Opening Address by the Chairman of the Boards of Governors, the Governor for Saudi Arabia1

International Monetary Fund. Secretary's Department
Published Date:
November 1962
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Ahmed Zaki Saad

Once again we meet in Washington, the seat of our institutions, to participate in the Annual Meetings of the Boards of Governors of the International Monetary Fund, the International Bank for Reconstruction and Development, the International Development Association, and the International Finance Corporation.

I should like to welcome the honorable Governors, Alternate Governors, and Advisers of the member countries, the representatives of other international and regional organizations, and our distinguished guests. I also wish to extend special greetings and welcome to the honorable Governors of the new members who have joined our institutions during the past year.

The many new countries which have already, or soon will, become members will broaden significantly the membership of our institutions. When one considers the increase in our ranks from 35 at the end of 1945 to 82 at the present time, with the prospect of 100 in the near future, it would seem that this is an appropriate time to pause and take stock of the situation and the problems we face today.

When the Bretton Woods twins were organized, the stated purpose of the Fund was to promote international monetary cooperation and to facilitate the expansion and balanced growth of international trade. The Bank was to assist in the reconstruction and development of territories of the members by facilitating the investment of capital for productive purposes. These worthy objectives would have but a hollow ring if, in fact, they were belied by the experience since the inception of the institutions. No one would claim that the objectives have been fully achieved. But the Fund and the Bank have properly assessed their tasks, and the record testifies to the success they have had in tackling those tasks.

The assistance extended to its members by the Fund is both financial and technical. The Annual Report has amply covered the technical assistance role played by the Fund. The Fund holds annual consultations on the balance of payments and related problems with practically all of its members, whether they have exchange restrictions or not. The consultations papers have been favorably received by the authorities of the various members and have been commended for their high quality and deep analysis.

Those of us who have studied the reports on consultations with the developing countries must have noticed that continuing inflation is still a major problem in many of them. Whatever the reason, many governments still find that monetary expansion is an easier road to travel when coping with budgetary and other difficulties than is the road of financial stability. It is understandable that countries with inadequate savings and resources should feel the need to find ways of increasing them for use both by the government and by the private economy. But, as this year’s Fund Report states more vividly than before, much experience over many years has taught the simple lesson that inflation merely leads to a reduction and misuse of real resources and savings. Furthermore, the need to overcome inflation where it exists is heightened by the fact that some countries are achieving price stability. Indeed, in the United States there is now concern with such problems as unemployment and idle resources. In the developing countries, we cannot establish a basis for the economic growth which will raise living standards and bring hope to the masses unless governments have the wisdom and courage to bring continuing inflation to an end. Only then can an enduring basis be established for continuing growth.

It is, therefore, gratifying to note the efforts which are made by the International Monetary Fund to find practical ways and means to help many developing members fight inflation. Difficult though it is to achieve success, we must not be discouraged. Setbacks are inevitable in any dynamic program with such a great diversity of countries and an ever-changing international economic, social, and political environment. The Fund is learning from these setbacks, as well as from the successes. What is important is patiently to help members to devise policies, to create financial institutions and tools, and to test and perfect them in the only feasible way—by trial and error in the field of action. Out of this growing and precious experience, the Fund should also continue and expand its campaign of public education in this much-debated and much-misunderstood field of financial stabilization.

Another problem which has been revealed in consultations with members, and one which causes deep concern, is the ever-growing short-term and medium-term foreign debt of the developing members. Countries which are short of capital are understandably and frequently eager to accept foreign capital in all forms. However, the ability to service foreign debt, particularly of a short-term and medium-term character, is necessarily limited. We have now come to the situation where a number of the members of the Fund have a burden of foreign indebtedness which absorbs a large part of their total current foreign exchange earnings. The cost of excessive external borrowing is very high, in terms both of the prices of the commodities obtained in this way and of the rates of interest paid. Pushed too far, it leads to internal and external financial crises and drastic interruptions in the orderly process of growth. The International Bank and the Monetary Fund have not only made clear to countries the dangers of excessive foreign debt, particularly debt of a short-term character, but have also done much to bring about a healthier pattern of foreign debt and to reduce the burden on member countries.

Apart from the annual consultations, the Fund has assigned many of its top staff to member countries, for periods ranging from a few days to several years, to help them in the formulation of appropriate monetary and fiscal programs and policies. The Fund has also established a training program at its headquarters, particularly for the benefit of people from developing areas. Recently, the period of training has had to be shortened in order to increase the number of trainees who can be accepted. The developing countries attach great importance to these various forms of technical assistance. As the years pass, there will be an increasing demand both for technicians and for training. This will challenge the Fund to expand its facilities to meet this demand.

The 1961–62 financial year has set a record in the Fund’s history in every phase of operational activity. During this year, drawings and stand-by arrangements amounted to approximately the equivalent of US$4 billion and were granted to over 30 countries. While these drawings reflected balance of payments difficulties experienced by a large number of members, they also reflected the ability and willingness of the Fund to be of major assistance to these countries. The Fund has become the one sure source to which countries turn when they need and can make effective use of short-term assistance. This is what was planned at Bretton Woods, and the Fund has been imaginative in evolving both techniques and policy for the use of its resources.

This is a summary covering only a few of the activities of the Fund. You will undoubtedly hear more about this today from Mr. Jacobsson, the Chairman of the Executive Board of the Fund.

The most striking feature of the past year’s operations of the Bank, the International Development Association, and the International Finance Corporation is that together they committed more than $1 billion for new economic development projects in more than a score of member countries. This is indeed a milestone. The Bank’s rate of lending reached nearly $900 million—a new record—and IFC and IDA together accounted for over $150 million.

But the Executive Directors and Managements of the Bank group, in their Annual Reports of this record year, have also emphasized quite another aspect: the evolution of the entire Bank group of organizations into a comprehensive development instrument able to provide a wide range of services to member countries. I need not tell this audience that the amount of money lent is of great importance; but only if the loans are accompanied by proper planning and direction can the objectives of the developing countries be fully achieved.

The Bank began purely as a financial institution designed to provide development funds. Its early loans were for postwar reconstruction and were made to a number of highly industrialized countries, possessing a high level of technical capacity. When the reconstruction phase ended in 1947, the Bank was faced with a quite different task: to provide funds to less developed countries with practically no industrial base and with few persons trained in modern technical skills. There was something of a pause in the World Bank’s lending in the late forties and early fifties. This pause was not due to a shortage of funds, but was directly related to the fact that the many less developed member countries who wished to borrow from the Bank were not able quickly to prepare large-scale development projects in a form suitable for financing.

Faced with this situation, the Bank embarked on a technical assistance program which has come to play a major role in the Bank’s operations, paving the way for its loans.

Today the Bank is able to help its member countries in many ways. It is equipped to send survey missions to analyze the development potential of member countries and to indicate the main frameworks of long-term development plans to suit particular needs of different areas. The Bank’s experts on the marketing of securities have helped several countries to improve their machinery for the raising of local funds. The Bank has also helped to overcome difficulties encountered in the actual construction of large projects, such as special rock formations. In the field of development programing the Bank staff, assisted by consultants, is increasingly engaged in assisting member countries to draft and to improve both the objectives and the administration of long-term development plans. And there is also the valuable work of the Bank as a mediator in certain difficult international economic disputes.

The evolution of all these services has been gradual, and I welcome this year’s Report of the Bank because it brings them into sharp relief so that they can be better understood and appreciated. Moreover, it shows how the Bank has assisted in the creation of new financial institutions to meet new needs—the International Finance Corporation and the International Development Association. It has long been believed, and correctly, that the Bank’s first great achievement was to demonstrate that the financing of economic development, if properly conducted, is sound business. It is now becoming clear that the Bank’s second great contribution has been to demonstrate the value of providing technical assistance at every level and thereby increasing the ability of the less developed countries to absorb and use efficiently the external assistance which the Bank and other sources can provide.

The International Development Association has also been committing its funds at a high rate: $134 million of new IDA development credits were signed during the fiscal year. Indeed, the value of IDA has become so clear that the Governors have before them proposals dealing with a possible increase in IDA’s resources. This question is, perhaps, the most important matter coming up in the discussions regarding the Bank group of institutions at this Annual Meeting.

The rationale of IDA finance is clear. The needs for finance of the less developed countries of the world are too large to be met by international loans on conventional terms. As I have mentioned, the annual debt service burden of many member countries has already reached a level which cannot be exceeded within the limits of prudence. If the flow of development finance is to continue to those countries, a much larger percentage must therefore be on terms such as IDA offers, which do not impose any immediate burden on the balance of payments of the borrowing countries. This means that the industrialized member countries of IDA are being asked to contribute regularly to an organization whose lending terms are such that there can be no significant return of the capital for many years. The issue here, while it is difficult, is also simple and straightforward. I believe that the international community of nations has to decide to adopt a long-term program whereby the developed countries of the world will provide to the less developed countries large amounts of development finance on easy repayment terms.

The third member of the Bank group of organizations is the International Finance Corporation. Just a year ago, in order that the Corporation might fulfill its purposes more effectively, the Board of Governors took action to enable the Corporation to invest in capital stock. In consequence of this important change, the past year has been a period of readjustment for the Corporation.

The Annual Report of the Corporation, which is before you, demonstrates in a gratifying manner that the Corporation is beginning to expand and diversify its activities in a way which indicates an accelerated pace and scale of operations in the future. This is encouraging to those who have followed the affairs of the Corporation since its inception and who believe in the importance of the private sector in balanced economic growth and in the opportunities that lie open to the Corporation to stimulate the employment of private investment capital.

We should note with particular satisfaction the Corporation’s first underwriting operation, the results of which augur well for similar operations in the future, and also the assumption by the Corporation of wider responsibilities in relation to development banks within the framework of the World Bank group. Especially, this latter function well illustrates the way in which the Corporation’s experience in the techniques of private investment, and its ability to work alongside private investors in equity financing, complement the activities of its sister institutions so that the group is strengthened and operates more effectively as a whole. The Corporation is still young and we may view its future with confidence.

Mr. Jacobsson and Mr. Black will put before you a fuller survey of the activities of our institutions during the recent past. This brief record, however, is enough to show the impressive achievements made to date. At the same time, we all know that the task is far from being fully discharged. There is a tremendous amount of work still to be done. In large areas of the world, per capita national income is far below minimum subsistence levels, and it is this woeful state of affairs which has given such impetus to the drive for economic development.

Among the difficulties faced by the developing countries, as they press forward with development plans, are inadequate and fluctuating export receipts. Indeed, with prices of primary commodities persistently weak, the inflow of development capital little more than offsets the weak trend of export earnings. The large number of developing countries which have sought help from the IMF is proof of the balance of payments difficulties that these countries are encountering. Many experts are today devoting considerable thought and ingenuity to solving the attendant problems arising from price fluctuations of primary products and the tendency of some of these to decline markedly. These efforts are taking two complementary forms. One is to stabilize prices of major comodities, of which coffee is the most recent example. The other is financing of export fluctuations in the primary exporting countries. The IMF is an important source of compensatory financing. We have only to look at the magnitude of the drawings of primary producing countries in the last year or so, and the reasons for such drawings, to realize the importance of the Fund’s compensatory role.

Various proposals for additional compensatory facilities have been made by expert groups under the aegis of both the United Nations and the Organization of American States. All of these proposals are under active study by those institutions and by the International Monetary Fund. But one thing seems clear. There is nothing in the Articles of Agreement or the policies of the Fund, as outlined in the Annual Report, that precludes the Executive Directors, when they deem it fit, from waiving any terms or conditions laid down in the Articles governing the use of the Fund’s resources. In this way, the Fund can offer its financial help in case of balance of payments difficulty arising from shortfalls in export receipts. As a matter of fact, this has been the practice in numerous cases. Even in instances where the need for a stabilization program was clear, the Fund, in emergency situations, has wisely extended its financial assistance first and successfully negotiated the stabilization program later.

I am sure that with regard to the developing countries the Fund, without changing its Articles, can and will continue to adapt its policies to suit the particular case of each country. At the same time, it must be stressed that no scheme for use of the Fund’s resources can be a substitute for the adoption of fiscal, monetary, and exchange policies which strengthen the balance of payments, permit a rebuilding of reserves, and encourage a larger inflow of capital.

Closely linked with the question of shortfalls in export earnings of primary producing countries is that of commercial or trade policy. The less developed countries have had an increasingly smaller share of world trade. The trade gap between the industrial countries and the nonindustrial countries is constantly widening. The commercial policy of the industrial countries is of critical importance in this respect, as they are bound for many years to be the principal markets of the developing countries. Major impediments to the exports of the developing countries still remain in many of the industrial countries, particularly in the field of agricultural and industrial raw materials. It is futile to encourage development and growth without making provision for expanding international markets for the products of this development and growth. Increased export capacity without access to foreign markets can only lead to frustration and bitterness. We are all aware that a number of developing countries are concerned with the implications for them of the formation of the Common Market in Europe. More rapid growth in the industrial countries is to the advantage of all. However, care must be taken that access to these growing markets is available to all of our member countries. Ways and means must be diligently sought to reconcile the objectives of the Common Market with the needs of other countries. It is encouraging that in the industrial countries there are wide sectors of the population and many responsible government officials who recognize the problems of the developing countries. There is room for greater international cooperation in these matters, and in this cooperation I am confident that our institutions can play a most useful part.

The enormity of the task of development is made more difficult by many other factors, of which two may be worth special mention: the population explosion, and the lack of adequate educational facilities for the great majority of the world inhabitants.

In most developing countries the increase in population outpaces, and indeed nullifies, the increase in production, with a resulting deterioration in the standard of living. It is encouraging that countries are awakening to this danger and that solutions are being explored and tested.

Much attention has been given to the need for material resources—capital and industrial materials—but of basic importance are the people and their qualities. Uneducated, unhealthy, and apathetic people are great drawbacks to energetic development programs. General education and public health programs are essential to overcome these handicaps. It is gratifying to note that the Bank is working in cooperation with the UNESCO on projects which aim at extending loans for educational purposes. The Bank is also assigning more experts on education to make a very thorough study and survey of the ways in which the Bank could make funds available for the kind of education required in connection with the activities of the Bank, that is, education in engineering, managerial, or vocational fields.

If most of my remarks have dealt with some problems of the developing countries, it is because I feel that their problems are acute and need all of our efforts and our continuous attention to tackle them. It is a source of satisfaction to see that a recent resolution by the United Nations General Assembly has designated the next ten years as the United Nations Development Decade. In view of this, many of my fellow Governors may wish to contribute to this effort by expressing any views they may have on how our institutions may be of further help. I am sure that their suggestions will serve as a guide to our Executive Directors and the Managements in their future actions and practices.

September 17, 1962.

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