The Fund in 1988/89

International Monetary Fund
Published Date:
January 1989
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1. Surveillance

While the Fund welcomes many developments in the world economy—including the healthy growth in output and investment in industrial countries and the narrowing of trade imbalances among them—it is concerned about other aspects of the global situation. Among the developing countries, the inadequate growth of output and investment, continuing problems with fiscal positions and inflation, and the persistence of debt-servicing difficulties are worrisome. In many industrial countries, fiscal deficits need to be reduced, and adjustment of external imbalances must be reinforced. All countries require vigorous structural reforms to reduce trade distortions and to improve efficiency. Further intensified and sustained policy coordination among the major industrial countries—supported by the use of economic indicators—can help improve global economic performance and the functioning of the international monetary system.

Fund surveillance of the policies of member countries—and of the global economy—remains central to the system. The Fund must continue to monitor the international monetary system and promote an adequate supply of international liquidity.

The Fund is a forum in which member countries can consult and collaborate on each other’s economic policies as well as on global economic issues. To be effective the Fund is mandated to “exercise firm surveillance over the exchange rate policies of members.” Surveillance extends to a broad range of domestic and external policies affecting, in particular, members’ payments balances and exchange rates.

The Fund discharges these surveillance responsibilities in two ways: primarily through regular consultations with individual member countries, and as part of the World Economic Outlook exercise.

Article IV Consultations

The Fund staff conducts regular meetings with the authorities of member countries to gather up-to-date economic and financial information, and to review economic policies and developments. These consultation discussions under Article IV of the Fund’s Articles of Agreement, or charter, provide the data the Fund needs to exercise surveillance over the economic policies of member countries. More specifically, these consultations allow the Fund to analyze economic developments and policies in member countries; to examine members’ fiscal, monetary, and balance of payments accounts; and to assess how policies influence their exchange rates and external accounts.

Article IV consultations may be held annually, or at intervals of up to 24 months, depending on the member country. A “bicyclic” procedure, which entails a full consultation every second year and a simplified interim consultation in the intervening year, was introduced in 1987 for application in certain circumstances. As of April 30, 1989, 30 countries were subject to the bi-cyclic procedure.

Box 3The IMF Executive Board, the Interim Committee, and the Development Committee

The Executive Board (the Board) is the Fund’s permanent decision-making organ, currently composed of 22 Directors appointed or elected by member countries or by groups of countries. Chaired by the Managing Director, the Board conducts the day-to-day business of the Fund by reviewing papers prepared by the Fund management and staff and is in continuous session.

The Interim Committee of the Board of Governors on the International Monetary System is an advisory body made up of 22 Fund Governors, ministers, or others of comparable rank, representing the same constituencies as in the Fund’s Executive Board. Normally, the Interim Committee meets twice a year, in April and at the time of the Annual Meetings in September or October. It advises and reports to the Board of Governors on the functions of the Board of Governors in supervising the management and adaptation of the international monetary system, considering proposals by the Fund’s Executive Board to amend the Articles, and dealing with sudden disturbances that might threaten the international monetary system; it also advises the Fund’s Executive Board on these matters.

The Development Committee (the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries) is composed of 22 members—finance ministers or others of comparable rank—and generally meets at the same time and place as the Interim Committee. It advises and reports to the Boards of Governors of the Bank and Fund on all aspects of the transfer of real financial resources to developing countries.

The focus of an Article IV consultation depends on the characteristics of the member country and on external economic conditions. In recent years, given the large payments imbalances among industrial and developing countries and the debt-servicing problems of many developing countries, the Fund has devoted greater attention to:

• determining whether a country can sustain economic and employment growth with a viable balance of payments position over the medium term;

• helping restore external credit-worthiness over the medium term; and

• examining how structural policies can improve economic performance.

Ultimately, consultations attempt to call attention to the international implications of developments and policies in the economies of individual countries.

The number of Article IV consultations rose sharply in 1983 and peaked in 1985, owing to modifications in procedures aimed at ensuring a greater frequency of consultations in the face of the difficult balance of payments prospects of many countries. The number reached 131 in 1985 (85 percent of the Fund’s membership), falling only slightly to 125 in 1986. The sharp increase in the workload of the Board and staff led the Board, in July 1987, to reconsider the frequency of consultations. It decided that the resources devoted to consultations could be economized while ensuring the quality of Fund surveillance. To this end, the bicyclic consultation procedure was introduced and the number of countries on the standard 12-month consultation cycle was reduced from 25 to the 20 members with the largest Fund quotas, because of the “substantial impact” they have on other countries. (In addition to those countries on the bicyclic and annual consultation schedules, some members are on annual schedules for other reasons—such as having an arrangement with the Fund—and some are on 18-month or 24-month cycles. The latter are distinguished from the bicyclic schedule in that consultation discussions with the authorities are held every two years, rather than annually under the bicyclic procedure. There are also a few members whose cycles are unspecified.) As a result of these efforts to economize on resources devoted to consultations, the number of Article IV consultations fell to 115 in 1987 (75 percent of the membership) and to 110 in 1988 (74 percent of the membership).

Industrial Countries

United States

The U.S. economy expanded briskly in 1988, contributing measurably to the strengthening of growth in the rest of the world. Domestic demand stayed robust, with business investment strong and net exports recovering. The high level of resource use, however, raised some concerns about inflation. In the Board’s view, this development indicated a need for policies to boost national savings, in order to ensure that exports expanded further and capital formation remained strong without fueling inflation. In this connection, the Board emphasized the importance of decisive action to reduce the fiscal deficit. While the U.S. authorities cut the deficit in the fiscal year ended September 30, 1987, concern was expressed that further substantial reductions would not be forthcoming soon. The Board reaffirmed the need for urgent and forceful action, particularly with a new administration, and saw a strong case for concentrating on fiscal adjustment at the outset. Directors agreed with the authorities’ view that expenditure restraint should be emphasized. The Board also noted that several features of the current U.S. tax system discourage private saving and distort portfolio decisions; in view of the large saving-investment imbalance, action might be needed in these areas.

The U.S. trade deficit began to improve in real terms in 1987 and was substantially reduced in real and nominal terms in 1988. Nevertheless, large external imbalances persisted in 1988, constituting a major source of vulnerability. Here again, progress in reducing the fiscal deficit would provide scope for external adjustment without adding to inflation or crowding out investment.

The authorities implemented monetary policy pragmatically in 1987 and 1988; their prompt and forceful response to the October 1987 stock market crisis was laudable. Subsequently, the Federal Reserve placed commendable emphasis on inflation control. At the same time, rising short-term and medium-term interest rates in the United States and abroad caused concern. Continued reduction of the fiscal deficit could ease the burden placed on monetary policy and help mitigate upward pressure on interest rates. The Board was pleased that the authorities successfully avoided overtly protectionist measures in new trade legislation, but it expressed concern that protectionist pressures remained strong in the United States. The Board hoped that the United States would maintain—and indeed expand—developing countries’ access to U.S. markets.


The Japanese economy has performed impressively in recent years, achieving substantial external adjustment in 1987–88, together with high output growth and stable prices. This owed much to the authorities’ pursuit of sound financial policies. While the outlook for continued noninflationary growth is encouraging, prospects for further external adjustment have become less clear.

The Board commended Japanese fiscal management in fiscal year 1988/89 (ended March 31, 1989), which had permitted further progress toward fiscal consolidation without dampening private domestic demand. Japan’s comprehensive tax reform should improve the system’s fairness and neutrality. The Board largely supported the broadly neutral fiscal policy embodied in the 1989/90 budget, given the strong demand and high rate of capacity utilization.

The authorities’ skillful conduct of monetary policy had preserved price stability while supporting economic growth. In view of the weakening yen and the need to prevent inflation, the recent tightening of monetary conditions was broadly endorsed by the Board. The authorities’ efforts to maintain appropriate growth of domestic demand should not compromise price stability. In this connection, the Board cited the high rates of capacity utilization and the continued rapid growth of the money supply.

The Board strongly supported further structural reforms, to promote external adjustment as well as domestic welfare. Although substantial progress has already been achieved, much remains to be done. The authorities need to accelerate the pace of structural reforms, giving special priority to land management, the agricultural sector, and the distribution system. In addition, the authorities have made progress in liberalizing interest rates on small savings deposits and they are encouraged to make further efforts. These—along with public investment in social overhead capital—would improve public welfare and raise living standards.

As regards external policies, the Board acknowledged the limited scope for unilateral financial action by Japan to reduce its external surplus, agreeing that stronger adjustment requires both deficit and surplus countries to adapt their policies. The Board commended Japan’s efforts to support multilateral trade liberalization in the Uruguay Round. At the same time, it urged improved access to the Japanese market, particularly for agricultural goods.

The Board applauded Japan’s substantial efforts to encourage the recycling of Japanese official and private funds to developing countries and its leadership in strengthening the debt strategy. The Board noted Japan’s ongoing role in official development assistance, including concessional assistance, and encouraged the authorities to intensify these efforts.


The economic expansion of the Federal Republic of Germany continued into its sixth year in 1988, still accompanied by low inflation. While real growth had been slower than might have been hoped for in 1987, activity in 1988 was stronger than had been expected, despite the reduced impact of terms of trade gains. While improved terms of trade have stimulated economic performance in recent years, monetary and fiscal policies also supported domestic demand. Of continued concern to the Board, however, was the persistence of structural rigidities, high unemployment, and—despite external adjustment in real terms in 1986 and 1987—large external surpluses.

The Board was of the opinion that the German authorities had demonstrated their adaptability to the changing environment without losing sight of their overall medium-term fiscal strategy. Although the authorities remain committed to controlling government spending, in 1988 they adapted to changes in the global environment by the decision to take no action to offset a widening budget deficit. The Board welcomed the enactment of the 1990 tax reform, together with the financing package that reduced tax preferences and improved enforcement. It was concerned, however, that the authorities’ decision to raise taxes in 1989 between two years of significant tax reductions might create confusion about the authorities’ fiscal philosophy and goals and thought that a preferred fiscal alternative would have been a reduction in subsidies.

In the Board’s view, encouraging domestic demand requires the right mix of macroeconomic and structural policies; this, in turn, needs vigorous action to ease structural rigidities in the goods and labor markets. Progress in relaxing structural rigidities has been limited, however; action on deregulation has been slow and disincentives in some critical sectors continue to hamper economic activity.

The Board welcomed the monetary authorities’ flexibility—as evidenced by their continued toleration of a rapid pace of monetary expansion—in support of the international effort to stabilize foreign exchanges and to promote international adjustment; it thus saw little scope for added stimulus from monetary policy. It was noted that the authorities should be alert to opportunities to restore monetary growth to a rate more appropriate to the medium-term needs of the economy. The Board encouraged Germany to play a prominent role in facilitating European market unification by 1992 and in helping ensure that trade barriers against non-European countries are not raised and, where possible, are lowered. It welcomed Germany’s cancellation of a significant portion (about DM 9 billion to date) of the official debt owed it by least developed countries.


France’s economic performance in 1988 combined the strongest increase in output in ten years and the first decline in unemployment in nearly twenty with a deceleration in inflation to rates not observed since the early 1960s. While this performance was partly the result of a favorable international environment, much of it was attributable to the restrictive financial and supply-oriented structural policies in effect since 1983. The policies of wage restraint and market liberalization, in particular, set the stage for a significant and sustained turnaround in enterprise profitability that encouraged the rapid growth of investment and employment in 1988.

While recognizing these achievements, the Board remained concerned about the high level of unemployment, the declining national savings rate, the near peak levels of capacity utilization, and the need for France to become more competitive if it is to recapture market shares and cut unemployment. The Board therefore commended the authorities’ intention to maintain their supply-oriented and disinflationary policies, including continued fiscal retrenchment and a flexible use of interest rate policy in managing the exchange rate. The Board also urged that the liberalization of domestic markets observed during the previous few years be extended to the external sector—particularly through further reductions in subsidies and less protection of domestic industries and agriculture.

United Kingdom

In 1988, the United Kingdom marked its seventh successive year of economic growth. The expansion was led by domestic demand—especially private consumption and investment—and reflected, in part, the authorities’ success in strengthening the supply side of the economy. Productivity grew impressively, particularly in manufacturing. At the same time, already high business profitability continued to improve and unemployment declined steadily. Progress on the structural front included strengthened public finances and comprehensive tax reform.

The Board was concerned, however, that demand had grown too rapidly and had begun to show up in higher inflation and in a wider deficit in the current account of the balance of payments. With hindsight, it was clear that demand in the first half of 1988 was stronger than the indicators at the time had suggested. While fiscal policy in the financial year ended March 31, 1989 was restrictive, it did not fully offset the momentum of activity that had developed in 1988.

Firm policies are needed to prevent inflation from becoming entrenched, and the Board welcomed the monetary tightening after mid-1988. Indeed, it appeared that a desired slowdown in domestic demand growth had begun, although the question remained whether the deceleration of demand was fast enough. The Board emphasized that the budget for 1989/90 should support monetary restraint by forgoing tax cuts and accepting the resulting substantial surplus. Doing so would not conflict with the overriding importance of the medium-term orientation of fiscal policy, in view of the more important immediate need to curb inflation. The Board welcomed the authorities’ efforts to liberalize trade, but was concerned about the United Kingdom’s high nontariff barriers and subsidies—particularly in the agricultural sector.


Italy turned in a remarkable economic performance in 1988, led by strong gains in output, investment, and employment. While the current account deficit widened, it remained manageable. The combination of an expansionary fiscal policy and a tight monetary policy increased official reserves, stabilized the exchange rate and the rate of inflation in 1988, and kept real interest rates broadly unchanged at a high level.

The Board commended the Italian authorities for the further measures adopted in 1988 to liberalize capital flows and observed that these actions had also tended to reinforce cohesion within the European Monetary System. The Board was concerned, however, that slippages in controlling public expenditure had set back the process of fiscal consolidation. It stressed that decisive fiscal adjustment was needed without delay. The Italian authorities’ intention to stabilize the ratio of public debt to GDP by 1992 was welcomed, but there was concern that this goal would become increasingly elusive as the average interest rate on the public debt increased. The Board stressed that the progressive erosion of the autonomy of monetary policy made fiscal correction all the more urgent—not only to ensure long-term financial stability, but also to contain recent inflationary pressures.

The Board urged the authorities to pursue structural reforms so as to reduce public spending on health, social security, and public transport. The ongoing process of European economic integration requires some harmonization of tax policies, which limits the scope for raising tax rates. Thus, long-lasting adjustment can best be secured by cutting expenditures and broadening tax bases.


The Canadian economy grew strongly in 1988, approaching the limits of full employment. This growth was accompanied, however, by a large but falling current account deficit, reduced competitiveness, a decline in the personal saving rate, tight monetary conditions, and signs of an increase in inflationary pressure.

The Board considered the authorities to be at a critical juncture in their policy choices, needing simultaneously to control the expansion of demand and to strengthen the supply side of the economy. A substantial reduction in the fiscal deficit was essential. The authorities had, in fact, acknowledged that fiscal policy was central and that a discretionary deficit reduction was needed. Emphasis should be placed on limiting expenditures, but action on the revenue side should not be excluded. The budget presented in April 1989 included expenditure reduction and revenue-enhancing measures aimed at returning the fiscal deficit to a downward track. The Board supported the structural adjustment measures of recent years, notably the reform of the sales tax system and financial deregulation. Nonetheless, further structural measures are needed to reduce obstacles to regional and sectoral adjustment and to expand labor market flexibility.

The authorities’ tightening of monetary policy was appropriate—particularly in light of the high level of resource use. The Board welcomed Canada’s active participation in the Uruguay Round of multilateral trade negotiations. It commended Canada’s action to remove trade barriers, but stressed the need to reduce agricultural subsidies.

Smaller Industrial Countries

Article IV consultations with the smaller industrial countries addressed the same general concerns as those with the major industrial countries. Discussions continued to focus on the need for sound macroeconomic policies and for effective structural reform to improve overall efficiency and competitiveness. In 1988, the need for domestic demand restraint and stronger efforts to stimulate the supply side was a common theme. Several countries had to address large external deficits, while others found that increased fiscal restraint was vital in relieving pressure on monetary policy. Continued high unemployment and labor market rigidities persisted in many countries. Some countries needed to dampen inflation and reduce protectionism.

Despite these concerns, the Board commended most of the smaller industrial countries for their efforts at economic stabilization and structural adjustment and welcomed the widespread trend toward financial deregulation and tax reform. In general, fiscal policy was restrictive in 1988 as a result of favorable revenues and curbs on spending. The Board, in noting that several countries needed to liberalize their trade policies further, commended the liberal regimes of the Nordic economies.

Developing Countries

As discussed earlier, average real economic growth in the developing countries in 1988 was vigorous, but the performances of different country groups varied sharply. Output and investment growth was concentrated in Asia, while, with a few exceptions, the African countries and the indebted middle-income countries in the Western Hemisphere continued to experience weak growth and investment.

Although influenced by the global environment, the performance of developing countries depends to a large extent on their own economic policies. Consequently, the Board welcomed the considerable progress made in 1988 by a large number of developing countries—many in Africa—with substantive programs of structural and financial reform. Such reforms extended to the liberalization of trade and exchange systems. Many countries aimed their adjustment policies at achieving more efficient public resource management and promoting private sector activity.

Advances in economic adjustment in some developing economies have to be sustained and extended because of the magnitude of these countries’ structural and financial problems, their limited resources, and, in many cases, rapidly growing populations. The issue of poverty alleviation—and the social consequences of adjustment policies—also received increased attention in 1988, and Article IV consultations included the use of social indicators and highlighted the efforts of some countries pursuing adjustment to protect the needs of their poorest and most vulnerable groups.

Growth prospects for the developing countries with debt-servicing problems are uncertain, underscoring the need for domestic policies oriented toward enhancing productive investment. These would include, in general, macroeconomic policies designed to raise domestic savings, reduce inflation, and foster capital formation and long-term growth, as well as structural policies to allocate resources more efficiently and to nourish sustainable growth over the medium term. Efforts to liberalize investment regimes and encourage repatriation of flight capital are important complements to attempts to mobilize resources for growth. A reduction of external debt, in conjunction with strong adjustment policies, would assist these countries in resuming growth.

In addition to these broad policy themes, the specific policies needed to strengthen economic performance in developing countries depend on the circumstances of each country. Article IV consultations frequently address the importance of limiting the growth of public spending by restraining public sector wages and employment. Reduced fiscal deficits curb inflation and prevent a crowding out of private investment. Another recurring theme is the need to sustain structural adjustment measures. The determined implementation of such measures at the appropriate time and in the proper sequence would help to encourage a recovery of domestic savings and investment, tackle infrastructural bottlenecks, and make tax systems and public enterprises more efficient. Further, these measures would bolster external positions that remain highly vulnerable to adverse global developments.

Many consultations with developing countries stressed the need to make public enterprises more efficient or, otherwise, to proceed with privatization, where considered appropriate. It was also important to eliminate price distortions through more market-oriented pricing mechanisms and to phase out administrative controls over goods, labor, and financial markets. Other issues that figured prominently in policy discussions were the need to reform the tax system (including broadening the tax base and more effective enforcement), reduce public subsidies, improve the financial system, extend the influence of markets over exchange rates, and remove exchange and trade restrictions.

Exchange rate policies continued to be a central feature of Article IV consultations, and many developing countries experienced a real effective exchange rate appreciation in 1988—following a large real depreciation during 1985–87. Consultations frequently indicated satisfaction with the flexibility of exchange rate management. Many developing countries have adopted more flexible exchange rate policies in recent years—also taking steps to unify their official and commercial market exchange rates—in order to promote exports and more efficient import substitution and to encourage inflows of foreign investment. These measures were coupled with efforts to eliminate exchange and trade restrictions and improve external debt management. In some developing countries, however, exchange rate management remained rigid; and many countries continued to maintain overvalued currencies and multiple exchange rates. In addition, a number of countries needed to make better efforts to eliminate outstanding external payments arrears.

Newly Industrializing Economies

As a group, the newly industrializing economies and other exporters of manufactures in Asia are growing faster by far than other economies in the developing world. They have benefited in particular from consistent outward-oriented growth strategies and from having started early on the road to industrialization. Article IV consultations showed that these economies were pursuing sound macroeconomic and structural policies, which permitted them to sustain high growth rates with low inflation. Particularly notable was the rising trend in private investment in several of these economies.

The newly industrializing economies benefited handsomely as a group from the buoyant trade growth in 1988, with most adding to their already sizable external surpluses. A few acted to halt, or modestly reverse, the real effective depreciations of their currencies, in recognition of their changed positions in the global economy. The Board commended the efforts of many newly industrializing economies to privatize inefficient public enterprises, to liberalize trade, and to reform financial and tax systems. Its general concerns centered on the need for a fuller reflection of market forces in the value of their currencies, a reduction in persistently large current account surpluses as a share of GNP, market-opening measures, vigilance on inflation, and continued financial and tax reform. The April 1989 Interim Committee communiqué reiterated many of these themes. It noted that some Asian newly industrializing economies could enhance their standards of living and contribute further to the process of international adjustment by stepping up deregulation of domestic markets, by liberalizing imports, and by bringing exchange rates to levels that reflected their economic fundamentals.

World Economic Outlook Exercise

The World Economic Outlook exercise allows the Board and the Interim Committee to review on a regular basis how the economic policies of member countries interact and what these policies imply for the global monetary system. These reviews are based on the staff’s World Economic Outlook report, which contains a full analysis of short-term and medium-term prospects for the world economy, for the major industrial countries, and for various other country groups.

Besides providing a global context for the surveillance conducted in Article IV consultations with individual countries, the World Economic Outlook exercise helps identify potential conflicts and tensions that may arise between countries if economic policies continue unchanged. It is also a framework for monitoring and analyzing other important issues, such as the debt problem.

If world economic conditions change dramatically between regularly scheduled discussions of the World Economic Outlook, the Board may hold additional discussions.

Global Situation

In their April 1989 discussions of the World Economic Outlook, the Board and the Interim Committee noted the stronger-than-expected growth of output and investment in the industrial countries in 1988 and the rapid expansion of world trade. They observed, however, that the pace of growth in 1989 and 1990 is likely to slow to a rate more in line with growth in productive capacity, which may reduce the risk of inflation over the next year or two.

Less encouraging was the limited impact that the favorable external environment in 1988 had on many developing countries, especially the heavily indebted countries. The failure of growth and investment to recover sufficiently in most countries with debt-servicing problems suggests that they need to boost domestic saving, curb inflation, and encourage the repatriation of flight capital.

The Board and the Interim Committee welcomed the narrowing of external imbalances (in real terms) between the major industrial countries in 1988, but they noted that the adjustment had slowed in the second half of the year. Given present policies and exchange rate patterns, the Board does not generally expect external imbalances to narrow much further, if at all, in 1989–90. However, there is support for the view that changes in exchange rates since 1985 may help reduce these imbalances over the medium term.

Despite the contribution that domestic policies and exchange rate realignment can make to reducing external imbalances, the Interim Committee sees policy coordination among the major industrial countries as critical in reducing such imbalances in an orderly fashion and in maintaining growth without inflation. The deficit countries urgently need to increase their national savings; in particular, the Interim Committee stated in its April 1989 communiqué that early action by the United States to reduce its fiscal and trade deficits without pushing up interest rates was essential. On the other hand, the major surplus countries—the Federal Republic of Germany and Japan—need to adopt macroeconomic and structural policies that encourage the growth of domestic demand without inflation and that promote external adjustment. This is also true of other surplus countries, including some of the newly industrializing economies of Asia.

Industrial Country Policies

Discussions of the economic policies of industrial countries in the context of the World Economic Outlook exercise revealed the Board’s concern about inflation in several countries. Monetary policy was central to economic management in 1988, and monetary conditions in most countries became considerably more restrictive. Too heavy a reliance on monetary policy, however, needs to be avoided, because high interest rates discourage investment and aggravate the debt-servicing burden of the developing countries. One way to avoid these adverse consequences is to reduce public sector consumption (or “absorption”) of goods and services, especially in countries with large public sector deficits. Recent reductions in the public share of total spending—and in government use of national savings—have been insufficient in several industrial countries. Further effort toward reducing fiscal imbalances is needed to meet future commitments to social security and public health, and to build up adequate capital.

To resume progress in reducing external imbalances, following the apparent stalling of the adjustment process in the second half of 1988, policy changes are needed to bring about a desirable pattern of domestic demand and output growth. In the deficit countries, a combination of efforts to achieve fiscal balance and to remove distortions that inhibit private saving would help to contain aggregate demand and to expand the tradable goods sector. In the surplus countries, there is need to implement macroeconomic and structural policies that will sustain noninflationary growth of domestic demand so that it exceeds growth in output. In this way, the capacity of these countries to absorb imports will be increased.

Increased attention is being given to structural reforms in strengthening countries’ overall economies and expanding their productive capacities. Despite some success, industrial countries need more structural reforms to sustain faster growth without higher inflation. Comprehensive structural reform is most desirable, but because of political and technical constraints, a pragmatic, partial approach may sometimes be more likely to gain acceptance.

The Board sees structural (or supply-side) and macroeconomic policies as complementary; supply distortions compromise the effectiveness of macroeconomic policies and interfere with the efficient use of resources. Labor market reforms remain a priority, especially in Europe, and countries urgently need to restructure industrial and agricultural policies. The reduction of trade distortions, especially in agricultural trade, is vital to structural reform.

Box 4What Is Structural Adjustment?

The beginning of the 1980s marked a change in the thinking of economic policymakers in the industrial countries. Realizing that traditional macro-economic policies—including fiscal, monetary, and, in some countries, incomes policies—had failed to foster noninflationary economic growth with full employment in the previous decade, they sought to strengthen economic performance over the medium term. Policymakers recognized not only that traditional macroeconomic policies needed a medium-term orientation but also that the way economies function had to be improved.

The longer-term orientation of policies highlighted productive capacity as critical to economic performance. It emphasized measures to raise the economy’s output potential and to increase the flexibility of factor and goods markets. This new emphasis called for less government intervention and less regulation of private markets.

Structural measures can be classified into two broad categories:

(1) Measures that eliminate inefficient use of resources and allow more rapid adjustment to technological innovations, changes in relative prices, or trade liberalization. Such measures remove rigidities impeding the mobility of resources—such as institutional or regulatory barriers to the mobility of labor—and eliminate price distortions.

(2) Measures that boost output potential by adding to productive resources (such as capital and labor) or by raising overall productivity. Promoting research and development, applying technical knowledge more effectively to production, and eliminating taxes that distort private saving and investment decisions are examples of these.

Policy changes are required that will reduce the large external imbalances among the industrial countries and support the current medium-term growth strategy. A policy mix relying more heavily on fiscal consolidation in deficit countries, on measures to promote growth of domestic demand greater than output growth in surplus countries, and on structural reform in all countries could help reduce external imbalances and sustain growth without inflation.

Capacity constraints in the major deficit countries limit the effectiveness of further exchange rate changes in the absence of changes in policies. While external adjustment may include further changes in real exchange rates over time, it is the Board’s view that such changes need to be accompanied by the implementation of appropriate fiscal and structural policies.

Developing Country Policies

The rapid growth of trade in 1988 has helped ease the debt problems of a number of developing countries—especially exporters of manufactures—but in many heavily indebted countries growth has slackened, debt-servicing burdens have become heavier, and inflation has risen. As already noted, these countries need to boost domestic savings, encourage investment, and reverse capital flight. Controlling inflation and reinforcing structural policies will promote the efficient use of resources.

The Board commended the considerable progress that a large number of developing countries achieved in 1988 with programs of structural and fiscal reform. Increasing Fund technical assistance in tax and expenditure policies, budgeting, and statistical services would help members implement comprehensive programs.

Beyond the requirement of more effective domestic policies, a favorable external environment is vital to the prospects of the developing countries. These countries can be harmed by policy adjustments and protectionism in industrial countries. Improving industrial policies and liberalizing trade policies would not only make industrial economies more competitive and their resource allocation more efficient, but would also expand marketing opportunities and allow a spillover of higher growth rates to the developing countries.

With sizable outstanding debt and high ratios of debt service to exports, developing countries also depend for growth on their relations with external creditors. Creditors should respond to determined economic and structural reform programs in these countries with appropriate and timely financial support, through rescheduling or reducing existing debt and providing new money on more concessional terms.

Policy Coordination

Intensified policy coordination among the major industrial countries in recent years is useful in an increasingly interdependent world, where countries—especially the major industrial countries—should take into account the international implications of their domestic policies. While still evolving, coordination has demonstrated its ability to improve the functioning of the global economy and the world monetary system.

By imparting a global perspective, the Fund is contributing to strengthened coordination. Existing practices, such as the contribution of the Managing Director to the Group of Seven’s coordination efforts, and the use of economic indicators by the Fund (see discussion of analytical issues, below), are bolstering coordination. The Board has stressed the need to promote trade liberalization. The Uruguay Round of multilateral trade negotiations offers a venue for multilateral cooperation in reducing tariff and non-tariff barriers to trade in goods and services. The Fund welcomes the satisfactory conclusion of the Round’s Mid-Term Review.

Coordination must be viewed as a mechanism for promoting sound macroeconomic and structural policies rather than a substitute for such policies. Although fiscal and structural policies are more difficult to make consistent than monetary policies, they are integral to effective coordination. The Interim Committee, at its April 1989 meeting, echoed this theme by stating that coordination provides an appropriate framework for the industrial countries to “develop an adequate mix of fiscal and monetary policies, supported by structural policies, in order to maintain noninflationary growth and reduce external imbalances.” In the Board’s view, coordination is most effective when it is continuous, rather than episodic; is set in a medium-term framework; pays due attention to fundamentals; and is broadly focused.

Monetary and Financial Systems

In discussing the international monetary system, the Board reaffirmed the Fund’s responsibility for keeping the system functioning well. It agreed that disciplined and coordinated policies were necessary for the successful operation of all exchange rate systems, from fixed to freely floating. The Board expressed doubts about the value of estimating equilibrium exchange rates; at the same time, it was wary about relying exclusively on market forces to determine exchange rates. In this connection, the Board commended the greater emphasis placed by country authorities on pursuing policies to promote exchange rate stability in recent years.

On the issue of international liquidity, the Board noted the increased depth and breadth of private capital markets. Nevertheless, Board members agreed that the monetary system will function more smoothly if attention is directed to provisions for promoting the appropriate supply of international liquidity. Since the SDR can contribute to this task, the Board discussed various ways to enhance its role as a monetary asset. (See discussion of international liquidity and the SDR, below.)

International capital markets were active in 1987–88, as capital flows were further liberalized. The integration of capital markets and the development of innovative financing instruments, however, pose new challenges for policymakers.

The Board broadly supports the European Community goal of a single market by 1992, and particularly the integration of financial markets. At a February 1989 meeting it underlined the need to take adequate account of the impact that the single market could have on trade and financial flows between the European Community and the rest of the world. Some concern was expressed about how open and nondiscriminatory the single market would be. The Board welcomed assurances that far from envisioning a rise in the average level of external protection, the single market program had the indisputable aim of furthering both internal and external trade liberalization. The European Monetary System has maintained fixed but adjustable exchange rates between its members; the Board commended the establishment of a zone of monetary stability in the EMS.

Analytical Issues in Surveillance

Economic Indicators

In its surveillance activities (both Article IV consultations and the World Economic Outlook exercise), the Fund examines a wide range of economic variables. Among the numerous indicators that are monitored and analyzed are GNP growth rates, inflation, unemployment rates, fiscal and monetary trends, external debt developments, structural indicators, trade and current account balances, capital flows, investment, savings, exchange rates, and reserves.

In order to oversee more effectively the policies of its member countries, the Fund has developed an analytical framework in which to assess these policies in a multilateral perspective and to support intensified economic policy coordination among the major industrial countries. To facilitate this process, the Fund staff prepares medium-term projections for a range of indicators that are being used as a basis for monitoring and reviewing the policies and performance of the large industrial countries. In addition, the Fund staff prepares, for discussion by the Board, medium-term scenarios to illustrate the effects of alternative policy assumptions and to help identify potential conflicts that may need to be addressed by policymakers.

Article IV consultations with the major industrial countries give considerable attention to analyzing the evolution of economic indicators. This analysis guides the appraisal of national policies and helps the multilateral assessments of policy interactions that are a part of the World Economic Outlook exercise. Indicators can also be useful in consultations with other countries. A common framework for making economic assessments must not be used, however, at the expense of an analysis tailored to each member country’s circumstances and directly relevant for the authorities’ concerns.

Box 5A Chronology of the Indicator Approach

• In the Tokyo economic declaration in May 1986, the heads of state or government of the seven major industrial countries ask their finance ministers to review their individual economic objectives and forecasts collectively at least once a year, using specified indicators, “to assess their mutual compatibility.” The indicators specified are GNP growth rates, inflation, interest rates, unemployment rates, ratios of fiscal deficits to GNP, current account and trade balances, money growth rates, reserves, and exchange rates. The summit declaration notes that the Fund’s Managing Director will participate in the review of indicators by the major industrial countries.

• The Interim Committee, meeting in September 1986, welcomes the agreement at the Tokyo summit to use indicators in conducting surveillance and their greater use in the latest World Economic Outlook analysis. The Committee emphasizes that indicators should focus on interactions among national economies, in particular on developments affecting the sustainability of balance of payments positions and on underlying policies. It asks the Board to develop further the application of indicators in the context both of consultations with members and the World Economic Outlook exercise.

• The Interim Committee’s April 1987 communiqué states 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 Committee asks the Board 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.

• At their June 1987 economic summit in Venice, the major industrial countries endorse the use of indicators in surveillance. The summit communiqué calls for strengthening, with the assistance of the Fund, the surveillance of the Group of Seven countries, using economic indicators, including exchange rates, to review and assess current trends and to determine “whether there are significant deviations from an intended course that require consideration of remedial actions.”

• At their June 1988 economic summit in Toronto, the major industrial countries commend the refinement of the analytical use of indicators and the addition of a commodity-price indicator. The Group of Seven agrees to review the progress on structural reforms and to strive to integrate them into the coordination process.

• The September 1988 Interim Committee session reaffirms the role of indicators in reinforcing economic policy coordination among the larger industrial countries; the Committee encourages the Board to explore the possibility of strengthening surveillance, both in the areas of economic indicators and—for the first time—structural policies.

• At its April 1989 meeting, the Interim Committee underscores the contribution of intensified economic policy coordination to the greater stability of exchange rates and to more consistent policy implementation. The Committee urges the Board to continue strengthening the analytical framework underlying multilateral surveillance, to examine the effects of structural measures, and to develop criteria for identifying desirable and sustainable policies in a medium-term perspective.

Developments in 1988/89

The Interim Committee continues to encourage the Board to refine the use of economic indicators to guide Fund surveillance. In September 1988, the Committee welcomed the closer policy coordination achieved among the industrial countries, partly crediting this to the use of economic indicators. The Committee encouraged the Board to explore the possible strengthening of surveillance, “both in the fields of economic indicators and in the area of structural policies,” in order to improve the appropriateness, consistency, and timely implementation of policies adopted by the industrial countries.

The Board considered the analytical aspects of surveillance at its March 1989 meeting on the World Economic Outlook. Board members were satisfied with the development of the analytical basis, but thought that further improvements might be possible through a better understanding of the interaction of the various indicators within individual economies and among countries; increased coverage of structural policies in Article IV consultations; and further development of medium-term scenarios. Later that month, the Board discussed the functioning of the international monetary system. At that session, the Board restated the need to continue strengthening policy coordination. It also commented on the role that “monitoring zones” for key economic indicators might play in helping implement stronger international policy coordination. It regarded such zones as a tool for judgmental analysis rather than an automatic trigger for policy responses.

Most recently, at its April 1989 meeting, the Interim Committee urged the Board to continue strengthening the analytical framework for multilateral surveillance; it asked the Board to examine the effects of structural measures adopted in member countries and to develop criteria for identifying which policies would be desirable and sustainable over the medium term.

Changing Scope of Indicators

The list of economic indicators, first specified in the 1986 Tokyo economic summit declaration (see box, above), has evolved gradually. The number of indicators currently used in the World Economic Outlook is somewhat smaller and more specific. It includes the following:

• growth of real GNP (or GDP)

• growth of real domestic demand

• GDP deflator

• general government financial balance

• current account balance

• gross private investment

• primary commodity prices

The broad indicator of commodity prices, which was first proposed by U.S. Treasury Secretary Baker at the September 1987 Annual Meeting, was discussed by the Board in January 1988 with a view to introducing a commodity price index as an indicator of future price developments. Since commodity prices often lead movements in consumer prices in industrial countries, it was thought that such an early warning signal might complement other indicators in providing timely information about shifts in global inflation. It was recognized, however, that, because consumer price inflation has been far less volatile than commodity price inflation, the stability of consumer prices may not necessarily require stability of commodity prices. While commodity price indices are now used as broad indicators of future consumer price developments in the industrial countries, work is continuing on their refinement.

At a February 1989 meeting to assess the role of structural policies in the industrial countries and the possible use of structural indicators, the Board concluded that the Fund should expand its surveillance to include structural policies, without deviating from its central macroeconomic focus. The Board acknowledged that the use of quantitative structural indicators had to be approached cautiously. It saw possible scope for experimentation with quantitative structural indicators in Article IV consultations, but not yet in the context of the World Economic Outlook exercise.

International Liquidity and the Role of the SDR

During the past year, the Executive Board has continued its discussions of the measurement of the adequacy of international reserves and liquidity and ways to invigorate the role of the SDR in the international monetary system, as enjoined by the Articles.

Adequacy of International Reserves

In considering the adequacy of international reserves and liquidity, the Board noted that the expansion of private international capital markets has made international liquidity a broader—and in many ways a more relevant—concept than international reserves. Most see these structural changes as rendering the level of reserves and the ratios of reserves to imports less meaningful for assessing the long-term global need for reserve supplementation, although there is also a strong sentiment that such indicators remain useful rules of thumb. Despite the growth and the breadth of private capital markets, efforts to improve the functioning of the international monetary system should pay adequate attention to the supply of international liquidity.

In view of limitations on using reserve-to-import ratios and difficulties in constructing quantitative measures of international liquidity, there is some support in the Board for placing greater reliance on a comprehensive, judgmental approach to assessing the long-term global need for reserve supplementation encompassed by quantitative and qualitative considerations. Opinions differ as to how far such an approach can be taken while remaining consistent with the provisions of the Articles.

Box 6Adequacy of Reserves and Liquidity

An adequate stock of reserves allows countries to avoid abrupt adjustments in economic policies in response to unanticipated disturbances that adversely affect their international payments positions.

The demand for reserves is influenced by a number of factors. These include the speed with which external imbalances respond to policy changes; the opportunity cost of holding reserves; the exchange rate regime; the size and nature of the domestic and external shocks to a country; and the extent to which a country has access to international capital markets. How readily this demand is satisfied at any particular time depends on the responsiveness of the supply of reserve assets.

The supply of reserves is affected by such factors as the monetary and fiscal policies of the reserve currency countries, the state of these countries’ balance of payments, and developments in international capital markets. The expansion of private international capital markets has greatly extended the capacity of national authorities to obtain reserves either by borrowing foreign currency directly or by issuing debt denominated in domestic currency and using the proceeds to purchase foreign exchange.

The adequacy of reserves can be appraised in a number of ways. In past discussions of the need for reserves, for both individual countries and the entire system, the ratio of reserves to imports and changes in this ratio were used as criteria. The rationale for doing so was that reserves are needed as adverse fluctuations in external payments relative to receipts and the size of reserve needs are likely to grow with the scale of international transactions. The value of merchandise imports may be too narrow a concept to measure reserve needs, however, and adverse fluctuations may also be related to payments for services, imports, and other nonmerchandise items, including debt-servicing payments.

An additional argument against relying on reserve-to-import ratios is that international reserves constitute only one element in a country’s more broadly defined international liquidity, which consists of the resources that the country has readily available for financing balance of payments deficits or intervening in foreign exchange markets to stabilize the value of its currency. Accordingly, measures of international liquidity typically include not only official international reserve assets, but also (1) assets held by private domestic residents that are close substitutes for official reserves, (2) external resources readily available from international organizations and national authorities, and (3) external resources readily available from private foreign sources.

Several different quantitative approaches might be contemplated for assessing the adequacy of international liquidity.

• The most direct approach would attempt to measure the liquidity available from private and official sources combined. On conceptual grounds, however, such a direct approach is subject to problems of aggregation, because it would mix conditional and unconditional resources, with different degrees of liquidity, as well as resources available over the short term and the long term.

• A second possible approach would be to assess the adequacy of international liquidity from data showing the extent to which countries have actually expanded their external borrowing. However, a contraction (or relatively small expansion) of external debt does not always indicate a liquidity problem and, conversely, a relatively large expansion of external debt may be caused by a severe liquidity problem.

• A third approach to assessing the adequacy of international liquidity would look for symptoms or indicators of inadequate liquidity, such as a widespread increase in import restrictions or a marked increase in forms of international transactions that do not require liquidity (for example, barter). One variant is to try to infer the adequacy of international liquidity from statistics on the volume of international trade and the pattern of real economic activity. Conceptually, the basis for this approach is the presumption that liquidity shortages give rise to import compression, but there are pitfalls to be avoided: imports may decline when liquidity is adequate, as in the case of economic recessions that are not themselves the result of liquidity shortages, and contractions of world trade may not be related to liquidity shortages.

Role of the SDR

Discussions have continued about the role that the SDR might play in stabilizing exchange markets, promoting growth-oriented adjustment, providing an anchor against inflation, and improving the efficiency and stability of the reserve system. Within the Board there is a range of views on how the SDR might better promote exchange market stability. This objective has been a prominent motive for strengthened economic policy coordination among the major industrial countries over the past three years. In this context, some feel that it would be desirable to enlarge the stock of owned reserves, or to expand the external resources that national authorities can readily obtain from sources other than private capital markets, or to promote off-market mechanisms for diversifying official reserve portfolios. Others, however, have expressed concern about the SDR as a source of unconditional liquidity, and the effects that SDR allocations could have on inflation and on adjustment incentives in developing countries.

There is some support in the Board for making existing SDRs more readily available in exchange for other currencies through voluntary operations. This support extends to expanding members’ authority to borrow or lend SDRs through voluntary operations; others consider that unlimited lending and borrowing operations could undermine the monetary character of the SDR. While sharing a desire for greater exchange market stability, some Directors feel that existing arrangements for financing official intervention are broadly adequate and that an SDR allocation for this purpose is neither necessary nor in accordance with the Articles.

The Board has noted that attempts to strengthen the role of the SDR in the international monetary system would be more successful if the SDR was made more attractive. Toward this end, there is some support for expanding the list of official holders and for encouraging greater official and private use of SDR-denominated assets. There has also been some interest in such mechanisms as a clearing house, SDR certificates that would allow wider use of SDRs, and substitution and asset-settlement schemes. The proposition that, in the long run, it is desirable to consider a system in which the central reserve asset is no individual country’s liability has received support as well. On the other hand, it has been argued that reserve diversification and more effective discipline over policies of reserve center countries could be better pursued by other means, such as enhanced multilateral surveillance and policy coordination among the major industrial countries.

The SDR system—and, in particular, further SDR allocations—could, according to some, play an important role in facilitating growth-oriented adjustment. This position is based on the view that some countries face uncertainties in private credit markets in obtaining borrowed resources; that increasing reserves through current account adjustment has unfavorable effects if achieved by unduly depressing imports and productive investment; that adequate international liquidity has a tendency to contribute to—rather than substitute for—effective adjustment; and, finally, that inadequate reserves could have an inhibiting effect on carrying out debt reduction techniques. Others, however, feel that current circumstances in indebted developing countries call primarily for conditional—rather than unconditional—liquidity and for a revival of long-term capital flows based on fundamental improvements in creditworthiness. They also emphasize that an SDR allocation might give rise to inappropriate forms of demand stimulus, especially now that capacity utilization is high in many countries.

In addressing how SDR allocations could be made without stimulating inflation, the idea has been broached of a two-stage process in which an individual country’s receipt of its allocation would be subject to Board surveillance, while the use of SDRs, once received, would remain unconditional. This approach, however, is regarded as inconsistent with the unconditional and “owned” character of the SDR. It would also require an amendment of the Articles.

The Board has considered the potential of the SDR to improve the efficiency and stability of the reserve system. The sharp differences in the terms under which reserves and liquidity have been made available to different countries, and even to the same countries over time, are seen by some Directors to offer a good reason for moving away from a system that relies heavily on borrowed reserves. Private financial markets are viewed as providing efficient and flexible means of adjusting reserves for countries with sufficient creditworthiness, but many developing countries have found it necessary since 1982 to acquire reserves at a much higher cost through current account adjustments. There is need for caution, however, in distinguishing an overall reserve shortage from a reserve shortage for individual countries or groups of countries. In this respect, there is some concern that an SDR allocation could reduce incentives for countries to undertake appropriate economic policies directed at restoring their access to international financing. Moreover, any prolonged net use of SDRs might counter the objective of having the SDR serve as a reserve asset.

2. External Debt Situation and Strategy

A number of indebted countries have made considerable progress since the debt crisis broke out seven years ago, but debt problems continue to hamper stable economic growth in many others. Attention has increasingly turned toward reinforcing the debt strategy to strengthen economic growth and expand debt-servicing capacity. The Fund adopted in May 1989 broad guidelines for its lending policies that could, on a case-by-case basis, facilitate a reduction in the volume of outstanding debt and debt-service payments. It will thus continue to play a pivotal role in the debt strategy, through its support for strong adjustment policies, and in addition may provide financial support for debt and debt-service reduction in the context of sustained adjustment policies. While the low-income countries have begun to benefit from official debt reduction, they cannot finance themselves on market terms and thus continue to require external assistance on concessional terms.

Almost seven years have passed since the debt crisis broke out. Throughout this period, the Fund has been active in designing and implementing the cooperative strategy for dealing with the debt problem. That strategy is based on a case-by-case approach with three basic elements: the pursuit of growth-oriented adjustment and structural reform in debtor countries; the provision of adequate financial support by official, multilateral, and private sources; and the maintenance of a favorable global economic environment. The ultimate objective of this strategy is a return to satisfactory economic growth and the restoration of spontaneous access to credit markets for debtor countries.

Since the debt problems emerged in 1982, the condition of many countries with debt-servicing difficulties has improved: external debts have been restructured, adjustment programs have been put in place, and external current account positions have been strengthened. In addition, official financing for the low-income countries has expanded in connection with Paris Club reschedulings. A major disruption to the global payments system has been avoided. Commercial banks have strengthened their capital and built reserves, placing them in a stronger position to contribute to a more rapid resolution of debt problems.

Despite these advances, the prospects for debtor countries are uncertain, and they remain highly vulnerable to adverse external developments. Adjustment has not been sufficiently strong and sustained in many debtor countries and has been made more difficult by terms of trade deterioration, continued protectionism, and renewed increases in international interest rates, as well as uncertainties regarding external financial support. Average external debt ratios declined in 1987 and 1988, but remain high for countries with debt-servicing problems.

Debt Reduction

In view of these mixed results and continuing uncertainties, the debt strategy needed to be strengthened in a way that would encourage debtor countries to implement policies that will promote their growth, lead to sustainable balance of payments positions, and enlarge their debt-servicing capacity while shielding them from exceptional unfavorable external factors. This would enable debtor countries to attract private capital flows and direct investment and help reverse capital flight. Stronger debt-servicing capacity might, in turn, induce commercial creditors to resume voluntary lending to debtor countries.

In some situations, improved incentives might help debtors struggling under onerous debt-service burdens and heavy outward transfers of financial resources to persevere with effective adjustment. A widespread recognition of this need has moved the debt strategy to a new phase that incorporates explicit consideration of debt and debt-service reduction.

At its April 1989 meeting, the Interim Committee reaffirmed the case-by-case approach to debt problems and the central importance to debtor countries of implementing growth-oriented reforms and improving the investment climate. The Committee emphasized that new financing from private and official sources—and re-flows of flight capital—depend on strong and sustained adjustment policies in debtor countries.

At the same time, the Interim Committee and the Development Committee welcomed the fact that new proposals had been made by several countries, including France, Japan, and, more recently, the United States, to strengthen the debt strategy and to emphasize greater reduction of debt and debt service. Voluntary debt reduction would complement new lending, cut back financing needs to more manageable levels, and reduce the stock of debt over time. The Fund continues to play a central role in the strengthened debt strategy, through its policy guidance and financial support.

Debt reduction operations have been developed in recent years and have broadened the menu of financial options to address the diverse needs of middle-income debtors and their creditors. These techniques include debt for equity swaps, debt buy backs, exit bonds, securitized new money claims, and fees to encourage early participation by banks in restructuring agreements.

Box 7Debt Proposals

French President François Mitterrand outlined a proposal prior to the Toronto economic summit in June 1988 and at the United Nations in September. He called for considerably easier debt repayment terms for the poorer countries. For the middle-income debtors, he favored a special SDR allocation to finance the creation of a guarantee fund managed by the IMF, to guarantee interest payments on commercial loans converted into bonds. The guarantee provided by this new fund would facilitate the negotiation of debt reduction schemes, and thus significantly lower the finance charges payable by debtors.

In the summer of 1988, Japan’s Minister of Finance put forward a proposal that could allow creditor banks to swap, for guaranteed bonds, part of the debt owed to them by debtor countries. The debtor would in turn deposit in an escrow account in the Fund an amount equivalent to the guarantee. The balance of the debt would be rescheduled.

On March 10, 1989, U.S. Treasury Secretary Nicholas F. Brady proposed steps to strengthen the debt strategy and to provide financial support for debtor countries’ efforts to reform their economies and achieve lasting growth. These proposals increased the emphasis on debt and debt-service reduction as a complement to new lending by commercial banks and stressed investment and flight capital repatriation as important sources of capital.

The key proposals included:

• adoption of sound economic policies, with stronger emphasis on measures to increase foreign and domestic investment and the repatriation of flight capital;

• timely support from the IMF and World Bank for countries’ reform programs, in part through financing for debt and debt-service reduction transactions; and

• active participation by commercial banks in providing financial support through the negotiation of debt and debt-service reduction and new lending, where needed.

In considering the debt problem in March 1989, the Board emphasized that sustained adjustment remains fundamental to debtor countries’ prospects of achieving growth and a return to voluntary lending. Strong adjustment is also likely to promote the return of flight capital, so easing financing problems. In this connection, the Board noted that too gradual a medium-term policy approach was not the best way. It also pointed to the need for debtor countries to signal their willingness to cooperate in the strategy by creating a hospitable environment for foreign direct investment.

Quite apart from policy measures that debtor countries need to adopt, the Board also discussed, in November 1988, the scope for financial risk management by these countries to protect themselves—and their adjustment and development objectives—against volatile interest rates, commodity prices, and major currency exchange rates. The Board concluded that there was scope, in individual cases, for using more market-related hedging instruments—such as financial options and futures—especially if these markets continue to expand. However, the benefit of hedging operations needs to be assessed carefully.

The Interim Committee cited the need to act quickly in carrying out debt reduction plans for countries embarked on strong adjustment programs. The Committee welcomed Japan’s offer to extend additional financing to indebted countries in parallel with Fund arrangements and within the framework of the strengthened debt strategy. It also considered it important that the World Bank play its commensurate role in the debt strategy and that the Fund and Bank collaborate closely on these issues.

The Interim Committee also encouraged creditor governments to review the extent to which their tax, regulatory, and accounting systems might discourage the participation of commercial banks in such operations.

The Interim Committee underlined the Fund’s important role in the debt strategy; this role entails policy advice and the provision of financial assistance that will attract (or “catalyze”) financing from other sources. It requested the Board to consider, as a matter of urgency, the issues and actions involved in the proposals. It directed the Fund to “provide resources in appropriate amounts to members to facilitate debt reduction operations for countries undertaking … sound economic reforms, by setting aside a portion of members’ purchases under Fund-supported arrangements.” While the Interim Committee approved the concept of debt reduction, it requested the Board to examine the question of provision of resources for limited interest support for transactions involving significant debt or debt-service reduction.

In May 1989, the Board discussed the issues concerning the Fund’s involvement in debt and debt-service reduction, as directed by the Interim Committee. It agreed on a set of guidelines for eligibility, the kinds of debt operations the Fund would support, the degree of access to Fund resources, and the Fund’s policy on financing assurances. (Similar guidelines were formulated by the World Bank shortly thereafter.) Directors emphasized that the guidelines are to be applied flexibly, on a case-by-case basis, and the policy is expected to evolve in light of experience. The Board will review debt reduction operations in a year’s time or earlier as needed.

The Board agreed that Fund support for debt reduction operations will be open to all members, subject to the following criteria:

• the sustained pursuit of strong economic policies, in the context of a medium-term program supported by the Fund, which includes strong elements of structural reform;

• the likelihood that such voluntary, market-based operations will help the country regain access to credit markets and achieve external payments viability with economic growth; and

• a determination that support for the reduction of debt and debt service represents an efficient use of scarce resources.

The Board agreed that a certain proportion of Fund resources committed under an extended or stand-by arrangement could be set aside to reduce the stock of debt through buy-backs or exchanges; while this percentage will be determined on a case-by-case basis, it would normally be around 25 percent. Drawings on the amounts set aside will be phased in line with the member’s performance under the adjustment program, although some front-loading may be permitted in certain cases.

The Fund would be prepared to approve additional access to its resources, in certain cases, provided that such support is decisive in promoting further cost-effective operations and in catalyzing (that is, mobilizing) other financial resources. Such additional access—up to 40 percent of the member’s quota—will be used for interest support, in connection with debt or debt-service reduction. Actual access will be determined case by case, in light of the magnitude of the member’s balance of payments problems, the strength of its adjustment program, and its efforts to contribute its own resources to support debt and debt-service reduction.

Fund resources in support of debt reduction will be disbursed only when the Fund-supported adjustment program is on track; if the Board is satisfied with the authorities’ description of the debt reduction plan agreed between the debtor and its commercial bank creditors; and on the understanding that the debt reduction operations are market based (or at market-related prices) and involve substantial discounts.

The Fund will review periodically the progress of individual debt reduction operations to ensure that a substantial reduction in debt or debt-service obligations is occurring, consistent with movement toward a sustainable balance of payments position for the debtor. At the same time, the Fund will not interfere directly in the negotiations between members and their bank creditors. The Board stressed the importance of close collaboration between the Fund and the World Bank in supporting effective debt reduction operations by member countries.

After the Fund’s approval of broad guidelines for its involvement in the revised debt strategy, the guidelines were applied in four initial cases:

Costa Rica. An SDR 42 million stand-by arrangement was approved on May 24, with 25 percent set aside for debt reduction and the possibility of additional Fund resources of up to 40 percent of Costa Rica’s quota for debt-service reduction.

Philippines. Also on May 24, the Fund approved an SDR 660.6 million extended arrangement, with another SDR 286.3 million to be made available under the compensatory and contingency financing facility. Again, 25 percent of resources approved under the extended arrangement were set aside for debt reduction, with the possibility of an additional sum, up to 40 percent of the Philippine quota, for debt-service reduction.

Mexico. The Fund approved SDR 2.8 billion under an extended arrangement on May 26, with SDR 453.5 million available under the compensatory and contingency financing facility. Thirty percent of the Fund resources available under the extended arrangement were to be set aside for debt reduction, with the possibility of an additional amount, up to 40 percent of the Mexican quota, to be made available for debt-service reduction.

Venezuela. On June 23, the Fund approved SDR 3.7 billion under an extended arrangement, with 25 percent to be set aside for debt reduction, and the possibility for additional resources, up to 40 percent of Venezuela’s quota, for debt-service reduction.

In addressing debt reduction, the Interim Committee has cautioned that due account must be taken of the Fund’s mandate and the need to preserve its financial integrity. The Board, in discussing the debt problem in March 1989, cited the need for assurance that sufficient Fund resources be available for general balance of payments support of adjustment programs—which remains the Fund’s principal financing role.

In May 1989, the Board discussed the financial impact of debt reduction operations on the Fund and agreed that such Fund support could be accommodated without harmful effects on the Fund’s liquidity position in the near term. It stressed, however, that Fund support for debt reduction needs to be taken into account in considering the need for a quota increase under the Ninth Review.

The Board also discussed the Fund’s policy of financing assurances, whose basic objectives are to ensure that adjustment programs are adequately financed; that financing helps return the country to a viable balance of payments position, enabling it to repay the Fund; that the burden of financing is shared equitably; and that orderly relations between the member country and its creditors are maintained or re-established.

The Board agreed to the following modifications of its policy on financing assurances in light of changes in the financial environment and the possibility that debtors may need more time to agree on financing packages with their creditors.

• The Fund may, on a case-by-case basis, approve an arrangement outright before the conclusion of an appropriate package is agreed between the member and commercial bank creditors if it is judged that prompt Fund support is essential for program implementation, that negotiations between the member and the banks have begun, and that it can be expected that a financing package consistent with external viability will be agreed within a reasonable period of time. Progress in the negotiations with bank creditors will be closely monitored. When circumstances warrant, the practice of seeking a critical mass, as well as the possibility of approving an arrangement in principle, will continue to be followed.

• In promoting orderly financial relations, every effort will be made to avoid arrears, which could not be condoned or anticipated by the Fund in the design of programs. Nevertheless, an accumulation of arrears to banks may have to be tolerated where negotiations continue and the country’s financing situation does not allow them to be avoided. The Fund’s policy of nontoleration of arrears to official creditors remains unchanged.

The Interim Committee emphasized that official creditors must not substitute for private lenders and that any Fund participation in debt alleviation requires strong financial support—including new money—from commercial banks. The Board has stressed, in the same vein, that the shift in emphasis toward debt reduction must not be an excuse for banks to delay their financial support. Debt reduction can help reduce new financing needs but cannot replace the need for strong adjustment programs. Adequate and timely bank support remains critical for countries undertaking adjustment efforts.

Box 8Debt Reduction Mechanisms


Debt buy-backs permit countries to repurchase their debt at a discount for cash. When negotiated directly with the debtor country, buy-backs normally require waivers from creditor banks of certain provisions in loan or restructuring agreements. Either the country’s international reserves or foreign exchange donated or borrowed from official or private sources may be used for such operations. Banks have approved the use of this technique in three recent cases:

• The Bolivian buy-back scheme went into operation in 1988. By early 1989, about half the outstanding principal owed to commercial banks had been retired or converted into collateralized bonds under this scheme. The Fund, through the establishment of a voluntary contribution account, administered the receipt and disbursement of donations made for the purpose of the buy-back.

• In Mexico, more than $5 billion of private sector debt covered by the Foreign Exchange Risk Coverage Trust Fund was bought back during 1987–88.

Chile and its commercial bank creditors agreed in 1988 to amend the existing rescheduling agreement to allow for direct buy-backs (or debt exchanges) by the Government. Chile could use up to $500 million for these operations to buy back or extinguish up to $2 billion of old debt. In November 1988, $299 million of old debt was bought back for $168 million.


Debt-equity conversion schemes have been established in many countries (Argentina, Brazil, Chile, Costa Rica, Mexico, the Philippines, Uruguay. Venezuela, and Yugoslavia) normally in the context of bank restructuring agreements. During 1984–88, an estimated S16.5 billion in bank debt was converted under officially recognized schemes, equivalent to almost 5 percent of outstanding bank debt of these countries. Under these schemes, foreign banks may swap their loan claims for an equity investment, while foreign nonbanks may purchase loan claims at a discount in the secondary market to finance direct investment or purchases of domestic financial assets. In some cases, resident nationals of the country may also purchase bank loan claims, employing their own external assets (including flight capital) in order to convert them into domestic assets (such as privatized public entities).

Debt for export swaps have been arranged by a few countries. Normally, an importer buys bank debt of the country he wants to import from in the secondary market at a discount, redeems the debt at a rate closer to its face value with the debtor’s central bank, and uses the local currency proceeds to pay the exporter.

Debt for nature swaps have been arranged between environmental organizations, including government agencies, and a growing number of developing countries, although the amounts swapped remain small. In essence, bank debt is bought in the secondary market at a discount and either donated directly to the debtor country’s government in exchange for policy commitments concerning the environment (for example, to protect rain forests) or exchanged for domestic currency to be used for environmental protection.


Debt exchanges involve the exchange of existing debt instruments for new debt instruments denominated in domestic or foreign currency. The terms of the two claims will normally differ substantially. For example, the face value of the new claim may reflect a discount from the face value of the old claim; or the face value may remain unchanged while the contractual interest rate on the new claim is lower than on the old claim. The value of new claims may be enhanced, for example, through collateralization of principal or interest.

• In early 1988, Mexico completed an exchange of $3.7 billion of public sector medium-term bank debt for $2.6 billion in new bonds.

Exit bonds have been introduced in a number of restructuring agreements between commercial banks and debtor countries. They are issued by a debtor government or central bank to a creditor bank in place of a bank credit, generally exempting the bank from future requests for new money and restructuring. Interest rates on these bonds are below market, so a bank that decides to take up exit bonds instead of participating in a concerted lending package contributes to the debtor country’s financing needs by accepting lower interest payments.

At its April 1989 meeting, the Interim Committee also noted that the Fund’s role in the evolving debt strategy was another factor to be taken into account by the Executive Board in its work on the Ninth General Review of Quotas; this work is to be completed with a view to a decision by the Board of Governors before December 31, 1989.

Enhanced Surveillance

Despite somewhat limited experience, enhanced surveillance has facilitated debtor-creditor relations. Enhanced surveillance is a procedure for monitoring economic developments in a country for which support under a Fund arrangement is not envisaged. It is undertaken under the following conditions: at the request of a member; where a good record of adjustment has been shown; where a multiyear restructuring agreement is needed to normalize market relations and facilitate a return to voluntary or spontaneous financing; and where the member is in a position to present an adequate quantified policy program in the framework of consultations with the Fund staff, which are part of the procedure of enhanced surveillance. In the few instances where enhanced surveillance has been applied, it has helped in negotiating early multiyear restructuring agreements and has thus fostered a cooperative approach to the debt strategy.

In February 1989, the Board reaffirmed the usefulness of enhanced surveillance, but noted that experience with it has been mixed. The Board expressed concern about the limited degree to which current procedures permitted the Fund and creditors to influence member countries to adopt strong adjustment policies conducive to a viable balance of payments. The Board thus intends to exercise considerable caution in examining any future request for enhanced surveillance.

Low-Income Countries

The indebted low-income countries—whose creditors tend mainly to be official entities—have seen their financial positions improve a little, owing to some relief provided on a bilateral basis. The Interim Committee welcomed the rapid implementation of the agreement on Paris Club reschedulings, reached at the 1988 Berlin Annual Meetings, to provide additional assistance on concessional terms to the poorest countries. It also recommended that additional concessional resources be made available through the Fund’s structural adjustment facility (SAF) and the enhanced structural adjustment facility (ESAF), and the expansion of the World Bank’s lending capacity. It noted that particular problems remain for those countries that are not benefiting from access to exceptional debt relief, yet cannot afford to finance themselves on market terms. The Committee discussed, in this connection, the policy framework paper process—whereby low-income countries seeking to use the Fund’s SAF and ESAF develop with the Fund and the World Bank a policy framework for three-year, growth-oriented, adjustment programs. It recommended that this mechanism be used to improve the coordination of policy advice and to mobilize additional external assistance in support of adjustment programs in such low-income countries.

The Interim Committee urged eligible countries, donors, and international institutions to seize the opportunity offered by the ESAF and rapidly conclude related arrangements to assist low-income countries. It also pressed Fund creditor members to see that their full contributions were made available to the ESAF Trust and emphasized the importance of additional subsidy contributions to the Trust.

3. Trade Policy Issues

Protectionist pressures persist. Trade restrictions harm domestic prosperity and impede needed adjustments in the industrial, as well as the developing, countries. Trade liberalization is crucial for improving domestic economic efficiency, and bringing about a healthier global economic environment. The Fund supports efforts under way in the GATT Uruguay Round of multilateral trade negotiations to reduce barriers to trade, and, in its own surveillance activities, urges its members to adopt more liberal trade policies.

Trade policy issues are important to Fund surveillance; they are addressed in the World Economic Outlook exercise, Article IV consultations with individual countries, and Fund-supported adjustment programs. In keeping with its mandate to facilitate a balanced growth of international trade, the Fund encourages multilateral trade liberalization. It sees this liberalization as vital to steady global economic growth and to the success of the adjustment programs that it supports.

In its review of trade policy issues and developments, the Board reaffirmed the importance of trade liberalization, for both the industrial and the developing countries. The Board remains especially concerned about the increased resort by industrial countries to restrictive trade, industrial, and agricultural policy measures. Given the size of the industrial economies and the vast markets they represent, trade measures of industrial countries have important repercussions for the rest of the world. Indeed, in the absence of open markets and higher growth rates in the industrial world, structural adjustments undertaken by the developing countries are unlikely to yield their intended benefits.

At their September 1988 meetings, and again at their April 1989 meetings, the Interim and Development Committees underscored the urgency of resisting new trade restrictions and of rolling back existing restrictions, in keeping with political commitments made under the Uruguay Round.


Despite renewed growth in the volume of world trade, protectionist pressures have remained strong in the industrial countries, and some countries have increased trade restrictions. Protectionist pressures stem from rigidities in the structures of many economies—particularly in labor markets—and from the persistence of large macroeconomic imbalances among the major industrial countries. Nontariff barriers to trade—that is, restrictions other than tariff duties, such as quotas, health and customs clearance procedures, and advertising restrictions—also give cause for concern. Such measures obscure the “transparency” (or visibility) of world trading arrangements since they are not always publicized and have an impact on trade that is often indirect and difficult to measure. For example, “voluntary” export restraint agreements—bilaterally agreed measures to restrict export volumes—tend to penalize more efficient suppliers and contravene the rule of nondiscrimination espoused by both the General Agreement on Tariffs and Trade (GATT) and the Fund. The increased use of “process,” or “administrative,” protection is also worrisome. This is the aggressive or unjustified use of measures such as antidumping and countervailing duties to counter “unfair” trade practices. Unilateral actions by some countries cause concern because of their potential to increase retaliation and counter-retaliation. Many developing countries use nontariff barriers extensively, and while progress is being made in reducing these barriers, their economies would benefit from more intensive efforts toward greater trade liberalization.

The Board gives high priority to the role of structural reform in both industrial and developing countries in promoting freer trade. Current industrial and agricultural support policies of the major industrial countries distort resource allocation, impose a high cost on taxpayers and consumers in the industrial countries and hinder their macroeconomic—and notably their fiscal—performance; at the same time, they have a net negative impact on developing countries. Outward-looking policies, including industrial policies, in the developed countries—whether undertaken by the group or unilaterally—would not only increase output and improve internal resource allocation, but would also promote global adjustment and support efforts to resolve the external debt problems of developing countries. These countries would benefit considerably from more assured access to the export markets of the industrial countries and from higher growth rates in these economies. The Fund therefore encourages industrial countries to adopt structural policies aimed at reducing large domestic and external imbalances and excess capacity in certain sectors, such as steel, textile and clothing, and especially agriculture. In none of these sectors is increased resort to managed trade, particularly by voluntary export restraints, an appropriate response. Although the recent decline in the provision of subsidies to specific manufacturing sectors by the industrial countries is promising, the Fund is concerned that growing reliance on general subsidies and restrictive nontariff border measures may have at least partly offset some of the benefits. Also, both “tariff peaks” and escalating increases in tariffs in industrial countries tend to be concentrated in products and industries of interest to developing countries.

For their part, the developing countries need to pursue with vigor outward-oriented policies and to open their markets to the fullest extent possible—so as to ease their own structural adjustment. The timing and sequencing of these measures are important to the success of adjustment. A number of countries have made determined strides toward trade liberalization in the context of structural adjustment programs, but progress in other countries is slow. The considerable successes of the newly industrializing economies are encouraging. The Fund is hopeful that these economies will increase their role in trade liberalization and assist international adjustment.

Prospects for Liberalization

The Uruguay Round of multilateral trade negotiations, launched at Punta del Este in September 1986, represents an opportunity to strengthen the international trading system. Because of the increased complexity of the issues in the negotiations, however, the prospect of an early, significant reduction in trade barriers appears remote. At the same time, the Fund has stressed the need for early action to stem protectionism and to reduce external macroeconomic imbalances. Action by the industrial countries in reforming their agricultural policies, for example, would promote structural adjustment in the developing countries and ease their debt burdens. While the Fund recognizes the problems associated with structural adjustment in the agricultural sector, it urges early agreement on concrete steps to reduce recourse to trade subsidies and restrictions, which distort the allocation of a country’s resources and world trade. Although early action by the industrial countries is imperative—owing to their large impact on the world trading system—developing countries also need to act to remove restrictions on goods and services in a multilateral framework of trade liberalization.

In particular, the Uruguay Round aims to resolve longstanding problems in areas such as agriculture, textiles and clothing, safeguard measures, and trade restrictions adopted for balance of payments reasons, and to agree on multilateral rules in the “new areas” of services, trade-related investment measures, and trade-related aspects of intellectual property rights. Some positive results were achieved at the Mid-Term Review of the Uruguay Round, which was begun in Montreal in December 1988 and completed in Geneva in April 1989. These included agreements on procedural issues in all negotiating groups and comprehensive guidelines for the negotiation of a framework regarding the progressive liberalization of trade in services. The Review also requires industrial countries to impose a short-term freeze on domestic and export support and protection levels in the agricultural sector. The long-term objective is “to provide for substantial progressive reductions in agricultural support and protection sustained over an agreed period of time.” Other results of the Review include the establishment of a trade surveillance mechanism for individual GATT members and agreement on concrete liberalization measures by industrial countries in the area of tropical products.

Some developing countries were disappointed that the decision on textiles and clothing did not accommodate their expectation for a freeze on restrictions against the exports of developing countries.

The plans for liberalizing the internal European Community market by 1992 and the recently concluded free trade agreement between the United States and Canada have profound implications for global trade. The Fund considers it important that regional and bilateral trade arrangements contribute to a more liberal multilateral trading system and take into account the interests of countries not directly party to such arrangements.

Role of the Fund

The increased importance of trade policies for the world economy means that trade issues must be addressed in both international and national settings. With respect to international surveillance, ways to strengthen the role of the GATT are being explored in the Uruguay Round. While the GATT has primary competence in the trade field, the Fund is actively cooperating with the GATT to help promote an open and nondiscriminatory trade system. The Fund sees the Uruguay Round as a means of tackling protectionism comprehensively and of helping to ensure that trade disputes are resolved in a nondiscriminatory manner. It thus intends to do all it can to ensure a successful Round.

As the Managing Director emphasized in his address, in December 1988, to the Ministerial Mid-Term Review of the Uruguay Round negotiations in Montreal, the Fund continues to provide financial support to member countries implementing trade-liberalization measures and is using all of its lending facilities—including the revitalized extended Fund facility, the ESAF, and the compensatory and contingency financing facility—to support trade liberalization as part of members’ comprehensive adjustment programs.

The Fund also stands ready to provide technical support where possible to the various Uruguay Round negotiating groups. It intends to explore ways in which it can cooperate with the GATT, the World Bank, and the Organization for Economic Cooperation and Development to measure more accurately the effects of trade-distorting measures.

On the domestic front, the Fund encourages its members to move toward greater transparency and accountability in their trade systems to allow a more objective assessment of the nature, costs, and benefits of trade policy measures in force. Increased domestic publicity about the costs of protectionist policies helps reduce domestic pressure for protectionism and musters support for multilateral liberalization.

In its own surveillance activities, the Fund emphasizes the complementarity of trade liberalization and macro-economic adjustment. It believes that strong protectionist pressures are likely to persist until policies that address their root causes are adopted. This calls for progress toward correcting fiscal, external, and structural imbalances through sustained efforts at economic policy coordination, which the Fund actively supports. The Fund continues to assist its members in adopting the appropriate macroeconomic and structural adjustment policies, including appropriate exchange rates, industrial policies, trade liberalization, and reduced reliance on subsidies, both in the context of its surveillance functions and in the design of Fund-supported adjustment programs.

The Fund’s periodic trade policy reviews enhance the transparency of trade policies of all its members and make it easier to assess individual country trade policies in the broader environment of global trade and finance. In an increasingly interdependent world, the Fund sees the objectives of durable growth, monetary stability, more manageable debt, and trade liberalization as complementary objectives.

4. Fund Support of Adjustment Programs

The Fund lends to countries in support of growth-oriented adjustment programs. As of the end of the last financial year, a total of 46 arrangements with the Fund were in effect. The Fund periodically reviews the policies and procedures that govern its financial assistance. In its most recent review, the Board emphasized the importance of appropriate program design and strong commitment by national authorities to the adjustment effort. To assist countries whose adjustment programs may be disrupted by external developments, in August 1988 the Fund established the compensatory and contingency financing facility. This combines the original functions of the compensatory financing facility, designed to stabilize export earnings and the cost of cereal imports, with a contingency element to protect adjustment programs from external shocks. In addressing the broad aspects of its assistance, the Fund is paying increased attention to the impact of adjustment programs on income distribution and on the poorer segments of society.


The Fund provides financial resources to members on certain conditions; these are designed to encourage appropriate economic adjustment and ensure that the use of Fund credit is temporary and otherwise consistent with the Fund’s purposes. Use of Fund credit is therefore closely linked to a member’s progress in implementing policies to reduce its balance of payments deficit to a manageable size while fostering economic growth, employment, and financial stability, and eliminating restrictions on international trade and payments.

The conditions governing the use of Fund credit evolve as warranted. The Board reviews the experience with programs supported by stand-by and extended arrangements, normally once every 12–18 months, to ensure that these conditions remain relevant and continue to promote timely repayments of Fund resources. About once a decade, the Board conducts a more comprehensive examination of conditionality. It completed the most recent of these in April 1988. The principal topics discussed and conclusions drawn were described in the 1988 Annual Report.

In concluding the April 1988 comprehensive examination, the Board decided that the conditionality guidelines adopted in 1979 had served the Fund and its membership well during the ensuing nine years and were sufficiently flexible to be consistent with the increased emphasis the Fund had placed on structural adjustment in recent years. Consequently, the 1979 guidelines were not changed, although the Board agreed that they should be reviewed as necessary in the light of experience. Subsequently, in a discussion of poverty issues in economic adjustment, the Board reiterated that questions of income distribution should not form part of Fund conditionality, though it was appropriate for the Fund to point out to member governments the implications that alternative policies might have for their low-income citizens.

In June 1989, the Board conducted a regular review of conditionality in the context of stand-by arrangements. (Since the Board had undertaken a comprehensive review of the extended Fund facility during the first half of 1988, reconsideration of the experience with extended arrangements was not considered necessary in 1989.) The Board considered case studies of nine members’ experiences with Fund-supported adjustment programs (see box), as well as the usual general—or cross-country—analysis of countries’ experiences.

The Board stressed the need for Fund-supported programs to incorporate strong financial and exchange rate policies in order to ensure macroeconomic stability, adding that programs should take into account the impact of exchange rate policy on a country’s fiscal position and inflation rate. Greater attention should be paid to fiscal adjustment, to ways of liberalizing interest rates or otherwise securing positive interest rates, and to specific structural adjustments.

Member countries’ adjustment problems could be assessed more efficiently if, in designing programs, the Fund sharpened the focus of its economic background studies and improved the quality of the data bases it used. The Board suggested that reducing the constraints on some countries’ structural reform efforts imposed by their limited administrative capacities also be considered; the Fund’s carrying out of thoughtful studies of members’ economic problems should not, however, lead to undue postponement of economic adjustment. The Board supported an increase in the Fund’s technical assistance to members, as well as closer collaboration with the World Bank and other development institutions, in support of adjustment programs. In particular, where complex and deep-seated structural problems exist, the Fund should promptly seek assistance from the World Bank in the design of structural policies.

Sustained effort in implementing adjustment programs is critical. The Board emphasized that members’ contingency policy planning, the appropriate accumulation of international reserves when there were favorable economic developments, and the compensatory and contingency financing facility could help keep programs on track despite external shocks. Experience has shown that successful implementation of adjustment programs requires a strong commitment on the part of the national authorities. The Board noted that in formulating programs, the Fund should continue to pay due regard to members’ social and political objectives, particularly the impact of policies on income distribution. At the same time, such considerations should not be allowed to weaken conditionality.

Fund monitoring of programs had generally been effective, the Board agreed, both in helping to maintain the revolving character of Fund resources and in assisting members to identify, at an early stage, corrective measures needed to keep their adjustment programs on track. Where appropriate, prior actions—specific policy measures to be implemented before an adjustment program formally begins—are needed to give adjustment programs a strong start. Clearly specified performance criteria and reviews of appropriate scope are also important in ensuring that progress is adequately monitored. Most Directors considered it essential to monitor structural reforms when these were regarded as crucial to the success of a program.

The Board agreed that when Fund support of debt and debt-service reduction is essential, adjustment programs should attach particular importance to policies aimed at reversing capital flight and attracting private capital inflows. Focusing on the fundamentals of macroeconomic and exchange rate adjustment is critical in achieving this goal. In addition, adjustment programs should emphasize structural reforms that improve incentives to save and enhance domestic investment by removing economic distortions.

Fund-Supported Programs

Unless an adjusting member country’s government fully supports a program, it is unlikely to succeed. If a member country is to obtain domestic support for its adjustment program, it must play the leading role in designing it and take into account the need to resume economic growth while protecting the poorest groups from the short-run impact of economic adjustment.

Furthermore, if economic adjustment programs are to succeed, they need to be adequately financed. The Fund provides important direct financial support to members in several ways. Stand-by arrangements (covering adjustment programs lasting one to two years) and extended arrangements (covering programs of three years, with a possible one-year extension) are the usual financing vehicles. Low-income countries may obtain assistance under SAF and ESAF arrangements covering three-year adjustment programs. During financial year 1988/89, the Fund approved 12 stand-by arrangements, 1 extended arrangement, 4 SAF arrangements, and 7 ESAF arrangements for members. When the financial year ended on April 30, 1989, a total of 14 standby arrangements, 2 extended arrangements, 23 SAF arrangements, and 7 ESAF arrangements were in effect.

Catalytic Role

In addition to providing direct financial assistance to its members, the Fund plays an important catalytic role—that is, it serves to generate additional financing in support of adjustment programs. The existence of a Fund arrangement is often seen as a “seal of approval,” assuring the international financial community that the member country has agreed to implement appropriate adjustment policies and that the Fund is helping to support these with its own resources. Thus assured, creditors frequently will provide additional financing, and official and commercial creditors will reschedule or refinance existing debts, in order to support the country’s adjustment efforts. In some cases, the existence of an arrangement between a debtor and the Fund has been a prerequisite for entry into force of the debt-rescheduling arrangement the country has negotiated.

Box 9Experience with Fund-Supported Adjustment Programs

A recent Fund study, based on nine countries that had made extensive use of Fund credit during the 1980s, produced interesting results regarding the formulation of adjustment programs and performance under them. The countries (Bangladesh, Chile, Egypt, Ghana, Mexico, Morocco, Philippines, Yugoslavia, and Zambia) represented different regions and economic structures and encompassed different approaches to adjustment—as well as varying degrees of success. The selection included some countries that had delayed seeking Fund support, to assess if this delay had created any adjustment problems. Overall, the selected countries accounted for 31 percent of total Fund lending during the period. The study analyzed the causes of payments difficulties and evaluated the design of the programs and their outcome in terms of progress toward attainment of balance of payments viability, with reasonable price stability and sustainable growth.


In the 1970s and early 1980s, spurred on by readily available external finance (at negative real interest rates), the sample countries generally pursued strongly expansionary, but ultimately unsustainable, policies. After 1982, they were beset by higher interest rates, slower export market growth, and a marked worsening of their terms of trade. These difficulties compounded domestic problems (including weak tax bases, excessive public expenditure, and deep-seated structural weaknesses), which easy access to financing had enabled to persist. Amid a general loss of confidence by creditor banks, commercial financing was abruptly cut back.

To achieve a steady rate of growth over the medium term, it was necessary to restore a viable balance of payments and price stability. Most of the countries made progress toward these goals. Despite considerable Fund support, however, they all failed to meet fully the objectives of the programs.

Factors Affecting Performance

The following domestic and external factors contribute to successful economic performance.

• A clearly specified policy package that addresses macroeconomic imbalances and is accompanied by a strong political commitment to reform.

• The general framework for program design includes requirements to: restrain domestic absorption (that is, domestic consumption, plus investment, plus imports); raise national savings to allow higher productive investment; and use resources more efficiently. Interrelated and mutually supportive policies are often required: macroeconomic policies, comprising both fiscal and monetary measures to correct underlying imbalances; exchange rate policies to improve competitiveness and strengthen the supply response of the economy; and structural measures, including interest rate and pricing policies, to increase domestic savings and promote efficient resource allocation and investment. Within this framework, adjustment programs must be tailored to the experience of each country.

Adequate external financing is critical, and since 1982 the Fund has worked with members to help them unlock financing from other sources.

• A favorable external environment—including positive terms of trade, buoyant markets, and lower interest rates—is important. Those countries that made relative progress benefited from favorable external conditions, while adverse developments caused serious difficulties.

Lessons of Experience

The record of the countries suggests that the general approach is appropriate. Beyond that, the study noted the following points with respect to program content:

• There is a close link between progress in fiscal adjustment and the achievement of program objectives, particularly regarding the balance of payments and inflation. In designing the fiscal program, the primary objective should be to raise the level of public sector savings available for the financing of public investment. However, revenue-raising measures should not penalize private savings, nor should expenditure-reducing measures result in reduced maintenance of the existing capital stock or lower living standards for the most vulnerable low-income social groups.

Monetary policy management (on the basis of program targets for credit expansion by the banking system or the central bank) is generally effective in contributing to balance of payments and inflation objectives. However, the experience of some of the countries raises a number of issues concerning the difficulty of managing credit policy during high inflation. Programs generally aim at achieving positive real interest rates to promote increases in, and efficient use of, personal savings. This objective is usually met when inflation is relatively low and stable; implementing a policy of interest rate liberalization is one way to ensure positive real interest rates.

Real exchange rate adjustments have a direct impact on competitiveness and can help the balance of payments when supported by the appropriate financial or wage policies.

• Producer and consumer pricing policies are important. Measures reducing distortions, sometimes in conjunction with exchange rate adjustment, help to ensure that resources are properly allocated. They also improve a country’s fiscal position.


Sustained implementation of policies is clearly linked with progress toward external viability. At the same time, it is more difficult for a country to carry out sustained adjustment in a changing world environment, since unanticipated external developments can directly affect its program.


The experience with monitoring progress under programs confirmed that comprehensive and well-defined performance criteria covering a sufficiently long period of policy planning (generally a fiscal year) are needed to keep track of developments, to trigger corrective action, if needed, and to provide safeguards for Fund resources. Regular program reviews can be useful, particularly in an uncertain policy environment. The growing emphasis on structural measures makes such reviews essential. There is a need to define understandings on crucial policies at the start of programs and to ensure an adequate phasing of borrowings under an arrangement.

The Fund’s contribution to the design, adoption, and support of members’ adjustment programs is crucial in generating the considerable financial assistance members need to sustain vigorous structural adjustment programs. This has been demonstrated by developments in the 1980s. Between 1982 and 1988, commercial banks provided about $44 billion in concerted lending to developing countries and restructured a substantial amount of debt; official creditors rescheduled close to $80 billion in principal and interest payments and also provided new credits.

The financing thus made available has enabled member countries to maintain their imports, investment, output, and employment at levels significantly higher than would have been possible without the Fund’s intervention. By effectively multiplying available resources and increasing the efficiency with which a member uses financial assistance to achieve structural adjustment, the Fund has facilitated members’ efforts to regain access to financial markets.

In the years ahead, the Fund’s catalytic role will be important for the purpose of attracting financing for debt reduction plans. The Fund may also have a role in setting up a trust or a similar account to channel these resources appropriately. At the same time, encouragement by the Fund of measures that would promote the repatriation of flight capital, as well as the enhancement of bilateral aid flows and the creation of a hospitable environment for foreign direct investment, could provide important additional support for adjustment programs.


The structural adjustment facility was set up in March 1986 to provide concessional financial assistance to low-income members facing serious balance of payments problems and needing to undertake programs of structural adjustment. Its resources, which consist of about SDR 2.7 billion in loans repaid to the Trust Fund, are lent at an annual interest rate of 0.5 percent. Repayments begin five and a half years, and end ten years, after the loan is made. Currently, 62 countries are eligible to borrow under the SAF. However, the two largest of these—China and India—have indicated that, since they do not expect to have acute or persistent balance of payments needs, they do not intend to use the facility. This has enlarged the amount likely to be available to other eligible members. Eligible countries may currently obtain a maximum of 70 percent of their quotas in three annual installments (tranches), each designed to support a one-year program and disbursed at the beginning of the program year.

The ESAF was established in December 1987 to provide additional assistance to low-income countries undertaking structural adjustment programs, and became operational in April 1988. Its financing is derived in part from SAF resources but mostly from special contributions in the form of loans (which are expected to total about SDR 6 billion) and grants (to help provide a concessional interest rate). (See Section 6, below.) The maturity of ESAF loans is identical to that of SAF loans; the interest rate is also currently the same as that under the SAF (0.5 percent a year) and is reviewed periodically by the Board. Access under the ESAF is considerably larger; it is normally expected to average about 150 percent of quota over a three-year program period, with provision for up to 350 percent in exceptional circumstances. The same 62 members eligible for SAF loans may borrow under the ESAF. The amount an eligible member can borrow under the ESAF varies according to the strength of its adjustment effort and the size of its balance of payments need.

Under both the SAF and the ESAF, a three-year policy framework paper is prepared annually by the member country’s authorities, in close cooperation with the staffs of the Fund and the World Bank.

In a March 1989 review of experience with the SAF and the ESAF, the Board agreed that the broad objectives originally set out for adjustment programs supported by SAF and ESAF arrangements remained appropriate. It expressed concern that the record of SAF-supported adjustment programs had been mixed and urged that the involvement of member countries’ authorities in program design be intensified. At the same time, the Board stressed the importance of allowing sufficient time for political consensus to be reached in borrowing countries. Directors emphasized that programs should be strong and realistic, taking each member’s administrative capacity—that is, its ability to execute policies and policy changes—into account and allowing for the provision of technical assistance by the Fund as needed. They added that each request for a SAF or an ESAF loan should include an explicit analysis of the country’s capacity to repay the Fund, with safeguards built into the adjustment program to prevent the emergence of arrears to the Fund.

The Board expressed the view that the monitoring techniques being used for SAF and ESAF arrangements were appropriate. It suggested that benchmarks (policy targets) be limited to a few key variables and be specified as precisely as possible. Most Directors agreed that prior actions—policy measures to be implemented before an arrangement is begun, or disbursements are made—were appropriate under both facilities, especially in instances where a member had previously failed to implement adjustment measures as planned; some felt, however, that prior actions should be used only sparingly.

The Board agreed that in order to give eligible members more time to use ESAF resources, the original November 30, 1989 cutoff date for Fund approval of three-year ESAF arrangements should be changed to November 30, 1990. Directors noted that the various lenders to the ESAF Trust had informally indicated their willingness to modify their lending agreements accordingly. The Board also agreed to continue operating the SAF in parallel with the ESAF, raising potential third-year access under the SAF to 20 percent of quota from 13.5 percent of quota. In order to ensure equal treatment of members, Executive Directors decided that additional disbursements of 6.5 percent of quota would be considered for countries that had already received third-year loans under SAF arrangements at the lower level.

Box 10Policy Framework Papers

When a member country seeks to borrow Fund resources under a SAF or ESAF arrangement, the design of the required three-year adjustment program is outlined in a policy framework paper prepared by the member’s authorities with the assistance of the staffs of the Fund and the World Bank. This document discusses the country’s public investment program and financing requirements and outlines the likely social impacts of policy changes, along with steps that can be taken to cushion the poorest segments of the population. Potential creditor and donor members—that is, members who may provide external assistance in support of adjustment programs—may participate informally in the preparation of policy framework papers and rely on the completed papers in making their own financial assistance decisions. Each paper is reviewed by the Fund’s Executive Board and the Committee of the Whole of the Executive Board of the World Bank.

At a Board seminar on the policy framework paper and aid coordination held in May 1988, the two years of experience that had been gained with policy framework papers was widely viewed as having led to a substantial improvement in the quality of these papers, though the Board felt there was still room for improvement. Directors urged that the papers address key structural problems and be as specific as possible in the main policy areas, emphasizing the principal measures to be taken and including a clear timetable for implementation. Policy framework papers should clearly describe the prospective evolution of macroeconomic and balance of payments aggregates over a three-year period as envisaged by the country’s authorities and endorsed by the Fund and the World Bank.

The Board stressed that the member country should play the leading role in preparing the policy framework paper, so that the document would be an authentic expression of the country’s objectives and policies. It also emphasized the importance of achieving consensus within the member country’s government on the content of an adjustment program. In some cases additional time might be needed to permit full discussion of major issues before the policy framework paper was drafted. The Board suggested that the policy framework paper’s catalytic role in mobilizing external financing for adjustment programs be broadened. Directors thought that closer Fund staff contacts with potential donor countries could be helpful, specifying that such contacts should be informal, build on existing consultation arrangements, and be tailored to institutional arrangements within particular donor countries. At the same time, the Board agreed that donors should not play a formal role in negotiating or drafting policy framework papers.

The Board concluded that policy framework papers had fostered improved collaboration between the staffs of the Fund and the World Bank, and had led to the provision of more consistent policy advice and setting of priorities by the two Bretton Woods institutions. They added that the staffs of the Fund and Bank should each work within their respective areas of competence, which should help avoid cross-conditionality and unnecessary delays in negotiating adjustment programs.

Other Facilities

In addition to its general balance of payments assistance, the Fund has a number of special facilities designed to address needs arising from specific factors.

The first of these, established in 1963, was the compensatory financing facility, designed to help stabilize the earnings of countries exporting primary commodities. Countries experiencing, for reasons beyond their control, balance of payments difficulties because of temporary shortfalls in export earnings could borrow under this facility, provided they cooperated with the Fund to find solutions to their difficulties. In 1979 the facility was broadened to include receipts from tourism and worker remittances in calculating the export shortfall, and a further extension in 1981 allowed compensation for countries experiencing an excessive rise in the cost of specific cereal imports.

More recently, the changing global economic climate suggested that another expansion of this facility would be justified. Following an agreement reached by the Interim Committee during its spring 1988 meeting, the Fund established, on August 23, 1988, the compensatory and contingency financing facility (CCFF). This facility supersedes the compensatory financing facility, yet keeps its essential features. It adds a mechanism for contingency financing of member countries that have entered into adjustment programs supported by the Fund. Under the compensatory features that have been retained, the Fund continues to compensate member countries for levels of export earnings or cereal imports costs that deviate from medium-term trends. The contingency mechanism is activated only in conjunction with Fund-supported programs of adjustment. The Fund commits itself to provide additional financing to countries whose programs may be threatened by external disruptions that may cause economic variables to deviate from those paths originally forecast under the adjustment program. Contingency financing thus protects program countries from the disruptive effects on their current account caused by sudden movements in export earnings and import prices, by sharp declines in worker remittances and receipts from tourism, and by unexpected increases in international interest rates.

In January 1989, the Fund approved for Trinidad and Tobago, in association with a stand-by arrangement, the first loan (of SDR 42.5 million) under the compensatory and contingency financing facility to cover unanticipated deviations in export prices for crude oil and petroleum products, as well as a rise in interest rates on variable rate external debt.

A second special facility, designed to smooth out fluctuations in the prices of primary commodities and so reduce variations in the export earnings of participating countries, is the buffer stock financing facility, which was established in June 1969. Through this facility the Fund may finance members’ contributions to international schemes aimed at stabilizing commodity prices by building up buffer stocks. Although no loans under this facility are now outstanding, a recent discussion by the Board favored keeping the present limits on borrowing of 45 percent of quota, as this facility complements the CCFF. The last agreement to qualify for Fund support was the 1979 International Natural Rubber Agreement, which expired in October 1987. The 1987 International Natural Rubber Agreement is expected to come into effect during 1989, and the Fund may be asked to evaluate this agreement to determine its suitability for support under the buffer stock financing facility.

Box 11The Contingency Mechanism of the CCFF

The contingency element of this facility is available only when a country has in place a stand-by or extended arrangement with the Fund, or in association with an arrangement under the structural adjustment or enhanced structural adjustment facility, provided that the member accepts conditions similar to those attached to upper credit tranche arrangements. Contingency financing will not generally exceed 70 percent of the amount of the associated arrangement. Drawings are to be repurchased in 3–5 years.

A member using the CCFF may draw, under the compensatory mechanism, up to 40 percent of its quota for export shortfalls and 17 percent for the excess costs of cereal imports; under the contingency mechanism, it may also draw up to 40 percent to cover applicable external contingencies, as discussed above. In addition, the Fund will allow an optional drawing of up to 25 percent to supplement either the compensatory or the contingency element, at the choice of the member. Borrowing for all three elements at any one time is limited to 122 percent of quota.

Besides financing these special facilities, the Fund has, since 1960, provided emergency assistance to member countries to meet payments problems arising from sudden and unforeseen natural disasters, such as earthquakes, hurricanes, or droughts. During the financial year, the Board approved requests for emergency assistance from the Government of Bangladesh for SDR 71.8 million, to help it cope with massive flooding, and from the Government of Jamaica for SDR 36.4 million, to help it meet foreign exchange needs following a hurricane that struck the island in September 1988.

Fiscal Issues

In May 1988, the Board considered fiscal aspects of Fund-supported adjustment programs. During its discussion, it acknowledged that fiscal adjustments have wide-ranging effects on economies and on objectives pursued by national authorities. It stressed the importance of pursuing fiscal reform in the tax, expenditure, and public enterprise areas to achieve macroeconomic and external balance. Special care needs to be taken to define the context and content of fiscal adjustment measures. The Board recognized that there might be conflicts between some short-term requirements of adjustment—such as the need to curtail government expenditures sharply or to increase revenues—and medium-term structural reform and growth objectives. It suggested that in instances where such a conflict occurred, the ability of the member government to attract external financing would be a crucial determinant of whether it could relax short-term fiscal adjustment measures without jeopardizing the program’s prospects.

The Board agreed that structural fiscal policy issues should receive greater attention during the Article IV consultation process and that more analyses of these issues should be conducted not only for developing countries but also for industrial countries. It concluded that long-term structural measures were legitimate elements of short-term adjustment programs and that their inclusion did not necessitate a lengthening of the program period.

Poverty Issues

In a September 1988 discussion of a joint Fund-World Bank report on poverty issues in economic adjustment, the Board—meeting as a Committee of the Whole for the Development Committee—while agreeing that the essential role of the Fund remained the promotion of domestic and balance of payments adjustment in member countries, welcomed the increased attention being paid to the important impact of Fund-supported adjustment programs on income distribution and on the poorest population groups. The Board saw this concern as justified not only on moral grounds but also because it enhanced adjustment programs’ chances of success by minimizing public resistance to them.

The Board agreed that while the policy instruments—particularly the fiscal ones—used in a Fund-supported program had important effects on a country’s income distribution, adjustment did not necessarily lower the living standards of the poor. The sustained growth resulting from the successful implementation of an adjustment program could benefit all socioeconomic groups in a country. Nevertheless, Directors recognized that some poverty-stricken groups could be disadvantaged in the short run by increases in the prices of necessities, reductions in employment, and cutbacks in public services. They supported the occasional use of compensatory measures to cushion the impact of adjustment on these groups. Directors also noted that some policy measures undertaken during adjustment programs—such as increases in agricultural producer prices, currency devaluations, and price liberalizations—could directly benefit some low-income groups, especially the rural poor.

The Board recommended that the Fund staff conduct more research, policy studies, and in-house training programs on poverty and that it consider income distribution issues during annual consultations and program discussions with members. At the same time, Directors agreed that since, in the final analysis, it was the prerogative of member countries to make the social choices involved in adjustment, income distribution criteria should not become part of Fund conditionality. They also concluded that in addressing poverty issues, the Fund staff should make greater use of the expertise of the World Bank and other UN institutions, such as the United Nations Children’s Fund, the United Nations Development Program, and the International Labor Organization.

Technical Assistance and Training

Technical assistance continued to be an important part of the Fund’s services to its member countries during 1988/89 as members sought its advice on a wide range of subjects, from broad policy issues connected with stabilization policies and external debt management to specialized technical and legal matters. Much of the policy assistance is provided through the Fund’s consultation procedures with its members under Article IV or in connection with adjustment programs. This aspect of the Fund’s assistance has been expanded through the policy framework papers prepared in conjunction with the World Bank for lending under the SAF and the ESAF. Often, in helping a member to carry out a program, the Fund will use both the expert services of staff members from headquarters and the services of a staff member assigned to the country as resident representative. (Further information on the Fund’s technical assistance activities during the year under review is to be found in Appendix III.)

5. Fund-Bank Collaboration

Although their Articles of Agreement define different purposes and mandates for the Fund and the World Bank, cooperation between the two institutions has always been emphasized, reflecting the important links between macroeconomic management and economic development. The severe problems facing member countries in the 1970s and 1980s have led to greater overlap in the activities of the two institutions, with the Fund paying greater attention to structural reform and the Bank making structural and sectoral adjustment loans. Against this background, principles have been developed, and further elaborated during the past year, to promote closer collaboration between the institutions in assisting their member countries.

Broad Objective

The Fund and the World Bank were founded together at the Bretton Woods Conference in 1944. While the two institutions share the broad objective of promoting the economic prosperity of their member countries, their charters provide them with differing, albeit complementary, roles in pursuing this objective. Their founders clearly intended that the Fund and the Bank would help their members by pooling their specialized expertise and coordinating their policy advice and financial assistance. The two institutions have cooperated closely ever since.

The scope for such cooperation increased substantially in the 1970s and 1980s, as the efforts of the two institutions to address severe economic and financial imbalances of their members led to increasing overlap in their activities. The Fund placed greater emphasis on correcting structural imbalances and established three facilities to support broad programs of structural adjustment—the extended Fund facility in 1974, the structural adjustment facility in 1986, and the enhanced structural adjustment facility in 1987. Similarly, in 1979–80, the Bank began to extend structural loans in support of adjustment programs.

Fund-Bank collaboration in assisting member countries is founded on frequent contact between the two staffs. This interaction is characterized by openness tempered with a respect for the confidentiality between each institution and its members. The staff of each institution is expected to be aware of the concerns of the other and to adopt a consistent perspective on the economic situations, policies, and prospects of member countries.

Communication between the Fund and the Bank at headquarters includes a continuous exchange of information on each institution’s work program, proposed lending operations, diagnoses of members’ economic problems, and prospective positions in dealing with members or other international institutions. There are frequent meetings between the two senior staffs and managements; also, staff attend one another’s Executive Board meetings. Detailed procedures have been worked out for staff interaction in assisting member countries to prepare policy framework papers setting out their medium-term economic objectives and planned policy measures. Collaboration is also close on a range of administrative matters, including preparations for Annual Meetings and meetings of the Development Committee.

Cooperation in the field includes parallel or joint staff missions to member countries, as well as participation by the staff of each institution in missions of the other. Visiting staff members of one institution are normally in contact with staff members of the other in that member country. Discussions of policy framework papers with member governments take place in the context of joint or parallel missions. Moreover, during 1985–88, Bank staff participated directly in 46 Fund missions that did not involve policy framework papers; Fund staff participated in 78 Bank missions, and there were 8 joint missions.


Given the complex problems faced by their members and the separate mandates of the Fund and the Bank, differences of view may sometimes arise. The procedures governing Fund-Bank collaboration have been designed to improve policy advice to members by bringing to bear the different perspectives and expertise of the two institutions and by ensuring that any differences of view are resolved at an early stage. To facilitate this process, the two managements agreed in March 1989 to define better the responsibilities stemming from the Articles of each of the institutions and to build on previous agreements by adopting additional administrative and procedural steps. These were intended to strengthen the exchange of information on policy concerns, mission plans, and research; the conduct of policy framework paper discussions; collaborative analysis of debt strategy issues; cooperation in cases of overdue obligations to the institutions; contacts with other institutions; and the secondment of staff. Steps to enhance collaboration between the institutions in the context of the debt strategy were also included in a 1989 report of the Deputies of the Group of Ten.

6. The Fund’s Financial Operations and Policies

Commitments of Fund resources increased substantially during the year, although actual drawings declined. The policy of enlarged access was maintained. The Fund’s holdings of usable resources at the end of the financial year stood at SDR 42.9 billion, while available borrowed resources were SDR 3.3 billion. Overdue obligations to the Fund amounted to SDR 2.9 billion. The Fund’s liquidity position remained satisfactory, but prudent management will continue to be needed. The total of SDRs in circulation remained unchanged at SDR 21.4 billion. The Board of Governors has requested the Executive Board to complete its work on the Ninth General Review of Quotas with a view to a decision by the Governors before December 31, 1989.

Major Developments

The main feature of the Fund’s financial activity in the 1988/89 financial year was a substantial increase in commitments of Fund resources. Amounts approved under stand-by, extended Fund facility, structural adjustment facility, and enhanced structural adjustment facility arrangements rose by about 50 percent in the financial year to SDR 4.6 billion. The bulk of the 46 Fund arrangements in effect at the end of the financial year entailed relatively strict conditionality, corresponding to drawings in the upper credit tranches.

While commitments of Fund resources increased, actual purchases (drawings) in the General Department (other than reserve tranche purchases) declined from SDR 4.1 billion in 1987/88 to SDR 2.1 billion in 1988/89 (Table 1, above). The Fund’s concessional lending (under the SAF and the ESAF) increased from SDR 445 million in 1987/88 to SDR 554 million in 1988/89, reflecting the progress made by low-income member countries in adopting structural adjustment programs.

Table 1Selected Financial Activities, 1983–89(Amounts in millions of SDRs)
Financial Years Ended April 30
During period
Total disbursements10,25810,1646,0603,9413,3074,5622,682
Purchases by facility (General Resources Account)110,25810,1646,0603,9413,1684,1172,128
Credit tranches3,7034,1642,7682,8412,3252,3131,702
Buffer stock financing facility352102
Compensatory and contingency financing facility3,7401,1801,2486015931,544238
Extended Fund facility2,4634,7182,044498250260188
Loans under SAF/ESAF arrangements139445554
Special Disbursement Account resources139445380
ESAF Trust resources174
By region
Industrial countries54
Developing countries10,20410,1646,0603,9413,3074,5622,682
Middle East2557116
Western Hemisphere3,7854,2733,4011,9331,3112,6881,174
Repurchases and repayments1,4882,1233,0414,6876,7418,4636,705
Trust Fund loan repayments18111212413579528447
End of period
Total outstanding credit provided by Fund26,56334,60437,62236,87733,44329,54325,520
Of which:
General Resources Account23,59031,74234,97334,64031,64627,82923,700
Special Disbursement Account139584965
Administered Accounts
Trust Fund2,9732,8622,6502,2371,6581,129682
ESAF Trust174
Outstanding credit
Change during the year8,7708,0413,019−745−3,434−3,900−4,022
As percent of total quotas44394241373329
Number of countries (General Resources Account)85848379807673

Excluding reserve tranche purchases.

Including sales of currencies, which have the effect of repurchases.

Excluding reserve tranche purchases.

Including sales of currencies, which have the effect of repurchases.

Repurchases and repayments in 1988/89 were relatively large, at SDR 6.7 billion. This mirrored the very high levels of Fund lending during the early 1980s and included advance repurchases by a number of countries whose external positions had improved. Outstanding Fund credit (including Trust Fund and SAF and ESAF loans) declined from SDR 29.5 billion as of April 30, 1988, to SDR 25.5 billion as of April 30, 1989. In recent years, large repurchases by many members have significantly restored their access to Fund resources within existing limits.

During 1988/89, although many member countries continued to pursue appropriate adjustment policies, their financing needs were large in relation to their quotas. In view of these circumstances, several decisions were made to maintain the Fund’s ability to provide appropriate amounts of financing to its members.

• The Interim Committee, at its meeting in September 1988, agreed to recommend the continuation of the policy of enlarged access, which is financed by borrowed resources, and the maintenance of the limits on the use of Fund resources then in effect. Under the enlarged access policy, the limit on annual access under a standby or an extended arrangement continued to be 90 percent or 110 percent of quota; the cumulative access limit remained at 400 or 440 percent of quota, depending on the size and nature of the member’s balance of payments need and on the strength of its adjustment efforts.

• As discussed in Section 4, above, the Fund established the CCFF in August 1988 and set maximum access to this facility at 122 percent of quota, with sublimits of 40 percent each for compensatory financing of export shortfalls and for contingency financing, and 17 percent for financing of excesses in cereal import costs. An “optional” tranche of 25 percent of quota may be used to supplement any of the three elements of the CCFF.1

• In reviewing the SAF in March 1989 (see Section 4, above), the Fund agreed that the facility should continue to operate in parallel with the ESAF and raised potential maximum access under three-year SAF arrangements to 70 percent of quota from 63.5 percent. The Fund also reviewed the ESAF and decided to extend the period during which members could seek commitments under the facility for a further year (to November 30, 1990). Access under the ESAF, which on the average should be 150 percent of quota, is subject to a three-year limit of 250 percent of quota, which can, however, be exceeded in exceptional cases.

• The Fund’s holdings of usable ordinary resources, at SDR 42.9 billion as of April 30, 1989, remained at a near record level, while its stock of available borrowed resources had declined to SDR 3.3 billion. During 1988/89, members accounting for a relatively high proportion of Fund quotas continued to maintain sufficiently strong balance of payments and reserve positions to warrant the use of their currencies in Fund transactions. The Fund continued to manage its liquidity prudently to ensure that its resources are available to provide financial assistance to its members and to meet members’ calls on the Fund’s liquid liabilities.

Overdue obligations of members, comprising arrears to the General and SDR Departments and the Administered Accounts, rose during 1988/89 from SDR 2.0 billion to SDR 2.9 billion, of which SDR 2.8 billion was due from 11 members that were in arrears to the Fund by six months or more. While overdue obligations were still relatively small in relation to the Fund’s size and the volume of its financial activity, the increasing gravity of this problem gives rise to serious concerns. Consequently, the Fund continued to strengthen its policies and procedures to deal with the arrears situation, as is discussed more fully below.

• The Fund’s net income in 1988/89 amounted to SDR 54 million, about the same as in the previous financial year. It reflected the implementation of the Fund’s policy of adding to its reserves, while paying an appropriate rate of remuneration to creditor members and retaining a concessional element in the rate of charge paid by debtor members. The Fund added to its Special Contingent Account balances during 1988/89 (SDR 62.9 million) to strengthen the Fund’s financial position in the face of members’ overdue obligations.

• No new SDRs have been allocated since 1981; total SDRs in circulation remained unchanged at SDR 21.4 billion. The Fund’s own holdings of SDRs rose from SDR 0.77 billion at the end of 1987/88 to about SDR 0.98 billion at the end of 1988/89, because the inflow from charges and repayments was greater than the outflow. The volume of SDR transfers, however, declined in 1988/89 in step with the decline in purchases from the Fund.

• Discussions on an increase in Fund quotas under the Ninth General Review of Quotas that began in 1987 are continuing. The Interim Committee agreed in April 1989 that the size and distribution of any quota increase should take into account changes in the world economy and other factors. The Board of Governors has requested the Executive Board to complete its work on the Ninth General Review with a view to a decision by the Governors before the end of 1989.

Financial Operations, Fund Liquidity, and Borrowing

Stand-By and Extended Arrangements


Twelve new stand-by arrangements came into effect in 1988/89. Commitments of Fund resources under these arrangements, all to developing members, totaled SDR 3.0 billion. This compares with 14 arrangements for SDR 1.7 billion granted in the previous year. The largest commitments were to Brazil (SDR 1.1 billion); Nigeria (SDR 0.5 billion); and Hungary, Pakistan, and Yugoslavia (SDR 0.3 billion each). Two of the stand-by arrangements approved in 1988/89 involved borrowed resources and, as of April 30, 1989, undrawn balances under 14 stand-by arrangements amounted to SDR 1.9 billion. A commitment of SDR 42.5 million under the CCFF’s external contingency element was incorporated in the stand-by arrangement with Trinidad and Tobago, but had not been drawn by April 30, 1989.

One new extended arrangement for SDR 0.2 billion was approved for Tunisia in July 1988, and an arrangement for Ghana for SDR 0.25 billion approved during the previous year was replaced by an ESAF arrangement in November 1988. One other extended arrangement, approved for Chile in August 1985, remained in effect. At the end of April 1989, undrawn balances under the arrangements for Tunisia and Chile totaled SDR 0.24 billion.

The use of extended arrangements has been relatively limited in the last four years, after peaking in 1983/84. In June 1988, the Board concluded a review of the facility and agreed to enhance its effectiveness. In cases of strong programs of macroeconomic adjustment and structural reforms, more Fund resources would be made available within prevailing access limits. The Executive Board can also make use of the exceptional circumstances clause, where warranted. At the request of the member, the period of an extended arrangement may be lengthened from an initial three to four years, where appropriate. Drawings by members would be financed first with ordinary resources up to 140 percent of quota and would be expected to be at lower rates of charge and with longer maturities than purchases beyond this limit, which would be financed with borrowed resources. For extended arrangements, performance criteria and purchases could be phased at semiannual intervals, provided that appropriate monitoring of macroeconomic developments, normally in the form of quarterly benchmarks, would be ensured. The Fund will review the provisions of the facility in light of the guidelines on conditionality.

Commitments of Fund resources under stand-by and extended arrangements in 1988/89 ranged from 21 to 51 percent of quota annually, with an overall average of 44 percent. This compared with a range of 19–46 percent and an overall average access of 34 percent in 1987/88. The lower end of these ranges represents a few cases where payments problems required a protracted adjustment and where the Fund’s involvement was mainly catalytic in attracting lending from other sources.


While there was a substantial increase in commitments of resources by the Fund in 1988/89, purchases (drawings) under stand-by and extended arrangements and under the various facilities in the General Resources Account decreased during the year from SDR 4.1 billion in 1987/88 to SDR 2.1 billion in 1988/89.2 (Chart 8.) The bulk of these drawings was made by African and Latin American countries. The decline in purchases was due in part to the successful implementation of adjustment policies in the past, which helped to moderate demand for credit, and also to such factors as delays in new arrangements, slippages under existing arrangements, and the ineligibility of a number of members in arrears to the Fund to use its resources.

Chart 8General Resources: Purchases and Repurchases, Financial Years Ended April 30, 1978–89

(In billions of SDRs)

1 Purchases excluding reserve tranche.

Purchases under the compensatory element of the CCFF and its predecessor, the compensatory financing facility, were made by five members for a total of SDR 0.24 billion, compared with SDR 1.54 billion in 1987/88. Part of the decline in such purchases can be attributed to a lower level of export shortfalls recorded during the year. For the third consecutive year, no drawings were made under the decision related to cereal import costs.

As mentioned in Section 4 above, no drawings have been made under the buffer stock financing facility during the past five years, and no amounts were outstanding under this facility at the end of 1988/89.


Repurchases in the General Resources Account (repayments to the Fund) remained at a high level, amounting to SDR 6.3 billion in 1988/89, compared with SDR 7.9 billion in 1987/88. Almost half of these (SDR 2.7 billion) were made by a few countries, including Brazil, India, Korea, and Thailand, that had either been in strong external positions or had refrained until recently from using Fund credit. Indeed, repurchases amounting to SDR 0.6 billion were made ahead of schedule by four members either voluntarily or under the guidelines for early repurchase. The relatively heavy volume of repayments is a consequence of the high level of use of Fund credit in the General Resources Account in the first half of the 1980s (Chart 9) and is consistent with both the revolving character of Fund resources and the short-term to medium-term maturity of its balance of payments lending. It should be noted that a similar pattern of repurchases occurred in 1978/79, following a sizable expansion of Fund credit in 1974–76.

Chart 9Total Fund Credit Outstanding to Members (Including Trust Fund, SAF, and ESAF), Financial Years Ended April 30, 1978–89

(In billions of SDRs)

Fund Liquidity and Borrowing

The liquid resources of the Fund consist of usable currencies, SDRs, and borrowed resources. Usable currencies, the largest component of these resources, are those of members whose balance of payments and gross reserve positions are considered sufficiently strong to warrant their use in financing Fund operations and transactions. As of April 30, 1989, the Fund’s usable ordinary resources totaled SDR 42.9 billion, compared with SDR 41.0 billion a year earlier. The increase resulted from the inflow of repurchases in the General Resources Account, which was partially offset by the use of ordinary resources to repay SDR 0.8 billion of short-term Fund borrowing. Such use of ordinary resources to repay borrowing will eventually be reversed as repayments of drawings originally financed by borrowed resources are completed.

The Fund borrows from official sources to supplement its resources and to finance members’ purchases under the enlarged access policy. On April 30, 1989, available borrowed resources amounted to SDR 3.3 billion, comprising SDR 3.0 billion under the 1986 agreement with the Government of Japan and SDR 0.3 billion held in investment balances in the Borrowed Resources Suspense Accounts with the Bank for International Settlements pending use in purchases.3 During the financial year, available borrowed resources declined by SDR 2.0 billion because (1) the Fund used SDR 0.2 billion of borrowed resources, and (2) a balance of SDR 1.8 billion that had been available under the 1984 agreement with the Saudi Arabian Monetary Agency (SAMA) could no longer be drawn by the Fund after May 6, 1989. At the same time, the use of borrowed resources declined during 1988/89.

The Fund’s liquid liabilities declined to SDR 27.3 billion at April 30, 1989 from SDR 31.3 billion at April 30, 1988. These liabilities comprise reserve tranche positions, which declined by SDR 0.5 billion to SDR 21.7 billion, and loan claims on the Fund, which fell to SDR 5.6 billion from SDR 9.1 billion.


The Fund’s financial assistance to low-income members under the structural adjustment facility and the enhanced structural adjustment facility rose significantly in 1988/89.4 Commitments totaled SDR 2.5 billion as of April 30, 1989, up from SDR 1.4 billion a year earlier. A total of SDR 8.7 billion is expected to be made available under SAF and ESAF arrangements. Disbursements under the two facilities, taken together, amounted to SDR 554 million in 1988/89, compared with disbursements of SDR 445 million in the previous financial year.

Four SAF arrangements were approved during 1988/89, for a total of SDR 441 million, the largest being for Pakistan (SDR 382 million) and the rest for three African countries. This compared with commitments of SDR 1.0 billion in 1987/88 under SAF arrangements for 15 members, of which only 2 were not African countries. SDR 0.9 billion remained undrawn under 23 SAF arrangements as of April 30, 1989.

The first ESAF arrangements were approved in 1988/89. Commitments to seven members totaled SDR 0.95 billion, of which SDR 0.8 billion was for African countries and SDR 0.1 billion was for one Latin American country. SDR 0.7 billion remained undrawn under the arrangements as of April 30, 1989. Access approved thus far has ranged from 120 to 180 percent of quota, with a weighted average of 168 percent of quota.

Loan contributions to the ESAF Trust to date amount to about SDR 5.3 billion and subsidy contributions to about SDR 2.3 billion. Discussions are continuing with a number of contributors on the possibility of additional contributions. Loan agreements amounting to SDR 4.6 billion had entered into effect as of April 30, 1989. Some loan contributions are provided at market-related interest rates, while others bear concessional interest rates. Subsidy contributions to the ESAF take a variety of forms, including direct grants and grant elements of loans provided at concessional interest rates.

Information regarding loan contributions and subsidy contributions by donors to the ESAF Trust, including other details of their contributions, is to be found in Appendix II, Table II-12.

SDR Department

The overall level of activity in the SDR Department declined during 1988/89 from the peak level of 1987/88, but it was nonetheless higher than in any other year except 1983/84, when payments for quota increases absorbed about 29 percent of total SDR allocations. The decline in activity in 1988/89 reflected mainly a substantial decrease in transfers from the General Resources Account to participants as part of drawings and a sharp fall in transactions by agreement. Transfers from participants in repurchases and payment of charges also declined, but by small margins. Prescribed operations rose more than threefold, partly as a result of a large swap operation, the first to take place since such operations were prescribed in November 1979. Summary data on transfers of SDRs by participants, the General Resources Account, and other prescribed holders are presented in Table 2.

Table 2Transfers of SDRs, January 1, 1970-April 30, 1989(In millions of SDRs)
Annual Average, January 1, 1970-April 30, 1983Financial Years Ended April 30Total, January 1, 1970-April 30, 1989
Transfers among participants and prescribed holders
Transactions with designation
From own holdings3278998449275,016
From purchase of SDRs from Fund5072,3132,0551,3601,24998614,727
Transactions by agreement6373,1752,7062,6773,9257,3356,68634,997
Prescribed operations421,1941611116145401,6894,852
Fund-related operations172296334815
Net interest on SDRs1011883263133053013443,124
Transfers from participants to General Resources Account
Quota payments4256,19514115512,025
Interest received on General Resources Account holdings12314750631216281563,005
Transfers from General Resources Account to participants and prescribed holders
Repayments of Fund borrowings337871295331,0071,9991,7826,674
Interest on Fund borrowings in exchange for other members’ currencies362024467214045854903,330
Acquisitions to pay charges153309531,5507504022444,428
Acquisitions to make quota payments26341
Total transfers4,31622,66715,70315,63415,60419,86217,367164,378
General Resources Account holdings at end of period4,3356,4374,6162,7221,960770976976

SDRs may be held by Fund members (all of which are participants in the SDR Department), by the Fund’s General Resources Account, and by official entities prescribed by the Fund to hold SDRs. The number of institutions prescribed by the Fund as eligible to accept, hold, and use SDRs remained unchanged at 16 during 1988/89. Prescribed holders do not receive allocations but can acquire and use SDRs in transactions and operations with participants in the SDR Department and other prescribed holders under the same terms and conditions as participants.5

Total SDRs in circulation remained at SDR 21.4 billion. Holdings of SDRs by participants declined in 1988/89 to SDR 19.9 billion from SDR 20.6 billion. The Fund’s holdings of SDRs increased to SDR 0.98 billion from SDR 0.77 billion, and prescribed holders increased their holdings to SDR 546 million from SDR 61 million. In 1988/89, SDR holdings of developing countries as a group declined by more than 20 percent, while those of industrial countries remained virtually unchanged. (See Appendix Tables II-13 and II-14.)

There was no transaction with designation during the year, since all prospective uses of SDRs through the designation process were arranged through transactions by agreement with other participants. Transactions by agreement declined from SDR 7.34 billion in 1987/88 to SDR 6.69 billion in 1988/89, of which SDR 635 million involved prescribed holders. Participants acquired SDRs in transactions by agreement mainly to discharge obligations to the Fund, such as charges, which must be paid in SDRs, and repurchases, which may be made in SDRs. The decline in the amount of SDRs transferred in transactions by agreement from 1987/88 to 1988/89 reflected a decreased use of SDRs in repurchases, lower charges paid to the Fund, and a significant decline in transfers by the Fund in connection with purchases and operational payments. Nonetheless, the total amount of SDRs used in transactions by agreement was substantially higher than in any year prior to 1987/88.

The high volume of SDR use in transactions by agreement during the last two years was facilitated by two-way arrangements for voluntary SDR transactions. These arrangements permitted the Fund to effect potential purchases or sales of over SDR 1.2 billion in exchange for U.S. dollars, deutsche mark, French francs, pounds sterling, and Japanese yen. In 1988/89, one participant entered into such an arrangement, raising the number of these arrangements to nine. While maintaining the SDR holdings of participating members within the desired ranges, these arrangements have greatly facilitated the smooth functioning of the SDR system by avoiding recourse to the designation process and accommodating excess demand or supply created by other participants. Four other participants have standing arrangements with the Fund permitting it to sell SDRs on their behalf.

Almost half of all transfers of SDRs in 1988/89 took place between participants and the Fund. Receipts of SDRs by the General Resources Account in 1988/89 declined to SDR 4.26 billion from SDR 4.61 billion in 1987/88. Receipts consisted mainly of payments of charges on members’ use of Fund resources, which amounted to SDR 1.73 billion, and repurchases made in SDRs (at participants’ options), which amounted to SDR 2.47 billion. The proportion of total repurchases that was discharged in SDRs in 1988/89 was 39 percent.

Transfers from the General Resources Account to participants fell by 30 percent, to SDR 4.05 billion, in 1988/89. The total of SDRs used for interest payments and in repayments of Fund borrowings declined by 12 percent, to SDR 2.27 billion, in 1988/89. SDRs used in purchases decreased to SDR 0.62 billion from SDR 1.85 billion, while remuneration payments made in SDRs on members’ creditor positions in the Fund declined to SDR 0.89 billion from SDR 0.93 billion. The total of SDRs sold to members for currencies of other members declined to SDR 0.24 billion from SDR 0.40 billion.

Participants and prescribed holders made a number of other operational uses of SDRs in 1988/89. These consisted of a swap, settlement of financial obligations, and Fund-related transfers other than those involving the General Resources Account. During 1988/89, SDR 63.0 million was transferred by participants to one prescribed holder to settle financial obligations and SDR 91.5 million was transferred by the same prescribed holder to 5 participants. For the first time, a swap operation was carried out in SDRs; it involved a transfer of SDR 503 million that was renewed at maturity and converted to two swaps with different maturities.

SDRs are used in other operations involving SAF, ESAF, and Trust Fund loans, including their repayment and interest payments; payment of special charges on SAF and Trust Fund loans; and subsidy payments to members. In 1988/89, 11 SAF and ESAF loans totaling SDR 165.3 million were disbursed in SDRs. SDR repayments of Trust Fund loans amounted to SDR 56.8 million. Interest payments made in SDRs on SAF, ESAF, and Trust Fund loans, and payments of special charges on overdue obligations related to these loans, totaled about SDR 1.8 million. Supplementary financing facility subsidy payments made in SDRs during 1988/89 amounted to SDR 35 million and contributions to the ESAF Trust Subsidy Account amounted to SDR 75 million.

Overdue Financial Obligations

Overdue financial obligations to the Fund remain a serious problem. The total amount of overdue obligations at the end of the financial year was SDR 2.9 billion, while the amount of obligations overdue from members that were in arrears to the Fund by six months or more increased to SDR 2.8 billion on April 30, 1989 from SDR 1.9 billion on April 30, 1988. The number of members in arrears on obligations to the Fund by six months or more rose from 9 to 11. All these members were in arrears to the General Resources Account; six had arrears in the SDR Department; seven had arrears to the Trust Fund; and two were in arrears on interest payments on SAF loans. Unpaid charges due from these members (deferred charges)—which are excluded from the Fund’s current income—amounted to SDR 209 million in 1988/89, compared with SDR 170 million in 1987/88.

On May 6, 1988, Somalia was declared ineligible to use the general resources of the Fund, pursuant to Article XXVI, Section 2(a), in the light of its overdue obligations in the General Department. As of that date, Somalia had overdue obligations of SDR 23.8 million to the General Resources Account (with the longest overdue obligation having been outstanding for 10 months), SDR 0.8 million in the SDR Department (9 months), SDR 2.2 million to the Trust Fund (9 months), and SDR 0.02 million under SAF loans (4 months). Earlier declarations of ineligibility for Viet Nam January 15, 1985), Guyana (May 15, 1985), Liberia January 24, 1986), Sudan (February 3, 1986), Peru (August 15, 1986), Zambia (September 30, 1987), and Sierra Leone (April 25, 1988) remained in effect. These eight members accounted for 88 percent of total overdue obligations to the Fund as of April 30, 1989. Selected data on arrears to the Fund for 1985/86–1988/89 are shown in Table 3; additional data on members’ overdue obligations by type and duration are shown in Appendix II, Table II-16.

Table 3Arrears to the Fund of Members with Obligations Overdue by Six Months or More, 1986–89(Amounts in millions of SDRs)
Financial Years Ended April 30
Amount of overdue obligations489.01,186.31,945.22,801.5
Number of members88911
Of which:
General Department418.91,088.41,787.72,594.2
Number of members88911
SDR Department12.215.625.135.0
Number of members5466
Trust Fund57.982.3132.4172.3
Number of members6677
Number of ineligible members4578

Overdue financial obligations must be eliminated in order to ensure the financial integrity of the Fund and to preserve its effectiveness as a cooperative intergovernmental monetary institution. Responding to the continued increase in overdue obligations, the Board has made strenuous efforts to develop and implement a strategy for resolving members’ arrears problems. The strategy has three main elements: (1) prevention of new arrears; (2) intensified collaboration among the members concerned, the Fund, and other multilateral and official bilateral financial institutions to resolve existing cases of protracted arrears; and (3) remedial action to be taken if a country with protracted arrears fails to collaborate with the Fund. One important aspect of intensified collaboration is the provision of exceptional financial assistance by creditors and donors in support of efforts on the part of members to eliminate their arrears.

The Board pursued its work on the modalities of the cooperative strategy during 1988/89 and began to implement it in a number of cases. During the financial year, some members with protracted arrears made progress in designing and implementing strong programs of economic adjustment and structural reform. Policy framework papers, outlining medium-term economic objectives and policies as well as financing requirements, were formulated by two countries and were discussed by the Executive Boards of the Fund and the World Bank. The Fund and the World Bank also cooperated closely in organizing financial assistance for these members.

A “support group” of creditor and donor countries has been established for Guyana under the leadership of Canada, to help mobilize the external financial assistance necessary to clear Guyana’s arrears to the international financial institutions. The formation of other support groups is under active consideration. In the case of Guyana, after the conclusion of the financing arrangements by the support group, the Board endorsed a Fund-monitored program intended to strengthen Guyana’s domestic and external position and pave the way to normalizing its relations with all creditors.

The Board has also begun to implement remedial measures in the few cases in which members have not shown a willingness to cooperate with the Fund to resolve the problem of their overdue obligations. Every effort is being made to prevent the emergence of new cases of arrears—including improved assessments of members’ capacity to repay the Fund, stronger adjustment programs in cases where debt-servicing difficulties could arise, and assistance to members to establish arrangements to make timely payments to the Fund. The Fund is also working closely with the World Bank to develop mutually supportive approaches to arrears cases and to reinforce the two institutions’ status as preferred creditors. Given the importance of a quick resolution of any new arrears problem that may emerge, the Managing Director would consult with the Board at an early stage regarding immediate and direct communications with the Fund’s Governors on the matter.

Fund Income and Charges and Burden Sharing

Owing to the further increase in overdue obligations, the Board maintained the various measures taken in recent years to strengthen the Fund’s financial position. For financial year 1988/89, the target amount of additions to the Fund’s precautionary balances (reserves plus the Special Contingent Account) remained at 10 percent of accumulated reserves at the beginning of the year. The burden of overdue charges, reflected in the deferral of income, and the additions to the Special Contingent Account continued to be shared among debtor and creditor members through adjustments applied to the basic rates of charge and remuneration. For 1988/89, the rate of charge was accordingly increased by 95 basis points (to an adjusted rate of charge that averaged 7.38 percent), and the rate of remuneration was lowered by 90 basis points (to an adjusted rate of remuneration that averaged 6.15 percent). In December 1988, the Board reviewed the Special Contingent Account and discussed criteria that might be used in judging the adequacy of balances in this account and in deciding on their possible reduction.

Because of rising market interest rates and the consequent increase in the Fund’s operational cost, the basic rate of charge on the use of ordinary resources was raised to 7.38 percent, effective November 1, 1988, from the 5.5 percent that had been in effect since the beginning of the financial year. Net income for the financial year amounted to SDR 54 million, and this amount was added to the Fund’s reserves, which rose to SDR 1.31 billion on April 30, 1989 from SDR 1.26 billion on April 30, 1988, an increase of 4 percent. Total precautionary balances, which include amounts in the Special Contingent Account, reached SDR 1.46 billion at the end of 1988/89, an increase of 8.7 percent over a year earlier.

For financial year 1989/90, the Board decided to maintain existing target additions to precautionary balances of 5 percent of the Fund’s reserves at the beginning of the financial year each to the Special Contingent Account and to reserves and also to make up for the shortfall of SDR 20 million of net income in 1988/89 below the target amount. For the year, the basic rate of charge will be a proportion of the SDR interest rate in order to avoid sharp fluctuations in the rate of charge that might otherwise be necessary to achieve the target amount of net income. The proportion was set at 96.3 percent; it is to be reviewed at midyear.


As described in the 1988 Annual Report, the Board of Governors resolved to continue the Ninth General Review of Quotas and requested the Board to submit appropriate proposals on the Ninth Review not later than April 30, 1989. Accordingly, the Board continued its work on the Ninth Review, meeting six times during the financial year. While the Board agreed to retain the economic criteria and the formulas that were used for the Eighth General Review, it has not concluded its discussions on the role of the Fund in the 1990s and on such substantive issues as the size and distribution of an overall increase in quotas.

At its April 1989 meeting, the Interim Committee agreed that the size and distribution of any quota increase should take into account changes in the world economy since the last review of quotas as well as members’ relative positions in the world economy and the need to maintain a balance between different groups of countries, the Fund’s effectiveness in fulfilling its systemic responsibilities, including its role in the strengthened debt strategy, and reduce the Fund’s reliance on borrowing. The Interim Committee urged the Board to complete its work on the Ninth Review with a view to the Board of Governors taking a decision on this matter before the end of 1989. In light of this request, the Executive Board has submitted a report to the Board of Governors entitled “Increases in Quotas of Members—Ninth General Review,” dated April 27, 1989, and the Board of Governors has resolved to continue its review.


During financial year 1988/89, a committee of Executive Directors considered the membership application of the People’s Republic of Angola. A resolution approving the application was adopted by the Board of Governors, effective July 18, 1989.

The Fund retained the previous access limit, used under the compensatory financing facility, of 83 percent of quota for financing either export shortfalls or cereal import cost excesses (and a combined limit of 105 percent of quota) for members with balance of payments difficulties that do not extend beyond the effects of an export shortfall or excess costs of cereal imports.

Four members encashed SDR 413 million of their reserve tranche positions, compared with SDR 35 million of reserve tranche purchases by two members in 1987/88. Reserve tranche purchases represent use of members’ own reserves held in the Fund and therefore do not constitute use of Fund credit.

For a summary of the Fund’s borrowings from 1981 onward, see Annual Report, 1988, page 75. Under the agreement with the Government of Japan, the Fund may make drawings until March 31, 1991, although the period may be extended for up to two years if warranted in light of the Fund’s liquidity and borrowing requirements. In addition, the Fund may borrow up to SDR 17 billion under the General Arrangements to Borrow (GAB) and a further SDR 1.5 billion under a borrowing arrangement with the Saudi Arabian Monetary Agency (SAMA) in association with the General Arrangements, when supplementary resources are needed to forestall or to cope with an impairment of the international monetary system.

The establishment of the SAF, its financing from reflows of Trust Fund repayments to the Special Disbursement Account (SDA), and the terms of use for this facility were discussed in previous annual reports (Annual Report, 1986, pages 48-49 and 92-98, and Annual Report, 1987, pages 65-66). Total SDA resources available for disbursement are expected to be SDR 2.7 billion.

Prescribed holders of SDRs are the African Development Bank, African Development Fund, Andean Reserve Fund, Arab Monetary Fund, Asian Development Bank, Bank of Central African States, Bank for International Settlements, Central Bank of West African States, East African Development Bank, Eastern Caribbean Central Bank, International Bank for Reconstruction and Development, International Development Association, International Fund for Agricultural Development, Islamic Development Bank, Nordic Investment Bank, and Swiss National Bank.

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