declined further. A number of developing countries continued to experience substantial internal and external imbalances and, even though growth recovered in 1984—85, income per capita in many heavily indebted countries remained below pre-1982 levels. As a result of all these factors, the process of adjustment came under increasing pressure in 1985.
In response to these difficulties, the U.S. Secretary of the Treasury, James A. Baker III, launched an initiative at the Annual Meetings of the World Bank and the Fund in October 1985 to reinforce the debt strategy. The initiative stressed the continued validity of the case-by-case approach and emphasized three mutually supporting elements. First, debtor countries needed to implement macroeconomic and structural policies designed to promote growth, to encourage external adjustment, and to reduce inflation. Second, the Fund should continue to play a central role in managing the debt problem, while the role of multilateral development banks and, in particular, the World Bank, should be enhanced by increased and more effective structural adjustment lending. It was suggested that annual disbursements from the World Bank and the Inter-American Development Bank to principal debtor countries should, over the period 1986—88, rise by about 50 percent from the projected rate of $6 billion a year. The World Bank’s role in stimulating private lending to developing countries would also be enhanced, while the operations of both the Multilateral Investment Guarantee Agency and the International Finance Corporation would assist in attracting non-debt-creating capital flows to these countries. Third, additional net lending from commercial bank sources was needed to underpin sound economic policies. On the basis of an indicative group of 15 heavily indebted countries, a figure of $20 billion for such new lending was suggested for the period 1986–88, which would represent an increase of 2½–3 percent a year in outstanding commercial bank claims.8 (This list of countries was not intended to be exhaustive, and the figure of 2½–3 percent per annum was not to be regarded as an entitlement for countries, not as a maximum for creditors.) In addition to the provision of net new loans to the group of 15 countries, it was expected that banks would continue to provide, on a spontaneous basis, adequate net new lending to countries receiving bank financing, provided that these countries maintained sound policies. It was also expected that banks would consider lending to other developing countries experiencing debt-servicing problems that might require relatively small amounts of commercial bank financing under adjustment programs supported by the Fund and the Bank.
The proposed strengthening of the debt strategy was welcomed by the international community. In a joint press release issued in December 1985, the Managing Director of the Fund and the President of the World Bank urged that the initiative should be translated into positive and concrete action as soon as possible. Commercial banks accounting for the overwhelming bulk of claims on debtor countries indicated their willingness to play their part in implementing the strategy in collaboration with other concerned parties—including governments and the international institutions. The Interim and Development Committees, at their meetings in April 1986, also welcomed the strengthening of the debt strategy.
A strengthened debt strategy requires important policy changes in both debtor and creditor countries. The key task for debtor countries is to implement sound macroeconomic and structural policies in order to provide the basis for sustained economic growth, reduced inflation, and the restoration of international creditworthiness. When there are internal imbalances, prudent fiscal and monetary policies are needed to restore stable financial conditions and establish the foundation for durable growth. A growth-oriented adjustment strategy also requires prices, exchange rates, and interest rates that are in line with market realities to bolster the generation of private financial savings, foster the efficient allocation of investment, ensure the competitiveness of exports, and discourage capital flight.
Creditor countries need to create a commercial and financial environment that is more supportive of the growth objectives of developing countries. There has been evidence of progress in this area in the past year, including, for example, the commitment of the United States to reduce its fiscal deficit, the coordinated adjustment in the pattern of exchange rates among major currencies, and the downward movement in international interest rates. Successful implementation of the reinforced debt strategy, however, also requires industrial countries to maintain open markets and pursue policies aimed at noninflationary growth, creating a financial climate in which further declines in interest rates may be possible.
Creditor governments have also been facilitating financial flows to developing countries more directly. In the framework of the Paris Club, official creditors have shown considerable flexibility in responding to the needs and circumstances of debtor countries. The Paris Club has agreed to successive annual reschedulings in a number of cases and to multiyear rescheduling agreements (MYRAs) for Ecuador in April 1985 and Côte d’lvoire in June 1986. The Paris Club has also indicated willingness to agree on MYRAs in cases where such agreements would contribute to a return to normal debtor-creditor relationships. Official creditors have recognized that export credits and credit guarantees extended by their export credit agencies are an important source of bilateral financing for debtor countries. Consequently, many agencies are now prepared to resume or increase export credits and cover, on a case-by-case basis, for developing countries that are willing to undertake the policy adjustments needed to restore creditworthiness and have concluded and are implementing Paris Club debt reschedulings.
The Fund has played a central role in the management of the debt crisis both by assisting developing countries in the design of comprehensive economic programs tailored to their individual circumstances and by helping to mobilize the necessary financial resources in support of these programs. As a result of the decision in December 1985 to continue the policy of enlarged access (see below, page 47), the Fund can continue to make a significant contribution to balance of payments financing. Nevertheless, its financial support is not likely to be on the same scale as in the early stages of the debt crisis; thus a somewhat greater emphasis has been given to the catalytic role of Fund support. In this regard, the procedure of “enhanced surveillance” has been established in connection with the development of MYRAs.
Enhanced surveillance, which is prompted by a request from the member, is a procedure for monitoring economic developments in certain countries that have advanced significantly in their process of adjustment, and for which a Fund arrangement is not envisaged. The Fund staff’s assessment of the policy program presented by the member in the process of consultations with the Fund staff is provided to creditors for consideration, along with other information, in making lending decisions. This procedure is intended to secure the Fund’s help for countries that are very close to restoring normal market relations. Commercial banks have already negotiated MYRAs in conjunction with enhanced surveillance in a number of cases. The MYRA that was extended to Ecuador in 1985 by the Paris Club may entail enhanced surveillance in the third year (after the current Fund arrangement expires); more recently, the Paris Club rescheduling with Yugoslavia incorporated enhanced surveillance.
FUND-SUPPORTED ADJUSTMENT PROGRAMS
Besides the role it has played in coordinating the global response to the debt crisis, the Fund has also worked directly with member countries to develop adjustment programs that it has supported financially. The main vehicles for this purpose are upper credit tranche stand-by and extended arrangements. So far in the 1980s the Fund has approved such arrangements for over 40 percent of the membership.9 These countries included 12 of the 15 highly indebted countries mentioned above. (Two of the other three entered into special monitoring arrangements with the Fund in connection with their adjustment programs.)
Twenty-six countries had stand-by or extended arrangements in place at the end of 1985/86, a somewhat smaller number than in other recent years (Table 14). Nineteen arrangements were approved in the course of the year, while the other seven were continuations of arrangements approved in earlier years. In part, the decline in the number of arrangements reflects the adjustment of the current account deficits of some countries to the available financing.10 Most of the countries that have undertaken adjustment programs during this period, however, still have some way to go before reaching balance of payments viability. Some countries have in fact made little progress, and a number of countries have overdue obligations to the Fund, which preclude them from drawing under existing arrangements or entering into new arrangements.
The fact that some countries have yet to reach balance of payments viability, despite adjustment programs that have continued over a number of years, contrasts with past experience when most countries entering into such programs were able to reach a satisfactory balance of payments position within three to five years, the repurchase period for use of the Fund’s ordinary resources in the credit tranches. In large part, the recent difficulties reflect the unprecedented need for adjustment that was faced by developing countries at the beginning of the 1980s, which was acknowledged in the 1981 Annual Report (page 78) in the following terms:
The Fund recognizes that to rectify a country’s balance of payments position may, under present circumstances, require structural changes and that these adaptations may take longer than the one to three years normally set for Fund programs.
This difficult situation, which was reflected in the longer repurchase period for borrowed resources under the Fund’s enlarged access policy (three and a half to seven years), was compounded by the shift in the availability of external finance that took place following the emergence of the debt crisis in 1982. While much of the difficulty members have had with their adjustment programs has reflected the difficult external environment, there has been a continuing search for improvement in the application of the Fund’s conditionality—the standards the Fund applies in providing financial support for members’ adjustment programs.
CURRENT ISSUES IN CONDITIONALITY
The process of reviewing conditionality and adapting it to new situations takes place at two levels. The experience with each individual program is examined through reviews in the course of the program, through discussions of further programs, and through Article IV consultations. This process may result in changes in subsequent programs with the member and, where the experience is applicable more broadly, in programs with other members. There are also reviews by the Executive Board of particular topics in conditionality, or, more generally, of overall experience with Fund-supported programs.
The most recent review of conditionality was carried out by the Executive Board in January 1986. It dealt with a variety of issues in the implementation of conditionality, focusing on possible improvements in program design and on ways of dealing with the problem of prolonged use of Fund resources by a growing number of member countries. During 1985/ 86, the Executive Board also held three seminars related to conditionality. The first seminar, in July 1985, considered a number of effects of Fund-supported adjustment programs: their effects on growth in program countries, their global effects, and their effects on income distribution.11 The other two seminars, in February 1986, dealt with the design of Fund programs: the first was a discussion of general issues, the second a discussion of program design in planned economies.
The Executive Board’s review of conditionality drew on a detailed appraisal of the experience of the 22 countries that had been granted upper credit tranche arrangements in 1982, supplemented by material on selected aspects of the experience of other countries with more recent programs. The Board noted with concern that a significant number of program countries had not made satisfactory progress toward balance of payments viability. In discussing this experience, attention was drawn to the external environment, slippages in policy implementation, and problems relating to program design. While the adverse economic environment since 1980 had clearly been a major factor, it was noteworthy that some members had made considerable progress in adjustment under circumstances comparable to those faced by members that had not. These differences appeared mainly to reflect divergences in the determination with which policies had been implemented. Directors stressed particularly that the success of a program depended on introducing policy measures at a sufficiently early stage, on tailoring the program to the circumstances of each individual case, and on having the ability to make flexible policy adjustments in the course of the program when circumstances changed. For these conditions to be fulfilled, there needed to be strong support from the political leadership of the country concerned.
In considering the implications of this experience for program design, Directors stressed the need for a growth-oriented approach. In the discussion of the growth issue at the July 1985 seminar, it was noted that the Fund’s ability to promote growth was constrained by the availability of resources to the Fund and the use to which available resources could be put. As a monetary institution that needs to ensure the revolving character of its resources, the Fund must emphasize the restoration of balance of payments viability in member countries using Fund resources. Nevertheless, there are strong causal links running from growth to balance of payments viability (and vice versa). Balance of payments adjustment in a context of slow growth can lead to “adjustment fatigue,” particularly if the period of adjustment is prolonged. Directors therefore felt that the Fund should increase its efforts to persuade members to adopt policy reforms favorable to growth.
In considering how to direct adjustment policies toward faster growth, Directors supported the increasing emphasis in Fund programs on the need to enhance economic efficiency and competitiveness and increase supply responses. Both in the conditionality review and in the subsequent seminar on program design, the need for comprehensiveness of programs and greater emphasis on structural reforms was stressed. Many such reforms fall within the Fund’s traditional areas of responsibility. These include, in particular, policies to enhance competitiveness. The Board noted that exchange rate flexibility designed to bring the exchange rate into line with market realities was an important tool with which to improve efficiency.
While the Fund has had long experience with the development of policies to enhance competitiveness, other areas of structural adjustment presented more difficult challenges. A higher priority would need to be given to the supply-side, or structural, aspects of programs. These include pricing policy, tax reform, financial sector reform, and trade liberalization. To move very far in that direction, however, would require careful attention to the question of collaboration with the World Bank (see below) and also could have implications for the guidelines on conditionality.
The present guidelines on conditionality date from 1979,12 and were developed in the course of a major review of all aspects of conditionality. While there has been a considerable evolution of the practices of conditionality since then, this evolution has not been so great as to require any revisions in the guidelines. The coverage of policy conditions (or “performance criteria”) is dealt with in Guideline 9, which reads as follows:
The number and content of performance criteria may vary because of the diversity of problems and institutional arrangements of members. Performance criteria will be limited to those that are necessary to evaluate implementation of the program with a view to ensuring the achievement of its objectives. Performance criteria will normally be confined to (i) macroeconomic variables, and (ii) those necessary to implement specific provisions of the Articles or policies adopted under them. Performance criteria may relate to other variables only in exceptional cases when they are essential for the effectiveness of the member’s program because of their macroeconomic impact.13
Consideration was given to a change in this guideline to provide for more routine inclusion in Fund arrangements of performance criteria on microeconomic policies. It was eventually concluded, however, that the Fund should not go too far in the formulation and follow-up of microeconomic policies, but should nevertheless increase its efforts to persuade program countries to carry out structural reforms. More generally, the Board agreed that the present guidelines on conditionality, applied on a case-by-case basis, continued to provide a satisfactory and sufficiently flexible basis for Fund policies on the use of its resources.
Among the other issues emphasized by the Board in its discussions of conditionality over the last year has been the value of medium-term scenarios, which in recent years have become a standard feature of the Fund’s work both at the aggregate level (in the world economic outlook exercise) and at the level of the analysis of individual countries. The increased use of such scenarios was welcomed, with the proviso that the inevitable uncertainties involved in such exercises necessitated caution in their use. Adjustment programs were now more explicit about the time frame for adjustment as well as the assumptions of exogenous factors and policies underlying the projections. The medium-term scenarios facilitated a more explicit evaluation of the question of medium-term viability, and the greater use recently of sensitivity analyses and alternative scenarios had been an important innovation in this respect. Medium-term scenarios were also considered helpful in understanding the longer-term aspects of adjustment as well as in assessing the adequacy of short-term measures.
The Fund and the World Bank share the common objective of assisting members in their efforts to improve economic conditions in their countries, but each institution has its own specific responsibilities and specialized expertise. The areas of economic policy dealt with by the two institutions are complementary and interrelated, as is the financial assistance each can provide.
Close cooperation between the Fund and the Bank is thus essential so that each can assist its members to the greatest extent possible, draw on each other’s expertise, and avoid duplication and working at cross-purposes.
Collaboration between the Fund and the Bank has intensified recently in a variety of ways, especially with respect to countries where both institutions are actively involved in lending operations. The increasing emphasis on issues of medium-term and structural adjustment under Fund-supported programs, and the importance of an appropriate macroeconomic framework for sectoral and structural adjustment policies under the Bank’s policy-based lending, have led to the further development of mechanisms for closer collaboration between the two institutions. These mechanisms aim at ensuring mutual understanding of the views and activities of the other and the development of a consistent diagnosis of members’ policies, so that policy advice and financial resources provided by the two institutions can be made consistent, complementary, and mutually reinforcing while avoiding cross-conditionality. Collaboration has also been necessary to further the efforts of the two institutions to encourage the provision of additional financial resources from other creditors.
In the past year the frequency of contacts between the Fund and Bank staff increased markedly both at headquarters and in the field. In 1985, Bank staff participated in Fund missions to 17 countries, and parallel or overlapping Fund and Bank missions took place to 44 countries, in some cases more than once to the same country. Such participation was relatively frequent in cases involving actual or potential use of Fund resources, and where the Bank was also undertaking or contemplating policy-based lending. Fund staff participated in Bank missions on 18 occasions in 1985, including participation by Fund staff from functional departments in Bank missions dealing with specialized topics. In 1985, Fund and Bank staff members began attending Executive Board meetings at the other institution on a systematic basis. Bank staff members have normally been invited to attend Fund Board meetings on country matters of interest to the Bank to promote effective cooperation by strengthening the understanding of considerations underlying Fund activities. Similarly, Fund staff have normally been invited to attend Bank Board meetings regarding lending operations in support of structural change. Frequent interaction and discussion between the two staffs have contributed to improved understanding of social and economic conditions of member countries and have broadened the overall short-term and medium-term perspectives of the two institutions.
In connection with Article IV consultations, as well as in the design of programs supported by Fund resources, the Fund staff frequently consulted the Bank staff in the areas where the Bank had particular expertise, especially the assessment of the efficacy of public sector investment programs and investment priorities, the efficiency of public enterprises’ operations, and the pricing of energy, transport, and other important commodities. Other areas where Bank staff views were frequently sought include sectoral productivity analysis, import liberalization, and tariff reform. Fund staff, in turn, assisted Bank staff in assessments of a range of macroeconomic issues, particularly in connection with the Bank’s structural and sector adjustment lending. Coordination between the staffs of the two institutions on their respective lending has been close. For those countries in which structural problems were important, the economic programs were supported in most cases by both a Fund arrangement and the Bank’s policy-based lending; while aiming at mutually supportive lending operations, care is taken to avoid cross-conditionality. Fund-Bank collaboration to mobilize commercial bank financing has become particularly close and was a feature in five of nine commercial bank financial packages concluded or agreed in principle in 1985.
A recent development that will require intensified collaboration between the Fund and the World Bank is the establishment of the Structural Adjustment Facility, discussed in more detail in the following section. The Facility calls for member countries to develop medium-term policy frameworks, in close collaboration with the staffs of the Fund and the Bank, working together.
FINANCIAL POLICIES AND ACTIVITIES
The financial activities of the Fund during the year 1985/86 were marked by a continuing high level of Fund credit outstanding, some slackening in the extension of new Fund credit, and a rising volume of repurchases. A notable policy development was the establishment (noted above, and discussed in more detail below) of the Structural Adjustment Facility, designed to provide concessional assistance to eligible low-income member countries that face protracted balance of payments problems.
The financial activities of the Fund have been influenced in part by the progress that a number of member countries have made over the past several years in strengthening their current account and external reserve positions. Drawings from the Fund declined from SDR 6.1 billion in 1984/85 to SDR 3.9 billion in 1985/86, and outstanding Fund credit fell slightly from SDR 34.9 billion at the end of 1984/85 to SDR 34.6 billion at the end of 1985/86 (Chart 16). The decline in outstanding Fund credit reflected the sizable repurchase obligations falling due, which were in turn related to the large expansion of Fund credit earlier in the 1980s (Table 15). Such a cycle of drawings and repurchases reflects the nature of Fund credit, which is for short-term to medium-term balance of payments assistance, and the revolving character of Fund resources.
Chart 16.Use of Fund’s Resources as at April 30, 1975–86
|Financial Year Ended April 30|
|Number of stand-by and|
|as of April 30||29||37||35||39||35||30||26|
|Of which, extended|
|Amounts under arrangements||3,049.7||9,475.1||16,206.3||25,025.5||18,569.4||11,675.3||4,906.7|
|As percent of total quotas||7.8||15.9||26.7||41.0||20.9||13.1||5.5|
|As percent of commitments|
|Outstanding Fund credit||8,306||9,545||14,802||23,590||31,742||34,973||34,640|
|As percent of total quotas||21.3||16.0||24.4||38.6||35.6||39.2||38.8|
|Number of countries||74||78||79||85||84||83||79|
Excluding purchases in the reserve tranche.
Purchases minus repurchases; net repurchases (−).
Excluding purchases in the reserve tranche.
Purchases minus repurchases; net repurchases (−).
Overall activity in the SDR Department remained at roughly the same level as in 1984/85. Transactions by agreement increased significantly and exceeded those with designation for the third consecutive year. The significant growth in voluntary SDR transactions in recent years is related largely to members’ needs to acquire SDRs for Fund-related transactions—mainly for the payment of charges. The pattern of SDR holdings across countries was similar to that at the end of April 1985, with SDRs continuing to accumulate in the reserves of members as the Fund reduced its holdings of an unchanged stock of SDRs.
As noted in Chapter 1, the export earnings of many developing countries remain quite weak, and their balance of payments and international creditworthiness are still a source of concern. Recovery remains fragile in many countries, and it is important that the Fund remain in a position to respond to members’ needs to use its resources. The Fund’s liquidity position and financing needs are reviewed regularly by the Executive Board to evaluate the Fund’s ability to meet prospective requirements. At its latest review in March 1986, the Executive Board determined that the Fund’s liquidity was adequate to meet expected demands under existing policies for the immediate future.
An important aspect of membership in the Fund is the access of members to the Fund’s resources. In recent years, members’ access has been governed by the Fund’s policy on enlarged access, which has been in operation since March 1981 and subject to annual review since 1983. At its meeting in October 1985, the Interim Committee recalled that the enlarged access facility was temporary and that the access limits under it were subject to periodic review. At the same time, the Committee recognized that, given the uncertainties in the world economy and the serious payments difficulties that many member countries continue to face, the policy should be continued in 1986 with only modest reductions in access limits. Reflecting the agreement reached in the Interim Committee, a subsequent Executive Board decision provided that access during 1986 should be subject to annual limits of 90 or 110 percent of quota (previously 95 or 115 percent of quota); three-year limits of 270 or 330 percent of quota (previously 280 or 345 percent of quota); and cumulative limits of 400 or 440 percent of quota (previously 408 or 450 percent of quota), depending on the seriousness of the balance of payments need of the member and the strength of its adjustment efforts. As in the past, the access limits under the policy are not treated as targets or entitlements. Although the Fund can approve arrangements above the indicated access limits in exceptional circumstances,14 all programs approved during 1985/86 were within the prescribed limits. The enlarged access policy and the access limits will be reviewed again before the end of 1986.
The Executive Board also decided to retain the existing limits of maximum access to the compensatory financing facility (83 percent of quota each in respect of shortfalls in export receipts or excesses in the cost of cereal imports, subject to an overall limit of 105 percent of quota) and the buffer stock financing facility (45 percent of quota). With reference to compensatory financing of cereal import costs, the Executive Board completed, in May 1985, a review of the 1981 cereal decision, which covered an initial period of four years.15 The Board concluded that the operations under the decision had served their purpose in providing balance of payments assistance to members experiencing temporary increases in the value of their cereal imports and decided to extend the period of operation from four to eight years, that is, to mid-1989.16
Recognizing that a number of low-income member countries continue to face protracted balance of payments problems, the Interim Committee, at its meeting in October 1985, agreed that the resources that would become available over the period 1985–91 from repayments of Trust Fund loans totaling about SDR 2.7 billion (which might be supplemented with funds from other sources) should be used to provide additional concessional balance of payments assistance—in conjunction with World Bank and other resources—to some of the low-income countries that are currently eligible for International Development Association (IDA) resources and that are in need of such assistance.17 On this basis, the Executive Board established in March 1986 a lending facility within the Fund’s Special Disbursement Account, known as the Structural Adjustment Facility (SAF), and also decided that members eligible to use it will be the low-income countries eligible, as of March 1986, to receive IDA loans.18 In April 1986, 60 countries were eligible for SAF assistance;19 of this group, the two largest countries, China and India, indicated at the Interim Committee meeting in October 1985 that they would not avail themselves of the facility, thus enlarging the amount available to other eligible countries.
The access of each eligible member under the SAF will be the equivalent of 47 percent of its quota over three years, of which up to 20 percent of quota would be available in the first year with provision for possible enlargement of access over time as experience with the new facility develops. The terms for use of resources will be similar to those of the Trust Fund, with interest at the rate of ½ of 1 percent per annum on outstanding balances, payable semiannually, and repayments in ten equal installments commencing five and a half years, and finishing ten years, after the date of each disbursement. Loans will be made to eligible members that present medium-term macroeconomic and structural adjustment programs designed to overcome protracted balance of payments problems and foster growth. These programs will be in the context of a medium-term policy framework to be developed by the authorities of the members, together with the Fund and the World Bank working in close collaboration. The Fund will review the operations of the SAF not later than May 31, 1988, and determine, inter alia, the disposition of any uncommitted balances available in the period through mid-1991.20
A number of member countries continued to experience difficulties in settling their financial obligations to the Fund on time during 1985/86. While the amounts of overdue financial obligations remain small in relation to the amount of Fund credit outstanding, they are large in relation to the Fund’s reserves and they have tended to rise in terms of their size and duration as well as in respect of the number of member countries in arrears. As of April 30, 1986, eight members were overdue by six months or more on financial obligations in the General Resources Account, and two in the SDR Department. Six members were also overdue by six months or more on repayments of principal or interest on Trust Fund loans. In total, the number of members overdue by six months or more in one or both Departments or to the Trust Fund was eight, as against four at the end of April 1985. The total overdue obligations of these eight members on April 30, 1986 was SDR 482 million, compared with SDR 176 million overdue from four members at the end of April 1985.21
During the financial year 1985/86, two members were declared ineligible to use the general resources of the Fund, pursuant to Article XXVI, Section 2(a), in light of their overdue financial obligations to the General Resources Account. Liberia was declared ineligible on January 24, 1986, and Sudan on February 3, 1986. This brought to four the number of members in such a status at the end of April 1986. On the dates of those declarations, the total overdue obligations to the Fund of Liberia and Sudan amounted to SDR 52 million and SDR 227 million, respectively. The previous declarations of ineligibility in respect of Viet Nam (January 15, 1985) and Guyana (May 15, 1985) remained in effect.
A declaration of ineligibility, while imposing formal legal constraints on a member’s ability to obtain financial resources from the Fund, does not itself alter nonfinancial relations between the member and the Fund. The Fund seeks to remain in constructive communication with the member and to cooperate with it and assist it in designing and implementing economic policies that will lead to a strengthening of its external position and facilitate the early restoration of normal financial relations with the Fund.
The reduction and elimination of overdue obligations is important to the Fund’s financial position and character as a cooperative intergovernmental monetary institution. The Fund has kept the situation under close review and has established policies and procedures in an effort to prevent arrears from emerging and to help members to correct such problems when they do arise. In a number of cases, this approach has contributed to achieving positive results. Efforts have also been directed to strengthening the Fund’s own financial position in light of uncertainties about the timing of some members’ payments to the Fund.
Since the Fund’s current income does not include charges receivable from members that are overdue by six months or more in meeting their financial obligations to the Fund and are not current in paying charges, the existence of overdue obligations to the Fund has obvious implications for its income position. Taking account of the uncertainties concerning overdue payments, the Executive Board decided to raise the net income target, beginning with the financial year 1985/86, from 3 percent to 5 percent of reserves at the beginning of each year. The net income target was thus set at SDR 52 million for that year. Effective February 1, 1986, a system of special charges on overdue obligations was also instituted to recover the direct financial costs to the Fund resulting from members’ late payments of obligations.
Partly as a result of the measures taken by the Fund to safeguard its financial position in the face of the rising overdue obligations of members, charges on the use of the Fund’s resources did not follow the downward trend of interest rates in major international financial centers. Charges on the use of ordinary resources at the beginning of financial year 1985/86 were left unchanged at 7.0 percent, but they were increased to 7.87 percent at midyear in order to ensure that the net income target would be met, notwithstanding the negative effect on income of the increasing amount of overdue obligations and nonaccrual of charges. In the event, net income at the end of the year exceeded projections and permitted a retroactive reduction in the rate of charge to 7.0 percent effective November 1, 1985. Taking the retroactive reduction of the rate of charge into account, net income for the year was SDR 78 million, which was added to the Special Reserve, thus raising the Fund’s total reserves (the Special Reserve and the General Reserve) from SDR 1,044 million at April 30, 1985 to SDR 1,122 million at April 30, 1986, an increase of 7.5 percent.
The remuneration coefficient, which is expressed as a percentage of the SDR interest rate and determines the rate of remuneration to creditor members of the Fund, is set in accordance with Rule I-10 of the Fund’s Rules and Regulations. This rule aims at gradually raising the rate of remuneration toward the SDR interest rate, while taking account of all relevant factors, including the SDR interest rate and the rate of charge.22 On May 1, 1985, the remuneration coefficient was raised from 90 percent to 91.66 percent, and on August 1, 1985 it was raised further to 93 percent. It was lowered to 92 percent on February 1, 1986, but was raised on May 1, 1986 to 97.49 percent (Chart 17). The rate of remuneration averaged 6.85 percent per annum in 1985/86 compared with 7.77 percent in 1984/85.
Chart 17.SDR Interest Rate, Rate of Remuneration, and Short-Term Interest Rates, July 1976–June 19861
1 Data are monthly averages. Up to December 1980, short-term domestic interest rates are the yield on three-month treasury bills for the United Kingdom and the United States, the rate on three-month interbank deposits for France and the Federal Republic of Germany, and the call money market rate (unconditional) for Japan. From January 1981, the yield on U.S. Treasury bills was converted to a coupon equivalent basis, and the discount rate on two-month (private) bills (converted to a bond equivalent yield) was used for Japan. From March 1981, the basis for the interbank rates for France and the Federal Republic of Germany was converted from a 360-day year to a 365-day year. Since August 1, 1983, the SDR interest rate and the rate of remuneration have been fixed weekly.
Effective July 25, 1986, the Executive Board decided on a new target for net income for the financial years 1987 and 1988 and on the rate of charge and the rate of remuneration. These decisions were taken in the light of the level of overdue financial obligations and the resulting need to strengthen the Fund’s financial position. They were based on the principle that the financial consequences for the Fund which stem from the existence of overdue financial obligations shall be shared between debtor and creditor countries, and that the sharing shall be applied in a simultaneous and symmetrical fashion.23 Essentially the new decisions provide that during the financial years 1987 and 1988 the Fund’s net income target be raised from 5 percent to 7.5 percent of the Fund’s reserves at the beginning of each year.
The basic rate of charge (in Rule 1-6(4)) will be determined at the beginning of the financial years 1987 and 1988 on the basis of the estimated income and expense of the Fund and the target amount of net and supplemental income during that year. Effective May 1, 1986, the rate of charge was set at 6.0 percent. The rate of charge during 1987 and 1988 shall be further adjusted at half-yearly intervals in light of overdue charges to the Fund, and the rate of remuneration prescribed in Rule I-10 will also be adjusted in a similar fashion as the rate of charge. The adjustments will be made within agreed limits. The decision also provides that effective February 1, 1987 the rate of remuneration (under amended Rule I-10) shall be equal to 100 percent of the SDR interest rate (under Rule T-1). It was understood in the Executive Board that the net income target will remain at 7.5 percent in any financial year beyond 1988 in which the problem of overdue financial obligations to the Fund remains serious. The increase in the net income target above 5 percent will remain subject to a sharing of the burden between debtor and creditor countries, as during the financial years 1987 and 1988, as long as the increase is required by the problem of overdue financial obligations.
The SDR valuation basket was revised effective January 1, 1986 in accordance with the 1980 decision.24 The five currencies used for the previous valuation were retained, as these currencies were those of the same five members whose exports of goods and services during the period 1980–84 had the largest value. However, the weights were revised reflecting changes from 1975–79 to 1980–84 in the relative importance of these currencies in international trade and finance. The weights used in determining the amounts of each of the five currencies to be included in the valuation basket were as follows:
|Date of Effective Change of Valuation|
(Percentage weights; amounts of
currency unit in parentheses)
|Currency||January 1, 1981||January 1, 1986|
|U.S. dollar||42 (0.540)||42 (0.452)|
|Deutsche mark||19 (0.460)||19 (0.527)|
|Japanese yen||13 (34)||15 (33.4)|
|French franc||13 (0.740)||12 (1.020)|
|Pound sterling||13 (0.071)||12 (0.0893)|
The currency weights were translated into the corresponding amounts of each currency unit on the basis of the average exchange rate prevailing during the three months preceding the introduction of the respective baskets. The absolute amounts of each currency were adjusted so that the value of the new basket was the same on December 31, 1985 under both the revised valuation and the then current valuation. The basket as defined by the new combination of currency units will constitute the SDR until December 31, 1990, even though the percentage weights of each currency in the basket will change with shifts in exchange rates among the five currencies.
Articles of Agreement of the International Monetary Fund, Article IV, Section 3(b).
Executive Board Decision No. 5392-(77/63), adopted April 29, 1977, Selected Decisions of the International Monetary Fund and Selected Documents, Twelfth Issue, pages 9-14 (hereafter referred to as Selected Decisions).
See Appendix IX, page 165, for a listing of the 15 heavily indebted countries.
In recent years all such arrangements have been for developing countries.
Some countries that no longer require the Fund’s financial assistance have sought continuing close involvement through enhanced surveillance.
The Executive Board had before it three papers on these topics which have since been published in the Occasional Papers series (numbered, respectively, 41, 42, and 46).
Executive Board Decision No. 6056-(79/38), adopted March 2, 1979, Selected Decisions, Twelfth Issue, pages 26-28. From 1968 to 1978, the Fund’s approach was guided by the conclusions from the first comprehensive review of conditionality carried out in the former year.
Ibid., pages 27-28.
Executive Board Decision No. 8147-(85/177), adopted December 9, 1985 (reproduced in Appendix III).
Executive Board Decision No. 6860-(81/81), adopted May 13, 1981, as amended by Decisions Nos. 7602-(84/3), January 6, 1984, and 7967-(85/69), May 3, 1985, Selected Decisions, Twelfth Issue, pages 88-93.
Under Schedule B of the Articles of Agreement all assets that become available as a result of the termination of the Trust Fund must be transferred to the Special Disbursement Account. The disposition of resources in the Special Disbursement Account is subject to Article V, Section 12(f), and in the specific case of Trust Fund reflows, also subject to Executive Board Decision No. 6704-(80/185) TR, December 17, 1980, Selected Decisions, Twelfth Issue, pages 360-61.
For details, see Appendix II. The list of eligible countries is subject to change at the discretion of the Board.
Executive Board Decision No. 8240-(86/56) SAF, adopted March 26, 1986 (reproduced in Appendix III).
Executive Board Decision No. 8241-(86/56) SAF, adopted March 26, 1986 (reproduced in Appendix III).
Detailed information on overdue financial obligations to the Fund of members overdue by six months or more is provided in the notes to the Financial Statements relating to the General Department, the SDR Department, and the Trust Fund in Appendix VIII.
Executive Board Decision No. 7603-(84/3), adopted January 6, 1984. For details, see the Annual Report for 1984, pages 83, 129-30.
Executive Board Decision No. 8348-(86/122), adopted July 25, 1986, and Executive Board Decision No. 8349-(86/122), adopted July 25, 1986 (reproduced in Appendix III).
Executive Board Decision No. 6631-(80/145) G/S, adopted September 17, 1980 (Selected Decisions, Twelfth Issue, pp. 307-308) states that, unless the Fund decides otherwise, the SDR valuation basket be revised with effect on January 1, 1986 and on the first day of each subsequent five-year period. This decision provided that the SDR basket is to include the currencies of the five countries with the largest exports of goods and services during the five-year period ending one year prior to the date of the revision, which in the present revision is the period 1980-84.