III. Fund Activities

International Monetary Fund. External Relations Dept.
Published Date:
September 1955
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Article XIV Consultations and Other Reviews of Exchange Restrictions

Financial Stability

In earlier consultations, the Fund expressed the view that use of restrictions as a means of coping with balance of payments difficulties was at best a temporary expedient, and that a sound external position could not be achieved without internal stability. The Fund has maintained that many of the restrictions retained by member countries were designed primarily to cope with external imbalance resulting from inflationary conditions at home. Therefore, it has consistently urged the development of sound fiscal and monetary policies to stabilize the domestic situation and so reduce the need for restrictions. A year ago, the Fund reported that a significant number of members had succeeded in achieving conditions of internal stability through determined and effective anti-inflationary measures.6

During the year under review, this progress has been carried further. Moreover, it is encouraging to observe that many countries with substantial economic development programs intend to pursue these programs within a framework of monetary stability and external equilibrium without restrictions, and to coordinate their development expenditures with available domestic and foreign resources. For several members, the Fund has suggested in its decisions the continuation of existing policies with a view to consolidating the results already attained and preventing the resurgence of inflationary pressures arising from expansion in development expenditures. In a few countries, the Fund has felt that further progress could be made toward domestic stabilization through the strengthening and better coordination of measures to control money, credit, and investment.

Not all countries have shared in the movement toward greater domestic stability, and some are still faced with financial difficulties which have resulted currently from inflationary domestic expenditures. In these cases, the Fund has again stressed the need for measures to place the internal economy on a sound basis, and, where the economy has tended to become rigid, the need for re-examining basic policies and, in particular, policies relating to price-wage relationships and other factors affecting the various sectors of production.

However, by and large, the year under review witnessed a substantial measure of internal stability, and the emphasis in the consultations has shifted in many cases from domestic financial policies to the question of excessive reliance on restrictive devices. The Fund has, therefore, during the year used the opportunities provided by the consultations to make a closer scrutiny than hitherto of the restrictions and discrimination maintained by member countries under Article XIV of the Articles of Agreement.

Continued Use of Restrictions

As noted in the previous section, many countries in the past year have responded to improvement in their positions by relaxing restrictions and reducing discrimination. The Fund has felt that the liberalization measures already undertaken by some member countries could be carried further, and has recommended such action. At times this has involved the reduction or elimination of discriminatory features.

Similarly, bilateral arrangements have come under closer scrutiny from the point of view both of their discriminatory effects and of the justification for their continuance. In the forthcoming consultations with members under Article XIV, the Fund will place special emphasis on the question of bilateralism because of its significance for further progress toward convertibility and the removal of restrictions.

Despite the progress reported in the preceding pages, the use of restrictive devices is still widespread. Restrictions have sometimes been intensified in order to cope with increased external imbalance resulting from internal conditions and policies. Certain countries are still faced with payments difficulties stemming from external causes, such as fluctuations in the demand for their exports or the restrictive practices of other countries with which they have close trading relations. The Fund has recognized that some countries find it difficult to give up restrictive devices. Despite similar handicaps, however, a number of countries have made very substantial progress toward the realization of the Fund objective of multilateral payments.

During the period under review, only a few countries have attempted to simplify their multiple exchange rate structure with a view to moving to a unitary rate system. The Fund has welcomed such developments as have taken place on these lines. The Fund has discussed fully with other member countries the prospects for further unification of their exchange systems, and, in general, has been assured that countries would strive to continue progress in this direction as conditions permit.

The Fund has found that the purpose for which multiple exchange rate systems and discriminatory exchange devices are used has generally been to cope with payments difficulties. In some countries these practices reduce, and at times eliminate, the need for quantitative exchange restrictions. The Fund has in certain cases raised no objection, noting the intention of the member countries to abandon such devices as soon as conditions permit. The Fund has also urged some member countries to give more active consideration to the removal of these devices and consequently the simplification of their exchange rate structures. For some countries, it has emphasized the importance of appropriate exchange rate policies in dealing more adequately with the internal and external problems of its members. Where par values do not exist, or are not realistic, the steps which must precede the establishment of an appropriate par value have been considered with the member countries.

Fund Assistance to Members

In its discussions with countries concerning their restrictive systems, the Fund has recognized the difficulties and problems that beset countries in their attempts to remove restrictions. While deriving its basic criteria from the objectives embodied in the Articles of Agreement, the Fund has sought to adapt its policies to the circumstances of each country, with a view to assisting the country in meeting its problems and in making further progress toward a freer system of payments. At the request of member countries, technical Fund missions have been sent, often in connection with the consultations under Article XIV, to provide assistance on matters relating to their exchange systems. The Fund has also made its resources available to members. The policies of the Fund regarding the use of its resources, and particularly its policies on gold tranche drawings, stand-by arrangements, and the application of the waiver provisions in its Articles of Agreement, have been devised to enable the Fund to give its members that added assurance which they may need in order to declare or maintain the convertibility of their currencies. At the same time, these policies also enable the Fund to give financial help to countries which, although not able to establish convertibility, are able to make substantial moves in that direction, or to help countries avoid the need to intensify restrictions.

Discrimination in Transport Insurance

The Fifth Annual Report on Exchange Restrictions (page 18) referred to the request made to the Fund at the Fifteenth Session of the Economic and Social Council of United Nations to examine the question of possible discrimination in the field of transport insurance. The Fund carefully reviewed information on this subject covering some forty countries, and concluded that only a very few countries use their exchange control machinery to restrict specifically the making of payments to foreign insurers in respect of transport insurance, for the purpose of conserving their foreign exchange resources. It was noted, however, that about one fourth of these countries have legislation which protects their domestic insurance industry and which precludes their residents from entering into transport insurance contracts with foreign insurers or companies not authorized to operate in the national territory. In these countries, consequently, exchange is not available for payments in respect of unauthorized insurance contracts. The Fund has accordingly replied to the ECOSOC, pointing out the Fund’s interest in the subject, and its concern to promote and encourage the lessening of restrictions on all current international payments, including those placed on making payments abroad in respect of transport insurance.

Fund-GATT Relations

At the Ninth Session of the Contracting Parties to the General Agreement on Tariffs and Trade (GATT), the Fund was represented by a mission that followed and, as an observer, participated in the reconsideration of the General Agreement. The Contracting Parties’ field of activity is closely related to that of the Fund. Frequently, both institutions are actively concerned with essentially similar issues, e.g., deterioration in a country’s balance of payments position and measures taken to improve it.

The provisions in the General Agreement concerning the use of quantitative restrictions for balance of payments purposes and concerning discrimination in their application are of particular importance to the Fund. Under the existing agreement, the Contracting Parties, when called upon to consider or deal with problems concerning monetary reserves, balances of payments, and foreign exchange arrangements, are required to consult fully with the Fund. Generally speaking, maintenance of discrimination under the GATT has been closely tied in practice to action permitted under the Fund Agreement, and the Fund’s determinations, as embodied in its decisions on Article XIV consultations, have played an important part in shaping the attitude taken by the Contracting Parties toward quantitative restrictions. The Fund has been able to contribute to the Contracting Parties’ consideration of a number of matters, particularly questions relating to quantitative restrictions for balance of payments purposes. The improvements envisaged for carrying out the provisions of the GATT provide for the establishment of an Organization for Trade Cooperation. Meanwhile, the Contracting Parties have adopted recommendations designed to lead to closer cooperation with the Fund. The Fund has welcomed this step and looks forward to receiving suggestions from the Contracting Parties for the implementation of their recommendations.

Fund-OEEC Relations

The Fund has continued to maintain continuous contact with the Organization for European Economic Cooperation (OEEC) through the Fund’s European Office in Paris. In response to an invitation, the Fund’s Deputy Managing Director attended, as an observer, the OEEC meeting held in Paris in January 1955. The Council of the OEEC has undertaken an extensive re-examination of the trade problems of its member countries. The OEEC member countries agreed, among other things, to an increase in the near future in their commitments regarding the liberalization of trade among themselves, from the present overall level of 75 per cent to 90 per cent of their total imports on private account, and from 60 per cent to 75 per cent as a minimum in each of the three broad categories of imports (agricultural goods, raw materials, and manufactured goods). The Council of the OEEC recommended also that its members should continue their individual efforts to reduce “quantitative restrictions on invisible transactions and transfers from the United States and Canada,” and that its members (other than Greece and Turkey) should discontinue certain artificial aids to exporters by the end of 1955 (for France, some other date may be determined later).

Op. cit., pp. 19-20.

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