III. Regional Arrangements

International Monetary Fund. External Relations Dept.
Published Date:
September 1975
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During 1974 the EEC pursued the negotiations that had been initiated in July 1973 with developing countries of Africa, the Caribbean area, and the Pacific region (ACP countries). These negotiations were conducted with a view to establishing new relations between the enlarged Community and the 46 ACP countries,5 i.e., the 22 associated member countries of the Yaoundé and Arusha Agreements and 24 “associable” countries, mainly members of the Commonwealth. On July 25-29, 1974 a meeting was held in Kingston, Jamaica, where the EEC agreed not to seek reverse preferences. The negotiations were concluded in Brussels on January 31, 1975, and the Convention, which will apply for five years, was signed in Lomé, Togo, on February 28, 1975, subject to ratification. Under the agreement, the EEC undertakes (1) to eliminate tariffs and quantitative restrictions on all industrial goods and on the vast majority of agricultural products exported from the ACP countries and liberalize the rules of origin for ACP products; (2) to provide them with industrial, technical, and financial assistance; (3) to set up a fund designed to stabilize receipts from exports of specified primary commodities from the ACP countries to the EEC; and (4) to guarantee an annual quota and a minimum price for sugar imports from ACP countries. The agreement succeeded both the Yaoundé Agreements (of June 1, 1964 and July 29, 1969) and the Arusha Agreement (of September 24, 1969), which had expired on January 31, 1975.

Under the Lomé Convention, the EEC has undertaken to eliminate tariffs and quantitative restrictions on products representing approximately 54 per cent of the ACP countries’ exports to the EEC. In contrast to the Yaoundé and Arusha Agreements, under the Lomé Convention the ACP countries are not required to grant the EEC’s exports preferential treatment but most-favored-nation treatment. In order to protect ACP countries’ export receipts against price fluctuations for primary commodities, the EEC has agreed to set up a stabilization fund on which ACP countries will be entitled to draw if their earnings from exports of primary commodities to the EEC decline by a certain percentage, provided that these commodities account for a certain mimimum share in the exporting country’s total export earnings. The EEC has agreed to allocate 375 million Units of Account (see below) to this fund for a period of five years. Financial assistance, mostly in the form of grants, is to be channeled through a newly established European Development Fund (EDF), which is scheduled to disburse UA 3 billion over the five-year period, while an additional amount of UA 390 million will be provided in the form of loans by the European Investment Bank. A further UA 150 million has been allotted for contingencies. Industrial and technical cooperation will take the form of preinvestment and feasibility studies carried out by the EEC for projects to be financed by the EDF. Finally, the ACP sugar producing countries undertake to supply the EEC annually with 1.4 million tons of sugar, for which a guaranteed mimimum price will be maintained for a period of at least seven years, with a minimum price to be fixed annually.

The EEC undertook to adopt before the entry into force of the Lomé Agreement a definition of the Unit of Account for purposes of the Agreement. Consequently, on March 18, 1975 the Council of the EEC approved a new Unit of Account, based on a basket of EEC currencies; the Unit of Account is equivalent to the value of 1 SDR on June 28, 1974.

With regard to trade with developing countries other than signatories of the Lomé Convention, late in 1974 the EEC adopted a new Generalized Preferences Scheme for 1975, which includes an increase in the number of agricultural products receiving preferential treatment and a substantial increase in the preferential import quotas for manufactured products.

As mentioned in the previous Report, in 1973 a general Community policy toward Mediterranean countries was formulated. However, the negotiations which have taken place with Algeria, Malta, Morocco, Spain, and Tunisia have not yet resulted in an agreement. Negotiations with Israel were finalized on January 24, 1975 for a new agreement, to be signed shortly, which is broader than the previous one in that more products will be granted preferential treatment by both parties.

Following the change in government in Greece, the Commission of the EEC, on August 30, adopted a communication to the Council in which it put forward proposals for the reactivation of the Association Agreement with that country. These proposals included the reactivation of the Association Council, the extension of the Agreement to the three members which joined the EEC in January 1973, i.e., Denmark, Ireland, and the United Kingdom, and the restoration of financial aid. On December 2, the Association Council resumed its activities. On November 1, Greece effected the last tariff reductions and reductions in advance import deposits provided for under the Association Agreement with respect to the first phase of the association.

The EEC also is in the process of reorganizing its economic relations with state trading countries. At the end of 1973, individual member states ceased to be free to negotiate bilateral agreements with such countries. Council decisions of December 1974 and March 1975 laid down on a Community basis the import arrangements to be applicable to imports from state trading countries. These arrangements included for each member state a list of import quotas for calendar year 1975.

The EEC’s internal developments during 1974 were dominated by increasingly divergent economic developments in the member countries, and little progress was made toward the achievement of the Economic and Monetary Union. The European common margins arrangement continued to operate. After the United Kingdom and Ireland withdrew from the arrangement in June 1972 and Italy followed in February 1973, France decided in January 1974 to suspend for six months its participation in this arrangement. Its participation has remained suspended. At present, in addition to five EEC members (Belgium, Denmark, the Federal Republic of Germany, Luxembourg, and the Netherlands) Norway and Sweden participate in the arrangement. The European Monetary Cooperation Fund, which came into operation on June 1, 1973, administers for the EEC participants the financing operations which result from the common margins arrangement. In addition, the Fund is responsible for the administration of the short-term monetary support scheme of the EEC, which can provide credits of up to six months.

Problems arising from the increased price of oil were repeatedly discussed by the Council. By a Council decision of October 21, 1974, which was formalized on February 17, 1975, the Community as such was authorized to contract loans outside the Community, either direct with non-EEC member countries or on the financial markets; technical details were finalized on November 18. The Community was authorized to float in 1975 loans totaling up to US$3 billion (in principal plus interest) for onlending to member states to help them to finance balance of payments deficits brought about by the increase in oil prices. Loans to individual countries are to be made on a case-by-case basis, while the Community as a whole bears the responsibility for the obligations incurred.

As already mentioned, the United Kingdom in March 1974 introduced restrictions on the use of official exchange for direct investment in the EEC. On April 1, the United Kingdom announced that it would seek a renegotiation of its terms of membership in the Community. On June 4, the Foreign Secretary identified four areas where changes would be sought. On December 9-10, the Heads of Government met to examine various problems confronting the Community. In addition to reaffirming their determination to fight inflation and maintain employment, the Heads of Government adopted two decisions: they renounced the unanimity rule for Council decisions and they established a Regional Development Fund. The renegotiation with the U.K. Government was concluded in March 1975. The U.K. Government has expressed its intention to submit the issue of membership in the EEC to a national referendum.

Trade relations of the EEC with the European Free Trade Association (EFTA) continue to be regulated by the industrial free trade agreements signed with the remaining members of EFTA after Denmark, Ireland, and the United Kingdom joined the EEC. Within EFTA, Finland concluded separate bilateral agreements with Austria, Norway, and Portugal to promote agricultural trade. In its meeting on May 8-9, 1974, the EFTA Council decided that the governments would do their utmost, consistent with existing agreements and rules, to avoid action in dealing with balance of payments or sectoral difficulties which could be counterproductive in itself and would be prejudicial to the world trading system. The Council in its October 31-November 1 meeting, noted that the dismantling of barriers to trade provided for in the free trade agreements was progressing according to agreed timetables. In December, meetings were held of the Joint Committees established between each EFTA country and the EEC. Tariffs were reduced on January 1, 1975 on all products covered by EFTA countries’ trade agreements with the EEC and the European Coal and Steel Community. On the same date certain amendments to EFTA’s rules of origin came into force.

The eighth annual meeting of the Heads of State of the Common Organization of African and Mauritian States (OCAM) was held in Bangui, Central African Republic, on October 5-9, 1974. It was decided at that meeting to transfer the headquarters to Bangui. The West African Economic Community (CEAO) was established by the treaty signed on April 17,1973 by Ivory Coast, Mali, Mauritania, Niger, Senegal, and Upper Volta. It entered into force on January 1, 1974. The purpose of the Community, which is replacing the West African Customs Union (UDEAO), is to promote greater cooperation in the fields of trade and agricultural and industrial policy among the member countries. Two projects are presently being elaborated within the Community, relating to a regional cooperation tax and a community development fund. The new monetary arrangements of the West African Monetary Union, including a new charter of the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) and the related new cooperation agreement between France and the members of the Union, entered into force on October 11, 1974. At their October 11-12 meeting in Lomé, the Heads of State of the countries of the West African Monetary Union decided to transfer the headquarters of the BCEAO from Paris to Dakar, Senegal, and to establish the headquarters of the new West African Development Bank in Lomé, Togo.

On May 3, 1974 the subregional committee for West Africa of the Association of African Central Banks, which includes the BCEAO and the central banks of The Gambia, Ghana, Mali, Nigeria, and Sierra Leone, adopted a draft project for the establishment of a clearing mechanism among West African central banks. Furthermore, the committee recommended that Governors invite the central banks of Guinea and Liberia and the monetary authorities of Guinea-Bissau to join the proposed clearing arrangement as well as the Association of African Central Banks.

Some progress was made toward the establishment of the Economic Community for Development of West African States (CEDEAO) that would comprise all 15 West African States and thus would include (in addition to the countries of the CEAO, Dahomey, Guinea, Liberia, and Togo) two Sterling Area countries, Ghana and Nigeria.

At the 10th Annual Meeting of the African Development Bank (AfDB) held on July 1-6, 1974, the Governors adopted a resolution establishing a special relief fund for African countries afflicted by drought, to provide grants and loans for national and regional projects designed to counteract the effects of the drought and to prevent its recurrence.

The African Development Fund (ADF), which was set up in 1973 extended several loans in 1974. During the first Annual Meeting of the ADF, which was held on July 1-6, the Board of Governors of the ADF adopted several resolutions which provided guidelines for future operations of the Development Fund. The Governors agreed that priority should be given to the poorest and drought-stricken countries and that loans should be extended especially for agricultural projects.

The Special Arab Fund for Africa was established by the Arab oil producing countries in March 1974 with a capital of SDR 166 million. It is administered by the Arab League and is to support the purchase of oil by African countries.

In December, Lesotho, South Africa, and Swaziland reached agreement for a formalization and revision of the Rand Monetary Area (RMA) arrangements and adopted certain changes in the existing arrangements; Botswana withdrew from the negotiations but continues to participate de facto in the RMA arrangements. In September 1974 Swaziland introduced its own currency, the lilangeni; it is at par with the South African rand, which continues to have legal tender status together with the lilangeni.

The Arab Fund for Economic and Social Development was established in December 1971 to promote economic and social development of the Arab countries by providing project loans on concessional terms as well as technical assistance. Its capital of SDR 280 million is subscribed to by the 20 Arab League countries. As of April 1974 the Arab Fund had approved six loans totaling SDR 78 million to six Arab countries at interest rates varying between 4 per cent and 6 per cent per annum.

In June 1974, the oil ministers of the Organization of Arab Petroleum Exporting Countries (OAPEC) created a special fund with an allocation of US$80 million for 1974 to provide financial assistance to Arab non-oil exporting countries. As of November 5, 1974 six countries had pledged about US$70 million. The Arab Fund for Economic and Social Development has been entrusted with the management of this fund. In September 1974, OAPEC member countries decided on the creation of a special fund for promoting economic development, particularly industrialization, in the Arab world. The proposed capital of the special fund is the equivalent of SDR 840 million.

In August 1974, 24 Islamic states6 signed the charter establishing the Islamic Development Bank with an initial authorized capital of 750 million Islamic dinars (one Islamic dinar is equivalent to one SDR). The capital of the Bank is expected to be increased to the equivalent of SDR 2 billion. The Bank, which will be located in Jeddah, is expected to commence operations when 50 per cent of the initial capital has been subscribed, and will assist in the economic and social development of Islamic countries and countries with large Muslim communities. It will give loans for development projects and may also participate in the equity capital of selected enterprises.

At the end of 1973, all member countries of the Latin American Free Trade Association (LAFTA)7 had subscribed to the Caracas Protocol, thus formally postponing until the end of 1980 the deadline for the completion of the free trade area arrangements. During 1974 representatives of member countries of LAFTA met periodically to find ways to strengthen the integration process. On the occasion of the first round of collective negotiation held in Buenos Aires, August 18-27, 1974, the LAFTA countries reaffirmed their attachment to the goal of closer integration; committed themselves to achieving this through renewed efforts, particularly with regard to regional trade and multilateral ventures; concurred that existing LAFTA mechanisms should be restructured, or new ones adopted, in order to expedite the liberalization of trade; and reiterated their willingness to contribute to the consolidation and reinforcement of Andean subregional integration. At a second meeting held in Quito, September 23-28, the representatives discussed ways to improve financial cooperation, especially in the field of tax policy. They also agreed to seek the alignment of national policies with regard to industrial and agricultural development. A special group was set up to study possible reforms to be introduced in the integration mechanism and organs. This group was to submit its recommendation at a third meeting held in Montevideo on November 18-22. In addition to the above meetings, numerous sectoral meetings were held during 1974 at which specific projects were approved. The multilateral system of payments was further expanded with new reciprocal credit agreements between Brazil and Uruguay and between Mexico and the Dominican Republic, and the credit element in the system was again increased. On February 13, 1974 Mexico defined its position on the Latin American integration process. Mexico called for a strengthening of LAFTA, mainly through the introduction of an automatic tariff reduction mechanism and the implementation of a regional industrial policy, including the establishment of multilateral corporations directly connected to the integration process.

In 1973 the economic ministers of the member Countries of the Central American Common Market (CACM)8 had established a high level committee for the restructuring of the CACM. The committee was to submit its initial recommendations before the end of April 1974. At its fourth session held on March 20-23, 1974, the committee adopted several propositions, particularly with respect to regional projects, the creation of a regional capital market, and the establishment of Central American multinational enterprises. These proposals, as well as subsequent ones adopted at meetings held in June and September, were to be submitted to the economic ministers for approval. At its meeting held on June 20-22, 1974 the committee adopted recommendations regarding import substitution, tariff protection, and harmonization of the tax system. In September the discussion of the committee focused on agricultural policy, intraregional trade, and transfer of technology. On August 23-24, 1974 the Central American Monetary Council met to discuss a draft agreement designed to update and improve the functioning of the Central American Clearing House. Trade relations between the other CACM members and Honduras were further normalized.

The Andean Group of countries9 promulgated on January 18, 1974 a draft Treaty for the Creation of the Cartagena Agreement Court. The Treaty will enter into force once all the members have subscribed to it. The Ministers of Agriculture of the Group met in Lima on January 30-February 1, 1974. They studied matters relevant to the integration of agriculture and livestock and set up two commissions which submitted proposals for the creation of an agricultural council, the preparation of joint agricultural programs, and the identification of projects in the field of animal husbandry, to be financed partly by the Andean Development Corporation. During 1974 considerable attention was devoted within the Andean Group to the implementation of Decision 24 of the Cartagena Agreement. This Decision requires members of the Andean Group to adopt similar provisions regarding the treatment of foreign capital. In 1974, both Chile and Venezuela issued implementing regulations. Some members did not consider the Chilean Decree-Law No. 600 to be fully consistent with the Cartagena Agreement. A commission of experts was set up to study the matter, and Chile subsequently issued a clarification as to the implementation of the Decree-Law.

The Caribbean Common Market (CARICOM), which came into operation in August 1973 with Barbados, Guyana, Jamaica, and Trinidad and Tobago as original members, was enlarged to include ten new members during 1974. On May 1, Belize, Dominica, Grenada, Montserrat, St. Lucia, and St. Vincent formally acceded, followed in July by Antigua, and subsequently St. Kitts-Nevis-Anguilla. In July, Mexico signed an agreement with CARICOM under the provisions of which a Joint Commission was established to promote cooperation between Mexico and the CARICOM member countries in the fields of trade, science, and culture.

In April 1974, the United Nations Economic Commission for Asia and the Far East (ECAFE) passed a resolution changing its name to the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). On September 9, Nepal became the fifth country to sign the Agreement establishing the Asian Clearing Union (ACU). As a result, the Agreement legally entered into force on December 9, 1974. The other signatories are Bangladesh, India, Iran, Pakistan, and Sri Lanka. The inaugural meeting of the Board of Directors of the ACU was held in Bangkok in December 1974. The Central Bank of Iran was designated as the agent bank. A technical committee was established to draw up rules for the operation of the ACU.

Appendix: Guidelines for The Management of Floating Exchange Rates


There is widespread agreement that the behavior of governments with respect to exchange rates is a matter of international concern and a matter for consultation and surveillance in the Fund. This is no less true when rates are floating than when they are contained within fixed margins and are changed by par value and central rate adjustments.

The Fund cannot legally authorize floating but it can exercise surveillance over the manner in which members fulfill their undertaking, under Article IV, Section 4(a), “to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members and to avoid competitive exchange alterations.” The following guidelines, though not exhausting the possibilities of action by the Fund under this Article, are intended to provide criteria that members would observe in performing their undertaking and that the Fund would observe in exercising surveillance in present circumstances.

These guidelines are based on the assumption that in any situation of floating it may be desirable (a) to smooth out very short-run fluctuations in market rates and (b) to offer a measure of resistance to market tendencies in the slightly longer run, particularly when they are leading to unduly rapid movements in the rate, and (c) to the extent that it is possible to form a reasonable estimate of the medium-term norm for a country’s exchange rate, to resist movements in market rates that appear to be deviating substantially from that norm. Guidelines of this kind are necessary, inter alia, in order to arrive at a clear conception of what competitive exchange alteration is, and to provide safeguards against it.

The guidelines also take into account:

(a) that national policies, including those relating to domestic stabilization, should not be subjected to greater constraints than are clearly necessary in the international interest;

(b) that a degree of uncertainty necessarily attaches to any estimate of a medium-term normal exchange rate, that this uncertainty is particularly great in present circumstances, and that on occasion the market view may be more realistic than any official view whether of the country primarily concerned or of an international body; and

(c) that in view of the strength of short-term market forces it may at times be unavoidable to forego or curtail official intervention that would be desirable from the standpoint of exchange stability if such intervention should involve an excessive drain on reserves or an impact on the money supply which it is difficult to neutralize.

The guidelines are intended to provide the basis for a meaningful dialogue between the Fund and member countries with a view to promoting international consistency during a period of widespread floating. They are termed guidelines rather than rules to indicate their tentative and experimental character. They should be adaptable to changing circumstances. No attempt is here made to indicate the precise procedures through which they would be implemented. These will be considered later, but they must essentially rest on an intensification of the confidential interchange between the member and the Fund.

In the application of the guidelines it is to be expected that, in view of the emphasis laid by the Committee of Twenty at their fifth (Rome) meeting on the importance in present circumstances of avoiding competitive depreciation, particular attention would be attached to departures from the guidelines in the direction of depreciation. Special consideration will also be given to the manner in which the guidelines should be applied by developing countries, taking account of the stage of evolution of their exchange markets and intervention practices.

The guidelines should be understood in the light of the commentary which follows.

The Guidelines

(1) A member with a floating exchange rate should intervene on the foreign exchange market as necessary to prevent or moderate sharp and disruptive fluctuations from day to day and from week to week in the exchange value of its currency.

(2) Subject to (3)(b), a member with a floating rate may act, through intervention or otherwise, to moderate movements in the exchange value of its currency from month to month and quarter to quarter, and is encouraged to do so, if necessary, where factors recognized to be temporary are at work. Subject to (1) and (3)(a), the member should not normally act aggressively with respect to the exchange value of its currency (i.e., should not so act as to depress that value when it is falling, or to enhance that value when it is rising).

(3) (a) If a member with a floating rate should desire to act otherwise than in accordance with (1) and (2) above in order to bring its exchange rate within, or closer to, some target zone of rates, it should consult with the Fund about this target and its adaptation to changing circumstances. If the Fund considers the target to be within the range of reasonable estimates of the medium-term norm for the exchange rate in question, the member would be free, subject to (5), to act aggressively to move its rate towards the target zone, though within that zone (2) would continue to apply.

(b) If the exchange rate of a member with a floating rate has moved outside what the Fund considers to be the range of reasonable estimates of the medium-term norm for that exchange rate to an extent the Fund considers likely to be harmful to the interests of members, the Fund will consult with the member, and in the light of such consultation may encourage the member, despite 2 above, (i) not to act to moderate movements toward this range, or (ii) to take action to moderate further divergence from the range. A member would not be asked to hold any particular rate against strong market pressure.

(4) A member with a floating exchange rate would be encouraged to indicate to the Fund its broad objective for the development of its reserves over a period ahead and to discuss this objective with the Fund. If the Fund, taking account of the world reserve situation, considered this objective to be reasonable and if the member’s reserves were relatively low by this standard, the member would be encouraged to intervene more strongly under Guideline (2) to moderate a movement in its rate when the rate was rising than when it was falling. If the member’s reserves were relatively high by this standard it would be encouraged to intervene more strongly to moderate a movement in its rate when the rate was falling than when it was rising. In considering target exchange rate zones under (3), also, the Fund would pay due regard to the desirability of avoiding an increase over the medium term of reserves that were recognized by this standard to be relatively high, and the reduction of reserves that were recognized to be relatively low.

(5) A member with a floating rate, like other members, should refrain from introducing restrictions for balance of payments purposes on current account transactions or payments and should endeavor progressively to remove such restrictions of this kind as may exist.

(6) Members with a floating rate will bear in mind, in intervention, the interests of other members including those of the issuing countries in whose currencies they intervene. Mutually satisfactory arrangements might usefully be agreed between the issuers and users of intervention currencies, with respect to the use of such currencies in intervention. Any such arrangements should be compatible with the purposes of the foregoing guidelines. The Fund will stand ready to assist members in dealing with any problems that may arise in connection with them.



Certain of the terms used in the guidelines may be defined as follows:

(i) “A member with a floating exchange rate” means a member whose currency is floating independently in the sense that it is not pegged, within relatively narrow margins, to any other currency or composite of currencies. Members whose currencies are pegged to particular floating currencies, or to composites of such currencies, within these margins would be exempt from these guidelines, though not from any general principles relating to adjustment. Members which, though their currencies are pegged to another currency, change the peg frequently in the light of some formula relating, e.g., to price indices, would be expected to discuss this formula and any changes therein with the Fund. Members whose currencies are pegged to a composite of other currencies (e.g., members whose effective rates are fixed) would likewise be expected to discuss with the Fund the composite in question and any changes therein. Members whose currencies are floating jointly under mutual intervention arrangements with relatively narrow margins would be exempted from the intervention guidelines so far as intervention in each other’s currencies is concerned, but would be held responsible to the Fund for their exchange market intervention vis-à-vis the rest of the world. As regards capital controls, official financing, and other measures to influence capital flows, each member belonging to such a group would be responsible for its measures judged in relation to its overall balance of payments situation.

(ii) “Exchange market intervention” would normally be measured by the movement of reserves, adjusted as appropriate for compensatory official borrowing. Consideration might also be given to including in the concept of intervention changes in official foreign exchange positions other than reserves.

(iii) “Action to influence an exchange rate” includes, besides exchange market intervention, other policies that exercise a temporary effect on the balance of payments and hence on exchange rates, and that have been adopted for that purpose. Such policies may take the form of official forward exchange market intervention, official foreign borrowing or lending, capital restrictions, separate capital exchange markets, various types of fiscal intervention, and also monetary or interest rate policies. Monetary or interest rate policies adopted for demand management purposes or other policies adopted for purposes other than balance of payments purposes would not be regarded as action to influence the exchange rate.

(iv) Where the terms “exchange rate” or “exchange value” are employed with respect to any currency it is assumed that these would normally be expressed in terms of effective rates, i.e., the value of the currency would be measured relative to a representative set of currencies rather than relative to its intervention currency alone. The set chosen for this purpose should, in principle, vary from country to country, and the currencies in the set should be weighted according to their importance to the country in question. The composition of the set might be based on trade and financial relationships or on trade relationships alone. If trade-weighted, it might be derived from the Multilateral Exchange Rate Model, or based on bilateral trade relationships. In some cases the basket used for the valuation of the SDR might be satisfactory for this purpose also. In some cases, finally, the rate vis-à-vis a single currency might provide a satisfactory approximation to an effective rate.

On Guideline (1)

Known large once-for-all or reversible transactions would be largely offset and their effects spread over time. In addition, intervention would be undertaken to moderate large day-to-day or week-to-week movements in rates due to speculative or other factors. Such intervention, if properly conducted, should tend to net out over time.

It is unlikely to be necessary for the issuer of the principal intervention currency itself to intervene from day to day in the manner described in this guideline.

On Guideline (3)

(i) The concept of a medium-term norm for an exchange rate is employed explicitly in (a) and implicitly in (b) of Guideline (3). By this is meant a rate that would tend to bring about equilibrium in the “underlying” balance of payments, i.e., in the overall balance in the absence of cyclical and other short-term factors affecting the balance of payments, including government policies which are, or, on internationally accepted principles, ought to be temporary. If the member concerned so proposes and the Fund agrees, “equilibrium” could allow for an internationally appropriate rate of increase or decrease in the member’s reserves. The “medium-term” might be considered to refer to a period of about four years. Seasonal, speculative, and cyclical factors whose effects were reversible over such a period would be ignored.

(ii) An advantage of conceiving medium-term norms or target zones in terms of effective rates is that so long as the effective rate remains constant the balance of trade or currency payments of the floating country would not be greatly affected by changes in the relative exchange rates of the currencies of other countries. This should reduce the frequency with which it would be necessary to change zone boundaries, or the magnitude of the changes involved. It would be open to a member if it so desired to express its target rate or zone not as one that is constant over time but as one that is rising or falling at a certain rate or at a rate dependent, for example, on an index of relative price or cost levels.

(iii) Under Guideline (3)(b) the Fund would be authorized to take the initiative in situations where it considered that a member’s rate was likely to become harmful to the interests of members whether as a result of market forces or of action by the member. Recommendations to a member under this provision would be made by the Executive Directors, on a proposal by the Managing Director, but the Managing Director would not make such a proposal except after consultation with the member.

(iv) The greater the degree of uncertainty regarding the balance of payments situation and prospects of a country the wider would be the range of reasonable estimates of the medium-term norm for its exchange rate, and the wider would be the deviation beyond this range which would occur before the Fund would make any suggestions under Guideline (3)(b). The Fund’s right to make suggestions under this guideline will, in any case, be exercised with restraint.

(v) In any suggestions the Fund might make under Guideline (3)(b), it would give a preference to liberalizing as opposed to restricting ways of exercising a given effect on exchange rates, but would bear in mind the distinction between capital controls applied for temporary balance of payments reasons and those applied for other economic and social reasons.

On Guideline (6)

This guideline would imply that in their use of their customary reserve currencies members with a floating rate, while recognizing the need of issuing countries for reasonable freedom of exchange rate movement, should not be precluded from intervening in a manner conformable with the guidelines. Among the problems that might arise regarding the use of intervention currencies, in the resolution of which the Fund might be of service, are those regarding the circumstances in which a member might intervene in a currency other than its customary reserve currency, the problem of interventions that move the value of the currency of intervention in an undesirable direction, and the problem of mutually offsetting interventions.

The period covered in this Report is 1974 and the early part of 1975.

See Appendix for the memorandum “Guidelines for the Management of Floating Exchange Rates.”

Bulgaria, Cuba, Czechoslovakia, German Democratic Republic, Hungary, Mongolia, Poland, Romania, and U.S.S.R.

Countries whose institutes of issue maintain an Operations Account with the French Treasury; they are Cameroon, Central African Republic, Chad, People’s Republic of the Congo, Dahomey, Gabon, Ivory Coast, Mali, Niger, Senegal, Togo, and Upper Volta.

Bahamas, Barbados, Botswana, Burundi, Cameroon, Central African Republic, Chad, People’s Republic of the Congo, Dahomey, Equatorial Guinea, Ethiopia, Fiji, Gabon, The Gambia, Ghana, Grenada, Guinea, Guinea-Bissau, Guyana, Ivory Coast, Jamaica, Kenya, Lesotho, Liberia, Malagasy Republic, Malawi, Mali, Mauritania, Mauritius, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, Somalia, Sudan, Swaziland, Tanzania, Togo, Tonga, Trinidad and Tobago, Uganda, Upper Volta, Western Samoa, Zaïre, and Zambia.

Algeria, Bangladesh, Chad, Egypt, Indonesia, Jordan, Kuwait, Lebanon, Malaysia, Mali, Mauritania, Morocco, Niger, Oman, Pakistan, Qatar, Saudi Arabia, Senegal, Somalia, Sudan, Tunisia, Turkey, United Arab Emirates, and Yemen Arab Republic. Subsequently these were joined by Bahrain, Guinea, and Libyan Arab Republic.

Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.

Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

Bolivia, Chile, Colombia, Ecuador, Peru, and Venezuela.

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