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Consultations with the Fund

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1965
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Jean van der Mensbrugghe

EACH ONE OF US needs at some time to consult his doctor or his lawyer. Sometimes these consultations have some very specific problem in view: an ailment to be cured, or legal action to be taken. At other times they consist of a fairly general discussion in which the professional knowledge of the consultant comes into play: a physical examination, or a survey of some particular legal situation. It is the same with consultations between the Fund and its members: sometimes the member countries need advice for solving some special problem, and at other times they discuss their economic and monetary situation in general, in the light of the purposes of the Fund.

Consultations under Article XIV

Article I of the Articles of Agreement mentions the following among the purposes of the Fund:

to assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

Article VIII prescribes that

no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions [Section 2]

and

no member shall engage in any … discriminatory currency arrangements or multiple currency practices except as … approved by the Fund [Section 3];

it goes on to say that

each member shall buy balances of its currency held by another member if … (i) the balances to be bought have been recently acquired as a result of current transactions; or (ii) that their conversion is needed for making payments for current transactions. [Section 4]

In the period following World War II, most members found it impossible to assume fully the obligations imposed on them by Article VIII, and during the postwar transition period member countries availed themselves of the provisions of Article XIV which permitted them to maintain restrictions on payments and transfers for balance of payments reasons. Members must, however, have continuous regard to the purposes of the Fund. Article XIV also stipulates:

Five years after the date on which the Fund begins operations [i.e., in March of 1952] and in each year thereafter, any member still retaining any restrictions inconsistent with Article VIII, Sections 2, 3, or 4, shall consult the Fund as to their further retention. The Fund may … make representations to any member that conditions are favorable for the withdrawal of any particular restriction, or for the general abandonment of restrictions….

This passage from Section 4 of Article XIV constitutes the legal basis for the mandatory consultations.

Originally, only 5 of the countries which ratified the Bretton Woods agreement, and are still members, declared that they were prepared to assume the obligations of Article VIII. All the other original members availed themselves of the transitional arrangements provided for in Article XIV, and were still doing so in March 1952, the date on which consultations between these countries and the Fund became obligatory. Annual consultations under Article XIV are still obligatory for the great majority of members. Of the 102 members of the Fund on March 31, 1965, 26 had assumed the obligations of Article VIII, 74 were governed by Article XIV, and 2 had not yet made their decision. The Fund therefore now holds 74 annual consultations under Article XIV. These consultations are among the main activities of the Fund; it is therefore important to examine their purpose and the way in which they are conducted.

Purpose of Consultations Under Article XIV

The Fund’s consultations with an Article XIV country have the main purpose of determining whether the existing exchange restrictions on that country’s current transactions are still justified, or whether, on the contrary, they may be abolished without damage to the country’s economy and particularly to its balance of payments.

Between 1952 and 1958, the volume of exchange restrictions in most member countries was very great; during those years the Fund concentrated on the restrictions that seemed most likely to hamper the progressive establishment of a multilateral system of payments, and whose elimination would not entail serious difficulties for the countries imposing them. In 1952-53, the Fund focused its attention on “retention quotas.” This cryptic phrase denotes a practice, very widespread in Europe after World War II, whereby exporters—generally to the dollar area—were not bound to surrender the whole of their export earnings, but could use part of them either directly for transactions not normally permitted—for example, to import goods subject to quota in excess of the established quotas for local use or re-export—or indirectly for sale at free market prices to other nationals who in their turn, with the aid of this exchange, carried out transactions not normally permitted. Such a practice has many features in common with multiple exchange rates, and if it became widespread it would have the effect of entirely distorting the system of international payments.

During the years 1954-56 the Fund undertook an exhaustive study of bilateralism, including the bilateral payments agreements maintained by many of its members; as a result of these efforts, the Fund in June 1955 took a decision setting forth its policies on this matter. After this, in 1957-58, the Fund made a detailed study of multiple exchange rate practices, in the light both of the Articles of Agreement and of its decisions on the subject adopted on December 18, 1947 and June 26, 1957. Finally, in 1959, noting the progress made by certain countries, especially in Europe, in restoring de facto convertibility to their currencies, the Fund decided to pay special attention to discriminatory restrictions.

To determine whether restrictions on current transactions should be maintained or abolished, the Fund must study the balance of payments of the countries maintaining restrictions, since the balance of payments situation of a country is the decisive factor in deciding whether restrictions should be retained or eliminated. A balance of payments surplus, especially when it is long-term, ought in the normal course of events to lead to the gradual elimination of the restrictions. When there is a balance of payments deficit, it is more difficult to judge whether it would be opportune to abolish restrictions; to reach such a decision the causes of the deficit should be thoroughly analyzed, as well as the relationship between the various items in the balance of payments and the restrictions in force.

It is not enough, however, to study the balance of payments alone. The causes of the deficit can be discovered only in relation to the general state of the economy. Sometimes a deficit is due to a national calamity; sometimes to the attitude of other countries which have imposed restrictions on imports from the country with the deficit. Often the deficit in a particular country’s balance of payments is due to inflation, and the restoration of external equilibrium, which is a prerequisite to elimination of the exchange restrictions, can be achieved only through the restoration of internal equilibrium, which generally calls for measures in the monetary, fiscal, price, and income fields.

This kind of examination—focusing on the causes of the deficit and the adequacy of proposed policies—is also usually made in the many instances where consultations are linked to the evaluation of a request for the use of the Fund’s resources.

Procedure for Consultations Under Article XIV

In describing the consultations procedure, an effort has been made to stress the most general factors; in reality the procedure varies from one consultation to another, as the Fund tries to adjust its methods to the problems of its various member countries. It would be impossible, in a brief article, to deal with all the variants.

The consultations procedure consists of several stages, beginning with the preparation each year by the Fund of a general schedule of consultations and the designation of the personnel to be involved in each of them. The preparation of the schedule is facilitated by the fact that the consultations are normally held once a year.

Consultation discussions are usually held in the capital of the country consulted; and the Fund staff, of necessity, make preparations to carry out their mission. Often, the first of these preparations is the compilation of preliminary material, the so-called background paper, of which the first section describes the recent economic and monetary developments in the member concerned, while the second section gives an account of the existing system of exchange controls and any changes made since the previous consultation. This material is compiled from many different sources, in part from the Fund’s own extensive records and the experience of its staff, but also from published books and newspapers. A number of copies are sent in advance to the country consulted so that the government departments there may verify its accuracy before the arrival of the Fund mission.

Sometimes, but not always, the Fund staff also draws up a preliminary questionnaire, which is also sent in advance to the country being consulted. This questionnaire is not intended to limit the points to be discussed. The Fund staff may ask questions on the spot which had not been included in their questionnaire. Sending the questionnaire in advance gives the country that is to be consulted an idea of the direction in which the Fund staff proposes to steer the consultation discussions, and enables it to prepare its replies in time for the mission’s arrival. The list of questions is varied. It often includes questions of fact that the Fund staff have not been able to clarify in preparing the preliminary report, and sometimes questions on the authorities’ views regarding the immediate future and the policy they are pursuing and intend to pursue to overcome their economic, monetary, and exchange restrictions problems.

The next stage of the procedure consists of the consultation discussions between the Fund mission and officials of the country being consulted—officials of the ministry of finance, of the central bank, and of the exchange office. To get a general view of the economic situation and policy of the country consulted, the mission also talks with the staff of the ministries of planning, of economic affairs, of industry, of agriculture, and of trade. Discussions about policy matters are generally conducted with the governor of the central bank and with some cabinet ministers; in some instances, the Fund mission is also received by the head of state.

During the first phase of its work, the mission usually tries to obtain all the factual information needed, so that in the second phase the discussions may concentrate on the views of the authorities of the country visited regarding the future and the policies to be pursued.

On returning to Washington, the mission gives the Managing Director a summary of the outstanding features of the visit, and then proceeds to write a report for the Executive Board, which is presented in two parts. The second part contains the background material redrafted in the light of observations made and information collected in the country being consulted.

The first part is devoted to a report of the consultation discussions themselves; it begins by giving a summary of the current position and an account of the principal subjects covered in the discussions, and then makes an appraisal of the economic position and policies of the country being consulted. Part I of the report concludes with the staff’s recommendations for the consideration of the Executive Board. The recommendations contain both statements of fact and also a statement of the Fund’s views on such restrictions as still remain.

The staff report and recommendations are discussed at one of the regular meetings of the Executive Board. In this discussion staff members who have taken part in the mission reply to the technical questions asked. After this general discussion, the Executive Board considers the text of the draft decision which is set forth in the staff’s recommendations. Sometimes changes are suggested and agreed; on other occasions, the recommendations are approved without modification. The recommendations as approved by the Executive Board constitute the Fund’s decision on that particular consultation, and also complete it. The text of the decision is, of course, sent to the member country concerned.

Consultations Under Article VIII

Countries that have assumed the obligations of Article VIII do not generally apply exchange restrictions. However, Article VIII countries may impose restrictions with the prior approval of the Fund, and in some instances members obtained the Fund’s approval of restrictions existing at the time they elected to be governed by Article VIII. In other instances Article VIII countries later found it necessary to introduce restrictions on current transactions because of adverse developments in their balance of payments, and obtained the Fund’s approval for them. Such authorizations are frequently granted for a specified period, and if the country concerned still feels it necessary to continue them thereafter, a new authorization must be obtained. All members maintaining restrictions under Article VIII are required to consult the Fund about them; for other Article VIII countries, consultations are not mandatory.

In 1960, when several European countries were contemplating the transfer to the Article VIII regime, the Fund undertook a careful review of its policies with respect to both Article XIV and Article VIII, and on June 1, 1960, adopted a decision on the subject. This decision pointed out the advantages of periodic discussions between the Fund and its members even though there were no questions involving action under Article VIII, and stated that such discussions would be planned between the Fund and the member and would ordinarily take place at intervals of about one year. Most of the countries that have assumed the obligations of Article VIII have, since 1961, consulted annually with the Fund.

The main purpose of these consultations is to discuss monetary and financial developments in the country consulted, as well as the contribution the Fund might be able to make toward solving the country’s problems.

The procedure for conducting these consultations is practically the same as that for consultations under Article XIV, except that no decision is called for where no restrictions are maintained. Each staff report on an Article VIII consultation contains an appraisal of the country’s position and policies, and the Executive Director concerned reports to the authorities in that country the views expressed in the discussion of the staff report.

Other Consultations

In addition to the consultations already described, a member may consult the Fund at any time. Such consultations may have very different purposes: a member may ask the Fund’s advice for determining the par value of its currency, for organizing or carrying out an anti-inflationary program, for setting up or reorganizing its central bank, for establishing monetary statistics, for debt rescheduling, or for improving the system of government finance, with regard both to government spending and to revenue. There are also frequent special consultations in connection with standby arrangements.

When a member country makes use of the Fund’s resources under the terms of a stand-by arrangement, the Fund usually receives, when the contemplated drawings exceed the first credit tranche (i.e., raise the Fund’s holdings of the currency of that country above 125 per cent of quota), some firm commitments with regard to the economic and monetary policies which the country will follow to restore equilibrium. Frequently the drawings authorized under the stand-by arrangement can only be made in accordance with a schedule, after the Fund has ascertained that the commitments have been fulfilled. When, for one reason or another, the commitments are not fulfilled, special consultations are also organized to judge whether the country should actually be permitted to make further drawings under the stand-by arrangement.

The Usefulness of Consultations

The usefulness of special consultations, which take place in response to a request for technical assistance, is so obvious that it does not need to be described. The same does not apply to regular consultations or to those held under Articles XIV or VIII; these closing remarks will therefore try to show how the country consulted, the Fund, and the other members all benefit from these consultations.

The first advantage of consultations, both for the member and for the Fund, is the establishment of frank and regular contact between national and international experts. In discussions with the Fund mission, the authorities of the country consulted find it necessary to describe to international experts the national economic situation and their policies. In describing their economy to outside experts, the authorities are often led to reconsider their attitudes and to modify them in some respects. For example, when the authorities of many countries have, during consultations, analyzed the reasons why a certain exchange restriction must be maintained, they have come to realize that these reasons are sometimes more closely related to long-established custom than to the solution of balance of payments difficulties. To take another example, it has frequently happened that, in endeavoring to explain the causes of inflation to the Fund’s experts, the authorities of the country being consulted have glimpsed a lack of coordination between some of their policies, and have then proceeded to remedy this deficiency.

Moreover, consultations provide them with an excellent means of utilizing the Fund’s expertise. During the discussions, the Fund’s staff, knowing the situations and problems of many countries, can often give valuable advice on varied policy problems. And since the consultations are regular, a country visited by a mission more or less annually can discuss highly confidential matters—a possible change in the par value, for example—without stirring up public opinion or setting off speculative movements.

In practice, consultations have proved to be one of the Fund’s most effective means of achieving the aims laid down in the Articles of Agreement. Consultations provide the Fund with its most valuable source of information on the situations of its members, and it uses this source, in the first instance, as a basis for many of its general policy decisions. In making major decisions regarding the use of its resources or an increase in a member’s quota the Fund relies on valuable information gained in numerous consultations. The situation of a great many members of the Fund has, also, often been improved by help and advice received through consultations.

Consultations have played a major part in reducing recourse to exchange restrictions. The efforts the Fund has made, in the course of consultations, toward elimination of retention quotas, bilateralism, multiple exchange rates, and discrimination have been amply rewarded, and have stimulated members to take active measures toward the establishment of a multilateral system of payments, as far as the situation of their balance of payments permitted.

Consultations likewise have the advantage of showing members that their problems are not peculiar to them but must be viewed in a world context, and that the solution of these problems demands not only individual effort but also international cooperation under the aegis of the Fund.

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