The Fund in 1992/93

International Monetary Fund
Published Date:
January 1993
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Developments over the past year in the world economy, as well as in the international monetary system, have had important consequences for the Fund’s membership and the formulation of Fund policy. It has been a time of almost unprecedented changes in the international economy, which together constitute the most significant set of developments to have faced the Fund in recent years.

Foremost among these is the enlarged membership of the Fund, making it a near-universal institution. Other developments that have affected the work of the Fund include the number of members that are undergoing the difficult transition to market-oriented economies, including the states of the former Soviet Union; the record number of countries that are being assisted by the Fund in various ways with policy advice, technical assistance, and financial assistance; the number of countries that have taken steps to remove restrictions on payments and transfers for current international transactions and to open up their economies; and the major efforts in regional integration that are under way, such as economic and monetary union in the EC and other regional trade agreements (see section on Regional Trade Arrangements above).

Collectively these events have created far-reaching challenges and opportunities for the Fund in its role of overseeing the functioning of the international monetary system. In these circumstances, the Fund’s role has continued to evolve to enable it to respond in a constructive manner to the needs of the membership.

As the central institution in the international monetary system, the Fund provides a permanent forum for members to examine the economic policies of individual countries, as well as global economic developments. The Articles of Agreement provide that the Fund shall exercise “firm surveillance over the exchange rate policies of members” and adopt “specific principles for the guidance of all members with respect to those policies.” Surveillance involves analyzing all aspects of a country’s macroeconomic and related structural policies since these policies underpin a country’s exchange rate policy. The purpose of surveillance is twofold: to evaluate the appropriateness of a country’s existing policies and at the same time to encourage the country to adopt new policies that enhance the smooth functioning of the international monetary system. Thus, Fund surveillance integrates the bilateral aspects of surveillance, that is, analyzing the policies of individual countries, with multilateral surveillance, that is, examining the consequences of these policies for the operation of the global system as a whole.

The Fund implements surveillance through a variety of channels. The two principal means are, in a global context, the World Economic Outlook exercise and the consultations carried out with individual member countries, which are described later in this section. These are supported by regular monitoring of developments in exchange and financial markets. Apart from these reviews carried out by the Board, the Managing Director may participate in the deliberations of the Group of Seven major industrial countries. He addresses policies within and among these countries and also calls attention to the interaction of these countries’ policies internationally. This, in turn, helps support the efforts of the national authorities of the major industrial countries to consider the global implications of their domestic policies.

Biennial Review of Surveillance

The principles and procedures of Fund surveillance are described in a document “Surveillance Over Exchange Rate Policies,” which was approved by the Board in 1977 (see Annual Report, 1977, pages 107–109). This document establishes principles both for the conduct of members’ exchange rate policies and for the Fund’s surveillance over exchange rate policies. Members are enjoined to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members, to intervene in the exchange market if necessary to counter disorderly conditions, and to take into account in their intervention policies the interests of other members.

The principles governing the Fund’s responsibilities state that surveillance of exchange rate policies shall be adapted to the needs of international adjustment as they develop and that the Fund’s appraisal of a member’s exchange rate policies shall be made within the framework of a comprehensive analysis of the general economic situation and the member’s economic policy strategy. The document also lists the types of developments that might indicate the need for discussion with a member. These include protracted large-scale intervention in one direction in the exchange market; an unsustainable level of official or quasi-official borrowing or excessive and prolonged short-term official or quasi-official lending for balance of payments purposes; and the introduction, substantial intensification, or prolonged maintenance for balance of payments purposes of restrictions on, or incentives for, current transactions or payments; or the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, capital flows.

Box 3Board of Governors, Executive Board, Interim Committee, and Development Committee

The Board of Governors, the highest decision-making organ in the Fund, consists of one governor and one alternate governor appointed by each member country. The governor is chosen by the member and is usually the minister of finance or the governor of the central bank. All powers of the Fund are vested in the Board of Governors. The Board of Governors may delegate to the Executive Board all except certain reserved powers. The Board of Governors normally meets once a year.

The Executive Board (the Board) is the Fund’s permanent decision-making organ, currently composed of 24 Directors appointed or elected by member countries or by groups of countries. Chaired by the Managing Director, the Board usually meets several days a week to conduct the day-to-day business of the Fund. Decisions by the Board are based on papers prepared by Fund management and staff. In 1992/93, the Board spent more than half of its time on member country matters (Article IV consultations and reviews and approvals of arrangements) and most of its remaining time on policy issues (such as surveillance and the world economic outlook, developments in international capital markets, issues related to Fund facilities and program design, and international liquidity and the SDR mechanism).

The Interim Committee of the Board of Governors on the International Monetary System is an advisory body made up of 24 Fund Governors, ministers, or other officials of comparable rank, representing the same constituencies as in the Fund’s Executive Board. The Interim Committee normally meets twice a year, in April or May, and at the time of the Annual Meeting of the Board of Governors in September or October. It advises and reports to the Board of Governors on issues regarding the management and adaptation of the international monetary system, including sudden disturbances that might threaten the international monetary system, and on proposals to amend the Articles of Agreement.

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 24 members—finance ministers or other officials of comparable rank—and generally meets in conjunction with 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 resources to developing countries.

The Board examines the principles and procedures of surveillance every two years to see if any modifications are needed in light of changing economic circumstances. The Board conducted the most recent review in early 1993, taking into account developments—both in the performance of the world economy and in the evolution of the international monetary system—since the last review in 1991 (Annual Report, 1991, pages 13–15). At the 1993 review, a number of Directors commented on the significance for the Fund’s conduct of its surveillance responsibilities of developments both in the major industrial countries and in developing countries, the further evolution of regional groupings, and the membership of many former centrally planned economies.

Directors agreed that while the principles of surveillance remained broadly appropriate, there was a need to strengthen further the surveillance process. This would help the Fund to fulfill its role in promoting mutually consistent economic policies and encouraging national authorities, especially in the industrial countries, to take proper account of the views of the international community. Directors, therefore, agreed on several steps to adapt the existing procedures for implementing surveillance in order to make surveillance more continuous, flexible, and relevant (see below).

In its declaration issued on April 30, 1993, the Interim Committee endorsed the steps agreed by the Board to strengthen surveillance and agreed to strengthen its collaboration with the Fund as the central international monetary institution.

Analytical Issues in Surveillance

At the review in early 1993, Directors, in noting the unprecedented changes in the international economic environment that challenged the Fund in its oversight role of the international monetary system, addressed a number of analytical issues that were at the core of the Fund’s ability to carry out its surveillance responsibilities in an effective and meaningful manner.

The Board’s recognition of the need to strengthen surveillance had become more pressing as a result of tensions—both actual and potential—in the world economy and in the exchange rate system. Some of these tensions stem from systemic developments. Others have arisen because of divergences in macroeconomic policies and cyclical conditions across different member countries.

The design and implementation of members’ economic policies and the international repercussions of those policies have an important bearing on the stability of the exchange rate system. This is particularly true for the major industrial countries, since their policies have the largest spillover effects on the performance of the world economy and the stability of the international monetary system. Thus, in considering ways of enhancing the effectiveness of surveillance, both recent systemic developments in the world economy and developments in economic policies and performance of members, particularly those of the largest economies, have to be taken into account.

Over the past several decades, the share of North America and Europe in global output and trade has declined, while that of Asia and the Pacific region has risen sharply. In the same period, the currencies of the three major industrial countries have all taken on important roles. Because of these trends in economic size and the roles played by the key currencies and because capital markets have become more and more integrated, the potential for monetary instability has increased in the event that the economic policies and performance of the major industrial countries diverge significantly.

As Directors observed, the substantial growth and internationalization of private capital markets had made the international monetary system more vulnerable to macroeconomic imbalances in the industrial countries and to any inconsistencies that might be allowed to develop between exchange rates and macroeconomic fundamentals. They also agreed that efforts to achieve greater stability in the exchange rate system could not be separated from efforts to implement economic policies that were conducive to stable and convergent domestic macroeconomic conditions.

The movement toward greater regional and monetary integration among certain groups of countries has continued. The most notable is the Maastricht Treaty in December 1991 among the EC countries. Other moves toward economic integration include the Free Trade Agreement between the United States and Canada, NAFTA, and longer-run proposals to extend free trade throughout the hemisphere. Greater integration has also been suggested elsewhere, as in the context of the West African Monetary Union (WAMU).

With regard to the transition to EMU, economic convergence among the members of the ERM did not proceed sufficiently rapidly to avoid the outbreak of exchange market turbulence in September 1992. This turbulence, as well as the macroeconomic imbalances that led to it, raised important issues for Fund surveillance. Several Directors commented on the limited role of the Fund during the crisis in currency markets in Europe. They stressed that the exchange market pressures and the macroeconomic imbalances that had led to them were of considerable concern to the international community. Directors felt that the international community needed assurance that the wider international implications of regional policy decisions were adequately taken into account in the policymaking process. Directors added that this demonstrated the need for Fund surveillance to be carried out in a more timely and effective manner. Industrial countries, in particular, had a responsibility for and an interest in making greater efforts to direct their economic and financial policies at fostering sustained economic growth with reasonable price stability—not only for domestic reasons but also to avoid generating adverse spillover effects on other countries and to prevent a recurrence of the tensions that had led to the exchange market turbulence.

The reform efforts in Central and Eastern Europe and the states of the former Soviet Union have a number of implications for Fund surveillance. The increase in Fund membership and the associated demand for policy advice and technical assistance implies a substantial increase in the resources that the Fund needs to fulfill its surveillance responsibilities. Further, to transform centrally planned economies into market economies requires extensive structural changes, which call for closer consultation and coordination among the Fund, the World Bank, and other institutions involved in the transformation process. Finally, because these countries earlier had close regional ties, Fund surveillance must address the issues of exchange rate practices and macro-economic policies in a regional context, as well as in the context of integrating these countries into the world economy.

Enhancing the Effectiveness of Surveillance

As mentioned above, during their 1993 review, Directors agreed on a number of measures to enhance the effectiveness of surveillance. They emphasized, however, that no set of surveillance guidelines and procedures could be fully successful unless all members were prepared to give due consideration to the views of the international community in formulating and implementing their economic policies. Several Directors stressed that the quality and relevance of analysis by Fund staff would be most important for the effectiveness of the Fund’s surveillance role. The quality depended not only on the cogency of the analysis but also on the soundness of the underlying macroeconomic data bases, and on following international standards in statistical compilation. Directors emphasized that surveillance could be fully effective only if members provided the basic data necessary to analyze in a comprehensive manner the economic policies and developments relevant to their macroeconomic performance. Therefore, the staff was also asked to provide frank assessments where weaknesses in data made policy analysis and advice difficult.

Directors hoped that all members would cooperate in following the improved surveillance procedures so that Fund surveillance would be more effective and even-handed. The Fund management would inform Directors of the experience with the new procedures by January 1995, at the time of the next surveillance review.

Continuity of Surveillance

Directors agreed that a greater continuity of surveillance by the Board, especially of systemic and regional issues, should be a principal means of enhancing surveillance. Therefore, they supported the proposal to broaden the scope of the world economic and market development sessions through the coverage of a wide range of country and systemic matters. This would also help better to integrate these sessions into the other ongoing work of the Fund, such as the World Economic Outlook exercise and Article IV consultations with individual members.

The sessions would continue to be confidential, informal, and focused and could help to identify emerging trends and tensions in members’ economies, in general, and on the exchange markets, in particular. They would provide the Board with an opportunity to offer advice on policy matters and to suggest further contacts with national authorities or country groupings when judged appropriate. In addition, the sessions would provide a means of bringing significant country matters to the attention of the Board on a timely basis, filling an important gap in the timetable between regular consultations and World Economic Outlook discussions.

Directors also supported proposals to improve surveillance through greater but selective use of informal follow-up contacts on substantive issues subsequent to Article IV consultations. These would be based on communications from the Managing Director highlighting particular issues and, as appropriate, would invite a response from the member. Further discussions with senior staff or management could follow, including visits to the member country. There would normally be no written report to the Board, but Directors considered that an oral report on the outcome of the follow-up discussion might be appropriate. Several Directors hoped that the follow-up contacts would strengthen the policy dialogue between the Fund and its members.

Directors agreed to modify surveillance procedures to facilitate “ad hoc” consultations. The Managing Director would initiate a discussion that could lead to an ad hoc consultation whenever he considered that important economic and financial developments were likely to affect a member’s exchange rate policies or the behavior of the exchange rate of the member’s currency. In some instances, a brief staff report based on discussions with the authorities could be issued to the Board. Such reports could be discussed at the request of an Executive Director or upon the decision of the Managing Director.

Many Directors thought that there was a need for the Fund to be more closely involved in deliberations that potentially affected the functioning of the international monetary system. They stressed that efforts should be made to ensure a greater role for the Managing Director or other Fund officials in key external meetings among members where the direction of their economic policies and critical policy questions affecting the international monetary system were being discussed. In this context, Directors stressed the importance of ensuring that in all bilateral discussions with national authorities, particularly during Article IV consultations, a meaningful dialogue at an appropriately senior policymaking level takes place.

Enhanced Surveillance

To assist a wider range of members in the formulation and monitoring of their economic policies, Directors agreed during their 1993 review of surveillance to revise the enhanced surveillance procedures.2 Under these procedures, established in 1985 to facilitate some members’ multiyear rescheduling arrangements with commercial banks, there is a closer relationship between the Fund and the member than is customary in periodic Article IV consultations, but less close than in cases of Fund arrangements.

Under the revised enhanced surveillance procedures, the authorities would request Fund monitoring of their macroeconomic and structural policies in the context of their ongoing adjustment efforts. The Board would respond to the member’s request on a case-by-case basis, taking into account, among other things, a member’s track record and the strength of the economic program formulated, but it would not involve Board approval or endorsement of the program as such. Monitoring would be expected to include a mid-term review of progress under the program irrespective of the actual performance; failing which, Directors would be informed of the absence of the review and the reasons. Both the Article IV reports (appropriately modified) and the half-yearly reports to the Board could be made available to creditors. Application of the procedures would be approved by the Board until the next scheduled Article IV consultation with the country or for a 12-month period. The Board would review these procedures within two years.

Directors agreed that the revised procedures could apply to the post-ESAF monitoring arrangements now in place. They envisaged monitoring by the Fund under enhanced surveillance procedures in several kinds of situations. For instance, the procedures could be used in cases in which members asked for monitoring to help secure external financial support, especially those with good records of economic performance that were no longer using Fund resources. Enhanced surveillance procedures could also be used in some cases in which there was no direct link to efforts at mobilizing external support, but where the member with a strong track record of performance requested the procedures to boost domestic and external confidence in its continuing efforts to pursue adjustment policies.

Article IV Consultation Procedures

In evaluating the experience with the temporary shift in consultation cycles, Directors expressed concern that gaps might have emerged in surveillance that could have had an adverse effect on the quality and effectiveness of the Fund’s policy advice. Similarly, they were concerned that there had been undue delays in holding consultations with certain members. Some of these were countries with Fund arrangements, while others were cases in which there had been a change in government or some other significant developments had occurred. Directors, therefore, reexamined the current Article IV consultation cycles and particularly the bicyclic procedure, with a view to increasing the continuity and flexibility of surveillance.

The bicyclic procedure is a modified consultation procedure that involves a Board discussion every second year and a simplified interim procedure in the intervening year. It was introduced in 1987 to reduce workload strains on the Board and staff while still ensuring effective surveillance. It had been adopted initially for 23 countries and was eventually applied to a total of 31 countries. Experience with the bicyclic procedure, however, showed that it did not always fulfill the need for continuity and evenhandedness of the Fund’s surveillance. Moreover, it appeared not to have resulted in the significant saving of Board and staff time that had been envisaged. Therefore, in April 1993, the Board endorsed the Managing Director’s proposal to eliminate the bicyclic procedure. As a result, except for a limited number of countries on 18- or 24-month consultation cycles, all consultation will be under the standard 12-month cycle and the consultation reports discussed annually by the Board.

Other Measures

During the biennial review, Directors noted that there was a need for more effective and timely surveillance by the Fund of regional economic developments (see Box 4). To the extent that regional institutions had assumed policymaking responsibilities in areas of concern to the Fund that were previously the sole prerogative of individual members. Directors took the view that it was necessary to have contacts with such institutions. The Fund is applying this approach to a number of regions, for instance to the EC.

Directors urged members that were availing themselves of the transitional arrangements under Article XIV to accept the obligations of Article VIII (see Box 5). Among other steps to improve the effectiveness of surveillance, Directors welcomed the progress made in cutting back the length of staff reports and continuing efforts at greater selectivity and better focusing of the reports.

Article IV Consultations

Fund staff meet regularly with the authorities of member countries to gather information, review economic developments, and discuss economic policies. These reviews form the basis of the staff reports that are discussed by the Board. Consultations between Fund staff and member countries take place under Article IV of the Fund’s Articles and, as mentioned earlier, are the primary means for the Fund to carry out its surveillance responsibilities bilaterally. A historical overview of indicators relating to Article IV consultations is to be found in Chart 6, and a breakdown of Article IV consultations by category of member countries is displayed in Chart 7. Table 2 lists the Article IV consultations that the Fund concluded during 1992/93.

Chart 6Indicators Related to Article IV Consultations

1Article IV consultation missions.

2Beginning February 1991, interim consultations were concluded by the Executive Board; 1992 includes premembership reviews with the 15 states of the former Soviet Union.

Chart 7Article IV Consultations Concluded by the Executive Board1

(Number of consultations)

1 Beginning February 1991, interim consultations were concluded by the Executive Board; 1992 includes premembership reviews with the 15 states of the former Soviet Union.

2Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. Switzerland became a member of the Fund in May 1992 and had not completed a consultation by the end of 1992.

Table 2Article IV Consultations Concluded in 1992/93
AlbaniaAug. 26, 1992
AlgeriaMar. 3, 1993
Antigua and BarbudaMay 18, 19921
ArmeniaFeb. 17, 1993
AustraliaMay 27, 19921
AzerbaijanMar. 22, 1993
Bahamas, TheJuly 17, 1992
BahrainJuly 31, 1992
BangladeshSep. 14, 1992
BarbadosJuly 10, 1992
BelgiumDec. 30, 1992
BeninJan. 25, 1993
BoliviaSep. 11, 1992
Burkina FasoMar. 31, 1993
BurundiJune 1, 1992
Central African Rep.Oct. 5, 1992
CanadaMar. 10, 1993
ChileJune 18, 19921
ChinaMay 20, 1992
Apr. 5, 1993
ColombiaJune 1, 1992
Costa RicaApr. 19, 1993
Côte d’IvoireJan. 6, 1993
DjiboutiFeb. 8, 1993
Dominican Rep.Nov. 20, 1992
EcuadorJan. 8, 1993
EgyptAug. 26, 1992
Equatorial GuineaFeb. 3, 1993
EstoniaApr. 2, 1993
FranceOct. 9, 1992
GabonMar. 31, 1993
Gambia, TheJune 19, 1992
GermanyNov. 20, 1992
GreeceJuly 29, 1992
GrenadaJan. 8, 1993
GuatemalaDec. 18, 1992
Guinea-BissauOct. 14, 1992
GuyanaDec. 21, 1992
Hong KongFeb. 3, 1993
IcelandFeb. 26, 19931
IndiaDec. 4, 1992
Iran, Islamic Rep. ofJuly 24, 1992
ItalyJan. 11, 1993
JapanJuly 15, 1992
JordanJuly 15, 1992
KazakhstanApr. 23, 1993
KenyaJuly 17, 1992
KoreaFeb. 8, 1993
KuwaitMay 15, 1992
Lao People’s Dem. Rep.May 4, 1992
LatviaApr. 23, 1993
LesothoJuly 1, 1992
LithuaniaApr. 7, 1993
MadagascarJuly 22, 1992
MalawiJan. 25, 1993
Malaysia1July 29, 19921
MaliApr. 26, 1993
MaltaJan. 25, 1993
Marshall IslandsOct. 7, 1992
MauritaniaDec. 9, 1992
MexicoJan. 25, 1993
MoldovaFeb. 3, 1993
MoroccoFeb. 26, 1993
MozambiqueJune 10, 1992
Namibia1May 20, 1992
NetherlandsMar. 5, 1993
Netherlands AntillesMay 29, 1992
NicaraguaDec. 2, 1992
NigerJune 26, 1992
NigeriaMar. 3, 1993
OmanMar. 16, 1993
PakistanNov. 25, 1992
PanamaOct. 5, 1992
Papua New GuineaFeb. 17, 1993
ParaguayDec. 23, 1992
PeruMar. 17, 1993
PhilippinesOct. 7, 1992
PolandJuly 31, 1992
RomaniaMay 29, 1992
RussiaApr. 21, 1993
RwandaSep. 14, 1992
Sao Tome and PrincipeJun. 10, 1992
SenegalNov. 30, 1992
SeychellesOct. 7, 1992
Sierra LeoneNov. 30, 1992
South AfricaOct. 28, 19921
SpainAug. 7, 19921
Sri LankaOct. 9, 1992
St. LuciaMay 29, 1992
St. VincentOct. 30, 1992
SudanAug. 3, 1992
SurinameJune 22, 1992
SwazilandApr. 7, 19931
SwedenJuly 8, 19921
Syrian Arab Rep.Sep. 24, 19921
TanzaniaNov. 25, 1992
ThailandMay 13, 19921
TogoMay 20, 1992
Trinidad and TobagoSep. 9, 1992
TunisiaJune 29, 1992
TurkeyMar. 17, 1993
United Arab EmiratesMar. 3, 19931
UgandaMay 15, 1992
United KingdomFeb. 12, 1993
United StatesAug. 31, 1992
UruguayJan. 8, 1993
VenezuelaDec. 21, 1992
Viet NamJan. 15, 1993
Western SamoaMar. 24, 1993
ZambiaJuly 17, 1992

Interim consultation.

Interim consultation.

Box 4Economic and Monetary Union in Europe

Economic and monetary union (EMU) in the EC has been a goal for some time. During the 1980s the reduced exchange rate fluctuations achieved throughout the ERM of the European Monetary System (EMS) provided an important step in this direction. Subsequently, in the Maastricht Treaty of December 1991 (Annual Report, 1992, pages 46–47) a consensus emerged among EC governments on the structure of such a union and how to get there. However, the period of stability in the ERM that had existed since the last realignment in January 1987 came to an end in September 1992. The Board, in an informal session in December 1992, examined a wide range of issues related to EMU, including the lessons that could be learned for the monetary union from the difficulties that arose in the system and the implications for Fund surveillance.

Most Directors considered that the convergence criteria set out in the Maastricht Treaty provided a useful framework in which to encourage financial discipline and economic convergence among EC countries. Nonetheless, Directors generally shared the view that the exchange and financial market turmoil in the late summer and early fall of 1992 had its roots in the divergence of economic policies, the growing difficulties of some ERM members in maintaining competitiveness, and differences in the cyclical positions of countries within Europe.

It was stressed that moving to EMU required strong fiscal and structural measures in many countries to reduce fiscal deficits and other impediments to monetary union. However, there were divergent views on many issues related to the current form of the ERM and the transition to EMU. Some Directors observed that the recent events called for an acceleration of the Maastricht timetable and the need to stick to the rules agreed to at Maastricht. The full benefits of a system of stable nominal exchange rates, in the face of large capital flows, could be achieved only through full monetary union. Noting the difficulty of maintaining fixed exchange rates during the transition to full monetary union, some Directors stressed that countries meeting the convergence criteria should be encouraged to move to EMU without delay.

Other Directors, however, noted that the recent events reflected structural weaknesses in the operation of the ERM and the convergence process, which raised fundamental questions about the transition process. These Directors maintained that the underlying problems were heightened by the inflexibility of the ERM and the rigid convergence timetable set out in the Maastricht Treaty. Timely realignments within existing ERM bands might possibly increase the credibility of the convergence process, although they recognized there was the inherent risk of adding to inflationary pressures and losing the disciplinary effect of the ERM. Some Directors also pointed out that the complete absence of convergence criteria for real variables such as unemployment and growth made the current Maastricht framework an insufficient basis on which to enter into the final stage of an economic union.

The view was widely shared on the Board that nominal exchange rate stability entailed a degree of interest rate volatility (at least when expectations are not stabilized) in the presence of almost complete capital mobility. The importance of being prepared to adjust interest rates was stressed; sterilized intervention was not a substitute for interest rate action. If interest rates were focused on domestic conditions, coordinated intervention under the terms of the Basle and Nyborg Accords would not be effective. However, it was pointed out that markets tended to react negatively to interest rate increases that were unwarranted by domestic conditions, as was the case in the United Kingdom.

While some Directors thought that a move toward granting independence to the central banks of member states along the lines stated in the Maastricht Treaty would help the monetary authorities in their task of pursuing the objective of monetary stability, others commented that the emphasis on the formal independence of a European central bank was overdone, as independence was not always synonymous with best performance; rather, it was more important to gain a political consensus on achieving price stability.

In a subsequent and related meeting in April 1993, the Executive Board considered the issue of the Fund’s surveillance of regional developments. Directors agreed that there was a need for more timely and effective surveillance of regional developments, for instance, those occurring in arrangements between the currencies of the Fund’s EC members. Issues raised by the close cooperation among EMS members, particularly in the exchange and monetary area, should be a subject of the Fund’s regional surveillance, because EMS arrangements had an impact on the macroeconomic stance of each member and had systemic implications.

As the EC Commission plays an important role in the preparation of EC discussions of macroeconomic policies, in general, and of convergence programs, trade and competition policies, in particular, Directors agreed that informal contacts between the Fund staff and the relevant EC bodies would need to continue and likely be intensified since they would be useful for the World Economic Outlook exercise and the Fund’s bilateral consultations. Nonetheless, Directors emphasized that surveillance over exchange rate policies should continue to be rooted in bilateral discussions with the authorities of each country, primarily Article IV consultations.

Article IV consultations provide the Fund with the opportunity to assess the appropriateness of a country’s economic policies. Because these consultations are held regularly, they are particularly useful for identifying balance of payments problems promptly and thereby helping a country to take the necessary corrective policy measures at an early stage. The consultations focus on a country’s exchange rate policies, within the framework of its macro-economic and related structural policies, and also examine whether these policies are conducive to achieving reasonable price stability, sustainable external positions, and orderly economic growth.

Industrial Countries

United States

At their meeting in August 1992, the sluggish pace of economic recovery in the United States led Directors to take a cautious view about the extent to which output growth would gain momentum in the latter part of 1992 and early 1993. The main reason for the caution was the continuing fiscal deficit, which was affecting inflationary expectations and long-term interest rates, and thereby dampening confidence and investment.

Many Directors viewed the large fiscal deficit as an important factor behind the weakness of private investment and growth, and the prospect of fiscal deficits continuing over the medium term as the most important impediment to sustained noninflationary growth. Therefore, a medium-term strategy for fiscal consolidation and for raising national saving was seen as vital. Although views on the appropriate long-term fiscal objective and the size of the necessary fiscal adjustment could legitimately differ, Directors agreed that the adjustment would have to be large if the U.S. saving and investment performance was to improve. Directors felt that after the presidential elections there should be an opportunity to establish a consensus on the set of medium-term fiscal measures of expenditure restraint and revenue enhancement that would enable an early start of meaningful adjustment.

Directors agreed that the growth of mandatory spending, which had increased rapidly in recent decades, had to be controlled. The need to reform the health care system was noted in particular. However, given the real demands behind many of the entitlement programs and limited scope for further substantive cuts in discretionary spending, Directors believed that the adoption of revenue-enhancing measures was inescapable. In this regard, the introduction of a broad-based consumption tax and the elimination of certain tax expenditures were viewed as having the important advantage of raising public saving without being damaging to private saving. Some Directors also suggested the adoption of an energy tax.

Box 5Current Account Convertibility

An important purpose of the Fund is to assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions that hamper the growth of world trade. The Articles of Agreement therefore provide that members will refrain, subject to certain exceptions, from imposing restrictions on payments and transfers for current international transactions and from engaging in discriminatory currency arrangements or multiple currency practices.

In the context of the biennial review of the Fund’s surveillance policy, Directors emphasized the importance of a greater commitment of members to current account convertibility. In this regard, acceptance by members of the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles is viewed by the international community as an important demonstration of the convertibility of a country’s currency. The staff was asked to intensify its efforts to encourage members to accept these obligations.

During 1992/93, seven members—the Republic of the Marshall Islands, The Gambia, Greece, Morocco, San Marino, Switzerland, and Tunisia—accepted the obligations of Article VIII bringing to 77 the number of members that had accepted these obligations as of April 30, 1993 (see Appendix Table II.17).

Directors were in broad agreement that the easing of monetary policy since late 1991 had been appropriate given the sluggishness of the recovery and the progress made in lowering inflation. They generally felt that monetary policy should continue to be guided by the objective of long-term price stability. In this context, Directors observed that the current low level of real short-term interest rates, the uncertainty regarding the actual degree of economic slack, and the apparent downward resistance of inflation expectations meant that there was a risk that inflationary pressures could re-emerge quickly. They stressed the importance of being alert to the need to allow short-term interest rates to rise as the economic recovery proceeded.

In commenting on the U.S. external current account, Directors emphasized that a sustained improvement in the external position that did not crowd out domestic investment required the adoption of macroeconomic policies that fostered an increase in national saving. They expressed concern about the weakness of the dollar, which, several Directors felt, had resulted from the considerable gap between interest rates on dollar- and Eurocurrency-denominated assets, as well as uncertainties about monetary policy in the United States and abroad. While some of the immediate pressure on the dollar might have been eased by the coordinated intervention by the major industrial countries in July and August 1992, a continuation of exchange market pressures could constrain the formulation of U.S. monetary policy. Some Directors pointed to the need to take account of the effect on exchange markets when interest rate changes in the United States were being formulated.

Directors observed that structural policies were important for improving the long-term growth prospects of the U.S. economy. They commended the authorities for their efforts to reform the financial sector and urged them to continue efforts on this front. Directors also regarded NAFTA positively, although some were concerned about possible trade diversion in certain sectors. In this connection, Directors also commended the U.S. authorities’ commitment to seek a successful outcome for the Uruguay Round and emphasized the vital role of U.S. leadership in this area. Some Directors expressed unease about the low level of U.S. official development assistance relative to the size of its economy.


At its July 1993 meeting to discuss the Japanese Article IV consultation, the Board noted that over the past two years, the Japanese economy had experienced its sharpest downswing since the mid-1970s. The recession was mainly due to the cyclical downturn and the inevitable correction of the factors that had characterized the preceding boom and had contributed to its unsustainable pace. These factors included a sharp run-up in asset prices; a large increase in the stock of capital and consumer durables, reflecting easy financial conditions; and excessive lending by the financial system to the real estate sector. Directors’ views on whether the recession had bottomed out differed; while a number of Directors noted increasing signs of recovery, most felt that, despite such signs, the economy had yet to turn the corner fully and that downside risks persisted at this stage of the cycle. The main policy issue was to solidify the momentum of the recovery, while maintaining the country’s excellent price performance and pursuing structural reform. This would benefit Japan and the world economy and would constitute an important contribution to the global cooperative effort to bolster confidence and strengthen prospects for a durable noninflationary world expansion.

Directors welcomed the authorities’ response to the cyclical downswing, on both the monetary and fiscal fronts, although some Directors believed that earlier and more forceful action would have been warranted. As regards monetary policy, Directors observed that conditions had eased significantly since mid-1991. Although a number of Directors considered that the recent strengthening of the yen and the absence of inflationary pressures called for a further easing of monetary policy, a number of other Directors suggested caution in guiding interest rates down further.

Directors commended the authorities for implementing large economic stimulus packages in both late 1992 and early 1993. They viewed the support to domestic demand provided by these packages as critical to economic recovery, and they commended the authorities’ decade-old fiscal consolidation effort, which had provided the room for maneuver during the current downturn.

A number of Directors felt that Japan’s fiscal position allowed room for providing additional stimulus—at least in the short run—if economic weakness persisted. In that context, several Directors suggested that the automatic stabilizers should in any case be allowed to work fully. Other Directors were concerned that an additional fiscal stimulus could prove procyclical and might be difficult to reverse. Some Directors thought that further easing, if needed, should be on the monetary side rather than on the fiscal side. Most Directors believed that once the recovery was firmly established, medium-term fiscal consolidation efforts should resume, and in that context, the prospective large pressure on public expenditure arising from the aging of the population was mentioned by a number of Directors. A few other Directors, however, placed less emphasis on the medium-term demographic outlook and advocated instead continued fiscal expansion in the form of greater public investment and/or a reduction in income tax to raise living standards and stimulate consumption.

Directors observed that the current account surplus had widened significantly since 1990. Most Directors took the view that, as the Japanese economy recovered and trade volumes responded to the stronger yen, the current account surplus would again decline. This confirmed their view that policies should focus on sustainable, strong, job-creating growth with low inflation and contribute indirectly to a reduction of the external current surpluses. A falling propensity to save resulting from a rise in the share of the elderly in the population would also contribute to lowering the surplus over time. A number of Directors noted Japan’s important contribution to the world pool of savings.

Many Directors observed that an appreciation of the yen over the medium term would be consistent with a cyclical upswing in Japan. However, a number of Directors cautioned that a too rapid further appreciation of the yen could weaken or delay the emerging recovery.

Directors urged Japan to continue its efforts to open up markets. A priority in this regard was the reform of agricultural trade. Directors also stressed the need for further strong measures to reform the distribution system, strengthen competition policy, reduce regulations and make them more transparent, and promote foreign direct investment. Demonstrably open markets would be an important antidote to protectionist pressures. Most Directors expressed concerns about managed trade arrangements and stressed the paramount need for market opening and deregulation in a multilateral framework. A few Directors noted that some recent bilateral initiatives could nevertheless promote market opening. Directors also urged the authorities to help bring the Uruguay Round negotiations to a successful conclusion, and they welcomed Japan’s recent proposal of tariff reduction.

Many Directors noted the risks posed by the recent problems in the financial system. They believed that more transparency, quicker action to deal with the problem of nonperforming loans, and greater disclosure of asset quality were needed. Directors also noted continued interest rate liberalization under the recent enactment of the Financial System Reform Act, and they encouraged the authorities to continue with financial sector reform. A few Directors particularly stressed the need to reform the postal saving system and ease market access by foreign financial institutions.

Directors noted the high absolute amount of Japan’s official development assistance, particularly in close collaboration with the Fund, and they welcomed the authorities’ new five-year foreign assistance plan. Several Directors hoped that Japan would make every effort to raise its level of official development assistance further and, in particular, to achieve the UN target at an early date.


In their review in November 1992 of the risks and challenges facing the German economy, Directors stressed two issues of importance not only for Germany but also for the world community. These were the imbalance in the mix of economic policies and the unfavorable prospects for the economy over the short run. Immediately after unification the surge in spending had provided a significant demand stimulus, which had benefited both Germany and its trading partners. In the view of most Directors, however, now that demand was declining, the authorities’ tight monetary policy and the resulting high short-term interest rates necessary to combat inflation were slowing economic activity in Germany and had negatively affected already weak growth prospects in some European countries. Uncertainties about future economic policies were further exacerbating the slowdown in western Germany. Several Directors noted the danger of the slowdown developing into a recession.

Directors underlined that a more balanced mix of policies in Germany was required to improve prospects for growth and recommended the adoption of policies that would contribute to a renewal of confidence and provide room for short-term interest rates to be reduced. Such policies included reduced borrowing by the public sector, fostering moderate wage rounds, and prompting lower wage increases, and a more realistic pace of wage catch-up in the east.

Directors emphasized that intensified efforts on the fiscal front should play a central role. They welcomed the authorities’ medium-term fiscal targets and the emphasis placed on expenditure restraint. They noted, however, that unless there was substantial progress in 1993, in particular with the critically needed cuts in subsidies and transfers and increased expenditure discipline at the lower levels of government in western Germany, the credibility of the fiscal consolidation program would suffer. Further, according to many Directors, if new taxes were to be avoided, the authorities needed at an early stage to make bold spending cuts beyond those included in the 1993 budget.

Directors stressed the importance of early progress in reducing the pace of wage increases in western Germany and agreed that the public sector should set signals in fostering wage restraint. They therefore welcomed the authorities’ objective to avoid wage increases in real terms for the next three years in the context of the social pact between industry, employees, and government.

Directors noted that much had been achieved in eastern Germany since unification, particularly in the areas of privatization and the rebuilding of the public and private infrastructure. They encouraged the authorities to complete the privatization of industrial enterprises in eastern Germany by the end of 1993 as planned. However, Directors expressed great concern that the conditions necessary for a self-sustaining growth process in eastern Germany were not yet in place. They also regarded the level of private investment in the east as alarmingly low. Directors emphasized that it was critical to have a pause in the process of wage catch-up with western Germany, and suggested that, in that context, the decentralization of the wage bargaining process at the enterprise level was essential.

Most Directors recognized that the tight monetary stance of the Deutsche Bundesbank had been appropriate given the inflationary pressures that had emerged after unification and the weakening of the fiscal position. However, it had led to high real short-term interest rates on a sustained basis. With continued weakening of economic activity and some moderation in cost pressures, Directors hoped for an early relaxation of monetary conditions but pointed out that this had to be supported by a credible framework for fiscal consolidation and a moderate growth of wages. Some Directors, however, regarded monetary policy in Germany to have been unduly tight over the past year. Further, given the lags in the operation of monetary policy and indications that the economy was facing a period of slow growth or even declining economic activity, they saw risks in delaying a sustained cut in interest rates.

Directors acknowledged the role that monetary targeting had played over the years in keeping inflation low and stated it was critical that the Bundesbank should not appear to be lessening the priority it attached to price stability. Several Directors, however, noted that given the questions surrounding the behavior of monetary aggregates, there appeared to be some grounds for both a lesser emphasis on a broad monetary aggregate, such as M3, as well as reassessing some of the underlying technical criteria on which the target was based.

Directors hoped that Germany would play a leading role in bringing the Uruguay Round to a successful conclusion. They encouraged the authorities to strive for greater access to EC markets of exports from developing countries and countries in transition in Central and Eastern Europe. Directors noted Germany’s generous financial assistance for reform in Eastern European countries and pointed out that greater market access would enhance the benefits of this assistance. In this context, they regretted that there would be little increase in aid to developing countries.

Since the time of the Board discussion in November 1992, the Bundesbank has eased interest rate policy markedly, although proceeding step by step so as not to jeopardize confidence in the deutsche mark or risk a setback in the downward movement of long-term interest rates and in the development of exchange rates. Notwithstanding the continuing anti-inflationary stance of monetary policy in Germany, this sizable easing of monetary conditions was made possible by improved price prospects owing to the appreciation of the deutsche mark, the slowing down of economic activity, and progress in other policy areas, especially wage policy in western Germany.


Despite an unfavorable external environment, in a number of respects the performance of the French economy continued to be better than that of other major industrial countries, Directors observed in their October 1992 review of the French economy. Commenting on the soundness of the authorities’ medium-term approach to disinflation and structural reform, as well as their exchange market stance, Directors remarked that recessionary tendencies had been avoided, the rate of inflation had been reduced, and the trade balance had improved.

Many Directors noted that the rate of economic growth had slowed considerably in 1991 and that the rate of unemployment had increased, reaching 10 percent in mid-1992. Some Directors were concerned that prospects for improved growth and employment in the near term had weakened because of recent adjustments in interest rates and exchange rates and the expected economic slowdown in important trading partners. Although these concerns did not call for a change in economic strategy, Directors encouraged the authorities to remain vigilant on the budgetary front. They also suggested quickening the pace of structural reforms, particularly in the labor market, so that early progress could be made in lowering unemployment.

Box 6Scope of Article IV Consultations

In response to changes in the domestic and external environment of countries, the scope of surveillance under Article IV consultations has broadened over the years, in terms of both policy content and technical issues. There has been greater emphasis on the appropriateness of a country’s exchange rate policies, the medium-term viability of its economic program, its structural reform efforts, and the stance of its trade policy.

Moreover, economic developments as well as policies have been reviewed more explicitly against the background of the conclusions of the preceding consultation, including those relating to an international perspective. In those countries where the poor quality of macroeconomic statistics impairs economic analysis and policy advice, statistical issues have been included in the analysis. Similarly, if appropriate, a member’s relations with the World Bank or other multilateral development institutions have been considered, including their assessment of the investment or development programs or other policy issues.

The 281 Article IV consultation reports issued during 1990–June 1992 were surveyed to determine the extent of the coverage of structural, regional, and other topics that may be germane to macroeconomic developments and prospects. Some of the highlights of the survey follow.

The survey found that the coverage of regional and cross-country issues had increased slightly since 1990. Often the treatment was descriptive, for example, based on cross-country comparisons of macroeconomic variables such as price developments, interest rate developments, and the size of government sectors.

Coverage of regional issues was pronounced among the European countries. For instance, economic policies of EC member countries were analyzed in the framework of economic developments in and policies of other EC members. Influences of regional policies on individual members and individual member’s policies on the region were also examined.

In other regions, the scope of the coverage has varied. For instance, in some neighboring countries where goods and capital move relatively free across open borders, policy-related issues have been examined. In consultation reports on African countries, various aspects of regional issues have been covered in the context of WAMU, the Central African Monetary Area, and the Common Monetary Agreement. In some reports, the process of regional integration was emphasized: for example, negotiations on the establishment of the NAFTA and proposals for an ASEAN Free Trade Area. In reports on the Central and Eastern European countries, the economic impact of the dissolution of trading arrangements under the former Council for Mutual Economic Assistance (CMEA) has been covered widely.

As appropriate, consultation reports discuss poverty and, more broadly, social issues. Some reports have considered the impact of natural disasters or civil conflicts on the most vulnerable groups. The adverse consequences of structural and fiscal adjustment efforts on the poor, the design of social safety nets, and targeted programs for the poor, such as budgetary allocations for job mobility and retraining programs have been mentioned (see section on Economic Reform and the Poor, below).

In the reports examined, coverage of structural reforms, including privatization, focused on the need to reduce bottlenecks and promote more efficient use of resources. In some reports, intra-industry issues and measures to improve industrial performance were also discussed. Labor market issues were usually described in the context of the impact of labor costs on a member’s fiscal or external position.

Much of the discussion on environmental issues has centered around energy policy, particularly for Central and Eastern European countries. Examples include limiting the use of solid fuel, especially coal, and closing down plants in the chemical and energy sectors. Among other environmental concerns, one report discussed coordinated efforts in the Middle East region to restore air and water resources damaged during the 1991 conflict. Problems of land degradation and deforestation because of population pressures have also been examined.

Directors recognized that cyclical shortfalls in tax revenues had led to the wider budget deficit.

While several Directors agreed that the projected deficit, as evidenced by the draft budget for 1993, was not unduly large, others emphasized that the consistent reduction in the deficit had been an essential component of the medium-term economic strategy and the slippages that had occurred in meeting deficit targets should be fully reversed as soon as growth prospects improved.

Several Directors proposed further efforts in privatization, to contain public debt and to improve economic efficiency.

Directors broadly supported the medium-term monetary policy stance of the authorities, which was based on disinflation in the framework of an unchanged franc/deutsche mark exchange rate parity. Directors were encouraged by the downward trend in long-term interest rates, despite unsettled market conditions. The tendency for risk premiums on franc-denominated interest rates to decline could be expected to resume once foreign exchange markets were settled. Directors commended the authorities for successfully defending the franc against speculative pressures in the fall of 1992. Several Directors suggested that increased flexibility in the use of interest rates was desirable in order to strengthen the position of the franc within the narrow band of the ERM.

Directors stressed that the persistently high rates of unemployment had resulted from longstanding labor market rigidities, especially those associated with the minimum wage law, generous unemployment benefits, and the large wedge between gross wage costs and take-home pay. They called for additional market-oriented measures to improve the functioning of the labor market and to strengthen job training programs.

Directors called on France to further liberalize its trade regime and to take a leading role in completing the Uruguay Round. Directors praised France’s strong commitment to official development assistance.

United Kingdom

In February 1993, Directors discussed developments in the U.K. economy against the background of the suspension of the pound sterling from the ERM on September 16, 1992, which had fundamentally changed the macroeconomic policy environment. Although the suspension had freed the authorities to lower short-term interest rates to stimulate the economy, it deprived sterling of the nominal anchor provided by the ERM and had temporarily resulted in some weakening in business and consumer confidence.

The main challenge of economic policy in the period ahead was establishing a new policy framework outside the ERM, aimed at enhancing credibility of the price stability objective, while promoting recovery. Directors welcomed the setting of a medium-term inflation target in the bottom half of the 1–4 percent target range. They commented that steady and significant progress in meeting this target would be crucial in enhancing credibility. In that context, most Directors agreed that a prompt start should be made on the fiscal consolidation process.

Directors noted that the latest price indicators showed that inflationary pressures remained low. Further, against the background of the continued domestic economic recession, the emphasis of policy had been put on substantially stimulating the economy. However, Directors agreed that easing of monetary policy had already been substantial, and that the overall stance of policies would need to ensure that the inflation objective was not put at risk as the economic recovery got under way. In that context, Directors noted that wages had continued to rise in real terms, despite the prolonged recession and job losses.

Directors observed that the easing of monetary policy should provide a substantial stimulus to the economy over the next two years, although it would take time for the full effects to work their way through the economy. They suggested that in steering monetary policy by a wide range of indicators, developments in the exchange rate and in wages should be carefully taken into account.

Although Directors welcomed the recent steps taken to increase the transparency of monetary policy implementation, several Directors questioned whether these measures went far enough in the direction of increased central bank independence to reassure economic agents that monetary policy decisions would be insulated from short-run political considerations. Some other Directors, however, did not consider independence of the central bank to be necessary to ensure the correct monetary policies or a good record on inflation.

Directors were concerned about the medium-term prospects for the public finances. While they recognized the impact of the economic cycle on the Public Sector Borrowing Requirement, they noted that the erosion of the tax base and discretionary increases in public spending had also played a role. These developments supported the need to strengthen fiscal consolidation in a way that would not stifle recovery.

Directors observed that the sharp depreciation of sterling after September 1992 should facilitate over time the correction of the underlying external balance, provided the gain in competitiveness was maintained and was backed by early steps to strengthen the fiscal position. Several Directors pointed out the importance of a credible medium-term policy framework and structural reforms to facilitate the external adjustment in the years ahead.

Directors also noted that while there had been significant deceleration in wage inflation, it remained disappointing in relation to the severity of the recession and the rise in unemployment. This still insufficient flexibility in wage rates suggested that the functioning of the labor market needed to be further improved to minimize the cost of attaining the medium-term inflation objective.

Directors commended the United Kingdom’s commitment to a liberal trade system and its approach to the Uruguay Round. They also encouraged the United Kingdom to continue within the EC in its efforts to foster open markets. Several Directors encouraged the United Kingdom to increase its official development assistance.


Italy has made considerable efforts at tackling the country’s severe fiscal imbalances, in the view of the Board. But its problems, which had played a major part in the collapse of confidence in financial markets in the summer of 1992, are deep rooted. Meeting in January 1993, Directors emphasized that more steps should be taken to set public finances on a sustainable path and to establish confidence in the Government’s ability to continue the disinflation process. They noted the continued weakness of the lira, even though real interest rates were still high, and the mounting evidence that the economy was slowing down markedly.

While Directors warmly welcomed the authorities’ deficit-reduction measures, including structural reforms, they were concerned that in the absence of further fiscal action the public sector deficit would exceed targets both in 1993 and over the medium term. Taking into account the size of the fiscal imbalances and tensions in the financial markets, most Directors remarked that additional measures should have been proposed for 1993. Directors suggested that the authorities should consider contingency measures, focused to the extent possible on expenditure restraint, for 1993, as well as further permanent adjustment measures for 1994 and beyond.

The state plays a prominent role in the Italian economy, and Directors welcomed the authorities’ plans for privatization. Progress in privatization would signal the authorities’ determination to embark on a new policy strategy and would enhance the credibility and quality of the fiscal adjustment effort. Directors commented that wage restraint, including in the public sector, would also be an important element of the adjustment efforts. Labor market reform was vital, including reform of wage determination so that wages could respond flexibly to market conditions. Directors commended the decision to end the wage indexation system.

Directors noted that the temporary withdrawal of the lira from the ERM had complicated the conduct of monetary and disinflation policy and suggested that the exchange rate should continue to be given a large weight, since it had provided a well-known signal to wage and price setters. Some Directors suggested using a number of indicators in setting monetary policy. There was support for ending monetary financing for the treasury as a means of enhancing the independence of the central bank, but many Directors stressed that for monetary policy to be effectively independent, lasting reductions were needed in the budget deficit and in the high level of the government debt.

It was generally agreed that the restoration of confidence was vital if re-entry into the ERM, which the authorities intended in due course, was to be successful, and the new parity was to be credible and sustainable. In this context, progress in lowering the fiscal deficit, maintaining wage restraint, and disinflation were essential. While some Directors noted that an excessive depreciation would affect the possibility of wage and price moderation, others emphasized that a new exchange rate peg must be fully credible and not regarded as unsustainable or incompatible with domestic objectives.

Directors called on Italy to play its role in efforts to complete the Uruguay Round. They also emphasized the need for providing an adequate amount of development assistance, despite budgetary difficulties.


Canada’s economic growth in 1992 was much lower than expected, Directors noted in their review in March 1993. Domestic demand was weak and employment declined. Inflation dropped significantly and monetary conditions eased steadily until September when turbulence in financial markets put downward pressure on exchange rates and caused short-term interest rates to rise sharply. By the end of the year, the economy was strengthening and stability had returned to financial markets.

Directors observed that while the sluggishness of the economy had been disappointing, the authorities had taken policy actions that laid the basis for sustained economic recovery.

Directors commended the authorities for their efforts to achieve their fiscal goals, despite shortfalls in revenue and increased outlays because of the cyclical slowdown. Although Directors expressed concern about the sizable upward revision of the estimated federal budget deficit for 1992/93, they considered the fiscal measures adopted to be appropriate for trying to contain the deficit while strengthening investor and consumer confidence in the face of continued economic weakness. Directors stressed that further fiscal consolidation would be needed to reach the Government’s medium-term goal of fiscal balance, even with strong economic growth over the next several years. They further agreed that fiscal consolidation was needed at provincial as well as federal levels and that the pace of consolidation should be accelerated as the economic expansion gained momentum.

Directors observed that the increase in the external current account deficit had been associated with a sharp fall in the national saving rate, especially because of the operations of the public sector, particularly at the provincial level. While a significant improvement in the external current account would depend on policies to strengthen public sector saving, Directors noted that Canada’s competitiveness had improved significantly owing to the effects of increased labor productivity, low inflation, and moderate wage growth.

Directors acknowledged that price stability was the most important contribution that monetary policy could make to economic growth, and commended the authorities for meeting the inflation-reduction targets. The authorities’ commitment to price stability had gained in credibility, and this had helped to limit the movement in long-term interest rates during the turbulence in financial markets in the latter part of 1992. This credibility should also enable monetary policy to be eased further without endangering price stability or orderly exchange markets.

Canada has long followed a flexible exchange rate system, which has helped the economy to adjust to external shocks. Directors observed that while stability had returned to exchange markets, the large fiscal and external deficits could cause tensions in financial markets to reemerge. Directors also agreed that since interest rates in Canada had remained well above U.S. rates and Canada’s inflation record had been better than that in the United States, the best course for the authorities was to try to improve expectations with continued fiscal consolidation and a monetary policy aimed at price stability.

Directors welcomed the structural reform policies initiated by the authorities, including the introduction of the goods and services tax and comprehensive measures to improve efficiency in the financial sector. They observed that measures such as tightening and narrowing eligibility requirements for unemployment insurance benefits and increased employee retraining should help improve labor market flexibility, and urged the authorities to continue reviewing labor market policies so as to improve market flexibility further.

There was general agreement that continued implementation of the Free Trade Agreement between Canada and the United States and ratification of NAFTA would improve Canada’s efficiency in the long run. Directors also emphasized the importance of Canada’s active support of the Uruguay Round, while noting that Canada needed to liberalize trade further, especially in agriculture, where subsidies should also be reduced. Directors commended Canada’s record on development assistance, but regretted that the Government intended to reduce planned official development assistance as part of its fiscal consolidation measures.

Smaller Industrial Countries

As a result of the temporary, across-the-board shift in consultation cycles in 1992, in the period covered by this Annual Report consultations were discussed by the Board in the cases of only three of the smaller industrial countries. In addition, interim consultations were concluded without discussion in the cases of Australia, Iceland, Spain, and Sweden. With the elimination of the bicyclic procedure, consultations with all the smaller industrial countries will take place annually.

Board discussion on the smaller industrial countries addressed many of the same general issues raised in the discussions with the major industrial countries. The policy reviews emphasized the need for the pursuit of sound macroeconomic policies, in conjunction with effective structural reforms, to improve overall efficiency and competitiveness.


In their review of the Belgian economy in December 1992, Directors commended the authorities for their efforts to reduce the public sector deficit, as well as for their success in cutting inflation further. However, economic activity had weakened in 1992, generally in line with the rest of the EC, and the fiscal deficit in 1992 would once again exceed 6 percent of GNP despite the corrective measures taken by the authorities.

Directors agreed that over the medium term fiscal policy would need to focus on reducing the ratio of debt to GNP. While views differed on the pace of adjustment, Directors generally agreed that fiscal adjustment should place greater emphasis than at present on expenditure reduction—rather than on tax increases—as well as on structural measures.

The further increase in unemployment and the persistence of the rigidities and policy-induced distortions in the labor market were of particular concern to Directors. While they welcomed the measures to improve the functioning of the labor market, they considered that additional reform measures were necessary.

Directors noted the franc’s success in avoiding the turbulence that had affected other EMS currencies since September 1992. They also praised the authorities for their financial sector reforms and for their support of the Uruguay Round.


At their discussion in July 1992, Directors expressed concern at the continued weakness of Greece’s economic performance. Despite some improvement in 1991—including a reduction of inflation from the 1990 peak, a return to positive output growth, and a narrowing of the external current account deficit—this fell far short of what was needed.

Directors again emphasized the importance of a front-loaded approach. The dynamics of deficits and debt meant that a vigorous attack on the deficit was needed in 1992–93 to make credible the authorities’ longer-term objectives. Directors noted that monetary policy continued to be hampered by the accumulated debt burden and large financing needs of the public sector. Directors welcomed the substantial liberalization of the financial system, and Greece’s acceptance of the obligations of Article VIII.

While welcoming the improvement in the external current account and overall balance of payments in 1991, Directors stressed that strong and credible monetary and fiscal restraint would need to be in place—and be supported by a broad array of structural reforms—for current exchange rate policy to contribute to Greece’s adjustment strategy.


The performance of the Dutch economy continued to be satisfactory, Directors noted in their review in March 1993. Nevertheless, economic growth had fallen in the past year, and unemployment had begun to rise, after several years of rapid employment gains. In light of this development, Directors commended the authorities for their efforts to restore wage moderation, but underlined the need for supportive labor market and social security reforms. Many Directors welcomed the continued low level of inflation in the Netherlands.

Directors also welcomed the authorities’ continued adherence to their medium-term budget deficit reduction path, but emphasized that further deficit reduction should occur without increasing taxation. A lowering of the tax and social premium burden by curtailing social security spending was seen as essential to bolster economic performance and, in particular, to reduce disincentive effects in the labor market.

Directors observed that the authorities’ commitment to a hard currency policy (that is, pegging to the currency of a country with an established reputation for price stability) had continued to pay handsome dividends. The position of the guilder within the ERM and its standing in the financial markets had strengthened after the currency turmoil in September 1992, allowing interest rates on guilder-denominated deposits to fall below those on the deutsche mark. At the same time, the modest appreciation of the guilder within the ERM had helped to curb domestic price and cost pressures. Directors attributed these positive developments to the structural and financial policies pursued over a number of years and thought that maintaining the stance of these policies would help consolidate the gains so far achieved. They commended the authorities for their high level of official development assistance and continued support for rapidly concluding the Uruguay Round.

Developing Countries

A broad range of developing countries—from newly industrializing to low-income—were commended by the Board during their Article IV consultations for having made significant strides with macroeconomic and structural reforms, many with the financial support of the Fund. This progress often came despite an unfavorable external environment to which, as Directors frequently noted in their discussions, many developing countries were vulnerable. Most developing countries to varying degrees required further macroeconomic and structural adjustment—or a faster pace of adjustment.

Many countries undertook strong fiscal adjustment measures during 1992, although in others the fiscal position deteriorated. In general, Directors believed that fiscal policy, which needed to focus on strengthening domestic resource mobilization and improving the management of public sector resources, should remain at the heart of the adjustment effort. Adhering to fiscal targets helped to narrow external imbalances, and to meet monetary and inflation objectives, and reduced the threat of exchange market pressures.

In a number of cases, Directors drew attention to the effects of the large short-term private capital inflows, which contributed to rapid money growth and complicated exchange rate management. Among the actions that could neutralize these flows were additional fiscal restraint and tighter bank liquidity, they noted.

As a way of strengthening the budget position, Directors often stated that it was desirable to curb some items of current spending, such as wages, subsidies, and defense, while at the same time they stressed the need to maintain necessary expenditure on essential functions of the health and education sectors, and on a social safety net. Also, they cited the need for better expenditure control. Directors frequently pointed to the need for additional revenue measures, and underscored the importance of fiscal reforms—including improved tax administration—designed to enlarge the revenue base and, in some cases, raise a low tax-to-GDP ratio. In some cases, the Board emphasized that the process of fiscal adjustments should be made as early in the reform as possible.

An improvement in the budget position helped to foster private sector investment, to generate adequate public sector savings to finance valuable public investment, and, for some countries, to attract donor support.

Actions on the fiscal front needed in the Board’s view to be supported by monetary restraint, often with additional steps to liberalize the financial system. Many developing countries were commended for pursuing prudent monetary policies. Directors stressed that the authorities should exercise firm control over the credit and monetary aggregates so as to ease pressures on domestic prices and the balance of payments. Although prudent financial policies had frequently resulted in a significant reduction in inflation in many countries, in others the rate of inflation remained above that of main trading partners or had accelerated. Where deterioration on the inflation or balance of payments fronts occurred, this called for a corrective tightening of policies.

In the area of monetary policy, Directors welcomed the structural improvements that had been introduced in many developing countries, particularly the introduction, or maintenance, of interest rates at positive levels in real terms. Monetary objectives should be supported by a continuation of banking and capital market reforms, and the need for greater use of open market instruments was often noted. Directors also emphasized the importance of measures and actions that would ensure the independence of monetary policy and a proper degree of autonomy for central banks. They also called for preserving a healthy financial system and encouraged the monetary authorities to enhance their surveillance over the banking system. Monetary policy needed to be geared toward providing adequate credit to the private sector to allow it to play a leading role in the growth process.

Board members considered that developing countries generally had undertaken significant structural reforms to increase the supply of productive resources and enhance economic efficiency and competitiveness, but deficiencies persisted in some areas. These pointed to the need for elimination of labor market rigidities, incentives, subsidies, and price supports. Directors also emphasized the need to promote the diversification of production and of exports, improve the competitiveness of the economy, and strengthen the role of the private sector. At the same time, social safety nets were seen as increasingly becoming an important component of countries’ efforts to shield the most vulnerable segments of their populations from the short-term effects of corrective policies (see section on Economic Reform and the Poor, below).

Several developing countries were urged by the Board to eliminate arrears and work toward normalizing relations with external creditors. This would help some developing countries regain access to voluntary market financing. For most low-income countries, substantial financial support from the international community, on concessional terms, would continue to be necessary. All developing countries needed improved access to industrial country markets.

Exchange rate policy continued to be an important component of Article IV discussions with developing countries. The Fund’s advice in this area depends on the circumstances of each country. A few countries were urged to unify exchange rates at a realistic, market-determined level.

On the external front, a large number of countries were commended by Directors for initiatives to reduce exchange and trade restrictions, to promote greater competition, and to encourage fuller integration into the world economy. Many countries made progress toward balance of payments viability, but in many cases further adjustment efforts would be needed to establish external viability over the medium term. In addition to the external shocks to which many developing countries were vulnerable, a number of African countries faced a continuing drought in 1992; Directors in their discussions during Article IV consultations recognized the adverse impact of the drought.

Finally, in order to guide policymakers better in reformed economic environments, Board members asked a number of countries to improve the quality, coverage, and timeliness of their economic and financial data, in some cases with technical assistance from the Fund.

The Board’s discussions of the economies of China and India illustrate the substantial progress that the two largest developing countries in Asia have made against the background of the present world economic situation.


In their April 1993 review of the Chinese economy, Directors praised the country’s 1992 growth performance, which they considered to be remarkable given the weak world economic situation. They also welcomed a stronger political commitment to transforming China’s economy to one based on market mechanisms, while emphasizing that reforms must be as comprehensive as possible and that macroeconomic policy must ensure the maintenance of stability to allow the reform effort to be sustained. Directors supported the authorities’ emphasis on the rapid integration of China into the world economy but stressed that a full opening of the economy would require a deepening of exchange and trade reforms. Directors viewed the persistently poor financial performance of state enterprises as a threat to macroeconomic stability but welcomed the authorities’ efforts to reduce losses.

Turning to financial sector reform, Directors felt the most immediate step required was a strengthening of competition in the banking system by reducing the specialization among major banks and allowing the banks greater flexibility in setting interest rates while freeing them from policy-based lending. Directors also underscored the importance of developing national money and interbank markets.

In their discussion of the macroeconomic situation, Directors pointed to the growing indications of overheating that had been evident since late 1992 and emphasized that domestic financial policies had not, so far, been adequate to restrain demand growth. Directors were clearly of the view that action to curb demand was urgent. While emphasizing the need to safeguard against higher inflation, most Directors believed this should not deter the authorities from moving toward more market-based monetary management and away from direct credit control.

The persistently large fiscal imbalance was another focus of the Directors’ discussion of macroeconomic policy, and some expressed concern that the budget for 1993 failed to take a first major step toward the medium-term goals of eliminating the Government’s domestic bank borrowing, bank financing of state enterprises’ losses, and all direct subsidies to cover these losses.


In their December 1992 review, Directors commended the Indian authorities for policies that had brought a marked turnaround in economic conditions through a move away from regulation and control and toward strengthening of competition and efficiency. The external payments crisis had been overcome, foreign exchange reserves had been rebuilt, inflation had fallen to single digits, and economic growth had begun to recover. There was also progress in removing some of the obstacles to long-term growth through the deregulation of industry, liberalization of trade and foreign investment, and the initial stages of financial sector reform.

While Directors cautioned that the central tasks of macroeconomic stabilization and structural transformation were far from complete, they expressed satisfaction that the authorities’ economic program for 1992/93, including the targeted reduction in the fiscal deficit, was on track.

Directors expressed concern about the continued rapid money growth that resulted in part from larger than anticipated capital inflows, and they urged the authorities to take early steps to tighten bank liquidity. They also urged an early unification of the dual exchange rate regime.

Looking toward the medium term, Directors underscored the importance of faster and more decisive action in several key areas—notably further fiscal consolidation, implementation of tax reform, and developing a sound, competitive banking system.

Economies in Transition

Both in regular Article IV consultations and at a September 1992 discussion on developments in Central and Eastern Europe and the states of the former Soviet Union, Directors emphasized the importance of macroeconomic stabilization—including the introduction, from the outset, of appropriately tight fiscal and monetary policies. They also stressed that although necessary, macroeconomic stabilization was not a sufficient condition for successful transformation. Directors agreed that the experience of these countries demonstrated that a substantial degree of price liberalization at the outset was essential for successful reform.

Directors called for the early resolution of uncertainties in regard to monetary, payments, and financing relations within the ruble area. There was a clear need for all members of the ruble area to decide between participating in a common monetary arrangement with effective instruments for monetary control or introducing their own currency.3 Directors saw a clear need for speedy progress in working out effective arrangements for interstate trade and payments.

An orderly withdrawal from a common currency structure is likely to be less disruptive than remaining in a dysfunctional monetary union. Independent currencies will facilitate conclusion of interrepublican arrangements by separating them from monetary arrangements and settlement systems. They will encourage the development of interstate credit arrangements among commercial banks and enterprises. Perhaps most important in the context of the former Soviet Union, independent currencies should permit greater monetary discipline than has seemed possible to date. A national currency, however, does not in itself guarantee low inflation; macroeconomic reforms and monetary restraint are required.

At the September 1992 review, most Directors believed that the debate between gradualism and shock therapy had become moribund and that the key issues at present were the priorities for policy orientation and the sequencing of reform. Some Directors noted in this connection that the fundamental shock throughout this region was caused by the collapse of central planning. The issue, in the Board’s view, was not whether the Fund was imposing shock therapy, but rather how the Fund could under these difficult circumstances provide financial assistance that would effectively deal with the aftermath of the shock that had already taken place.

A most important lesson in policy adjustment for the countries of both Central and Eastern Europe and the states of the former Soviet Union was the close relationship between, and mutual reinforcement of, macroeconomic and structural policies and institution building. The difficulty of structural transformation was being reflected by widening fiscal deficits in several countries in Central and Eastern Europe. The extent to which such deficits could be tolerated was typically limited, especially in countries with still severe external constraints and high inflation. Directors cautioned that the formulation of programs in individual cases would have to weigh carefully the impact of budget deficits on the medium-term outlook and the progress achieved in narrowing domestic and external imbalances. Given the limited scope for increasing revenues, the main burden of adjustment in the short term would have to be borne by cuts in expenditures; the need for “investment in reforms” suggested that increased emphasis should be placed on the quality of expenditures.

With respect to the states of the former U.S.S.R., the Board stressed the particular urgency of establishing hard budget constraints for enterprises. The present lack of incentives for enterprises to improve their financial performance, together with problems in the payments system, were contributing to a massive increase in interenterprise arrears that was threatening to undermine the overall reform efforts in those states.

Directors further emphasized that an exchange rate policy based on a single unified rate was also an important element of the macroeconomic framework supporting the reform process. In this regard, they noted that Fund-supported programs in the countries of Central and Eastern Europe had adopted a pragmatic approach to exchange rate policy in the light of initial conditions in the various countries.

During the consultations on the Baltic states, the Board commended the authorities for the substantial progress that had already been made by Estonia, Latvia, and Lithuania in carrying out far-reaching stabilization and reform policies under extremely difficult conditions.

Directors expressed concern about the sharp fall in output and the prospect for rising unemployment, but observed that at least with respect to Estonia, the fall appeared to be bottoming out. While commending the authorities for the steps they had already undertaken to carry forward privatization and property restitution measures, they nevertheless urged them to accelerate implementation in these areas. Directors also called upon the authorities in these three countries to intensify efforts to reform the social safety net better to target scarce public resources to the neediest groups, especially as the expected increase in unemployment was likely to put pressure on the budget.

During 1992/93, the Board held Article IV consultations for three Central and Eastern European countries, the Baltic states, Russia, and four of the other states of the former Soviet Union. (For a description of specific Fund-supported programs in these countries, see the section on Policies in Member Countries, below.)

Central and Eastern Europe


At their discussion in August 1992, Directors welcomed the opportunity to review Albania’s new economic policies in the context of the country’s first Article IV consultation with the Fund. Directors recognized that the program was the best that could be achieved under the circumstances. They noted in this regard the impressive set of prior actions taken and endorsed the priorities of the program in support of which Albania had requested a stand-by arrangement—particularly the initial focus on price reform, exchange and trade liberalization, fiscal adjustment, and key elements of structural reforms.

Nevertheless, Directors pointed out that the authorities’ program faced major risks, and most speakers emphasized the need to avoid a slide toward hyperinflation. The Board further encouraged the authorities to develop a medium-term budget framework with the objective of returning to a more sustainable fiscal position. In that context, Directors emphasized the key role of strengthening tax administration, as well as proceeding with a comprehensive tax reform and an overhaul of the structure of government outlays in order to cut unproductive expenditures that were currently absorbing a large share of the budget.


In the Board’s July 1992 review, Directors commended the authorities for the progress that they had made in transforming the Polish economy over the past two years despite an adverse external economic environment, notably, the loss of a substantial part of the country’s traditional markets and an associated terms of trade shock. Directors pointed to the decline in inflation and the steady increase in the output share of the private sector as major successes. Moreover, in 1992 exports rose rapidly, the external current account returned to surplus, and external reserves recorded strong increases. Directors observed that systemic change was generally proving more difficult and time-consuming than initially envisaged, and they emphasized that an acceleration of reforms was essential to speed up the restructuring of the economy, support a sustained recovery of output, and underpin stabilization.

Many Directors noted with concern the problems in keeping with the fiscal targets for 1992. While recognizing the difficulties of coping with a weakening tax base, Directors observed that failure to contain this deficit would endanger the achievement of other policy objectives. The difficulties in extending the tax base beyond the shrinking financial base of the state enterprise sector was a point of special concern to Directors. In that regard, they welcomed the introduction of the new personal income tax and urged the authorities to introduce the value-added tax without delay.

A number of Directors stressed the importance of achieving a further reduction in inflation and of strengthening the role of the exchange rate as a nominal anchor. While welcoming the authorities’ policy of keeping interest rates broadly positive in real terms, Directors generally urged the dismantling of the directed credit programs. They further emphasized the necessity of pushing ahead with structural reform.


Directors in their May 1992 review noted that the initial phase of Romania’s reform program had resulted in important achievements. Most prices had been liberalized; all quantitative restrictions on imports had been removed; flexibility in the labor market had been introduced through collective bargaining; the financial system had been deregulated; the privatization process had been initiated; and citizens could establish businesses, compete freely in the market, and acquire and dispose of property.

Directors expressed concern, however, that the results on the stabilization front had been considerably below expectation. They accordingly viewed a strong stabilization effort and rapid advancement of structural reform as critical at this juncture of Romania’s transformation process. The Board also stressed the importance of adhering to the Government’s fiscal objectives, and it welcomed the authorities’ readiness to implement a set of contingency revenue measures in order to protect them. Directors agreed on the need for tight credit policy in 1992. They further noted that one of the more important lessons of 1991 was that enterprise reform was the key to both the successful transformation of the economy and the achievement of macroeconomic stability.

The Baltic States


Directors reiterated during their discussion in April 1993 their support for Estonia’s economic stabilization and reform program, which had been implemented in an exceptionally difficult environment. They commended the substantial progress that had been made in stabilizing the economy, as evidenced by the substantial moderation in the rate of inflation, growing confidence in the kroon, and the rapid growth of trade with industrial countries. They expressed concern, however, about the sharp fall in output and the prospect of rising unemployment, but observed that the fall in output appeared to be bottoming out.

Directors agreed with the broad thrust of budgetary policy in 1993, stressing that if additional expenditures were warranted, it was crucial that additional resources be raised through new taxes, or through offsetting measures elsewhere in the budget. The authorities were also encouraged to maintain a cautious approach toward wage policy. The Board welcomed the Government’s intention to accelerate the pace of privatization and restitution and underscored that, without rapid and determined action in that area, recovery in growth and employment would be unduly delayed. Directors also stressed the urgency of completing the market-oriented legal framework as soon as possible.


Directors at their April 1993 discussion commended the authorities for the substantial reduction in the rate of inflation and for remaining committed to the implementation of their economic program despite a difficult external and internal environment. They noted, however, that further progress in stabilization, coupled with an intensification of structural reforms, was needed. Directors attributed the success of the stabilization effort achieved so far to strong monetary discipline, underpinned by a prudent fiscal policy and supporting incomes policy measures.

While recognizing that the real appreciation of the Latvian ruble reflected a recovery from a very depreciated position, Directors expressed concern about competitiveness. As to trade policy, the Board viewed with concern the introduction of selective higher import tariffs in late 1992 that were designed to protect some sectors; they therefore welcomed the subsequent reduction in some of these tariff rates and urged the authorities to speed their removal. Directors said that program implementation had become somewhat unbalanced and urged the authorities to correct this by stepping up the implementation of structural policies, especially with respect to the enterprise sector. Another area of major concern for the Board was the weakness of the Latvian banking system. Directors recognized the general importance of external assistance, as well as the importance of open markets in the rest of the world for Latvian products.


Noting that Lithuania’s stabilization and structural reform program was being implemented under difficult conditions, Directors were encouraged at their April 1993 consultation that the quantitative performance criteria for December 1992 had been met. They nevertheless expressed concern about the larger-than-anticipated decline in output in 1992 but noted that the renewed availability of oil and the start of disbursement of loans from the EC and the Group of Twenty-Four should contribute to a gradual recovery of the real economy in 1993.

Directors also expressed concern about the slow progress made toward stabilizing the economy and attributed this—in part—to the loosening of monetary policy conditions at the end of 1992. Accordingly, they urged the authorities to tighten monetary policy. The burden of monetary policy, in the Board’s view, underscored the importance of enterprise reform and rapid progress by the banking sector toward market-based practices. Directors commended the strict application of incomes policy in the latter half of 1992. While agreeing that some increases in real wages were now justified, they were concerned that a further deterioration in Lithuania’s terms of trade was possible and urged caution in granting additional wage increases in the coming months so that incomes policy could be a positive force in reducing inflation.


During the Board’s April 1993 discussion of the Russian economy, Directors fully endorsed the staff appraisal and stressed the following broad themes: first, the difficult conditions under which the authorities had sought to implement stabilization policies and transform the economic system; second, the dangers of financial instability, which was threatening to undermine the thrust of the entire reform program, and the need for adjustment efforts to be intensified; and third, the expectation that the authorities would be able to meet the requirement to draw on the new systemic transformation facility, and that this would help them in their efforts to strengthen policies and to move to an upper credit tranche arrangement with the Fund. Directors noted that the program of financial stabilization and transition to a market economy had reached a critical juncture and that the current economic situation of balancing on the brink of hyperinflation was clearly unsustainable.

Directors further emphasized that the chief policy priority of the authorities in the period immediately ahead should be a substantial reduction in inflation, a goal that could be met only by sharply reducing the growth of monetary and credit aggregates. They believed that a durable reduction in inflation could be achieved only in the context of policies to reform the state enterprise sector, including the application of the bankruptcy code, rather than through central bank financing or budgetary transfers.

On the fiscal front, Directors observed that the continuation in 1993 of a domestic bank borrowing requirement at the level of 1992 would be incompatible with the restoration of financial stability. They stressed the need for additional fiscal measures, including increases in energy taxes, cutbacks in subsidies, and elimination of tax exemptions. They also stressed that policies toward the state enterprise sector should form a key component of the reform program. The system of financial assistance to enterprises needed to be reformed by making it transparent, temporary, conditional on restructuring, and consistent with overall macro-economic objectives. Directors underlined the importance of maintaining the momentum of systemic changes and indicated that a broad privatization program constituted the best prospect for the reform of state enterprises.

Directors noted that Russia’s external position was very difficult and that the financing requirement for 1993 would be large even with the prompt adoption of tighter policies. In this connection, they noted the recent announcements about commitments of bilateral assistance to Russia from major creditors. They welcomed in particular the progress achieved in regularizing Russia’s relations with its creditors, and especially the conclusion of a debt rescheduling with official creditors. They hoped that agreements would soon be reached with other creditors on comparable terms.

Directors noted that the Russian Federation, being by far the largest member of the ruble area, had a special responsibility for defining clearly its policy intentions, including those in regard to financial assistance to other states of the former Soviet Union.

Other States of the Former U.S.S.R.


Directors noted with grave concern in February 1993 the desperate economic situation in Armenia and the unprecedented decline in living standards. Directors recognized that the blockade of much of Armenia’s trading routes had a devastating effect on the country’s landlocked and energy-dependent economy. They expressed hope that the avenues being explored to resolve the regional conflict would be successful. In these circumstances, Directors acknowledged the virtual impossibility of Armenia being able to implement a successful stabilization program while a member of the larger ruble area. They nevertheless commended the authorities for their efforts to press ahead with the move to a market-based economy. They noted particular progress in several structural areas involving price liberalization, agricultural reform, tax reform, and the liberalization of the trade and exchange system.

The Board also expressed support for the authorities’ objective of pursuing an export-led growth strategy and welcomed the comprehensive measures taken to liberalize Armenia’s trade and exchange system. Directors nevertheless urged the authorities to reinvigorate their structural reform efforts. Some Directors encouraged the authorities to continue to work with the Fund in developing a stabilization program that would address, in a comprehensive manner, the critical policy issues facing the country.


During their March 1993 discussion, Directors commended the Azeri authorities for initiating measures to introduce market-based economic structures against a difficult background, and noted some of the relatively favorable developments in Azerbaijan compared with some neighboring countries. At the same time, they expressed concern about the more recent deterioration, particularly in budget performance. They further observed—and, indeed, many welcomed—Azerbaijan’s intention to introduce a national currency and stressed the importance of having the requisite supporting policies in place.

In that connection, several speakers were concerned that the fiscal policies presently envisaged for 1993 did not provide adequate assurance that the budget deficit could be sufficiently contained to ensure financial stability. While recognizing that both revenues and expenditures had been rising, they emphasized that the authorities should concentrate on curtailing expenditures and narrowly limiting government recourse to bank credit. Directors noted that once Azerbaijan introduced its national currency, the authorities would need to direct monetary policy firmly toward the objective of reducing the rate of inflation. Several Directors urged the authorities to raise interest rates to positive real levels in the context of the monetary and credit program for 1993.

Directors hoped that the efforts to resolve the conflict over Nagorno-Karabakh would be successful, as this would facilitate implementation of the government reform program.


At their April 1993 review, Directors commended the authorities for substantive progress made in the initial phase of the systemic reforms, in spite of a highly uncertain and difficult financial environment. They noted that, given the country’s vast natural resources, a favorable medium-term outlook could be expected with the implementation of coherent and credible reform policies. Directors welcomed the progress to date in implementing systemic reforms, including reductions in state intervention in production and trade, price liberalization, and privatization, but they stressed the need to expedite the progress on systemic reforms. They welcomed the adoption of a realistic and wide-ranging privatization program and called on the authorities to move rapidly to implementation. The importance of trade liberalization was also emphasized.

The Board nevertheless expressed regret that a comprehensive package of economic and structural policies had not yet been finalized, mainly owing to uncertainties associated with developments in the ruble area and the need for critical decisions regarding certain domestic policies. In these circumstances, implementation of a broad-based stabilization program and acceleration of systemic reforms should no longer be delayed, especially given that the authorities had shown a strengthened capacity for policymaking and implementation. Directors also agreed that a rapid and substantial lowering of inflation rates should be accorded high priority.


At their February 1993 review of the Moldovan economy, Directors recognized that adverse diplomatic and political conditions, as well as a severe drought, had contributed to a precipitous decline in GDP, financial imbalances, rapid inflation, a severe deterioration in its terms of trade, and an acute foreign exchange shortage. Nevertheless, Directors urged the authorities to formulate expeditiously a comprehensive and credible program of stabilization and structural reforms to pave the way for a successful introduction of a national currency—which most Directors strongly supported. Noting that consumer subsidies continued to constitute a heavy burden on the budget, speakers urged the authorities to pass through increases in costs—in energy and cereal prices, in particular—to consumers, while at the same time targeting support to the needy.

While welcoming the authorities’ intention to set up a treasury, Directors underscored the need for a comprehensive tax reform aimed at strengthening revenue mobilization, improving the tax structure, and bringing the revenue contribution of agriculture in line with that sector’s economic importance. The Board also underscored the importance of rapid progress in the implementation of the privatization program and urged the authorities to proceed expeditiously with small-scale privatization, which, they noted, was likely to produce an early positive supply response.

International Capital Markets

The Board’s discussion of international capital markets was held against the background of the currency crisis that enveloped the EMS in September 1992. The focus on this currency turmoil was particularly relevant, given the context in which it occurred—namely, the increasing and irreversible growth and global integration of capital markets. This integration, which is still in its early stages, has implications for the Fund’s surveillance role, the international monetary system, and the global effects of national and regional policy decisions.

Box 7Statistical Methodology

The Fund has played a major role in the revision of the UN System of National Accounts (SNA), which will be published in late 1993. The production of the 1993 SNA was a ten-year effort by five international agencies (the Fund, the Organization for Economic Cooperation and Development, the Statistical Division of the United Nations, the Statistical Office of the EC, and the World Bank). In addition to the work of the agencies, national accounts experts from a broad range of countries contributed to the revision process. The 1993 SNA is particularly important as most countries in the world are committed to implementing it, in whole or in part, as their own basis for compiling and presenting national accounts.

The Fund’s work in this unprecedented international cooperative effort has had two main goals—the overall improvement of national accounts standards and harmonization of its three specialized statistical systems with the SNA. The first goal was achieved through its active role in the management effort and by drafting a number of chapters and annexes of the 1993 SNA. The process of revision offered the opportunity to achieve harmonization of national accounting principles and those of other macroeconomic systems. Balance of payments, monetary, and government finance statistics are separate statistical methodologies that are organized to support specialized economic analysis that the framework of national accounts cannot easily do. Nevertheless, as the SNA is a global macroeconomic system, its links to other systems should be clear, and nonessential differences should be eliminated.

To promote these objectives, the Fund organized three international meetings of experts in national accounts and each of the Fund’s core areas. These meetings and the work that developed from them have led to a significant bridging of the gap between the systems. This is reflected most evidently in the almost complete harmonization of the 1993 SNA and the fifth edition of the Balance of Payments Manual (forthcoming).

In general, Directors viewed the structural changes that have taken place over the last decade in international financial markets as beneficial, bringing in their train significant efficiency gains for the world economy. However, the ability of private foreign exchange markets to mobilize at short notice a volume of resources that are much larger than those available to central banks posed serious challenges to policymakers at the regional and national level. Such an environment was not forgiving of policy inadequacies. Directors stressed the importance of more timely correction of macroeconomic imbalances, closer monitoring of exchange rates to ensure consistency with underlying fundamentals, and improved monetary coordination.

These areas are central to the Fund’s surveillance role—in particular, the timely, clear, and candid transmission to the concerned authorities of the Fund’s views on exchange rates and underlying policies. Directors stressed that a strengthening of the Fund’s surveillance function could contribute crucially to ensuring that policymakers take into account the global implications of national and regional policy decisions.

To several Directors, the ERM crisis of September 1992 provided an object lesson on the limits of the discipline that capital markets could exert over government policies. Not only was such discipline far from fallible, but it was not necessarily applied smoothly or consistently. During the currency turmoil, speculative attacks were launched not only on currencies with relatively weak fundamentals but on those with stronger fundamentals as well. It was noted that the definition of fundamentals may well need to be extended beyond the traditional macroeconomic indicators to include the market’s assessment of the political will of the authorities to make their exchange rate objectives paramount relative to the domestic requirements of monetary policy. Nevertheless, sound policy and strong fundamentals were still the best preventatives against exchange rate crises under both fixed and floating rate regimes.

A prologue to the ERM crisis was the series of “convergence plays,” which brought to light the insufficient degree of convergence of underlying economic conditions among the ERM participants. Over 1987–91, large cumulative amounts of capital flowed into the higher-yielding ERM currencies. These inflows were fueled by the diminishing expectation of international investors of further exchange rate changes on the way to economic and monetary union EMU, thereby creating the potential for large outflows once uncertainties surfaced. In the event, the assumption of complete fixity of exchange rates could not hold up against the evidence of insufficiently deep and durable convergence among the EMS countries, and there were massive shifts out of some currencies, precipitating the ERM crisis.

Directors noted that a broad range of private sector participants were involved in the ERM crisis, including banks, securities houses, institutional investors, hedge funds, and corporations. Nevertheless, as noted by Directors, the markets worked reasonably well during the crisis: no major financial firms failed, and there was no persistent seizing up of the largest asset markets. Further, the crisis remained localized to European currency markets. Some Directors attributed this relative stability to the improvements in risk-control systems that had been instituted following the equity market crash in 1987. They cautioned, however, against complacency and stressed the importance of making further progress in the improvement of risk-control systems, since there was no guarantee that the absence of contagion that characterized the ERM crisis would necessarily be the case in a future currency crisis.

In their evaluation of the tactics the authorities used to defend the ERM parities during the currency crisis, Directors noted that effective intervention depended on the degree of coordination among the participants, as well as the quality of the intervention. The crisis had made clear the limits of sterilized intervention when markets are convinced that certain exchange rates were out of line with fundamentals and interest rate coordination was under tight constraints. In an environment of strong fundamentals and monetary policy cooperation, however, Directors pointed out that intervention could still play a supporting role in countering short-term disorderly market conditions.

Several Directors suggested that the scope was limited for borrowing from private markets by the official sector to correct imbalances between their resources and those of the private market participants. But in the view of other Directors, merely the perception of inadequate reserves could trigger a speculative attack on a currency. An increase in the supply of official reserves or of official lines of credit warranted consideration, in the view of these Directors, including a new short-term facility from the Fund. A few Directors mentioned the possibility of a role for the SDR in this area.

Another lesson of the ERM crisis was that the scope of using aggressive interest rate action in defense of fixed rates was much greater where participants have healthy fundamentals and where there is reasonable harmony between internal and external monetary policy requirements. These conditions did not prevail in many of the ERM countries during the crisis. Several Directors felt that the effectiveness of interest rate policy in managing exchange rates depended on the ability of the authorities to convince the market that their commitment to the exchange rate took precedence over other monetary policy objectives. Several Directors agreed to central bank independence as a means of enhancing the credibility of commitment to an exchange rate. However, possibly more important than institutional arrangements was the ability of the authorities to convince the market that they were pursuing sound anti-inflationary policies.

Directors were unanimous in their support of open capital markets and in their rejection of the use of temporary capital controls during an exchange rate crisis. Directors were also cognizant, however, of the risk to banks and other institutions that exchange rate volatility posed, and felt that banks should be holding adequate capital against foreign exchange positions. They noted the efforts by the Basle Committee on Banking Supervision, which was readying proposals for extending bank capital requirements.

Directors considered actions that might be taken to forestall future crises in currency markets, as well as options for improving the current exchange rate system. In the case of the ERM, many Directors felt that future crises could be avoided if frequent, small changes were made within the ERM band in combination with strong continuing efforts to promote greater convergence. Others found considerable scope for improvement within the existing rules—taking earlier interest rate action, monitoring interest rates for consistency with fundamentals, and improving monetary policy coordination.

International Liquidity and the SDR Mechanism

One of the Fund’s primary purposes is to facilitate the expansion and balanced growth of international trade through the improved functioning of the international monetary system. International liquidity and the level of members’ international reserves are important components of this system. The SDR, which is an international reserve asset, was created to supplement existing reserves as and when the need arises. On two occasions, during the financial year, the Board reviewed the state of international liquidity in the context of members’ reserve positions to determine whether an additional allocation of SDRs was called for.

In the first review in June 1992, the Board discussion focused on three topics: the long-term global need for reserve supplementation and the case for an SDR allocation during the sixth basic period (1992–96); issues related to the prolonged use of SDRs; and proposals for linking allocation, redistribution, and conditionally.

In assessing the long-term global need for reserve supplementation, many Directors observed that a global need did not require that all, or nearly all, countries needed an increase in their reserves. Conversely, the fact that many individual countries or groups of countries needed to increase their reserves did not necessarily imply that a global need for reserve supplementation existed. Moreover, if a long-term global need existed, an allocation of SDRs could be made, even if that need could be met through other means. These Directors believed that it was particularly urgent to increase the supply of international reserves for countries facing severe reserve stringencies. Low reserve holdings in the states of the former U.S.S.R., the small low-income countries, and the sub-Saharan African countries were viewed as having potentially severe adverse implications, not only for the individual economic performance of those countries but also more generally for the world economy.

Other Directors, however, did not share the view that there was a long-term global need for reserve supplementation and therefore did not see the case for an SDR allocation. These Directors stressed three considerations. First, many of the countries that accounted for the bulk of world trade and financial flows did not appear to face any difficulties in satisfying their growing demand for reserves. Moreover, because the ratio of non-gold reserves to imports had risen for many developing countries, it did not appear that the reserve creation mechanism was operating abnormally. Second, these Directors stated that the low reserves of many countries often reflected inadequate or inappropriate macroeconomic and financial policies; such situations should be corrected by policy adjustments supported by conditional lending, rather than through a global mechanism such as an SDR allocation. Finally, the use of the SDR system to deal with a regional problem could impair the reserve asset characteristics of the SDR.

Many Directors emphasized the importance of using the SDR system to create reserves to hold. It was noted in this connection that many developing countries retained only a relatively small fraction of their cumulative SDR allocations. Differing views were expressed on the usefulness of measures to reduce prolonged net use of SDRs, but there was no support for the use of a penalty interest rate to reduce such prolonged use. It was broadly agreed that, in current circumstances, a moderately sized SDR allocation would not be a threat to world price stability.

A number of Directors supported proposals for a post-allocation redistribution of SDRs. These Directors stated that the beneficial effects of an SDR allocation could be enhanced if such redistribution directed reserves to those countries with the greatest need. They also highlighted the need to increase both conditional resources and owned reserves for countries implementing structural adjustment programs. Other Directors, however, noted that such redistribution proposals were not consistent with the objective of the SDR system, which in their view was to meet over time the growing need of the entire membership for reserves. In addition, some Directors objected to the provision of conditional liquidity through the SDR system and felt that the need for conditional liquidity should be addressed through quota increases.

Although the broad support needed for an SDR allocation was lacking, Directors were in general agreement that the possible need for such an allocation in future should be kept under active review.

The second review, which took place in April 1993, focused mainly on the long-term global need, which is fundamental to any consideration of an SDR allocation. In this connection, Directors who advocated an SDR allocation at the first discussion also stressed that the assessment of long-term global need involved the exercise of judgment and could not be reviewed only within a statistical framework of reserves developments, including the distribution of reserves.

These Directors noted that the reserves of several countries were very low, and that for 40 percent of the Fund’s membership, non-gold reserves amounted to at most ten weeks of imports, and far less in terms of their total current account transactions. Most Directors agreed that the economic and financial costs of building up reserves by borrowing were very high for many countries, even for those that had established sufficient creditworthiness. These Directors considered that if the Fund did not directly help members to build up their reserves, there was a risk that the international monetary system could be disrupted. The fact that 38 members that had joined the Fund since the last allocation had not been allocated SDRs raised the issue of equity.

Other Directors who in the earlier discussion did not feel there was a need for a reserve supplement were less convinced that an SDR allocation would produce the desired effect of helping the low-reserve countries build up their reserves. They noted that the conditional resources available through the Fund’s facilities would perhaps better meet medium-term needs, and they expressed some concern that an SDR allocation could weaken these countries’ commitment to strong programs of economic reform and adjustment.

All Directors agreed that making the SDR the principal reserve asset of the international monetary system was an objective of the Fund’s Articles of Agreement but was not a criterion for justifying an allocation. Many Directors thought that this objective could not be met without increasing the pace of SDR allocation in the future, and they stressed that continued reliance on reserve currencies alone to provide the supply of reserves would not be compatible with the objective.

On balance, most Directors believed that the case for long-term global need had been made to their satisfaction and they could therefore support an SDR allocation. Other Directors, however, felt that other means of international liquidity creation could satisfy the reserve needs for many members and that, for other members, conditional, rather than unconditional, liquidity might be a more appropriate response to their need for reserve supplementation. Therefore, although most Directors thought that the Fund should be prepared to cover a small share, say, 10 percent, of the projected increase in reserve demand over the sixth basic period, the broad support for an allocation at this time was lacking.

The decision to keep the need for an allocation under active review was reinforced by the Interim Committee, which, during its meeting in April 1993, requested the Board to assess the long-term global need for a supplement to existing reserve assets, the potential economic and monetary effects of an allocation, and the future of the SDR as a reserve asset. The Committee asked that a report on this work be submitted to it at its next meeting in September 1993.

Fund Financial Support of Member Countries

In 1992/93, 11 stand-by arrangements totaling SDR 2.0 billion, and 3 extended arrangements totaling SDR 1.2 billion, were approved. These commitments of SDR 3.2 billion were lower than the SDR 8.1 billion committed in 1991/92, mainly because of the improved economic performance of many developing countries. At the end of April 1993, 15 countries had standby arrangements with the Fund, with commitments amounting to SDR 4.5 billion, while there were 6 extended arrangements in effect, with commitments amounting to SDR 8.6 billion. Cumulative commitments under SAF and ESAF arrangements, including expired arrangements, totaled SDR 4.6 billion, of which SDR 3.7 billion had been disbursed—SDR 0.6 billion in 1992/93.

During the financial year, purchases from the Fund’s General Resources Account, excluding reserve tranche purchases, amounted to SDR 5.3 billion. Repurchases amounted to SDR 4.1 billion. Fund credit outstanding in the General Resources Account increased for the third year in a row, to SDR 24.6 billion at the end of April 1993.

A new systemic transformation facility (STF) was established in April 1993. The Board also reviewed the experience of 19 low-income countries under ESAF arrangements and agreed that the ESAF had proved effective in helping these countries formulate macroeconomic and structural reforms. The Board reached a broad consensus on a successor facility to the ESAF and agreed that this should be introduced in a timely manner.

Access Policy

With the quota increases under the Ninth General Review of Quotas becoming effective, the Fund adopted new access limits on the use of its resources by member countries. In addition, the financial terms for use of the Fund’s general resources were simplified and a technical provision of the access policy was eliminated to ensure a more appropriate application of conditionality.

The new access limits, expressed in terms of the new quotas, became effective on November 11, 1992. They are intended broadly to maintain potential access to the Fund’s resources for the membership as a whole (see Box 8). These limits ensure that the Fund will be able to continue to meet its central role in supporting and catalyzing other support for members’ economic adjustment efforts, while maintaining a sound liquidity position in the period ahead.

The limits are not targets, and access to Fund financing within the limits will continue to vary in each case, according to the circumstances of the member. In exceptional circumstances, the Fund may still approve stand-by or extended arrangements for amounts in excess of these limits. Moreover, the new access limits are intended to be temporary in nature and, therefore, will be reviewed annually by the Board in light of all relevant factors, including the magnitude of members’ balance of payments problems and the Fund’s own liquidity situation.

Board discussion of the new access policy in October 1992 underlined Directors’ concerns about the need both to safeguard the Fund’s liquidity position and maintain the Fund’s critical catalytic role in supporting members’ adjustment efforts.

Representation of Member Countries

At the 1992 Annual Meetings, the Chairman of the Board of Governors, following the recommendations of the Joint Procedures Committee, took a series of decisions concerning the representation of Haiti, Somalia, and Yugoslavia. With respect to Haiti, the Chairman decided to accept the credentials of the delegation appointed by the Government in exile of President Jean-Bertrand Aristide, thus denying the credentials of the delegation appointed by the government in Port-au-Prince that was in effective control of the territory and administration of the member. In the situation of Somalia, the Chairman decided to leave the seat of Somalia unfilled. Finally, for the Socialist Federal Republic of Yugoslavia, the Chairman denied the credentials of the delegation from the Federal Republic Yugoslavia (Serbia/Montenegro), and the seat was left unfilled for the Annual Meetings.

Box 8Fund Facilities and Policies

The facilities and policies through which the Fund provides financial support to its members differ, depending on the nature of the macroeconomic and structural problems they seek to address and the degree of conditionality attached to them.

Regular Facilities

  • Tranche policies. The Fund’s credit under its regular facilities is made available to members in tranches or segments of 25 percent of quota. For first credit tranche purchases, members are required to demonstrate reasonable efforts to overcome their balance of payments difficulties. There are no performance criteria and repurchases are made in 3¼ to 5 years. Upper credit tranche purchases are normally associated with stand-by arrangements. These typically cover periods of one to two years and focus on macroeconomic policies—such as fiscal, monetary, and exchange rate policies—aimed at overcoming balance of payments difficulties. Performance criteria to assess policy implementation—such as budgetary and credit ceilings, reserve and external debt targets, and avoidance of restrictions on current payments and transfers—are applied during the period of the arrangement and purchases are made in installments. Repurchases are made in 3¼ to 5 years.
  • Extended Fund facility. Under this facility, the Fund supports medium-term programs through extended arrangements that generally run for three years (up to four years in exceptional circumstances), and are aimed at overcoming balance of payments difficulties stemming from macroeconomic and structural problems. Typically, a program states the general objectives for the three-year period and the policies for the first year; policies for subsequent years are spelled out in annual reviews. Performance criteria are applied, and repurchases are made in 4½ to 10 years.

Special Facilities

  • Systemic transformation facility (see pages 60–61).
  • Compensatory and contingency financing facility (CCFF). The purpose of this facility is twofold. The compensatory element provides resources to members to cover shortfalls in export earnings and services receipts and excesses in cereal import costs that are temporary and arise from events beyond their control. The contingency element helps members with Fund rangements to maintain the momentum of reforms when faced with a broad range of unforeseen, adverse external shocks, such as declines in export prices, increases in import prices, and fluctuations in interest rates. Repurchases are made in 3¼ to 5 years.
  • Buffer stock financing facility. Under this facility the Fund provides resources to help finance members’ contributions to approved buffer stocks. Repayments are made within 3¼ to 5 years, or earlier.

Emergency Assistance

In addition to balance of payments assistance under its tranche policies and special facilities, the Fund provides emergency assistance in the form of purchases to help members meet balance of payments problems arising from sudden and unforeseeable natural disasters. Such purchases do not involve performance criteria or the phasing of disbursements and must be repurchased in 3¼ to 5 years.

Facilities for Low-Income Countries

  • Structural adjustment facility (SAF) arrangements. Under these arrangements, the Fund provides resources on concessional terms to support medium-term macroeconomic adjustment and structural reforms in low-income countries facing protracted balance of payments problems. The member develops and updates, with the help of the Fund and the World Bank, a medium-term policy framework for a three-year period, which is set out in a policy framework paper. Within this framework, detailed yearly policy programs are formulated and are supported by SAF arrangements, under which annual loan disbursements are made. The programs include quarterly benchmarks to assess performance. The rate of interest on SAF loans is 0.5 percent and repayments are made in 5½ to 10 years.
  • Enhanced structural adjustment facility (ESAF) arrangements. The objectives, conditions for eligibility, and program features under these arrangements are similar to those under SAF arrangements. However, ESAF arrangements differ in the scope and strength of structural policies, and in terms of access levels, monitoring procedures, and sources of funding. The cutoff date for commitments under the ESAF is November 30, 1993. Board discussions on an ESAF successor facility are summarized on pages 63–64.

In light of these decisions, the Executive Board, on October 30, 1992, endorsed a series of proposals concerning the Fund’s relations with these three members. With respect to Haiti, the Board decided that the Governor appointed by the Government of President Aristide would continue to be accepted as Governor of the Fund and that this Government would be asked to perform all obligations of membership. With respect to Somalia and the Socialist Federal Republic of Yugoslavia, the Board found that there were, at that time, no Governors for these members but that the designation of their respective fiscal agents and depositories would remain effective. The Fund would therefore continue to deal with these fiscal agents and depositories.

On December 14, 1992, the Fund determined that the former Socialist Federal Republic of Yugoslavia had ceased to exist, and therefore ceased to be a member of the Fund. At the same time, the Fund decided that the Republic of Bosnia and Herzegovina, the Republic of Croatia, the former Yugoslav Republic of Macedonia, the Republic of Slovenia, and the Federal Republic of Yugoslavia (Serbia/Montenegro) are the successors to the assets and liabilities of the former Socialist Federal Republic of Yugoslavia in the Fund, and, subject to specified conditions, may succeed to its membership in the Fund.

On January 15, 1993, the Fund’s Executive Board determined that the Republic of Croatia and the Republic of Slovenia had fulfilled the necessary conditions to succeed to the membership of the former Socialist Federal Republic of Yugoslavia in the Fund. A determination to the same effect was made with regard to the former Yugoslav Republic of Macedonia on April 21, 1993.

Systemic Transformation Facility

In view of the enormous problems confronting Russia and the other states of the former Soviet Union, as well as the other economies in transition, the Board in April 1993 agreed to the creation of a new temporary facility, the systemic transformation facility (STF).

The STF is specially designed to extend financial assistance to members experiencing severe disruptions in their trade and payments arrangements due to a shift from significant reliance on trading at nonmarket prices to multilateral, market-based trade. Such members would include those at an early stage of the transition process and as yet unable to formulate a program that could be supported by the Fund under its existing facilities and policies.

  • The STF is temporary in nature and will be in effect through 1994.
  • Use of the STF will be open to members experiencing balance of payments needs resulting from severe disruptions in traditional trade and payments arrangements. Such needs could be manifested by (1) a sharp fall in total export receipts on account of a shift from a significant reliance on trading at nonmarket prices to multilateral, market-based trade; (2) a substantial and permanent increase in net import costs, due to a shift toward world market pricing, particularly for energy products; or (3) a combination of both.
  • Under the eligibility provisions, it is expected that the primary focus of the STF will be the states of the former Soviet Union and the former participants in the Council for Mutual Economic Assistance (CMEA). In addition, eligibility may extend to a number of countries in Asia, Europe, and the Middle East that are undergoing the same kind of transition, or which had very close ties with the CMEA or the former Soviet Union and which are being significantly affected by that transition.
  • For members that have or already have had IMF arrangements, it would normally be expected that the use of the new facility would be in the context of their existing or a future arrangement and could, when appropriate, result in an increase in their overall access to IMF resources.

For countries seeking assistance under the STF, outside an upper credit tranche or an ESAF arrangement, the Fund will need to be satisfied that the member will cooperate in solving its balance of payments problems and, specifically, that it will move as soon as possible toward policies that the Fund could support under an upper credit tranche stand-by, extended, or ESAF arrangement. Significant policy actions designed as first steps in this process will be expected, including prior actions. Progress toward stabilizing the economy, stemming capital flight, and implementing structural and institutional reforms needed to create a market economy and to conduct economic policy in a market framework will be emphasized. In particular, convincing actions to stabilize monetary conditions will be a precondition for those member countries where inflation has been unacceptably high or is accelerating.

The request for financing will be accompanied by a written policy statement describing the objectives of economic policy; macroeconomic projections; structural, fiscal, monetary, and exchange measures to be implemented over the period covered by the STF; and, if applicable, a technical assistance program. The member will be expected to agree not to intensify exchange or trade restrictions or introduce new restrictions or multiple currency practices, and will also agree to cooperate with its trading partners in seeking constructive solutions to common problems.

For countries using the new facility in the context of existing or future upper credit tranche standby, extended, or ESAF arrangements, the approval of such an arrangement, or the completion of a review, would satisfy the conditionality requirements for use of the STF.

Access to the new facility is limited to not more than 50 percent of quota. Access will depend on a balance of payments need stemming from the disruption of a member’s traditional trade and payments arrangements, and could be in addition to any financing obtained under other Fund facilities. Disbursements are made from the Fund’s General Resources Account; the rate of charge will be the same as for other uses of the Fund’s general resources: repayment terms of 4½–10 years will be the same as for financing under the extended Fund facility.

Financing will be provided in two disbursements: half of the total financing will be disbursed at the outset. The remainder would be made available normally about 6 months and not later than 12 months after the first purchase, depending on continued cooperation and policy implementation, satisfactory progress toward agreement on an upper credit tranche stand-by, extended, or ESAF arrangement, articulation of a quantified financial program—where this was not already in place—and progress in mobilizing financing from other sources. In some cases, the second disbursement could take place in less than 6 months, depending on policy implementation; and it could take place after 2 months where the member reached agreement on a new upper credit tranche stand-by, extended, or ESAF arrangement or a review was completed under an existing arrangement. Provided that the first disbursement is made by the end of 1994, a second drawing may be completed by the end of 1995.

Meeting in Washington on April 30, 1993, the Interim Committee welcomed the Fund’s prompt response to the extraordinary circumstances being faced by a number of its members as a result of the widespread transition to market-based economic systems. In the Committee’s view, the STF would enable the Fund to play its essential role in promoting this historic transformation. The Committee expressed confidence that a number of members would qualify early for support, thereby paving the way for further support through the Fund’s customary facilities.

Compensatory and Contingency Financing Facility

In January 1993, the Board reviewed recent experience with the compensatory and contingency financing facility. Certain modifications to the compensatory element were approved, while the contingency element was simplified considerably to provide members with a more flexible means of reducing the vulnerability of Fund-supported programs to unexpected external developments.

Enhanced Structural Adjustment Facility

When the Board reviewed the experience of 19 low-income countries under arrangements under the enhanced structural adjustment facility (ESAF) in March 1993, there was broad agreement that the facility had proved an effective mechanism for Fund involvement in low-income countries and was a useful vehicle for formulating macroeconomic policies and structural reforms in a medium-term perspective.

The experience under ESAF-supported programs, while diverse, had been favorable. Notwithstanding exceptionally weak initial conditions and adverse exogenous developments affecting many countries, most indicators of economic performance had improved: real GDP growth, and export volume growth in particular, had strengthened and inflation had fallen. Although external current account deficits on average had widened, this was mainly due to worsening terms of trade and, in a few countries, higher investment. The latter reflected aid inflows, catalyzed by adjustment policies. The largest improvement had been in countries that had undertaken forceful structural reforms and had suffered the least from worsening terms of trade.

Welcoming the substantial structural reforms made under ESAF programs, Directors noted strong progress in liberalizing exchange and trade systems, eliminating price controls, reducing the role of agricultural marketing boards, and freeing interest rates. The need for supportive market-opening measures in the major export markets for these countries was emphasized.

Directors regretted that considerably less progress had been made in reforming public enterprises—an issue for most of the countries under review—and stressed that a more forceful effort was needed to address this issue in close collaboration with the World Bank. On financial sector reform, Directors welcomed progress in liberalizing direct controls over credit allocation and achieving positive real interest rates. They emphasized the need to press ahead with bank restructuring, improvements in banking supervision, and the legal and institutional changes for the transition from direct to indirect instruments of monetary control. Some suggested a greater role for prior actions in areas critical to ensure the effectiveness and success of programs.

While Directors welcomed the progress in reducing central government budget deficits, they considered that fiscal deficits remained excessive and that, in most cases, more ambitious policy adjustments were needed in ongoing and future programs. These adjustments needed to come from fundamental reforms to expenditure control and tax systems.

Many of the countries under review had actively used exchange rate policy supported by internal, particularly fiscal, adjustment and by structural reform in the exchange and trade systems. In that connection, Directors noted the importance of sustained financial discipline to maintain the improvements in competitiveness achieved in recent years, and stressed the need for countries to respond quickly and adequately to adverse terms of trade shocks.

Progress toward external viability had differed considerably among the countries under review. While almost all had been able to halt a deterioration in their debt profiles during their SAF and ESAF arrangements, only about half had progressed significantly toward external viability. The countries that had made the most progress in this area were those that had shown the strongest improvement in domestic economic performance.

In countries where there was less progress, adverse terms of trade developments, difficulties in policy implementation, and exceptionally high initial debt burdens had played a role. Many low-income countries still faced excessive debt burdens, and Directors urged the flexible implementation of enhanced concessions in Paris Club debt reschedulings—and some even called for further enhancement of these concessions—to alleviate exceptional debt burdens, provided that sound policies were sustained. As foreseen in current Paris Club agreements with low-income countries, this would also require timely action on the stock of debt tailored closely to individual country circumstances. Several Directors emphasized that progress toward external viability should be given greater emphasis in ongoing and future programs.

The technical assistance and training needs of the low-income countries remained substantial, pointing to the importance of carefully targeting this kind of assistance to the areas of greatest need: improved expenditure control, tax administration, and financial sector reform were obvious target areas. Several Directors focused on the need for an adequate administrative capacity if countries were to benefit fully from ESAF-supported programs.

In general, Directors approved of the objectives and design of the programs supported by ESAF resources. They stressed the need for strong political commitment by the authorities and the importance of “ownership” of the program by the country. Directors reconfirmed the importance of a medium-term perspective for adjustment and of the emphasis on structural reform and institution building to support strong macroeconomic policies. The ESAF-supported programs to date had made it clear that structural reform and institution building took time and required sustained effort. This process was now well under way in many low-income countries and deserved the Fund’s continued support through concessional resources.

Looking to the future, the Board saw a need to step up efforts to improve the quality of data, especially for the public sector and national accounts, debt, and the financial sector. On the design of programs, Directors emphasized the need for timely reassessments of program objectives and policies in light of unanticipated changes in external developments and to give greater recognition to the downside risks. They stressed the usefulness of contingency mechanisms and safety margins in programs.

Directors welcomed an increased emphasis on social issues and stressed the importance of protecting the more vulnerable social groups from the impact of adjustment policies. They asked for closer collaboration between the Fund and World Bank staffs in designing social safety nets.

Since the initial rationale for the ESAF remains relevant, there was a broad consensus among Directors at an April 1993 meeting that an ESAF-type facility should continue to be available for a further period of operations, and that a successor facility should be introduced in a timely manner to provide continuity after the November 1993 cutoff date of commitments under the current ESAF Trust. There was broad support for a time frame of three years from December 1, 1993 for commitments under the successor, as this would meet the currently foreseen needs of eligible countries, while signaling the essentially temporary nature of the operations. In relation to the financing needs of ESAF-eligible members, SDR 6 billion was considered appropriate for such operations. For funding the successor facility, Directors focused their attention on two alternatives: the use of resources from the General Resources Account, with interest subsidies from an administered account, and continuation of the current ESAF Trust funding structure.

Directors also agreed that the basic modalities of the current ESAF had worked well and should be retained. These pertain to eligibility, qualification for assistance, access policy, conditionality, and program monitoring. Most Directors concluded that eligibility should remain essentially unchanged from the current ESAF. Possible expansion of eligibility would continue to be considered case by case, based broadly on the criteria of per capita income and IDA (International Development Association) eligibility. Qualifications for assistance would also remain unchanged, and would involve close collaboration with the World Bank, in particular through the policy framework paper.

Regarding conditionality, programs supported by the ESAF successor would continue to be set in a three-year framework and aim at promoting, in a balanced manner, both balance of payments viability and growth. Drawing on the experience of the ESAF so far, programs would be expected to accelerate progress toward external viability and to feature in particular firm discipline in financial policies and a sharp focus on structural reforms. Directors stressed the need for greater attention to protection of programs through contingency mechanisms and appropriately designed social safety nets. Importance was attached to well-targeted and timely provision of technical assistance, in cooperation with other institutions—including the World Bank and bilateral donors—as a complement to ESAF programs, and to strengthening the country’s administrative capacity to implement reforms. Directors also stressed the importance of further progress in rationalizing public expenditure away from unproductive uses, including military spending.

Meeting in Washington on April 30, 1993, the Interim Committee welcomed the improved performance of developing countries as a group, but noted many low-income countries, particularly in Africa, still faced difficult economic situations and a lengthy process of adjustment. Encouraging the Fund to continue its efforts in helping to implement adjustment and catalyze external financing through the ESAF, the Committee invited the Executive Board to complete its work on a successor facility by the end of November 1993. The Board was encouraged to give urgent consideration to all the options for financing the successor facility.

The experience of the SAF and the ESAF has illustrated the close cooperation that exists between the Fund and the World Bank in coordinating policy advice and financial assistance to help members progress toward sustained economic growth, stability, and development. Although their charters give them different though complementary mandates, both institutions seek to promote sustained economic growth, stability, and development in their member countries. The policy framework paper process under the SAF and the ESAF is strengthened by promoting a more central role for the countries receiving assistance and a greater involvement of donors, as well as through close collaboration between the two staffs. The Fund staff relies to a considerable extent on the advice of the staff of the World Bank in preparing medium-term policy measures designed to address the social aspects of SAF- and ESAF-supported programs.

Economic Reform and the Poor

The Fund’s concern for the poor is reflected in its policy dialogue and advice, and in the measures incorporated in programs, as well as in the technical assistance in the area of social safety nets provided during 1992.

Many of the policies that are needed to achieve economic stabilization, including appropriate exchange rates and producer prices, are directly beneficial to the poor; for example, they provide real income gains to small farmers and increase activity levels for the poor. Some policies, however, such as major adjustments in relative prices, or in the overall size of the public sector to achieve a sustainable budgetary position, may have a negative impact on some poor or vulnerable groups in the short run. Particular mitigating measures may be needed to protect such groups from a decline in their living standards below an acceptable minimum. Together, these measures could be considered a social safety net with respect to a country’s adjustment effort.

Such social safety nets depend partly on existing social policy instruments and institutions, with appropriate modifications. These include formal social security arrangements and specific and transitory interventions, such as targeted consumer subsidies and public works assistance. The choice of social safety nets for a particular country depends crucially on the nature of the adjustment envisaged, as well as the country’s institutional and administrative capabilities.

Policy Advice in Fund-Supported Programs

The reform of consumer subsidies has figured prominently in Fund-supported programs—including under SAF and ESAF arrangements—for a number of developing countries, as well as in policy advice provided to countries in transition to a market economy. Adjustments that are needed to reduce budgetary outlays and provide appropriate producer incentives have been accompanied by a variety of social safety net measures, including limited transfers to the vulnerable in cash or kind. Such measures are used in Central and Eastern European transition economies and some states of the former U.S.S.R., as well as in developing countries, such as Guyana and Ethiopia.

In many countries, a reduction in the public sector wage bill has been required. The Fund has supported measures to avoid undue compression of the wage structure and, at the same time, to provide for those employees who might become unemployed because of retrenchment in the civil service or the military (for example, in Barbados, Benin, Ethiopia, and Mozambique). The restructuring or privatization of state-owned enterprises has been important in many former centrally planned economies, and measures have been proposed to cater for the unemployed. Where mitigating measures have been too generous, as with open-ended unemployment benefits, reform has been advised. The reform would not reduce incentives for job search, would be feasible from the budgetary perspective, and would provide an adequate social safety net (for example, in Poland and several states of the former U.S.S.R.). Here the role of targeted employment assistance, in conjunction with other measures for local assistance, has featured in a number of different contexts.

In many countries, inappropriately designed formal social security instruments, particularly for pensions and health care, have generated severe budgetary distortions. Fund advice has been provided in some cases through technical assistance.

Technical Assistance in Social Safety Nets

Technical assistance concerning social safety nets, provided often in connection with a Fund-supported program, serves to clarify the options that might be available to a government, and consequently forms an input to the government’s sustainable adjustment effort. This form of assistance is becoming an increasingly important element of the Fund’s support of adjustment efforts in a variety of countries.

Technical assistance has been provided in several transition economies (for example, Belarus, Kyrgyzstan, and Ukraine) to develop measures to support subsidy reduction and to assist with the restructuring of the public sector. Countries facing severe budgetary imbalances as a result of major social security programs, or that are considering major reforms to existing measures, have increasingly turned to the Fund for advice. Such assistance in the area of pensions has been given to Greece, Indonesia, the states of the former U.S.S.R. and to Brazil, Bolivia, and other Latin American countries. In this way, work on formal social security instruments complements efforts that are made in the area of social safety nets, which are related more to the adjustment and transition period.

Policies in Member Countries

Of the 11 countries for which the Fund approved new stand-by arrangements during 1992/93, 4 were in Central and Eastern Europe (Albania, the Czech Republic, Poland, and Romania); 3 were the Baltic states (Estonia, Latvia, and Lithuania); and 1 was a state of the former Soviet Union (Russia). The other three members for which stand-by arrangements were approved were Costa Rica, Guatemala, and Uruguay. Arrangements under the extended Fund facility were approved for Jamaica, Peru, and Zimbabwe. A SAF arrangement was concluded with Ethiopia, and ESAF arrangements were concluded with Benin, Burkina Faso, Equatorial Guinea, Honduras, Mali, Mauritania, Nepal, and Zimbabwe. Pakistan received emergency assistance, and Moldova obtained financing from the CCFF.

The collapse of Albania’s system of central planning and rigid economic controls has been accompanied by a breakdown of most governmental institutions. Since 1990, the downward spiral of the economy has worsened, and financial and external imbalances have widened dramatically. In spite of these very difficult conditions, the new Government has embarked on a comprehensive reform program to rebuild essential institutions, re-establish financial stability, and move toward a market-based economy. It has implemented a threefold strategy centering on price reform, liberalizing the exchange and trade system, and bringing domestic demand in line with available resources. The 1992–93 program aims at stabilizing output in 1993, with emphasis on an early revival of agriculture; a reduction in monthly inflation to 2–3 percent by mid-1993, from 6 percent in June 1992; and a gradual building up of the country’s international reserves. On August 26, 1992, the Fund approved a one-year standby arrangement for SDR 20 million in support of the Government’s economic and financial program.

To address Benin’s continuing economic problems, the authorities adopted a medium-term program for 1992-95 aimed at further reducing financial imbalances and accelerating the diversification of the economy. The Fund approved a three-year ESAF arrangement for Benin of SDR 46.95 million on January 25, 1993.

The first year’s (1992–93) program supported by the ESAF aims at real GDP growth of 4 percent in 1993, an inflation rate of 3 percent, and a further improvement in Benin’s external payments position. The Government intends to reduce its overall budget deficit (on a commitment basis) to 6.7 percent of GDP in 1993 by broadening the tax base and rationalizing public spending. Monetary and credit policies are designed to support the program’s overall objectives while increasing the volume of credit available to the private sector.

Burkina Faso, in early 1991, initiated a significant reorientation of economic policies and considerable progress was made in the area of macroeconomic and structural policies. In contrast, economic developments in 1992 were disappointing as a number of external and political factors combined to slow the growth of domestic output and incomes, worsen public finances, and weaken the external position.

On March 31, 1993, the Fund approved an ESAF arrangement for Burkina Faso of SDR 48.62 million to support its economic and financial program for 1993–95, which aimed at achieving an average annual growth rate of real GDP of 3–4 percent, reducing progressively the fiscal deficit from an estimated 6.1 percent of GDP in 1992 to about 2.8 percent of GDP in 1995, limiting the rate of inflation to some 2½ percent a year, and reducing the external current account deficit to roughly 14 percent in 1995.

Since mid-1990, Costa Rica has been implementing an economic and financial program, supported by the Fund, to reduce imbalances in the economy and improve growth prospects through greater reliance on market forces. Preliminary data for 1992 indicate that real GDP increased by more than 7 percent owing to a resurgence in private consumption and strong growth of private investment; unemployment was reduced; inflation declined to 17 percent from 25 percent in 1991; and there was a larger-than-expected increase in Costa Rica’s net international reserves.

On April 19, 1993, the Fund approved a stand-by arrangement of SDR 21.04 million over ten months to support the Government’s 1993 program, which aims at achieving GDP growth of about 4 percent, further reducing inflation, and increasing net international reserves. The program also expands the scope of the Government’s social safety net with financing from the Inter-American Development Bank and bilateral donors.

As the Czech Republic emerged as a new nation on January 1, 1993, following the dissolution of the former Czech and Slovak Federal Republic, its official reserves fell sharply to only about two and a half weeks of imports. Assuming that trade relations with the Slovak Republic are normalized, the Czech Republic’s 1993 economic program envisages economic activity increasing by 1–3 percent, with an early contraction offset by strong growth later in the year. Consumer price inflation is expected to be limited to about 15 percent, even after taking into account the impact of about 6 percentage points expected from the introduction of the value-added tax in January.

On the structural side, a second wave of large-scale privatizations will involve about 900 companies, with about one third to be privatized through voucher distribution to the adult population at a nominal fee. Privatization of small enterprises was mostly completed by the end of 1992, with 22,000 units sold. The Fund’s support of the Government’s program for 1993/94 consists of a one-year stand-by arrangement (for SDR 177 million, approved on March 17, 1993) to provide an early boost to reserves, as well as strengthen confidence in the appropriateness of the authorities’ policies.

On February 3, 1993, the Fund approved a three-year ESAF loan for Equatorial Guinea equivalent to SDR 12.88 million to support its economic and financial program for 1993–95. The objectives of the program are to increase the rate of economic growth to about 7 percent a year, hold inflation to about 3 percent a year, and achieve external viability by substantially reducing the external current account deficit. To these ends, the medium-term program relies on further reducing financial imbalances and accelerating the diversification of the economy. The overall fiscal balance (on a commitment basis and excluding foreign-financed public investment) is projected to shift from a deficit of 2.1 percent of GDP in 1992 to a surplus of 2.6 percent of GDP by 1995. Monetary policy is designed to contain pressures on prices and on the balance of payments. The program also includes a broad range of structural measures, covering agriculture, forestry, fishing, public administration, and public enterprise reform, as well as restructuring of the financial sector.

In order to assist the more vulnerable groups, the authorities are also committed to strengthening the education system, basic health services, as well as nutrition and food security, and enhancing the role of women in economic activities and the role of farmers. In addition to the already established poverty alleviation fund, the authorities’ strategy for the long term is to generate broadly based growth in employment and incomes to combat poverty.

The Estonian economy has experienced a severe contraction, not only because of the collapse of the command economy at home but also because of a sharp reduction in trade with the states of the former U.S.S.R. and the need to adjust to a substantial worsening of the terms of trade arising from the shift of energy prices toward world market prices. Recognizing the need for additional measures to stabilize and restructure the economy, the Government adopted a comprehensive economic program for the year beginning July 1, 1992.

The program seeks to limit the fall in real output to 15 percent during the program period, slow the annual rate of inflation to about 6 percent by the end of the period, and raise Estonia’s gross foreign reserves by mid-1993 to a level equivalent to more than two months of imports.

The authorities hope to stabilize the economy through completion of price reform, restrictive fiscal policies, maintenance of monetary discipline, a tax-based incomes policy to contain excessive wage increases, and further liberalization of the exchange and trade system. The structural reform efforts will include accelerating privatization and improving the social safety net. The Fund is supporting the Government’s stabilization and reform program under a one-year stand-by arrangement for SDR 27.9 million, approved on September 16, 1992.

Since the mid-1970s, Ethiopia’s economy has been devastated by civil conflict, centralization of economic management, suppression of market forces, and recurrent droughts. Average annual economic growth of about 1.5 percent and a population expansion of about 2.9 percent a year have led to a steady decline in living standards.

In mid-1991, Ethiopia began to introduce a decentralized political system and to implement major economic and structural reforms to restore growth, contain inflation, and reduce internal and external imbalances. The authorities have devalued Ethiopia’s currency and eased the remaining constraints on exports and import licensing. Prices have been freed for most goods, military spending has been reduced, and other public sector outlays contained. The structure of interest rates has been liberalized to facilitate the realization of positive real interest rates.

In the context of the Government’s medium-term policy framework for 1992/93–1994/95, which is supported by a three-year arrangement of SDR 49.42 million under the SAF, approved on October 28, 1992, emphasis is being placed on removing the remaining cost-price distortions, improving incentives, promoting private enterprise and exports, and progressively liberalizing the economy. This strategy requires continued shifting of the Government’s role in the economy from central control to the promotion of a market-oriented environment.

To mitigate the short-run costs of adjustment, the authorities have designed a number of programs, including a public service pay adjustment to cover the increase in food costs caused by the devaluation, assistance to retrenched public sector employees, a food and kerosene cash voucher scheme targeted toward the poorest urban groups, and a pilot labor-based public works program.

During the first part of 1992, the pace of economic activity in Guatemala accelerated and inflation remained subdued, but the balance of payments position weakened owing to a steep decline in international coffee prices and a surge in imports prompted by a sharp increase in bank credit to the private sector. Under these circumstances, the authorities decided to strengthen the adjustment efforts initiated in 1991. Their economic program for 1992–93, in support of which the Fund, on December 18, 1992, approved a stand-by arrangement for SDR 54 million over 15 months, is designed to achieve real economic growth of 4–5 percent in 1992 and 1993, limit the rate of inflation to about 11 percent in 1992 and 6 percent in 1993, and strengthen the balance of payments.

The program focuses on consolidating the public finances as the key instrument for achieving the price and balance of payments targets. Thus, it seeks to lower the overall public sector deficit from 1.2 percent of GDP in 1991 to 0.8 percent in 1993, mainly through tax reform and improvements in tax collection, but also through strengthening the finances of state enterprises, particularly the state electricity company. Monetary policy is being tightened, and exchange rate policy is being geared to maintaining an adequate level of external competitiveness. The value of the quetzal continues to be determined by the exchange auction system established in November 1990.

The program also envisages trade and financial sector reforms. In the trade area, most of the remaining nontariff barriers will be removed. In the financial sector, the Government intends to revise prudential regulations, strengthen bank supervision, and address the financial and management problems of state-owned banks.

Since 1990, the Government of Honduras has been implementing an economic program to reduce financial imbalances and establish a macroeconomic framework conducive to sustained economic growth and balance of payments viability. In April 1992, Honduras became the first of the 11 countries the Fund added to those eligible to borrow from the ESAF to make use of the facility. The Government’s 1992–95 program, which the three-year ESAF arrangement of SDR 40.7 million approved on July 24, 1992 supports, is designed to continue the authorities’ stabilization efforts and to consolidate and deepen the structural reforms initiated in 1990. The program seeks to increase real GDP growth to 4.5 percent a year, reduce inflation to international levels, and further strengthen the balance of payments to the point where exceptional financing will no longer be required after 1995.

In 1991/92, Jamaica experienced some difficulties in short-term financial management. The annual rate of economic growth decelerated to about 1 percent, and the rate of inflation increased to almost 70 percent, from 25 percent in the previous year. However, corrective fiscal and monetary policy actions adopted in late 1991 led to a reduction in inflation. During the year, the authorities implemented a major liberalization of the exchange system, introduced a value-added tax, instituted an automatic public sector pricing mechanism to allow for full cost recovery, and strengthened their privatization efforts.

The Fund approved on December 11, 1992 an arrangement under the extended Fund facility for Jamaica, authorizing drawings of up to the equivalent of SDR 109.13 million over the next three years in support of the Government’s economic and financial program. The program aims at raising the rate of economic growth to 3–3½ percent a year, reducing the rate of inflation to bring it more in line with Jamaica’s major trading partners in 1994 and beyond, and strengthening the country’s international reserve position. The program also seeks to achieve external viability by lowering Jamaica’s debt burden and eliminating the need for exceptional financing.

To these ends, public sector saving will be raised, and the overall public sector balance is targeted to rise from near zero in 1991/92 to a surplus of 3½ percent of GDP in 1995/96 through a combination of revenue enhancements and expenditure restraint. Monetary policy is to be consistent with the inflation and balance of payments objectives of the program and envisages greater use of treasury bills to prevent sharp fluctuations in liquidity.

Important steps have already been taken by Latvia toward developing a market economy against a background of an unfavorable external environment, but the authorities recognize that further measures will be necessary to stabilize the economy and obtain the external financing necessary to ensure a successful completion of the transformation process. With this in mind, they have formulated a comprehensive economic program for the year ending June 1993, supported by a Fund stand-by arrangement (for SDR 54.9 million, approved on September 14, 1992). The main elements of the program include continued liberalization of prices and of the exchange and trade system, together with a number of systemic reforms that include accelerating the privatization process to reduce the role of the Government in the economy.

Despite an unfavorable external environment, the Lithuanian Government has taken important steps to transform its economy into a market-based system, to establish macroeconomic stability, liberalize prices, and privatize the state sector, and to maintain a disciplined fiscal policy and reform the banking system. The Government’s comprehensive program for the year ending June 1993, which is supported by a Fund stand-by arrangement (for SDR 56.93 million, approved on October 21, 1992), is to stabilize the economy and adjust quickly to the deterioration in the external terms of trade. The authorities are determined to maintain sound fiscal and monetary policies supported by a restrictive incomes policy. The program further seeks to slow down the monthly rate of inflation to about 2 percent by the end of the program period and to limit the fall in real GDP to about 22 percent for the program year. A number of major structural reforms, including strengthened budgetary control and the privatization of state enterprises, are also envisaged.

The Government of Mali adopted a medium-term adjustment program covering the period July 1992–June 1995. Supported by a three-year ESAF arrangement approved on August 28, 1992 for SDR 60.96 million, the program aims to restore economic growth, maintain low inflation, and achieve a viable external position through restrained fiscal and monetary policies, and a further deepening of ongoing structural reforms. It also aims to reduce the overall fiscal deficit by improving tax collection, raising additional revenues, and containing expenditure. Monetary policy will increasingly rely on indirect instruments, maintenance of positive real interest rates, and reinforced banking supervision.

The Government is designing policies that will benefit the poor while improving its capacity to identify the most vulnerable among them. In the short term, it will focus on reducing the social costs associated with some of the adjustment measures, including a safety net to assist public sector workers who lose their jobs. The authorities also plan to strengthen basic health care and increase the enrollment ratios in primary schools.

Mauritania made significant economic gains in the late 1980s, but since 1990 its economic and financial situation has deteriorated. To address this problem, the authorities have formulated a medium-term strategy to achieve an average growth rate of 3.5 percent a year, reduce the inflation rate to 3.5 percent a year by 1995, and cut the external current account deficit (excluding official transfers) to 7.6 percent of GDP by 1995. A key element of the strategy, which involves strengthening macroeconomic management and deepening structural reforms, was the adjustment of the ouguiya’s external value in October 1992 (by 27 percent vis-à-vis the U.S. dollar) so as to restore the competitiveness of the export sector, strengthen the financial position of mining, and diversify and improve the performance of agriculture.

The Fund approved an ESAF arrangement equivalent to SDR 33.9 million on December 9, 1992 (to be disbursed in two years) in support of Mauritania’s economic and financial reform program.

Moldova, which became a member of the Fund on August 12, 1992, made its first use of Fund resources under the cereal component of the CCFF. The request for a credit of SDR 13.5 million, approved on February 3, 1993, was prompted by a major failure of the cereal crop.

At its meeting in Washington on April 27–28, 1992, the Interim Committee called for efforts to alleviate the effects of the drought in southern Africa and to protect the courageous policy adjustments under way in countries in the region. The Managing Director told the Committee that the Fund, in responding expeditiously, needed to provide policy advice and, if warranted, financial assistance through its existing facilities.

In its first provision of financing related to the drought, the Fund approved, on June 10, 1992, an increase in the amount of a loan to Mozambique under that country’s second annual ESAF arrangement by SDR 15.3 million. The Fund had approved a three-year ESAF totaling SDR 85.4 million for Mozambique in June 1990.

Nepal’s medium-term reform program aims at sustained economic growth through an enhanced role for the private sector, based on a stable financial environment that places increased reliance on market mechanisms, with the public sector providing physical and social infrastructure with the support of the international donor community. The success of this strategy relies on a number of factors, including tight fiscal and monetary policies to curb inflation and protect competitiveness; improved public administration; a streamlined and efficient public enterprise sector; an increase in public savings and improvement in public resource management; and a positive response by the private sector to trade, industrial, and financial sector reforms.

To support the Government’s medium-term economic program, the Fund approved, on October 5, 1992, a loan of SDR 33.57 million for the next three years under the ESAF.

The Fund approved, on November 25, 1992, a request for emergency assistance by Pakistan of SDR 189.55 million to assist in meeting immediate foreign exchange requirements in the wake of floods that caused widespread destruction in the country during September 1992.

The Government’s immediate policy response to the flood damage emphasized emergency rescue operations, provision of food and temporary shelter, and containment of the risks of disease. This is being followed by the implementation of a comprehensive relief and rehabilitation effort to be consistent with the authorities’ ongoing reform and adjustment program. The program, launched in 1989 and supported by the Fund under the SAF, has had beneficial effects on the economy. Its objective is to establish the conditions for high economic growth over the medium term in the context of domestic and external financial stability. Such a sound macroeconomic framework would provide a strong basis for sustainable improvements in Pakistan’s social and environmental conditions.

Following a period of declining per capita income and accelerating inflation in Peru, the Government that took office in August 1990 moved rapidly and successfully to stabilize the economy. Under the authorities’ macroeconomic and structural adjustment program, inflation fell from 7,600 percent in 1990 to 57 percent in 1992, international reserves increased, and the public sector deficit was reduced from 6.5 percent of GDP in 1990 to 2.5 percent in 1992. However, while GDP grew by some 2½ percent in 1991 for the first time in several years, this was offset by a decline in 1992 caused by a severe drought. Economic stabilization has been accompanied by structural reforms in taxation, social security, public enterprises, the banking system, and in the legal environment for foreign direct investment. The Government has also made substantial progress in re-establishing relations with foreign creditors.

The medium-term economic program currently being supported by the Fund is based on the continued pursuit of market-oriented policies and aims to consolidate the gains made since Peru launched its economic stabilization program. The program envisages real annual GDP growth of 3½ percent for the period 1993–95, a single-digit rate of inflation by the end of the program, and a broadening of the scope of structural reforms to provide the basis for sustained economic growth and progress toward external viability. The macroeconomic strategy is based on prudent fiscal and monetary policies, supported by structural reforms, including those needed to stimulate private sector savings and investment. The program also envisages measures to protect the poorer segments of the population.

Peru intends to normalize the external debt situation with commercial creditors through market-based debt and debt-service reduction. Recognizing the seriousness of Peru’s efforts to strengthen its economy, Paris Club creditors agreed in May 1993 to reschedule debt-service payments falling due during a three-year period.

The Fund lifted, on March 18, 1993, Peru’s ineligibility to use the institution’s general resources and approved a three-year arrangement for Peru under the extended Fund facility, authorizing drawings up to the equivalent of SDR 1,018.1 million through March 17, 1996 to support the Government’s medium-term economic program. Approval of the arrangement follows Peru’s successful completion of a rights accumulation program with the Fund, in effect between September 1991 and December 1992, and the clearance of its arrears to the Fund.

Since Poland adopted a sweeping economic reform program on January 1, 1990, much has been achieved, although the transformation to a market economy has been more difficult than anticipated. The decline in output during the first two years of reform was dramatic, and building the institutions necessary to underpin a market economy has proven to be arduous and time consuming. Nevertheless, in 1992, inflation slowed further, industrial production rebounded strongly, the trade balance strengthened, international reserves increased, and the private sector continued to flourish.

To achieve its program objectives, the Government aims to reduce the state budget deficit to 5 percent of GDP in 1993 from 7.2 percent in 1992 through a combination of measures, including expenditure reforms and an overhaul of the tax system, that are designed to control inflationary pressures and encourage investment to expand the growth potential of the economy. The Fund is supporting the Government’s economic and financial program under a one-year standby arrangement for SDR 476.0 million, approved on March 8, 1993.

Although Romania made significant progress in liberalizing the economy during 1991, the main objectives of the Government’s program could not be achieved because of the difficult external environment and a shortfall in external financing. To attain the objectives of their 1992 economic program, the authorities intend to maintain prudent fiscal and monetary policies and an appropriate interest rate policy; pursue a tight incomes policy; and follow a flexible exchange rate policy. The fiscal deficit was to be limited to 2 percent of GDP, while monetary policy was designed to contain inflationary pressures that could result from further price liberalization. The Romanian authorities regard the privatization of state-owned assets as essential for building a market-based economy, strengthening the financial discipline of enterprises, and improving their productivity and efficiency. The Fund provided support for the Government’s economic program under a 10-month stand-by arrangement for SDR 314.04 million, approved on May 29, 1992.

Building on the comprehensive framework set out in the Memorandum of Economic Policies submitted to the Fund in March 1992, the Russian Government’s stabilization and reform program was supported by a five-month stand-by arrangement in the first credit tranche (for SDR 719 million, approved on August 5, 1992). The program’s major goal was to contain and reduce inflationary pressures during the remainder of 1992 and to reinforce ongoing efforts at structural reform. Macroeconomic policies were designed to reduce the budget deficit in the second half of 1992 by approximately 11.5 percent of GDP from the deficit that would have prevailed had no new measures been taken.

During the second half of 1992, the Government was committed to accelerating structural change in the areas of enterprise reform, privatization, antimonopoly and pro-competition policy, financial sector reform, and agricultural sector reform. The Russian authorities are committed to protecting the most vulnerable groups of the population during the economic transformation period, while ensuring that social safety net expenditures are consistent with macroeconomic stabilization.

Uruguay’s 1992–93 government economic program seeks to reduce inflation, increase net international reserves, consolidate gains made in the fiscal area, and continue structural reforms to create the basis for sustained growth in output over the medium term, with reasonable price stability and external viability. A key element of the program, in support of which the Fund approved a one-year stand-by arrangement for SDR 50.0 million on July 1, 1992, is a renewed effort to break with backward-looking wage and price indexation to reduce the momentum of inflation. Fiscal, monetary, and exchange rate policies are designed to support this effort. As a result, GDP growth was about 8 percent in 1992, compared with 1 percent assumed under the program.

In early 1992, Zambia, like most of southern Africa, was hit by a severe drought. Despite this difficult situation, the Government implemented a series of key measures necessary to re-establish economic stability and set the stage for economic recovery. Subsidies will no longer place a major burden on the budget; fertilizer subsidies have been eliminated and maize meal prices increased. A fundamental reform of personal taxation has been implemented—an essential step to establishing a viable tax system; and important actions have been taken to liberalize the exchange system and encourage non-copper exports.

In line with the rights approach endorsed by the Interim Committee in May 1990, the Fund on July 17, 1992 approved the accumulation of rights for Zambia for up to a maximum of SDR 836.9 million, the level of its arrears to the Fund as of July 1, 1990. Upon successful implementation of this program, which runs through March 1995, and prior clearance of the arrears, as well as meeting all other requirements for using Fund resources, Zambia would be eligible to “encash” the accumulated rights under a fresh Fund arrangement. Commending Zambia for the continuation of impressive progress in structural reform, the Board, on April 19, 1993, endorsed Zambia’s rights accumulation program for 1993.

To rectify the adverse effects of the drought on its 1992 macroeconomic performance, Zimbabwe adopted a medium-term program of fiscal, monetary, pricing, and other structural measures. To support the 1992-95 economic reform program, the Fund on September 11, 1992 approved use of its resources by Zimbabwe totaling SDR 315.2 million over the next three years. Of the total, SDR 200.6 million may be drawn under the ESAF and SDR 114.6 million is available under the extended Fund facility. (An earlier extended arrangement approved in January 1992, before Zimbabwe became eligible to use ESAF resources, was canceled on September 10, 1992; SDR 71.2 million had been drawn.)

The Government’s program for 1992/93 is geared toward containing the external and domestic imbalances caused by the drought, as a basis for achieving satisfactory economic growth over the medium-term, restoring economic stability, and progress in implementing structural reforms. The strategy relies on a tight fiscal policy stance, requiring strict limits on recurring and non-drought-related expenditures. Monetary policy aims at maintaining tight liquidity conditions and keeping interest rates at positive real levels.

Financing for Developing Countries and Their Debt Situation

A number of countries have made substantial progress toward resolving their debt difficulties, and at a September 1992 review Directors saw this progress as welcome confirmation of the effectiveness of the debt strategy that had been implemented and adapted over the past decade. Directors considered that the instruments and approaches in place or under active consideration by creditors increased the potential for a comprehensive resolution of the debt problem. They noted, however, that the international environment needed to remain broadly supportive of the efforts made by the indebted countries, and, for their part, the debtors must persevere with their own strong adjustment efforts.

Despite several successful efforts, however, many individual countries were still far from a solution to their debt problems, and Directors stressed that these cases would require continuing attention from the international community as well as sustained efforts on the part of the debtors. Given the diversity of cases, several Directors noted that the Fund’s involvement in the debt strategy should continue to be conducted through a flexible and prudent application of the guidelines.

In their discussion of specific elements of the debt strategy, Directors were heartened by the recent progress made in bank restructuring agreements, opening the way for such agreements to be reached by those rescheduling countries that accounted for the major portion of the bank debt. Several countries, however, had yet to make much progress toward normalizing their relations with their bank creditors; Directors stressed that efforts should be made on both sides to advance the process. For these countries, sustained policy implementation was a requisite for creating an environment in which debt operations could help to achieve external viability. There was a possibility, however, that immediately available resources for financing a comprehensive debt package might fall short even in cases where the country had established a creditable track record. In these cases, phased debt operations might be a possibility, and, in fact, Directors pointed out that progress toward such phased operations had been made in at least one important case. This approach, however, might not be generally applicable.

Directors stressed that debtor countries needed to demonstrate their commitment to regularizing relations with their bank creditors by establishing a good payments record, which would mean devising financing plans that allowed for such payments to be made.

Combining new financing with cash-flow relief—a strategy pursued by bilateral official creditors—had been successful in an increasing number of middle-income countries that had exited, or had good prospects for, exiting from the Paris Club rescheduling process. However, as many Directors noted, this strategy might not work as well for a few lower-middle-income countries with particularly difficult debt problems. For these countries to make major progress toward external viability, both a restructuring of their commercial bank debt and special treatment of their obligations to bilateral official creditors would probably be necessary. Creditors should be encouraged to design approaches that would provide these countries with prospects of an exit from the rescheduling process on the basis of strong and sustained adjustment efforts.

Directors noted that official bilateral creditors and donors have provided low-income countries with financial support on a sustained and increasingly concessional basis. In particular, Directors welcomed the Paris Club’s recent adoption of enhanced concessions, and its readiness to consider stock of debt operations for debtor countries that perform successfully for three to four years. Such agreements that take account of the diversity of country circumstances, combined with positive moves toward normalized relations with private creditors, could substantially enhance the prospects of a return to external viability. These prospects for external viability were of particular relevance to the Fund, since they were a major consideration in the decision to support countries seeking to establish the track record that would enable them to exit from Paris Club restructuring. Directors noted, in this context, the growing importance of ESAF and ESAF-type Fund support.

Although welcoming the resumption of private capital flows to several developing countries, Directors noted the importance of sound economic policies in the recipient countries. It was also important that the flows were accompanied by adequate information and the matching of risk and returns. Directors suggested that the Fund might be able to play a role in the dissemination of such information.

The benefits to be derived from the resumption of capital flows could be further enhanced by institutional reforms that improved the availability of information and offered adequate investor protection. A number of Directors suggested that creditor countries might consider further modifying regulatory and tax regimes in countries whose creditworthiness had improved. Finally, those highly indebted countries that had avoided debt-servicing difficulties deserved the recognition and support of the international financial community.

It was decided that the Board would henceforth review debt and external financing issues on an annual, rather than a semiannual, basis. Pressing or significant developments would, of course, be given attention as the need arose.

Technical Assistance and Training

Three factors are critical in explaining the rising demand for technical assistance and training provided by the Fund. First, the rapid increase in membership, following the dissolution of the former Soviet Union and the accompanying moves toward political and economic liberalization in Central and Eastern Europe; second, the massive needs for training and assistance associated with the shift from centrally planned to market-oriented economies; and third, the increase in the number of countries with Fund-supported programs, and the acceleration of structural reforms in many member countries, which require higher levels of local expertise in economic and financial management.

Working with member countries, the Fund has underscored the importance of training as a key element in helping its members formulate and implement financial and economic policies that sustain their reform efforts and lead to noninflationary growth. This involves close collaboration with officials in member countries, as well as with multilateral, regional, and national institutions, to identify the best means of transferring knowledge and experience in the shortest possible time, while supporting or helping to create local or regional bodies that would eventually take on most of such training. An example of this collaboration was the creation of the Joint Vienna Institute in September 1992 as a cooperative venture of the Fund and other international organizations to train officials and private sector managers from former centrally planned economies.

Meanwhile, the continued need of other countries for training in macroeconomic management and specific technical areas, such as central banking, public finance, and statistics, has been met with expanded national and regional training seminars, as well as with greater collaboration in the case of African training institutions. The possibility of setting up a special training center for eastern and southern Africa is also under consideration.

In August 1992, a Technical Assistance Secretariat was set up in the Fund to advise management on all aspects of technical assistance and to provide a focal point for the coordination of technical assistance, both within the Fund and with other international agencies. (See Appendix III for full details of Fund technical assistance and training activities.)

IMF Institute

The IMF Institute continues to provide training for officials from member countries through residential and generally longer-term courses at its headquarters and at the Joint Vienna Institute; shorter courses and seminars in the field at either the national or regional level; lecturing assistance for other training institutions; and briefings for visiting groups in Washington. In addition to close collaboration with area departments, the Institute helps organize and administer training courses and seminars offered by the Monetary and Exchange Affairs, Fiscal, Legal, and Statistics Departments.

During 1992/93, the Institute offered 13 courses and 3 seminars for officials at Fund headquarters and 8 courses and a seminar at the Joint Vienna Institute, training a total of 816 persons in a wide range of subjects. These residential programs were complemented by 21 external training courses and 12 seminars for senior officials, and lecturing assistance for six other training institutions. Given the urgent need of the economies in transition for training in market economics, the main emphasis was put on providing their officials with instruction and advice. Six training courses were organized within the former U.S.S.R. and Central and Eastern Europe, while more than half the external seminars were held in the same group of countries. At the same time, the Fund continued to pay attention to its other members, particularly those in Africa, and organized seminars for senior officials as well as shorter courses on financial programming at the country and regional level.

In meeting its mandate on the delivery of training to members, the Institute has sought to enhance its effectiveness by working closely with other agencies and donors interested in supporting such activities. Traditionally, the Fund has financed all costs associated with the Institute’s training in Washington. This remains unchanged. The rise in need and the demand for overseas training has led the Institute to collaborate with other donors through cofinancing by local, regional, or multilateral sponsors. The Joint Vienna Institute is a prime example of such cofinancing. Its costs during the first year of operation were shared by six international organizations and a number of national donors, including the host country, Austria, which provided the site for the Institute and other logistical support.

An important element in the Institute’s approach to training is to impart instruction to trainers and provide help to other training institutions, thereby adding to the indigenous capacity of countries in the area of macroeconomic and financial management. Training is geared to local needs in terms of its content as well as duration.

Fiscal Affairs Department

The provision of technical assistance by the Fiscal Affairs Department increased substantially. As in the previous year, the increase was in large part accounted for by an expansion of assistance given to the states of the former Soviet Union and the Baltic states. But the department also remained heavily involved in providing technical assistance to Africa and Asia—where the volume of assistance again rose. In 1992/93, 109 countries were provided with assistance. There were 258 advisory missions and other short-term assignments by staff, headquarters-based consultants, and panel experts, and 41 long-term assignments by panel experts. In total, technical assistance activity was some 30 percent higher than in 1991/92. Externally financed assignments, principally by the UNDP-Japan Administered Account, also continued to expand; these accounted for almost 50 percent of the total funding for panel experts on short- and long-term assignments.

The department’s technical assistance activities were principally concentrated in the areas of tax policy, tax and customs administration, treasury systems, budgetary accounting, public expenditure management, social safety nets, and social security. The design of computerized systems and training have assumed increasing importance in most of these areas. Requests for such assistance were met from a wide spectrum of members, including many from countries in the process of moving to a market-based economy.

Legal Department

The Legal Department continued to provide technical assistance in the central and general banking, foreign exchange, and fiscal areas. This assistance included drafting legislation, reviewing draft legislation, and providing overall legal advice. Much of this assistance was directed to members that were in the process of transforming their centrally planned economies and were seeking expertise regarding the legal steps that must be taken for this process to be successful.

Monetary and Exchange Affairs Department

During the financial year, the Monetary and Exchange Affairs Department continued to provide assistance to Africa, Asia, and Latin America and expanded its intensive technical assistance efforts in Eastern European and the former Soviet Union states. The 60 advisory missions and more than 300 expert trips to these countries accounted for a substantial majority of the department’s technical assistance activities. Following the pattern established in Bulgaria, Poland, and Romania, the department has formed teams of staff and experts to develop and implement comprehensive programs of technical assistance aimed at establishing and modernizing central banks in each of the newly emerging countries. Twenty-three cooperating central banks have joined with the department to provide more than 125 staff to participate in these teams. While a broad range of subjects has been covered, particular focus has been given to monetary policies and operations, banking supervision, currency issue, foreign exchange, payment and settlement systems, and accounting. In the latter two areas, the department developed and delivered technical assistance workshops for officials from throughout the former Soviet Union.

These programs have required a substantial amount of collaboration—both with member countries’ central banks and with other international organizations, such as the Bank for International Settlements, the EC, and the OECD. To support both the growth in the department’s technical assistance program and its expanded responsibilities in the areas of policy review and analysis, jurisdiction, and surveillance, substantial efforts were made to strengthen staff resources in specialized areas, such as payments systems, and to recruit staff for the department’s new divisions. With a full complement of staff, the department will focus in the coming year on consolidating its technical assistance coordination and delivery functions and on fulfilling the mandate of its new areas of responsibility.

Statistics Department

The needs of the countries of the former Soviet Union and Central and Eastern Europe continued to absorb a substantial proportion of the resources of the Statistics Department devoted to technical assistance. As a group, these countries received about 73 percent of all the technical assistance provided by the department during the year. This assistance ranged from multitopic assessment missions and longer-term plans for the establishment of market-oriented statistical systems in these countries to single topic follow-up missions that provided intensive hands-on training and assistance in the implementation of such systems. Of the 106 single and multitopic technical assistance missions conducted by staff and consultants, 77 were to former centrally planned economies, of which 67 were to states of the former Soviet Union. These missions involved about three fourths of total staff and headquarters-based consultant trips during the year and most of the trips undertaken by outside experts on behalf of the Fund. In addition, a significant amount of technical assistance was provided through participation of staff of the Statistics Department in 27 missions of other departments, 23 of which were former Soviet Union states, compared with 16 such missions during 1991–92. The department also undertook external training seminars for officials from Central and Eastern Europe and from the former U.S.S.R.

The work of the high-level interagency Steering Committee on the Coordination of Technical Assistance in Statistics to the states of the former Soviet Union continued in 1993. Meetings of the Committee were held in June and November 1992 and January 1993. The Committee has established focal-point responsibilities for participating international organizations, designed to ensure a coordinated strategy for the provision of technical assistance in specified areas. The Chairman of the Committee has also consulted bilateral providers of technical assistance to keep them abreast of the Committee’s activities and to encourage the coordination of their assistance with the Committee’s focal-point agencies. An important aspect of this cooperative effort is the development of a data base by the Fund for the Committee. The data base will provide interactive access to technical assistance activities either completed or planned by the members of the Committee and participating bilateral agencies, thereby facilitating technical assistance planning and avoiding duplication of effort.

Treasurer’s Department

The Treasurer’s Department provides technical assistance to members on the establishment and maintenance of the Fund accounts, and on matters related to operations and transactions by members, including quota payments. Such technical assistance missions increased sharply in 1992/93, primarily reflecting the needs of the new members from the former Soviet Union. A total of ten missions were sent to eight states of the former Soviet Union to provide assistance in establishing the Fund accounts and conducting financial transactions with the Fund. Other missions provided training on the Fund’s financial organization and operations and on the accounting for financial operations and transactions with the Fund.

Fund Financial Operations and Policies

The expansion of Fund membership to 177 countries and the coming into effect of the quota increases under the Ninth General Review, which increased quotas by 50 percent, raised total Fund quotas from SDR 91.2 billion at the end of April 1992 to SDR 144.6 billion by the end of April 1993. The initial quotas of members that joined the Fund during that period account for SDR 6.2 billion of the quota increase. With the signing of the Articles of Agreement by Micronesia on June 24, 1993, total membership rose to 178 members. The Board revised the Fund’s access limits on the use of its general resources so as broadly to maintain potential access to Fund resources for the membership. Actual access within the new limits will continue to depend on the circumstances of members and the strength of their adjustment efforts.

When the increase in Fund quotas became effective, the Fund terminated its enlarged access policy, under which the Fund had, since 1981, borrowed from official sources to supplement its own resources and to finance members’ purchases. In October 1992, the General Arrangements to Borrow, along with the associated borrowing agreement with Saudi Arabia, were renewed for a five-year period from December 1993.

In 1992/93, 11 stand-by arrangements totaling SDR 2.0 billion, and 3 extended arrangements totaling SDR 1.2 billion, were approved. The total level of these commitments, SDR 3.2 billion, was below the comparable figure of SDR 8.1 billion for 1991/92, mainly because of the improved economic performance of many developing countries, particularly in Latin America, while the expected large demand for use of Fund resources from many of the Fund’s new members had not yet materialized. Most of the stand-by arrangements were with countries of the former Soviet Union and Central and Eastern European countries, while the extended arrangements were with developing countries in Africa and Latin America. At the end of April 1993, a total of 15 countries had stand-by arrangements with the Fund, with total commitments of SDR 4.5 billion and undrawn balances of SDR 2.5 billion, while the six extended arrangements in effect had commitments of SDR 8.6 billion, of which SDR 2.8 billion remained undrawn. As of the same date, cumulative commitments under SAF and ESAF arrangements totaled SDR 4.6 billion; there were 4 SAF arrangements and 20 ESAF arrangements.

During the financial year, members’ purchases from the General Resources Account, excluding reserve tranche purchases, amounted to SDR 5.3 billion, while repurchases amounted to SDR 4.1 billion, resulting in an increase in Fund credit outstanding in the Account for the third year in a row, to SDR 24.6 billion at the end of April 1993. SAF and ESAF disbursements totaled SDR 0.6 billion in 1992/93, bringing cumulative disbursements under the two concessional facilities to SDR 3.7 billion. Two drawings under the new STF had taken place by early July 1993.

In July 1992, the Board extended the commitment period for ESAF Trust loans to the end of November 1993, and in April 1993, the Board began an examination of the operational modalities and funding alternatives for a possible ESAF successor facility of some SDR 6.0 billion to operate over three years through November 1996.

With the payments of quota subscriptions by new members and quota increases by almost all members, the liquid resources of the Fund increased sharply during the financial year. As of the end of April 1993, the Fund’s adjusted and uncommitted usable resources totaled SDR 52.2 billion, compared with SDR 20.9 billion a year earlier.

The total allocations of SDRs remained unchanged during 1992/93 at SDR 21.4 billion. There was a significant transfer of SDRs from members to the Fund as a result of the reserve asset payments under the Ninth General Review of Quotas. In April 1993, the Board held a preliminary discussion on the role of the SDR in the provision of international liquidity in order to assess whether there was broad support for an SDR allocation in present circumstances.

Although the amount of overdue financial obligations to the Fund remained high in 1992/93, the sustained implementation of the Fund’s strengthened cooperative strategy resulted, for the first time in a decade, in a decline in the level of arrears from SDR 3.5 billion at the end of April 1992 to SDR 3.0 billion at the end of April 1993. One member in protracted arrears, Peru, successfully completed its rights accumulation program and eliminated its arrears to the Fund.

During 1992/93, the Board continued to implement the three key elements—prevention, deterrence, and intensified collaboration—of the strengthened cooperative strategy for dealing with arrears. With the entry into effect of the Third Amendment of the Articles of Agreement, the arrears strategy has been strengthened by a further deterrent measure—the suspension of voting and certain related rights.

For 1993/94 onward, the Board simplified the Fund’s schedule of charges by adopting a single unified rate of charge for all use of Fund credit financed through the General Resources Account.

Membership and Quotas

The Fund’s membership increased to 177 countries in 1992/93, with Armenia, Azerbaijan, Belarus, Croatia, the Czech Republic, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, the former Yugoslav Republic of Macedonia, the Marshall Islands, Moldova, Russian Federation, San Marino, the Slovak Republic, Slovenia, Switzerland, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan becoming members. In addition, Micronesia became a member on June 24, 1993. Two of the states of the former Socialist Federal Republic of Yugoslavia—the Federal Republic of Yugoslavia (Serbia/Montenegro) and the Republic of Bosnia and Herzegovina—have not yet completed arrangements for succession to membership in the Fund. When these latter two countries have signed the Articles, the Fund will have 180 members.

Ninth General Review of Quotas

An increase in total Fund quotas from SDR 90.1 billion to SDR 135.2 billion under the Ninth General Review of Quotas was proposed by the Board of Governors on June 28, 1990. Increases in quotas were proposed for all members except Cambodia, which, as in the Seventh and Eighth General Reviews, did not participate in the Ninth General Review.

The participation requirement for the Ninth General Review stipulated that members having 70 percent of total Fund quotas as of May 30, 1990 had to consent to their increases in quotas. The Resolution of the Board of Governors also specified that no quota increase could come into effect before the effective date of the Third Amendment of the Articles of Agreement, which provides for the suspension of voting and certain other related rights of members that do not fulfill their obligations under the Articles. On November 11, 1992, the Executive Board determined that the requirements for the Ninth Review of Quotas to come into effect had been fulfilled.

The Board of Governors also decided, in June 1990 as part of the quota resolution, that each member pay to the Fund the increase in its quota within 30 days after its consent or the date of effectiveness of the Ninth Review, whichever was later, provided that the Executive Board could extend the payment period as it might determine. On November 30, 1992, the Executive Board extended the period of consent to the increases in quotas from that date to May 31, 1993, and the original 30-day payment period to 45 days. Subsequently, the consent period was extended first to June 30, 1993, and then to December 31, 1993; the payment period was extended on four occasions and currently stands at 415 days after November 11, 1992 or the date of consent, whichever is later.

A total of 162 out of 177 members completed the payments for their quota increases by the end of April 1993. With these payments and the initial quota payments by new members, total quotas in the Fund rose to SDR 144.6 billion from SDR 91.2 billion at the end of April 1992. Of the remaining members, one member did not participate in the quota review, and nine members have overdue obligations to the General Resources Account and consequently cannot consent to their quota increases. By early July 1993, two of the other five members also had completed their payments.

Members were required to pay 25 percent of their quota increases in SDRs, or in the currencies of other members specified by the Fund, with the concurrence of the issuers, or in any combination of SDRs and such currencies. The balance of the increases was to be paid by members in their own currencies. In cooperation with some members with large SDR holdings, the Fund made it possible for a number of members that did not have sufficient SDRs or foreign exchange holdings to pay the reserve asset portion of their quota increases by borrowing SDRs for that purpose. (Similar arrangements were made at the time of the Eighth General Review of Quotas.) On the same day, they purchased the reserve tranche position created by the payments and used the proceeds to repay the SDR loans. In 1992/93, a total of 77 members borrowed SDR 1.7 billion from 17 other members under this mechanism. No interest, fee, or commission was charged for the use of the mechanism by either the Fund or the lenders.

Payments of quota increases amounted to SDR 47.5 billion in 1992/93, of which 25 percent (SDR 11.9 billion) represented payments of the reserve asset portion. Reserve asset payments made in SDRs equaled SDR 11.3 billion, and payments made in the currencies of other members specified by the Fund totaled SDR 0.6 billion. The reserve asset portion of the quota increases was paid in SDRs by 151 members, in foreign currencies by 8 members, and in a combination of SDRs and foreign currencies by 3 members.

Individual members’ quotas in the Fund at the end of April 1992 and April 1993, and the effective date of payment of the increase in the quota of each member, are shown in Appendix Table II.15.

Tenth General Review of Quotas

In accordance with Article III, Section 2(a) of the Fund’s Articles of Agreement, the Board of Governors must conduct the Tenth General Review of Quotas not later than five years from the original date of completion of the Ninth General Review, that is, not later than March 31, 1993. As required by Rule D-3 of the Fund’s Rules and Regulations, the Executive Board must appoint—at least one year prior to the time when a general review of quotas must be undertaken—a Committee of the Whole to study the matter and to prepare a written report. The Executive Board accordingly established a Committee of the Whole for the Tenth General Review of Quotas on March 31, 1992. However, the Committee was not in a position to undertake a substantive review of the issues relating to the Tenth Review by March 31, 1993. In April 1993, the Board of Governors resolved to continue the Tenth Review and requested the Executive Board to complete its work and submit a final report to the Board of Governors not later than December 31, 1994. The work of the Committee will include, as agreed in the Ninth General Review, an examination of the working of the quota formulas to ensure that the formulas take adequate account of all relevant developments bearing on quotas. Preparatory work on these issues has begun.

Fund Liquidity, Borrowing, and Members’ Access

The Fund’s liquidity position improved considerably with the payments of the quota increases following the effectiveness of the Ninth General Review of Quotas in November 1992, and is at present very comfortable.

The liquid resources of the Fund consist of usable currencies and SDRs held in the General Resources Account. Usable currencies, the largest component of liquid resources, are the currencies of members whose balance of payments and gross reserve positions are considered sufficiently strong to warrant the inclusion of their currencies in the operational budget for use in the financing of Fund operations and transactions (see Box 9). As of the end of April 1993, the Fund’s liquid resources amounted to SDR 68.0 billion, compared with SDR 37.4 billion a year earlier, reflecting mainly the inflow of resources from the payments of Ninth Review quota increases. Total usable resources received by the Fund from payments for the increases in quotas amounted to SDR 31.1 billion, of which SDR 9.1 billion was received in SDRs (payments for the reserve asset portion of the increases, net of reserve tranche purchases made in SDRs) and SDR 22.0 billion was received in currencies considered to be sufficiently strong to be used in Fund transactions.

Box 9Operational Budget

In accordance with principles set out in the Fund’s Articles of Agreement, the currencies of members whose external positions are considered to be sufficiently strong are selected by the Board for inclusion in the Fund’s operational budget to be used to finance operations and transactions. These currencies are transferred by the Fund to other members experiencing balance of payments difficulties. The issuers of these currencies are obliged to convert them into one of the five freely convertible currencies, if so requested by the member using Fund resources.

The guidelines governing the use of currencies and SDRs are set by the Board and are implemented through quarterly operational budgets. The present guidelines take into account members’ gross holdings of gold and foreign exchange reserves and their reserve tranche positions in the Fund. They also incorporate a floor so that the use of a member’s currency will not be carried beyond the point where the Fund’s holdings of that currency are two thirds of the average level of its holdings of other members’ currencies included in the budget, expressed as a percentage of quota. The Board reviews the guidelines underlying the operational budget from time to time. The most recent review was completed in February 1993. The present guidelines—reproduced in Appendix IV—will be reviewed again by the Board by February 1995.

In assessing the adequacy of the Fund’s liquidity, the stock of usable currencies is adjusted downward to take into account the staffs assessment of the need to maintain working balances of currencies and the possibility that the currencies of some members in relatively weak external positions could become unusable in financing Fund operations and transactions. Undrawn balances of commitments of resources are also taken into account in assessing the Fund’s liquidity. After these adjustments were made, as of April 30, 1993 the Fund’s adjusted and uncommitted usable resources totaled SDR 52.2 billion, compared with SDR 20.9 billion a year earlier.

The Fund’s liquid liabilities increased from SDR 25.6 billion as of the end of April 1992 to SDR 33.7 billion as of the end of April 1993, representing primarily an increase in reserve tranche positions from SDR 21.9 billion to SDR 30.3 billion; outstanding borrowing by the Fund decreased from SDR 3.7 billion to SDR 3.4 billion. The ratio of the Fund’s adjusted and uncommitted usable resources to its liquid liabilities—the liquidity ratio—increased from 81.6 percent to 154.9 percent over the same period. (The evolution of the liquidity ratio since calendar year 1978 is shown in Chart 8.) Thus, following the quota increases under the Ninth General Review of Quotas the Fund’s liquidity position has been strengthened markedly, placing the Fund in a position to meet the projected substantial demands on its resources over the next few years while holding adequate liquidity as cover against any encashment of liquid liabilities.

Chart 8The Fund’s Liquidity Ratio

(In percent; end of period)

The quota increases under the Ninth General Review enable the Fund to make credit available to its members without the need for borrowing. Accordingly, the enlarged access policy, in effect since 1981, was terminated with the effectiveness of the quota increases. There are no unused credit lines at present, although the Fund can borrow under the General Arrangements to Borrow (GAB), if a need would arise for the type of financing envisaged under the GAB (see Box 10).

The Fund’s policy on access and access limits to its resources was reviewed by the Board in October 1992 in connection with the quota increases under the Ninth General Review of Quotas. Access limits in relation to the new quotas were established and became effective when the Ninth Review quotas entered into effect on November 11, 1992 (see Table 3). The new limits, which are temporary in nature, are broadly intended to maintain potential access to the Fund’s resources for the membership as a whole.

Table 3Access Limits Under IMF Arrangements, Special Facilities, and in Connection with Augmentation for Debt and Debt-Service Reduction(In percent of quota)
Under Old

Under New

Access under credit tranches
and the extended Fund facility
Structural adjustment facility17050
First year2015
Second year3020
Third year2015
Enhanced structural adjustment facility1
Originally eligible members
Expected average150110
Compensatory and contingency financing facility12295
Optional tranche2520
Buffer stock financing facility4535
Systemic transformation facility350
Augmentation for debt/debt-service reduction4030

Access over a three-year period.

If the balance of payments position, apart from the effects of the export shortfall (cereal import costs), is satisfactory, the old limit was 83 percent of quota, and the new limit is 65 percent of quota.

The systemic transformation facility was established in April 1993.

Access over a three-year period.

If the balance of payments position, apart from the effects of the export shortfall (cereal import costs), is satisfactory, the old limit was 83 percent of quota, and the new limit is 65 percent of quota.

The systemic transformation facility was established in April 1993.

Financial Operations

During 1992/93, members’ purchases from the General Resources Account (GRA), excluding reserve tranche purchases,4 amounted to SDR 5.3 billion (Table 4). Although the overall level of purchases remained virtually unchanged from the level in 1991/92, there was a significant shift away from purchases under the CCFF and toward purchases under stand-by and extended arrangements. Of the total, SDR 2.9 billion was purchased in the credit tranches and under stand-by arrangements (compared with SDR 2.3 billion in 1991/92), SDR 2.3 billion was purchased under extended arrangements (SDR 1.6 billion in 1991/92), and only SDR 0.1 billion was purchased under the CCFF (SDR 1.4 billion in 1991/92).

Table 4Selected Financial Indicators(In millions of SDRs)
Financial Year Ended April 30
During period
Total disbursements3,9413,3074,5622,6825,2666,8235,9035,877
Purchases by facility (GRA)13,9413,1684,1182,1284,4406,2485,2945,284
Stand-by and first credit tranche2,8412,3252,3131,7021,1831,9752,3432,940
Compensatory and contingency
financing facility6015931,5442388082,1271,38190
Extended Fund facility4982502601882,4492,1461,5712,254
Loans under SAF/ESAF arrangements139445554826575608593
Special Disbursement Account resources13944538058418013849
ESAF Trust resources174242395470544
By region
Industrial countries
Developing countries3,9413,3074,5622,6825,2676,8235,9035,877
Middle East1166633326
Western Hemisphere1,9331,3112,6881,1743,1192,5721,8382,325
Repurchases and repayments4,7026,7498,4636,7056,3995,6084,7704,117
Trust Fund and SAF/ESAF loan repayments413579528447357168236
End of period
Total outstanding credit provided by Fund36,87733,44329,54325,52024,38825,60326,73628,496
Of which
General Resources Account34,64031,64627,82923,70022,09822,90623,43224,635
Special Disbursement Account1395849651,5491,7291,8651,879
Administered accounts
Trust Fund2,2371,6581,129682326158158158
ESAF Trust21744168111,2811,824
Percentage change in total outstanding credit–2.0–9.3–11.7–13.6–
Number of indebted countries8788868387818290

Excluding reserve tranche purchases.

Includes Saudi Fund for Development associated loans of SDR 19.5 million.

Excluding reserve tranche purchases.

Includes Saudi Fund for Development associated loans of SDR 19.5 million.

The largest purchases were made by Argentina (SDR 1.3 billion),5 India (SDR 1.2 billion), Russia (SDR 0.7 billion), and Peru (SDR 0.6 billion). An emergency purchase was made by Pakistan for SDR 0.2 billion on account of devastating floods experienced by that country. The regional breakdown shows that purchases by Latin American countries amounted to SDR 2.3 billion, while Asian countries purchased SDR 1.6 billion, Central and Eastern European countries purchased SDR 1.3 billion, and the remaining SDR 0.1 billion was purchased by African and Middle Eastern countries.

Box 10General Arrangements to Borrow

Established in 1962, the General Arrangements to Borrow (GAB) permit the Fund to borrow, under prescribed circumstances, from the United States, Germany, Japan, the United Kingdom, France, Italy, Canada, the Netherlands, Belgium, Sweden, and since 1964, Switzerland.

The GAB were originally designed to enable the participants to strengthen the Fund by lending to it specified amounts of their currencies. These loans would be made when supplementary resources were needed to help finance purchases by GAB participants in circumstances where such financing would forestall or cope with an impairment of the international monetary system. Credit lines available until December 1983, specified in national currencies, totaled the equivalent of about SDR 6.4 billion.

The Fund decided to expand the GAB substantially in February 1983: the amount of credit available was increased to SDR 17.0 billion, specified in SDR terms, with an additional SDR 1.5 billion available under an associated agreement with Saudi Arabia. In addition, the GAB were amended, inter alia, to permit the Fund to use the arrangements to finance transactions with nonparticipants under certain conditions on purchases involving upper credit tranche conditionality, in the event that the Managing •Director considered that the Fund faced an inadequacy of resources to meet actual and expected requests for financing that reflected the existence of an exceptional situation associated with balance of payments problems of members of a character or aggregate size that threatened the stability of the international monetary system. Although the GAB had earlier carried a rate of interest below market rates, this rate was increased to the level of the SDR rate of interest when the GAB were enlarged. The new GAB became operational in December 1983 when all participants concurred with these changes.

In October 1992, the Board renewed the GAB for a period of five years from December 26, 1993 and approved an amendment to the GAB to reflect Switzerland’s membership in the Fund. The amendment of the GAB entered into effect on December 22, 1992, following concurrence by all participants in the GAB. The borrowing agreement between Saudi Arabia and the Fund in association with the GAB was also renewed for a period of five years from December 26, 1993.

Repurchases in the General Resources Account during 1992/93 amounted to SDR 4.1 billion, compared with SDR 4.8 billion in the previous financial year. There were no voluntary advance repurchases or early repurchases in 1992/93. Noteworthy, however, was Peru’s clearance of its arrears to the Fund, including overdue repurchases of SDR 447 million. Repurchases, which peaked in 1987/88 following a significant expansion of Fund credit in the early 1980s, are expected to continue to decline in the short term, reflecting a decrease in the use of Fund credit during the latter part of the 1980s (Chart 9). Given the revolving nature and medium-term maturity of the Fund’s balance of payments assistance, however, repurchases subsequently will begin to increase again as a result of the high level of purchases in the past few years. It may be noted that depending on the type of facility, repurchases tend to peak about four to five years after the corresponding purchases.

Chart 9General Resources: Purchases and Repurchases, Financial Years Ended April 30, 1981–93

(In billions of SDRs)

1Excluding reserve tranche purchases.

Taking into account both purchases and repurchases, there was an increase in Fund credit outstanding in the General Resources Account in 1992/93 for the third year in a row. Total credit outstanding in the General Resources Account rose by SDR 1.2 billion, from SDR 23.4 billion as of April 30, 1992 to SDR 24.6 billion as of April 30, 1993. (Details are provided in Appendix Table II.10.) Including also disbursements under the SAF and ESAF (see below), net credit provided by the Fund under all facilities expanded by SDR 1.8 billion in 1992/93 (Chart 10). This trend toward expansion of Fund credit outstanding is expected to continue in the period ahead in line with the projected continued strong demand for use of Fund resources by members.

Chart 10Total Fund Credit Outstanding to Members, Financial Years Ended April 30, 1981–93

(In billions of SDRs; end of period)

Stand-By and Extended Arrangements

Eleven stand-by arrangements totaling SDR 2.0 billion and three extended arrangements totaling SDR 1.2 billion were approved during 1992/93. This compares with 21 stand-by arrangements (SDR 5.6 billion) and 2 extended arrangements (SDR 2.5 billion) approved in the previous financial year. Eight of the stand-by arrangements approved in 1992/93 were with countries of the former Soviet Union and Central and Eastern European countries (Albania, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania, and Russia). The other 3 were with Latin American countries (Costa Rica, Guatemala, and Uruguay). As of April 30, 1993, a total of 15 countries had stand-by arrangements with the Fund, with total commitments of SDR 4.5 billion and undrawn balances of SDR 2.5 billion. The three extended arrangements approved in 1992/93 were for Jamaica (SDR 0.1 billion), Peru (SDR 1.0 billion), and Zimbabwe (SDR 0.1 billion). Total commitments as of April 30, 1993 under the six extended arrangements in effect were SDR 8.6 billion, of which SDR 2.8 billion remained undrawn.

Taken together, new commitments of Fund resources under both stand-by and extended arrangements decreased to SDR 3.2 billion in 1992/93 from SDR 8.1 billion in 1991/92. This reduced level of commitments is attributable mainly to improved economic performance in a number of developing countries, particularly in Latin America, while the expected large demand by many of the new members had not yet been formalized in adjustment and structural reform programs that could be supported by financial arrangements from the Fund.

Special Facilities

The Fund’s special facilities consist of the compensatory and contingency financing facility (CCFF), the buffer stock financing facility (BSFF), and the systemic transformation facility (STF).

Purchases under the CCFF declined to SDR 0.1 billion in 1992/93 from SDR 1.4 billion in 1991/92. This decrease partly reflected the expiration of the oil element of the facility, which had accounted for SDR 0.5 billion of the purchases in 1991/92. There were no purchases under the BSFF for the ninth consecutive year and no amounts were outstanding under that facility at the end of 1992/93.

By early July 1993, Kyrgyzstan and Russia had purchased SDR 16.0 million and SDR 1,078.3 million, respectively, under the STF, a new temporary facility approved by the Executive Board in late April 1993.


During 1992/93, the Fund continued to provide financial support on concessional terms to low-income members through the SAF and the ESAF. As of April 30, 1993, 4 SAF arrangements and 20 ESAF arrangements were in effect. One SAF arrangement was concluded in 1992/93 with Ethiopia (SDR 49.4 million). Eight ESAF arrangements totaling SDR 478.2 million were also concluded in 1992/93 with Benin (SDR 47.0 million), Burkina Faso (SDR 48.6 million), Equatorial Guinea (SDR 12.9 million), Honduras (SDR40.7 million), Mali (SDR61.0 million), Mauritania (SDR 33.9 million),6 Nepal (SDR33.6 million), and Zimbabwe (SDR 200.6 million). The Board also approved a request for an increase in access of SDR 15.3 million under the second annual ESAF arrangement for Mozambique, and requests for fourth annual ESAF arrangements for Bolivia (SDR 27.2 million) and Uganda (SDR39.8 million). Cumulative commitments under all approved SAF and ESAF arrangements (including arrangements that have expired) totaled SDR 4.6 billion as of April 30, 1993, compared with SDR 4.1 billion as of April 30, 1992.

SAF loans and the SAF-related portion of ESAF loans are financed from the resources of the Special Disbursement Account (SDA), which derive from repayments on loans from the Trust Fund (established in 1976). The remainder of the resources provided under the ESAF is financed from the ESAF Trust. Total resources available for disbursement from the SDA in support of SAF and ESAF arrangements, including disbursements already made, are projected to amount to about SDR 2.7 billion, assuming that existing overdue Trust Fund obligations are settled. Total loan commitments by lenders to the ESAF Trust under agreements approved by the Board amount to SDR 5.1 billion. SAF and ESAF disbursements during 1992/93 totaled SDR 0.6 billion, the same level as in 1991/92.

In July 1992, the Board approved a one-year extension of the commitment period for ESAF Trust loans from November 30, 1992 to November 30, 1993. Lenders to the ESAF Trust Loan Account, with the exception of the Bank of Spain, have agreed to a corresponding extension of the drawdown periods of their respective loan agreements through November 30, 1996. The drawdown period under the agreement with the Bank of Spain expired on June 30, 1993.

To enable all ESAF financing to be provided at low concessional interest rates (currently 0.5 percent a year), subsidy contributions are received by the ESAF Trust Subsidy Account. Contributions to the Account take a variety of forms, including direct grants and deposits made at concessional interest rates. Resources available to the Subsidy Account, net of subsidies already paid, increased from SDR 506.0 million as of April 30, 1992 to SDR 606.3 million as of April 30, 1993. The ESAF Trust made interest payments to lenders in 1992/93 amounting to SDR 67.9 million, of which SDR 4.7 million was financed by payments of interest by borrowers and the balance of SDR 63.2 million was drawn from the resources of the Subsidy Account. Details on SAF and ESAF arrangements, and on borrowing agreements and subsidy contributions for the ESAF Trust, are provided in Appendix Tables II.5, II.6, and II.12.

In April 1993, the Board began an examination of the operational modalities and funding alternatives for a possible ESAF successor facility. It was agreed that the successor facility should be introduced in a timely manner to provide continuity after the November 1993 cutoff date of commitments under the current ESAF. The aim is for an ESAF successor of SDR 6 billion over three years through November 1996. At its spring 1993 meeting, the Interim Committee encouraged the Board urgently to consider all the options for financing the successor facility and invited the Board to complete its work on the facility by the end of November 1993. Further work on this matter is in process.

Fund Income, Charges, and Burden Sharing

During 1992/93, the Fund continued to set the basic rate of charge on the use of ordinary resources as a proportion of the weekly SDR interest rate. This practice was adopted in 1989/90 to ensure that the Fund’s operational income more closely reflects its operational costs, which largely depend on the SDR interest rate, and thus to avoid the need for stepwise increases in the rate of charge in order to achieve the target amount of net income. For 1992/93, the proportion was set at 97.9 percent.

The average rate of charge on the use of ordinary resources in 1992/93 was 5.65 percent before adjustments under the burden-sharing mechanisms, which are discussed below. Charges on the use of borrowed resources were based on the Fund’s cost of borrowing plus a margin and were determined retroactively for the six-month periods ending June 30 and December 31. During 1992/93, the average rates of charge under the supplementary financing facility and under the policy on enlarged access were 6.53 percent and 6.60 percent, respectively.

In December 1992, the Board concluded that the distinction between the use of ordinary and borrowed resources was no longer relevant for purposes of setting the rate of charge, and decided to simplify the Fund’s schedule of charges by adopting effective May 1, 1993 a single unified rate of charge that would apply to all outstanding use of Fund resources. As a result, adjustments under the burden-sharing mechanisms would also apply to the use of borrowed resources (which previously had not been subject to adjustment). In June 1993, the Fund adopted the procedure of setting the basic rate of charge as a proportion of the weekly SDR interest rate as a permanent feature. For 1993/94, the Board decided to set the unified basic rate of charge at 111 percent of the SDR interest rate and to review this decision at midyear.

The Fund pays remuneration to a member on the amount by which its norm for remuneration exceeds the Fund’s holdings of its currency, excluding holdings that reflect the member’s use of Fund credit. For each member, the norm is calculated as the sum of 75 percent of the member’s quota on April 1, 1978 and the increases in quota consented to and paid after that date. For members joining the Fund after April 1, 1978, the norm is calculated as the weighted average of the norms applicable to all other members on the date of admission, plus all increases in the member’s quota paid after that date. The rate of remuneration, before the adjustments under the burden-sharing mechanisms discussed below, is set at 100 percent of the SDR interest rate, which averaged 5.71 percent in 1992/93.

The various measures taken in recent years to strengthen the Fund’s financial position against the consequences of overdue obligations were continued in 1992/93. First, a target amount of net income (5 percent of reserves at the beginning of the financial year) is added to the Fund’s reserves each year. Second, the financial burden of overdue obligations is shared by debtor and creditor members: one half each of the cost of deferred overdue charges and the allocation to the Special Contingent Account (SCA-1) of 5 percent of reserves at the beginning of the year is borne by members paying charges on the use of Fund resources and by members receiving remuneration through adjustments to the rates of charge and remuneration, except that the adjustment to the rate of remuneration cannot reduce that rate to less than 85 percent of the SDR interest rate. These burden-sharing procedures were extended by the Board through 1993/94.

As part of the strengthened cooperative strategy to resolve the problem of protracted overdue obligations, further adjustments—called extended burden sharing—are made to the rate of charge and to the rate of remuneration (subject to the floor of 80 percent of the SDR interest rate stipulated in the Articles of Agreement). The resources so generated are placed in a second Special Contingent Account (SCA-2) and are intended to protect the Fund against risks associated with credit extended by the General Resources Account for the encashment of rights earned in the context of rights accumulation programs, and also to provide additional liquidity to finance those encashments. The extended burden-sharing procedures were adopted in July 1990 and will remain in effect until the target level of resources of SDR 1 billion has been accumulated in the SCA-2. In view of the unification of the rate of charge, and the correspondingly larger balances of outstanding credit subject to burden-sharing adjustments, the adjustment to the rate of charge for extended burden sharing was reduced for 1993/94 from 35 to 26 basis points, in order to maintain constant the amount of resources generated for the SCA-2.

When deferred overdue charges are settled, an equivalent amount is repaid to members that paid higher charges or received lower remuneration under burden sharing. Settlements of deferred charges amounted to SDR 246 million during 1992/93, and cumulative refunds at the end of April 1993 amounted to SDR 557 million. Balances in the SCA-1 will be returned to the contributors when there are no more overdue obligations, or at such earlier time as the Fund may decide. Balances in the SCA-2 will be distributed to members that paid additional charges or received reduced remuneration when all outstanding purchases related to the encashment of rights have been repurchased, or at such earlier time as the Fund may decide.

For 1992/93, the target amount of net income to be added to reserves and the amount to be added to the SCA-1 were each set at SDR 78 million. Deferred charges due by members in protracted arrears and contributions to the SCA-1 resulted in average adjustments to the basic rate of charge of 60 basis points, and to the rate of remuneration of 56 basis points. Adjustments for extended burden sharing further increased the basic rate of charge by an average of 35 basis points and further reduced the rate of remuneration by an average of 58 basis points to 80 percent of the average SDR interest rate. Shortfalls in the amounts placed to the SCA-2 owing to the 80 percent floor of the remuneration coefficient being reached, which amounted to SDR 176 million cumulatively at the end of 1992/93, will be recaptured when the adjusted rate of remuneration does not reach that limit. For 1992/93, the adjusted rate of charge on the use of ordinary resources averaged 6.60 percent and the adjusted rate of remuneration averaged 4.57 percent.

The Fund’s net income in 1992/93 amounted to SDR 71 million, SDR 7 million less than the target amount of SDR 78 million. The Board decided to take this shortfall into account when determining the target net income for 1993/94. The net income for 1992/93 was added to reserves, which increased to SDR 1.63 billion at the end of April 1993 from SDR 1.56 billion a year earlier. Total precautionary balances (reserves and the balances in the two Special Contingent Accounts) amounted to SDR 2.5 billion at the end of April 1993, while the precautionary balances available to protect the Fund’s financial position against overdue credit outstanding from the General Resources Account (reserves plus SCA-1) totaled SDR 2.1 billion and were equivalent to 119 percent of such overdue credit (SDR 1.7 billion). Since 1986/87, the Fund’s exposure to loss from overdue charges (SDR 779 million at April 30, 1993) has been offset through the burden-sharing mechanisms and the risk has been assumed by the Fund’s debtor and creditor members. The precautionary balances placed in the SCA-2, which are to protect the Fund against risks associated with the encashment of rights by countries under rights accumulation programs and to provide additional liquidity to finance those encashments, and which are planned to amount to SDR 1 billion by about mid-1995, totaled SDR 476 million at the end of April 1993.

Overdue Financial Obligations

Although the amount of overdue financial obligations to the Fund remained high in 1992/93, the sustained implementation of the Fund’s strengthened cooperative strategy resulted, for the first time since 1982, in a decline in the level of arrears, from SDR 3.5 billion on April 30, 1992 to SDR 3.0 billion on April 30, 1993. Over the same period, the amount of financial obligations overdue from countries in arrears to the Fund by six months or more also declined from SDR 3.5 billion to SDR 3.0 billion.7

One country in protracted arrears, Peru, completed its rights accumulation program and eliminated its arrears to the Fund in March 1993. While most cases of short-term arrears were resolved in 1992/93, the number of countries in arrears to the Fund by six months or more increased from 10 to 12. Progress toward the resolution of some of these protracted cases, including the more recent ones, was hampered by difficult internal and external political conditions, as well as, in some instances, by international sanctions. All of these countries were in arrears to the General Resources Account; 9 to the SDR Department; 6 to the Trust Fund; and 4 were in arrears on SAF loans. Overdue deferred charges from these countries, which are excluded from the Fund’s current income, amounted to SDR 1,058 million at the end of 1992/93, compared with SDR 1,182 million at the end of 1991/92. Selected data on arrears to the Fund are shown in Table 5, and additional information on countries’ overdue financial obligations by type and duration is presented in Table 6.

Table 5Arrears to the Fund of Members with Obligations Overdue by Six Months or More(In millions of SDRs; end of period)
Financial Year Ended April 30
Amount of overdue obligations1,945.22,801.53,251.13,377.73,496.03,006.4
Number of members9111191012
Of which
General Department1,787.72,594.23,018.63,171.73,274.12,768.3
Number of members9111191012
SDR Department25.135.044.727.337.549.8
Number of members669679
Trust Fund132.4172.3187.8178.7184.3188.3
Number of members779666
Number of ineligible members7810887
Table 6Arrears to the Fund of Members with Obligations Overdue by Six Months or More, by Type and Duration, as of April 30, 1993(In millions of SDRs)
By TypeBy Duration



Less than

One year


3 years

or more
Bosnia and Herzegovina9.
Sierra Leone87.276.610.60.39.711.965.2
Viet Nam100.151.748.

In 1992/93, a declaration of ineligibility pursuant to Article XXVI, Section 2(a) with respect to Peru was lifted following the full settlement of its arrears to the Fund on March 18, 1993. At the end of the financial year, declarations of ineligibility remained in effect with respect to seven members: Viet Nam January 15, 1985), Liberia January 24, 1986), Sudan (February 3, 1986), Zambia (September 30, 1987), Sierra Leone (April 25, 1988), Somalia (May 6, 1988), and Zaïre (September 6, 1991). As of April 30, 1993, these seven ineligible members accounted for 97 percent of total overdue financial obligations to the Fund. In addition, declarations of noncooperation have been issued and remain in effect with respect to three members—Liberia (March 30, 1990), Sudan (September 14, 1990), and Zaïre (February 14, 1992).

Progress Under the Strengthened Cooperative Strategy

The strengthened cooperative strategy on overdue financial obligations to the Fund was formulated in early 1990 and endorsed by the Interim Committee in May 1990. During 1992/93, the Board continued to implement the three key elements of this strategy—prevention, deterrence, and intensified collaboration—to assist overdue members to find solutions to their arrears problems and to prevent the emergence of new arrears.

Preventive Measures

Actions to prevent the emergence of new cases of arrears are a fundamental aspect of the strengthened cooperative strategy. Assessments of members’ external viability and their capacity to repay the Fund are made by the staff in cases of members requesting the use of Fund resources. Such assessments highlight potential risks and dangers arising, for example, from future financing gaps, a bunching of maturities or an excessive debt burden, possible adverse external shocks, or slippages in policy implementation. Every effort is made to take these risks into account in the design, implementation, and financing of programs.

When large medium-term financing gaps and very heavy debt burdens are in prospect, the Board is informed of the member’s future financing needs and of how these are expected to be met. In such instances, the Fund has sought additional assurances from the international financial community regarding the availability of financing on appropriate terms over the medium term. In addition, assistance may be provided to strengthen members’ international reserve management practices through, for example, the targeting of a higher level of international reserves, the building up of budgetary resources in local currency, or arrangements for voluntary advance acquisitions of SDRs combined with a standing authorization to debit the member’s SDR account for amounts as they fall due.

Remedial and Deterrent Measures

The preventive element of the arrears strategy is complemented by remedial and deterrent measures, the purpose of which is to prevent new arrears from becoming protracted. These measures consist of specific actions to be taken in the light of developments in a member’s situation, and in accordance with a timetable agreed by the Board in early 1990. The timetable sets a framework for the Board’s consideration of various measures, which are then implemented in accordance with the Board’s judgment regarding the degree of a member’s cooperation with the Fund and the particular circumstances of the individual member.

The strategy for dealing with the problem of overdue financial obligations has been strengthened by the entry into effect on November 11, 1992 of the Third Amendment to the Articles of Agreement. This Amendment empowers the Fund to suspend the voting and certain related rights of a member that fails to fulfill any of its obligations under the Articles, other than obligations with respect to SDRs. Suspension may be imposed by a decision of the Board with a 70 percent majority of the total voting power.

Intensified Collaboration and the Rights Approach

Fund-monitored programs and rights accumulation programs provide a framework for members in protracted arrears to the Fund to establish a track record on policies and payments performance. The availability of the rights approach is limited to those of the 11 members that were in protracted arrears to the Fund at the end of 1989 that enter into a rights accumulation program by a certain deadline, which has been extended to the spring 1994 meeting of the Interim Committee. A rights accumulation program allows a member in protracted arrears to accumulate rights to future drawings on Fund resources in accordance with a phased schedule, and in amounts up to the level of arrears outstanding at the beginning of the program. Disbursements, however, are not made until after the clearance of arrears and are conditional upon satisfactory conclusion of the rights program and endorsement by the Fund of a follow-up arrangement. Following the completion of legislative action by certain members in February 1993, the Board formally took a decision implementing its earlier agreement to establish a pledge to use up to 3 million ounces of the Fund’s gold, if needed, as additional security for use of the resources of the ESAF Trust in connection with the encashment of rights accumulated by low-income Fund members.

Three of the 11 members in protracted arrears at the end of 1989—Guyana, Honduras, and Panama—cleared their arrears to the Fund without recourse to the rights approach. Three other members—Peru, Sierra Leone, and Zambia—adopted rights accumulation programs. As noted above, Peru completed its rights program in December 1992 and accumulated all of the rights available under the program. Peru cleared its arrears to the Fund on March 18, 1993, and on the same day the Board approved a three-year extended arrangement in support of Peru’s medium-term economic program. Sierra Leone continued to make satisfactory progress under its rights accumulation program, which was endorsed by the Board in April 1992. Sierra Leone has observed most of the financial and structural performance objectives of the program and has been accumulating rights. In July 1992, the Board endorsed a revised rights accumulation program for Zambia. While some difficulties in program implementation have been encountered, progress in the areas of structural reform and economic liberalization has been generally satisfactory and Zambia has continued to accumulate rights under the revised program.

In the case of three other members in protracted arrears at the end of 1989—Liberia, Somalia, and Sudan—progress has been hindered by a number of factors, including, inter alia, political and security problems.

The two remaining members—Cambodia and Viet Nam—have made clear progress toward resolving the problem of their overdue financial obligations to the Fund. In October 1992, the Fund re-established formal channels of communication with Cambodia, and in December 1992 Cambodia applied certain assets that the Fund had held on its behalf toward partial settlement of its arrears to the Fund. Cambodia has also been implementing a package of economic adjustment measures informally monitored by Fund staff. Since 1989, Viet Nam has continued to cooperate with the Fund under the intensified collaborative approach by implementing macroeconomic stabilization policies and making payments to the Fund equivalent to obligations falling due. More recently, there have been indications of the emergence of an international consensus that would facilitate progress toward clearance of Viet Nam’s arrears to the Fund in the near future.

The international financial community has provided support to overdue members that are cooperating with the Fund through a variety of channels. The financing required for Peru’s rights accumulation program was mobilized through a Support Group co-chaired by Japan and the United States with broad international representation. Japan and the United States also provided the bridge loan used to help clear Peru’s arrears to the Fund in March 1993. In the case of Zambia, international support has been provided through the Consultative Group and the World Bank’s Special Program of Assistance to Africa. The extraordinary cash flow relief granted to Peru, Zambia, and Sierra Leone in the context of the Paris Club of official creditors has also helped these members to meet the financing requirements of their programs.

Special Charges

In order to assist members in protracted arrears to the Fund, the Board has in recent years modified the system of special charges on overdue financial obligations to the Fund. In April 1991, the Board decided to suspend special charges on overdue financial obligations in the General Resources Account of members in protracted arrears that were judged to be actively cooperating with the Fund and that had undertaken not to allow their overdue obligations to the Fund to increase above a specified ceiling level. Four members—Panama, Peru, Viet Nam, and Zambia—initially qualified for such suspension and benefited from it to varying degrees. At its review of the system of special charges in April 1992, the Board concluded that, in the cases of members in protracted arrears, the continued application of special charges could have the effect of compounding the severity of the arrears problem and complicating the efforts by all parties to arrive at a solution. The Board therefore decided to discontinue levying special charges in the General Resources Account on all members with overdue obligations outstanding for six months or more with effect from May 1, 1992. In April 1993, the Board decided that with effect from May 1, 1993, the levying of special charges in the Trust Fund and of additional interest on overdue SAF obligations would also be discontinued for members with overdue obligations outstanding for six months or more.

SDR Department

The SDR is an international reserve asset created by the Fund. SDRs are held and used by Fund members, all of which are participants in the SDR Department. In addition, SDRs can be held by the Fund’s General Resources Account and by official entities prescribed by the Fund for that purpose. Although prescribed holders do not receive SDR allocations, they can acquire and use SDRs in operations and transactions with participants in the SDR Department and with other prescribed holders under the same terms and conditions as participants. Following Switzerland’s membership in the Fund, the status of the Swiss National Bank as a prescribed holder of SDRs was terminated. Consequently, the number of institutions prescribed by the Fund to accept, hold, and use SDRs declined to 15 during 1992/93.8

The SDR is the unit of account for Fund operations and transactions and for its administered accounts, and is also used as a unit of account (or as the basis for a unit of account) by a number of other international and regional organizations and international conventions. In addition, the SDR has been used to denominate financial instruments and transactions outside the Fund by the private sector (private SDRs). As of the end of 1992/93, the currencies of four member countries of the Fund were pegged to the SDR.

SDR Valuation and Interest Rate Basket

The SDR is valued on the basis of a basket of currencies. The current SDR valuation basket was revised on January 1, 1991 and will be in effect through December 31, 1995. It comprises the currencies of the five member countries in the Fund with the largest values of exports of goods and services during the period 1985-89. The revision of weights at the beginning of 1991 reflected changes that had occurred between 1980–84 and 1985–89 in the relative importance in international trade and finance of the five countries whose currencies are included in the basket. The initial weights and the corresponding amounts of each of the five currencies in the valuation basket are shown in Table 7.

Table 7SDR Valuation Basket(As of January 1, 1991)

Amount of

Currency Units
U.S. dollar400.572
Deutsche mark210.453
Japanese yen1731.8
French franc110.800
Pound sterling110.0812

Following the unification of the SDR valuation and interest rate baskets in January 1981, the rate of interest on the SDR is calculated by using interest rates on selected short-term instruments in the domestic money markets of the five countries whose currencies are included in the valuation basket to determine a combined market interest rate. With effect from January 1, 1991, these instruments are the market yield on three-month U.S. Treasury bills, the three-month interbank deposit rate in Germany, the three-month rate for treasury bills in France, the three-month rate on certificates of deposit in Japan, and the market yield on three-month U.K. Treasury bills. The weekly (Monday-Sunday) yield on the SDR is computed as the sum, rounded to the two nearest decimal places, of the products of the respective interest rates, the currency amounts, and the exchange rates in effect on the preceding Friday.

SDR Transfers

In 1992/93, the transactions undertaken in connection with quota subscription payments by new members of the Fund and with members’ reserve asset payments for their quota increases under the Ninth General Review resulted in a record level of total gross transfers of SDRs of SDR 34.2 billion. This level of transfers was substantially above the previous peak of SDR 22.6 billion reached in 1983/84, when reserve asset payments for quota increases under the Eighth General Review took place. Summary data on transfers of SDRs by participants, the General Resources Account, and prescribed holders are presented in Table 8.

Table 8Transfers of SDRs, January 1, 1970–April 30, 1993(In millions of SDRs)
Annual Averages1Financial Year Ended

April 30
Transfers among participants and
prescribed holders
Transactions with designation
From own holdings2212948151655,016
From purchase of SDRs from Fund431,1501,4791,74432914,727
Transactions by agreement4397711,2623,1216,9335,2665,0195,05657,114
Prescribed operations2775208403492405,61011,355
Fund-related operations43280132149941,388
Net interest on SDRs421612592853815414413374,949
Transfers from participants to
General Resources Account
Quota payments241,7031751,591112201112,64324,933
Interest received on General Resources
Account holdings161355513077579571283,356
Transfers from General Resources
Account to participants and
prescribed holders
Repayments of Fund borrowings88866141,8761,09050035010,458
Interest on Fund borrowings42718344346919577924,027
In exchange for other members’
Acquisitions to pay charges3958963373642536996,107
Acquisitions to make quota payments114341
Total transfers1,7927,5569,97117,40418,02514,82413,45034,157243,662
General Resources Account1,3715,4454,3351,9606286946807,9307,930
holdings at end of period

The first column covers the period from the creation of the SDR until the Second Amendment of the Articles of Agreement; the second column shows the period covering the SDR allocations in the third basic period, as well as the Seventh General Review quota increases; and the fourth column covers the period during which the Eighth General Review quota increases came into effect and before two-way arrangements facilitated transactions by agreement.

The first column covers the period from the creation of the SDR until the Second Amendment of the Articles of Agreement; the second column shows the period covering the SDR allocations in the third basic period, as well as the Seventh General Review quota increases; and the fourth column covers the period during which the Eighth General Review quota increases came into effect and before two-way arrangements facilitated transactions by agreement.

Transfers of SDRs among participants and prescribed holders nearly doubled to SDR 11.1 billion in 1992/93, mainly as a result of the substantial increase in prescribed operations associated with the use of the same-day SDR loan/repayment mechanism by members paying the reserve asset portion of their quota subscriptions and increases. The level of transactions by agreement remained about the same at SDR 5.0 billion. For the fifth consecutive year, there were no transactions with designation, as potential uses of SDRs through the designation mechanism were channeled through voluntary transactions by agreement with other participants.9

The designation mechanism was not used in part as a consequence of the establishment by a number of members of standing arrangements with the Fund to buy or sell SDRs (so-called two-way arrangements). Under these arrangements, which facilitate transactions by agreement, members stand ready to buy or sell SDRs for one or more freely usable currencies at any time, provided that their SDR holdings remain within certain limits. These two-way arrangements numbered 11 as of April 30, 1993. Together with other arrangements for SDR sales, they have contributed significantly to the smooth functioning of the SDR system by accommodating a large portion of desired purchases and sales of SDRs.

During 1992/93, however, members wishing to acquire SDRs (generally to discharge financial obligations to the Fund) sought more SDRs than other members were prepared to sell, and the Fund was unable to arrange for all the requested acquisitions. This led to a lower capacity of members indebted to the Fund to effect repurchases in SDRs (which declined from SDR 1.8 billion in 1991/92 to SDR 0.6 billion in 1992/93), and to a larger recourse to the Fund’s General Resources Account to meet these members’ needs to acquire SDRs to pay charges.

SDR transfers from participants to the Fund increased sharply in 1992/93, mainly reflecting the large transactions associated with quota payments. At the same time, transfers from the General Resources Account to participants more than doubled, due largely to the high volume of purchases by members, which reflected in part the use of the reserve tranche by members in connection with their quota payments and the same-day SDR loan/repayment mechanism (see Table 8).

Pattern of SDR Holdings

While total allocations of SDRs remained unchanged at SDR 21.4 billion in 1992/93, there was a marked redistribution of holdings resulting from the transfers described in the previous section. The Fund’s holdings of SDRs in the General Resources Account increased sharply from SDR 0.7 billion to SDR 8.0 billion during the financial year, reflecting receipts from members of reserve asset payments in SDRs in connection with the quota increases under the Ninth General Review. Holdings of SDRs by participants correspondingly declined from SDR 20.7 billion to SDR 13.5 billion. Mainly as a result of the use of SDRs to pay the reserve asset portion of their quota increases, the SDR holdings of the industrial countries in relation to their net cumulative allocations declined from 121.2 percent to 73.8 percent during 1992/93, while the holdings of developing countries declined from 44.6 percent to 39.9 percent of their net cumulative allocations (Appendix Table II.14).

In February 1993, the Board reviewed the Fund’s policy on the appropriate level of its SDR holdings and considered the pace at which the high level of SDR holdings resulting from the quota payments could be reduced in the period ahead. In light of the need of members to hold SDRs as reserves and as a means of payment, the Board decided that Fund operations should be guided by the aim of reducing the Fund’s SDR holdings to within a range of SDR 1.0-1.5 billion by the end of 1995. Given the projected inflows and outflows of SDRs in the General Resources Account over the next three years, it is expected that about half of total transfers under the quarterly operational budgets will be made in SDRs until the target range for the Fund’s holdings is reached in late 1995.


Enhanced surveillance is not performed under Article IV of the Fund’s Articles; it is a service provided at the request of members under Article V, Section 2.


For a discussion of the implications of introducing national currencies in the states of the former Soviet Union, see World Economic Outlook, May 1993 (Washington: International Monetary Fund, 1993), pages 67–68.


Reserve tranche purchases were made by 86 members in 1992/93 (SDR 3.2 billion), compared with 3 members (SDR 14 million) in 1991/92. The large increase in reserve tranche purchases was related to the establishment of reserve tranche positions when members paid their increased quota subscriptions under the Ninth General Review. To facilitate these payments, the Fund established, and many members used, a same-day SDR borrowing mechanism to pay the reserve asset portion of the quota increases. Under that mechanism, reserve tranche positions created by the quota payments were purchased in order to repay the member that had lent the SDRs. Reserve tranche purchases represent members’ use of their own Fund-related assets and not use of Fund credit.


Including SDR 717 million in support of debt and debt-service reduction operations.


Following the amendment of the ESAF Trust Instrument in July 1992, the Board approved in 1992/93 a two-year ESAF arrangement for Mauritania in an amount of SDR 33.9 million, the undrawn balance under the three-year ESAF arrangement that expired in mid-1992.


The data in this section include the overdue financial obligations of the Republic of Bosnia and Herzegovina and the Federal Republic of Yugoslavia (Serbia/Montenegro), which have not yet completed arrangements for succession to membership in the Fund.


These 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, and Nordic Investment Bank.


The Fund’s Articles of Agreement provide for a designation mechanism whereby participants whose balance of payments and reserve positions are deemed sufficiently strong are obliged, or designated, by the Fund to provide freely usable currencies up to specified amounts in exchange for SDRs. In transactions with designation, the participant exchanging its SDRs is required to make a representation to the Fund that it has a need to use its SDRs because of its weak balance of payments or reserve position and not for the sole purpose of changing the composition of its reserves.

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