Opening Address by the Co-Chairman of the Boards of Governors, the Governor of the Fund for the Syrian Arab Republic1, Mohammed Imady

International Monetary Fund. Secretary's Department
Published Date:
October 1976
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It is a great privilege to follow the distinguished President of the Republic of the Philippines in addressing this thirty-first joint meeting of the Boards of Governors of the International Monetary Fund and the World Bank. The welcoming speech of President Marcos reflects the gracious friendship and hospitality with which the Philippines has received us. Indeed, the cordial welcome extended to us by the delightful city of Manila will long remain in our memories. May I voice at this time the appreciation of all participants at this joint meeting for the personal efforts of the President and the First Lady to provide us with this magnificent new convention center designed by the talented Filipino architect, Leandro Locsin, whose building combines innovative efficiency with artistic design.

As Chairmen of the Boards of Governors, Chairman Ayoubi and I wish to add our greetings to those of President Marcos. We welcome the Governors, their alternates, our observers, and special guests. A special welcome is extended to the Governor for Papua New Guinea, which is participating for the first time as a member of our institutions, and to the Fund’s newest member, the state of the Comoros. Special greetings are also offered the observers from Cape Verde, Maldives, and Sao Tome and Principe, which have applied for membership, and from Seychelles, whose membership Governors have already approved, and to Guinea-Bissau and Surinam, whose memberships are on our agenda here.

To these expressions of good will, I am pleased to add the greetings and best wishes of my own country, the Syrian Arab Republic, which I am honored to represent as Governor of the Fund. Throughout the ages many phrases have been coined to describe Syria—land of prophecies, birthplace of the world’s earliest alphabet, cradle of civilization, and crossroads of three continents. Ancient in its proud Arab heritage, and modern in its aspirations, Syria is all these things. It is also a developing country, involved in a struggle to help restore prosperity and a just peace to the troubled Middle East.

Our Annual Meetings provide the occasion once again for reviewing the state of the world economy and the important developments in the work of the Fund and the World Bank.

This year, 1976, is expected to be a favorable one for the industrial countries in particular and consequently—although to a lesser degree—for the world economy as a whole. Recovery is now well under way and firmly established in the industrial countries. These countries, which suffered from a negative rate of growth in 1975, are now expected to achieve a rate of around 6 per cent in real gross national product. Moreover, they have also achieved during this year a somewhat limited success in combating inflation, though its expected rate remains high when compared with the average during 1962–72.

There is no doubt that these favorable developments in the industrial countries will have a positive impact on the economy of the non-oil developing countries. The export volume of these countries, which stagnated in 1975, is expected to grow by more than 8 per cent in 1976. Partly as a result of these developments, it is expected that their current deficits will decline from $37 billion in 1975 to $32 billion in 1976.

Despite these favorable developments, the undeniable fact remains that the current balance of payments situation of the non-oil developing countries remains a source of serious concern. This becomes very clear when one realizes that their cumulative current deficits during the three-year period 1974–76 are expected to reach around $98 billion—far higher than during any previous three-year period. Indeed, the ratio of current deficits to exports of a major group of non-oil debtor countries increased from 10.8 per cent in 1973 to around 30 per cent in 1976. As a result, the external debt of developing countries reached a very high level which is estimated to be more than $130 billion. The seriousness of the problem is intensified by the fact that most of the net capital inflow to non-oil developing countries during the last three years was contracted on terms harder than before.

While concern is warranted, exaggerated fears are not justified. These countries cannot continue incurring such large current deficits and financing them on hardened terms without facing serious external debt problems in the near future. Action is required to avoid the emergence of such problems. This action must be taken by the developing countries, the industrial countries, and the international financial institutions.

The developing countries have asserted in many international forums that the task of their development devolves primarily upon themselves. Indeed, many of them have taken measures to improve the mobilization of their domestic resources and to diversify their exports. The savings of poor people in poor countries have provided a far larger proportion of development investment than have external resources. But the effectiveness of national development efforts is adversely affected by unfavorable international developments and a lack of positive action in the fields of trade, commodity stabilization, and concessionary aid.

There is no doubt in my mind that the growing current deficits of the non-oil developing countries during the last three years and the subsequent sharp increase in their indebtedness are mainly attributable to the external forces of inflation and recession in the industrial world.

The limited recovery of the past year has had some favorable impact on the developing nations. Regrettably, no discernible progress has yet been made in the cooperative struggle needed to achieve a new, and more equitable, international economic order. Such a new order requires the development of institutions and practices to redress the imbalances of present international market forces. Market forces can be an equitable and efficient means of allocation when wealth and economic power are fairly balanced. When large disparities exist, as they do in today’s world, the market works only in favor of the rich and the powerful.

In the industrial countries themselves, the social progress of the past century has centered on the efforts of progressive people, governments, and labor unions to humanize the market’s blind forces. The developing countries now urge a similar effort at the international level.

The means necessary to this end have been discussed at length at international meetings in Lima, Nairobi, Colombo, and the continuing dialogue in Paris. The essentials are a common fund for buffer stock financing and real progress in winning developing countries freer access to developed countries’ markets to help improve their terms of trade and export performance.

The industrial countries must intensify their efforts to reach the second development decade’s target of devoting 0.7 per cent of their gross national product to development assistance; their present rate is less than half that target. The need for such increased aid flows has been dramatically underlined by a World Bank study showing that additional capital transfers of $30 billion to $40 billion a year will be needed to meet the United Nations’ goal of 6 per cent annual growth in the 1970s.

The aid performance of the Organization of Petroleum Exporting Countries during the last three years, and particularly of the Middle East oil producers, has been remarkable. This performance is even more commendable when it is remembered that it is based on the exportation of depletable wealth, rather than renewable income surpluses, and that it is not tied to donor country procurement or used as a mechanism for utilizing idle capacity or for alleviating unemployment.

Against this background, the International Monetary Fund has recently taken an important step in the process of international monetary reform toward which it has been moving since the collapse of the Bretton Woods system in late 1971. As Chairman of the Board of Governors of the International Monetary Fund, I had the privilege earlier this year of bringing before the Board the proposals of the Executive Directors for modifications of the Articles of Agreement that will provide a more realistic international monetary system.

These proposals—embodied in a draft amendment—were approved by a resolution of the Board of Governors on April 30, 1976 and now await acceptance by member governments. They bear witness both to the ability of the Fund, through its members, to reach compromises on difficult issues and to the Fund’s concern for the interests of all members. I urge all members to speedily ratify these amendments.

This second amendment of the Articles of Agreement leaves the time-honored purposes of the Fund unchanged. It also does not alter substantially members’ entitlement to access to the general resources of the Fund or the conditionality of their use, features which are intended, as before, to safeguard both the Fund and its members. The amendment does, however, bring substantial changes in regard to exchange arrangements, gold, and the SDR.

The new Article IV on exchange arrangements will legalize the floating of exchange rates that has been widely practiced since 1973 by permitting member countries to have exchange arrangements of their choice. The amendment reflects a sense of realism and creates possibilities for a more effective adjustment process.

But floating is not and cannot be totally free—for the simple reason that no country can realistically abstain from trying to influence such an important economic variable as its exchange rate. It is, thus, all the more necessary that international rules be agreed upon to ensure that situations of serious conflicts do not emerge and that the burden of adjustment is equitably shared.

Some rules may already exist in the form of implicit or explicit understandings among major central banks. The issue of adjustment is, however, the concern of the international community as a whole: its failure affects all countries, and often the developing countries the most. The rules for such adjustments should be agreed upon within the Fund and administered by that institution.

The second amendment also brought important changes in reducing the role of gold in the international monetary system with the objectives of making the SDR the principal reserve asset. The SDR has begun to establish itself in a variety of ways: as a currency peg, as a unit of account in international transport, for bond issues, and as a definition of obligation in many international agreements. The sale of IMF gold goes a long way toward reducing the monetary role of gold. Nevertheless, if national gold reserves are valued at market-related prices—in view of the expected legalization of the use of gold between central banks—the share of SDRs in total international reserves would be reduced to less than half the 7 per cent it constituted when the new reserve unit was first distributed. Thus, further action is still needed to enhance the SDR’s role as a reserve asset. The growth of international reserves must be internationally and cooperatively controlled if stability is to be restored to the world monetary system.

The developing countries must also be given a fair share in non-earned reserve increases. The share of the non-oil developing countries in future SDR allocations should be greater than called for under the present criteria, perhaps 50 per cent of the total reserves to be created.

The allocation of a larger share of new SDRs to the developing countries is justified by the greater reserve needs of these countries: their exports are more vulnerable, their flexibility in adjusting imports more limited, and they lack the access to alternative sources of liquidity and balance of payments support enjoyed by the industrial countries.

I would urge the Interim Committee to give due consideration to the needs of the non-oil developing countries in recommending new allocations of SDRs.

In the past year, the Fund, under the competent leadership of Mr. Witteveen, has made commendable progress in enlarging its role in a number of fields. There has been a substantial expansion in members’ use of the Fund’s resources, with drawings reaching an unprecedented SDR 6.6 billion. Both developed and developing countries have benefited. The Sixth General Review of Quotas, the establishment of the Trust Fund, the temporary enlargement of members’ credit tranches by 45 per cent, and the liberalization of the compensatory financing facility will add greatly to the ability of the Fund to fulfill its objectives.

The World Bank Group—the Bank, the International Development Association (IDA), and the International Finance Corporation (IFC)—has made an increasingly valuable contribution to economic development in the Third World in recent years. We are delighted to witness the progress it has achieved under the dynamic leadership of Mr. McNamara in a number of development fields, most notably in assisting the urban and rural poor through projects aimed directly at increasing their productivity.

We are concerned, however, that the Bank and IDA are making decreasing use of one of their most effective aid mechanisms: program lending. In its early years, when some developed countries still needed Bank assistance, program loans constituted about 38 per cent of Bank operations. For the immediate future, a level of only 4 to 7 per cent is planned; we feel this should be raised to some 15 per cent. Many of the balance of payments problems facing developing countries are structural in nature, and cannot be adequately remedied by Fund financing or short-term stabilization programs. The required solution to such problems is quickly disbursing long-term financing which will allow longer-term structural remedies to be devised. This can only be provided through Bank program lending.

Increases in the level of assistance the World Bank can offer the developing world are also urgently needed.

After prolonged and arduous negotiations, the Bank’s Executive Directors have approved a recommendation to the Board of Governors to selectively increase its capital by $8.2 billion, the minimum amount needed to avoid an actual slowdown in lending because of the statutory limits imposed by the Bank’s Articles of Agreement. Under the proposed selective capital increase, the Board has been able to approve a Bank lending program of $5.8 billion for the present fiscal year.

We fully support this proposed capital increase. We recommend its speedy approval by the Board of Governors, and urge all our member countries to fully subscribe to the shares offered to them.

It must be noted, however, that the agreement to recommend the selective capital increase was won only at a high price. This price will be paid by the developing countries—those very countries that the Bank was created to assist. The price included an understanding that future yearly lending programs would be based on an assumption that no general increase in the Bank’s capital would be forthcoming. Thus, the Bank’s annual lending will be frozen at $5.8 billion current dollars, with shortened grace and maturity periods. In real terms, this agreement means a decline in future lending.

Such a decline was probably inevitable, in the absence of a general increase in the Bank’s capital. But to insist—as did certain member countries—on such a freeze in lending as an explicit condition for the selective capital increase was constrictive and contrary to the spirit of international cooperation for development.

A further price was paid in the adoption of an automatic formula under which the Bank’s lending rate will be set automatically each quarter at a level ½ of 1 per cent higher than its borrowing costs in the previous quarter. This formula was initiated in July and forced an increase in the lending rate to 8.9 per cent.

We firmly believe that this formula is not necessary to ensure the Bank’s financial soundness. The World Bank is very sound already; the new lending rates will have a nearly negligible impact on the financial ratios which demonstrate this soundness. Worst of all, the price will be paid directly by the developing countries—at a time when they are already faced with serious payments and external debt problems. Continuation of this formula could transform the World Bank from the world’s leading development institution into a commercial institution. We urge the Executive Directors to reconsider this decision. It should be abolished as soon as practicably possible.

The World Bank is clearly the most important of the world’s multilateral development institutions. A continued expansion of its operations is of paramount importance to the developing countries. We urge that planning for a vitally necessary general increase in its capital be undertaken as quickly as possible.

Negotiations toward a Fifth Replenishment of the IDA have been under way for more than a year. The urgency of this replenishment has increased with the realization that quick action is necessary if IDA’s commitment power is to be extended beyond July 1977, a very short nine months from now.

I cannot overly stress the importance of IDA. It is the strongest financial link—now amounting to more than $10 billion—between the international community and its poorest members. The developing countries attach the greatest importance to replenishing its resources, at the very least, to the real level of IDA IV.

Most unfortunately, the very slow progress of negotiations so far has given rise to fears that the whole future of IDA may be at stake. We urge those industrial countries which have fallen behind in their efforts to reach the United Nations’ target of devoting 0.7 per cent of their gross national product to official development assistance to show their determination to reach this goal by agreeing to a generous Fifth Replenishment of IDA.

The Executive Directors have also acted to strengthen the World Bank’s potential involvement in the private sector of developing country economies by authorizing a major increase—from $107 million to $480 million—in the capital of the IFC. In its 20 years, IFC—the only international financial institution focusing on the private sector—has committed $1.5 billion to 271 enterprises in 61 countries. Last year, the Corporation and its associated investors accounted for some 7 per cent of net nonpetroleum investment in the developing countries.

Increasing IFC’s resources more than fourfold would allow the Corporation a much greater impact. It would enable it to expand its role as promoter and honest broker to undertake more and larger projects and to join more fully with private capital sources in such fields as natural resource development. Increased capital would also allow IFC a deeper involvement in both projects and financial institutions in smaller and less developed countries—in Africa and elsewhere—in which market structures do not yet allow small entrepreneurs to fulfill their potential.

The activities of the International Monetary Fund and the World Bank—under the imaginative leadership of Mr. Witteveen and Mr. McNamara—have contributed significantly to improving the well-being of the world community. The need for further monetary reform and expanded development assistance is still great. The disparity between the wealth of nations continues to widen; stability in their financial relationships has not yet been achieved.

Greater economic security and prosperity in the developing countries will allow for the increase in international production and trade which is the only real answer to the need for growth without inflation: ultimately, it will benefit the industrialized countries as much as their developing neighbors. A stable, equitable, and internationally controlled monetary framework must be created as the basis for this relationship.

Until these twin goals are achieved, world progress—and, indeed, world peace—will continually be threatened.

Two hundred years ago, Adam Smith wrote of the wealth of nations. Since then that wealth has multiplied to a level unimaginable in 1776. The question before our international community is not one of sharing the wealth a few nations possess today. Our goal instead must be the creation of a new order that will put today’s wealth to its most productive uses, to join in a cooperative effort to invest in a more prosperous future for all nations.

Delivered at the Opening Joint Session, October 4, 1976. Mr. Mohammed Imady, Governor of the Fund for the Syrian Arab Republic, and Mr. Sadek Ayoubi, Governor of the Bank, IFC and IDA for the Syrian Arab Republic, acted as Chairmen of the Annual Meetings.

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