Chapter 2 Policies and Activities of the Fund

International Monetary Fund
Published Date:
January 1988
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One of the principal functions of the Fund is to act as a permanent institution in which member countries examine each other’s economic policies and the functioning of the world economy at large. In this connection, the Fund has a specific responsibility to exercise firm surveillance over the exchange rate policies of member countries.9 The first part of this chapter reviews the procedures by which the Fund conducts its surveillance responsibilities and describes the views the Fund has expressed concerning key economic developments in the past year.

Prospects for the world economy and the interaction of policies among countries are regularly reviewed by the Fund’s Executive Board and subsequently by the Interim Committee.10 These reviews are based on the staffs World Economic Outlook report, which contains a comprehensive analysis of short-term and medium-term prospects for the world economy as well as for the economies of individual Fund members and country groupings. Besides establishing a global context for the surveillance that is conducted in periodic Article IV consultations with individual member countries, the World Economic Outlook exercise provides a basis for identifying potential conflicts and tensions that may arise among countries on the basis of unchanged economic policies. It also constitutes a framework for monitoring and analyzing other issues, such as the debt situation.

On occasions, if world economic conditions change markedly between the regularly scheduled discussions of the World Economic Outlook, the Board may decide to hold additional discussions. One such supplementary discussion was held in January 1988 on the global implications of the sudden sharp decline in equity prices that had occurred in October 1987. In addition, the Board reviews on a regular basis developments underlying current trends in exchange markets.

While the World Economic Outlook exercise provides the opportunity for members to review economic prospects and policies in a global context, the Fund’s consultations with individual member countries are the primary means for the exercise of surveillance over exchange rate policies. In addition, a monitoring system brings to the attention of the Board any large changes in members’ real effective exchange rates.

Article IV consultations with most countries take place annually. They focus on economic developments and policies in the member country concerned and particularly on how these policies affect the exchange rate and external accounts. Such assessments require a comprehensive analysis of real economic developments and prospects as well as an examination of the country’s fiscal, monetary, and balance of payments accounts. The particular focus of individual Article IV consultations depends on the characteristics of the member country concerned, as well as on circumstances in the world economy. In recent years, given the large imbalances in payments positions, both in industrial and developing countries, and the difficult debt situation facing many developing countries, increasing attention has been devoted to the medium-term sustainability of balance of payments positions, to the restoration of medium-term external creditworthiness, and to the role of structural policies in improving economic performance. Nonetheless, the ultimate focus has remained on the international implications of developments and policies in individual countries.

The International Economic Situation

In their discussions of the World Economic Outlook during the financial year ended April 30, 1988, the Board and the Interim Committee considered that economic expansion in the industrial countries is likely to be sustained in 1988 and 1989, albeit probably at a more moderate pace than in 1987. However, a less encouraging sign is the recent slowing in growth of developing countries, and continuing evidence of debt difficulties among many heavily indebted countries.

Looking ahead to the medium term, that is the period through 1992, the Board and the Interim Committee noted a number of important uncertainties on the horizon. Despite signs that external imbalances among the largest industrial countries are beginning to diminish in real terms, they continue to be larger than can be considered sustainable in the medium term. Reflecting these concerns, policy discussions in the Fund continued to emphasize the need for further policy adjustments in line with the Louvre Accord and subsequent statements by the Group of Seven (see Box 1 in Chapter 1).11 There was general agreement that it would be counterproductive at the present time to look to further exchange rate adjustments to deal with the disequilibria that still remain. Instead, it was felt that enhanced coordination of domestic economic policies should play an important role in supporting the international adjustment process. This appears to be the best way of ensuring that the large changes in exchange rates since 1985 are adequately reflected in changes in payments positions.

It was generally accepted that countries with unsustainable payments deficits should take steps to restrain the growth of domestic demand, using an appropriate mix of fiscal, monetary, and structural policies to raise national savings levels and promote efficiency of resource allocation. Surplus countries, on the other hand, need to ensure that domestic demand continues to grow at a satisfactory pace and that domestic obstacles to higher levels of economic activity are eliminated.

Discussions of industrial countries’ economic policies in the context of the World Economic Outlook exercise have noted the limitations of demand management policies and the importance of avoiding fine tuning. Thus, adaptations of monetary and fiscal policies should respect the medium-term objective of establishing and maintaining a strong fiscal position, curbing the growth of government expenditure, and creating a stable financial environment. Increased attention has been given to the role of microeconomic reforms in strengthening overall economic performance and improving the capacity of economies to adjust to changing circumstances and deal with payments disequilibria.

Concerning economic trends in developing countries, the Board and the Interim Committee noted that 1987 was somewhat disappointing, with a deceleration in output growth and a fairly widespread acceleration in inflation. The increase of commodity prices in the latter part of the year appears to have improved the prospects for higher growth, but a strengthening in the quality and the quantity of domestic investment will be needed to take proper advantage of any improvement in the external environment. Thus, developing countries will have to persevere with efforts to reduce budget deficits, increase returns to savers, and maintain realistic exchange rates; the latter would help discourage capital flight. In addition, an essential requirement for higher growth is for savings to be channeled into genuinely productive investment, to reverse the decline in productivity observed in many countries over the past decade. To achieve this, it will be necessary in many cases to rationalize the structure of relative prices and to ensure that adequate public infrastructure exists to support productive activity in the private sector. Structural reforms are thus just as important to domestic and external adjustment in the developing countries as they are in the industrial world.

Beyond the requirement of improved domestic policies, it was emphasized that a stable international environment is vitally important for the economic prospects of the developing countries. Developing countries remain vulnerable to any adverse market reactions or increases in protectionism that might result if the needed policy adjustments are not sustained by the industrial countries.

Growth prospects for developing countries are also critically dependent on relations with external creditors. Some indicators of the debt situation point toward an improvement in 1987; the strong growth of the developing countries’ export earnings, for example, permitted both a recovery of import growth and the first significant decline in the ratio of debt to exports since the onset of the debt crisis in 1982. However, the situation of the most indebted countries has remained difficult.

Discussions in the Board and the Interim Committee on the international financial system have underlined the importance of multilateral surveillance and of cooperative solutions to the challenges facing the world economy. The intensification of policy coordination among the major industrial countries following the Louvre Accord, as reconfirmed in their statement of December 22, 1987 and the Group of Seven communiqué of April 13, 1988, is a key element in the efforts to promote stability in financial markets and to sustain growth throughout the world economy. At the same time, it is essential to persevere with efforts to prevent a relapse into intensified protectionism, which would be a destructive and self-defeating way of tackling problems in the international trade area.

Article IV Consultations

As noted above, Article IV consultations provide the Fund with the opportunity to review and comment on economic policies and developments in individual countries. The following brief summary deals with some of the main conclusions of Article IV consultations during the past year, beginning with the large economies with the biggest impact on international conditions and continuing with aspects of Article IV consultations for other groups of members.

  • By the end of 1987, the current expansion of the economy of the United States, which began in 1982, had become the longest peacetime expansion in that country since the end of the Second World War. This upswing has been sustained in spite of the stock market reversal of October 1987 and has been accompanied by relatively moderate wage and price inflation and by a large decline in unemployment. The expansion has had important growth-supporting effects on the rest of the world. Nevertheless, the external and fiscal imbalances that have emerged in the United States during the recovery continue to be a concern.

It was noted that there was an unprecedented widening in the external current account deficit of the United States between 1981 and 1987. Although this deficit has recently begun to narrow, especially in real terms, it remains unsustainably large. A significant reduction in the budget deficit was achieved in 1987, but external adjustment in a context of sustained noninflationary growth requires that the federal fiscal deficit continue to decline. Strong fiscal action in the United States would also contribute to the objective of maintaining stable exchange rates.

Monetary policy in the United States can most usefully contribute to sustained economic growth by keeping inflationary pressures in check. Since the behavior of the monetary aggregates is uncertain, the Federal Reserve’s conduct of monetary policy has for some time been based on a variety of economic indicators, including those aggregates. The greater role of international considerations in this policymaking is welcome, as was the prompt response when stock markets declined in October 1987. In the area of trade policy, the authorities have generally succeeded in keeping protectionist pressures at bay.

  • The performance of the economy of Japan during 1987/88 has surpassed most expectations. The economic structure appears to have adapted relatively quickly to the appreciation of the yen since early 1985—and economic activity in 1987 has responded both to favorable terms of trade developments and to stimulative financial policies. Output growth has rebounded vigorously, price stability has been maintained, and external adjustment has proceeded steadily. The fiscal stimulus introduced in May 1987 has contributed to the expansion of domestic demand, mainly through increased capital expenditure in the public sector.

The tax reform measures introduced in 1987 are also welcome. The fiscal stance of the budget for 1988/89 seems appropriate given the strength of domestic demand. Monetary policy in Japan was broadly accommodative during much of 1987 and the early part of 1988. Continuation of the recent monetary policy stance, emphasizing stable prices and exchange rate stability, appears broadly correct. However, a close watch will be needed over domestic prices, given the resultant fairly rapid expansion of liquidity.

The Japanese authorities’ planned structural reforms are welcome. There have already been significant achievements with financial reform, but further liberalization is needed. In the field of trade policy, continued progress in improving access to Japan’s markets is desirable. For manufactures, Japan’s market is highly open in terms of tariffs and quantitative restrictions, but there is scope for further deregulation that would facilitate access by foreign producers. Certain features of the land use policy that impede the effective use of land should be tackled vigorously. The authorities’ efforts to proceed rapidly with further tax reform proposals to enhance equity and to eliminate distortions in the economy are appropriate. An acceleration of structural reforms would complement macroeconomic policies in reducing Japan’s external current account surplus to sustainable levels over the medium term. Japan’s recent efforts to increase the flow of resources to the developing countries—particularly through the Fund and other international financial institutions—are noteworthy.

  • The growth of economic activity in the Federal Republic of Germany weakened somewhat in 1987, as the rise of domestic demand faltered and real net exports declined. More recently, however, there has been a strong revival in economic activity. The rate of growth of domestic demand is the central feature determining Germany’s contribution to world economic growth and influencing the speed with which global current account imbalances are adjusted. Sufficiently strong economic growth in Germany is also desirable to reduce its high rate of unemployment. Firm control of government expenditure remains a central element of the country’s budgetary policy. Nonetheless, the switch of emphasis in recent years to the reform and reduction of taxes—exemplified by the cut in direct taxes at the beginning of 1988 and the reform package scheduled for implementation in 1990—is welcome. In monetary policy, the authorities have shown flexibility over the past year, particularly in adjusting short-term interest rates to moderate exchange market tensions. Concerning structural policies, there has been little progress to date with reforms in a number of important areas, particularly competition, protection, subsidization, and regulation. It seems likely that structural rigidities are a significant part of the explanation for Germany’s relatively moderate overall economic growth in recent years; vigorous policy actions to tackle these rigidities would be highly desirable.

  • In France, a number of significant improvements in economic performance have been achieved in recent years, including the reduction of inflation, a moderation in wage costs, the restoration of company profitability, and the consolidation of the fiscal accounts. In addition, the authorities have undertaken a number of important structural reforms aimed at enhancing the efficiency of the economy. These have included an extensive liberalization of the financial system; the removal of almost all foreign exchange, price, and credit controls; the easing of various administrative impediments to labor market flexibility; and the successful privatization of a number of publicly owned enterprises. Nonetheless, there remain causes of concern. Unemployment is high, industry has lost market shares both at home and abroad, and the current account balance has moved back into deficit. Given the weakening of the external position, there is a continuing need for policies of financial restraint, wage moderation, and structural reform. In this vein, the authorities have taken actions to reduce the central government budget deficit and the burden of taxes. In the area of monetary policy, they have successfully switched from a system of credit controls to a system of monetary control based on interest rates. Interest rates were reduced by ¼ of 1 percentage point in late May 1988, although they remain high in real terms.

  • In the United Kingdom, economic activity has been expanding at a rate above the average of the other major industrial countries. Productivity has continued to rise rapidly and unemployment, though still high, has come down significantly from the peak reached in 1986. Structural reforms have contributed to these achievements by strengthening the supply side of the economy. Important in this connection have been the authorities’ recent initiatives to improve the working of labor markets, and the major progress that has been made in restructuring financial markets. A source of concern is inflation. Although productivity growth has been rapid, wages are continuing to rise faster than in other major industrial countries. In addition, the external current account has weakened somewhat since 1986. The implementation of monetary policy in the period since the Louvre Accord has generally given greater weight to the stability of the exchange rate, particularly against the deutsche mark. In the face of heavy upward pressure on sterling in March–April 1988, however, the authorities allowed the pound to rise significantly against the deutsche mark, while lowering interest rates somewhat.

  • Economic performance in Italy presents a somewhat mixed picture. While the growth of GDP and investment in 1987 was satisfactory, there was a weakening of the process of fiscal adjustment. This contributed to a sharp expansion in domestic demand, a slowing in the momentum of disinflation, and a weakening in the external current account. The worsening of the fiscal position added to the burden on monetary policy, as reflected in a rise in interest rates from mid-1987 and the temporary introduction of credit ceilings and tightening of exchange controls, which were removed after a short period. Given Italy’s commitments within the European Monetary System, and the authorities’ intention to proceed toward financial integration in Europe, a determined resumption of the convergence of Italy’s economic performance toward that of its main trading partners is desirable. Apart from the need to rein in the growth of public indebtedness, there is a need for a restrained stance of monetary policy, not only for continued progress on the price front but also as a necessary underpinning for wage moderation. There is also a need for structural improvements, including measures to increase flexibility in the labor market.

  • In Canada, while the economic expansion that started in early 1983 has continued with considerable momentum, there has been increased concern that cost-price pressures have intensified. Substantial progress has been made over the past few years in correcting the fiscal imbalance. Nevertheless, the federal budget deficit remains large, and further steps are needed to ensure that the fiscal correction that is planned over the medium term is in fact achieved. The authorities recognize that the best way for monetary policy to contribute to sustained economic growth is to continue to aim at price stability. Their actions in 1987 to curb monetary expansion in response to a rapid rise in the degree of resource use and certain signs that inflation might begin to accelerate were appropriate and contributed to a further strengthening of market confidence in the Canadian dollar. The Government’s continued efforts to improve efficiency by curbing public sector involvement in the economy and reducing obstacles to the play of market forces are welcome. The comprehensive tax reform that the Government began to implement in 1987 may bring substantial benefits in terms of higher output in the long run. The Free Trade Agreement with the United States, which is still in the process of being ratified, should also contribute to improved long-term performance in the Canadian economy.

  • Article IV consultations with smaller industrial countries and developing countries have reflected the varying circumstances facing individual members. The Board’s consideration of the appropriate stance of policies in these countries has continued to focus on the need for sound macroeconomic policies, but has given increased attention to structural reforms, the sustainability of policies in a medium-term context, and the need for trade liberalization.

  • For many smaller industrial countries, measures to facilitate labor mobility and increase the flexibility of wage determination (including modification or suspension of wage indexation) continue to be of central importance, along with tax reform. Also of growing importance have been efforts to deregulate domestic financial markets and to liberalize international capital markets. In addition, competitive forces have been strengthened in a range of product markets through the revision of policies affecting specific industries, including in particular the transport, telecommunications, and energy sectors. Article IV consultations with smaller industrial countries have generally stressed the need for intensified efforts to remove structural rigidities, within the framework of stable macroeconomic policies.

  • In developing countries, the range of measures required to strengthen economic performance is wide and depends to a considerable extent on individual circumstances. Among those measures most frequently stressed in Article IV consultations have been the reduction of fiscal imbalances and administrative rigidities; improvements in the efficiency of public enterprises; elimination of price distortions through more market-oriented pricing mechanisms; and the phasing out of administrative controls in goods, labor, and financial markets. Other policy areas that frequently receive attention include: reforms to improve the tax system; changes in expenditure policies to reduce the level of public subsidization; reforms of the financial system (including allowing greater scope for market forces to operate in the determination of interest rates); measures to increase the role of markets in determining exchange rates; and the removal of exchange and trade restrictions.

Considerable emphasis in Article IV consultations with developing countries continues to be placed on the need to pursue noninflationary financial policies. Recommended measures include—in addition to the containment of rates of monetary expansion—the reduction of fiscal deficits, particularly by limiting the growth of public expenditures and by wage restraint, with public sector pay policies being called upon to set the example.

The appropriateness of exchange rate policies continues to be a primary focus of consultations with developing countries. The analysis of exchange rate policies is pragmatic. It is based primarily on developments in real effective exchange rates and their implications for immediate and prospective balance of payments performance, as well as for diversification of the export base. This analysis is often supplemented by broader indicators of competitiveness, such as the profitability of particular goods and specific sectors, general wage and cost pressures, developments in parallel exchange markets, and the relationship between the level of the exchange rate and the restrictiveness of the exchange and trade system.

In general, exchange rate policies in developing countries appear to have been more appropriate in 1987/88 than previously. The real effective exchange rates for many developing countries, which in the early 1980s had been at levels that appeared to be incompatible with a viable balance of payments position, have subsequently reverted to levels that have strengthened international competitiveness and improved the prospects for export-led expansion. Further, the adoption of more flexible exchange rate arrangements in a number of developing countries has been accompanied by a liberalization of exchange and trade controls, including a reduced reliance on multiple currency practices. In certain cases where the competitive position of a country has been a source of potential concern, but importance has been attached to the stabilizing influence of a fixed link to another currency, it has been considered preferable to avoid exchange rate depreciation and to focus policy efforts on a tightening of financial policies and on wage restraint.

Trade Policy Issues

Trade policy issues are an important aspect of the Fund’s surveillance activities, and receive attention both in the World Economic Outlook and in Article IV consultations. The Fund stresses the importance of resisting protectionist pressures and of rolling back existing restrictions. Liberalization is seen as important in industrial countries, both to improve resource allocation in these countries themselves and to promote a more conducive environment for growth and adjustment in the rest of the world. In this connection, the need to liberalize trade in agriculture has received particular attention. For many developing countries, the reduction of subsidies and the liberalization of trade regimes are seen as a necessary condition to enable them to strengthen economic performance and implement effectively a growth-oriented adjustment policy.

In addition to the treatment of trade questions in the World Economic Outlook and in Article IV consultations, the Board reviewed developments and issues in trade policy on two other occasions during the year ended April 30, 1988. These discussions covered recent trends in protection, its causes and effects, the prospects for trade reform in the context of the Uruguay Round of trade negotiations, and the role of the Fund in the trade area. They led the Board to reiterate its strong support for trade liberalization, in particular since such policies promote the balanced growth of world trade, help sustain economic growth, and facilitate the management of the debt problem.

Protectionist pressures in the 1980s have been fueled by macroeconomic imbalances—including persistent trade deficits and misaligned exchange rates, high levels of unemployment in many countries, and the difficulties that shifts in comparative advantage have created for particular sectors. A troubling feature of recent protectionist measures is the frequent resort to discriminatory nontariff barriers. In addition, trade conflicts have become more frequent, and greater use has been made of retaliation to encourage trading partners to change their practices.

Following the tariff reductions implemented under successive rounds of multilateral trade negotiations, nontariff barriers appear to have become at least as important as tariffs as instruments of protection. Voluntary export restraints, consisting of bilaterally agreed measures to restrict export volumes, are a common type of nontariff barrier and are usually applied against the more efficient suppliers. Discretionary licensing systems often focus restrictions on imports that compete with domestic production. Nontariff barriers reduce the transparency of the world trading system because they are not always publicized and because their impact on trade is difficult to measure.

Agricultural trade has long been severely distorted by the farm support systems of most industrial countries and other types of government intervention. Production subsidies have led to overproduction, which has depressed the terms of trade of agricultural exporters and distorted geographical production patterns. Recent agricultural policy reforms undertaken by a number of industrial countries are welcome, but they are not, by themselves, expected to reduce the imbalance between world demand and supply greatly, unless they are followed by further measures.

A trend toward trade liberalization has recently emerged in developing countries, often in the context of adjustment programs supported by the Fund and the World Bank. A number of countries that have adopted more flexible exchange rate regimes have also eliminated major trade restrictions, and several countries have replaced quotas with tariffs as the main instrument of protection. Nevertheless, protection in developing countries has remained high. In an attempt to deal with balance of payments and debt-servicing problems, some developing countries have made increased use of countertrade arrangements.

In its surveillance activities, the Fund stresses the complementarity of trade liberalization and macroeconomic adjustment. Protectionist pressures are likely to persist unless policies that address the fundamental causes of such pressures are adopted. Progress toward an orderly correction of fiscal and external imbalances is a necessary condition for the abatement of trade tensions. Trade tensions would be further eased by structural policies in industrial countries aimed at reducing surplus capacity both in a number of industrial sectors and in the agricultural sector.

Macroeconomic imbalances and exchange rate misalignments do not, of course, justify protection. Indeed, trade restrictions and internal barriers to the movement of factors of production tend to exacerbate the difficulties created by inappropriate macroeconomic policies. The Fund, through its contacts with member countries, emphasizes the benefits of trade liberalization both to the country undertaking it and to its trading partners. For example, freer access of developing countries to industrial country markets would serve the dual purpose of strengthening developing countries’ debt-service capacity and helping them gain domestic political support for their trade liberalization efforts. It would also help curb inflation in industrial countries and improve prospects for additional exports to the developing world.

Though not participating directly in the negotiations of the Uruguay Round, the Fund plays a constructive role through its efforts to promote a stable international environment and through its surveillance over the exchange rate and macroeconomic policies of its members. The Fund also urges countries to observe the standstill and rollback commitments contained in the Punta del Este Declaration and has underlined the importance of avoiding resort to discriminatory, bilateral measures. In pursuing its role, the Fund has continued its active cooperation with the General Agreement on Tariffs and Trade (GATT).

Analytical Issues in Surveillance

A key requirement for the effectiveness of the Fund’s surveillance work is to develop a suitable analytical basis to deal with the changing issues and concerns confronting member countries. For the past several years, a central preoccupation of policymakers has been to find ways of strengthening the mutual consistency of economic policies, in a world of high capital mobility and flexible exchange rates. To support this objective, efforts have been made to develop indicators of economic performance and policies that would underpin the process of international economic policy coordination (see Box 3).

Developments in the use of indicators in the Fund have involved both the Interim Committee and the Executive Board. In September 1987, the Interim Committee endorsed the extended use that was being made of indicators in surveillance and the medium-term focus that was being imparted to the analysis, and it urged the development of criteria that would be helpful in judging the sustainability and desirability of the evolution of a limited set of key economic variables. The Board discussed issues related to indicators on two occasions, in July 1987 and in January 1988.

The July 1987 discussion dealt with specific issues related to the implementation of the indicators approach, including that of how to develop procedures for monitoring economic indicators so as to enhance policy dialogue and policy coordination. The World Economic Outlook exercise, the results of which are discussed in the Board and the Interim Committee, was seen as a critical element in this process. It was agreed that the World Economic Outlook should provide a quantitative assessment of the implications of current policies for the evolution of key economic variables. This assessment should be set in a medium-term framework and, where appropriate, should include alternative scenarios based on different assumptions concerning economic policies and market reactions.

Box 3Economic Indicators and Policy Cooperation

The Fund has been working actively on the use of indicators since 1986, with a view to promoting policy cooperation while preserving the flexibility of the floating exchange rate system. In the Tokyo Economic Declaration of that year, the heads of state or government of the seven major industrial countries requested their finance ministers to “review their individual economic objectives and forecasts collectively at least once a year,” using specified indicators, “with a particular view to examining their mutual compatibility.” The indicators specified were GNP growth rates, inflation rates, interest rates, unemployment rates, fiscal deficit ratios, current account and trade balances, monetary growth rates, reserves, and exchange rates. It was noted that the Managing Director of the Fund would participate in the review of indicators by major industrial countries.

Subsequently, the Fund began to incorporate the use of indicators more explicitly in its World Economic Outlook analysis. The Interim Committee, meeting in September 1986, “welcomed the agreement at the Tokyo summit to use indicators in conducting surveillance as part of efforts to strengthen international economic cooperation.” It also “supported the greater use, in the latest World Economic Outlook analysis, of indicators of economic policies and performance.” The Committee emphasized that “a key focus of indicators should be on points of interaction among national economies, in particular developments affecting the sustainability of balance of payments positions, and on the policies underlying them.”

This guidance was extended in the course of 1987. At the April 1987 meeting of the Interim Committee, Committee members said that “actual policies should be looked at against an evolution of economic variables that could be considered desirable and sustainable.” In pursuing this work, the Executive Board was “encouraged to focus on a limited set of key indicators and to appraise the international interactions of domestic policies and performance in the light of alternative medium-term scenarios.”

The use of indicators in surveillance was endorsed by the heads of state and government of the Group of Seven countries in a communiqué issued at the conclusion of the summit meeting in Venice in June 1987. That communiqué called on the Fund to assist in strengthening the surveillance of the economies of the Group of Seven countries, using economic indicators, including exchange rates. It underlined the role that the Fund could play in helping to promote a constructive use of indicators to “review and assess current economic trends and to determine whether there are significant deviations from an intended course that require consideration of remedial actions.”

The September 1987 meeting of the Interim Committee welcomed the more extended use of indicators and the development of medium-term scenarios. The Committee asked the Executive Board to “continue exploring the development of criteria that would be helpful in judging the sustainability and desirability of the evolution of a limited set of key economic variables.”

The meeting of the Interim Committee in April 1988 welcomed the progress that has been made in developing the use of indicators, stressed the medium-term nature of the exercise, and encouraged the Executive Board to pursue its work. A noteworthy recent development has been the addition of a commodity price indicator to the indicators used in surveillance by the Group of Seven countries.

In January 1988, the Board discussed the use of commodity price indices as a possibly significant indicator of future price developments. Because commodity prices often lead movements in consumer prices in industrial countries, such an early-warning signal may complement other indicators in providing timely information about shifts in global inflationary tendencies. Nonetheless, the reliability of such relationships has not yet been thoroughly tested. Morever, because inflation of consumer prices has been much less volatile than that of commodity prices, it cannot be assumed that stability of consumer prices requires stability of commodity prices.

The Interim Committee, at its April 1987 meeting, encouraged the Executive Board to pursue its work on indicators in the context of both the World Economic Outlook exercise and Article IV consultations. In this regard, it was considered that actual policies should be looked at against an evolution of economic variables that could be considered desirable and sustainable. To the extent that earlier multilateral assessments of policies had identified potential sources of tensions in current policies, Article IV consultations would be a critical component of subsequent discussions to promote the adoption of more satisfactory policies. Considerable attention is now being directed to indicators in consultations with major industrial countries in order to strengthen the assessment of national policies against the background of the multilateral assessments of policy interactions in the World Economic Outlook. Indicators can also play a useful role in consultations with countries other than the major industrial countries. However, in extending the use of a common framework for assessments, care should be taken to retain the structure of analysis best suited to each member country’s circumstances and to ensure that staff reports are relevant to the authorities directly concerned.

Procedural Issues

The procedures for surveillance that were adopted by the Executive Board in 1977 require the Board to review annually the general implementation of surveillance. The most recent such review was concluded on April 22, 1988. One of the issues covered was that of the frequency of consultations. It was also decided that future reviews need take place only every second year.12

The guidelines for Article IV consultations adopted in 1983 state that Article IV consultations should be conducted annually with certain categories of members, namely, those whose economic developments have a substantial impact on other countries (later specified as the 25 countries with the largest quotas); those that are implementing programs involving use of Fund resources; and those for which there are substantial doubts about the medium-term viability of their balance of payments. For other members the interval between consultations could extend up to two years. With the external environment and balance of payments outlook being difficult for many member countries, the number of Article IV consultations concluded each year has increased sharply, reaching a peak of 131 consultations (covering 85 percent of the membership) in 1985, before declining slightly to 125 (81 percent of the membership) in 1986. The associated sharp increase in the work load of the Board and staff led the Board to reconsider the guidelines for consultations in July 1987. This reconsideration was aimed at economizing the resources devoted to the consultation process, without compromising the Fund’s responsibility for effective surveillance.

The Board, after considering several specific proposals, and while stressing the importance of regular consultations for the effective implementation of surveillance, adopted two modifications to the 1983 guidelines. The first was the introduction of a modified consultation procedure for some countries, involving a full Article IV consultation every second year and a simplified interim procedure in the intervening year. Under this “bi-cyclic” procedure, the frequency of staff contacts with the authorities in member countries will be maintained and the Board will continue to be informed of developments and policies in these countries on a regular basis. However, staff reports for the interim consultation will be circulated only for the information of the Board and will not normally be expected to involve discussions by the Board. A discussion, however, may be requested by the member country, an Executive Director, or the Managing Director. The coverage and analysis in reports on the occasion of the simplified interim procedure will remain comprehensive as far as substantive policy issues are concerned and will include in particular an assessment of the medium-term viability of the member’s balance of payments and a forthright statement of policy recommendations. At the time of the decision, such procedures were adopted for 23 members.

The second modification was a decision that the application of the “substantial impact” criterion be narrowed to cover the 20 instead of 25 members with the largest Fund quotas. At the same time, however, it was again stressed that countries that have significant impact regionally, or that are important competitors in world or regional markets for certain commodities and services, should be maintained on the standard 12-month cycle. These changes in the procedures for implementation of surveillance and a further lengthening of the average period between consultations have already resulted in some saving of Board and staff resources. Thus, the number of Article IV consultations concluded in 1987 declined to 115 (75 percent of membership).

At the most recent review of the implementation of surveillance by the Board, a further expansion of the coverage of the bi-cyclic procedure was recommended. To help further reduce the work load of the Board and the staff, consideration was given to using greater flexibility in the application of regular consultation cycles, including the use on a case-by-case basis of 15-month intervals where a strict 12-month periodicity is not considered essential.

External Debt Situation and Strategy

For the past six years, debt difficulties have been a central feature of the international economic landscape. The Fund has played a central role in developing a cooperative strategy for dealing with these difficulties and continues to be fully involved in its implementation.

The Interim Committee reaffirmed the case-by-case debt strategy at its April 1988 meeting, emphasizing three requirements: the sustained implementation of growth-oriented adjustment and structural reform policies by debtor countries; the maintenance of a reasonably favorable international environment; and an adequate flow of financing to debtor countries from official, multilateral, and private creditors.

As noted in the Interim Committee communiqué, there have been a number of positive developments in the debt situation. One important achievement has been the significant external adjustment in many indebted countries, as described in Chapter 1. In addition, the threat of a serious dislocation of the international financial system has been contained. Also, the international banking system has been substantially strengthened, with the balance sheets of the major banks in most industrial countries showing marked improvements in capital-asset ratios since 1982.

Nevertheless, serious problems remain that call for the continuation of strong cooperative efforts. Policy reforms in a number of debtor countries have not been undertaken with the desired speed, scope, or intensity. In addition, the international economic environment has continued to be difficult, with intensified protectionist pressures, high real interest rates, substantial variability in key currency exchange rates, relatively modest growth in world trade and, in particular, a fall in the terms of trade for developing countries that is estimated at some 20 percent from 1982 to 1987. This terms of trade deterioration has offset much of the real adjustment that indebted countries have achieved; as a result, in many of these countries the expected easing in debt-service burdens has not materialized. On the contrary, the debt-to-exports ratio of countries with recent debt-servicing problems rose from an average of about 170 percent in 1980–81 to about 300 percent in 1987. Although growth has resumed in many countries with debt difficulties, it is still modest—well below the rates experienced during the 1960s and 1970s—allowing little room for an expansion in per capita consumption. This difficult economic situation has been a factor in the continued low net private lending to developing countries.

The intensity of debt difficulties in 1987 was reflected, inter alia, in announced suspensions of interest payments to commercial banks by Brazil, Ecuador, and Côte d’Ivoire, protracted payments arrears in several other of the 15 heavily indebted countries, and serious delays in assembling bank financing packages. This intensification of difficulties helped prompt significant increases in loan-loss provisions by a number of large banks in some major financial centers and a sharp decline in the prices of the sovereign debt of some countries in the secondary market. In the latter part of 1987 and early 1988, however, some progress was made in reducing these strains.

Adequate external financing is crucial for the debt strategy, because it supplements the domestic resources needed to foster economic growth and enable countries to service their international obligations. It also helps the authorities in debtor countries to mobilize the social consensus needed for a steady implementation of adjustment and structural reform policies. Restructuring arrangements reached between 1983 and 1987 (including multiyear restructuring arrangements) covered over $300 billion of commercial bank loans. However, commitments of new finance under concerted bank lending, which had amounted to over $15 billion a year during 1983 and 1984, fell to an average of $5 billion in 1985–86 and were only $2.4 billion in 1987. Moreover, delays were encountered in finalizing some commercial bank financing packages. Non-debt-creating flows have not offset this decline, with direct investment, in particular, being disappointingly low in recent years.

To address the concerns about exposure and the diverging interests among commercial banks, as well as debtor countries’ worries about increasing their stocks of nonconcessional debt, a variety of financing options have been developed. For example, the “menu approach,” adopted in a package negotiated with Argentina in August 1987, combines more traditional financing mechanisms—such as interest rate options, cofinancing, parallel financing, and debt conversion—with more recent innovations, such as alternative participation instruments, securitized new money claims, and fees to encourage early participation (see Box 4).

The Interim Committee considered that the Fund should continue to support market-based approaches voluntarily agreed between debtors and creditors that would help restore normal access to external financing within a reasonable time frame. The Committee welcomed the emergence of financing techniques—such as debt-equity conversions and other forms of debt exchange—that could work to reduce the existing stock of debt and enhance prospects of repayments.

Assurances on bank financing are important to the Fund for three reasons—to ensure that sound adjustment programs are fully financed, to safeguard Fund resources, and to encourage other sources of external financing. Where concerted financing from commercial banks has been required to finance fully a Fund-supported adjustment program, a “critical mass” of bank commitments has normally been required prior to Board approval of arrangements. Timely and adequate financial support from all creditor groups remains essential to facilitate the pursuit of growth-oriented adjustment policies. The Fund does not have the mandate or the resources to take on the financing role that should fall to private and other official creditors.

Over the past several years, for some of the countries that have made progress in their adjustment efforts, commercial banks and official creditors have agreed to multiyear restructuring agreements (MYRAs). In two of these cases (Venezuela and Yugoslavia), restructurings have been based on the “enhanced surveillance” procedure developed by the Fund in 1984–85. The Board has held two reviews of enhanced surveillance, in March 1987 and March 1988. In these reviews, the Board concluded that the procedure, as adopted initially, remains appropriate, but that it is essential that members using enhanced surveillance demonstrate a strong record of adjustment and that creditors continue to exercise appropriate influence. The Fund’s role in this connection was seen as one of influencing members’ authorities to adopt and maintain appropriate policies through a close process of consultation and of helping the review and decision process of creditors through the provision of candid assessments.

There continues to be an interest in the enhanced surveillance procedure, and in several MYRAs agreed during 1985–87, the possibility of enhanced surveillance is envisaged after the expiration of an arrangement to use Fund resources. The Board considers application of the enhanced surveillance procedure upon the request of member countries. Thus, Uruguay’s request was approved in July 1987. Nevertheless, at this stage, less use is being made of this procedure than had earlier been expected, as a number of countries have opted to continue making use of Fund resources.

Box 4Innovations in Financing Instruments

Financing modalities in bank financial packages have evolved progressively since the emergence of debt-servicing difficulties in 1982–83. Financing in 1984–85 saw the use of certain financial modalities—currency redenomination, interest retiming, onlending/relending, trade facilities, cofinancing, debt conversion—and modifications in terms. These adaptations reflected a desire to tailor these packages more closely to the needs of both the creditors and debtor. Some more recent developments in financing techniques are described below.

  • Debt conversions rose rapidly in 1987. Under official schemes operating in seven countries (Brazil, Chile, Costa Rica, Ecuador, Honduras, Mexico, and the Philippines)$3.9 billion of debt was converted, compared with an annual average of $1.5 billion during 1985–86. A number of recent regulatory changes and rulings in creditor countries, particularly in the United States and Japan, facilitated such conversions.

  • Further moves toward securitization—the substitution of more tradable financial assets for bank book claims—were reflected in the financing agreements with Argentina and Ecuador and in the Mexican debt exchange.

  • Alternative participation instruments (APIs) were designed to allow banks, especially those with small exposures, to exchange their book claims for bonds with a lower interest rate and longer maturity than associated with the traditional terms for restructuring for new money. In return, these banks were permitted to “exit” from the restructuring and new money process. Commercial banks’ requests for APIs have been very limited so far, as banks have considered the actual pricing of these “exit” options to be unattractive. The Argentine new money bonds provided banks with the option to receive up to $1 million of their commitment to the new money package in the form of U.S. dollar-denominated bearer bonds.

  • A debt exchange scheme was proposed by the Mexican authorities in late 1987. Under the scheme, certain existing medium-term debt could be exchanged voluntarily for newly issued 20-year Mexican bonds, which would be collateralized by a 20-year zero coupon U.S. Treasury bond. The price at which the actual exchange took place was determined through an auction, with banks being invited to submit bids and the Mexican Government determining the amount and price at which such offers were accepted. The auction was completed in February 1988, when $3.7 billion in existing bank debt was exchanged for $2.6 billion in new bonds.

  • Debt buy-backs permit countries to repurchase their debt at a discount using international reserves or foreign exchange obtained from official or private sources. The Bolivian buy-back scheme allows that country to purchase back its bank debt at a steep discount using donated funds. Bolivia is purchasing about half of its bank debt at a price of 11 cents per dollar of face value. The Fund, through the establishment of a voluntary contribution account, is administering the receipt and disbursement of donations made for the purpose of the buy-back.

  • Interest retiming essentially extends the interval between interest payments, permitting a country to defer one or more interest payments. The interest base option is usually adjusted to reflect the extended interest periods. For example, associated with a switch from quarterly to semiannual interest payments would be a change from a three-month to a six-month LIBOR interest base. Retiming thus enables banks to extend finance without committing new money.

  • Performance incentives for either the banks or a debtor country have been included in several recent restructuring agreements. These packages included an early participation fee for banks. Bankers believed that such fees have played an important role in accelerating commitments.

Multilateral development banks and official creditors have played a growing role in providing financial support for heavily indebted countries. Net disbursements to these countries by the World Bank rose from $1.4 billion in 1980 to $2.3 billion in 1987, with the share of policy-based lending rising rapidly over the period. In addition to their direct lending operations, multilateral development banks have helped mobilize sizable flows from official donors and commercial banks through various techniques, including cofinancing, parallel financing, and guarantees.

Official creditors have provided very substantial amounts of debt relief through the Paris Club. In 1987, 17 rescheduling agreements were concluded for an unprecedented total estimated at $25 billion. Of this amount, $19 billion was accounted for by rescheduling agreements concluded with three countries: Brazil, Egypt, and Poland. In response to the protracted problems of the poorest indebted countries, Paris Club creditors agreed in mid-1987 to consider, on a case-by-case basis, stretching the repayment period to between 15 and 20 years, with a corresponding lengthening of the grace period to up to 10 years. (For all other debtor countries, a maturity of 10 years with 5 years’ grace remains the maximum.) Earlier in 1987, Paris Club creditors had decided to consider, on an exceptional and case-by-case basis, rescheduling agreements for low-income countries that have Fund arrangements under the structural adjustment facility (SAF). By mid-1988, such agreements had been reached for Guinea-Bissau, Mozambique, Niger, and Uganda. For other cases, however, an upper credit tranche arrangement with the Fund continues to be the norm required by Paris Club creditors for a rescheduling.

On the part of international financial institutions, the establishment of the enhanced structural adjustment facility (ESAF) has effectively tripled the amount of concessional resources that the Fund can make available to countries undertaking strong growth-oriented adjustment programs. The World Bank has received substantial support from donors for its special program of action to assist the low-income, debt-distressed countries of Africa, and the eighth replenishment of the International Development Association is ready for disbursement. In addition, the proposed general capital increase for the World Bank has entered into effect. Some of the regional development banks have also substantially augmented the resources at their disposal through capital increases and replenishment of concessional windows.

Despite these positive steps, the external debt situation of a number of low-income developing countries remains extremely difficult. It is essential that adequate and timely concessional assistance be provided to support low-income countries that undertake strong programs of structural reform and macroeconomic adjustment. For these countries, new financing flows, including debt rescheduling, must be provided on terms that are appropriate to their circumstances. The retroactive conversion of existing official development assistance to grants, which involves, in effect, writing off or writing down outstanding debt, is being applied to such countries by a number of donors. Furthermore, there is a need in such cases to improve the coordination of support from all donors and creditors; the policy framework process (see below) that has been developed in connection with the SAF can play a major role in this respect.

Fund Financial Support of Adjustment Programs

An important means by which the Fund fulfills its purposes is through the provision of financial resources in support of programs of economic adjustment in member countries. There are several vehicles by which Fund financial support is provided. These include stand-by arrangements (typically covering adjustment programs of one-two years); extended arrangements (generally covering somewhat longer programs of up to three years); compensatory financing of temporary export shortfalls; buffer stock financing; and lending to low-income countries under the SAF and the ESAF. The following analysis describes a number of key developments in policies governing these facilities and also discusses the agreement that has been reached to provide financing for external contingencies. Detailed information concerning the amounts and beneficiaries of Fund support under the various facilities is provided in Appendix II.


A key feature of the Fund’s financial support is that it is made available under conditions designed to promote effective adjustment and ensure that the use of resources by members is temporary and consistent with the Fund’s objectives. These conditions relate to the overall economic policies pursued by members: such policies should permit the return to balance of payments viability within a reasonable time frame, while at the same time encouraging economic growth and employment creation, promoting financial stability, and reducing trade and payments restrictions (or avoiding their intensification). The conditions under which Fund resources are made available are reviewed periodically to ensure that they remain appropriate to the situations faced by member countries, and consistent with the revolving character of the Fund’s resources.

The latest comprehensive examination of conditionally was completed in April 1988; the two previous examinations were in 1968 and 1979.13 In this process, the Board conducted a wide-ranging review of issues in the design of adjustment programs supported by the Fund. These issues included the means of ensuring that adjustment programs foster growth, how programs affect poverty, the monitoring of structural adjustment, and technical issues in program monitoring.

It is accepted that Fund-supported adjustment programs should foster sustainable economic growth in a medium-term perspective: programs that strengthen the balance of payments in the short run without laying the basis for medium-term growth would not be sustainable. (Conversely, of course, appropriate fiscal and monetary policies and balance of payments viability are essential for growth to be sustainable.) Over the medium term, capital formation and factor productivity play a key role in explaining growth. Given the limited scope many countries have for additional foreign borrowing, an essential precondition for faster growth is the pursuit of policies aimed at strengthening domestic savings and improving resource allocation. Among structural measures that have been considered important in improving total factor productivity and growth performance are: price reforms, including the establishment and maintenance of realistic exchange rates; actions to strengthen the efficiency of the capital structure, in part by raising the quality of public sector investment; and steps to lessen the distortions caused by monopolies, skewed incidence of taxation, and trade restrictions.

The Board also discussed the implications of Fund-supported adjustment programs for poverty. While it is agreed that questions of income distribution, as such, should not form part of Fund conditionality, considerable importance is attached to improving program design so as to protect the poorest segments of the population during the period in which adjustment policies are being implemented. There was a broad consensus to mitigate, without sacrificing the goals of macroeconomic adjustment, the impact of adjustment programs on poverty, as well as for the Fund to strengthen its capacity to respond more effectively to members’ requests for advice in this field.

The growing recognition of the importance of microeconomic policies for growth and adjustment has brought to the fore issues of the design and monitoring of structural policies. The Board addressed both the broad policy issue of the role of the Fund in promoting structural reform and the more technical question of the suitability of alternative techniques for monitoring structural adjustment. It agreed that the Fund needs to place more emphasis on structural reforms and growth-oriented adjustment, and noted that current guidelines do in fact permit such emphasis in Fund programs when structural reform is seen as essential for external viability.

Structural reforms are expected to figure prominently in programs supported by arrangements under the SAF, the ESAF, and the extended Fund facility, as well as in many programs supported by stand-by arrangements complementing measures of macroeconomic adjustment. In many cases it may not be possible to establish the precise nature of the link between structural reform and external viability. Given the limited knowledge about some of the effects of different structural policies, including their lagged effects, it may be particularly difficult to determine the weight to be attached to particular types of reform. The impact of structural reforms in promoting growth is an area where more work and experience will be needed. Furthermore, while certain structural measures are clearly within the Fund’s traditional areas of responsibility, others, such as the rationalization of public sector investment programs, strengthening social and economic infrastructure, and promoting administrative and other microeconomic reforms, are less directly related. Deeper Fund involvement in these areas must involve very close collaboration with the World Bank. Such collaboration should nevertheless respect the particular competence, mandate, and experience of each institution.

With respect to the issue of the appropriate techniques for program monitoring, the Executive Board has reaffirmed the principle that precise and objective monitoring is necessary to provide assurance to members concerning the conditions under which they can have access to Fund resources as well as to ensure the appropriate use of those resources. At the same time, a desirable characteristic of monitoring is that it should be limited to what is necessary to ensure that the Fund’s financial assistance contributes to effective external adjustment. Prior policy actions can be particularly important in this connection since they give a strong start for an adjustment program and enhance its credibility. Program reviews have a useful role to play, particularly for the monitoring of policies, including structural policies, that may not be amenable to quantitative performance criteria. Care must be taken, however, that the scope of reviews is well defined and that reviews do not become a substitute for a clear delineation of policy intentions in performance criteria.

There would appear to be room for some experimentation with certain aspects of monitoring. One suggestion that received broad support was to use semiannual rather than quarterly performance criteria in certain arrangements. The proposal was considered particularly relevant for extended arrangements, given their strong structural emphasis, longer-term orientation, and extended repurchase periods, but it was also seen as potentially relevant in some longer-term stand-by arrangements with a strong structural content. Semiannual performance criteria were not, however, seen as reducing the need for careful and continuous tracking of macroeconomic developments.

The April 1988 comprehensive examination of conditionality also addressed issues relating to the guidelines on conditionality that were adopted in 1979. It was generally agreed that the 1979 guidelines have served the Fund well and that they provide enough latitude for a greater emphasis to be given to structural reforms when these are essential to external viability. It was therefore decided to continue for the time being with the present guidelines but to keep them under examination as further experience is gained.

Modifications to Fund Facilities

In addition to the policy conditions under which the Fund’s resources are made available to members, other aspects of the design of Fund facilities are also of significance. These aspects include limits on access to Fund resources; the conditions for access (other than policy conditions); the maturity period over which resources are available; and the rate of charge. Developments concerning the volume of use of the Fund’s resources, charges, and changes in maximum access limits are described later in this chapter; the analysis immediately below discusses developments concerning other aspects of the design of Fund facilities.

  • In its reconsideration of the extended Fund facility, the Board focused on how to make it more effective both for supporting adjustment efforts in comprehensive medium-term programs of macroeconomic adjustment and structural reform, and for acting as a catalyst for other sources of finance. In particular, emphasis was placed on the sustained implementation of structural reforms leading to balance of payments viability in the context of a liberalized trade and payments regime. At the same time, it was understood that any changes should not jeopardize the monetary character of the Fund or strain its liquidity.

In considering how to increase the effectiveness of the extended Fund facility, the Interim Committee communiqué stated that with strong adjustment programs, more Fund resources should, where appropriate, be made available by increasing actual access within current limits and that, in exceptional circumstances, access might extend beyond these limits. The Committee observed that, in present circumstances, forceful initial policy actions would often be needed.

Concerning the duration of arrangements, merit was seen in allowing existing three-year extended arrangements to be lengthened to four years where this would facilitate sustained policy implementation and balance of payments viability over the medium term. There was also support for changes in the operational features of the extended Fund facility that would tend to reduce the average rate of charge and lengthen the average maturity during which drawings are outstanding. These latter changes could be accomplished by a change in the mix of borrowed and ordinary resources used to finance purchases from the extended Fund facility in favor of ordinary resources.

  • Following the 1987 Annual Meeting, the Board began a detailed examination of external contingency mechanisms in parallel with the review of the compensatory financing facility. The purpose of external contingency mechanisms is to provide additional financing to support programs that might be thrown off track by adverse exogenous developments, and thereby to encourage members with Fund-supported programs to sustain their policy reform efforts. Agreement has been reached to combine Fund assistance for export shortfalls and external contingencies into a single facility. It has also been agreed that the essential features of the compensatory financing facility should be preserved and that the basic features of the external contingency component of the new facility will include: partial compensation for the effects of external disturbances beyond the control of the authorities; an appropriate blend of adjustment and financing; symmetrical adjustments in financing for favorable and unfavorable developments; and a minimum threshold level for access to the facility.

The new facility will have an overall access limit of 105 percent of quota. Within that overall access, a limit of 40 percent of quota would apply both to the compensatory element and to the contingency element, and an optional tranche of 25 percent of quota would be available to supplement either element at the choice of the member. Members who have no payments problems other than those arising out of shortfalls in their exports or service earnings that were beyond their control will continue to have, as under the compensatory financing facility, access up to 83 percent of quota for the compensatory element.

  • The structural adjustment facility (SAF) was established in March 1986 to provide concessional balance of payments assistance to low-income countries facing protracted balance of payments problems and undertaking comprehensive efforts to strengthen their balance of payments position. The facility operates within the Fund’s Special Disbursement Account; its resources are obtained from repayments of Trust Fund loans (about SDR 2.7 billion) disbursed during 1977–81. SAF loans are provided on highly concessional terms; the interest rate is 0.5 percent per annum and repayments are made over a period beginning five and one half years and ending ten years after disbursement. Eligible countries may currently obtain financing under the facility of up to 63.5 percent of quota in three tranches, each one disbursed at the beginning of three successive years in support of one-year programs within a medium-term framework. At present, 62 countries are eligible for assistance under the facility, and, as of April 30, 1988, 25 SAF arrangements were in effect. However, the two largest eligible countries, China and India, have indicated that, as they do not anticipate acute or persistent balance of payments need, they do not intend to make use of the facility, thus enlarging the amount available to other eligible countries.

  • In order to provide additional concessional financing and support strong growth-oriented adjustment efforts by low-income countries, the Managing Director proposed in June 1987 that the concessional resources available from the repayment of Trust Fund loans be tripled through contributions from other sources. This proposal met with widespread support, and by the end of the year commitments had been received from a broad range of contributors in the form of loans to a Trust administered by the Fund, and both loans and grants to an interest subsidy account within the Trust. Accordingly, in December 1987, the Executive Board established the enhanced structural adjustment facility (ESAF). The new facility became operational in April 1988, and the first loans were approved by the Executive Board in mid-1988.

The interest rate applying to loans under the new facility is subject to periodic review, but is currently much the same as under the SAF, as is the maturity of loans under the new facility. The amount of the financing extended to a country under the new facility will be determined on the basis of the strength of the country’s adjustment effort and the size of its balance of payments need, but is subject to a normal maximum of 250 percent of quota over a three-year period. It is expected, however, that loans will average about 150 percent of quota. There is also provision for loans of up to 350 percent of quota in exceptional cases. The 62 member countries eligible for assistance under the SAF are also eligible for assistance under the new facility.

A major innovative feature of both the SAF and the ESAF is the requirement that a policy framework paper be prepared by the national authorities, with the joint assistance of the staffs of the Fund and the World Bank. The purpose of the policy framework paper is to ensure that the policy reforms of eligible countries are properly targeted on the obstacles to growth and balance of payments viability, and are mutually reinforcing, feasible, and supported by appropriate amounts and forms of external financing. Each policy framework paper covers a three-year period. It discusses the public investment program and financing requirements of the country, and outlines the social implications of policy changes, together with the steps being taken to mitigate the possible adverse impact of adjustment measures on the poorest segments of the population. The paper is reviewed by the Executive Board of the Fund and the Committee of the Whole of the Board of the World Bank. It can also be used to mobilize financial support from other multilateral and bilateral sources.

Fund-Bank Collaboration

Collaboration between the Fund and the Bank has intensified in recent years, reflecting the growing recognition that achievement of a viable balance of payments position with sustainably high rates of economic growth in most developing countries requires substantial macroeconomic and structural reforms. The structural policy content of Fund-supported adjustment programs has been increasing and in operations financed by the Bank there has been a shift from project lending toward structural and sectoral adjustment lending. As a result, it has been necessary to develop mechanisms to facilitate interaction between the staffs of the Fund and the Bank, with the aim of ensuring consistent views on the strategies and policies of borrowing countries. In this way, the policy advice and financial resources provided by the two institutions have been made consistent and mutually reinforcing, but at the same time care has been taken to avoid cross-conditionality.

Collaboration between the Fund and the Bank has been particularly important for countries where lending under the SAF or the ESAF is involved. While considerable progress has been made in strengthening Fund-Bank collaboration since the advent of the policy framework paper, further progress is necessary. The Board had an opportunity to address collaboration between the two institutions in the context of a discussion about policy framework papers and aid coordination. A number of proposals to improve collaboration between the Fund and the Bank have been made and are under consideration.

As part of the effort to strengthen coordination among all the parties involved, the Fund and the Bank organized a joint seminar in February 1988 on the policy framework paper and aid coordination for senior officials of major aid agencies, development banks, the Commission of the European Communities, the Organization for Economic Cooperation and Development, and the United Nations Development Program, as well as selected recipient countries. The purpose of the seminar was to inform aid agencies about the evolving policy framework paper process, to explore the extent to which the agencies were using policy framework papers in their operations, to benefit from the experience of recipient countries in the process, and to discuss issues related to enhancing the usefulness of policy framework papers in aid coordination and mobilization for low-income countries.

The Fund and Bank staff have collaborated closely in efforts to encourage the flow of resources from donor governments to member countries. The Fund staff is normally invited to present a statement providing an overview of the country’s macroeconomic situation at Consultative Group meetings organized by the Bank to promote aid flows to individual developing countries. The Fund and the Bank have also been involved in assisting several countries to obtain concerted lending packages from commercial banks.

During 1987, Fund staff members took part in 21 Bank missions and Bank staff members participated in 7 Fund missions. In addition, there were numerous instances in which Fund missions coincided with Bank missions and the staffs of the two institutions collaborated closely in the field. It has also become common practice for Fund and Bank staff members to attend Executive Board meetings of the other institution for discussions concerning member countries in which both organizations have substantial financial involvement.

International Liquidity and the SDR

Adequacy of International Reserves

An adequate stock of international reserves contributes to the efficiency and stability of the international monetary system by allowing countries to adjust their economic policies more smoothly when unanticipated disturbances adversely affect their international payments positions. The assessment of the adequacy of the stock of international reserves is an important responsibility of the Fund. Such an assessment depends on an evaluation of the current and prospective factors influencing reserve needs as well as of the terms and conditions under which reserves are expected to be supplied.

During the 1980s, there have been sharp but erratic increases in reserve holdings. For many developing countries, this has reflected efforts to rebuild reserve holdings from the low levels that had resulted from the emergence of widespread external payments difficulties in 1981–82. For the industrial countries, the most rapid increases of reserve holdings have been associated with extensive foreign exchange market intervention.

For Fund member countries, taken together, the ratio of non-gold reserves to imports, which had averaged 22 percent between 1973 and 1987, reached 27 percent at the end of 1987. While reserve holdings of all countries have tended to increase as the value of world trade has expanded, the increased variability of trade and capital flows and uncertain macroeconomic conditions have led some countries to expand their reserve holdings even more rapidly. For the industrial countries, the ratio of non-gold reserves to imports rose to 22 percent at the end of 1987. The corresponding ratio for developing countries reached 39 percent, the highest level since 1970. Since the ratio of non-gold reserves to imports for those developing countries with recent debt-servicing problems has not increased since the end of 1984, the increase in the ratio for developing countries as a whole has primarily reflected extensive accumulation of reserves by those developing countries that have avoided debt-servicing problems.

The expansion of international liquidity has been generated through a variety of channels: foreign exchange market intervention by industrial countries, current account adjustment, and borrowing in international financial markets. While the scale of foreign exchange market intervention can be substantial at times, such intervention can be episodic, and often partially reversed once exchange market conditions change. It may not, therefore, provide a stable source of expansion for non-gold reserves. Since 1982, many developing countries, especially those with debt-servicing problems, have attempted to protect or strengthen their reserve position through the adoption of policies designed to improve their current account. While the implicit cost (measured by forgone domestic absorption) of undertaking the adjustments needed to generate additional reserves through improvements in current account positions has naturally varied across countries, the willingness of countries to incur these costs has provided an indication of the perceived importance of increased reserve holdings in the relatively unstable macroeconomic environment that has existed during the 1980s.

As international financial markets have expanded and have become increasingly integrated, countries with access to these markets have often found borrowing in them to be a flexible and efficient source of reserve accumulation and financing for temporary external payments imbalances. However, experience during the 1980s suggests that changes in perceived creditworthiness can at times lead to an abrupt and prolonged loss of access to financial markets. Moreover, fluctuations in financial markets may sometimes limit the capacity of countries to use these markets with confidence as a source of reserve supplementation.

In achieving some desired reserve position, countries face the costs of both acquiring and maintaining their reserves. Since reserves can be obtained from a number of sources, the cost of acquiring reserves could reflect considerations such as the cost of external borrowing (if the country holds borrowed reserves) or the costs of domestic absorption forgone to generate reserves through current account improvements. Under current conditions, concerns have been expressed that countries with the greatest perceived need for reserves have faced the most adverse terms and conditions for acquiring such reserves, often because they are not viewed as creditworthy in international capital markets. As a result, some have argued that the supply of reserves generated by international agreement can take on special importance.

In examining the adequacy of the existing stock of reserves, prospective as well as current developments in the international economy and world financial markets are important considerations. Inadequacy of reserves does not appear to have been a major problem in the financial market disturbances of 1987. However, since borrowed reserves play an important role in the current reserve system, it has been argued that unanticipated changes in economic and financial market conditions that would make it difficult for many countries to refinance their borrowed reserves could adversely affect the adequacy of existing reserves. Some have suggested that such a possibility creates the need for a “safety net,” or for a core level of reserves whose availability is independent of conditions prevailing in private financial markets.


Over the past year, the Executive Board has continued its discussions of the role of the SDR in the international monetary system. Attention has been given to the question of a resumption of SDR allocations, the issue of whether the SDR system leads to resource transfers, and the use of SDRs in reserve management practices. In considering issues relating to a possible SDR allocation, discussions at the Executive Board have been guided by Article XVIII, Section 1(a) of the Fund’s Articles of Agreement which notes that “in all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.” Although in recent discussions most Executive Directors have favored renewed SDR allocations, the degree of support has not reached the level required for the Managing Director to make a proposal for an allocation to the Board of Governors. As a result, there have been no SDR allocations since 1981.

Many of the Executive Directors favoring a resumption of SDR allocations have argued that such allocations could improve the performance of the international monetary system by reducing the cost of acquiring reserves, reducing reliance on borrowed reserves, and facilitating the financing of exchange market intervention. Since a large number of countries still lack adequate access to international financial markets, a number of Executive Directors have noted that SDR allocations could help reduce the cost of acquiring reserves for those countries that have been forced to generate additional reserves through current account adjustments, often involving import compression. In addition, SDR allocations have been viewed by some Executive Directors as a means of reducing the dependence of the reserve system on borrowed reserves during a period of variability of asset prices. Moreover, a number of Executive Directors have also suggested that the SDR system could provide a nonmarket source of funding for coordinated exchange market intervention.

Executive Directors who do not favor a resumption of SDR allocations have argued that the reserve system has generated adequate liquidity for all except capital importing countries experiencing difficulty in servicing their external debt. As a result, there is no long-term global need for reserve supplementation. Some of these Executive Directors feel that existing resources for exchange market intervention are adequate and do not require augmentation via SDR allocation. They observed that the question of the cost of borrowing is not one of the criteria prescribed in the Articles of Agreement as being relevant to an assessment of reserve adequacy for the purpose of deciding an SDR allocation. Moreover, these Executive Directors have noted that for a number of countries the lack of access to borrowed reserves is a problem of creditworthiness that should be addressed through the use of conditional liquidity rather than the creation of unconditional global liquidity, in order to be consistent with the debt strategy. In addition, several Executive Directors have expressed concern that prolonged net use of SDRs by some groups of countries is inconsistent with the monetary character of the SDR.

In considering the functioning of the SDR system, Executive Directors generally agreed that permanent resource transfers would arise in the SDR system only to the extent that the SDR interest rate is uncompetitive with the yields on other reserve assets or that holding SDRs is risky. Most Executive Directors regard the current SDR interest rate as broadly competitive with the yields on other reserve assets, and they consider that holding SDRs does not involve significant risks. Moreover, the safety and usability of the SDR make it a useful instrument to hold for precautionary and investment purposes, although some Directors have pointed to the desirability of further steps to enhance the usability and liquidity of the instrument. Executive Directors agreed that every effort, within the boundaries set by the Articles of Agreement, should be made to improve the process by which SDRs can be transacted among participants and also within the Fund.

Table 12Selected Financial Activities: General Resources Account, 1982–88(In millions of SDRs)
Financial Year Ended April 30
Gross purchases16,960.210,258.210,164.16,059.83,940.93,168.14,117.6
Industrial countries54.0
Developing countries6,960.210,204.310,164.16,059.83,940.93,168.14,117.6
Middle East25.157.4116.0
Western Hemisphere496.03,785.04,273.43,400.51,932.51,282.92,686.4
Changes in outstanding Fund credit5,066.08,711.58,148.93,214.8–340.6–2,993.8–3,817.0
Number of stand-by and extended arrangements as of April 3035393530262420
Of which, extended arrangements12953212
Amounts under arrangements16,206.325,025.518,569.411,675.34,906.75,063.13,182.6
As percent of total quotas26.741.020.913.
Undrawn balances11,154.616,405.19,269.55,543.12,379.12,981.81,337.8
As percent of commitments under arrangements68.865.649.947.548.558.942.0
Outstanding Fund credit14,801.423,589.931,741.634,972.634,640.231,646.427,829.4
As percent of total quotas24.438.635.639.238.835.230.9
Number of countries79858483798076

Excluding purchases in the reserve tranche.

Excluding purchases in the reserve tranche.

Financial Policies and Activities

The financial assistance provided by the Fund expanded significantly in 1987/88.14 At the same time, repurchases by members continued to increase, reflecting the record level of balance of payments support provided by the Fund in the first half of the 1980s, which has begun to fall due in the last three years. Outstanding Fund credit declined to SDR 27.8 billion at the end of 1987/88. The flow of repurchases, together with a high proportion of the Fund’s holdings of currencies being usable, contributed to the Fund’s liquidity position remaining satisfactory during 1987/88. During the year, the Fund continued to use borrowed resources to finance enlarged access but repayments exceeded new borrowings by a substantial margin so that outstanding borrowings declined by SDR 3.6 billion to SDR 9.1 billion. Arrears to the Fund continued to increase and the Executive Board is considering measures to reduce and eventually eliminate these arrears.

The most noteworthy features of the Fund’s financial assistance during the year were the sharp increases in the use of Fund resources by members under the compensatory financing facility and in the number of new arrangements under the structural adjustment facility (SAF). Despite some signs of improvement in the current account position of developing countries as a group and higher international prices of a number of commodities, drawings under the compensatory financing facility increased substantially from SDR 593 million in 1986/87 to SDR 1.5 billion in 1987/88. This strong rise reflected large drawings by a limited number of countries whose exports were adversely affected, inter alia, by deterioration in terms of trade. As of April 30, 1988, 25 arrangements were in effect under the SAF, involving aggregate commitments of SDR 1.4 billion, compared with 10 such arrangements for SDR 442 million on April 30, 1987. As already explained, the active use of resources under this concessional facility reflects the urgent need on the part of low-income developing countries to undertake comprehensive multiyear growth-oriented adjustment programs to address deep-rooted structural problems and to restore viability in their external payments positions.

Total purchases (excluding reserve tranche purchases) by members increased from SDR 3.2 billion in 1986/87 to SDR 4.1 billion in 1987/88, mainly reflecting the sizable increase, as noted above, in the use of resources under the compensatory financing facility, while purchases under tranche policies rose marginally by SDR 10 million to SDR 2.6 billion in the same period. The use of reserve tranche positions remained small, and that of the extended Fund facility was little changed. All purchases were made by developing countries. Repurchases by members also continued to increase, and reached SDR 7.9 billion in 1987/88 from SDR 6.2 billion in 1986/87. Seven members with relatively large quotas, namely, Brazil, India, Korea, Mexico, South Africa, Thailand, and Turkey, accounted for nearly one half of these repurchases (SDR 3.6 billion). Advance and early repurchases by Argentina, Korea, and Portugal aggregated almost SDR 0.8 billion. As a result, outstanding Fund credit to members (excluding loans under the SAF) declined from SDR 31.6 billion in 1986/87 to SDR 27.8 billion in 1987/88 (see Chart 17). Disbursement of SAF loans amounted to SDR 584 million. At the end of April 1988, 86 members had outstanding indebtedness to the Fund under its various facilities (including the SAF) in the General Department.

Chart 17Use of Fund’s General Resources as at April 30, 1977–881

(In billions of SDRs)

1 Excluding disbursements totaling SDR 584 million under the structural adjustment facility.

The increase in repurchases by members was the natural corollary of the record use of Fund credit during 1982/83–1984/85 that has begun to fall due in the last two to three years (Chart 18). Some of the members that had used Fund resources in the earlier period have made considerable progress toward adjustment so that continued recourse to further Fund assistance was not necessary. Given the temporary nature of the balance of payments assistance provided by the Fund and the revolving character of its resources, any large increase in the provision of Fund credit in a given period will at a later period be reflected in similarly large inflows when repurchases fall due. Aggregate purchases by members during 1982/83–1984/85 totaled SDR 37.2 billion, significantly larger than the total of SDR 34.4 billion in the preceding ten years.

Chart 18General Resources: Purchases and Repurchases, Financial Years Ended April 30, 1977–881

(In billions of SDRs)

1 Purchases excluding reserve tranche.

The financial capacity of the Fund to meet any increased demand for use of its resources has been strengthened both by the enhancement of SAF resources and the flow of repurchases. Indeed, the Fund stands ready to assist its members financially in their adjustment efforts as well as in facilitating commitments of financial assistance from other sources. In particular, many low-income developing countries are expected to make substantially larger use of SAF and ESAF resources, while possibilities exist for other developing countries to have increased recourse to the use of Fund resources under a revitalized extended Fund facility and as a consequence of the newly established compensatory and contingency financing facility.

The Fund’s liquidity position remained satisfactory during 1987/88, and its holdings of usable ordinary resources rose from SDR 39.3 billion at the end of April 1987 to SDR 41.0 billion on April 30, 1988; these resources consisted of the equivalent of SDR 40.2 billion in usable currencies and SDR 0.8 billion in SDR holdings. The increase in the stock of usable ordinary resources also reflected, to some extent, an increase in the number of members having sufficiently strong balance of payments and reserve positions to warrant the net use of their currencies in financing purchases from the Fund. The stock of available borrowed resources amounted to SDR 5.3 billion on April 30, 1988, compared with SDR 7.1 billion at the end of the preceding year. The Fund renewed in November 1987 its Decision on the General Arrangements to Borrow in an amount of SDR 17.0 billion for the five-year period from December 26, 1988.15

In the light of continuing payments difficulties facing many members, it was considered appropriate to maintain unchanged the policy on enlarged access to Fund resources in 1988. This policy is governed by a decision that came into effect in March 1981 and has been subject to annual review since 1983. As in the past, the access limits are to be treated as limits and not as targets or entitlements. The enlarged access policy allows a member to have annual access under a stand-by or extended arrangement of up to 90 or 110 percent of quota, three-year access of up to 270 or 330 percent of quota, and cumulative access of 400 or 440 percent of quota. Actual access depends on the nature and size of the member’s balance of payments need and the strength of its adjustment efforts. Following the deliberations of the Interim Committee in September 1987, the Executive Board decided that the policy will continue in 1988. The access to the compensatory financing facility has been subject to the limit of 83 percent of quota each in respect of shortfalls in export receipts or excesses in the cost of cereal imports (subject to a combined overall limit of 105 percent of quota), and the limit on access to the buffer stock financing facility has been 45 percent of quota. The access limits under the compensatory and contingency financing facility and the extended Fund facility have been modified in June and August 1988, as discussed above.

The continued delay by some members in discharging financial obligations to the Fund has been of increasing concern to the Fund. The number of members in arrears on obligations to the Fund by six months or more rose by one to nine by the end of the financial year, with amounts overdue for six months or more reaching SDR 1.5 billion on April 30, 1988 from SDR 0.8 billion on April 30, 1987. All of these members were in arrears in settling obligations to the General Resources Account, seven had arrears to the SDR Department, eight were in arrears to the Trust Fund, and two were in arrears on interest payments on loans under the SAF. During 1987/88, two members were declared ineligible to use the general resources of the Fund, pursuant to Article XXVI, Section 2(a), in the light of their overdue obligations in the General Department—Zambia on September 30, 1987 and Sierra Leone on April 25, 1988. Somalia was declared ineligible on May 6, 1988. Earlier declarations of ineligibility with respect to Viet Nam (January 15, 1985), Guyana (May 15, 1985), Liberia (January 24, 1986), Sudan (February 8, 1986), and Peru (August 15, 1986) remained in effect. These eight members accounted for 95 percent of the total overdue obligations to the Fund as of April 30, 1988. Selected data on arrears for the period 1984/85 to 1987/88 are presented in Table 13.

Table 13Arrears to the Fund of Members with Obligations Overdue for Six Months or More(In millions of SDRs)
End of Financial Year:
Amount of overdue
Number of members4889
Of which:
General Department161.4417.71,088.41,787.7
Number of members4889
SDR Department4.912.315.625.1
Number of members2446
Trust Fund16.457.982.3132.4
Number of members2667
Number of ineligible

The elimination of arrears is crucial for maintaining the financial integrity of the Fund, preserving its monetary character, and continuing its operation as a cooperative intergovernmental financial institution. Since the emergence of significant arrears in 1983, the Fund has adopted a number of measures to help identify potential problems of arrears, forestall the emergence of arrears, encourage member countries seeking to clear their arrears, and protect the Fund’s financial position. These measures include improving assessments of members’ capacity to repay the Fund; strengthening adjustment programs in cases where debt-servicing difficulties could arise; and collaborating with individual debtor countries, other creditors, donors, and multilateral development institutions in response to the efforts of individual members to become current on their Fund obligations. As a result of these efforts, several members have eliminated sizable arrears and thus regained access to Fund credit. A few countries have, however, allowed their arrears to the Fund to accumulate to such an extent that strong and determined efforts on their part, together with extraordinary support from the international community, will be necessary to clear the arrears and remain current in the future. Concerned by the continued increase of overdue obligations, the Interim Committee at its April 1988 meeting requested the Executive Board to prepare a report for the Committee’s next meeting on measures to reduce and eventually eliminate arrears to the Fund.

The Executive Board has adopted various measures to strengthen the financial position of the Fund, some of which place a financial burden on the membership in general in the form of increased charges and reduced remuneration. For example, the target amount of additions to precautionary balances was raised from 5 percent to 7.5 percent of accumulated reserves for the financial years 1986/87 and 1987/88; the target amount was increased for the latter year by a further 2.5 percentage points in January 1988. Income in excess of the target amount for 1986/87 was placed in a newly established Special Contingent Account. For the financial year 1987/88, the additions to this contingent account and to the Fund’s reserves were thus each to be equal to 5 percent of reserves at the beginning of the year.16 The income target exceeding 5 percent of reserves has been contributed, as in 1986/87, by both creditor and debtor countries. Reflecting in part the various measures taken to safeguard its financial position, the Fund recorded a net income of SDR 49 million in the financial year 1987/88 (SDR 86 million in 1986/87), which was added to reserves, thus raising the Fund’s total reserves (the Special Reserve and the General Reserve) to SDR 1.26 billion on April 30, 1988 from SDR 1.21 billion on April 30, 1987, an increase of 4.1 percent. Total precautionary balances, that is, reserves and balances in the Special Contingent Account, amounted to SDR 1.34 billion on April 30, 1988, of which SDR 87.0 million was held in the Special Contingent Account. It is intended that in 1988/89, 5 percent of reserves at the beginning of the year will be added to the Special Contingent Account and another 5 percent will be placed in reserves.

In the SDR Department, the total stock of SDRs remained unchanged at SDR 21.4 billion in 1987/88 as there was no allocation or cancellation. About 96 percent of this amount was held by participants and prescribed holders and the balance of 4 percent was held by the General Resources Account. The holdings of the General Resources Account are managed in accordance with the guidelines in the Executive Board’s decision to maintain the level of the Fund’s SDR holdings in the range of SDR 0.75–1.25 billion; the Fund’s holdings of SDRs amounted to SDR 0.8 billion at the end of April 1988. Transactions by agreement increased substantially from SDR 3.9 billion in 1986/87 to SDR 7.3 billion in 1987/88, while transactions with designation declined from SDR 1.2 billion to SDR 1.0 billion in the same period.

During the year, at the initiative of the Fund, the number of participants having two-way arrangements to sell and buy SDRs, as and when requested by the Fund, was expanded. This expansion contributed significantly to the decline in transactions with designation noted above and the absence of any such transactions since August 1987. Eight members entered into such arrangements, which involved an aggregate scope for transfers exceeding SDR 1 billion; the currencies to be exchanged under these arrangements include the U.S. dollar, the deutsche mark, the Japanese yen, the French franc, and the pound sterling.

Under the Articles of Agreement, the Board of Governors is required to conduct reviews of quotas at intervals of not more than five years. Accordingly, the Ninth General Review of Quotas was to be conducted by March 31, 1988, five years from the completion of the previous review. As noted in last year’s Annual Report, the Executive Board established a Committee of the Whole on March 27, 1987 for this purpose. The Committee met four times during the year to consider various aspects of the adjustment of quotas, including quota formulas, quota calculations, the size of an overall increase in quotas, and principles and techniques of quota adjustments. The Committee was not able to complete its work and make recommendations by March 31, 1988. On March 22, 1988, the Executive Board submitted a report to the Board of Governors entitled Increases in Quotas of Members—Ninth General Review and a Resolution for adoption by the Board of Governors. The Board of Governors resolved to continue its review under Article III, Section 2(a) and requested the Executive Board to complete its work on this matter and to submit appropriate proposals to the Board of Governors not later than April 30, 1989.17

This activity is governed by Article IV, Section 3(b) of the Articles of Agreement and is conducted according to the principles and procedures set forth in the document “Surveillance over Exchange Rate Policies.” See Executive Board Decision No. 5392-(77/63), adopted April 29, 1977, as amended by Decision No. 8564-(87/59), adopted April 1, 1987, Selected Decisions of the International Monetary Fund and Selected Documents, Thirteen Issue (Washington, April 30, 1987), pp. 9–14 (hereafter referred to as Selected Decisions). As discussed below, this decision was amended effective April 22, 1988; see Appendix III.

The Executive Board is a permanent decision-making organ currently comprising 22 Directors elected or appointed by member countries or groups of countries and chaired by the Managing Director. The Interim Committee is an advisory, body composed of 22 Fund Governors (ministers of finance or central bank governors), representing the same constituencies as in the Fund Board. Normally, the Interim Committee meets twice a year, in April and at the time of the Annual Meetings in September/October. In this Report, “Board” refers to the Executive Board of the Fund; references to the Board of Governors are stated fully.

The Group of Seven comprises Canada, France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States.

Decision No. 8856-(88/64), April 22, 1988; see Appendix III.

Since the adoption of the 1979 Guidelines on Conditionality (Executive Board Decision No. 6056-(79/38), adopted March 2, 1979, Selected Decisions, Thirteenth Issue, pp. 27–29), periodic reviews of the general experience, as called for in the 1979 Decision, have taken place at intervals of one to one and a half years.

Data on selected financial activities in the General Resources Account are provided in Table 12.

See Executive Board Decision No. 8733-(87/159), November 23, 1987 (reproduced in Appendix III).

In the light of the level of deferred charges in the fourth quarter of 1987/88 which could not be fully generated by a symmetrical adjustment of the rate of remuneration and the rate of charge because of the limitation on the adjustment of the rate of remuneration, the Board decided to reduce the amount of addition to reserves from 5.0 percent to 4.1 percent. The reduction is to be made up through an additional placement to reserves in 1988/89. (Executive Board Decisions Nos. 8878-(88/84), 8879-(88/84), and 8880-(88/84), May 23, 1988, reproduced in Appendix III.)

Board of Governors Resolution No. 43–1, April 22, 1988; see Appendix III.

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